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Diplomacy in Action

2010 Investment Climate Statement - South Africa


2010 Investment Climate Statement
Bureau of Economic, Energy and Business Affairs
March 2010
Report
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Openness to Foreign Investment

The government of South Africa is open to foreign investment, which it views as a means to drive growth, improve international competitiveness, and obtain access to foreign markets. Virtually all business sectors are open to foreign investors. No government approval is required to invest, and there are almost no restrictions on the form or extent of foreign investment. The Department of Trade and Industry’s (DTI) Trade and Investment South Africa (TISA) division provides assistance to foreign investors. The DTI concentrates on sectors in which research has indicated that the country has a comparative advantage. TISA offers information on sectors and industries, consultation on the regulatory environment, facilitation for investment missions, links to joint venture partners, information on incentive packages, assistance with work permits, and logistical support for relocation. DTI publishes the "Investor's Handbook" on its website: http://www.thedti.gov.za/ (see "publications").

Macroeconomic management was strong over the past decade, with reduced levels of public debt, generally low inflation, a progression from a fiscal deficit to a fiscal surplus, and a positive rate of economic growth until the global slowdown in 2009. The post-apartheid government has sought to liberalize trade and enhance international competitiveness by lowering tariffs, abolishing most import controls, undertaking some privatization, and reforming the regulatory environment. While this has resulted in several large foreign acquisitions in banking, telecommunications, tourism, and other sectors, foreign direct investment has fallen short of the government’s expectations. South African banks are well-capitalized and have little exposure to sub-prime debt or other sources of financial contagion. However, in the wake of the recent global financial turmoil, Standard & Poor’s (S&P) and Fitch downgraded their outlook on South Africa’s sovereign credit from “stable” to “negative” in late 2008, reflecting concerns that capital outflows could depress the rand and make it difficult for South Africa to finance its growing current account deficit. As of December 2009, S&P maintained the negative outlook for South Africa’s creditworthiness.

In August 2007, the DTI launched its National Industrial Policy Framework, and accompanying Industrial Policy Action Plan, to promote a more labor-absorbing and broader-based industrialization path in four lead sectors: capital or transport equipment; automotive; chemical, plastic fabrication and pharmaceuticals; and forestry, paper and furniture. Business-process outsourcing, clothing and textiles, tourism, and biofuels were also identified for attention. The Policy Framework anticipated initiatives in the form of tariff reductions, increased industrial financing, and additional incentives for investors.

The Black Economic Empowerment (BEE) strategy is a government program to increase the participation in the economy of historically disadvantaged South Africans. BEE requirements are specified in the Codes of Good Practice, which were published in the Government Gazette in February 2007. The codes set forth best practices for employment equity, skills development, enterprise development, preferential procurement, equity ownership, and small and medium-sized enterprises. They also permit multinational corporations to score equity ownership “points” through the use of mechanisms not involving the transfer of equity if these mechanisms are approved by DTI and the multinationals have a global corporate policy of owning 100 percent of the equity in their subsidiaries. The American Chamber of Commerce and many individual U.S. companies had pressed for the right to use such "equity equivalent" mechanisms. To date approvals of “equity equivalent” proposals have been slow. A firm's BEE “score” will be considered by government departments when awarding contracts, and in some cases is a requirement for tendering. While firms are not legally required to meet BEE criteria, they are less competitive for government tenders if they fail to meet the criteria. The BEE Codes of Good Practice and other pertinent BEE legislation may be found on DTI's website: http://www.thedti.gov.za/.

Some state-owned enterprises were privatized in the 1995-2004 period. Since 2004, the government has been restructuring most of the remaining state-owned enterprises rather than proceeding with plans for further privatization. Transnet (transportation) is focusing on core sectors that support its freight transport and logistics business. Assets or businesses that are not part of this strategy are in the process of being sold to the private sector or are being transferred back to the government. Transnet transferred SA Express to the Department of Public Enterprises in 2008 and Transtel Telecom was sold to Neotel. The Department of Minerals and Energy (DME) contracted with US power producer AES for a 1000 MW power project, but canceled the agreement when AES was unable to fulfill its contractual obligations. Other opportunities for private investment in the power sector are likely to follow DME’s policy to grant up to 30 percent of new energy projects to the private sector. The planned privatization of smaller parastatals (like Safcol in the forestry sector and Denel in the defense sector) with partial buy-ins by foreign suitors also present opportunities for foreign investment. In late 2009 the electricity utility Eskom announced that it would seek private participation in at least one power plant project.

Conversion and Transfer Policies

The South African Reserve Bank’s (SARB) Exchange Control Department administers foreign exchange policy. An authorized foreign exchange dealer, normally one of the large commercial banks, must handle international commercial transactions and report every purchase of foreign exchange, irrespective of the amount, that is received by South African residents or companies. Generally, there are only limited delays in the conversion and transfer of funds.

While non-residents may freely transfer capital into and out of South Africa, transactions must be reported to authorities. Non-residents may purchase local securities without restriction. To facilitate repatriation of capital and profits, foreign investors should make sure that an authorized dealer endorses their share certificates as "non-resident." Foreign investors should also be sure to maintain an accurate record of investment.

South African subsidiaries and branches of foreign companies are considered to be South African residents, and as such, are subject to exchange control by the SARB. South African companies may, as a general rule, freely remit the following to non-residents: repayment of capital investments; dividends and branch profits (provided such transfers are made out of trading profits and are financed without resorting to excessive local borrowing); interest payments (provided the rate is reasonable); and payment of royalties or similar fees for the use of know-how, patents, designs, trademarks or similar property (subject to prior approval of SARB authorities).

While South African companies are permitted to invest in other countries without restriction, SARB approval/notification is required for investments over R500 million. South African individuals may freely invest in foreign firms listed on South African stock exchanges. Individual South African taxpayers in good standing may make investments up to a total of R4 million in other countries. South African banks are permitted to commit up to 40 percent of their domestic capital in other countries, but only 20 percent outside Africa. In addition, mutual and other investment funds may now invest up to 25 percent of their retail assets in other countries. Pension plans and insurance funds may invest 15 percent of their retail assets in other countries.

Before accepting or repaying a foreign loan, South African residents must obtain SARB approval. The SARB must also approve the payment of royalties and license fees to non-residents when no local manufacturing is involved. When local manufacturing is involved, the DTI must approve the payment of royalties related to patents on manufacturing processes and products. Upon proof of invoice, South African companies may pay fees for foreign management and other services provided such fees are not calculated as a percentage of sales, profits, purchases, or income.

SARB approval is also required for the sale of all forms of South African-owned intellectual property rights (IPR). Approval is generally granted by SARB if the transaction occurs at arm’s length and at fair market value. IPR owned by non-residents is not subject to any restrictions in terms of repatriation of profits, royalties, or proceeds from sales.

Further questions on exchange control may be addressed to:

South African Reserve Bank
Exchange Control Department
P.O. Box 427, Pretoria, 0001
Tel: +27 (0) 12 313-3911; Fax: +27 (0) 12 313-3197
Website: http://www.reservebank.co.za/

Expropriation and Compensation

The Expropriation Act of 1975 (Act) and the Expropriation Act Amendment of 1992 entitle the government to expropriate private property for reasons of public necessity or utility. The decision is an administrative one. Compensation should be the fair market value of the property. There is no record, dating back to 1924, of an expropriation or nationalization of a U.S. investment in South Africa.

Racially discriminatory property laws during apartheid resulted in highly disproportionate patterns of land ownership in South Africa. As a result, the post-apartheid government has committed to redistributing 30 percent of the country's farm land to black South Africans by 2014.

In several restitution cases, the government has initiated proceedings to expropriate white-owned farms after courts ruled that the land had been seized from blacks during apartheid and that the owners subsequently refused court-approved purchase prices. In most of these cases, the government and owners reached agreement on compensation prior to any final expropriation actions. The government has twice exercised its expropriation power. It took possession of farms in Northern Cape Province and Limpopo in March 2007 and December 2007 after negotiations with owners collapsed. The government paid the owners the fair market value for the land in both cases.

South Africa’s Cabinet approved for submission to Parliament a new piece of legislation called the Expropriation Bill in March 2008. The Expropriation Bill sought to resolve differences between the Act and the South African Constitution, which allows the government to expropriate land not just for reasons of public necessity but also for reasons that are "in the public interest.” The bill is viewed as a government strategy to speed land redistribution; as of 2009, only 5 percent of total farm land had been redistributed under the government's land reform program. In August 2008, the bill was withdrawn - and ultimately scrapped – in the face of criticism from farmers and private sector groups that questioned its constitutionality. In October 2009, senior land reform officials were considering input from a government task team set up to amend the bill and resubmit it to Parliament.

Mineral rights have also been the subject of expropriation claims. The Mineral and Petroleum Resources Development Act 28 of 2002 (“MPRDA”) replaced private ownership of mineral rights with a system of licenses offered by the South African government. Under the MPRDA, investors who held pre-existing mineral rights were granted the opportunity to apply for licenses provided they met certain criteria, including the achievement of certain Broad Based Black Economic Empowerment objectives. A group of European investors who hold interests in granite quarrying companies in South Africa filed an international arbitration complaint against the South African government, claiming that their mineral rights had been extinguished without adequate compensation. The World Bank's International Centre for the Settlement of Investment Disputes is scheduled to hear the case in April 2010.

Dispute Settlement

South Africa is a member of the New York Convention of 1958 on the recognition and enforcement of foreign arbitration awards, but is not a member of the World Bank’s International Center for the Settlement of Investment Disputes. South Africa recognizes the International Chamber of Commerce, which supervises the resolution of transnational disputes. South Africa applies its commercial and bankruptcy laws with consistency and has an independent, objective court system for enforcing property and contractual rights.

Performance Requirements and Incentives

DTI offers six investment incentives for manufacturing. Foreign Investment Grants may provide up to 15 percent of the value of new machinery and equipment to a maximum of R3 million per entity for relocation to South Africa. Industrial Development Zones (IDZ) provide duty-free import of production-related materials and zero VAT on materials sourced from South Africa, along with the right to sell into South Africa upon payment of normal import duties on finished goods. The Skills Support Program provides up to 50 percent of training costs and 30 percent of worker salaries for a maximum of three years to encourage the development of advanced skills. The Strategic Investment Project program offers a tax allowance of up to 100 percent (a maximum allowance of R600 million per project) on the cost of buildings, plant and machinery for strategic investments of at least R500 million. The Critical Infrastructure Facility supplements funds up to 30 percent of the development costs of qualifying infrastructure projects. The Small and Medium Enterprise Development Program offers a tax free grant of up to R3.05 million to manufacturers with assets of less than R100 million for a maximum of three years. The first two years of the grant is based on the investment in operating assets and the third year on the level of employment generated.

DTI established the Film and Television Production Rebate Scheme to encourage foreign and domestic investment in the local film industry. Eligible applicants may receive a rebate of 15 percent of the production expenditures for foreign productions and up to 25 percent for qualifying South African productions. Film projects must have begun after April 1, 2004 and must reach a threshold of R25 million to qualify for the rebate. Other requirements include 50 percent completion of the principal photography in South Africa and a minimum of four weeks photography time. Eligible productions include movies, tele-movies, television series, and documentaries. The maximum rebate for any project will be R10 million. Details on the entire program are available at the DTI website at http://www.dti.gov.za/.

South Africa's various provinces have development agencies that offer incentives to encourage investors to establish or relocate industry to areas throughout South Africa. The incentives vary from province to province and may include reduced interest rates, reduced costs for leasing land and buildings, cash grants for the relocation of physical plants and employees, reduced rates for basic facilities, railage and other transport rebates, and assistance in the provision of housing.

The Industrial Development Corporation (IDC) is a self-financing, state-owned corporation that provides equity and loan financing to support investment in target sectors. The IDC also provides credit facilities for South African exporters. Several government-supported bodies provide technical assistance to industry. The Council for Scientific and Industrial Research provides multi-disciplinary research and development for industrial application.

Technifin is a government-owned corporation which finances the commercialization of new technology and products. MINTEK develops mining and mineral processing technology for company application. The Council for Geoscience undertakes geological surveys and services related to minerals exploration.

Under the National Industrial Participation Program (NIPP), foreign companies winning large government tenders exceeding $10 million must invest at least 30 percent of the value of the imported content of the tender in South Africa.

The government initiated the Motor Industry Development Program in 1995 to restructure the South African automotive industry over a period of twelve years. The program was designed to encourage local manufacturing by means of a duty rebate scheme on imported vehicles and component parts, to be phased out over the life of the program. In 2002, the Minister of Trade and Industry extended the program from 2007 to 2012. Import duties and duty rebates will continue to decline over this extended period. The import duty on built-up light vehicles will fall to 25 percent and the import duty on original equipment components will fall to 20 percent by 2012. In 2008, the South African cabinet approved a new Automotive Production and Development Program (APDP) to replace the MIDP. The APDP will aim to increase production in the auto sector to 1.2 million vehicles per year by 2020, with an associated deepening of components production. The APDP is structured around a mix of high tariffs and tariff credits plus other incentives. The old program included export incentives, whereas the new program includes production incentives. The new program epitomizes the government’s relatively new commitment to industrial policy as a source of job creation and growth. The government launched its National Industrial Policy Framework with an accompanying Action Plan in August 2007. As noted above in Section 6.1, the Policy Framework provides for import tariff reductions, tighter competition legislation, increased industrial financing, and an improved incentive scheme for investors in specific industrial sectors.

Right to Private Ownership and Establishment

The right to private property is protected under South African law. All foreign and domestic private entities may freely establish, acquire, and dispose of commercial interests. The securities regulation code requires that an offer to minority shareholders be made when 30 percent shareholding has been acquired in a public company that has at least ten shareholders and net equity in excess of R5 million.

Protection of Property Rights

The South African legal system protects and facilitates the acquisition and disposition of all property rights, e.g., land, buildings, and mortgages. Deeds must be registered at the Deeds Office. Banks usually provide finance for the purchase of property by registering the mortgage as security.

Owners of patents and trademarks may license them locally, but when a patent license entails the payment of royalties to a non-resident licensor, DTI must approve the royalty agreement. Patents are granted for twenty years - usually with no option to renew. Trademarks are valid for an initial period of ten years and thereafter are renewable for ten-year periods. The holder of a patent or trademark must pay an annual fee to preserve ownership rights. All agreements relating to payment for the right to use know-how, patents, trademarks, copyrights, or other similar property are subject to approval by exchange control authorities in the SARB. A royalty of up to four percent of the factory selling price is the standard approval for consumer goods. A royalty of up to six percent will be approved for intermediate and finished capital goods.

Literary, musical, and artistic works, as well as cinematographic films and sound recordings are eligible for copyright under the Copyright Act of 1978. New designs may be registered under the Designs Act of 1967, which grants copyrights for five years.

The Counterfeit Goods Act of 1997 provides additional protection to owners of trademarks, copyrights, and certain marks under the Merchandise Marks Act of 1941. The Intellectual Property Laws Amendment Act of 1997 amended the Merchandise Marks Act of 1941, the Performers' Protection Act of 1967, the Patents Act of 1978, the Copyright Act of 1978, the Trademarks Act of 1993, and the Designs Act of 1993 to bring South African intellectual property legislation fully into line with the WTO's Trade-Related Aspects of Intellectual Property Rights Agreement. Amendments to the Patents Act of 1978 were also intended to bring South Africa into line with TRIPS, to which South Africa became a party in 1999, and provides for the implementation of the Patent Cooperation Treaty.

Transparency of the Regulatory System

The Companies Act of 2008 is in the process of being implemented. It will reform and replace the Companies Act of 1973. The 1973 Act provided for transparent regulations concerning the establishment and operation of businesses. Major reforms in the 2008 Act include the alignment of corporate governance regulations with international best practices, allotment of greater powers to minority shareholders, the codification of common law duties and liabilities of directors, and the introduction of flexibility in the design and organization of companies.

Efficient Capital Markets and Portfolio Investment

South Africa's banks are well capitalized and comply with international banking standards. Six of the 35 banks in South Africa are foreign-owned and 15 are branches of foreign banks. The "Big Four" (Standard, ABSA, First Rand, and Nedcor) dominate the sector, accounting for almost 85 percent of the country's banking assets, which total over $240 billion. Barclays' acquisition of ABSA received government approval in 2005. The International Commercial Bank of China purchased a 20% stake in Standard Bank in late 2007 and the government approved the sale in early 2008. The SARB regulates the sector according to the Bank Act of 1990. There are three alternatives for foreign banks to establish local operations, all of which require SARB approval. These include the establishment of: 1) a separate company; 2) a branch; or 3) a representative office. The criteria for the registration of a foreign bank are the same as for domestic banks. Foreign banks must include additional information, such as holding company approval, a letter of "comfort and understanding" from the holding company, and a letter of no objection from the foreign bank's home regulatory authority. More information on the banking industry may be obtained from the South African Banking Association at the following website: http://www.banking.org.za/.

The Financial Services Board (FSB) governs South Africa's non-bank financial services industry (see website: http://www.fsb.co.za/). The FSB regulates insurance companies, pension funds, unit trusts (i.e., mutual funds), participation bond schemes, portfolio management, and the financial markets. The JSE Securities Exchange SA (JSE) is the fourteenth largest exchange measured by market capitalization in the world. Market capitalization stood at R4.4 billion in December 2008 with over 400 firms listed. The Bond Exchange of South Africa (BESA) is licensed under the Financial Markets Control Act. Membership includes banks, insurers, investors, stockbrokers, and independent intermediaries. The exchange consists principally of bonds issued by government, state-owned enterprises, and private corporations. The JSE acquired BESA in June 2009. More information on financial markets may be obtained from the JSE (website: www.jse.co.za).

Non–residents are allowed to finance 100 percent of their investment through local borrowing (previously, they were required to invest R1 for every R3 borrowed locally). However, a finance ratio of 1:1 still applies to emigrants, the acquisition of residential properties by non-residents as well as financial transactions such as portfolio investments, securities lending and hedging by non-residents.

Competition from State-Owned Enterprises

State-owned enterprises and private enterprises in South Africa do not necessarily compete on the same terms and conditions with respect to access to markets, credit, and other business operations. State-owned enterprises dominate a number of key sectors in South Africa. Eskom supplies 94 percent of South Africa's electricity. Transnet operates the bulk of the nation's railways and ports. The South African Post Office is a legislated monopoly. Telkom is the dominant fixed-line telephone operator and is 37 percent government-owned. Neotel is a second national operator that began limited business-only operations in October 2006 and is 30 percent government-owned. Neotel entered the business-to-business market in 2007 and has entered the residential market in selected areas. InfraCo, a 100 percent government-owned broadband provider, was formed using the fiber-optic networks of Eskom and Transnet in December 2006, approved for operations by Parliament in October 2007, and awarded an electronic communications network services license in October 2009.

The Competition Act of 1998 and subsequent amendments address anticompetitive practices in both the private and public sectors. The Competition Commission has demonstrated increasing capacity to implement competition policy. There have been more frequent challenges in recent years against state-owned enterprises that compete unfairly or otherwise abuse their dominant position.

The South African government is usually the sole shareholder in state-owned enterprises. The shareholder representative is the relevant minister.

Corporate Social Responsibility

Corporations operating in South Africa have well-developed corporate social responsibility programs. The programs are one way to obtain credits under the Black Economic Empowerment (BEE) initiative (see “Openness to Foreign Investment,” above).

Political Violence

South Africa’s national election in April 2009 was free, fair, and peaceful, though there had been isolated incidents of violence in the run up to the vote. This was the fourth national election since the transition to democracy in 1994. Criminal violence remains high. National and provincial governments have pursued a number of programs in an attempt to control or stabilize the level of criminal violence. Some forms of crime, including murders, armored vehicle and mall robberies, have declined, while burglaries, small business robberies, and sexual assaults have increased.

Corruption

The 2000 Promotion of Access to Information Act and the 2000 Public Finance Management Act helped to increase transparency in government. The 2004 Prevention and Combating of Corrupt Activities Act (PCCAA) defines graft, bars the payment of bribes by South African citizens and firms to foreign public officials, and obliges public officials to report corrupt activities. One shortcoming of the PCCAA has been its failure to protect whistleblowers against recrimination or defamation claims. South African law also provides for the prosecution of government officials who solicit or accept bribes. Penalties for offering or accepting a bribe may include criminal prosecution, monetary fines, dismissal from government employment, or deportation (for foreign citizens).

South Africa has no fewer than 10 agencies engaged in anti-corruption activities. Some, like the Public Service Commission, the Office of the Public Protector, and the Office of the Auditor-General, are constitutionally mandated to address corruption as only part of their responsibilities. High rates of violent crime are a strain on capacity and make it difficult for South African criminal and judicial entities to dedicate adequate resources to anti-corruption efforts.

Parliament voted to disband the South African Police Anti-Corruption Unit and the Directorate for Special Operations (more popularly known as the “Scorpions”) and fold its jurisdiction into the National Police in October 2008. A new high priority crimes unit, known as the Hawks, has been formed under the South African Police Service and has claimed credit for several high-priority drug busts.

Transparency International's 2009 Corruption Perceptions Index reports that corruption in South Africa is perceived to be at the same level it was in 2008. South Africa was ranked 54th out of 180 countries (where 1 is the country where corruption is perceived to be the lowest, and 180 is the country where corruption is perceived to be the greatest) in 2008 and to 55th out of 180 countries in 2009. South Africa was again deemed the fourth least corrupt country in Africa in 2009. Transparency International maintains an office in South Africa. More information about the Corruption Perceptions Index is available at the following website: http://www.transparency.org/policy_research/surveys_indices/cpi/2009/cpi_2009_table

Public perception of widespread official corruption, particularly in the police and the Department of Home Affairs, continued. South Africa is not a signatory of the OECD Convention on Combating Bribery, but is a signatory of the UN Convention against Corruption.

Bilateral Investment Agreements

South Africa has bilateral investment treaties (BITs) with Argentina, Austria, Belgium, Canada, Chile, the Czech Republic, Finland, France, Germany, Greece, Mauritius, the Netherlands, the Republic of Korea, Spain, Sweden, Switzerland, Turkey, and the United Kingdom. A Trade, Development, and Cooperation Agreement that came into force between South Africa and the European Union on January 1, 2000 does not contain an investment chapter. South Africa, as a member of the Southern African Customs Union (SACU), is currently in negotiations for free trade agreements with Mercosur and India. The Department of Trade and Industry is reviewing South Africa’s BITs to determine whether they are consistent with the country’s developmental and transformational agenda.

The United States began free trade agreement (FTA) negotiations with the five SACU countries (South Africa, Botswana, Lesotho, Namibia, and Swaziland) in June 2003, but active negotiations were suspended in April 2006. In lieu of a U.S.-SACU FTA, the United States and SACU negotiated a Trade, Investment and Development Cooperation Agreement (TIDCA), which was signed in July 2008. The four areas identified for special attention under the TIDCA are customs cooperation, technical barriers to trade, sanitary/phytosanitary (SPS) issues, and trade and investment promotion.

Agreements regarding mutual assistance between the customs administrations of the United States and South Africa became effective on August 1, 2001. The U.S.-South Africa bilateral tax treaty eliminating double taxation became effective on January 1, 1998.

OPIC and Other Investment Insurance Programs

South Africa and the United States signed an agreement to facilitate Overseas Private Investment Corporation (OPIC) programs in 1993. OPIC has since invested in a number of funds supporting sub-Saharan Africa development, including the Africa Growth Fund ($25 million), the Modern Africa Growth and Investment Fund ($105 million), and the ZM Investment Fund ($120 million). OPIC also established the $350 million Sub-Saharan Africa Infrastructure Fund (SAIF), which intends to fund infrastructure projects in sub-Saharan Africa. OPIC helped the National Urban Reconstruction and Housing Agency (NURCHA) establish a $31 million scheme to lend to small contractors for the construction of affordable houses. OPIC entered into an agreement with the Homeloan Guarantee Company (HLGC) to fund low-income home loans for HIV-positive South Africans in 2004. The pilot program for this project was initiated in 2005. Net proceeds from a $300 million investment pool will be used to purchase medication for HIV-positive South African homeowners holding HLGC-guaranteed mortgages. OPIC announced in June 2008 that it will provide up to $250 million to banks and financial institutions to expand their lending to small businesses. Additional information on OPIC programs that involve South Africa may be found on OPIC's website: http://www.opic.gov/.

South Africa is also a member of the World Bank's Multilateral Investment Guarantee Agency.

Labor

The South African government has worked to remove all vestiges of apartheid-era labor legislation over the last 16 years. In its place, the government created a labor market characterized by employment security, reasonable wages, and decent working conditions. Under the aegis of the National Economic Development and Labor Council (NEDLAC), government, business, and organized labor negotiated all labor laws, with the exception of laws pertaining to occupational health and safety. NEDLAC negotiations placed a high value on worker rights and collective bargaining.

The law allows almost all workers to form or join trade unions of their choice without previous authorization or excessive requirements. Total trade union membership figures are imprecise but membership is estimated at three and one half million persons or 31 percent of the economically active population employed in the formal sector. Most union members belong to affiliates of the Congress of South African Trade Unions (COSATU). Other unions are affiliated to the Federation of Unions of South Africa (FEDUSA) or the National Council of Trade Unions (NACTU). COSATU, the largest of the federations, is part of the ruling alliance with the African National Congress (ANC) and the South African Communist Party and vigorously lobbies the ruling party to implement its policy positions.

The right to strike is protected under South African labor law. A Department of Labor bulletin reported 59 strikes in the 2007-2008 year ending March 2008, with 497,436 working days lost. Data for 2008-2009 has not yet been released but the 2009 “Strike Season” was more robust than in recent years. Sectors most affected have historically been community services, manufacturing, mining, and retail.

South African business argues that the labor market is rigid and over-regulation has constrained employment. Trade unions argue that employers evade labor legislation through the use of labor brokers who supply casual workers. COSATU has lobbied for and welcomed a pledge by the Minister of Labor that the Zuma government will heavily regulate or outlaw all labor brokers (third-party contracted labor) during 2010. The Department of Labor Director General has also pledged changes to employment equity law (affirmative action) to include harsher penalties on businesses found in non-compliance. Other areas of contention between government, business and trade unions revolve around workplace safety, the application of wage structures to all firms in an industry whether or not firms participated in wage negotiations, wage increases, and complex requirements and appeal procedures for the dismissal of workers.

Major labor legislation includes:
-- The Labor Relations Act, in effect since November 1996, provides retrenchment guidelines, stating that employers must consider alternatives to retrenchment and must consult all relevant parties when considering possible layoffs. The Act enshrines the right of workers to strike and of management to lock out workers. The Act created the Commission on Conciliation, Mediation, and Arbitration (CCMA) which can conciliate, mediate, and arbitrate in cases of labor dispute, and is required to certify an impasse in bargaining council negotiation before a strike can be called legally. The CCMA enjoys substantial popularity among workers and has a caseload that exceeds what was anticipated.
-- The Basic Conditions of Employment Act, implemented in December 1998, establishes a 45-hour workweek as well as minimum standards for overtime pay, annual leave, and notice of termination. It outlaws child labor. No employer may require or permit overtime except by agreement, and overtime may not be more than ten hours per week.
-- The Employment Equity Act of 1998 prohibits unfair employment discrimination and requires large- and medium-sized companies to prepare affirmative action plans to ensure that black South Africans, women, and disabled persons are adequately represented in the workforce.
-- The Occupational Health and Safety Act, last amended in 1993, provides for occupational health and safety standards and gives the Department of Labor the right to inspect the workplace. The Mine, Health and Safety Act authorizes the Inspector of Mines to provide regulatory oversight for the mining industry.
-- The Skills Development Act of 1998 imposes a levy on employers equal to one percent of the payroll that is to be used for training programs devised by industry-specific training authorities (SETAs). Employers who provide job skills training can claim back much of their contribution from government.

The most recent Quarterly Labor Force Survey (LFS) published on October 29, 2009 listed the official unemployment rate at 24.5 percent. This rate uses a definition of unemployment that excludes persons who have not actively sought employment during the previous four weeks. The unemployment rate increases if 1.6 million discouraged job seekers are included in the figure. Many of those unemployed have never worked. Despite the high unemployment rate, South Africa has a shortage of skilled workers across many sectors. Businesses allege that their statutory contributions to government-sponsored training authorities are wasted or misused, and that those authorities have done little to increase the skills base.

South Africa has no country-wide minimum wage, but the Minister of Labor has issued determinations that set a minimum wage for certain occupations where collective bargaining is not common. These occupations include domestic workers, farm workers, taxi-drivers, and retail employees. In addition, the Minister can apply collective bargaining agreements to firms that did not participate in negotiations.

Companies have criticized the introduction, through a regulation in early 2003, of a two-percent training levy on the salaries of expatriates who wish to enter the country under an expedited visa procedure. This money goes directly to industry-specific training authorities (SETAs). The levy does not apply to expatriates already resident in the country or to inter-company transfers. While expatriates who enter the country under the normal visa procedure are exempt from the levy, that process is complex and time-consuming. The government's decision to implement the levy-based system through regulation rather than legislation has also been controversial. A legal challenge to the regulations further delayed the implementation of new immigration legislation and this created more uncertainty about the effective handling of applications for visas.

Foreign Trade Zones/Free Ports

South Africa designated its first Industrial Development Zone (IDZ) in 2001. IDZs offer duty-free import of production-related materials and zero VAT on materials sourced from South Africa, along with the right to sell into South Africa upon payment of normal import duties on finished goods. Expedited services and other logistical arrangements may be provided for small to medium-sized enterprises, or for new foreign direct investment. Co-funding for infrastructure development is available. There are no exemptions from other laws or regulations, such as environmental and labor laws. The Manufacturing Development Board licenses IDZ enterprises in collaboration with the South African Revenue Service (SARS), which handles IDZ customs matters. IDZ operators may be public, private, or a combination of both. IDZs are currently located at Coega near Port Elizabeth, in East London, Richards Bay, Mafikeng, and at OR Tambo International Airport near Johannesburg.

Foreign Direct Investment Statistics

Foreign direct investment (FDI) data is readily available in South Africa. The U.S. Embassy in South Africa relies primarily on the SARB for foreign investment data. SARB statistics conform to the IMF definition of FDI (i.e., FDI is generally defined as ownership of at least 10 percent of the voting rights in an organization by a foreign resident or several affiliated foreign residents, including equity capital, reinvested earnings, and long-term loan capital) and represent actual investment, excluding announced but not completed "intended" investment. The SARB does not provide country-specific figures that distinguish between actual investment flows and changes in investment stocks caused by asset swaps, exchange rate adjustments, and mergers and acquisitions. This makes it difficult to track the United States' and other countries' FDI position in South Africa on an annual basis.

Because SARB statistics only provide an annual total for all the countries' flows combined, observers also often consult more updated information obtained from the South Africa-based firm "Business Map" (BM). The latter offers fee-based services for a wide range of investor-related data and analysis (website: http://www.businessmap.co.za/). The following FDI statistics were drawn from the SARB's December 2009 Quarterly Bulletin. The conversion exchange rate used was the average exchange rate for each year cited.

Table A: Average Exchange Rates

2003

2004

2005

2006

2007

2008

Rand/US$

7.56

6.45

6.36

6.77

7.05

8.25

Table B: Year-end Stock of Foreign Direct Investment in South Africa

2003

2004

2005

2006

2007

2008

Rand(billion)

303.55

355.09

489.32

611.72

751.92

632.61

US$ (billion)

40.14

55.05

76.94

90.36

106.65

76.68

Table C: Year-end Stock of South African Direct Investment Abroad

2003

2004

2005

2006

2007

2008

Rand(billion)

180.51

216.66

232.93

354.25

448.62

463.14

US$ (billion)

23.87

33.59

36.62

52.33

63.63

56.14

Table D: GDP (in billion rand at current prices) and year-end FDI Stock as a percentage of GDP

2003

2004

2005

2006

2007

2008

GDP

1,272.53

1,415.27

1,571.08

1,767.42

2,017.10

2,283.82

FDI (%)

23.8

25.1

31.1

34.6

37.2

27.6

Table E: Year-end stock of FDI in South Africa by region/country (billions)

REGION/COUNTRY

2007

2008

2007

2008

RAND

RAND

US$

US$

EUROPE – Total

656.1

492.3

93.1

59.6

UNITED KINGDOM

524.2

342.4

76.9

41.5

GERMANY

41.3

46.9

5.9

5.6

NETHERLANDS

28.9

32.2

4.1

3.9

SWITZERLAND

21.3

29.2

3.0

3.5

FRANCE

12.3

9.2

1.7

1.1

ITALY

3.5

4.6

0.5

0.5

N&S AMERICA (total)

64.1

65.1

9.1

7.8

USA

46.3

47.1

6.6

5.7

AFRICA (total)

5.7

52.2

0.8

6.3

ASIA (total)

24.7

68.1

3.5

8.2

MALAYSIA

2.3

12.7

0.3

1.5

JAPAN

12.9

17.0

1.8

2.0

OCEANIA (total)

1.2

1.6

0.2

0.1

TOTAL

751.9

632.6

106.6

76.6

Table F: Year-end Stock of South African Direct Investment Abroad by Region/Country (billions)

REGION/COUNTRY

2007

2008

2007

2008

RAND

RAND

US$

US$

EUROPE - Total

276.4

253.6

39.2

30.7

LUXEMBURG

122.1

54.0

17.3

6.5

UNITED KINGDOM

92.7

115.0

13.1

13.9

AUSTRIA

22.7

28.4

3.2

3.4

OTHER

4.0

3.0

4.8

3.6

N&S AMERICA (total)

26.8

34.0

3.8

4.1

USA

23.8

27.4

3.3

3.3

AFRICA (total)

84.4

44.2

11.9

5.3

ASIA (total)

44.3

52.9

6.2

6.4

OCEANIA (total)

16.6

21.3

2.3

2.5

TOTAL

448.6

463.1

63.6

56.1

Table G: Year-end Stock of FDI in South Africa by Industry Sector (billions)

INDUSTRY

2007

2008

2007

2008

RAND

RAND

US$

US$

Agriculture, Forestry & Fishing

0.8

0.9

0.2

0.1

Mining

332.2

195.3

47.1

23.6

Manufacturing

197.1

204.7

27.9

24.8

Construction

1.9

2.0

0.2

2.4

Trade, Catering, & Accommodation

27.7

30.9

3.9

3.7

Transport, Storage, & Communication

12.8

15.5

1.8

1.8

Finance, Insurance, Real Estate & Business Services

178.6

182.4

25.3

22.1

Social Services

0.5

0.5

0.1

0.1

TOTAL

751.9

632.6

106.6

76.6

Table H: FDI Flows into South Africa:

Investment by foreigners in undertakings in South Africa in which they have at least ten percent of the voting rights (R billion):

2001*

58.4

2002

16.5

2003

5.6

2004

5.2

2005*

42.3

2006

-3.6

2007

40.1

2008

74.4

*The high inflow in 2001 was due to the DeBeers/Anglo American transaction.

*The inflow in 2005 was due to the Barclays/ABSA and Vodafone/Vodacom transactions.

*The inflow in 2007 was due to ICBC’s purchase of Standard Bank.

Table I: FDI Flows out of South Africa:

Investment by South Africans in undertakings abroad in which they have at least ten percent of the voting rights (R billion):

2001*

27.4

2002

4.2

2003

-4.3

2004

-8.7

2005

-5.9

2006

-41.0

2007

-20.9

2008

25.8


*2001 De Beers/Anglo American transaction resulted in the return of capital, previously invested abroad, to South Africa.

Since 1994 many foreign firms have opened or re-opened offices in South Africa. There are an estimated 600 American companies (including subsidiaries, joint ventures, local partners, agents, franchises, and representative offices) doing business in South Africa.

Key Investment Industries in South Africa:

South Africa is largely a food self-sufficient country, with imports of wheat, oilseeds, poultry and pork largely offset by exports of fresh fruits, vegetables, fruit juice, and wine. The bulk of the population's food needs are supplied locally. In certain instances, South African food and beverage companies have become global players, such as beer producer SAB Miller. Major international agro-processing companies with a presence in South Africa include Unilever, Nestle, Coca-Cola, Groupe Danone, Parmalat, Kellogg, HJ Heinz, Cadbury-Schweppes, Virgin Cola, McCain Foods of Canada, and Pillsbury.

The chemical industry is the largest manufacturing sector in the South African economy, accounting for five percent of GDP. The country is a world leader in the manufacture of synthetic fuel from coal. In addition to Sasol and PetroSA Fischer-Tropsch-based synthetic fuel operations, four oil refineries dominate the petroleum and petrochemical industry. The rest of the chemical manufacturing sector consists mainly of AECI, Sentrachem, and fertilizer plants.

The Standard, ABSA, First Rand, and Nedcor commercial banking groups provide retail and investment banking services and dominate the South African banking industry. The European, Malaysian, and U.S. banks with banking licenses have so far concentrated on corporate rather than retail banking. Foreign banks have gained market share through acquisition, as in the case of ABSA, by offering competitive lending rates.

The South African automotive and components industry includes Ford, General Motors, Volkswagen, Bavarian Motor Works, Daimler, Chrysler, Nissan, and Toyota, all of which benefit from the APDP and have production plants in South Africa.

Table J: Top Foreign Companies Invested In South Africa

Australia

BHP Billiton

Canada

Placer Dome

Denmark

AP Moller

France

Lafarge

Germany

BMW, Volkswagon

India

Neotel, Tata

Italy

Cirio (Del Monte)

Switzerland

Movenpick Hotels

U.K.

Anglo American, Barclays, British Petroleum, Lonrho Plc, Old Mutual, SA Breweries, Virgin, Vodafone,

U.S.

Caltex, Coca Cola, CSX, Dow Chemical, Ford, Forest Oil, General Motors, Pioneer Energy, Timkin, Westinghouse

Saudi Arabia

Oger

UAE

Victoria and Alfred Waterfront

This is an illustrative listing of companies that have invested in excess of R1 billion in South Africa since 1994.

Other significant U.S. investors include: Caterpillar, Cisco, CitiGroup, Dell, Eli Lilly, Fluor, General Electric, Goodyear, HP, IBM, Levi Strauss, Johnson & Johnson, McDonald’s, Microsoft, Nike, Proctor & Gamble, Sara Lee, and Silicon Graphics.



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