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Country Commercial Guides for FY 2000: South AfricaReport prepared by U.S. Embassy Pretoria, released July 1999 Note* |
VII. INVESTMENT CLIMATE1. Openness to Foreign Investment
South Africa offers an attractive climate for foreign investors, and as a result, a large number of American firms have invested or reinvested in South Africa since the lifting of sanctions in the early 1990s, making the U.S. the largest source of new investment in South Africa.
The Gore/Mbeki Binational Commission (BNC) has fostered unusually strong bilateral relations including rapidly expanding commercial ties. The South African government's GEAR macroeconomic policy is based on sound economic principles and is highly praised internationally. South Africa has a substantial market with significant growth potential, an economy steadily moving toward market orientation, access to other markets in Africa, well-developed financial institutions and capital markets, excellent communication and transport links, liberal repatriation of profits and other earnings, lower labor costs compared to western industrialized countries (although productivity is also lower), and availability of inexpensive electrical power and raw materials. However, South Africa's economic growth has been sluggish at 2.5 percent in 1997 and 0.5 percent in 1998; and the country faces daunting challenges as it competes with other emerging market countries for foreign investment.
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, it offers access to markets not only throughout Africa but also farther afield in the Southern Hemisphere. Investment has been spurred by a number of steps designed to make South Africa's markets more attractive to foreign investment. These include: reducing import tariffs and subsidies to local firms; eliminating the discriminatory non-resident shareholders tax; removing certain limits on hard currency repatriation; halving the secondary tax on corporate dividends; lowering the corporate tax rate on earnings to 30 percent; and allowing foreign investors 100 percent ownership.
Additionally, the government does not impose performance requirements on foreign companies, does not normally screen foreign investment, and does not require new investments to comply with specific requirements (although the government encourages investments that strengthen, expand, or enhance technology in various industries). At the same time, South Africa's tariff system is complex and is subject to rapid change. Foreign companies also complain about delays or rejections in receiving work permits for some of their proposed expatriate employees.
The South African Government treats foreign investment essentially the same as domestic enterprise investment. Foreign firms receive national treatment for various investment incentives such as export incentive programs, tax allowances and other trade regulations. As the Government pushes ahead with plans to attract strategic equity partners for its large parastatal organizations, sensitivity to the concerns of foreign investors has become more pronounced.
The main area in which foreign investors are treated differently from domestic investors concerns local borrowing restrictions imposed by exchange control authorities. No person in South Africa may provide credit to a non-resident or " affected person" without exchange control exemption. An "affected person" is a company or other body in which (1) 25 percent or more of the capital assets or earnings may be utilized for payment to, or to the benefit of, a non-resident, or (2) 75 percent or more of the voting securities, voting power, power of control, capital, assets or earnings are vested in, or controlled by, any non-resident. A company falling into the category of an "affected person" may only borrow up to a specified percentage of its total "effective capital" which mainly comprises issued shared capital, share premium accounts, reserves created from profits, unappropriated profits and approved shareholders' loans.
Normally, the maximum amount an "affected person" may borrow is 50 percent of the total "effective capital", plus an amount determined by the following formula: South Africa participation/non-resident participation times 50 percent. Requests to borrow in excess of the formula are granted for operations that are considered to be in the national interest such as import replacement.
The primary purpose of the local borrowing restriction is to ensure the adequate capitalization of foreign investments and to prevent excessive "gearing" using local funds (i.e., a company borrowing against its share capital). The definition of local borrowing includes overdrafts, leasing of capital equipment, mortgage bonds and local shareholders' loans in excess of foreign shareholders' loans. 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 repeatedly has reaffirmed the 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 story 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 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, 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 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. President Mbeki also noted that there would be further developments with the issuing of new licenses in the telecommunications sector.
South Africa has been a member of the SADC since 1994 and currently chairs the organization (until September 1999). SADC is a sub-regional organization created in 1992 that seeks to foster economic growth and development through increased economic integration among its 14 member states. SADC origins go back to 1980 when the organization was created as the South African Development Coordinating Committee with the objective of cooperating to, inter-alia, reduce dependence on the then Apartheid regime of South Africa. The organization's name changed to SADC in 1992 when economic integration and free trade became explicit goals.
The SADC Trade Protocol is the cornerstone of SADC's sub-regional trade integration effort. On August 24, 1996, 11 SADC member states signed this Trade Protocol, and as of August 1999 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) can come into effect in early 2000.
Economists predict that a likely negative impact of the implementation of the SADC Trade Protocol will be the loss of customs revenues upon which many SADC countries are heavily dependent. This loss will not significantly affect South Africa, however, because only 3.4 percent of South Africa's revenue is derived from tariff collections.
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 (CMA).
The SACU agreement is again being renegotiated but it is not clear when these discussions will be completed. Disputes over how to redo the revenue sharing formula and over the powers to be given the new SACU secretariat are slowing the negotiations. Under the current revenue sharing formula, South Africa would soon pay out to other SACU members larger customs related shares than the Customs Union takes in. South Africa is therefore seeking a revenue sharing formula that would take account of the phase down in the customs tariff.
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. These quotas will be increased under the FTA. Differences over health requirements (sanitary and phyto-sanitary requirements) will oblige South Africa to make additional changes before the benefits of lower agricultural tariffs can be realized. The least liberalization will occur in agricultural products and the most in manufactured products.
Although the EU-SA FTA is expected to have a significant impact on SACU revenue collection, it is not likely to have a major short-term impact on non-SACU, SADC countries. Until analysis of actual tariff lines under the EU-SA FTA is completed, it is impossible to determine the exact impact on U.S. exports.
2. Currency Conversion and Transfer Policies
Investment South Africa (ISA; www.isa.co.za) - a national investment promotion agency established by the DTI on April 1, 1996 - provided most of the following information on foreign exchange controls. ISA provides information and assistance to prospective investors, including identification of opportunities and joint venture partners and sourcing of technology and capital. The South African Reserve Bank (SARB) administers foreign exchange controls through its Exchange Control Department. Commercial banks act as authorized dealers of foreign exchange on behalf of the SARB.
During the Apartheid era, South Africa restricted investment abroad by its citizens through a stringent foreign exchange control regime. In 1994, the Government announced a long-term plan for the gradual lifting of foreign exchange controls. In 1995, the abolishment of the financial Rand mechanism removed most exchange controls on non-residents. Unless otherwise authorized by the exchange control department, all transactions between residents and non-residents of South Africa must be accounted for through the authorized dealers.
In general, there are no controls on the removal of investment income or capital gains by non-residents. Dividends may be paid to non-residents without the approval of the SARB, provided an auditor's certificate shows such dividends are a result of post-tax trading, or realized capital profits. The SARB must approve the payment of dividends following deregistrations or liquidations. The SARB does not allow the remittance of profits or repayment of loans when, as a result of the remittance, the local financial assistance limit is exceeded. In such cases, local financial assistance will be reduced prior to remittance.
Companies taking money out of South Africa must complete a Form A (available from authorized dealers) if the amount is in excess of the currently prescribed amount of R 50,000 (USD 8333 as of July 1999 - see Appendix C 2).
Foreign firms may invest in share capital without restriction. In order to return disposal proceeds and dividends to their country of origin, foreign investors should ensure that their share certificates are endorsed "non-resident" by an authorized dealer.
Royalties, software license fees, and certain other remittances to non-residents require the approval of the SARB. The Department of Trade and Industry must approve manufacturing royalties (not including sales or marketing royalties). Royalty fees are based on a percentage of ex-factory sales with a maximum of 4 percent for consumer goods and 6 percent for intermediate and final capital goods. Approval is normally for five years.
Additional information on exchange control regulations can be obtained from the South African Reserve Bank.
South African Reserve Bank Exchange Control Division P.O. Box 3125 Pretoria 0001 Telephone: (27) (12) 313-3911, Fax: (27) (12) 313-3197 Internet: www.resbank.co.za
3. Expropriation and Compensation
There is no record of any expropriation or nationalization of American investment in South Africa. The one known case of nationalization in South Africa occurred in 1924 and involved an airline in financial difficulties. The new government has shown no interest in utilizing nationalization as a policy tool in spite of African National Congress (ANC) statements in years past.
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 realized in an open market transaction by a willing seller to a willing buyer. Compensation is not payable for any rights where there has been no registration of such rights. Due process and transparency are established. However, the legal process of determining compensation can require 18 months to three years. Interest is not payable during this period.
4. Dispute settlement
South Africa is a member of the New York Convention of 1958 on the recognition and enforcement of foreign arbitral awards, but is not a member of the International Center for the Settlement of Investment Disputes (Washington Convention).
5. Performance Requirements and Incentives
South Africa does not impose performance requirements as a condition for establishing, maintaining or expanding investments, or for access to tax and investment incentives. However, investment in certain strategic sectors is contingent upon acceptance of informal sectoral "gentleman's agreements" aimed at assuring security of supply. For example, oil companies are required to purchase synthetic fuels at a specified formula price. The government has identified the need to deregulate sectors governed by such informal agreements, including the transportation, energy, and telecommunications sectors to encourage investment and foreign participation in the economy.
By virtue of South Africa's membership in the World Trade Organization (WTO), SA is a signatory to the Trade-Related Investment Measures (TRIMS) agreement. South African legislation is fully compliant with the TRIMS agreement. In 1998, the last protectionist local content requirements with regard to tea and motor vehicle schemes were phased out.
On October 1, 1996, South Africa introduced an incentive scheme as part of the Small/Medium Manufacturing Development Program (SMMDP). Incorporated entities as well as sole proprietors and partnerships (excluding trusts) qualify for the incentive package and may apply for assistance. Only "new, secondary" operations engaged in manufacturing as well as processing or assembly may be considered for incentives. A "new" operation refers to any entity registered after October 1, 1996, and "secondary" refers to the manufacturing of final products. The incentive package provides for an establishment grant payable for three years on qualifying assets and a profit/output incentive payable for an additional year. The industrialist may also qualify for an additional two years profit/output incentive provided the industrialist can meet or exceed the labor remuneration to value added ratio of 55 percent measured in the fourth financial year. The SMMDP also provides a Productivity Improvement Program on merit and at the discretion of the Board.
Initial assistance is rendered in the form of a tax-free establishment grant for the first three years calculated at 10.5 percent per year on qualifying assets up to a maximum investment of R3 million (USD 542,495 at the 1998 average exchange rate) per enterprise per project. Qualifying assets are defined as land and buildings owned at cost, land and buildings leased (capitalized at 15 percent), plant and machinery at cost, and capitalized leased plant and machinery. Payment of the establishment grant is subject to the demonstration of a minimum equity of 10 percent.
The tax free profit/output incentive is calculated as 25 percent of profit before tax (PBT), not to exceed the annual establishment grant as calculated above, up to a maximum amount of R315,000 (USD 56,962 at the 1998 average exchange rate) per year, per undertaking, whichever is the lesser. To qualify for the fifth- and sixth-year profit/output incentive, the applicant is required to maintain a labor remuneration to value added ratio equal to or exceeding 55 percent. The labor remuneration to value added means the percentage is determined in accordance with the formula and with all the accounting terms referred to given their meaning as understood under the General Accepted Accounting Practice (GAAP).
The incentive package also provides for a foreign investment grant up to a maximum value of USD 50,000. This assistance is only provided with respect to an initial maximum investment of up to R3 million in qualifying assets per enterprise per project. No further assistance will be granted with respect to any future expansions of the project. The incentives are tax-exempt in terms of Section 10 (zH) of the Income Tax Act, 1962 (Act No. 58 of 1962) and valid in all areas of South Africa for the maximum period of six years. All incentives are offered on a basis that does not discriminate between national and foreign investors.
All inquiries regarding the SMMDP should be directed to:
Board for Regional Industrial Development The Chief Director Private Bag X86 Pretoria Fax: RSA (012) 325-5268 Fax: International 27 12 325 5268 Tel: RSA (012) 312-9121 or 312-9319 or 312-9461 Tel: International 27 12 312-9121 or 312-9319 or 312-9461
While the SMMDP scheme follow a wide burst approach, some much more focussed incentive schemas have been created. These aim at creating a whole new industry cluster or supporting an existing cluster with self-generating support sectors up- and down-stream in the value chain.
An example is the MIDP (Motor Industry Development Program) which in its current format will run out by the year 2007. It has had a significant effect on attempts to rationalize the traditionally over-protected SA motor industry in a piecemeal fashion while facing up to the gradual reduction of import duties on motor vehicle imports (10 years ago the import duty was more than 115 %; currently it is 50.50 % and dropping). The MIDP scheme has resulted in reinforcing South Africa as a production location of certain RHD platform models for a global, if marginal, market, as well as the production of components requiring natural resource inputs e.g. leather seats (labor intensive, cow or buffalo hide beneficiation) or catalytic converters (platinum beneficiation), to name but a few.
The MIDP enables South African vehicle and component manufacturers to increase production runs and encourages rationalization of the number of models manufactured by way of exports and complementing imports of vehicles and components. With the MIDP scheme South African exporters of motor vehicles or motor vehicle components earn export credits which can be used to off-set the import duty at currently 50.50 % on similar imports.
A logical opportunity in this field of SAG incentives is presented by the alliance / merger of Daimler-Chrysler AG, with Mercedes Benz having a South African passenger vehicle production facility as well as a nation-wide product and service delivery infrastructure. The opportunity with this cross-cutting delivery strategy is to expand the Chrysler market share in South Africa, and to let Mercedes-Benz take advantage of export opportunities incentives thanks to the local production of the RHD C-Class range.
The issue of Black Economic Empowerment (BEE) has assumed growing importance in the past five years. Government, for its part, has shown increasing interest in using its position, as both buyer and seller, to promote the economic empowerment of historically disadvantaged groups. Depending on the ministry involved, this interest has been reflected in varying degrees. In large-scale infrastructure projects like the Maputo Corridor, BEE objectives were evident in requirements mandating the use of small and medium subcontractors. In other cases, like the tender for the third cellular license, having a BEE plan and partner was mandatory. The variations in Government's approach to BEE and concerns that existing empowerment efforts have not benefited the public at large have led to calls for a review of the practice in general. One such review is currently underway through the privately backed Black Economic Empowerment Commission, which is scheduled to release a set of recommendations in late 1999.
In September 1996, the Department of Trade and Industry (DTI) introduced an Industrial Participation (IP) program. The role of this program is to fast-track investment, exports and technology development by utilizing the instrument of government procurement to leverage such initiatives. The program is designed to create a win-win situation by encouraging foreign suppliers of major government contracts to seriously evaluate the South African market as a possible investment or business location. Under the program, all government and parastatal purchases or lease contracts (goods, equipment or services) with an imported content equal to or exceeding USD 10 million (or the equivalent thereof) are subject to an Industrial Participation Obligation. This obligation requires the seller/supplier to engage in commercial or industrial activity equaling or exceeding 30 percent of the imported content of total goods purchased under government tender. The seller/supplier submits and implements business projects, generating IP credits in an amount that equals or exceeds the IP Obligation. Excess credits may be "banked" for a period of four years after the obligation is discharged. Only 50 percent of a new obligation can be fulfilled by banked credits. The obligation must be fulfilled within seven years of the effective date of the Industrial Participation agreement.
The state-owned Industrial Development Corporation provides loan financing to the private sector for the development of viable secondary manufacturing industry. As of July 1999, the fixed annual IDC rate was 17 percent and the variable rate was 4.5 percent below the Prime rate for loans to emerging entrepreneurs or when one job is created for every R100,000 (USD 16,667 as of July 1999 see Appendix C 2) borrowed, and 2.0 percent below the Prime rate in all other cases. IDC financing facilities include: term loans for land, buildings, plant and machinery; finance for exporters of capital goods and services; import financing; and venture capital, usually for small, high technology businesses with good growth potential. In addition, IDC offers financing under the following heading:
Employment Promotion Scheme, providing finance for operations creating new employment capacity; Economic Empowerment Scheme, for industrialists from previously disadvantaged communities establishing new, or buying into existing manufacturing businesses; Orchards Scheme, for orchards establishments creating job opportunities in rural areas; General Tourism Schemes wherein existing accommodation facilities throughout South Africa are renovated or extended; and, Ecotourism Schemes where tourist facilities in game parks and conservation areas are developed, improved, or expanded.
Several government-supported bodies 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; and the Council for Mineral Technology, Metallurgy Research and Development (Mintek). The Government has established the National Research Foundation to promote research and general education in science. The Foundation funds the Agricultural Research Council, the Medical Research Council, the Human Sciences Research Council, and the Minerals Technology Council. The Foundation for Research Development (FRD) funds research and education in natural sciences, engineering, and technology as well as operates three National Research Facilities.
A Government program of "Spatial Development Initiatives"(SDIs) - sometimes known as "Investment Corridors" - has enhanced investment opportunities outside of the major industrial centers. The SDI program aims to create jobs and encourage economic growth through industrial and agri-tourism development, and represents the practical implementation of the South African government's economic strategy as set forth in its GEAR policy. The roughly ten such initiatives underway in South Africa are to be financed primarily by private investment with a maximum of 10 percent government participation. Each SDI area, or corridor, is to be driven by inherent economic potential, but will be promoted and facilitated by government through the provision of detailed information about the area, descriptions of existing private sector plans, government investment in infrastructure to relieve bottlenecks, the creation of industrial development zones or parks, and opportunities for private participation in publicly-funded supplies of services to the local population. Each SDI includes of a number of projects that are available to investors, both foreign and local. Within each SDI area, local facilitators provide assistance and work directly with private investors. The use of local facilitators has kept government involvement to a minimum and no special Government agency has been created to deal with SDIs. Investment South Africa also provides individual SDI advisors assigned to each Spatial Development Initiative to keep track of investment projects (refer to pages 15 - 18 for additional information).
Additional cross-border investment corridors are being considered within the SADC region. The South African cabinet has provided a special budget for the Beira Corridor, running from Beira in Mozambique to Harare, Zimbabwe. The SAG has also begun to discuss the Benguela Corridor with Angola. Other possible projects include a Tazara Development Corridor from Dar es Salaam, Tanzania to Lusaka, Zambia; a Nacala Corridor from Nacala, Mozambique to Lilongwe, Malawi, which would open up resource-based industries such as agriculture, forestry, mining, and tourism; a Malanje Corridor from Luanda to Msianje, both in Angola; and a Namibe Corridor from Namibe to Manongue, both in Angola, which would make iron resources at Kassing more accessible. Additional SDIs under consideration within the SADC region include the Zambezi River SDI in Mozambique as well as the Okavango-Upper Zambezi Tourism SDI to promote international tourism within the area outside of limited visits to Victoria Falls. Internet: www.sdi.org.za.
6. Right to Private Ownership and Establishment
Private property rights, whether foreign or domestic, are equally protected by law and the same opportunities exist for both foreign and domestic private entities. 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 panel code applies to public limited companies and to private companies with 10 or more shareholders and capital and reserves in excess of R5 million (USD 904,159 at the 1998 average exchange rate). If a stake of 30 percent 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.
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-a-vis private entities: 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 SAG 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.
7. Protection of Property Rights
Property rights, including intellectual property, are protected under a variety of laws and regulations. South Africa has an independent judiciary under which any threat to property rights may be enforced without political interference.
Patents may be registered under the Patents Act of 1978 and are granted for 20 years. Trademarks can be registered under the Trademarks Act of 1993, are granted for ten years and may be renewed for an additional ten years. New designs may be registered under the Designs Act of 1967, which grants copyrights for five years. Literary, musical and artistic works, cinematographic films and sound recordings are eligible for copyrights under the Copyright Act of 1978. This act is based on the provisions of the Berne Convention as modified in Paris in 1971 and was amended in 1992 to include computer software. The Patents, Trademarks, Designs, and Copyrights Registrar of the Department of Trade and Industry administers these acts.
South Africa is a member of the Paris Union and acceded to the Stockholm text of the Paris Convention for the protection of industrial property. South Africa is also a member of the World Intellectual Property Organization (WIPO). The Government passed two IPR-related bills in parliament at the end of 1997 -the Counterfeit Goods Bill and the Intellectual Property Laws Amendment Bills, thereby enhancing its IPR protections.
While South African IPR laws and regulations are largely TRIPS-compliant, there is concern about increasing copyright piracy and trademark counterfeiting. The U.S. copyright industry estimates trade losses due to piracy of copyrighted works increased by more than 35 percent between 1997 and 1998. The U.S. is working with the South African Government to find ways of raising awareness and ensuring that all government offices in South Africa use only legitimate software. The South African Government recently took the positive step of adopting an implementing strategy to its 1997 Counterfeit Goods Act, which could strengthen enforcement. South Africa is required to bring its IPR regime into full compliance with TRIPS before the treaty's required deadline of January 1, 2000.
The U.S. and South African governments have held extensive consultations to clarify a section of the South African Medicines Act which appears to grant the Minister of Health broad powers in regard to patents on pharmaceuticals. Due to a separate constitutional challenge to the law brought by private parties, the law has not been implemented.
8. Transparency of the Regulatory System
In general, South Africa's Companies Act 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 Companies Act of 1973, which is based upon British company law. Foreign investments are organized under the same rules and regulations as domestic firms with one exception. Foreign companies that choose not to form a firm in South Africa operate as "external companies." External companies do not normally pay tax on undistributed profits, but share capital duty is based on the shares of the parent firm. The legal liabilities of an external company are not limited. Foreign investors may normally buy into local firms without limitation. Restrictions on foreign ownership in the 1990 privatization of ISCOR were an isolated case. No local equity requirements exist. In practice, foreign firms invite domestic participation when it is suitable for the business of the firm.
It is not necessary for any shares in a firm to be held by a South African resident. Shares of any denomination may be issued, and no-par shares are permitted. The use of "nominee" shares, non-voting, and low-voting shares is common, as are cross-holdings among corporations and overlapping boards of directors. This makes it difficult to identify the ownership of many listed corporations and concentrates control among the country's large conglomerates.
A pending change to the Companies Act, which will affect voting and nominee shares, is likely to make share ownership more transparent. Regulations on insider trading are poorly developed with little investigation of insider trading.
The Financial Services Board has indicated that it will beef up its monitoring and protection against insider trading. The subscription of a minimum amount of shares is not required. Public firms must have at least two directors and private firms one director. The directors need not be South African residents.
External firms must appoint a South African resident to accept services of notices on the firm. All firms must keep proper financial records, but only public companies and external companies must file annual financial statements with the registrar of companies. External companies must file with the registrar their South African financial statements and the financial statements for the foreign company as a whole. An application for exemption from this requirement may be requested.
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 Receiver of Revenue, and the Department of Customs and Excise.
As a general principle, taxes are levied only on income derived from a source within or deemed to be within South Africa. This principle applies to resident and non-resident individuals and companies.
Income tax payers are divided into two categories: individuals, who are taxed at progressive rates, and companies, taxed at 30 percent of taxable income (mining companies have different tax rates). A secondary tax on companies (STC) - an additional tax on company income - is imposed at a rate of 12.5 percent on the net amount of dividends declared by a company. Withholding taxes are imposed on interest and royalties are remitted to non-residents. Capital gains are tax free, and dividends received by a South African company are tax exempt. South Africa has a 14 percent value-added tax (VAT). Exports are zero-rated, and no VAT is payable on imported capital goods. The Government levies a one-time fixed income tax rate of 2.5 percent on demutualization funds from life insurance companies Old Mutual and Sanlam.
The maintenance and promotion of the Competition Act of 1979 provides for the prevention of, or control over, restrictive trade practices and monopoly situations. The Competition Board, which has power to investigate anti-competitive behavior or structure, implements the Act. It can only recommend to the responsible cabinet minister punitive or preventative action against the concerned parties. A 1986 amendment to the Competition Act of 1979 specifically prohibits five anti-competitive practices: resale price maintenance, horizontal price fixing, horizontal collusion on conditions of supply, horizontal collusion on market sharing, and collusive tendering or "bid rigging". In spite of these measures to restrict anti-competitive behavior, South Africa is known for "cozy relationships"among business owners, which may involve cross sitting on one another's boards and the extension of favors. Recent decisions of the Competition Board (such as the Mondi and Kohler decision) suggest increasing openness to foreign investment and more likelihood of stopping domestic tie-ins that appear to restrict competition.
The South African Parliament recently passed a new Competition Act, based largely on the Canadian and British models of common law, which is to take effect September 1, 1999, replacing the 1979 Act. The Bill creates a Competition Commission (replacing the Competition Board) to act as investigator and prosecutor of anti-trust cases, a Competition Tribunal to consider and rule on the cases, and a Competition Court to act as the appeals body. These bodies are too new to evaluate their performance.
Under the Communications Law of 1996, a new regulatory authority for the telecommunications sector was created - the South African Telecommunications Regulatory Authority (SATRA), which assumed its new responsibilities in early 1997. Under the law, SATRA is independent from the Ministry of Posts, Telecommunications, and Broadcasting and has exclusive authority over the issuance of licenses in the telecommunications industry, the investigation of anti-competitive actions by market participants, and the enforcement of government telecommunications policy.
As a relatively new regulatory authority, SATRA is still engaged in the process of building its technical and legal capacity, and defining its relationship with the Department of Communications and the telecommunications industry. Unlike the U.S. Federal Communications Commission (FCC), SATRA does not have control over the formulation of government telecommunications policy, which is retained by the Minister of Posts, Telecommunications, and Broadcasting. SATRA has made several important rulings, such as the refusal to grant Telkom exclusive rights to promote Internet access, and the prohibition of"callback" operations, both of which are currently before the courts.
South Africa's tax, health, and safety laws and regulations are fairly unbureaucratic and transparent. See Section 14 for the regulatory framework for labor.
9. Efficient Capital Markets and Portfolio Investments
The South African Reserve Bank (SARB) provides oversight of South Africa's financial markets. South Africa's sophisticated non-bank financial services industry is governed by the Financial Services Board Act, which regulates insurance, pension funds, unit trusts (i.e., Mutual funds), participation bond schemes, portfolio management, and the financial markets (the Johannesburg Stock Exchange, Bond Exchange of South Africa, and South African Futures Exchange).
The Johannesburg Stock Exchange (JSE) is the principal center for raising equity capital in South Africa. As of July 1999, the total capitalization value of JSE firms was over R1.3 trillion (approximately USD 216 billion as of July1999). Turnover (total value of shares traded) increased from R206.5 billion (USD 34.41billion) in 1997 to R319.3 billion (USD 53.22 billion as of July1999) in 1998. The number of shares traded in 1998 was 34.4 billion compared with 17.9 billion shares in 1997. Two sections within the JSE are the Venture Capital Market (VCM) and the Development Capital Market (DCM). The DCM, which was established in 1984, permits the listing of smaller companies on simplified terms and at far less cost. The VCM, established in 1989, consists of joint ventures between listed and non-listed firms.
The South African Futures Exchange (SAFEX), whose members include banks, stockbrokers, futures brokers and other institutions, is the exchange that trades the futures market in South Africa. It is licensed under the Financial Markets Control Act. It has three tiers of membership: clearing members who guarantee all trades done in the market, non-clearing members (brokers or non-brokers) who must clear trades through a clearing member, and clients who must trade through a broking member.
The Bond Exchange of South Africa is empowered to regulate the fixed-interest securities market. Membership includes banks, insurers, investors, stockbrokers, and independent intermediaries. Its operations are governed by the Financial Markets Control Act.
Within the foreign exchange control system, financial resources move in response to market signals. Private financial services companies make an active market in government and private securities and equities. A variety of credit instruments are available to the private sector, including bankers' acceptances, fixed and variable rate securities, bonds and equities. On November 1, 1995, the JSE began permitting banks and foreign firms to join its registry. South African financial institutions and markets are in the throes of adjusting to international competition. The policy board for financial services and regulation has initiated a policy process intended to bring South Africa in line with international practices. The three exchanges have agreed in principal to merge eventually into a single regional exchange with a goal of becoming a platform for regional integration of financial markets and development of South Africa as a regional financial hub.
South Africa's banking system is comprised of three elements: the South African Reserve Bank, private sector banks, and mutual banks. The latter are banks registered without ordinary shareholders, owned instead by all shareholders/depositors. Four exist in South Africa. The Banks Act of 1990 regulates private banks. 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.
10. Political Violence
Since South Africa's first non-racial elections in April 1994, political violence has decreased dramatically. The second non-racial elections in June 1999 were generally peaceful, with political violence comparatively minimal. The highest incidence of political violence occurred in rural areas of the province of KwaZulu/Natal, where there were occasional clashes between supporters of the African National Congress (ANC), the Inkatha Freedom Party (IFP) and the United Democratic Movement (UDM). In June 1999, the ANC and the IFP signed a peace pact, which indicates that politically motivated violence is likely to wane. Foreigners have not been specific targets of political violence.
11. Corruption and Crime
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, dismissal for government employees, and deportation for foreign citizens.
Responsibility for the enforcement of anti-corruption law lies primarily with the South African Police Service (SAPS) Office of Serious Economic Offenses. Although this office has occasionally been criticized for its low conviction rate, enforcement of anti-bribery and anti-corruption laws appears to be consistent among both domestic and foreign business concerns. Judge William Heath heads a commission (the Heath Commission) that investigates corruption and attempts to recover funds related to bribery and malfeasance.
Still, with violent crime rates in South Africa on the rise, economic offenses are likely to be devoted fewer resources than criminal cases as the SAPS struggles to do more with limited resources. U.S. firms have not identified corruption as an obstacle to foreign direct investment.
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. President Mbeki (in speeches) and South African citizens and foreign residents (in polls) underscore the urgency of combating crime and violence. The police have not been effective or well accepted in many communities because of their historical role in enforcing minority rule, poor training, and internal crime and corruption.
In June 1999, Safety and Security Minister Steve Tshwete announced a new initiative to establish a FBI-type agency that will target violent and commercial crime, including police corruption. The new agency will bring together specialists from various departments as well as outside government. Minister Tshwete said measures would also be taken to strengthen community police forums to improve their capacity to mobilize citizens against crime and improve cooperation between citizens and law enforcement agencies.
In May 1995, the SAG had adopted a National Crime Prevention Strategy that outlined an overall strategy which includes: strengthening the criminal justice system; redesigning crime-resistant governmental systems such as new personal identity documents and a new vehicle registration system; educational crime prevention programs targeted the youth in schools; as well as strengthening South Africa's regional security. Local government and community involvement are increasingly perceived as important factors in crime prevention and control.
12. Bilateral Investment Agreements
South Africa has signed various investment agreements with many countries since 1994. South Africa's investment agreements that have entered into force include those with the U.S., Malaysia, the UK, the Netherlands, Switzerland, the Republic of Korea, Germany, France, Cuba, Denmark, Austria, China, and Canada. South Africa has also signed many investment agreements that have not yet been ratified or entered into force, including those with Paraguay, Senegal, Mozambique, Italy, Iran, Mauritius, Sweden, Ghana, Argentina, Finland, Spain, Egypt, Chile, Greece, Russia, the Czech Republic, the Belgo-Luxembourg Economic Union, and the European Investment Bank.
The South African Customs Union (SACU) agreement with Botswana, Lesotho, Namibia, and Swaziland; and the Common Monetary Area agreement with Lesotho, Namibia, and Swaziland also facilitate investment flows between the participating countries.
The U.S.-South Africa bilateral tax treaty signed in February 1997 entered into force on January 1, 1998. This treaty eliminates double-taxation of business officials from one country working in the other.
In February 1999, the U.S. and South Africa signed a Trade and Investment Framework Agreement (TIFA). This was the first TIFA for the U.S. signed in sub-Saharan Africa, recognizing South Africa's importance as a leading African economic power. The TIFA establishes a Council on Trade and Investment composed of representatives of both governments, chaired in the U.S. by the Office of the U.S. Trade Representative and in South Africa by the Department of Trade and Industry. The council is to meet regularly to discuss specific trade and investment matters, negotiate agreements where appropriate and identify and work to remove impediments to trade and investment flows. The council may also consult with the private sectors of both countries. The first Council meeting took place on July 28, 1999.
13. OPIC and Other Investment Insurance Programs
The Overseas Private Investment Corporation (OPIC) supports, finances, and insures projects that are financially sound, and promise significant benefits to the social and economic development of the host country, and do not injure the U.S. economy. OPIC assists American investors through the following four principal activities which are designed to promote overseas investment and reduce the associated risks: financing businesses through loans and loan guarantees; supporting private investment funds; insuring investment against a broad range of political risks; and engaging in outreach activities designed to inform the American business community. Between 1994 and 1998 OPIC committed more than USD 80 million in combined political risk insurance and project financing to U.S. businesses seeking investment in South Africa.
South Africa signed a bilateral investment incentive agreement with the United States in November 1993 with respect to all of OPIC's programs. OPIC has received dozens of insurance registrations for a variety of sectors, including computers, communications and electronic products, restaurants, banking, housing construction, mining, and pharmaceuticals. A registration represents an investor's interest in obtaining OPIC insurance prior to submitting a formal application.
OPIC backs a number of investment funds focused on the sub-Saharan Africa region. They include the USD 25 million Africa Growth Fund, the USD 150 million Modern Africa Growth and Investment Fund, and the USD 120 million New Africa Opportunity Fund ("NAOF"). The NAOF is open for investment in South Africa. Most recently, at the July 1999 World Economic Forum in Durban, South Africa, George Munoz, President and Chief Executive Officer of OPIC, announced the launch of the USD 350 million New Africa Infrastructure Fund (NAIF). OPIC's largest single fund, NAIF is to target the infrastructure needs of sub-Saharan Africa, including South Africa, and investments that help women and those living in rural communities.
South Africa is also a member of the Multilateral Investment Guarantee Agency (MIGA) of the World Bank.
14. Labor
Since 1994 the South African government has been systematically removing the vestiges of the Apartheid labor system. The government is attempting to erect in its place a system that balances flexibility in an economy increasingly open to international competition with employment security and decent wages and working conditions. The new system, which was negotiated between government, business, and organized labor under the aegis of the National Economic Development and Labor Council (NEDLAC), places a high value on worker rights and collective bargaining between parties that are equally empowered.
The new labor dispensation rests on four legislative pillars. The Labor Relations Act, in effect since November 1996, is the cornerstone of the whole regulatory structure. It enshrines the right of workers to strike and also the right of management to lock out workers and hire replacement labor during a strike. The Act created the Commission on Conciliation, Mediation and Arbitration (CCMA), which in its first two years in existence settled more than 100,000 cases referred to it for mediation and completed more than 15,000 arbitrations.
Second is the Basic Conditions of Employment Act, implemented in December 1998. The Act establishes a 45-hour workweek and minimum standards for overtime pay, annual leave, notice of termination, and the like.
Third is the Employment Equity Act, which prohibits unfair employment discrimination on some 19 grounds and which, effective December 1999, requires large- and medium-sized employers to prepare affirmative action plans to ensure that blacks, women, and disabled persons are adequately represented in the workforce.
Fourth is the Skills Development Act, passed in October 1998, which will impose a levy on employers equal to one percent of payroll to be used for training programs devised by industry-run training authorities. Many in business claim that the South African labor market is over-regulated, and have urged government to scale back some of the recently passed legislation. In response, Mbeki has promised to examine the impact, if any, of the labor laws on investment and job creation.
According to the latest (October 1997) household survey conducted by Statistics South Africa, there are 2.2 million unemployed people in South Africa, or 23 percent of an economically active population of 9.8 million. These figures use the International Labor Organization (ILO) definition of unemployed, which excludes persons who have not looked for work in the four weeks prior to the interview. Official unemployment rates are highest for black people (29 percent), followed by colored (16 percent), Indian (10 percent), and white (4 percent) people. Education and skills training are not keeping pace with the rapid increase in demand for skilled workers.
In recognition of the seriousness of the unemployment problem, President Mandela called for a Jobs Summit, which took place in October 1998 and resulted in a number of job-creation initiatives. These initiatives include a pilot housing project to build between 50,000 and 150,000 units by the end of 2001; a R1 billion (USD 170 million) "business trust" to finance labor-intensive projects in the tourism industry and education projects in disadvantaged communities; short-term public works projects targeting unemployed youth; and programs to assist microenterprises through access to credit, mentorship schemes, and business incubation centers.
In 1997 there were 3.4 million union members in South Africa, or nearly 35 percent of the economically active population, as defined by the ILO. The largest labor federation, the 1.8 million-strong Congress of South African Trade Unions (COSATU), is in a formal alliance with the African National Congress (ANC) and the South African Communist Party (SACP).
Several COSATU officials have left the union movement to run for parliament and take positions in government up to the ministerial level. The current premier of Gauteng province - the commercial, financial, and industrial heartland of South Africa, with almost 40 percent of South Africa's GDP - is former COSATU general secretary Mbhazima Shilowa.
COSATU, while supportive of the ANC, nevertheless has its differences with the government over economic policy, in particular government efforts to privatize municipal services and state-owned corporations. These differences have manifested themselves in debate, not industrial action. In fact, strike activity has declined sharply under the ANC-led government, averaging 1.6 million person-days lost per year in 1995-98 against 4.2 million per year in 1987-94. There are indications of an upswing in strike activity in 1999 coming mainly from the public sector.
15. Foreign Trade Zones and Free Ports
The Department of Trade and Industry has undertaken to implement a series of Industrial Development Zone (IDZ) Initiatives that aim to create environments conducive to export-oriented production and services for international and local investors. The idea is that by locating within these zones, new investments will benefit from world-class infrastructure, local and cost advantages, in addition to existing fiscal incentives, linkages with local markets, expedited customs procedures, and a single stop regulatory authority. IDZs are to be geographically designated within a controlled duty free area, near a port or airport.
A National Development Zone Authority (NDZA) is to be responsible for the regulation, facilitation, and administration of the IDZs. Local NDZA offices will facilitate the regulatory and approval process - acting as "one-stop shops" - while the private sector manages and develops the zones.
The Coega Industrial Development Zone Initiative, which includes South Africa's first deep-water free port near Port Elizabeth, is up and running. Development has also begun on the East London IDZ Initiative, designed to create a duty free environment with tax incentives and access to deep water ports while minimizing input costs, particularly transport. More information on IDZs is available from the Department of Trade and Industry at www.sdi.org.za.
16. Foreign Direct Investment Statistics
16.1 Foreign Direct Investment into South Africa. Foreign direct investment (FDI) data is readily available in South Africa, but published statistics vary widely depending on source. Among the various institutions that provide foreign investment data, the U.S. Embassy in South Africa tends to rely most heavily on the South African Reserve Bank (SARB), the Investor Responsibility Research Center (IRRC) - a Washington, D.C. based corporate research provider, and South Africa based Business Map (BM). The latter two offer fee based services for a wide range of investor related data and analysis and may be contacted via their respective web sites, www.irrc.org and www.bmap.co.za.
Although FDI statistics from IRRC and BM are not in total agreement, both show the U.S. to be the largest source of new foreign direct investment in South Africa since the 1994 transition to democracy. The SARB does not provide country specific figures which distinguish between actual new investment flows and changes in investment stocks caused by asset swaps, exchange rate adjustments, and mergers and acquisitions - making it difficult to track the U.S. FDI position in South Africa on a yearly basis.
16.2 South African Direct Investment Abroad. Since 1994, direct investment abroad by South African multi-national firms has outpaced that of FDI inflow into South Africa. Throughout this period, for instance, net FDI inflows from sources into South Africa have been largely offset by net FDI outflows from South Africa to the UK, Luxembourg, and Switzerland by primarily large south African conglomerates, particularly Anglo American/De Beers. South Africa is now the largest source of new investment for many surrounding SADC nations and South African investment in the rest of Africa presently exceeds that from all of Asia, the U.S., and Latin America.
16.3 Statistics. The following statistics on foreign direct investment were drawn from the SARB's June 1999 Quarterly Bulletin. SARB statistics conform to the IMF definition of FDI and represent actual investment, excluding announced but not completed "intended" investment. The conversion exchange rate used was that of the average for each year cited.
Note: FDI is generally defined as ownership of at least ten percent of the voting rights in an organization by a foreign resident or several affiliated foreign residents, including equity capital, reinvested earnings and long-term loan capital. Average exchange rates by year: 1993 - 3.40; 1994 - 3.54; 1995 - 3.65; 1996 - 4.30; 1997 - 4.61; 1998 - 5.53. Figures are in millions unless otherwise indicated.
Table 16. GDP* and FDI as Percentage of GDP
1993 1994 1995 1996 1997 1998 GDP 426.1 482.1 548.1 614.9 680.2 737.8 FDI 8.0 9.0 9.0 10.0 12.0 N/A*In Rand at current prices (see Appendix C 2).
Region/Country RAND USD Europe 61.8 13.4 -United Kingdom 37.4 8.1 -Germany 10.4 2.3 -Netherlands 4.6 1.0 -Switzerland 3.8 0.8 -France 1.8 0.4 -Italy 0.8 0.2 North & South America 13.7 3.0 -USA Only 12.4 2.7 -Africa 0.9 0.2 -Asia 5.5 1.2 -Malaysia 3.5 0.8 -Japan 1.1 0.2 Oceania 0.5 0.1 -Australia 0.5 0.1 International Organizations 0.1 0.03 TOTAL 82.5 17.9Source: South African Reserve Bank (SARB). According to Investment South Africa, the following statistics represent the top U.S. and international investors in South Africa from 1994 to the present (mid-year 1999). Investment South Africa's web site is www.isa.co.za Table 19. Top 15 U.S. Investors in South Africa (Rand billions) Ranking Company Name Invested1. SBC Communications 3.720 2. Dow Chemicals 2.720 3. Coca-Cola 2.070 4. Caltex 1.200 5. IBM 1.020 6. Salem 0.887 7. Goodyear 0.568 8. Duracell 0.525 9. Ford 0.350 10. McDonalds 0.350 11. Ucar International Corporation 0.330 12. Minute Maid International 0.250 13. Federal Mogul 0.248 14. Arrow Electronics Corporation 0.200 15. Pepsico Foods International 0.190Table 20. Top 15 International Investors in South Africa (Rand billions)Ranking Company Name Source Country Invested 1. Petronas Malaysia 4.700 2. SBC Communications USA 3.720 3. Dow Chemicals USA 2.720 4. Telecom Malaysia Malaysia 2.200 5. Coca-Cola USA 2.070 6. Lafarge France 1.530 7. Placer Dome Canada 1.410 8. Lonrho Pic UK 1.400 9. Swissair Switzerland 1.400 10. AP Moller Denmark 1.222 11. Caltex USA 1.200 12. Billliton UK 1.104 13. BMW Germany 1.100 14. IBM USA 1.022 15. Movenpick Hotels and Resorts Switzerland 0.923Source: Investment South Africa Business Map provided the following statistics on FDI flows into South Africa by industry sector and country of origin.Table 21. FDI Flows into South Africa by Country, 1994 - April 1998 (Rand millions)
Country FDI USA 14,263 Malaysia 6,658 UK 6,192 Germany 2,661 Japan 1,785 Switzerland 1,686 Italy 1,409 Sweden 843 Netherlands 694 France 519 Dubai 450 Thailand 350 Korea 277 Indonesia 260 Austria 230 Denmark 180 International Organizations 167 India 145 Turkey 117 China 108 Norway 92 Australia 61 Namibia 60 Belgium 26 Canada 10 Mauritius 5 TOTAL 39,252Table 22. FDI Flows by Investment Sector, 1994 - April 1998 (Rand millions)
Investment Sector FDI Telecommunications 6,930 Energy and Oil 4,517 Motor and Components 4,242 Food and Beverages 4,142 Chemicals and Plastics 2,989 Mining and Quarrying 2,412 Manufacturing Other 2,369 Hotel, Leisure and Gaming 1,616 Property 1,270 Financial Services 1,121 Transport 1,086 Pharmaceutical and Medical 1,016 Electronics and Electrical 847 Information Technology 808 Consultancy and Management 532 Investment Holdings 500 Metals Manufacturing 441 Clothing and Textiles 401 Engineering 395 Media and Publishing 376 Construction and Materials 317 Agriculture, Forestry And Fishing 268 Services 243 Retail and Wholesale 157 Packaging and Paper 156 Industrial Holdings 92 TOTAL 39,252Note: The Business Map definition of FDI includes mergers and acquisitions, new investments, privatizations, expansions that result in new productivity capacity, and firm plans or intentions to invest (i.e. commitments).
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