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