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South Africa: 2007 INVESTMENT CLIMATE STATEMENT Q SOUTH AFRICA

     
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Reference ID: 07PRETORIA142
Created: 2007-01-12 11:40
Released: 2011-08-30 01:44
Classification: UNCLASSIFIED
Origin: Embassy Pretoria

VZCZCXRO6647
RR RUEHDU RUEHJO
DE RUEHSA #0142/01 0121140
ZNR UUUUU ZZH
R 121140Z JAN 07
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 7645
RUCPDC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUCPCIM/CIMS NTDB WASHDC
RUEHJO/AMCONSUL JOHANNESBURG 6014
RUEHTN/AMCONSUL CAPE TOWN 3829
RUEHDU/AMCONSUL DURBAN 8488

UNCLAS SECTION 01 OF 14 PRETORIA 000142
 
SIPDIS
 
DEPT FOR EB/IFD/OIA
USTR FOR COLEMAN
 
SIPDIS
 
E.O. 12958: N/A
TAGS: ECON EINV ETRD KTDB SF
SUBJECT: 2007 INVESTMENT CLIMATE STATEMENT Q SOUTH
AFRICA
 
REF:  06 STATE 178303
 
1. (U) In response to Ref A, this cable presents post's
2007 Investment Climate Statement for South Africa.
This is also Chapter 6 of the 2007 Country Commercial
Guide for South Africa.
 
2. (U) BEGIN TEXT
 
Chapter 6 Investment Climate Statement FY 2007
 
6.1   Openness to Foreign Investment
 
The government of South Africa is open to foreign
investment, which it views as a means to drive growth,
improve international competitiveness, and obtain access
to foreign markets.  Virtually all business sectors are
open to foreign investors.  No government approval is
required, and there are almost no restrictions on the
form or extent of foreign investment.  Trade and
Investment South Africa (TISA), a division of the
Department of Trade and Industry (DTI), provides
assistance to foreign investors.  The agency
concentrates on sectors in which research has indicated
that the country has a comparative advantage.  TISA
offers information on sectors and industries,
consultation on the regulatory environment, facilitation
for investment missions, links to joint venture
partners, information on incentive packages, assistance
with work permits, and logistical support for
relocation.  DTI publishes the "Investor's Handbook" on
its website: http://www.thedti.gov.za/ (see
"publications").
 
Over the past decade, macroeconomic management has been
strong, resulting in a strengthened rand and a
consistently positive rate of economic growth.  Since
1994, the government has sought to liberalize trade and
enhance international competitiveness by lowering
tariffs, abolishing most import controls, undertaking
some privatization, and reforming the regulatory
environment.  The government would like to have
experienced more foreign direct investment during this
time, but it did not materialize.  Several large
acquisitions in the banking, telecommunications, and
real estate sectors promise to change this for 2006 and
beyond, but are not likely to add much to the
government's primary goal of increasing employment.  In
January 2005, Moody's assigned South Africa a sovereign
debt rating of Baa1, three steps into investment grade.
Standard and Poor's and Fitch also rank South Africa at
investment grade.
 
To alleviate high unemployment (25.6 percent as of March
2006), the government has focused on quickening the pace
of economic growth and job creation.  Given steady
domestic investment and the relative lack of foreign
direct investment, the government is convinced that the
public sector must take the lead by investing in the
nation's inadequate infrastructure.  Under the
government's new Accelerated and Shared Growth
Initiative of South Africa (ASGISA), unveiled in 2006,
state-owned enterprises plan to invest more than $25
billion over the next four years, mainly on
transportation infrastructure, telecommunication
networks, and energy.  Other key elements of ASGISA
include labor market reform, improved delivery of public
services, skills development, a revamped industrial
policy, and support to small business.
 
A 2005 survey of South African businesses sponsored by
the World Bank and DTI queried domestic and foreign
firms about South Africa's investment climate.
Constraints most often mentioned were the lack of
skilled labor, the strong rand limiting exports, labor
relations, and crime.  A 2005 survey conducted by the
American Chamber of Commerce in South Africa reinforced
these views.  Black Economic Empowerment has been at the
center of business-government relations for the past
several years.  While supporting the need for
affirmative action, many foreign investors have
commented that there was a lack of clarity surrounding
the application of Black Economic Empowerment between
 
PRETORIA 00000142  002.2 OF 014
 
 
the time of announcement of the strategy until January
2006.  This resulted in a dampening effect on their
plans to further invest in South Africa during this
period.
 
In January 2004, President Mbeki signed into law the
Broad-Based Black Economic Empowerment Act of 2003, the
legislation enacting the Black Economic Empowerment
(BEE) strategy, a program to increase the participation
in the economy of historically disadvantaged South
Africans.  The Act directed the Minister of Trade and
Industry to develop a national strategy for BEE, issue
implementing guidelines in the form of Codes of Good
Practice, encourage the development of industry-specific
BEE charters, and establish a National BEE Advisory
Council to review progress on BEE targets.  While firms
are not legally required to meet BEE criteria, in
practice they are less competitive for government
tenders if they do not.
 
On December 6, cabinet approved Codes of Good Practice
specifying BEE requirements.  These codes deal with
employment equity, skills development, enterprise
development, preferential procurement, small and medium
sized enterprises, as well as separate guidelines on the
transfer of equity to BEE firms/individuals for
multinationals.  Earlier Codes dealing with black equity
ownership and black management were released in
November, 2005.  In December, the government also
released a revised QscorecardQ with specific targets and
rules for measuring empowerment.  These included the
percentage to which blacks own, manage, and work in an
enterprise as well as targets for training black South
Africans, purchasing supplies from BEE-compliant firms,
and assisting the development of black-owned businesses.
The Codes approved on December 6 will be gazetted in
early 2007.
 
All firms must have their BEE compliance audited
annually by an accredited verification agency and be
assigned a BEE compliance status based upon its BEE
performance.  A firm's BEE status will factor into the
award of government contracts and contributes to the BEE
compliance status of a firm's customers.
 
On December 20, 2005, DTI released drafts of the
remaining five Codes of Good Practice for public
comment.  These codes deal with employment equity,
skills development, enterprise development, preferential
procurement, small and medium sized enterprises, as well
as separate guidelines on the transfer of equity to BEE
firms/individuals for multinationals.  On December 6,
2006 the Cabinet approved the gazetting of Codes of Good
Practice.  In early 2007, the government intends to
gazette the codes after completion of the legal audit
process.  BEE Codes of Good Practice and other pertinent
BEE legislation may be found on DTI's website:
http://www.thedti.gov.za/.
 
Poor or unclear regulations in key sectors, such as
telecommunications, have sometimes acted as a
disincentive to investment.  In instances where the
regulator is weak and unable to enforce its own
regulations, foreign firms may find themselves at a
disadvantage to domestic companies.  Costs associated
with pursuing legal action to resolve disputes can cut
into the bottom line.
 
Following national elections in April 2004, the
government unveiled plans to restructure most of the
remaining state-owned enterprises rather than proceed
with plans for privatization.  Transnet (transportation)
is considering the concessioning of several of
SpoornetQs (rail freight) branch lines in its move to
become solely a mainline operator.  Transnet also
expects to enter into a concession for the operation of
a container terminal at the Port of Durban.  The
Department of Minerals and Energy has tendered for 1000
MW from its Independent Power Producer projects.  Other
opportunities for private investment in the power sector
are likely to follow.  The planned privatization of
smaller parastatals, such as Sentech (radio
transmission), Safcol (forestry) and, in the case of
 
PRETORIA 00000142  003.2 OF 014
 
 
Denel (Defense), a hoped-for partial buy-in by foreign
suitors, may also afford opportunities for foreign
investment in the medium-term.
 
6.2   Conversion and Transfer Policies
 
The Exchange Control Department at the South African
Reserve Bank (SARB) administers foreign exchange policy.
Authorized foreign exchange dealers, normally one of the
large commercial banks, must handle international
commercial transactions and report every purchase of
foreign exchange, irrespective of the amount, that is
received by South African residents or companies.  As a
rule, there are only limited delays in the conversion
and transfer of funds.
 
Foreign investors may purchase local securities without
restriction.  To facilitate repatriation of capital and
profits, foreign investors should make sure that an
authorized dealer endorses their share certificates as
"non-resident."  Foreign investors should also be sure
to maintain an accurate record of investment.
 
For South African residents and companies, the
government has made significant progress in liberalizing
the foreign exchange regime.  Since 2004, South African
companies may invest in other countries without
restriction (although SARB approval/notification is
still required) and South African individuals may freely
invest in foreign firms listed on South African stock
exchanges.  Individual South African taxpayers in good
standing may invest up to R750,000 in total (approximate
$107,000) in other countries.  In October 2005, the
government announced that South African banks would be
able to commit up to 40 percent of their domestic
capital in other countries, but only 20 percent outside
Africa.  In addition, mutual and other investment funds
may now invest up to 25 percent of their retail assets
in other countries.  Pension plans and insurance funds
may invest 15 percent of their retail assets in other
countries.
 
Before accepting or repaying a foreign loan, South
African residents must obtain SARB approval.  The SARB
must also approve the payment of royalties and license
fees to non-residents when no local manufacturing is
involved.  When local manufacturing is involved, the DTI
must approve the payment of royalties related to patents
on manufacturing processes and products.  Upon proof of
invoice, South African companies may pay fees for
foreign management and other services provided such fees
are not calculated as a percentage of sales, profits,
purchases, or income.
 
SARB approval is also required for the sale of all forms
of South African-owned intellectual property rights
(IPR).  Approval is generally granted by SARB if the
transaction occurs at arms length and at fair market
value.  IPR owned by non-residents is not subject to any
restrictions in terms of repatriation of profits,
royalties, or proceeds from sales.
 
Further questions on exchange control may be addressed
to:
 
South African Reserve Bank
Exchange Control Department
P.O.  Box 427, Pretoria, 0001
Tel: +27 (0) 12 313-3911; Fax: +27 (0) 12 313-3197
Website: http://www.reservebank.co.za/
 
6.3   Expropriation and Compensation
 
Under the Expropriation Act of 1975 and the
Expropriation Act Amendment of 1992, the government is
entitled to expropriate private property for reasons of
public necessity or utility.  The decision is an
administrative one.  Compensation should be the price
that the property would have realized in an open market
transaction.  There is no record, dating back to 1924,
of an expropriation or nationalization of an American
investment in South Africa.
 
 
PRETORIA 00000142  004.2 OF 014
 
 
Racially discriminatory property laws during apartheid
resulted in highly disproportionate patterns of land
ownership in South Africa.  As a result, the post-
apartheid government has committed to redistributing 30
percent of the country's farm land to black South
Africans by 2014.  As of 2005, only 3.1 percent of total
farm land had been redistributed under the government's
land reform program.  The government employs market-
based land reform, but wants to speed redistribution.
In 2005, the government indicated that it was willing to
use its power to expropriate land should farm owners
refuse court-approved purchase prices.  Shortly
thereafter, the government initiated proceedings to
expropriate a white-owned farm after the owner refused
the court-approved purchase price.  However, the case
was settled prior to any court ruling.  To speed up the
process, the new Minister of Agriculture and Land
Affairs recently delegated decision-making on government
purchases of farms to provincial land affairs
commissioners, thereby eliminating a major barrier in
the process, the Department of Land AffairsQ
headquarters bureaucracy.
 
6.4   Dispute Settlement
 
South Africa is a member of the New York Convention of
1958 on the recognition and enforcement of foreign
arbitration awards, but is not a member of the World
BankQs International Center for the Settlement of
Investment Disputes.  South Africa recognizes the
International Chamber of Commerce, which supervises the
resolution of transnational disputes.  South Africa
applies its commercial and bankruptcy laws with
consistency and has an independent, objective court
system for enforcing property and contractual rights.
 
6.5   Performance Requirements and Incentives
 
DTI offers six investment incentives for manufacturing.
Foreign Investment Grants may provide up to 15 percent
of the value of new machinery and equipment to a maximum
of R3 million (approximate $430,000) per entity for
relocation to South Africa.  Industrial Development
Zones provide duty-free import of production-related
materials and zero VAT on materials sourced from South
Africa, along with the right to sell into South Africa
upon payment of normal import duties on finished goods.
The Skills Support Program provides up to 50 percent of
training costs and 30 percent of worker salaries for a
maximum of three years to encourage the development of
advanced skills.  The Strategic Investment Project
program offers a tax allowance of up to 100 percent (a
maximum allowance of R600 million (approximate $86
million) per project) on the cost of buildings, plant
and machinery, for strategic investments of at least
R500 million (approximate $70 million).  The Critical
Infrastructure Facility supplements funds up to 30
percent of the development costs of qualifying
infrastructure projects.  The Small and Medium
Enterprise Development Program offers a tax free grant
of up to R3.05 million (approximate $435,000) to
manufacturers with assets of less than R100 million
(approximate $14 million) for a maximum of three years.
The first two years of the grant is based on the
investment in operating assets and the third year on the
level of employment generated.
 
In July 2004, DTI announced an incentive to encourage
investment, both foreign and domestic, in the local film
industry.  It established the Film and Television
Production Rebate Scheme that allows eligible applicants
to receive a rebate of 15 percent of the production
expenditures for foreign productions and up to 25
percent for qualifying South African productions.  Film
projects must have begun after April 1, 2004 and must
reach a threshold of R25 million (approximate $3.6
million) to qualify for the rebate.  Other requirements
include 50 percent completion of the principal
photography in South Africa and a minimum of four weeks
photography time.  Eligible productions include movies,
tele-movies, television series, and documentaries.  The
maximum rebate for any project will be R10 million
(approximate $1.4 million).  Details on the entire
 
PRETORIA 00000142  005.2 OF 014
 
 
program are available at the DTI website at
http://www.dti.gov.za/.
 
To encourage investors to establish or relocate industry
to areas throughout South Africa, the country's various
provinces have development agencies that offer
incentives.  These vary from province to province and
may include reduced interest rates, reduced rental cost
for land and buildings, cash grants for the relocation
of plant and employees, reduced rates for basic
facilities, railage and other transport rebates, and
assistance in the provision of housing.
 
The Industrial Development Corporation, a self-
financing, state-owned development finance institution
that reports to DTI, provides equity and loan financing
to support investment in target sectors.  It also
provides credit facilities for South African exporters.
Several government-supported bodies provide technical
assistance to industry.  The Council for Scientific and
Industrial Research provides multi-disciplinary research
and development for industrial application.
 
Technifin is a government-owned corporation which
finances the commercialization of new technology and
products.  MINTEK develops mining and mineral processing
technology for company application.  The
Council for Geoscience undertakes geological surveys and
services related to minerals exploration.
 
Under the National Industrial Participation Program
(NIPP), foreign companies winning large government
tenders exceeding $10 million must invest at least 30
percent of the value of the imported content of the
tender in South Africa.  The Department of Defense and
the Armaments Corporation of South Africa imposed a one-
time obligation under the QArms DealQ of up to 50
percent on all defense purchases exceeding US$2 million,
and an obligation of at least 50 percent on purchases
exceeding US$10 million.  Future purchases, if any, will
be subject to the general 30 percent obligation.
 
The government initiated the Motor Industry Development
Program (MIDP) in 1995 to restructure the South African
automotive industry over a period of twelve years.  The
program was designed to encourage local manufacturing by
means of a duty rebate scheme on imported vehicles and
component parts, to be phased out over the life of the
program.  In 2002, the Minister of Trade and Industry
extended the program from 2007 to 2012.  Import duties
and duty rebates will continue to decline over this
extended period.  The import duty on built-up light
vehicles will fall to 25 percent and the import duty on
original equipment components will fall to 20 percent by
2012.
 
6.6   Right to Private Ownership and Establishment
 
The right to private property is protected under South
African law.  All foreign and domestic private entities
may freely establish, acquire, and dispose of commercial
interests.  The securities regulation code requires that
an offer to minority shareholders be made when 30
percent shareholding has been acquired in a public
company that has at least 10 shareholders and net equity
in excess of R5 million.
 
State-owned enterprises dominate a number of key sectors
in South Africa.  Eskom supplies 94 percent of South
Africa's electricity.  Transnet operates the bulk of the
nation's rail, port, and air transportation.  The South
African Post Office is a legislated monopoly.  Telkom,
37 percent-owned by government, is the dominant fixed-
line telephone operator.  A second national operator,
Neotel, began limited business-only operations in
October 2006 and is 30 percent government owned.  Neotel
is expected to begin retail operations in the second
quarter of 2007.  InfraCo, a 100 percent government-
owned broadband provider, was formed in December 2006
using the fiberoptic networks of Eskom and Transnet.
 
The Competition Act of 1998 and subsequent amendments
address anticompetitive practices in both the private
 
PRETORIA 00000142  006.2 OF 014
 
 
and public sectors.  The Competition Commission has
demonstrated increasing capacity to implement
competition policy effectively.  There have been more
frequent challenges in recent years against state-owned
enterprises that compete unfairly.
 
6.7   Protection of Property Rights
 
The South African legal system protects and facilitates
the acquisition and disposition of all property rights,
e.g., land, buildings, and mortgages.  Deeds must be
registered at the Deeds Office.  Banks usually provide
finance for the purchase of property by registering the
mortgage as security.
 
Owners of patents and trademarks may license them
locally, but when a patent license entails the payment
of royalties to a non-resident licensor, DTI must
approve the royalty agreement.  Patents are granted for
twenty years - usually with no option to renew.
Trademarks are valid for an initial period of ten years
and thereafter renewable for ten-year periods.  The
holder of a patent or trademark must pay an annual fee
to preserve ownership rights.  All agreements relating
to payment for the right to use know-how, patents,
trademarks, copyrights, or other similar property are
subject to approval by exchange control authorities.
For consumer goods, a royalty of up to four percent of
the factory selling price is the standard approval.  For
intermediate and finished capital goods, a royalty of up
to six percent will be approved.
 
Literary, musical, and artistic works, as well as
cinematographic films and sound recordings are eligible
for copyright under the Copyright Act of 1978.  New
designs may be registered under the Designs Act of 1967,
which grants copyrights for five years.
 
The Counterfeit Goods Act of 1997 provides additional
protection to owners of trademarks, copyrights, and
certain marks under the Merchandise Marks Act of 1941.
The Intellectual Property Laws Amendment Act of 1997
amended the Merchandise Marks Act of 1941, the
Performers' Protection Act of 1967, the Patents Act of
1978, the Copyright Act of 1978, the Trademarks Act of
1993, and the Designs Act of 1993 to bring South African
intellectual property legislation fully into line with
the WTO's Trade-Related Aspects of Intellectual Property
Rights Agreement.  Amendments to the Patents Act of 1978
were also intended to bring South Africa into line with
TRIPS, to which South Africa became a party in 1999, and
provides for the implementation of the Patent
Cooperation Treaty.
 
The International Intellectual Property Alliance
reported an increase in border seizures of pirated
goods, as well as increased police raids in the optical
disc market during 2005 and 2006.  A local watchdog, the
South African Federation Against Copyright Theft
reported on its website (http://www.safact.co.za/)
statistics on seizures of counterfeit DVDs as well as a
number of successful criminal court cases against
pirates in 2006, demonstrating the government's
commitment to IPR enforcement.
 
6.8   Transparency of the Regulatory System
 
In general, the Companies Act of 1973 provides for
transparent regulations concerning the establishment and
operation of businesses.  Under the Act, for-profit
businesses employing more than 20 persons must register
as a company within 21 days.  The same rules apply to
foreign companies, with the exception that foreign
companies may elect to operate as an "external company"
(with no limit on legal liabilities).  In general,
businesses must also register with the local Regional
Services Council, the Department of Labor, the Workman's
Compensation Commissioner, the appropriate industry
council, and the South African Revenue Service.  In
addition, all businesses must obtain an operating
license from local authorities.  The validity of an
operating license is indefinite unless a business is
sold or relocated.  Forms to be filled out by investors
 
PRETORIA 00000142  007.2 OF 014
 
 
are straightforward.  The process takes six months on
average, but can be done in one month through Trade and
Investment South Africa, a division of DTI.
 
Virtually all business activities are open to foreign
investors.  The government does not prohibit or
officially discourage a foreign-owned business from
locating in a particular region of the country.
Restrictions that apply to a particular industry apply
to both domestic and international investors.
Exceptions exist in the areas of banking and defense.
For example, a branch of a foreign bank may be required
to employ a certain number of South Africans and
maintain a minimum local capital base to obtain a
banking license.  In addition, a foreign company must
register as an external company before immovable
property can be registered in their names.
 
6.9   Efficient Capital Markets and Portfolio Investment
 
South Africa's banks are well-capitalized and comply
with international banking standards.  Non-performing
loans as a percentage of total loans and advances was
1.6 percent as of June 2005.  In 2006, non-performing
loans remained low, supporting banksQ willingness to
extend credit.  Six of the 35 banks in South Africa are
foreign-owned and 15 are branches of foreign banks.  The
"Big Four" (Standard, ABSA, First Rand, and Nedcor)
dominate the sector, accounting for almost 85 percent of
the country's banking assets, which total over $240
billion.  In 2005, the government approved Barclays'
acquisition of ABSA, the first of the Big Four to become
foreign-owned.  (Technically it is the second.  Old
Mutual, which moved its primary listing from the
Johannesburg Stock Exchange to the London Stock Exchange
in 1999, owns Nedcor.)
 
The South African Reserve Bank (SARB) regulates the
sector according to the Bank Act of 1990.  There are
three alternatives for foreign banks to establish local
operations, all of which require SARB approval: 1) a
separate company; 2) a branch; or 3) a representative
office.  The criteria for the registration of a bank are
the same as for domestic banks.  Foreign banks, however,
must include additional information, such as holding
company approval, a letter of "comfort and
understanding" from the holding company, and a letter of
no objection from the foreign bank's home regulatory
authority.  More information on the banking industry may
be obtained from the South African Banking Association
at the following website: http://www.banking.org.za/.
 
The Financial Services Board (FSB) governs South
Africa's non-bank financial services industry (see
website: http://www.fsb.co.za/).  The FSB regulates
insurance companies, pension funds, unit trusts (i.e.,
mutual funds), participation bond schemes, portfolio
management, and the financial markets.  The JSE
Securities Exchange SA (JSE) is the eighteenth largest
exchange measured by market capitalization in the world.
As of October 2006, market capitalization stood at $579
billion with a total of 387 firms listed.  The Bond
Exchange of South Africa (BESA) is licensed under the
Financial Markets Control Act.  Membership includes
banks, insurers, investors, stockbrokers, and
independent intermediaries.  The exchange consists
principally of bonds issued by government, state-owned
enterprises, and private corporations.  More information
on financial markets may be obtained from the JSE
(website: http://www.jse.co.za)and/ the Bond Exchange
(website: http://www.bondexchange.co.za/).
 
Foreign investors deemed "affected persons" must obtain
SARB approval to borrow amounts greater than R20,000
(approximate $2,900).  "Affected persons" are defined as
companies or other bodies in which: 1) 75 percent or
more of the capital assets or earnings may be used for
payment to, or for the benefit of, a non-resident; or 2)
75 percent or more of the voting securities, voting
power, power of control, capital, assets or earnings are
vested in, or controlled by, any non-resident.  No
person in South Africa may provide credit to a non-
resident or "affected person" without an exchange
 
PRETORIA 00000142  008.3 OF 014
 
 
control exemption.  Non-residents and "affected
persons," however, may borrow up to 100 percent of the
South African Rand value of funds introduced from abroad
and invested locally.  Additionally, the ability to
borrow locally increases if both residents and non-
residents own the local enterprise.
 
6.10  Political Violence
 
Political violence is no longer a serious issue in South
Africa, but criminal violence continues to remain high
in comparison to other developed countries.  National
and provincial governments have pursued a number of
programs to control criminal violence and levels of most
violent crimes have stabilized or fallen in recent
years.
 
6.11  Corruption
 
South African law provides for prosecution of government
officials who solicit or accept bribes.  Penalties for
offering or accepting bribes include criminal
prosecution, fines, dismissal (for government
employees), and deportation (for foreign citizens).  The
South African Prevention and Combating of Corrupt
Activities Act of 2004 clarified what should be
considered as corruption and allows for the
investigation and seizure of "unexplained wealth."  The
act also obliges public officials to report corrupt
activities, prescribes strict penalties, including the
possibility of life imprisonment, and tasks the National
Treasury to create a register of corrupt individuals and
firms that will not be allowed to submit bids on
government tenders.  One shortcoming of the Act is the
provision of protection for whistleblowers.
 
New laws, such as the Promotion of Access to Information
Act signed into law in February 2000, have helped to
increase transparency in government in the last few
years.  The Public Finance Management Act, which became
effective on April 1, 2000, has helped to raise the
level of oversight and control over public funds and
improved the transparency of government spending,
especially with regard to off-budget agencies and
parastatals.
 
At least ten agencies are engaged in fighting
corruption.  Some, like the Public Service Commission
(PSC), Office of the Public Protector and Office of the
Auditor-General are constitutionally mandated.  The
South African Police Anti-Corruption Unit and the
Directorate for Special Operations (popularly known as
the Scorpions) have dedicated units to combat
corruption.  The Special Investigating Unit (SIU) under
the Presidency investigates corruption in government
departments and in the process has identified civil
servants who are now repaying the government for
illicitly obtained income.  The SIU presently is
investigating 400,000 people who might be fraudulently
obtaining social grants and pensions from the
government.
 
According to the 2004 Institute for Security Studies'
"National Victims of Crime Survey," which drew from a
nationally representative sampling of South African
households, petty corruption - mainly bribery - was the
second-most experienced crime in South Africa after
burglary.  According to Transparency International's
2006 Corruption Perceptions Index, South Africa ranked
51 out of 163 and was the third least corrupt in Africa.
South Africa is not a signatory of the OECD Convention
on Combating Bribery, but is a signatory of the UN
Convention against Corruption.  Transparency
International maintains an office in South Africa.
 
6.12  Bilateral Investment Agreements
 
South Africa has bilateral investment agreements with
Argentina, Austria, Belgium, Canada, Chile, the Czech
Republic, Finland, France, Germany, Greece, Mauritius,
the Netherlands, the Republic of Korea, Spain, Sweden,
Switzerland, Turkey, and the United Kingdom.  A Trade,
Development, and Cooperation Agreement went into force
 
PRETORIA 00000142  009.2 OF 014
 
 
between South Africa and the European Union on January
1, 2000, but it does not contain an investment chapter.
 
The United States began free trade agreement (FTA)
negotiations with the five Southern African Customs
Union (SACU) countries (including South Africa,
Botswana, Lesotho, Namibia, and Swaziland) in June 2003,
but active negotiations were ended in April 2006.  In
lieu of a U.S.-SACU FTA, the United States and SACU
agreed to negotiate a new type of agreement (called a
Trade and Investment Cooperation Agreement or QTICAQ).
An agenda for the U.S.-SACU TICA will be defined in
early 2007.
 
Agreements regarding mutual assistance between the
customs administrations of the United States and South
Africa became effective on August 1, 2001.  The U.S.-
South Africa bilateral tax treaty eliminating double-
taxation became effective on January 1, 1998.
 
6.13  OPIC and Other Investment Insurance Programs
 
In 1993, South Africa signed an investment incentive
agreement with the United States to facilitate Overseas
Private Investment Corporation (OPIC) programs.  To
date, OPIC has invested in a number of investment funds
supporting sub-Saharan Africa development, including the
Africa Growth Fund ($25 million), the Modern Africa
Growth and Investment Fund ($105 million), and the ZM
Investment Fund ($120 million).  OPIC also established
the $350 million Sub-Saharan Africa Infrastructure Fund
(SAIF) to fund infrastructure projects in sub-Saharan
Africa.  OPIC helped the National Urban Reconstruction
and Housing Agency (NURCHA) to establish a $31 million
scheme to lend to small contractors for the construction
of affordable houses.  In 2004, OPIC entered into an
agreement with the Homeloan Guarantee Company (HLGC) to
fund low-income home loans for HIV-positive South
Africans.  The pilot program for this project was
initiated in 2005.  Additional information on OPIC
programs that involve South Africa may be found on
OPIC's website: http://www.opic.gov/.
 
South Africa is also a member of the World Bank's
Multilateral Investment Guarantee Agency.
 
6.14   Labor
 
The right to strike is protected under South African
labor law.  Although labor militancy has declined since
1994, the number of work days lost to strikes had risen
to 1.6 million as of the first half of 2006, exceeding
the first half totals for the past 10 years.  The Labour
Research Service reported a total of 102 strikes in
2005.  As of March 2006, total trade union membership
was approximately 2.9 million persons, or roughly 30
percent of the economically active population employed
in the formal sector.  Most union members belong to
affiliates of the three major union federations: the
Congress of South African Trade Unions (COSATU), the
Federation of Unions of South Africa (FEDUSA) or the
National Council of Trade Unions (NACTU).  Although
COSATU, the largest of the federations, is allied with
the African National Congress (ANC) and the South
African Communist Party (SACP), it often opposes the
government on issues of economic and health policy.
COSATU is opposed to efforts to privatize government
services and state-owned corporations.
 
According to the March 2006 Labor Force Survey (LFS),
the official unemployment rate is 25.6 percent.  This
rate uses the International Labor Organization (ILO)
definition of unemployment, which excludes persons who
have not actively sought employment during the previous
four weeks.  To help counter unemployment and contribute
to economic growth, the government has shifted
substantial resources to skills development, and
undertaken a growth and employment policy.
 
South Africa has no country-wide minimum wage, but the
Minister of Labor has issued determinations that set a
minimum wage for certain occupations where collective
bargaining is not common.  These include domestic
 
PRETORIA 00000142  010.2 OF 014
 
 
workers, farm workers, taxi-drivers, and retail
employees.  In addition, the Minister can apply
collective bargaining agreements to firms that did not
participate in negotiations.
 
Since 1994, the government has systemically sought to
remove all vestiges of apartheid labor legislation.  In
its place, the government has sought to install a labor
market characterized by employment security, reasonable
wages, and decent working conditions.  Under the aegis
of the National Economic Development and Labor Council
(NEDLAC), government, business, and organized labor
negotiated all labor laws, with the exception of laws
pertaining to occupational health and safety.  NEDLAC
negotiations placed a high value on worker rights and
collective bargaining.
 
Major labor legislation includes the following:
 
-- The Labor Relations Act, in effect since November
1996, enshrines the right of workers to strike and of
management to lock out workers.  The Act created the
Commission on Conciliation, Mediation, and Arbitration
(CCMA) which can conciliate, mediate, and arbitrate in
cases of labor dispute, and is required to certify an
impasse in bargaining council negotiation before a
strike can be legally called.  The CCMA currently has a
caseload in excess of what was anticipated.
 
-- The Basic Conditions of Employment Act, implemented
in December 1998, establishes a 45-hour workweek as well
as minimum standards for overtime pay, annual leave, and
notice of termination.
 
-- The Employment Equity Act prohibits unfair employment
discrimination and requires large and medium-sized
employers to prepare affirmative action plans to ensure
that black African, women, and disabled persons are
adequately represented on the workforce.
 
-- Occupational Health and Safety Act, last amended in
1993, provides for occupational health and safety
standards and gives the Department of Labor the right to
inspect the workplace.  For the mining industry, the
Inspector of Mines provides regulatory oversight under
the Mine Health and Safety Act.
 
-- The Skills Development Act imposes a levy on
employers equal to one percent of the payroll that is to
be used for training programs devised by industry-
specific training authorities.  Employers who provide
job skills training can claim back much of their
contribution from government.
 
Companies have complained about the introduction,
through a regulation in early 2003, of a two percent
training levy on the salaries of expatriates in order to
enter the country under an expedited visa procedure.
The levy does not apply to expatriates already resident
in the country or to inter-company transfers.
Expatriates who enter the country under the normal visa
procedure are exempt from the levy, but the normal
process is complex and time-consuming.  The government's
decision to implement the levy-based system through
regulation rather than legislation has also been
controversial.  A legal challenge to the regulations
further delayed the implementation of new immigration
legislation and this created more uncertainty about the
effective handling of applications for visas.
 
Despite amendments to some of the above labor laws
passed in 2002, business argues that over-regulation of
the labor market has constrained employment and
contributed to the rise in unemployment.  On the other
side, trade unions argue that employers evade labor
legislation through the use of labor brokers who supply
casual workers.  Other areas of contention revolve
around the application of wage structures to all firms
in an industry, whether or not firms participated in
wage negotiations, and complex requirements and appeal
procedures for the dismissal of workers.
 
6.15  Foreign Trade Zones/Free Ports
 
PRETORIA 00000142  011.2 OF 014
 
 
 
South Africa designated its first Industrial Development
Zone (IDZ) in 2001.  IDZs offer duty-free import of
production-related materials and zero VAT on materials
sourced from South Africa, along with the right to sell
into South Africa upon payment of normal import duties
on finished goods.  Expedited services and other
logistical arrangements may be provided for small to
medium-sized enterprises, or for new foreign direct
investment.  Co-funding for infrastructure development
is available.  There are no exemptions from other laws
or regulations, such as environmental and labor laws.
The Manufacturing Development Board licenses IDZ
enterprises in collaboration with the South African
Revenue Service (SARS), which handles IDZ customs
matters.  IDZ operators may be public, private, or a
combination of both.  IDZs are currently located at
Coega near Port Elizabeth, in East London, Richards Bay,
and at Johannesburg International Airport.
 
6.16  Foreign Direct Investment Statistics
 
Foreign direct investment (FDI) data is readily
available in South Africa, but published statistics vary
depending on their source and definition.  Among the
numerous institutions that provide foreign investment
data, the U.S. Embassy in South Africa relies mostly on
the SARB.  SARB statistics conform to the IMF definition
of FDI (i.e., FDI is generally defined as ownership of
at least 10 percent of the voting rights in an
organization by a foreign resident or several affiliated
foreign residents, including equity capital, reinvested
earnings, and long-term loan capital) and represent
actual investment, excluding announced but not completed
"intended" investment.  However, the SARB does not
provide country-specific figures that distinguish
between actual investment flows and changes in
investment stocks caused by asset swaps, exchange rate
adjustments, and mergers and acquisitions.  This makes
it difficult to track the United States' and other
countries' FDI position in South Africa on an annual
basis.
 
Because SARB statistics only provide an annual total for
all the countries' flows combined, observers also often
consult more updated information obtained from the South
Africa-based firm "Business Map" (BM).  The latter
offers fee-based services for a wide range of investor-
related data and analysis (website:
http://www.businessmap.co.za/).
 
The following FDI statistics were drawn from the SARB's
December 2006 Quarterly Bulletin.  The conversion
exchange rate used was the average exchange rate for
each year cited.
 
Table A: Average Exchange Rates
 
          2000    2001    2002    2003    2004    2005
Rand/US$  6.94    8.83   10.52    7.56    6.45    6.36
 
Table B: Year-end Stock of Foreign Direct Investment in
South Africa
 
           2000    2001    2002    2003    2004   2005
Rand
(billion) 328.86  370.70  255.84  303.55  355.09 489.32
US$
(billion)  47.42   41.96   24.33   40.14   55.05  76.94
 
Table C: Year-end Stock of South African Direct
Investment Abroad
 
          2000    2001    2002    2003    2004    2005
Rand
billion) 244.65  213.18  189.91  180.51  217.90  232.93
US$
(billion) 35.28   24.13   18.06   23.87   33.59   36.62
 
Table D: GDP (in billion rands at current prices) and
Year-end FDI Stock as a percentage of GDP
 
       2000     2001     2002     2003     2004     2005
 
PRETORIA 00000142  012.2 OF 014
 
 
GDP   922.1  1,020.0  1,168.7  1,260.7  1,398.6  1,539.3
FDI(%) 35.7     36.3     21.9     24.1     25.4     31.8
 
Table E: Year-end stock of FDI in South Africa
         by region/country (billions)
 
REGION/COUNTRY       RAND   RAND    US$    US$
                     2004   2005   2004   2005
EUROPE - Total      301.0  436.3   46.7   68.6
UNITED  KINGDOM     228.0  350.5   35.3   55.1
GERMANY              25.8   29.9    4.0    4.7
SWITZERLAND           6.4   10.6    1.0    1.7
NETHERLANDS          16.2   14.1    2.5    2.2
FRANCE                6.5    7.7    1.0    1.2
ITALY                 2.1    1.2    0.3    0.2
N&S AMERICA (total)  34.1   33.8    5.3    5.3
USA                  31.2   32.1    4.8    5.0
AFRICA (total)        4.2    4.0    0.7    0.6
ASIA (total)         15.2   14.3    2.4    2.2
MALAYSIA              2.4    2.3    0.4    0.4
JAPAN                 7.4    9.9    1.1    1.6
OCEANIA (total)       0.5     .8    0.1    0.1
 
--------------------------------------------- --
TOTAL               355.1  489.3   55.1   76.9
--------------------------------------------- --
 
Table F: Year-end Stock of South African Direct
         Investment Abroad by Region/Country
         (billions)
 
REGION/COUNTRY       RAND    RAND    US$     US$
                     2004    2005   2004    2005
EUROPE - Total      165.5   189.1   25.7    29.7
UNITED KINGDOM       65.0    70.9   10.1    11.1
LUXEMBURG            51.1    74.8    7.9    11.8
AUSTRIA              16.7    18.0    2.6     2.8
OTHER                 2.2     2.1    0.4     0.3
N&S AMERICA (total)  17.5    16.3    2.7     2.6
USA                  15.3    14.4    2.4     2.3
AFRICA (total)       23.6    19.1    3.7     3.0
ASIA (total)          3.2     1.5    0.5     0.2
OCEANIA (total)       6.8     6.8    1.1     1.1
--------------------------------------------- ----
TOTAL               216.7   232.9   33.6    36.6
--------------------------------------------- ----
 
Table G: Year-end Stock of FDI in South Africa
         by Industry Sector (billions)
 
INDUSTRY             RAND    RAND      US$      US$
                     2004     2005     2004    2005
Agriculture,
 Forestry & Fishing   0.7      0.7      0.1     0.2
Mining              111.6    168.3     17.3    26.5
Manufacturing       111.4    136.0     17.3    21.4
Construction          2.0      2.0      0.3     0.3
Trade, Catering,     14.5     14.7      2.3     2.3
 & Accommodation
Transport, Storage,  14.1      9.4      2.2     1.5
 & Communication
Finance, Insurance, 100.2    157.6     15.5    24.8
 Real Estate &
 Business Services
Social services       0.5       .5      0.1     0.1
--------------------------------------------- -------
TOTAL               355.1    489.2     55.1    77.0
--------------------------------------------- -------
 
Table H:  FDI Flows into South Africa:
 
Investment by foreigners in undertakings in South Africa
in which they have at least 10 percent of the voting
rights (billions):
 
2000   6.2
2001* 58.4
2002   8.0
2003   5.6
2004   5.2
2005* 39.8
 
*The high inflow in 2001 was due to the Anglo
 
PRETORIA 00000142  013.2 OF 014
 
 
American/DeBeers transaction.
*The inflow in 2005 was due to the Barclays/ABSA and
Vodafone/Vodacom transactions.
 
Table I:  FDI Flows out of South Africa:
 
Investment by South Africans in undertakings abroad in
which they have at least 10 percent of the voting rights
(billions):
 
2000   1.9
2001 -27.4 (inflow - decrease in investment abroad)
2002  -4.2 (inflow - decrease of investment abroad)
2003   4.3
2004   8.7
2005   5.9
 
*2001 De Beers/Anglo American transaction resulted in
the return of capital, previously invested abroad, to
South Africa.
 
Since 1994 many foreign firms have opened or re-opened
offices in South Africa.  There are an estimated 600
American companies (including subsidiaries, joint
ventures, local partners, agents, franchises, and
representative offices) doing business in South Africa.
The second and third highest numbers of companies per
country are from Germany and the U.K., respectively.
 
Key Investment Industries in South Africa:
 
South Africa is largely a food self-sufficient country,
with imports of wheat, oilseeds, poultry and pork
largely offset by exports of fresh fruits, vegetables,
fruit juice, and wine.  The bulk of the population's
food needs are supplied locally.  In certain instances,
South African food and beverage companies have become
global players, such as SAB Miller.  Major international
agro-processing companies with a presence in South
Africa include Unilever, Nestle, Coca-Cola, Danone,
Parmalat, Kellogg, HJ Heinz, Cadbury-Schweppes, Virgin
Cola, McCain Foods of Canada, and Pillsbury.
 
The chemical industry is the largest manufacturing
sector in the South African economy, accounting for five
percent of GDP.  The country is a world leader in the
manufacture of synthetic fuel from coal.  In addition to
Sasol and PetroSA Fischer-Tropsch-based synthetic fuel
operations, four oil refineries dominate the petroleum
and petrochemical industry.  The rest of the chemical
manufacturing sector consists mainly of AECI,
Sentrachem, and fertilizer plants.
 
The Standard, ABSA, First Rand, and Nedcor commercial
banking groups provide retail and investment banking
services and dominate the South African banking
industry.  The European, Malaysian, and U.S. banks with
banking licenses have so far concentrated on corporate
rather than retail banking.  Foreign banks have gained
market share by offering competitive lending rates.
 
The South African automotive and components industry
includes Ford, General Motors, Volkswagen, Bavarian
Motor Works, Daimler-Chrysler, Nissan, and Toyota, all
of which benefit from the Motor Vehicle Development
Program and have production plants in South Africa.
 
Table F: Top Foreign Companies Invested In South Africa
 
Australia    - BHP Billiton
Canada       - Placer Dome
Denmark      - AP Moller
France       - Lafarge
Germany      - BMW
Italy        - Cirio (Del Monte)
Switzerland  - Movenpick Hotels
U.K.         Q Lonrho Plc, SA Breweries,
               Anglo American, Barclays, Vodafone,
               British Petroleum, Old Mutual
U.S.         - Caltex; Coca Cola; Dow Chemicals;
               General Motors, Ford
Saudi Arabia - Oger
 
 
PRETORIA 00000142  014.2 OF 014
 
 
These companies have invested in excess of R1 billion in
South Africa since 1994.
 
Other significant U.S. investors include: McDonalds,
Levi Strauss, Nike, Silicon Graphics, Microsoft, HP,
Dell, Sara Lee, Caterpillar, Goodyear, Eli Lilly,
Johnson and Johnson, Proctor & Gamble, Fluor, CitiGroup,
IBM, and General Electric.
 
END TEXT
 
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