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Diplomacy in Action

2012 Investment Climate Statement - South Africa


2012 Investment Climate Statement
Bureau of Economic and Business Affairs
June 2012
Report
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Openness to Foreign Investment

The government of South Africa is open to green field foreign investment as a means to drive economic growth, improve international competitiveness, and obtain access to foreign markets for its exports. Merger and acquisition activity is more sensitive and requires more advance work. Virtually all business sectors are open to foreign investment. Certain sectors require government approval for foreign participation, including energy, mining, banking, insurance, and defense. Excepting those sectors, no government approval is required to invest, and there are few 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 foreign 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.dti.gov.za/publications/publications.htm.

While the South African government supports investment in principle, investors and other observers are concerned that there is insufficient commitment to support foreign investors. Some investors express a belief that the national level government lacks a sense of urgency when it comes to providing support for investment deals. Several investors report trouble gaining access to senior decision makers to provide support for the investment. Additionally, South Africa has begun scrutinizing merger and acquisition related foreign direct investment more closely for its impact on jobs and local industry. Private sector representatives and other interested parties are concerned about politicization of South Africa’s posture towards this type of investment.

Macroeconomic management was generally strong over the past decade, with reduced levels of public debt, generally low inflation, and a positive rate of economic growth until the global slowdown in 2009. While inflation increased over 2011, it remains within the target range of 3-6% set by the central bank. As growth has stalled, government revenue has been negatively affected. This, combined with higher labor costs for public services, now means that South Africa is projected to run a budget deficit of 5.5% of GDP through March, 2012. In November 2011, Moody’s downgraded South Africa’s credit outlook from “stable” to “negative," citing greater political risk due to increasing constraints on public finances. Fitch followed suit in January 2012, but S&P maintained a “stable outlook rating.

Since the end of apartheid in 1994, the 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.

South Africa’s Industrial Policy Action Plan (IPAP) is focused on South Africa’s industrial infrastructure development. Key stated objectives include revising government procurement policy to enable the government to support targeted sectors (capital and transport equipment; automotive; chemical, plastic fabrication and pharmaceuticals; and forestry, paper and furniture); improving South Africa’s competitiveness by using trade and competition policy, and improving small- and medium-sized firms’ access to industrial financing.

Mergers and acquisitions in South Africa are subject to screening and approval under the Competition Act of 1998 (The Act). The Act allows South Africa’s Competition Commission to review investment for public interest considerations such as the effect the investment would have on specific industrial sectors, employment within South Africa, the ability of small businesses to become competitive, and the ability of national industries to compete internationally. These broad powers present a risk, if the process becomes politicized, that requirements could be imposed that would distort trade or discriminate against foreign investors. The Competition Tribunal reviews decisions made by the Competition Commission. Inward investment is also subject to the requirements of the Companies Act of 2008, which sets out requirements for corporate governance, among other considerations. Please see the “Transparency of the Regulatory System” for more about South Africa’s Companies Act.

Foreign investment within South Africa is also affected by South Africa’s Broad-Based Black Economic Empowerment (BEE) program. BEE 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 created a “BEE Scorecard” that awards firms “empowerment points” along seven different dimensions, including ownership, management, skills development, employment equity, preferential procurement, enterprise development, and socio-economic development. Each dimension is weighted, with ownership receiving the most empowerment points (20) and socio-economic development the least (5). Equity equivalence” deals permit multinational corporations to score equity ownership empowerment 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 process for getting an equity equivalent mechanism approved is complicated and requires a significant effort from the company. The government recently submitted for public comment proposed revisions to the law underpinning its BEE policy. The revisions would broaden the definition of BEE, put more emphasis on local procurement, and combat the practice of “fronting” where companies misrepresent their black empowerment levels to win contracts. The government expressed the hope that an increased focus on enterprise and skill development on the BEE scorecard over simple equity ownership would produce more meaningful transformation of the South African economy.

Sectors such as financial services, mining, and petroleum have their own “transformation charters” intended to promote accelerated empowerment within the sectors. As of November 2011, the integrated transport, forest products, construction, tourism, and chartered accountancy sectors have force of law in South Africa. Many other sectors, including financial services, ICT, and property have transformation charters that are more aspirational in nature.

Openness Index

South Africa is not a Millennium Challenge Corporation (MCC) compact country, therefore it is not ranked by MCC on measures of openness. The following chart explains where South Africa stands internationally according to other widely used indices compiled by non-governmental organizations.

Measure

Year

Index/Ranking

Transparency International Corruption Index

2011

64

Heritage Economic Freedom

2012

70

World Bank Doing Business

2012

35

Currency 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. Due to South Africa’s relatively closed exchange system, no private player, however large, can hedge large quantities of Rand for more than five years.

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.

Subsidiaries and branches of foreign companies in South Africa are considered to be South African residents and are treated legally as South African companies, 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. As of March 2010, South African banks are permitted to commit up to 25 percent of their capital in direct and indirect foreign liabilities. In addition, mutual and other investment funds can 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 distorted patterns of land ownership in South Africa. In August 2011, South Africa tabled a “Green Paper” on land reform in an attempt to address this inequality. The Green Paper’s “three pillars” include a land management commission, a land valuer-general and a land rights management board, with local management committees. These would collectively keep track of land sales, ensure there were proper records, and "facilitate productive land usage and an equitable land distribution". Certain provisions in the Green Paper have generated controversy including proposed "severe limitations" on private land ownership, the powers granted to a proposed “valuer-general” to determine the value of land, the proposed commission’s powers to invalidate title deeds and confiscate land, and the state’s right to intervene regarding the use of land. Additionally, the government has suggested that it would pursue legislation that would limit foreign land ownership in South Africa. Proposals for expropriation of land continue to surface from time to time.

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, taking possession of farms in Northern Cape and Limpopo Provinces 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.

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 controlled by the South African government. Under the MPRDA, investors that held pre-existing mineral rights were granted the opportunity to apply for licenses provided they met certain criteria, including the achievement of certain BEE objectives.

Nationalization of mineral resources continues to be debated at the highest political levels in South Africa. Proponents of the idea suggest that it would help redistribute wealth and tackle economic inequality in South Africa. Critics suggest that nationalization would not be tenable or workable in South Africa due to the potential cost of compensating mine owners and the broader impact that it would have on foreign investment.

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. South Africa’s new Companies Act also provides a mechanism for alternative dispute resolution.

Performance Requirements and Incentives

DTI offers several investment incentives for manufacturing:

· The Business Process Outsourcing & Off-Shoring (BPO&O) investment incentive comprises an Investment Grant ranging between R37,000-R60,000 ($5,400-$8,800 U.S.) and a Training Support Grant towards costs of company specific training up to a maximum of R12,000 ($1,765 U.S.) per agent. The incentive is offered to local and foreign investors establishing projects that aim primarily to serve offshore clients. The

objective of the incentive is to attract BPO&O investments that create employment opportunities. The grant is provided directly to approved projects depending on the value of qualifying investment cost and employment creation.

· The 12i Tax Incentive is designed to support green field investments (i.e. new industrial projects that utilize only new and unused manufacturing assets), as well as brown field investments (i.e. expansions or upgrades of existing industrial projects). The 12i incentive is available for investments with a total value of more than R1.6 million ($235,000 U.S.).

· The Manufacturing Investment Program offers local- and foreign-owned entities an investment grant of up to 30 percent of the value of qualifying investment costs in machinery, equipment, commercial vehicles, land and buildings, required for establishing a new production facility; expanding an existing production facility; or upgrading production capability in an existing clothing and textile production facility.

· The Sector Specific Assistance Scheme (SSAS) is a reimbursable cost-sharing grant whereby financial support is granted to Export Councils, Industry Associations, and Joint Action Groups. Export Councils represent the trade promotion efforts of specific industries, while Industry Associations are trade associations that represent sectors that are prioritized for development by DTI. Joint Action Groups are groups of companies or associations that seek to cooperate on one-time projects in sectors prioritized for development by DTI. Foreign companies can access SSAS funding through participation in one of these entities.

· The Film and Television Production Rebate Scheme encourages 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 investment in the film must reach a threshold of R25 million ($3.67 million U.S.) to qualify for the rebate. Other requirements include 50 percent completion of the principal photography in South Africa and a minimum of four weeks' local photography time. Eligible productions include movies, television series, and documentaries. The maximum rebate for any project will be R20 million ($2.9 million U.S.).

· To encourage investment in the automotive sector, the Automotive Investment Scheme was announced in June 2010 as part of the Automotive Production and Development Program (APDP). It will provide qualifying firms with a taxable cash grant of 20 percent of the value of qualifying investment in productive assets. In order to qualify, a light motor vehicle manufacturer must introduce a new or replacement model and demonstrate that it will achieve a minimum of 50,000 annual units of production per plant within 3 years. A component manufacturer can qualify by proving that a contract has been awarded for the manufacture of components to supply into the light motor vehicle manufacturing supply chain, and that the investment will generate revenue of R10 million ($1.4 million U.S.). An additional taxable cash grant of 5-10 percent is available if additional conditions are met. APDP stipulates that automobile import tariffs will be frozen at 25 percent until 2020.

· Details on all investment programs are available at the DTI website at: http://www.thedti.gov.za/offerings/Investment_Support.htm

· AIS details can be found at this website: http://www.dti.gov.za/ais/ais.htm

South Africa's various provinces have development agencies that offer incentives to encourage investors to establish or relocate industry to their areas. 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, railroads and other transport rebates, and assistance in the provision of housing. 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.

Several South African entities have been established to support investment in export-oriented industries, research and development, or offer technical assistance to industry:

· 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

· The Council for Scientific and Industrial Research (CSIR) is a government-owned organization that does multi-disciplinary research and development for industrial application.

· Technifin, a CSIR subsidiary, finances the commercialization of new technology and products.

· MINTEK develops mining and mineral processing technology for commercial application.

· The Council for Geoscience undertakes geological surveys and services related to minerals exploration. Foreign companies and research organizations can access research done by a specific organization through partnerships and direct contract.

South Africa plans to use government procurement to support and promote domestic economic development and fight persistent unemployment. South Africa’s Preferential Procurement Policy Framework Act of 2000 (the Framework Act) and associated implementing regulations created the legal framework and a formula for evaluating tenders for government contracts. Certain provisions of the Act provide a pathway for government departments to issue tenders that will favor local content providers. Moreover, South African government and labor leaders also recently signed a pact to increase the government’s purchasing of goods and services from South African producers to an "aspirational target" of 75% in a bid to boost industrialization and to create jobs.

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 ($750,000 U.S.).

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 register mortgages as security when providing finance for the purchase of property.

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, 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 went into force on October 1, 1997. It 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 (TRIPS). Amendments to the Patents Act of 1978 also brought South Africa into line with TRIPS, to which South Africa became a party in 1999, and implemented the Patent Cooperation Treaty.

A proposal to amend the four pieces of IP legislation to protect indigenous intellectual property was approved by South Africa’s National Assembly in November 2011. One potential source of concern is the legislation’s vague definition of “indigenous” intellectual property. It is feared that existing IP rights holders’ ability to protect their rights in court may be undermined due to the vague definitions contained in the amended legislation. If rights holders are unable to protect their IP, this could discourage foreign investment in South Africa. The bill is pending in Parliament.

Transparency of the Regulatory System

South African laws and registrations are generally published in draft form for stakeholder comment, and legal, regulatory, and accounting systems are generally transparent and consistent with international norms.

South Africa implemented a new Companies Act in 2011, intended to encourage entrepreneurship and employment opportunities by simplifying company registration procedures and reducing the costs for forming new companies. It is also intended to promote innovation and investment in South African markets and companies by providing for a predictable and effective regulatory environment.

On April 1, 2011, South Africa’s Consumer Protection Act (2008) went into effect. The legislation reinforces various consumer rights, including right of product choice, right to fair contract terms, and right of product quality. Impact of the legislation will vary by industry, and businesses will need to adjust their operations accordingly. The legislation for the Consumer Protection Act can be found at: http://www.dti.gov.za/ccrdlawreview/DraftConsumerProtectionBill.htm

and the implementing regulations can be found at: http://www.dti.gov.za/ccrd/cpa_regulations.htm.

Efficient Capital Markets and Portfolio Investment

South African 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. Four banks - Standard, ABSA, First Rand, and Nedbank - dominate the sector, accounting for almost 85 percent of the country's banking assets, which total over $240 billion. The South African Reserve Bank (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: separate company, branch, or 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 R6.964 billion ($875 million U.S.) in October 2011, 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, and financial transactions such as portfolio investments, securities lending and hedging by non-residents.

Competition from State-Owned Enterprises

State-owned enterprises (SOE) play a significant role in the South African economy. In key sectors such as electricity, transport (air, rail and freight), and telecommunications, SOEs play a lead role, often defined by law, although some competition is allowed in some sectors. The government’s interest in these sectors often competes with and discourages foreign investment. The Department of Public Enterprises has oversight responsibility in full or in part for nine of the approximately 300 SOEs that exist at the national, provincial and local levels: Alexcor (diamonds); Broadband Infraco (fiber optic cable); Denel (military equipment); Eskom (electricity generation); Pebble Bed Modular Reactor (nuclear); South African Airways; South African Air Express; SAFCOL (forestry) and Transnet (transportation). Government oversight can inject some political uncertainty into business decisions.

South Africa plans to “ring-fence” Eskom’s power purchasing function from its power generating function, to allow an independent system market operator (ISMO) to emerge. This would gradually allow independent power producers (IPPs) to enter the market. The government has been slow to enact and implement ISMO legislation. Eskom has said IPP investment will be needed to help redress the long-term neglect of electric power generation capacity that has led to a tight supply-demand balance. Higher prices and heavy public investment in new capacity, as well as energy efficiency and demand management initiatives, are designed to prevent a repeat of 2008's brownouts as the economy recovers from recession.

South Africa needs significant foreign investment to upgrade its rail and port infrastructure. Direct aviation links between the U.S. and Africa are limited, but have expanded in the last few years. The growth of low-cost carriers in South Africa in the last five years has reduced bloated airfares domestically, but without further air liberalization in the region and in Africa, private carriers are likely to continue facing problems with African governments that wish to protect their national carriers. The state-owned carrier, South African Airways, continues to dominate the market in South Africa and the region.

South Africa’s telecommunications sector presents a slightly different challenge for investors. While efforts to liberalize the telecommunications sector have improved, regulatory uncertainty and fragmented competition have hampered growth in the industry. Key challenges include strengthening the regulator’s capacity to spearhead the long-awaited spectrum auction, ensuring the digital migration remains on track, stabilizing the Department of Communication’s state-owned-entities (including Telkom (national telephone operator), South African Broadcasting Company, Sentech (signals provider), and improving broadband penetration. South Africa’s biggest priority going forward will be meeting the ambitious target of 2013 for the migration from analog to digital broadcasting, which, if achieved, will significantly improve South Africa’s broadcasting capabilities. The move to digital terrestrial broadcasting will open an opportunity for new players. Provide While Regulatory uncertainty and fragmented competition have stifled growth, the sector remains stifled. However, South Africa aims to encourage more competition in the sector. The United States-led SEACOM undersea fiber-optic cable project became operational in late July 2009 and expanded broad-band connectivity in South Africa and other countries on Africa’s eastern seaboard.

Political Violence

Political violence is not currently a serious problem in South Africa. In 2011, South Africa’s Independent Electoral Commission, with support from the South African Police Service, held municipal elections generally considered free and fair, despite minor voting irregularities, and violence was not a factor. Service delivery protests and strike actions can turn violent.

Corruption

South Africa has an excellent anti-corruption regulatory framework, highlighted by the passage of the Prevention and Combating of Corrupt Activities Act of 2004. In 2010 and 2011 the government intensified anti-corruption efforts. While the newly formed priority crimes unit, known as the “Hawks”, thus far is still deemed less effective than the unit it replaced in 2009 (the “Scorpions”), it has arrested a number of white collar criminals for banking irregularities and fraud.

Despite the advances against corruption, allegations of corruption in the public tendering process persist, including at the provincial and municipal levels.

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.

The United States and South Africa signed a Trade and Investment Framework Agreement (TIFA) in 1999. TIFA discussions were renewed in 2011. The United States and SACU negotiated a Trade, Investment and Development Cooperation Agreement (TIDCA), which was signed in July 2008. The U.S.-South Africa bilateral tax treaty eliminating double taxation entered into force on January 1, 1998.

OPIC Programs

Since a 1993 agreement to facilitate Overseas Private Investment Corporation (OPIC) programs, OPIC has invested in a number of funds supporting sub-Saharan Africa development, including the Africa Catalyst Fund ($300 million focused on small- and medium-sized enterprise development), Africa Healthcare Fund ($100 million focused on private healthcare delivery businesses, and ECP Africa Fund II, ($523 million, focused on telecommunications, oil and gas, power, transportation, agribusiness, media, financial services and manufacturing.) Tailored products to support clean and renewable energy are a particular focus. Specific to South Africa, OPIC also currently supports the South Africa Workforce Housing Fund ($240 million) for investments in individual housing developments and in companies that contribute to the development and affordability of residential housing at any point along the value chain. Additional information on OPIC programs that involve South Africa may be found on OPIC's website: http://www.opic.gov/investment-funds/africa.

Labor

The South African government has worked to remove all vestiges of apartheid-era labor legislation over the last 17 years, emphasizing 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 negotiate all labor laws, with the exception of laws pertaining to occupational health and safety. The law allows all workers to form or join trade unions of their choice without previous authorization or excessive requirements. Trade union membership figures are imprecise but total membership is estimated at 3.5 million people, which is 26.1% percent of the economically active population employed in the formal sector as of September 2011, a decrease of almost 5% from September 2010.

The right to strike is protected under South African law. The South African Department of Labor’s 2011 Industrial Action report estimates that 20.6 million work days were lost to strike action in 2010, far exceeding the 1.5 million work days lost in 2009. In 2011, major strikes included labor action by workers in the public sector (garbage collection), mining, transportation, and manufacturing sectors. The transportation strike led to some shortages of petroleum products, particularly in Gauteng province.

South African business argues that the labor market is rigid and over-regulation has constrained job creation and employment. Under pressure to preserve jobs in the face of Chinese competition, in October 2011, the Southern African Clothing and Textile Workers' Union (SACTWU) agreed to a novel deal that allowed for lower salaries for new hires.

Amendments to each of the four main labor laws were proposed in December 2010. The proposals were heavily criticized by business groups and analysts as making South Africa’s labor regime more rigid and discouraging job creation. The proposed amendments are being debated at the National Economic Development and Labor Council (NEDLAC). NEDLAC is a non-governmental organization that was set up by President Nelson Mandela to include South African citizens in government policy formation. NEDLAC is comprised of representatives from government, business, and labor, and it is funded through the South African Department of Labor.

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 striking 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's caseload currently exceeds what was anticipated. Revisions seek to close a loophole in current legislation regarding the definition of employers in the South African legal system.

· The Basic Conditions of Employment Act, implemented in December 1998, establishes a 45-hour workweek and minimum standards for overtime pay, annual leave, and notice of termination. The Act also outlaws child labor. Further, it states that 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 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 an annual 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). Many groups, including organized business, question the effectiveness of SETAs. This concern has been magnified due to recent proposals to double the annual levy.

The most recent Quarterly Labor Force Survey (LFS) published on October 26, 2011 listed the official unemployment rate at 25.0 percent. The LFS defines unemployment to exclude persons who have not actively sought employment during the previous four weeks. The unemployment rate increases to 37.4 percent if these 2.2 million discouraged job seekers are included. Many unemployed people have never worked. Despite the high unemployment rate, South Africa has a shortage of skilled workers across many sectors.

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, and taxi drivers. More information regarding South African labor legislation can be found at: http://www.labour.gov.za/legislation.

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 from DTI. 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 relies on the U.S. Department of Commerce and SARB for foreign investment data. SARB statistics conform to the IMF definition of FDI (i.e., 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. SARB statistics can be found at: http://www.reservebank.co.za/internet/publication.nsf/WTV/QuarterlyBulletins6AF7920302C489BB42256B440046F4F2?OpenDocument.

U.S. Companies with investment of at least R10 million ($1.4 million U.S.) in South Africa include:

Amazon, Amonix, Caltex, Caterpillar, Chevron, Coca-Cola, Corning, Cisco, CitiGroup, CSX, Dell, Dow Chemical, Eastman, Eli Lilly, First Solar, Ford, Forest Oil, Fluor, General Electric, General Motors, Goodyear, Honeywell, HP, IBM, Johnson & Johnson, Joy Global, Kimberly-Clark, Levi Strauss, McDonald's, Microsoft, Nike, Pioneer Energy, Proctor & Gamble, Sara Lee, and Silicon Graphics, Solar Reserve, Timken, Walmart, Westinghouse, Whirlpool.

The South Africa-based firm "Business Map" (BM) offers fee-based services for a wide range of investor-related data and analysis at their website: http://www.businessmap.co.za.

The following FDI statistics were drawn from the SARB's December 2011 Quarterly Bulletin. The conversion exchange rate used was the average exchange rate for each year cited.


Table A: Average Exchange Rates

           

Year

2005

2006

2007

2008

2009

2010

2011

 

Rand/US$

6.36

6.76

7.05

8.25

8.43

7.32

7.95

 


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

     
               
 

2004

2005

2006

2007

2008

2009

2010

Rand(billion)

362.86

499.59

611.72

751.92

632.61

866.66

1015.52

US$ (billion)

57.05

78.55

90.49

106.66

76.68

102.81

138.73


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

     

(billions)

             

REGION/COUNTRY

2008

2009

2010

2008

2009

2010

CURRENCY

 

Rand

Rand

Rand

US$

US$

US$

EUROPE - Total

492.3

697.4

850.03

59.67

82.73

116.12

N/S America- Total

65.1

80.14

62.732

7.89

9.5

10.04

USA

 

47.1

55.83

73.47

5.7

6.62

8.57

AFRICA

 

5.2

5.9

6.5

.63

.70

.89

ASIA

 

68.1

81.4

83.88

8.25

9.66

11.46

OCEANIA

 

1.6

1.6

1.52

.19

.19

 

TOTAL

 

679.4

922.27

1078.13

82.35

109.4

147.28


Table F: FDI Flows into South Africa (U.S. $ millions):

         
     

2005

2006

2007

2008

2009

2010

     

6.65094

-0.5325

5.68794

9.01818

5.39383

1.22814



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