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South Africa: INVESTMENT CLIMATE STATEMENT 2005 - SOUTH AFRICA

     
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Reference ID: 05PRETORIA226
Created: 2005-01-19 05:14
Released: 2011-08-30 01:44
Classification: UNCLASSIFIED
Origin: Embassy Pretoria

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 19 PRETORIA 000226
 
SIPDIS
 
DEPT FOR EB/IFD/OIA; AF/S TCRAIG; AF/EPS
USDOC FOR 4510/ITA/IEP/ANESA/OA/J DIEMOND
COMMERCE ALSO FOR HVINEYARD
TREASURY FOR GCHRISTOPOLUS, BRESNICK AND AJEWEL
DEPT PASS USTR FOR PCOLEMAN AND WJACKSON
 
E.O. 12958:  N/A
TAGS: EINV KTDB EFIN ELAB ECON ETRD PGOV SF
SUBJECT:  INVESTMENT CLIMATE STATEMENT 2005 - SOUTH AFRICA
 
REF:  (A) 04 STATE 250356, (B) 04 STATE 141379
 
1. In response to reftel A, here is post's 2005 investment
climate statement for South Africa, chapter 6 of the next
Country Commercial Guide.
 
2.  BEGIN TEXT
 
Chapter 6 Investment Climate Statement FY 2005
 
6.1       Openness to Foreign Investment
 
The  government  of  South  Africa  (SAG)  welcomes  foreign
investment  as  a  key  driver for  the  country's  economic
development  and  integration into the global  economy.  Its
macroeconomic management is sound.  Investment policies that
promote  openness and raise productivity and growth are  key
objectives  of the SAG.  In 2004 the government announced  a
goal  of  investment reaching 25 percent  of  GDP  by  2014.
Moody's  gave South Africa (SA) a sovereign debt  rating  of
Baa1,  three  steps  into the investment grade,  in  January
2005.   Standard & Poor and Fitch also rank South Africa  at
investment  grade.   The  SAG  has  liberalized  trade   and
developed   its   competitiveness   by   lowering   tariffs,
abolishing   most   import  controls,  and   reforming   the
regulatory environment.
 
South   Africa's  record  of  political  and   macroeconomic
stability  over  the  past decade has  helped  to  create  a
promising medium to long-term economic climate for local and
international firms in South Africa.   South Africa, through
its  Trade  and  Investment South  Africa  (TISA)  promotion
agency,   provides  investment  facilitation  services   for
inbound   investors.  While  investment  opportunities   are
abundant  in  many  sectors  of  the  economy,  the   agency
concentrates on sectors which research has indicated a  high
SA  comparative advantage.  The agency offers the  following
services to international investors:
 
    Information on sectors and industries;
    Consultation on the regulatory environment;
    Facilitation on investment missions;
    Links to joint venture partners;
    Information on incentive packages;
    Assistance with work permits;
    Logistical support for relocation.
 
The  Department  of  Trade and Industry  (DTI)  published  a
comprehensive  guide for investors about  the  dynamics  and
principles   involved   in   the  South   African   business
environment.     (For   the   "Investor's   Handbook"    see
"publications" on web site: www.dti.gov.za)
 
v.za)
 
The  government has created a number of incentives  for  the
potential  investor in South Africa.  All  business  sectors
are  open  to investors, no government approval is required,
and  there are almost no restrictions on the form or  extent
of  foreign investment.   For example, in his February  2001
budget  speech, the Finance Minister announced an R3-billion
incentive  package  for  investors in  strategic  industrial
projects.  It entails tax allowances of either 50 or 100% of
an approved investment, and is managed through the Strategic
Industrial Project (SIP) program of the Department of  Trade
and Industry (DTI).  Up to June 2003, investments worth R3.2
billion  have  been approved for tax break allowances  under
the  SIP, a program aimed at companies that will invest more
than   R50  million  and  will  contribute  to  the  growth,
development   and   competitiveness  of  specific   industry
sectors.  The program will run until July 2005.
 
In  July  2004,  the Department of Trade and Industry  (DTI)
announced  a  new  incentive  to  attract  investment,  both
foreign  and domestic, in the film industry.  It established
the Film and Television Production Rebate Scheme that allows
eligible  applicants  to receive a  rebate  of  15%  of  the
production expenditures for foreign productions  and  up  to
25% for qualifying South African productions.  Film projects
must  have  begun  after  April 1, 2004  and  must  reach  a
threshold  of  25 million Rand in order to qualify  for  the
rebate.   Other requirements include 50% 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 10 million  Rand
(approximately $1.5 million).  Details on the entire  scheme
are available at the DTI web site at www.dti.org.za.
To encourage investors to establish or relocate industry and
business  to  areas throughout South Africa,  the  country's
various  regions  (provinces) have development  bodies  that
offer incentives. These incentives, which vary from area  to
area,  include reduced interest rates, reduced  rentals  for
land and buildings, cash grants for relocation of plant  and
employees, reduced rates for basic facilities, rail age  and
other  transport rebates and assistance in the provision  of
housing.
 
The   Minister   of   Trade  and  Industry   expressed   the
government's view on foreign investment as  "...our  sincere
hope  to  attract  real  and growing international  investor
commitment to South Africa and, at the same time,  to  fully
capitalize  on  the  opportunities to  bring  about  dynamic
growth  in  our  country. In so doing  we  hope  to  enhance
commercial   and  industrial  development,  while   creating
sustainable employment and providing training for  our  vast
resource  pool."   He  continued  to  say  that  since   the
inception  of the new democratic government in  1994,  South
Africa  has  effectively adhered to discipline,  predictable
economic  fundamentals. Through this arduous process,  South
Africans  have  developed a strong entrepreneurial  culture,
keen  to  jointly  develop  the country  with  international
partners.  From  a geographic perspective, South  Africa  is
proud  of  the  role  to  be  played  in  facilitating   and
supporting  the development of the region, offering  a  wide
array of skills and technical understanding.
 
SA's policy and regulatory frameworks can, however, serve as
disincentives  to  new  investment  or  impediments  to  the
profitability  of firms already operating  in  SA.   Several
foreign  companies  have in the past complained  that  South
Africa's immigration legislation and the application of  the
law  made it difficult to get work permits for their foreign
employees.   In  particular they indicated that  unnecessary
delays,  rejections of applications and limits  (quotas)  on
foreign   workers  in  a  given  field  call  into  question
potential investors' ability to staff their operations  with
the  necessary skills at a given time.  It was  argued  that
the immigration legislation was a remnant from the apartheid-
era  and  did not take into account recent developments  and
the  opening  up  of  the  South African  market.   The  SAG
acknowledged  this  problem and during  2001  introduced  an
Immigration  Bill  that  would  create  more  categories  of
permits   for  temporary  residents.  The  legislation   was
contentious.  Parliament finally approved the legislation in
May  2002.   Critics have charged that the  Act,  which  was
intended to assist with the process of bringing more skilled
workers into SA, created uncertainty and confusion.
 
Companies  have  also  complained  about  the  introduction,
through a regulation in early 2003, of a 2% 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   the   new   immigration
legislation  and  this  created more uncertainty  about  the
effective handling of applications for visas.
 
 In January 2004, President Mbeki signed into law the Broad-
Based Black Economic Empowerment (BBBEE) Act of 2003, the
legislation enacting the Black Economic Empowerment (BEE)
strategy. The Act directs the Minister of Trade and Industry
to develop a national strategy for BEE, issue BEE
implementing guidelines in the form of Codes of Good
Practice, encourage the development of industry specific
charters, and establish a National BEE Advisory Council to
review progress in achieving BEE objectives.
 
The Minister released three codes in December 2004 with
seven more due in early 2005.  The recently released codes
address specific issues pertaining to the BEE Framework,
Equity Ownership, and Management and include a new generic
scorecard with suggested targets for areas such as equity
ownership, management, procurement, and equality in
employment.  The codes are intended to harmonize existing
and future industry empowerment charters.  Sectors that have
completed or are close to finalizing empowerment charters
for their respective industries include: accounting,
agriculture, chemical, cosmetics, clothing and footwear,
construction, engineering services, financial services,
forestry, health, information and communications technology
(ICT), liquid fuels, liquor, marketing, mining, property,
tourism, transport, and wine.  The Minister is expected to
establish the National BEE Advisory Council early in 2005.
 
U.S.  companies  support the broad goals of  South  Africa's
Black  Economic  Empowerment  (BEE)  policies.   They   have
contributed  to the positive transformation of the  economy,
including through their employment and management practices,
and  have  significant  programs that  support  historically
disadvantaged  individuals (HDIs).  They do have  questions,
however, about some of the details of BEE proposals and  how
they will be implemented.  They have concerns about the lack
of  clarity  and  consistency in the  BEE  rules.   A  major
concern   is  whether  HDI  equity  ownership  will   become
mandatory  and  a  cost  of doing business  with  the  South
African  government.  The Minister of Trade and Industry  is
developing    a   statement   on   equity   ownership    for
multinationals to be included in the Code of  Good  Practice
on  Equity  Ownership,  which is  expected  to  address  the
concerns of U.S. companies.
 
Poor  or  unclear  regulations  in  key  sectors,  such   as
telecommunications,  are also disincentives  to  investment.
In  instances  where  the regulator is weak  and  unable  to
enforce its own regulations, foreign firms are placed  in  a
weaker   competitive  position  compared  to  the   national
operator,  thereby  affecting  their  profitability.   Costs
associated  with  pursuing legal action to resolve  disputes
also  cut into the bottom line.  Improvement is expected  in
the telecoms industry, however, following the Communications
Minister's September 2004 announcement liberalizing much  of
the  telecoms environment by February 2005.  As part of this
announcement,  the  regulator  plans  to  allow  value-added
network  service  (VANS)  providers self-provide  their  own
facilities  or  lease  telecommunications  facilities   from
private  telecommunications network operator.  In  addition,
the  regulator is proposing that licensees as well  as  VANS
could resell spare network capacity.
 
In  contrast  to domestic investors, foreign investors  face
local  borrowing  restrictions imposed by  exchange  control
authorities.  Such restrictions apply to `affected  persons'
-  companies or other bodies in which (1) 75% 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% 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 SA may provide credit to  a
non-resident  or "affected person" without exchange  control
exemption.   Non-residents and "affected persons,"  however,
may  borrow  up to 100% 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.
 
The SAG has an official policy on the restructuring of state
assets,  which include privatization as an accepted  option.
There  are four big parastatals, all at different levels  of
privatization:   Eskom (power generation and  distribution),
Denel   (defense),  Transnet  (transportation)  and   Telkom
(telecommunications).  Eskom supplies nearly  94%  of  South
Africa's  electricity, makes substantial profits and  has  a
turnover of nearly R30 billion per year.  Transnet dominates
the  transport sector and contributes more than 3% of  South
Africa's GDP.  It comprises 13 companies involved in  multi-
modal transport and includes railways, an airline, ports and
a  pipeline.  Transnet has reported that they will keep only
four of its businesses
 
Prior to May 2002, South African legislation provided Telkom
a   monopoly   on  certain  international  and  fixed   line
telecommunications services. The government is in the  final
stages  of completing the shareholder structure of a  second
fixed-line  operator, however, to compete with Telkom.    In
2004,  the  U.S./Malaysia Thintana Consortium  sold  its  30
percent stake in Telkom, which it had acquired in 1997,  for
nearly $2 billion.
 
Following  national elections in April 2004, the  Government
unveiled plans to restructure state-owned enterprises rather
than to proceed with privatization at this time in an effort
to  support the administration's two major policy objectives
of  reducing  unemployment  and  creating  economic  growth.
Consequently, in 2005 the SAG estimates much lower  proceeds
from  the sale of state-owned assets than in previous years.
Since the completion of the Telkom deal, government has been
left  with  fewer  sizeable  state  entities  to  privatize.
Internationally  economic conditions are  not  favorable  to
attract   partners,  especially  in  the  airline  industry.
Proceeds   in   2005   are   expected   from   the   planned
"concessioning"  of  the  Durban  port  container  terminal.
Other   anticipated  deals  are  the  sale   of   "non-core"
businesses  unbundled  from Transnet  and  Airports  Company
South  Africa  (ACSA),  which manages  South  Africa's  nine
principal airports.
 
The medium-term privatization of smaller parastatals such as
Sentech (radio transmission), Safcol (forestry), the SA Post
Office,   or  in  the  case  of  Denel  (Defense   R&D   and
manufacturing),  a  hoped-for  partial  buy-in  by   foreign
suitors, may also afford lucrative opportunities for foreign
participation.
 
 6.2           Conversion and Transfer Policies
 
Exchange  control  in  South Africa is administered  by  the
South   African  Reserve  Bank's  (SARB)  Exchange   Control
Department  and  through commercial  banks  that  have  been
designated as "authorized dealers" in foreign exchange.  All
international commercial transactions must be accounted  for
through  authorized foreign exchange dealers.  There  is  no
difficulty  in  obtaining foreign exchange.   The  financial
sector in South Africa is well developed and there are  only
limited delays in the conversion and transfer of funds.  The
spot  turnover in the South African foreign exchange  market
is  substantial,  reaching a daily  average  of  $1  billion
during the month of May 2003.
 
There are no restrictions on foreign firms wishing to invest
in  share capital. Investors are advised to ensure that  the
share   certificates  are  endorsed  "non-resident"  by   an
authorized  dealer in order to return disposal proceeds  and
dividends  to  their country of origin. A  record  of  funds
introduced  into  South Africa should  be  kept.  For  every
purchase  of exchange, irrespective of the amount  involved,
authorized  dealers  are required  to  report  to  the  SARB
details of payments received from foreign partners by  South
African residents.
 
In  general there are no controls over the removal  by  non-
residents  of investment income or capital gains.  Repayment
of  foreign  loans  by  South  African  residents,  however,
requires  prior approval. Dividends may be paid  to  a  non-
resident without the approval of the SARB. Dividends due  to
a  non-resident  and  paid pursuant to a de-registration  or
liquidation    are   transferable   against    documentation
confirming  this  fact.  All loans from outside  the  Common
Monetary  Area  to  South  African residents  require  prior
Exchange  Control  approval. Approval  is  normally  granted
provided the minimum tenor of the loan is for a period of at
least  one  month  and  a market-related  interest  rate  is
charged  -  that  is up to prime plus 3% for  South  African
denominated  loans  and  up to prime  plus  2%  for  foreign
denominated  loans which are not shareholder-related  funds,
with shareholder's funds restricted to prime.
 
For  every  sale  of foreign exchange, irrespective  of  the
amount  involved, authorized dealers are required to  report
to  the SARB details of payments made to foreign parties  by
South African residents.  Royalties, license and patent fees
to  non-residents, where no local manufacturing is involved,
require  the approval of the SARB.  Manufacturing  royalties
(as  opposed  to sales/marketing royalties) are  subject  to
approval by the DTI, which will communicate its decision  to
the  licensee  or  the  Exchange  Control  Department  where
applicable, which will enable an approach to a bank directly
to  transfer  the  royalty payments. Authorized  dealers  on
production  of an invoice may pay current account  payments,
such   as  management  fees  and  other  fees  for  services
provided, provided that such payments are not calculated  as
a percentage of sales, profits, purchases or income.
Significant progress has been made in the liberalization  of
exchange  controls since 1994. The financial Rand  mechanism
was  abolished  in  1995, removing  most  controls  on  non-
residents. In June 1997, controls on South African residents
were  considerably relaxed, and virtually  all  controls  on
current  account transactions were removed. Resident private
individuals  who are over 18 and South African taxpayers  in
good standing have also been permitted to invest up to R500,
000 abroad since 1 July 1997.  The limit has since increased
to R750, 000 per person.
 
On  February  26,  2003  the Minister of  Finance  announced
further  measures to relax exchange controls.   The  changes
included  the  increase  of  the allowance  governing  South
African  corporations' use of South African funds to finance
new  approved direct investment in foreign countries as well
as  the  unwinding of blocked assets.  It was also announced
that dividends repatriated from foreign subsidiaries will in
future  be  eligible for an exchange control  credit,  which
will  allow  them  to  be re-exported for  approved  foreign
direct investments.  Furthermore, the tax payable on foreign
dividends  was  also  removed in  instances  where  a  South
African  taxpayer has a meaningful interest in  the  foreign
subsidiary  paying  the dividend. New emigrants  wishing  to
exit  more  than the permitted R750, 000 from  South  Africa
will  in  future be allowed to apply to the Exchange Control
Department  of  the  SARB to do so, subject  to  an  exiting
schedule and an exit charge of 10% of the amount.
 
In  October  2004,  the Finance Minister  announced  in  his
Medium  Term Budget Policy Statement (MTBPS) the  relaxation
of  exchange rate controls for corporations.  The rules  had
limited  offshore investments to R2 billion per project  for
investments in Africa and R1 billion elsewhere, in  addition
to   20   percent  of  the  excess  cost.   With   the   new
announcement,  the  limits on outward investments  by  local
corporations  and  restrictions  on  the  repatriation   for
foreign  dividends  are removed as well as  restrictions  on
individuals to invest in foreign firms listed on  the  South
African exchanges.  Even though there are no restrictions on
corporations'  foreign direct investment, corporations  will
still be required to apply to the Reserve Bank for approval.
Limits  on pension funds, insurance companies, mutual  funds
(unit  trusts)  and  individuals  are  still  in  place  but
expectations  are  that  they will be  removed  soon.   More
relaxed  exchange controls facing corporations  should  help
the  government's goal of investment reaching 25 percent  of
GDP by 2014.
 
 
Further questions on exchange control can be addressed to:
South African Reserve Bank
Exchange Control Division
P.O. Box 427, Pretoria, 0001
Tel: (27)(12) 313-3911; Fax: (27)(12) 313-3785
www.reservebank.co.za
 
6.3       Expropriation and Compensation
 
There  is  no record of any expropriation or nationalization
of  American  investment in South Africa since 1924.   Under
the  Expropriation  Act  of 1975 and the  Expropriation  Act
Amendment  of  1992,  the State is entitled  to  expropriate
property  for  public  necessity  or  public  utility.   The
decision  to expropriate is an administrative one vested  in
the  State.   Compensation is determined by the  amount  the
property  would  have  been  realized  in  an  open   market
transaction by a willing seller to a willing buyer.
 
Skewed  ownership of productive assets in  South  Africa  is
still  one  of  the most visible legacies of apartheid.  The
racially  discriminatory property laws of the past  resulted
in  highly disproportionate patterns of land ownership.  The
government's   Land  Reform  for  Agricultural   Development
Program  (LRAD)  has been designed to expand  the  range  of
support  measures  that  will  be  available  to  previously
disadvantaged   South  African  citizens  to   access   land
specifically  for agricultural purposes. The SAG  recognizes
that   market-based   programs  of   state   directed   land
redistribution  perform  better  than  programs   that   are
operated  exclusively by the public sector.  The  government
regularly confirms its commitment to ensuring the success of
this program and ensuring that individuals from historically
disadvantaged groups obtain access to land in a  speedy  and
orderly  fashion.   In cases where expropriation  has  taken
place, the landowner was fully compensated.
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 International Center  for
the Settlement of Investment Disputes.  South Africa has  an
objective  system  for  enforcing property  and  contractual
rights.   The  government does not interfere  in  the  court
system.   South Africa applies its commercial and bankruptcy
laws  with  consistency.  South Africa  has  signed  various
investment  agreements  with  a  number  of  countries   and
recognizes, and is recognized by, the International  Chamber
of    Commerce,   which   supervises   the   resolution   of
transnational  disputes.   In 2004  some  foreign  companies
operating   in   the  mining  sector  have   suggested   the
implementation  of  BEE  policies  may  lead  to  investment
disputes.
 
6.5       Performance Requirements and Incentives
 
In  September 2000, the Department of Trade & Industry (DTI)
announced  that the manufacturing support schemes  would  be
replaced with a "six pack" of incentives consisting of the:
 
       Small Medium Enterprise Development Program (SMEDP),
     which offers manufacturing and tourism enterprises with
     "significant expansions of their operations", tax-free cash
     grants for two years, based on the cost of the investment in
     land, buildings, machinery, equipment, and vehicles.  A
     maximum of R 3.05 million per year for enterprises with an
     investment in qualifying assets of up to R 100 million.
    Skills Support Programme (SSP) Skills Support Programme
(SSP) offers a maximum of 50% of the training costs, the
development of training curriculum and or land and buildings
related to training in order to encourage businesses to
introduce new and advanced skills to their workforce. This
grant will is payable for up to three years.
      Critical Infrastructure Facility (CIF) supplements the
     existing public or private sector infrastructure, by funding
     a top-up grant between 9 and 30% of actual costs.
    Industrial Development Zones (IDZ) consists of two
zones of operation: Customs secured area (CSA), and
industries and services corridor (ISC). A CSA is a delimited
area with entrance and exit points controlled by Customs
personnel. Each CSA has a dedicated customs office providing
inspection and clearance services, and a one-stop
op
administrative center to facilitate the approval and permit
 
processes. CSA-based enterprises are eligible for: duty-free
import of production-related raw materials and inputs; zero
rate on VAT for supplies procured from South Africa; and
right to sell into South Africa upon payment of normal
imported duties on finished goods. ISCs are industrial and
office park environments adjacent to CSAs, occupied by
service providers to CSA enterprises. The government first
designates areas suitable for IDZs. Prospective IDZ
companies then apply for permits to develop and operate an
IDZ.
       Foreign  Investment Grant (FIG) is open  to  foreign
     investors (i.e. at least 50% foreign shareholding) located
     outside  SACU  and/or the Southern African  Development
     Community (SADC).  It offers up to 15% of the value of new
     machinery  and equipment (a maximum of R3  million  per
     entity), based on accepted relocation costs.
    Strategic Investment Projects (SIP) offers a tax
x
allowance of up to 100% (a maximum allowance of R600 million
per project) on the cost of buildings, plant and machinery,
for strategic investments of at least R50 million.
 
In addition, the Industrial Development Corporation (IDC), a
self-financing,     state-owned,     development     finance
institution,  established  in  1940,  continues  to  provide
credit  facilities  to  South African  exporters.  Aimed  at
enabling   them  to  offer  competitive  terms  to   foreign
purchasers,  the credit facilities are still  subject  to  a
South African local content requirement of at least 70%, and
the  availability  of export credit insurance  cover.  Local
content considerations are taken into account when comparing
tenders for government procurement purposes
The  IDC also provides loan financing to the private  sector
for the development of viable secondary manufacturing in its
target  sectors  and is often prepared  to  make  an  equity
investment  or  enter  into  joint  ventures  with   foreign
investors.
 
There  are several government-supported bodies that  provide
technical assistance for new industries.  These include  the
Council  for  Scientific and Industrial Research  (CSIR),  a
multi-disciplinary research, development, and implementation
organization;  Technifin, a government-owned firm  financing
the commercialization of new technology and products; MINTEK
(formerly known as the Council for Mineral and Metallurgical
Technology); and the Council for Geoscience that fulfils the
role  of  a  geological survey and undertakes  geologically-
based investigations and services.
 
The  SAG  is not a member of the plurilateral WTO Government
Procurement  Agreement  (GPA). According  to  South  African
government  authorities, joining the GPA could  limit  South
Africa's  objectives  towards promoting  small,  micro,  and
medium-sized    enterprises   and   the   "black    economic
empowerment" (BEE) program.
 
The  government  procurement framework  is  still  regulated
through the State Tender Board Act of 1968.  However,  South
Africa is trying to align the buying procedures of national,
provincial, local, and state-owned companies. As part of the
Public Finance Management Act Regulations of 1999, the state
and  provincial tender boards ceased to exist  on  31  March
2002,  in  order  to  devolve accountability  to  accounting
officers.   Depending on their level of responsibility,  the
accounting  officers are now allowed to  approve  government
purchases  up  to  a  certain  amount.   There  is  also  an
appointed  independent ombudsperson to  provide  an  interim
mechanism for quick and effective intervention on complaints
from businesses.
 
The  basic  principles for government procurement  in  South
Africa,  in terms of socio-economic objectives, are set  out
in the Constitution: procurement by an organ of State or any
other  institution identified in national legislation  must,
on  the  one hand, be "in accordance with a system which  is
fair,   equitable,   transparent,  competitive   and   cost-
effective," and, on the other hand, allow for categories  of
preference  and the protection, or advancement,  of  persons
disadvantaged by unfair discrimination, within  a  framework
to  be  prescribed by national legislation. Other principles
on  which  procurement must be based  in  South  Africa  are
accountability,  and  the  just  in  time   (JIT)   delivery
principle.
 
Price preferences are taken into account for the purpose  of
comparing  tenders: the preferences are  deducted  from  the
tender  price  after  the tenders have  been  evaluated  and
brought to a comparative basis.  Price preferences, aimed at
promoting  local manufacture, are based on such criteria  as
use of the SABS (South African Bureau of Standards) mark and
locally manufactured electronic systems and components.  The
preference is up to 10% if local content is more  than  80%,
up  to  10%  for the use of locally manufactured  electronic
systems  and  components, plus a minimum  of  5%  for  local
design,  provided that the two together do not  exceed  10%,
and  2.5% for the use of products that carry the SABS  mark.
Price preferences are generally cumulative.
 
The  Preferential Procurement Policy Framework Act of  2000,
and  amended draft regulations promulgated in November 2004,
stipulates  that  preferences will  apply  to  all  tenders,
irrespective of the amount. Preference points, calculated on
the  basis  of comparative and not tendered prices,  may  be
allocated within the following limits: an 80/20 point system
for  tenders  up to R1 million. A maximum of  80  points  is
allocated to the lowest acceptable tender in terms of price;
higher price tenders receive fewer points. A maximum  of  20
points is awarded to bidding firms who meet minimum industry
targets  for ownership, management, procurement,  and  equal
employment of historically disadvantaged individuals  (HDI).
For  tenders above R1 million, a 90/10-point system is  used
on  the  same  basis. The contract must be  awarded  to  the
bidder   who   scores  the  highest  points,  unless   other
developmental  objective  criteria  justify  the  award   to
another  bidder.  An  organ of State may  be  exempted  from
provisions  of  the  Framework Act  if  public  or  national
security interests justify such exemption, or if the  likely
bidders are international suppliers.  Foreign firms can only
bid through a local agent.
 
Parastatals   also   generally   follow   the   government's
procurement  policy.  Eskom and Transnet have no  preference
system,  while  Telkom  grants preferences  based  on  local
content.  Any  bidder for a parastatal contract,  whose  bid
contains  imported  content worth  over  $10  million,  must
submit an "industrial participation" (IP) plan showing  that
the  bidder  will invest in new or incremental  business  in
South Africa.
 
Under  the National Industrial Participation Program (NIPP),
the  seller must invest in a South African business  to  the
value  of at least 30% of the value of the imported  content
of  the  tender. The industrial policy of the Department  of
Defense  and  the  Armaments  Corporation  of  South  Africa
imposes  an IP obligation on all defense purchases exceeding
$2  million; this obligation is known as "Defense Industrial
Participation" (DIP). Defense purchases exceeding $2 million
but less than $10 million require a DIP obligation of up  to
50%, and defense purchases exceeding US$10 million require a
DIP obligation of at least 50%.
 
The  NIPP,  which  became mandatory  on  1  September  1996,
resembles an offset contract in the sense that goods  and/or
services  imported under the tender contract  are  partially
offset  by  exports of services, and, to a  certain  extent,
goods,   during  the  period  of  fulfillment  of   the   IP
obligation.
 
6.6       Right to Private Ownership and Establishment
 
Private  property  rights are strongly  protected  by  South
African  law.  In general, all foreign and domestic  private
entities are entitled to own business enterprises and engage
in  profit-making activities.  Private entities are  allowed
freely  to  establish, acquire, and dispose of interests  in
business   enterprises.   The  acquisition  of  an  existing
business enterprise is usually achieved through the purchase
of shares or assets.  The securities regulation code applies
to public limited companies and to private companies with 10
or  more shareholders, and capital and reserves in excess of
R5 million.  If a stake of 30% or more is acquired, an offer
must  be made to minority shareholders to acquire all  their
shares at a price equal to the highest paid by the investor.
 
South  Africa  still  has  a  number  of  sectors  that  are
dominated by state-owned enterprises.  Eskom supplies nearly
94% of South Africa's electricity while state-owned Transnet
dominates the transport sector and contributes more than  3%
of  South  Africa's  GDP.   In  2004,  Transnet  unveiled  a
strategy  to  focus solely on rail, port  and  oil  pipeline
operations.  All other companies previously administered  by
Transnet, including South African Airlines (SAA), are  being
discarded.   Telkom,  the  fixed-line  telephone   operator,
continues    to    enjoy    a   monopoly    on    fixed-line
telecommunication  services despite the end  of  legislative
protection in May 2002.  A second national operator (SNO) is
close  to  resolving  shareholder  concerns  and  could   be
licensed in early 2005.  The South African Post Office still
enjoys a legislative monopoly on the delivery of mail.
 
South  Africa's  Competition Commission  and  Tribunal  have
demonstrated an increased capacity to implement  competition
policy  effectively.  The Competition Act of  1998  and  its
1999  and  2000 amendments address anti-competitive  mergers
and practices in both the private and public sectors.  State-
owned  enterprises that compete unfairly  with  the  private
sector   are   being  challenged  with  greater   frequency.
Economic  dominance by state-owned enterprises and  previous
weak  competition legislation could be partly to  blame  for
high concentration levels and business practices out of step
with the requirements of a competitive economy.
 
6.7       Protection of Property Rights
The  South African legal system protects and facilitates the
acquisition and disposition of all property rights, such  as
land,   buildings  and  mortgages.   Deeds  of   sales   are
registered  in the Deeds Office. Banks provide  finance  for
their  clients to purchase a property through registering  a
mortgage as security on the property.
 
All agreements relating to payment for the right to use know-
how,   patents,  trademarks,  copyrights  or  other  similar
property  are  subject to approval by the  exchange  control
authorities.   A distinction is made between consumer  goods
and  capital goods.  For consumer goods, a royalty of up  to
4%  of factory selling price is regarded as acceptable.  For
intermediate and finished capital goods, a royalty of up  to
6% will generally be approved.
 
Owners of patents and trademarks may license them, but  when
this  entails  the  payment of royalties to  a  non-resident
licensor, the royalty agreement must be approved by the DTI.
Patents are granted for 20 years - usually with no option to
renew.   Trademarks (including service marks) are valid  for
an initial period of 10 years and are renewable indefinitely
for  further  10-year periods.  The holder of  a  patent  or
trademark must pay an annual fee to preserve its validity.
 
Literary, musical and artistic works, 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 was adopted to provide additional
protection  to owners of trademarks, copyright  and  certain
marks under the Merchandise Marks Act of 1941. The 1997  Act
covers  offenses  related  to counterfeit  goods,  including
possession  of  such goods. The Intellectual  Property  Laws
Amendment Act, adopted to amend the Merchandise Marks Act of
1941,  the  Performers' Protection Act of 1967, the  Patents
Act  of 1978, the Copyright Act of 1978, the Trade Marks Act
of  1993,  and the Designs Act of 1993, aims to bring  South
African intellectual property legislation fully in line with
the  Trade-Related Aspects of Intellectual  Property  Rights
(TRIPS)  Agreement. Amendments to the Patents  Act  of  1978
were  also  intended  to bring it in line  with  TRIPS,  and
provides  for  the implementation of the Patent  Cooperation
Treaty (PCT), to which South Africa became a party in  March
1999.
 
The  International Intellectual Property Alliance  continued
to  note concerns about the piracy levels of optical  discs,
which it estimated to be 40% in 2004.  A local watchdog, the
SA  Federation Against Copyright Theft (Safact), reported on
its  website  (www.safact.co.za) statistics on  seizures  of
counterfeit DVDs as well as a number of successful  criminal
court  cases  against  pirates  in  2004,  demonstrating  an
increased commitment to IPR enforcement in 2004.
 
6.8       Transparency of the Regulatory System
 
Government   promulgated   the   new   International   Trade
Administration  Act  in  2002.  This  Act  established   the
International Trade Administration Commission (ITAC) and  is
responsible  for  tariff administration and  trade  remedies
(antidumping and countervailing measures). In terms  of  the
new  Act,  the Commission shall be responsible, among  other
things,  for investigating and evaluating applications  with
regard  to alleged dumping, or subsidized exports, safeguard
measures,  and  amendments of customs duties in  the  common
SACU  area. The Commission is required to implement measures
to  promote  public awareness of the provisions of  the  new
Act.
 
In general, South Africa's Companies Act (1973) provides for
clear,  transparent regulations concerning the establishment
and operation of businesses.  Business organizations of more
than 20 persons that operate for gain must be registered  as
a  company  under the Act.  Foreign investors are  organized
under the same rules and regulations as domestic firms, with
one  exception: foreign companies that choose not to form  a
firm  in  SA  operate  as "external companies."   The  legal
liabilities of an external company are not limited.
 
No  government approval is required for foreign investors to
establish  a  new business in South Africa  apart  from  the
approval  required  under the exchange control  regulations.
The    investor    will   be   required   to    appoint    a
consultant/auditor/legal advisor to register  a  company  on
his/her  behalf.   The company should be  registered  within
21days; it should also register with the tax authority.
 
In South Africa there are no locations where a foreign-owned
business   is   prohibited  or  investment   is   officially
discouraged.   The  forms, which are  to  be  filled  by  an
investor, are simple and understandable.  The whole  process
for  foreign firms setting up in South Africa from beginning
to  end  on average may take six months, but if done through
Trade and Investment South Africa it can be finalized within
one  month.  Virtually all business activities are  open  to
foreign investors and there are generally no restrictions on
foreign investment.  Restrictions would usually relate to  a
particular industry and be applicable both to residents  and
non-residents.  Very few restrictions apply only to  foreign
companies.   For  example,  a foreign  bank  establishing  a
branch  in  SA  may be required to employ a certain  minimum
number  of  local  residents in order to  obtain  a  banking
license  and may be obliged to have a minimum capital  base.
Restrictions also exist regarding the ownership of immovable
property  by  foreign  companies.   Foreign  companies   are
required  to register as external companies before immovable
property may be registered in their names.
 
All businesses must obtain a business license from the local
authority,  which is valid indefinitely unless the  business
is  relocated  or  acquired by a  new  owner.   In  general,
businesses  must  register with the local Regional  Services
Council,   Department   of  Labor,  Workman's   Compensation
Commissioner, the appropriate Industrial Council, the  South
African  Revenue Service, and the Department of Customs  and
Excise.
 
 6.9      Efficient Capital Markets and Portfolio Investment
 
South  Africa's  banks  comply  with  international  banking
standards  and  offer one of the most sophisticated  banking
systems in the developing world. Customers have online, real-
time, nationwide access to bank accounts 24 hours a day, 365
days  a  year.   South  Africa's  political  transformation,
together  with the relaxation of exchange controls  and  the
greater liberalization of African economies, has meant  that
South  Africa  is  now  well positioned  to  provide  global
services through its own banks' foreign offices as  well  as
the  increasing presence of foreign bank representatives  in
South Africa.
 
After a fairly turbulent first half year of 2002, which  saw
the  demise  of  a  number of small and medium-sized  banks,
stability  returned  to  the sector.   South  African  banks
remained  well  capitalized, and the  average  risk-weighted
capital-adequacy ratio for the sector increased to 12.6  per
cent at the end of December 2002, compared to 11.4% in 2001.
Growth  in  the total balance sheet moderated  during  2002,
mainly  as a result of a moderation in the growth  of  total
loans  and advances. By the end of December 2002, the  total
funds of banks - comprising capital, reserves, deposits  and
loans  -  had  increased by 4.8 per cent  (measured  over  a
period  of  twelve  months), to a level of  R1.101  billion.
Concentration in the South African banking sector  increased
noticeably  during  2002, and the  four  biggest  banks  now
represent about 80 per cent of the total banking sector. The
participation of foreign banks in the local banking industry
decreased for the first time in six years, from 7.7 per cent
in  2001  to  about 6.9 per cent of the total banking-sector
assets  by  the  end of December 2002.  South African  banks
maintained  adequate levels of liquidity  despite  liquidity
strains  experienced by the system during the first half  of
2002.
 
Oversight  of  South Africa's banks is the  purview  of  the
South  African Reserve Bank. The Bank Act of 1990  regulates
private banks. The SARB is nearing completion of meeting all
recommendations   of   the  Basel   Committee   on   Banking
Supervision.  A variety of credit instruments are  available
to the private sector, including bankers' acceptances, fixed
and  variable rate securities, bonds, and equities.  In  May
1995, amendments to the Banks Act permitted foreign banks to
conduct  banking operations via branches, ending the earlier
requirement  that they establish subsidiaries.   A  complete
list   of   the   registered  banks,  banking  associations,
development banks, and related organizations that maintain a
presence  in  South Africa is available on an ABSA-sponsored
website at www.finforum.co.za/fininsts/bankdir.htm.
Any  person, whether South African or foreigner, may control
a  bank. There are three alternatives for conducting banking
operations  in  South  Africa (all of  which  require  prior
approval  of the Registrar of Banks, who heads up  the  Bank
Supervision Division): a separate banking company, a  branch
of   an   international  bank  or  banking  group,   and   a
representative office of an international bank. The criteria
for the registration of a bank are the same for domestic and
foreign investors.  Foreign banks, however, are required  to
include additional information with their application,  such
as:   foreign  bank  holding  company  resolution  approving
proposed  formation of the bank, a letter  of  "comfort  and
understanding" from the foreign bank holding company, and  a
letter  of  no  objection  from  the  foreign  bank's   home
regulatory authority.
 
The  Financial  Services Board (FSB) governs South  Africa's
sophisticated non-bank financial services industry.  The FSB
regulates  insurance,  pension  funds,  unit  trusts  (i.e.,
mutual   funds),   participation  bond  schemes,   portfolio
management,  and  the  financial  markets.   The   financial
markets consist of:
      The JSE Securities Exchange SA (www.jse.co.za)
    The Bond Exchange of South Africa (www.bondex.co.za)
 
South Africa's financial markets are robust, liquid and well
developed. Turnovers remained brisk in 2002 to date. In  the
bond  market, for example, the value of turnover in a single
month  is approximately equal to South Africa's annual gross
domestic  product  of one trillion Rand. Non-residents  also
take  a keen interest in these markets. In an average  month
non-residents buy more than a R100 billion in bonds and  R18
billion  in  shares on South African bourses. Although  they
also  are  engaged in selling bonds and shares, often  of  a
roughly equal amount, some net inflow or outflow is recorded
from  month  to month. During the first half  of  2002  non-
residents  bought a net amount of R13 billion in shares  and
bonds  on  the South African formal exchanges, and sold  R17
billion  during  the  third quarter. Further  net  sales  in
n
October were followed by net purchases in November.
 
The JSE Securities Exchange is the 16th largest exchange
measured by capitalization in the world.  At the end of 2002
the market capitalization stood at around $182 billion (R1.6
trillion) with a total of 472 firms listed. This is much
larger than all the exchanges in Africa combined. The JSE
Securities Exchange includes AltX, an exchange for small and
medium-sized companies launched in October 2003.  AltX has
ten companies with a market capitalization of approximately
R1 billion.  Early in 2005, the JSE plans to launch YieldX,
a trading platform for interest rate products.  The JSE
Securities Exchange All Share Index broke through the 10,000
level during December 2001 when the Rand fell to record lows
against the U.S. dollar but in July 2003 it stood at 8,600.
The Index has since recovered with the strength of the Rand,
climbing back above 10,000 in 2004 and reaching nearly
13,000 by December 2004.
 
 
The Bond Exchange of South Africa (BESA) regulates the fixed-
interest  securities  market  and  is  licensed  under   the
Financial  Markets Control Act.  Membership includes  banks,
insurers,    investors,   stockbrokers,   and    independent
intermediaries.  The bond exchange consists  principally  of
government bonds with some bonds from government parastatals
also  available.  There is a growing corporate bond  sector,
however,  as  more companies seek to raise  capital  through
this mechanism.
 
The   Financial  Services  Board  continues  to  assess  and
implement   the   recommendations   of   the   International
Organization of Securities Commissions in order to bring the
non-banking  financial services in line  with  international
best practices.  There are presently discussions underway to
establish a single financial services regulator.
Financial  services  in South Africa  are  characterized  by
extensive  interlocking shareholding  relationships  between
the  major  banks  and  the large insurance  companies.  The
securities   markets  are  well  developed.   Non-residents'
participation  in  the  securities  and  stock  markets  has
increased  sharply. The JSE began permitting  foreign  banks
and firms to join its registry in November 1995.
 
6.10      Political Violence
 
Political  violence is not a major issue  in  South  Africa.
Criminal   violence,   however,  is  high.    National   and
provincial  governments have unveiled a number  of  programs
aimed  at  attacking crime in general, and South  Africa  is
working  closely  with  donor  countries  to  address   this
problem.
 
6.11 Corruption
 
South  African  law provides for prosecution  of  government
officials  who  solicit  or  accept  bribes.  Penalties  for
offering   or   accepting  a  bribe  may  include   criminal
prosecution,  monetary fines, and dismissal  for  government
employees, or deportation for foreign citizens. South Africa
boasts no fewer than ten agencies engaged in anti-corruption
activities. Some, like the Public Service Commission  (PSC),
Office  of  the  Public Protector (OPP), and Office  of  the
Auditor-General  (OAG),  are constitutionally  mandated  and
address  corruption as only part of their  responsibilities.
Others,  like the South African Police Anti-Corruption  Unit
and  the  Directorate for Special Operations (more popularly
known  as "the Scorpions"), are dedicated to combating crime
and corruption. High rates of violent crime, however, are  a
strain  on capacity and make it difficult for South  African
criminal   and   judicial  entities  to  dedicate   adequate
resources to anti-corruption efforts.
 
South  Africa  is not a signatory of the OECD Convention  on
Combating  Bribery.  South Africa signed the  UN  Convention
against  Corruption on December 9, 2003 and ratified  it  on
November 22, 2004.  Transparency International South Africa,
an  affiliate of Transparency International, has operated in
South Africa since 1997.
 
During the last few years, crime has been a far more serious
problem than either corruption or political violence and  an
impediment  to,  and  a  cost of, doing  business  in  South
Africa.  The  South  African police  forces  have  not  been
effective  or well accepted in many communities  because  of
their historical role in enforcing minority rule, their lack
of  training, and internal crime and corruption  within  the
forces. The levels of crime, especially violent crime, are a
deterrent to attracting U.S. companies to South Africa.
 
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,  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. Notwithstanding  these  efforts,
businesses   complain  about  the  lack  of  certainty   and
consistency in interpreting and implementing some government
policies.
 
President  Mbeki  signed "The South African  Prevention  and
Combating  of Corrupt Activities Act" (PCCAA)  into  law  on
April  28,  2004.   The  PCCAA makes  it  more  clear  which
activities are considered graft.  The act:
 
      includes a list of codified corruption offenses related
     to specific persons.
 
      clearly defines that graft occurs between a "corruptor"
     and a "corruptee."
 
      declares that a bribe need not be monetary in nature,
     nor need it be paid directly to the person who will be
     undertaking the corrupt act.
 
      bars the payment of bribes to foreign public officials
     by South African citizens and firms.
 
      provides a list of corruption-related offenses relating
ting
     to specific matters in the public and private sectors.
 
      allows for the investigation and seizure of
     "unexplained wealth."
 
      tasks the National Treasury to establish a register of
     tender defaulters for corrupt individuals and firms.
 
      obliges public officials to report any corrupt
     activities.
 
      prescribes strict penalties, including the possibility
     of life imprisonment.
 
One shortcoming of the act is the failure to protect
whistleblowers against recrimination or defamation claims.
 
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 containing  a  Free
Trade  Agreement (FTA) went into force between South  Africa
ica
and  the European Union on January 1, 2000, but it does  not
have  an  investment  chapter.  Under the  FTA,  the  EU  is
committed to the full liberalization of 95% of South African
imports over a 10-year transitional period, while SA  is  to
liberalize  86%  of  EU imports over a 12-year  transitional
period.
 
The   U.S.-SA  bilateral  tax  treaty,  eliminating  double-
taxation  of business officials from one country working  in
another  was  signed in February 1997 and  became  effective
January  1,  1998.   Agreements Regarding Mutual  Assistance
between the Customs Administrations of the United States and
South  Africa came into force on August 1, 2001.  The United
States  and  South  Africa signed the Trade  and  Investment
Framework Agreement (TIFA) in February 1999, establishing  a
Council    on    Trade   and   Investment   consisting    of
representatives  of  both governments.  The  council's  last
meeting   was   held  in  February  2002.    U.   S.   Trade
Representative  Robert  Zoellick  visited  South  Africa  in
February  2002  and  January 2003  and  met  with  his  SACU
counterparts on both occasions.  The United States and  SACU
decided to pursue a Free Trade Agreement (FTA) and held  six
rounds  of negotiations since June 2003.  The United  States
is seeking an investment chapter in the FTA.
 
The rate of South African Normal Company Taxation applicable
to  companies  (other than small business  corporations  and
"employment companies" with financial years ending  after  1
April  1999)  is 30%.  Prior to April 1999, the company  tax
was  35%  and prior to April 1994, the company tax rate  was
40%.   Companies are not entitled to any rebates except  for
foreign royalty and foreign taxes paid.  Companies are  also
liable  for  secondary tax on companies (STC)  at  12.5%  in
respect  of  all  dividends declared after  13  March  1996.
Close  Corporations  are treated as companies  for  taxation
purposes.
 
Beginning in January 2001, South Africa moved to a residence-
based  income tax system.  Taxes are levied on residents  of
SA  irrespective of where in the world the income is earned.
Although taxpayers are taxed on their worldwide income, some
categories  of income and activities undertaken  outside  SA
are  exempt from SA tax.  External companies are taxed at  a
flat  rate  of  35% on their South African  source  profits.
Effective  October  1,  2001, SA also instituted  a  capital
gains tax.  Individuals include 25% of net capital gains  in
taxable  income, and companies include 50% of capital  gains
in taxable income.  As a result, the effective capital gains
rate  for individuals will vary from zero0 to 10.5% and  the
rate  for  companies is 15%.  SA also has a 14%  value-added
tax (VAT).  Exports are zero-rated and no VAT is payable  on
imported capital goods.
To  further  encourage business investment, the Minister  of
Finance  in February 2003 made several proposals  that  will
offer tax relief to companies.  These include:
        The   accelerated  depreciation  arrangements   for
     manufacturing assets, introduced as a temporary measure,
     will be retained as a fixed element in the tax policy.
    In keeping with practice in many other jurisdictions,
relief will be provided where business asset sale proceeds
are reinvested within 18 months.
    Taxpayers will be allowed to claim losses from ordinary
revenue on the sale of devalued depreciable business assets
with short economic lives.
    An accelerated four-year write-off period is proposed
for capital expenditure relating to research and development
in the field of natural and applied science.
    A double deduction is introduced for the first R20, 000
of costs incurred in the start-up of new businesses. The
turnover limit for small businesses qualifying for a lower
company tax rate will be increased from R3 million to R5
million.
 
The  government  also  introduced tax measures  in  2003  to
  to
encourage urban development. It announced that investment in
refurbishment or construction of buildings in certain  urban
areas    would   receive   special   treatment.    Taxpayers
refurbishing a building within designated zones will receive
a  20  per cent straight-line depreciation allowance over  a
five-year period. Construction of new buildings within  such
a  zone  will receive a 20 per cent write-off in  the  first
year  and five per cent a year for a further 16 years.  This
benefit will be available to owners as users of the building
or   as   lessors/financiers   of   these   investments.   A
complementary  proposal  extends tax  advantages  to  public
benefit organizations that provide affordable housing to low-
income households in underdeveloped urban areas, as part  of
a  more  comprehensive broadening of the list of  activities
qualifying  for tax-deductible donations.   The Minister  of
Finance  also  announced  the scrapping  of  "a  potentially
harmful  tax  practice"  in the form  of  the  International
Headquarter  Company regime as the need for  this  exemption
was obviated by the removal of the foreign dividend tax.
 
6.13      OPIC and other investment insurance programs
 
The Overseas Private Investment Corporation (OPIC) supports,
finances, and insures U.S. overseas investment projects that
are   financially   sound.    Its   assistance   contributes
significantly to the social and economic development of  the
host   country.   OPIC  aids  U.S.  investors  through   the
following  four principal activities, which are designed  to
promote overseas investment and reduce the associated risks:
    Financing businesses through loans and loan guarantees.
    Supporting private investment funds.
    Insuring investment against a broad range of political
risks.
    Engaging in outreach activities designed to inform the
American business community.
 
South   Africa  signed  a  bilateral  investment   incentive
ive
agreement  with  the  United States in  November  1993  with
respect  to  all of OPIC's programs.  Today,  OPIC  backs  a
number  of  investment funds focused on  Sub-Saharan  Africa
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   recently
established    the    $350   million   Sub-Saharan    Africa
Infrastructure Fund (SAIF) to target infrastructure projects
in all of Sub-Saharan Africa, including South Africa.
 
During  2003,  OPIC helped the National Urban Reconstruction
and  Housing  Agency  (Nurcha), a wholesale  housing  income
fund,  to  establish  a  scheme to lend  directly  to  needy
contractors  in a bid to ensure small developing contractors
have access to finance.  Nurcha will use funds from the R200
million  transaction to lend out R100 million this  year  to
fund  projects,  facilitating construction of  about  24,000
affordable homes. The new scheme, which is intended to speed
up   the   delivery   of  affordable   housing,   will   use
intermediaries  to  handle  contractors'  financial  issues.
Previously  the  Nurcha Fund acted only as a  guarantor  for
loans  from  financial institutions to emerging contractors,
and  the  contractors  had  to handle  their  own  finances.
Additional information is available at www.opic.gov.   South
Africa  is  also  a member of the World Bank's  Multilateral
Investment Guarantee Agency (MIGA).
 
16.14          Labor
 
Since   1994,   the  South  African  Government   has   been
systematically removing the vestiges of the apartheid  labor
system.  The government is attempting to erect in its  place
a  labor  market system that is characterized by  employment
security,  reasonable wages, and decent working  conditions.
The  new  system,  which was negotiated between  government,
business,  and  organized  labor  under  the  aegis  of  the
National  Economic  Development and Labor Council  (NEDLAC),
places   a  high  value  on  worker  rights  and  collective
bargaining between parties that are equally empowered.
 
The   new  labor  dispensation  rests  on  four  legislative
pillars:
 
  (1)  The Labor Relations Act, in effect since November 1996,
     is the cornerstone of the entire regulatory structure.  It
     enshrines both the right of workers to strike and also the
     right of management to lock out workers and hire replacement
     labor during a strike.  The Act created the Commission on
     Conciliation, Mediation, and Arbitration  (CCMA).   The
     Commission currently has a caseload far in excess of that
     which was originally projected because of the ease of access
     to its services.
(2)  The Basic Conditions Employment Act, implemented in
December 1998, establishes a 45-hour workweek and minimum
standards for overtime pay, annual leave, notice of
termination, and the like.
(3)  The Employment Equity Act prohibits unfair employment
discrimination and requires large and medium employers to
prepare affirmative action plans to ensure that blacks,
women, and disabled persons are adequately represented in
the workforce.
(4)  The Skills Development Act imposes a levy on employers
equal to 1.0% of payroll to be used for training programs
devised by industry-specific training authorities and
jointly administered by employer organizations and labor.
 
Many  in business claim that the South African labor  market
is  over-regulated  and have urged the government  to  scale
back  some of the recently passed legislation.  In response,
the  Labor Minister proposed a number of amendments  to  the
labor laws, which were later, refined and agreed upon in  an
informal  business-labor body known as the Millennium  Labor
Council  (MLC).  These amendments were passed by  Parliament
in March 2002.  In its 2002 Article IV Staff Report on South
Africa,  released  on 23 January 2003, the  IMF  noted  that
conditions  in  the  labor  market  had  improved  with  the
introduction  of  legislation to streamline the  arbitration
process and allow for more flexibility in employment.
 
According  to  the latest (March 2004) Labor  Force  Survey,
published  by Statistics SA, the official unemployment  rate
is   27.8%.    This   rate  uses  the  International   Labor
Organization (ILO) definition of unemployed, which  excludes
persons who have not looked for work in the four weeks prior
to the interview.
 
There  are about 3.3 million union members in South  Africa,
composing  44% of the formal sector employment.  Most  union
members belong to affiliates of one 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  federation  with  some  1.8  million
members, is formally allied with the ruling African National
Congress (ANC) and the South African Communist Party (SACP),
it  often  opposes  the government on  matters  of  economic
policy.   One of COSATU's particular targets is governmental
efforts  to  privatize  municipal services  and  state-owned
corporations.   Striking is protected  under  South  African
law,  but,  in  general, labor militancy has been  declining
since 1994.
 
16.15          Foreign Trade Zones/Free Ports
 
The  DTI website states there are no foreign trade zones  or
free   ports  in  South  Africa,  though  there  are  bonded
warehouses  at various ports of entry.  General  rebates  of
duty  are available for specific situations, and duties  may
be rebated on goods on re-export.
 
South  Africa  has  what  it terms  "Industrial  Development
Zones."    They  are fairly new as the first  one  was  only
designated  in  2001.  The IDZ program and  the  regulations
were  introduced in 2000.  There are IDZs in Port  Elizabeth
(Coega)  and  East London (both in Eastern  Cape  province),
Richards  Bay  (in  KwaZuluNatal province) and  Johannesburg
International Airport in Gauteng province.  An IDZ is run by
an  IDZ  operator, which can be government-owned,  privately
owned,  or  PPP  (Public  Private Partnership)-  structured.
Customs  control  will  be part of the  IDZ  operations  and
handled   by  the  South  African  Revenue  Service  (SARS).
Licensing  of  enterprises is part of  the  process  and  is
performed by the Manufacturing Dev Board as the adjudicating
authority in collaboration with SARS.  The customs  benefits
related to manufacturing or processing in the zone are duty-
free  and  VAT-suspension on imports and  exports,  provided
that  the  finished product is exported.  Expedited services
and  other logistical arrangements can be provided  for  SME
businesses 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.
 
16.16          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 tends to rely mostly on  the  South
African Reserve Bank (SARB).  The SARB statistics conform to
the  IMF definition of FDI* and represent actual investment,
excluding    announced   but   not   completed,   "intended"
investment.   However,  the SARB does not  provide  country-
specific   figures  that  distinguish  between  actual   new
investment flows and changes in investment stocks caused  by
asset  swaps,  exchange rate adjustments,  and  mergers  and
acquisitions.   This situation makes it difficult  to  track
the  United States' and other countries' FDI position in  SA
on  a yearly 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 and may be  contacted
via its web site at www.bmap.co.za.
 
(*FDI  is generally defined as ownership of at least 10%  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.)
 
The  following  FDI statistics were drawn  from  the  SARB's
September 2004 Quarterly Bulletin.  The conversion  exchange
rate used was that of the average for each year cited.
 
 
 
Table A:  Average exchange rates used
          1999      2000    2001       2002         2003
US$/Rand  6.11      6.94    8.60       10.52        7.56
 
Table  B:   Year-end stock of Foreign Direct  Investment  in
South Africa
               1999      2000      2001      2002    2003
Rand (billion) 318.63    328.86    370.70    255.84  303.44
US$ (billion)   52.15     47.39     43.10     24.32   40.14
 
Table  C:  Year-end stock of South African Direct Investment
Abroad
               1999      2000     2001     2002    2003
Rand (billion) 203.04    244.65  213.18   189.91  180.51
US$ (billion)   33.23     35.25   24.79    18.05   23.88
 
(Table D: GDP (in Rand billion at current prices) & FDI as a
percentage of GDP
               1999      2000     2001     2002     2003
GDP            813.68    922.15 1020.01  1164.94   1251.47
FDI (%)         39.2      35.7    36.3     22.0      24.3
 
Table  E:   Year-end  stock  of  FDI  in  South  Africa   by
region/country (in billions)
REGION/COUNTRY   RAND         RAND           US$       US$
                 2002         2003           2002      2003
EUROPE - Total   211.2        245.8          20.1      32.5
UNITED   KINGDOM       158.2          188.4             15.0
24.9
GERMANY                22.1            22.9              2.1
3.0
SWITZERLAND     6.0          6.1           0.6       0.8
NETHERLANDS          12.8              16.1              1.2
2.1
FRANCE                  3.6             4.1              0.4
0.5
ITALY              1.4       2.0           0.1       0.3
 
N&S AMERICA - Total   25.1     32.1           2.4       4.2
USA                   23.9  29.5           2.3       3.9
 
AFRICA - Total        5.5      4.7            0.5      0.6
 
ASIA - Total         13.9     20.5            1.3      2.7
MALAYSIA           7.1     10.0            0.7      1.3
JAPAN                 3.4   7.1            0.3      0.9
 
OCEANIA - Total       0.2      0.4            0.0       0.1
 
--------------------------------------------- ---------------
--------------------------------------------- ---
TOTAL               255.8     303.4          24.3      40.1
--------------------------------------------- ---------------
--------------------------------------------- ---
 
Table  F:  Year-end stock of South African direct investment
abroad by region/country
REGION/COUNTRY      RAND           RAND       US$      US$
                     2002           2003      2002     2003
EUROPE - Total       152.4         137.4      14.5     18.2
UNITED KINGDOM     45.5          44.1       4.3      5.8
LUXEMBURG             46.8       43.7       4.5      5.8
AUSTRIA               27.0       11.2       2.6      1.5
OTHER              33.0          38.4       3.1      5.1
 
N&S AMERICA - Total   24.8          17.0       2.4      2.2
USA                        22.9            14.9          2.2
2.0
 
AFRICA - Total        14.2          15.8       1.4      2.1
 
ASIA - Total           4.4           3.5       0.4      0.5
OCEANIA - Total        7.0           6.8       0.7      0.9
--------------------------------------------- ---------------
--------------------------------------------- -
TOTAL                 202.8        180.5      19.3     23.9
--------------------------------------------- ---------------
--------------------------------------------- -
 
Table  G:  Year-end stock of FDI in South Africa by industry
sector (Billions)
 
INDUSTRY              RAND         RAND       US$      US$
                     2002          2003      2002      2003
Agriculture,
 Forestry & Fishing   0.7          0.5      0.1         0.1
Mining               80.6        103.1      7.7        13.6
Manufacturing        67.3         75.4      6.4        10.0
Construction        1.9          1.9       0.2      0.3
Trade, Catering,
 & Accommodation   13.3         13.4       1.3      1.8
Transport, Storage,
 & Communication   10.1         22.0       1.0      2.9
Finance, Insurance,
 Real Est. &
Business  Services  81.6        86.6       7.8     11.5
Social services      0.4         0.4       0.0      0.1
--------------------------------------------- ---------------
--------------------------------------------- --
TOTAL              255.8        303.4     24.3     40.1
--------------------------------------------- ---------------
--------------------------------------------- --
 
Table  H:   FDI  Flows  into  South  Africa:  Investment  by
foreigners in undertakings in SA in which they have at least
10% of the voting rights - Capital movements 1995 to 2002 in
Rand billions (inflows)
1995      4.5
1996      3.5
1997*    17.6
1998      3.1
1999      9.2
2000      6.2
2001*    58.4
2002      8.0
2003      5.8
 
*The high inflow in 1997 was due to the 30% privatization of
Telkom  while  the jump in 2001 is the result of  the  Anglo
American/ De Beers transaction.
 
Table  I:   FDI  flows:   Investment by  South  Africans  in
undertakings abroad in which they have at least 10%  of  the
voting  rights  -  Capital movements 1995 to  2002  in  Rand
billions (outflows)
1995      9.1
1996      4.5
1997      10.8
1998      9.8
1999      9.7
2000      1.9
2001    -27.4 (inflow - decrease in investment abroad))
2002     -4.2 (inflow- decrease of investment abroad)
2003      5.4
 
*2001  De Beers/ Anglo American transaction resulted in  the
return  of  capital, previously invested  abroad,  to  South
Africa
 
For  2003,  the Business Map Foundation, a non-profit  South
African  based  research  organization  and  think  tank,  *
reported  that  during the first quarter, FDI  inflows  were
slow.   However,  during the second  quarter,  plans  for  a
number  of  noteworthy investments were  announced.  Daimler
Chrysler announced a R2 billion-expansion deal.  This,  plus
a R123 million investment in improving the facilities at two
Da Gama Textile plants, made Germany the leading investor by
country  in  this  quarter.  Japan was  the  second  largest
investor in quarter 2, 2003 with Toyota announcing  that  it
is  to invest a further R1.7 billion to enhance its exports.
South  Africa  has been confirmed as one of  five  worldwide
locations  approved  by  Toyota Motor  Corporation  for  the
production of a new generation light commercial vehicle.  On
U.S.  investment, the Ford Motor Corporation of South Africa
announced  its  intention  to expand  into  a  R280  million
project to refurbish its paint shop.
 
(*  The Business Map definition of FDI includes mergers  and
acquisitions,  new  investments,  privatization,  expansions
that  result  in  new productivity capacity,  and  plans  or
intentions to invest, i.e., commitments.)
 
The  South African branch of Barclays Bank PLC announced  on
July  2,  2003  that it had received about R470  million  in
additional  capital from the UK banking group.  The  capital
will  be used to further grow its operations in this country
and  to  establish  a  local business structure  capable  of
supporting  its customers who are growing their Pan  African
operations,  it  said. Barclays South Africa  branch,  which
provides corporate and investment banking services, has over
the first six months of 2003 strategically positioned itself
to  become  a  more  prominent player in the  South  African
market.    This  is  evident  in  the  appointment   of   an
experienced  team of corporate bankers focused on  expanding
its  corporate and investment banking unit as well as moving
the  Barclays  Africa  headquarters  from  London  to  South
Africa.
 
BusinessMap set third quarter 2004 FDI at R27.8 billion, due
to  Barclays Banks' plans to obtain a majority share in ABSA
bank.  Investment by vehicle makers is forecast to  reach  a
five-year  high  of R3.5 billion in 2004 and  South  African
Breweries   has  committed  themselves  to  a   R5   billion
investment  over the next five years. Other major  companies
with  ambitious investment plans include Sasol, with capital
spending  peaking at R15 billion, PPC to add capacity  worth
almost  R1 billion with Eskom and Telkom expected  to  spend
R165billion to improve infrastructure.
Since  1994 many foreign firms have opened up (or re-opened)
offices  in  South Africa.  It is estimated that  there  are
nearly  700  American companies (including subsidiaries  and
joint  ventures,  local  partners,  agents,  franchises  and
representatives.)  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 a food self-sufficient country and the  bulk
of the population's food needs are produced locally from raw
materials. South Africa's well developed food and  beverages
industry  has  become a global player.  Some  of  the  major
international agro-processing companies that have a presence
in  South  Africa are: Unilever, Nestle, Coca-Cola,  Danone,
Parmalat, Kellogg, HJ Heinz, Cadbury-Schweppes, Virgin Cola,
McCain Foods of Canada, Pillsbury, and Minute Maid.
 
The South African Automotive and Components industry is on a
growth path and is well placed for investment opportunities.
 
BMW, Ford, General Motors, Volkswagen, Daimler-Chrysler and
Toyota all have production plants in South Africa.  .
General Motors / Opel is also intent on significant
investments in its Port Elizabeth plant.
 
Four major commercial banking groups who provide retail  and
investment  banking  services  dominate  the  South  African
banking  industry.  The European, Malaysian and  U.S.  banks
that  have  banking  licenses have so  far  concentrated  on
corporate  as opposed to retail banking. Foreign  banks  are
gaining market share by charging aggressive lending margins.
 
The chemical industry is the largest manufacturing sector of
the  SA  economy, accounting for some 5% of GDP. The country
is  a world leader in the manufacture of synthetic fuel from
coal.  Four  oil  refineries  dominate  the  petroleum   and
petrochemical industry plus the Sasol and Mossgass (PetroSA)
Fischer-Tropsch based operations. The rest of  the  chemical
manufacturing sector consists mainly of AECI, Sentrachem and
fertilizer plants.
 
The  following  companies  have invested  in  excess  of  R1
billion in South Africa since 1994:
 
Table F:  TOP FOREIGN COMPANIES INVESTED IN SOUTH AFRICA
 
Canada         - Placer Dome
Denmark        - AP Moller
France         - Lafarge
Germany        - BMW
Italy          - Cirio (Del Monte)
Switzerland    - Movenpick Hotels
UK             -  Billiton; Lonrho Plc, SA Breweries,  Anglo
               American
U.S.           - Caltex; Coca Cola; Dow Chemicals; IBM;
Saudi Arabia   - Oger
 
Other  significant U.S. investors include: Ford,  McDonalds,
Levi  Strauss,  Minute Maid, Nike, Salem, Silicon  Graphics,
Microsoft,  HP, Dell, Sara Lee, Caterpillar,  Goodyear,  Eli
Lilly, Fluor and General Electric.
 
END TEXT
 
 
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