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Country Commercial Guides for FY 2000: South AfricaReport prepared by U.S. Embassy Pretoria, released July 1999 |
II. ECONOMIC TRENDS AND OUTLOOK1. Major Trends and Outlook
With the peaceful democratic elections and smooth transition to majority rule in 1994, South Africa embarked on a structural transformation of its economy aimed at redressing racial inequalities and fostering long-term, outward-oriented growth. The country has a fair-sized domestic market of USD 133.4 billion (1998) with significant growth potential and is increasingly becoming free-market oriented. It enjoys easy access to other markets in Africa and has well-developed financial institutions and capital markets, a good communication infrastructure, lower labor costs compared to western industrialized countries and inexpensive electrical power and raw materials. It has, however, yet to develop to its full potential because of years of isolation, former inward-looking trade and investment policies, low savings rate and a largely unskilled labor force with attendant low productivity.
President Thabo Mbeki has repeatedly stressed his determination to meet the challenges facing the South African economy, particularly fighting crime and corruption; creating jobs; providing education, training, housing, and health care - including confronting the scourge of HIV/AIDS; stimulating growth in the economy; and alleviating poverty. South Africa continues to lack skilled labor, not only in professional fields relating to the sciences, medicine, technology and mathematics, but also in practical technical fields. This skills' shortage results from the inherited shortcomings of the educational system as well as the departure of skilled labor from South Africa to more lucrative employment opportunities abroad.
The South African government is addressing these problems through a number of policies, including the "Growth, Employment and Redistribution" (GEAR) macroeconomic policy, based on sound economic principles, which have earned international praise. The policy calls for foreign as well as domestic investment, privatization of government-owned enterprises and the restructuring of industry along globally competitive lines.
South Africa's proactive quest for foreign investment is a key part of its GEAR macroeconomic policy. In his July 1999 "State of the Nation" speech, newly inaugurated President Thabo Mbeki announced his plan for creating a prestigious International Investment Council which would include leading players in the global economy to ensure South Africa's attractiveness as a destination for foreign investment. Business has reacted positively to Minister of Trade and Industry Alec Erwin's April 1999 announcement of a new phase of the Department of Trade and Industry's (DTI) investment promotion campaign, which includes a late September 1999 roadshow to New York City and Los Angeles. Minister Erwin identified auto components, chemicals, electronics, information technology, pharmaceuticals, telecommunications and tourism as priority areas for attracting U.S. investment into South Africa.
Progress on privatization has been slower than expected, delayed by the government's strong desire to achieve consensus among business, government and labor in order to sustain the momentum of reform. South Africa has taken a number of steps to make its economy more open and attractive to global business including: reducing import tariffs and subsidies to local firms; eliminating the discriminatory non-resident shareholders tax; removing certain limits on hard currency repatriation; reducing the secondary tax on corporate dividends; lowering the corporate tax rate on earnings to 30 percent; and reducing tariff rates (although South Africa's tariff system remains complex and subject to rapid change).
As part of the opening of its economy, South Africa is working to develop and strengthen its trading relations with the world. In one such step on March 24, 1999 the South African Cabinet, the European Council of Ministers and the European Commission approved and endorsed the South Africa/European Union Trade, Development, and Cooperation Agreement. The EU and South Africa are expected to ratify the Agreement in time for implementation on January 1, 2000.
One of the provisions of the SA-EU Agreement is for a Free Trade Area (FTA). Under the FTA provision the EU is committed to the full liberalization of 95 percent of South African imports over a 10-year transitional period, while South Africa is to liberalize 86 percent of EU imports over a 12-year transitional period. Further, duty-free South African goods entering the EU are to increase by twenty percentage points over the next ten years. Many goods, especially agricultural goods, are currently subject to EU quotas that will be increased under the FTA.
2. GDP Outlook and Regional Role
South Africa's economic growth has been sluggish at 2.5 percent in 1997 and 0.5 percent in 1998. The decline was largely due to the Asian crisis, the delayed effects of South Africa's economic isolation during the Apartheid era and very high real positive interest rates. The fall in 1999 of the gold price to its lowest level in 20 years and low commodity prices in general brought on by the global economic slow-down have also had a clearly negative effect on the country. In July of 1999, the SA Rand was at 6.0 to the US Dollar.
Recent positive economic indicators include the substantial drop in key interest rates and the stabilization of the Rand, the South African currency. Inflation, which was in double digits for nearly twenty years, has been reduced to around 7% and the fiscal deficit to about 3 percent of gross domestic product (GDP). New South African government figures also indicate that the economy is more heavily weighted toward the service sector than previously thought, with primary and secondary sectors comprising only 34.5 percent total GDP, while the tertiary (services) sector comprises 65.5 percent.
A recent Reuters poll shows economists believe that South Africa's economy will be characterized by improving growth, stable inflation, a steady exchange rate and lower interest rates. They believe that South Africa has now emerged from the 1998 emerging financial market crisis, and will start to benefit from a return of foreign capital to lift growth this year and next year. The poll of 30 South African and European economists forecasts growth in 1999 at 0.9 percent and at 3.0 percent in 2000. Steep cuts in interest rates are predicted to free up consumer spending, which has been tied with rates that peaked at 25.5 percent in 1998, dropping to 16.5 percent by August 1999.
2.1 Regional Role. While South Africa's reputation as an emerging market suffers from its proximity to the tangle of conflicts that have engulfed its northern neighbors in and around the central African sub-region, its geographic position offers access to markets not only throughout Africa but also farther afield in the southern hemisphere.
The Southern African Development Community (SADC) was founded in 1980 is the most important regional organization in the continent. South Africa has been a member of SADC since 1994 and chairs the organization until September 1999. The SADC is a sub-regional organization created from the South African Development Coordinating Conference (SADCC) in 1980. The organization seeks to foster economic growth and development through increased economic integration among its 14 member states with approximately 180-million inhabitants: Angola, Botswana, Lesotho, Malawi, Mozambique, Namibia, South Africa, Swaziland, Zambia and Zimbabwe Mauritius and Tanzania, the Democratic Republic of Congo (former Zaire), and the Seychelles. These countries range from some of the poorest in the world, like Mozambique to the power-house of Africa - South Africa. Angola and Mozambique should be among Africa's wealthiest countries, but they have been devastated by war.
The SADC Trade Protocol is the cornerstone of SADC's sub-regional trade integration effort. On August 24, 1996 eleven SADC member states signed the SADC Trade Protocol, and to date Botswana, Mauritius, Namibia, Tanzania and Zimbabwe have ratified it. South African officials made a detailed proposal to their SADC counterparts indicating they are prepared to take steps toward ratification. At present there are intense discussions on the tariff reduction schedule and the rules of origin. Insufficient analytical capacity, perceptions of uneven benefits, non-tariff trade barriers and the absence of agreement on customs procedures and standards have slowed the implementation process. Nonetheless, there remains optimism that the SADC Free Trade Area (FTA) will come into effect in early 2004.
South Africa has been a member of the South African Customs Union (SACU) since its inception in 1910. The SACU agreement was renegotiated in 1969 following the independence of Botswana, Swaziland, and Lesotho. Namibia joined SACU in 1990. SACU aims to promote free trade and cooperation on customs matters among its five member states. There are presently no internal tariff barriers between SACU member states, but because of different tax regimes, there are some tax adjustments that occur at the borders. All SACU members, except Botswana, share a common currency as members of the Common Monetary Area.
3. Principal Growth Sectors
3.1 Agriculture. For South Africa's farmers, 1998 was slightly less prosperous than 1997, although the historical trend in output was not down significantly (agriculture's economic performance in both 1996 and 1997 was above average). The contribution of agriculture to GDP increased from R23.8 billion in 1997 to R24.0 billion in 1998, although the percentage contribution decreased from about 4.5 percent to 4.1 percent in 1998. The main reason for the decrease in agricultural production during 1998 was dry and hot conditions with below average rainfall during the first half of the year. During the year, the estimated volume of agricultural production fell 4.8 percent below 1997 with the volume of field crop production (grains and oilseeds) declining by 13 percent as a result of the drought.
The real contribution of the agricultural sector to the national economy is often obscured by its nominally low direct contribution to GDP (less than 5 percent) and employment (about 13 percent). However, if the full impact of income and employment linkages and multipliers are included, agriculture contributes about 12 percent to GDP, and 30 percent to employment. About two-thirds of agricultural output is used as intermediate inputs in the manufacturing sector. This fact is borne out by the large impact of drought on GDP; more severe droughts have caused a decline in total GDP of as much as 0.5 to 2 percent, a high figure for a sector playing a relatively small role in the economy.
South Africa has a market-oriented agricultural economy, with significant volumes of both agricultural imports and exports. The decline in the value of the South African Rand relative to the dollar over the last two years has had a beneficial effect on the country's agricultural export earnings. Exports rose to R13.4 billion in 1998 compared to about R12.3 billion in 1997. Principal exports in 1998 included fresh and processed fruits and vegetables worth about R4.4 billion and sugar worth about R1.7 billion. Agricultural exports contributed more than 30 percent of the gross value of agricultural production in 1998 while imports were equal to about 21 percent of the value of output..
The United States plays a major role in the South African agricultural market, supplying 11.5 percent of imports and taking 4.5 percent of the country's exports. Total U.S. agricultural exports to South Africa climbed to $296 million in 1996, but fell back to $195 million in 1998, mainly due to the decline in the value of the Rand. As of July 1999, the SA Rand was at 6.0 to the US Dollar.
Table 1: SOUTH AFRICA: AGRICULTURAL DATA:
1996 1997 1998 1999 Est. GDP, Rand Billion 484.1 529.6 573.0 580.0 Contribution of Agriculture, Rand Billion 22.6 24.0 23.8 25.0 % Contribution 4.7 4.5 4.1 4.3 Total market size: Expenditure on food, Rand Billion 78.1 87.4 93.0 98.0 Total local production: Gross value, Rand Billion 39.7 41.7 42.7 43.8 Total agricultural exports, Rand Million 11,640 12,258 13,394 15,000 To the U.S. 463.8 465.6 599.5 625.0 % to the U.S. 4.0 3.8 4.5 4.2 Total agricultural imports, Rand Million 7,697 8,602 9,345 10,000 From the U.S. 1,272 1,009 1,079 1,100 % from the U.S. 16.5 11.7 11.5 11.0Estimates and forecasts from various sources1996 U.S. Dollar R4.3, 1997 U.S Dollar R4.61 1998 U.S. Dollar R5.5, forecast, 1999 U.S. Dollar R6.0.
3.2 Air Pollution and Waste Management. South Africa's reintegration into the global economy necessitates improved pollution and waste management systems. Also, beginning with the country's first democratic elections, South Africa's role and influence in the Southern African Development Community (SADC) suggests that it should take the lead in promoting clear air and waste management technology within southern Africa. Key issues include water, air and land pollution, and poor disposal of waste. The potential air pollution resulting from industrial parks and residential areas has to date not been adequately considered during the planning stages of many initiatives. Moreover, control equipment is poorly maintained and often non-operational.
With knowledge of the potential hazards of pollution, a growing need exists for measurement and analysis instruments - specifically for instruments that are able to measure a number of parameters simultaneously and handle a number of observations over time. There is also a need in the market place for American "know-how"; the expertise which goes along with such products.
(For further information, refer to Air Pollution and Waste Management, under Leading Sectors for US Exports and Investment: Best Prospects for Non-Agricultural Goods and Services, page 35)
3.3 Cellular Telephony. The explosive growth of South Africa's cellular industry continued to outpace industry forecasts during the year under review. The industry has two principal operators, Vodacom and MTN, with licensing for a third mobile cellular operator scheduled for early next year. The Vodacom Group, in which Telkom has a 50 percent equity stake, saw its customer base climbing to two million by the end of 1998, of which 1.5 million were active subscribers, representing an increase of some 50 percent. Turnover rose by 56 percent to R6.8 billion from the previous year's R4.4 billion, while operating profit stood at R1.5 billion. Based on call traffic volumes, the regional distribution of users are 29 percent in Gauteng (the Johannesburg and Vereeniging area excluding Pretoria), 24 percent in Pretoria, Northern Province and Mpumalanga, 19 percent in the Western Cape, 4 percent in the Free State and Northern Cape, 7 percent in Eastern Cape and 17 percent in KwaZulu-Natal.
The Vodacom Board approved a capital expenditure program of R 2.5 billion for the year, an investment that was entirely self-funded. Included in the program were 100 micro-base stations, six voicemail platforms and two additional Intelligent Network platforms. Network expansion is ongoing and expenditure is expected to exceed R 2.3 billion in the coming financial year.
Another milestone for Vodacom was its entry into the Internet market with the launch of Vodacom Internet Company, its new Internet Service Provider (ISP), and Yebo!Net, which offers prepaid access to the Internet at local Telkom rates.
MTN (Mobile Telephone Networks), a privately-held company with shareholders in South Africa (a 25 % shareholder being Transtel, a parastatal South African organization and subsidiary of Transnet) and the United Kingdom, was recently awarded a second network operator's license in Uganda and a first operator's license in Rwanda. It is currently bidding for licenses in several other sub-Saharan countries. MTN's strategy in these countries is one of alliance-building to promote local job creation, entrepreneurship, skill-training, empowerment and enhanced socio-economic integration.
As the only telecommunications company in the southern hemisphere and one of only three in the world to have been awarded ISO 9001 quality accreditation, MTN has been approached by Visa Mastercard, Verifone and First National Bank to be the network carrier for the pilot project for retailer on-line verification. This will allow on-line retail point-of-sale transactions to be done without a phone line, thus opening up additional opportunities for rural areas.
MTN's coverage presently extends to over 34 percent of South Africa's geographical area. MTN had installed of over 6,500 of MTN's community payphones by December 1997 - well in excess of the numbers agreed to in terms of license obligations.
Potential investors and operators have thus far supported the South African government's efforts to create a favorable investment environment. In particular the low cost of market entry has been seen as a golden opportunity. Cellular networks can currently operate at a maximum speed of 9.6 kilobits per second (kbps). MTN recently carried out tests in conjunction with Ericsson (cellphone manufacturer) where speeds of up to 56kbps were achieved. Once speed of two to three gigabits (gbps) is reached, there is no reason why South Africa should be dependent on fixed lines for carrying voice or data. MTN predicts that speeds ranging from 28 to 56 kbps will become a commercial reality within the next 18 months, and that within three to five years this will be increased to speeds of 2 to 3 gbps. Increased speed across the networks will encourage the use of cellular telephony for data communications, which currently account for less than 2 percent of cellular usage. Moreover, once network speeds increase, opportunities will exist for carrying video to the cellular handset with video capability over the Internet using Internet protocol, the telephone network, or satellite infrastructure.
3.4 Computer Software and Services. The local computer software and services market has shown strong growth over the past few years, and to date investors have been rewarded by those IT companies focused in promising sectors. From high margin businesses such as networking and systems integration to lower margin businesses such as hardware distribution, there are many opportunities in the local software and services market for companies with the right management approach. Key trends in this market include:
Electronic Commerce Internet-oriented software and services Convergence of technologies Increased focus on outsourcing * * * * The convergence of technology and specifically the conversions of voice-to-text and vice-versa on advanced platforms are crucial for future growth. More and more demand will be placed on integrating voice into an IT solution. Demand for networking products as well as highly specialized software will enable communications and value-added services on all communications platforms. Value-added software is a key to long-term growth.
Software growth in South Africa, which has been consistently higher than the world average over the past several years, is expected to show substantial growth for the next two to three years.
(For further information, refer to Computer Software and Services, under Leading Sectors for US Exports and Investment: Best Prospects for Non-Agricultural Goods and Services, page 35)
3.5 (Eco) Tourism. With its return to the "global village," South Africa is fast becoming a popular tourist destination. In a recent report, the World Tourism Organization (WTO) ranked South Africa as the 25th most frequented tourist destination in 1998, a significant move upward from the 1990 ranking at 50th. The most recent figures on tourism illustrate that the number of travelers arriving to South Africa has grown steadily grown from 5.2 million in 1996, to 5.4 million in 1997, and 5.7 million in 1998. September was the most popular month for foreign arrivals in 1998. The number of Americans arriving to South Africa increased 16 percent between 1997 and 1998, and at 166,071 arrivals, American visitors represent the third largest overseas market after the U.K. (321,281) and Germany (195,878).
The number of American visitors is expected to continue rising through the year 2000 as a result of two agreements recently signed between the U.S. and South Africa. The first of these, a bilateral tourism initiative to promote co-operation in the tourism sector, was signed in mid-1995. In addition, the U.S. and South Africa signed a Civil Aviation Agreement that increased the number of weekly direct flights between the U.S. and South Africa from 7 to 11, effective 1 April 1996. This number will increase annually to 21 per week by 1 April 2000.
The tourism accommodation industry in South Africa provides a wide spectrum of lodgings - from the formal hotel sector to the informal holiday flats and cottages, game lodges and reserves, guest-houses, youth hostels, and bed-and-breakfast inns. Of the estimated 30,000 rooms available in South Africa's hotels, about 46 percent are categorized as "not graded"; 5 percent as "one and two-star"; 31 percent as "three-star"; 13 percent as "four-star"; and 5 percent as "five-star." The lack of five star accommodation, particularly on Durban beaches (situated in the KwaZulu-Natal province) has been an obstacle for tour operators looking for business in up-market areas. To improve the area's tourism potential, KwaZulu-Natal authorities have established a Tourism Authority, which is also empowered to engage in joint ventures with private enterprise. A number of major development opportunities exist, with projects already under development and further sites already identified as prospective locations for the development of tourism infrastructure.
The fastest growing segment of tourism in South Africa is ecological tourism (ecotourism), which encompasses fauna to flora, action holidays and, increasingly, local community empowerment and development. For U.S. exports, key sectors identified as having the greatest commercial potential include information systems, marketing, design, architecture, finance and planning - particularly with respect to the long-term development of the Kwa-Zulu Natal and the Western Cape as a tourist destination. The lack of local expertise in these areas creates an excellent opportunity for U.S. firms in fields ranging from management skills to education and training. Additional opportunities for U.S. investment may also exist in making tourist facilities accessible to the disabled.
3.6 Electronic Commerce. Over the next few years, electronic commerce or e-commerce (which encompasses all business conducted by means of computer networks), is likely to radically transform the way most South Africans do business. It reflects a paradigm shift driven principally by a wide range of converging technological developments and the emergence of the "knowledge economy." There are already a growing number of South African companies actively conducting electronic business via the Internet. The value of business conducted electronically has consistently increased on a month-by-month basis, with the overall transactional value growth of 140 percent over the past twelve months.
For developing countries like South Africa, e-commerce presents important new opportunities to achieve a more level playing field vis-ˆ-vis larger, more developed economies; it reduces existing drawbacks relating to cost, communication, and information, and has the potential to create huge new markets for U.S. products and services. One of the leading areas for continued growth is Internet security. Merchants and consumers who regularly engage in online trade are expressing growing concerns over security infrastructures on the Internet, and are demanding more secure session technology to guarantee the confidentiality of data exchanged during online transactions. Other promising areas include new technologies and business development concepts in e-commerce.
(For further information, refer to Electronic Commerce, under Leading Sectors for US Exports and Investment: Best Prospects for Non-Agricultural Goods and Services, page 35)
3.7 Mining. The mining industry has played a significant role in the economic development of South Africa. In terms of the world's mineral reserves' base, South Africa ranks number one for gold, platinum, manganese, chromium, vanadium, alumino-sillicates and titanium, second for vermiculite and zirconium, third for fluorspar, fourth for antimony, and fifth for zinc, coal, lead and uranium. While the reserve base for diamonds is not known, South Africa ranks second or third in terms of the value of current global diamond exports. In total the country produces some sixty mineral commodities of which gold, platinum group metals (PGM) coal and ferro-alloy account for 86 % of mineral exports and some 50 % of total merchandized exports. During the past decade South Africa's mining sector has undergone a major transformation. The gold mines in particular have seen costs increase significantly while both the tonnage and grades of ore produced have declined. The result has been the restructuring of a number of mining companies, for example Anglogold, Goldfields and Billiton. Thus far, the declining SA Rand-Dollar exchange rate, together with increased sales of PMGs, iron ore, copper, nickel and zinc as well as diamonds and coal have partially offset the declining export earnings of the gold sector. Improving economic conditions in many parts of the world however, including Japan's industrial production, should eventually flow through to mining. Thomas MacNamara, representing New York investment firm CIBC Oppenheimer, suggests that fundamental demand for gold continues to grow, while the world's central banks are not likely to sell as much of their gold reserves as previously believed.
In recent years, the coal sector has also seen significant expansion in terms of export earnings. However, intense competition in key markets and global oversupply of sea borne steam coal have been two factors contributing to downward pressure on spot and forward coal prices. At the same time the emerging markets financial crisis has led to reduced industrial output and hence a decreased demand for energy, resulting in a decline in the demand for coal.
Importantly, a number of resource-based mega-projects (e.g., Columbus Stainless Steel and Billiton's Hillside Aluminum Smelter) have allowed South Africa to move beyond exporting primary commodities to become a world-class exporter of processed industrial minerals. New investments in a small number of resource-based projects have accounted for almost half of recorded formal sector economic growth since 1994. Such investments are largely a consequence of increased investor confidence in the country's long-term political stability, and enabled South Africa to cross an important threshold in 1995 when for the first time exports of processed primary products exceeded gold exports. Looking forward, a host of natural resource and metals projects offer the potential for sustained industrial growth in the coming years.
Recognizing this potential, South Africa's industrialization program focuses heavily on resource-based manufacturing and processing to stimulate growth - especially in the minerals processing, petrochemicals, jewelry, and metal fabrication industries. This will, however, require massive investment and continued access to foreign markets. Competition for market share has increased at the same time that commodity prices have fallen and demand in East Asian countries has generally decreased. The key to the industry's survival lies in improved productivity which can be achieved, in part, through greater education, training, and motivation of the workforce.
Although the mining industry's contribution to the South African economy has declined since the early 1970's, it remains a substantial contributor both in terms of foreign exchange earnings and GDP. In 1998, the mining industry contributed 6.03 percent to GDP, or approximately 13 percent if indirect multiplier effects associated with the industry's effect on the economy are included. While the relative importance of gold mining has declined over the last decade in line with fluctuations in the gold price, gold mining still contributes a little more than 2 percent to GDP. Observers calculate that the mining industry contributes more than 50 % to South Africa's merchandized exports; this excludes the domestically generated beneficiation of these resources. With this value-added component, the contribution to exports could be as high as 70%.
For the year under review, mining also continued to contribute significantly to gross domestic fixed investment (GDFI) and gross capital formation, contributing 8.6 percent to GDFI. The industry also contributed significantly to the national fiscus, both directly and indirectly. For the fiscal year 1998/99, estimated total direct taxation paid by the industry was some R1.7 billion, representing 1 percent of total tax revenue. Mining also contributes indirectly through taxation paid by employees and by industries that supply the mining industry or use mining industry products and through indirect taxes paid by mines on input costs (such as the fuel levy).
3.8 Security and Safety Equipment. With the increasing loss of cars due to theft and hijacking, a great need exists for vehicle security products. Bank robberies persist, albeit with less frequency. Another major source of concern has been the heists on cash-in-transit vehicles by highly organized and heavily armed groups. As a consequence of the amount of criminal activity, there continues to be a strong demand in South Africa for security and self-defense related products and services. For example, large retailers are beginning to take pilferage very seriously and are installing substantial surveillance systems in their shop fronts. CCTV is ideal for this purpose, particularly because it produces concrete evidence in court.
The commercial and industrial security industry in South Africa is valued at approximately USD 1.8 billion Dollars. Of this aggregate value, the most promising sub-sectors include:
Vehicle security (car alarms, anti-carjacking devices and satellite tracking systems) - USD 417 million
Perimeter security and access control (e.g., fencing, wire, and security gates) - USD 154 million
Detection devices and building protection (e.g., close circuit t.v. and security glass) - USD 149 million
Internal physical security and turnkey systems (e.g., security doors and computer based microprocessor systems) - USD 96 million (For further information, refer to Security and Safety Equipment, under Leading Sectors for US Exports and Investment: Best Prospects for Non-Agricultural Goods and Services, page 35)
3.9 Spatial Development Initiatives (SDIs). SDIs are strategically located development regions aimed at unlocking the economic potential in selected areas. A single SDI may offer, among others, opportunities in construction, tourism, agriculture, and manufacturing. Because the initiatives are multifaceted they are implemented through consortia.
The SDI program consists of ten local SDIs and four Industrial Development Zones (IDZs) at varying stages of development. To date, the current portfolio of SDIs has identified 518 investment opportunities valued at approximately R115.4 billion (USD 19.2 billion) with the capacity to generate more than 118,000 new jobs. The initiatives are the practical implementation of the government's economic strategy as set out in its GEAR policy framework, and should provide U.S. companies with infrastructure, technological and investment opportunities. Former South African President Nelson Mandela likened the SDI program to an industrial revolution, stating the ultimate vision was to open the entire South African market through public-private partnerships. The aims of spatial development initiatives include:
Facilitate sustainable and equitable growth and development
Generate sustainable employment
Maximize private sector investment
Exploit South Africa's under-utilized locational and economic advantages General information on SDIs and links to the individual project initiatives can be found on the Internet at www.sdi.org.za or at www.transport.gov.za/projects/sdi.html. Brief descriptions of the major SDIs are below.
3.9.1 The Lubombo Initiative. The Lubombo Initiative is a concerted program by the governments of Swaziland, Mozambique, and South Africa to ensure that new investment occurs rapidly in the area. An essential infrastructure project is the upgrade of secondary roads and construction of a tar road through the SDI to link the major South African coastal road, the N2, to Maputo, the capital of Mozambique. Tourism anchor projects being proposed are the Ponta to Puro-Kosi Bay and Futi/Tembe/Usuthu transnational tourism nodes, the Greater St. Lucia Wetland Park, a tourism cluster at Lake Sibayi, an integrated Mlawula-Hlane wildlife project, the Lavumisa-Pongola Trans-Frontier Complex and the Lubombo tourism train route. In all 694 projects have been identified to the estimated value of R148 billion in the tourism, education, craft, commercial and agriculture sectors, including substantial opportunities for communities and small businesses.
Additional information can be found on the Internet at www.lubombo.org.za.
3.9.2 West Coast Initiative. The West Coast Investment Initiative is focused on the opportunities created by the mini mill of Saldanha Steel as well as under utilized opportunities in agriculture, tourism, manufacturing and fishing in the region. This initiative opens a window of opportunity to potential investors in an area with a significant resource base, and adequate and improving infrastructure. In addition, an investor friendly package of incentives and institutional arrangements is in place to enhance innovative and sound investments. One hundred and twenty investment projects were launched at the investment conference held in Saldanha Bay on the West Coast from 25 to 27 February 1998.
Additional information can be found on the Internet at www.westcoast.org.za. Also see Appendix H.
3.9.3 The Fish River Initiative. The Fish River initiative has evolved to promote employment in the Port Elizabeth and East London parts of the Eastern Cape. The primary focus of the Fish River SDI is on "crowding in" new investment from the private sector. Sectors under consideration include the automobile industry, supplier development, agro processing and forestry. The Fish River Initiative offers exciting opportunities for investors and has been designed to provide local entrepreneurs, international and national investors and fledgling businesses with a broad range of investment options.
Additional information can be found on the Internet at www.fishriver.org.za.
3.9.4 The Maputo Corridor. The Maputo Corridor, a development axis between Johannesburg and the city and port of Maputo, Mozambique, has seen considerable success since its launch in 1998 and is the most widely known development initiative. There has been a continual process of identifying investment opportunities in the following sectors: infrastructure, agriculture, mining, energy, chemicals, tourism and manufacturing. There are currently 180 projects under consideration with a total value estimated at approximately R42 billion (USD 7 billion).
Additional information can be found on the Internet at www.dbsa.org/Corridors/Maputo.
3.9.5 Wild Coast Initiative. The Wild Coast is a stretch of approximately 280 kilometers (174 miles) situated between the Mtamvuna River in the north and the Great Kei River in the south. The lull of perfect beaches attracts the majority of visitors to the resorts along the coastline, and the Wild Coast Initiative builds on this attraction through agri-tourism projects. Forestry and agriculture projects are also in development.
Additional information can be found on the Internet at wildcoastsdi.org.za.
3.9.6 Rustenburg (Platinum) Initiative. The Platinum SDI forms part of the Coast2Coast SDI that links Maputo Port in Mozambique to Walvis Bay in Namibia. Most of the Platinum SDI falls inside South Africa's North West Province, with direct links to import tourism, industrial and agriculture processing activities in the North West Province, and to the Mabopane-Centurion Development Corridor around Pretoria. The region has a wealth of raw materials, which can be used in processing and manufacturing industries. It also has tremendous potential to develop a tourist industry considering its existing tourism infrastructure and attractions, including big five nature reserves. An appraisal of the economic potential of this area has identified approximately 200 potential projects and project opportunities in tourism, manufacturing, agriculture and mining.
The Platinum SDI management team will provide additional information upon request.
Rustenburg (Platinum) SDI Project Manager
Mr. Rekwele Mmatli
Tel: (27 11) 313-3331
Fax: (27 11) 313-30003.9.7 Phalaborwa SDI. The Phalaborwa Initiative, broadly covering the Northern Province and Mpumalanga, is in the process of identifying and preparing attractive projects and investment opportunities in agriculture, forestry, tourism, mining, and mineral processing. The region is a significant supplier and processor of wood fiber in South Africa and internationally; it also includes a wide range of tourist attractions centered primarily in and adjacent to the famous Kruger National Park. The Phalaborwa SDI is linked to Maputo Development Corridor, and therefore has access to Maputo and international markets.
The Phalaborwa SDI management team will provide additional information upon request.
Phalaborwa SDI Project Manager
Mr. Jurgens van Zyl
Tel: (27 11) 313-3518
Fax: (27 11) 313-30863.9.8 Richards Bay Initiative. The Richards Bay Investment Center officially opened its doors in October 1998 to assist companies that want to establish a presence in the region. Industrial projects identified by the Industrial Development Corporation include opportunities in aluminum, heavy minerals, chemicals, wood, and sugar clusters. Tourism is also expected to become a key industry for the region. Richards Bay acts as a gateway to the Lubombo region, and the harbor is within a 45 minute drive of "big five" game viewing opportunities.
Additional information can be found on the Internet at www.richardsbay.org.za.
3.9.9 KwaZulu-Natal SDI. One of nine provinces of South Africa, KwaZulu-Natal stretches over 57,000 square miles on South Africa's eastern seaboard. KwaZulu-Natal is a competitive region for the attraction of foreign investment and nine target areas have been identified for this purpose. These areas include: textiles, clothing, plastic products, chemicals, fabricated metal products, automotive components, wood and wood products, footwear, machinery and appliances. During the three-year period ending March 1998, 47 foreign companies established operations in the region, primarily in four sectors: textiles, clothing and leather (38.3%), chemicals and plastics (21.3%), fabricated metal products and machinery (19.2%) and paper and paper products (17.0%).
Additional information can be found on the Internet at www.kmi.co.za.
4. Government Role in the Economy
South Africa under the former Nationalist Party government pursued a strategy of import substitution and industrial development which protected local industries by means of high tariff barriers and heavy state involvement in electrical, transportation, communications and service industries. In 1994, the ANC inherited an economy in which roughly half of all capital assets were owned by the government, a quarter of which were parastatal corporations.
A key element of GEAR is the "restructuring of state assets." In 1995, under a "National Framework Agreement" (NFA), tripartite stakeholders from government, business, and labor agreed to a substantial program of restructuring and privatization of state assets.
President Mbeki has repeatedly reaffirmed the South African government's commitment to the privatization program. Partial or complete privatization of several parastatals has been completed, including: The Airports Company, (an umbrella company for the country's major airports); six radio stations of the South African Broadcasting Corporation (SABC); Sun Air (a small former homeland airline); and Telkom (the national telecommunications company). South Africa's most recent privatization was the June 25, 1999 sale of 20 percent of South African Airways (SAA) to Swissair for USD 230 million. The sale puts the total value of the airline at USD 1.2 billion, making the deal South Africa's second-largest privatization effort. The South African government has indicated that as much as 40 percent of SAA could be in private hands by the end of 1999.
In his June 1999 "State of the Nation" speech, President Mbeki stated "some of the most important developments with regard to the restructuring of state assets will relate to Transnet" (the transportation parastatal). According to President Mbeki, "the priority given to this corporation arises from the fact that the transport and logistic system it contains underpins the success of other major investment projects."
Priority will also be given to the liquid fuels and petrochemical industry through a joint effort of the Ministries of Minerals and Energy, Trade and Industry, and Public Enterprises. This effort will include the finalization of discussions with the Government of Mozambique on a gas pipeline that is to run from Mozambican gas fields to South Africa. Mbeki also noted that there would be further developments with the issuing of new licenses in the telecommunications sector.
Although present government policy is to refrain from competing with private entities in the private sector, the following firms enjoy a degree of protection through direct or indirect allowances from the government which give them a financial advantage vis-ˆ-vis private entrants: ADE (diesel engines); SASOL (synthetic fuels and petrochemicals); IDC (industrial development corporation); CSIR (scientific and industrial research and marketing innovations); and the Central Energy Fund family of companies, including Mossgas, the Strategic Fuel Fund, and Soekor, the state oil exploration company.
In addition, Telkom (the state telecommunications company) enjoys a monopoly until the year 2002 on providing international and fixed line telecommunications services. If Telkom's strategic equity partners meet certain performance targets, the South African government will consider an extension of this monopoly until 2003. Transnet enjoys a monopoly on most transport and port services and Eskom (the state electricity monopoly) operates as a non-taxed company, which pays dividends to the state as its sole shareholder.
5. Balance of Payments Situation
Decreased demand in the South African economy contributed to a reversal of the deficit on the current account of the balance of payments into a surplus of R2.0 billion in the first quarter of 1999. At a seasonal adjusted annualized rate, the surplus in the first quarter is equal to 0.8% of GDP. The improvement came largely from a substantial decline in the value of merchandise goods imported and an equally substantial increase in the value of merchandise exports. The decline in the exchange value of the Rand also assisted in creating the surplus (see Appendix C 2). The value of South Africa's net gold exports however declined due to a lower volume of exports as well as lower realized prices.
The slowdown of financial flows to emerging market economies was echoed in a contraction of financial flows to South Africa during 1998. Foreign direct investment in South African assets declined sharply - from R17.6 billion in 1997 to R3.1 billion in 1998. The outflow of capital arising from acquisitions of foreign direct investment assets by South African entities maintained a steady flow from R10.8 billion in 1997 and R9.6 billion in 1998. The inflow of capital resulting from portfolio investment by non-residents has varied since early 1998 with an inflow of R26.5 billion in the first quarter of 1998, followed by an outflow of R1.1 billion in the third quarter, and then inflows of R2.5 billion and R10.9 billion in the fourth quarter of 1998 and first quarter of 1999. The variety of these demonstrates flow reflect the liquidity of the South African markets.
The fourth and first quarter inflows reflect continued confidence by short-term foreign investors in the South African economy. This was echoed by the recent U.S. Duff and Phelps credit rating for South Africa, which maintained the country's long-term foreign currency and Rand debt ratings at BBB- and A- respectively. The rating was largely based on Duff and Phelps' positive view of the South African government's macroeconomic framework including its fiscal consolidation, flexible monetary policy and external liberalization.
U.S. trade with South Africa totaled USD 4.67 billion in total (two-way) goods trade during 1998. U.S. exports to South Africa increased by 49% over the years from 1992 to 1998. Imports from South Africa have risen 77% over the last six years.
6. Infrastructure
6.1 International Trade Infrastructure. The exploitation of natural resources over the past century has created a transportation infrastructure in South Africa that dominates the subcontinent. South Africa provides more tonnage through its ports than the combined facilities of Angola, Gabon, Kenya, Mozambique, Tanzania, and the Democratic Republic of Congo; and more air transport than all other countries of Southern, Central and East Africa combined. South Africa's international trade infrastructure is relatively well-developed, while in the context of the developing world it ranks as excellent. However, a 1996 analysis conducted by the Department of Transport identified the following problem in terms of international transport:
* With the exception of world-class bulk transport systems in two key corridors, freight transport in general does not meet the needs of customers in terms of both cost and service.
The last few years have seen significant steps to enhance the effectiveness of South Africa's physical and service infrastructure. Trade support services such as cargo inspection, standards information and certification, and credit insurance have been improved, and the country's major ports (Durban, Cape Town, Richards Bay, and Port Elizabeth) are well-equipped to move cargo of all types.
6.2 Infrastructure in Rural Areas. The quality of infrastructure in the rural areas and the former homelands (the geographic ethnic-statehoods created and imposed by the previous National Party government) varies, and most townships (urban and peri-urban residential areas of mostly economic and sub-economic housing inhabited by the Black populace) remain in need of road development and improvement.
The South African government continues to look for projects in the framework of its Spatial Development Initiatives Program (SDIs), in urban and rural centers, and in partnership with other countries in the region in order to improve infrastructure. The government is also working to shift the weight of funding in public transport in favor of public transportation infrastructure, and is providing support to provincial Roads Departments to assist them in restructuring and rationalizing infrastructure delivery institutions. This support is intended to ensure that the level of expenditure on overhead is reduced in favor of expenditure targeted at the provision of new road infrastructure (particularly in rural areas), as well as to the rehabilitation and ongoing maintenance of existing provincial roads.
6.3 Transnet. The government department, South African Transport Services, was restructured into a public company (with share capital controlled by the Minister for Public Enterprises) in 1989, and became Transnet in 1990. Transnet's position as a profit-seeking, commercialized company, migrating towards a holding company over the next five to seven years, allows the company to pursue initiatives such as joint ventures and private/public sector partnerships as well as maintain competitiveness in a global business environment.
Transnet's transport holdings include: Spoornet (rail), Portnet (ports), Metrorail (rail), Autonet (roads), Fastforward (trucking), Petronet (pipelines), and South African Airways (SAA), each of which operates as a separate company. The next few years may continue to see a restructuring in Transnet as the company aims to secure private capital and reduce state debt.
Transnet reported a R426 million loss for the year to March compared with the R278 million profit previously and has been identified by President Mbeki and Public Enterprises Minister Jeff Radebe as a "key priorty." Already the partial privatization of Spoornet has opened the opportunity for private rail companies to gain concession for operating lines. Also, several private sector companies provide trucking services, and recently a number of private airlines have begun to provide services which compete with those offered by the government owned SAA. The successful restructuring of Transnet is expected to generate business opportunities in the following areas:
Stand-alone Core Business
New Business Opportunities
Strategic Business Development (national/international)
Black Empowerment
Logistics Additional information about Transnet can be found on the Internet at www.tnet.co.za.
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[end of document] Note* International Copyright, United States Government, 1999. All rights under foreign copyright laws are reserved. All portions of this publication are protected against any type or form of reproduction, communications to the public and the preparation of adaptations, arrangement and alterations outside the United States. U. S. copyright is not asserted under the U.S. Copyright Law, Title 17, United States Code.
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