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Diplomacy in Action

2013 Investment Climate Statement - South Africa


2013 Investment Climate Statement
Bureau of Economic and Business Affairs
February 2013
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 access foreign export markets. 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: www.dti.gov.za. DTI expects to release the 2012 publication in January 2013.

While the South African government supports investment in principle, investors and market commentators were concerned its commitment to assist foreign investors was insufficient in practice. Some of their concerns included a belief that the national-level government lacked a sense of urgency when it came to supporting investment deals. Several investors reported trouble accessing senior decision makers. Additionally, South Africa has begun scrutinizing merger- and acquisition-related foreign direct investment for its impact on jobs and local industry. Private sector representatives and other interested parties were 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 during 2012, it remained within the central bank’s target range of 3-6 percent. As growth stalled, however, government revenue has been negatively affected to result in a projected deficit of 4.3 percent of GDP through March 2013; although, worse-than-expected third and fourth quarter GDP results could push the deficit higher. While still investment worthy, South African sovereign debt was downgraded in 2012. In September, Moody’s downgraded South Africa’s credit rating to Baa1 from A3, and maintained a negative outlook. The rating agency cited the government’s weakening institutional strength, lackluster economic growth despite low interest rates, infrastructure shortfalls, high labor costs despite high unemployment, and increased concern about political stability. This brought Moody’s rating into line with Fitch Ratings. Standard and Poor's downgraded South Africa further to BBB in October, the lowest rating of all three major rating agencies.

Since the end of apartheid in 1994, the government has liberalized trade and enhanced international competitiveness by lowering tariffs, abolishing most import controls, undertaking some privatization and reforming the regulatory environment. While this 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. Moody’s in December 2012, however, downgraded the outlook for South African banks to negative based on their holding of government securities and overall weak macroeconomic conditions.

South Africa’s Industrial Policy Action Plan (IPAP) aims to strengthen industrial infrastructure development. Key stated objectives include revising government procurement policy to support targeted sectors (capital and transport equipment; automotive; chemical, plastic fabrication and pharmaceuticals; and forestry, paper and furniture); using trade and competition policy to improve South Africa’s competitiveness; and facilitating industrial financing for small- and medium-sized firms.

Mergers and acquisitions in South Africa are subject to screening and approval under the Competition Act of 1998. This act allows South Africa’s Competition Commission to review investment for public interest considerations such as its effect 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. Political interference has, at times, imposed requirements that discriminated against foreign investors. The Competition Tribunal reviews decisions made by the Competition Commission. Inward investment is subject the Companies Act of 2011, which sets out requirements for corporate governance, among other considerations. See the “Transparency of the Regulatory System” section of this report for more about South Africa’s Companies Act.

South Africa’s Broad-Based Black Economic Empowerment (B-BBEE) program has a significant effect on foreign investment. B-BBEE is an affirmative action program assisting historically disadvantaged South Africans to participate in the economy. B-BBEE requirements are specified in the Codes of Good Practice, which were published in the Government Gazette in 2007. The codes, first implemented in 2011, created a Black Economic Empowerment (BEE) “Scorecard” to rate a firm’s commitment to economic transformation using seven different dimensions—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 provide multinational corporations options for scoring on the ownership dimension without the transfer of equity stakes, which could run against the company’s bylaws. Such a deal would likely involve creation of a black-owned South African joint venture valued at least 25 percent of the multinational’s South African operations. However, the process for approving an equity equivalent mechanism by the DTI is complicated and requires a significant effort on the part of the multinational. Two U.S. companies have established equity equivalence schemes since 2007. Other companies have scored sufficiently well without such a scheme by focusing their transformation efforts on B-BBEE dimensions other than ownership.

In addition to B-BBEE transformation framework, sectors such as financial services, mining, and petroleum have their own “transformation charters” intended to accelerate empowerment within the sector. In 2011, the integrated transport, forest products, construction, tourism, and chartered accountancy sectors had force of law in South Africa. In 2012, the Information and Communication Technology (ICT) Charter and Property Sector and Financial Services Charters gained force of law. Other sectors, including Agri-business and Marketing, have transformation charters that are more “aspirational” in nature.

In October 2012, the government submitted for public comment proposed revisions to the law underpinning its B-BBEE policy. The revisions emphasize local procurement and introduce measures to combat the practice of “fronting,” by which companies manipulate or misrepresent their black empowerment levels to win contracts. The government reasoned an increased focus on enterprise and skill development over simple equity ownership would produce more meaningful transformation of the South African economy. The revisions also introduced penalties for companies failing to perform sufficiently across all key dimensions, including ownership, which would make certification more difficult for multinationals. The government has argued a more rigorous scoring regime was necessary to ensure only those firms most committed to economic transformation gain the benefits of B-BBEE certification. The public comment period ended December 5, and after further review the government may forward draft amendments to the National Assembly sometime in 2013.

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 lists South Africa's ranking in other widely used indices compiled by non-governmental organizations.

Measure

Year

Index/Ranking

Transparency International Corruption Index

2012

69

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. 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 in 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 ensure 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 South African entities and are treated legally as South African companies. As such, they 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 may invest in other countries without restrictions, 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 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 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 entitles 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 as agreed between the buyer and seller, or determined by the court, as per section 25 of the Constitution. 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 2011, South Africa tabled a “Green Paper” on land reform to address these distortions. 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 keep track of land sales, ensure proper record keeping, and "facilitate productive land usage and an equitable land distribution." Certain provisions in the Green Paper have generated controversy such as proposed "severe limitations" on private land ownership, particularly foreign ownership, the powers granted to a proposed “valuer-general” to assist the Department of Rural Development and Land Reform in assessing the fair 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. As of late 2012, this paper had not yet been turned into draft legislation. The government, however, approved a motion to establish an Office of the Valuer-General in November 2012. This motion could be brought before the National Assembly in 2013 as a bill to be given the force of law.

In several restitution cases, in which the government initiated proceedings to expropriate white-owned farms after courts ruled the land had been seized from blacks during apartheid, the owners rejected the 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 2007 after negotiations with owners collapsed. The government paid the owners the fair market value for the land in both cases.

The Mineral and Petroleum Resources Development Act 28 of 2002 ("MPRDA"), enacted in May 2004, gave the state ownership of all of South Africa's mineral and petroleum resources. It replaced private ownership with a system of licenses controlled by the South African government. Under the MPRDA, investors who held pre-existing rights were granted the opportunity to apply for licenses provided they met certain criteria, including the achievement of certain BEE objectives.

Controversial debates over the nationalization of mines and banks continued at the highest political levels in South Africa throughout most of 2012. Proponents claim it would redistribute wealth and tackle economic inequality. Critics argue nationalization is neither tenable nor workable in South Africa due to the potential cost of compensating mine owners and the broader, adverse impact 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 commercial 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. South African courts retain discretion to hear a dispute over a contract entered into under U.S. law and under U.S. jurisdiction. The South African court will interpret the contract with the law of the country or jurisdiction provided for in the contract, however.

Dispute resolution can be a time intensive process in South Africa. If the matter is urgent, and the presiding judge agrees, an interim decision can be taken within days while the subsequent appeal process can take months or years. If the matter is a dispute of law and is not urgent, it may proceed by application or motion to be solved within months. Where there is a dispute of fact, the matter is referred to trial, which can take several years. The Alternative Dispute Resolution involves negotiation, mediation or arbitration, and may resolve the matter within a couple of months. Alternative Dispute Resolution is increasingly popular in South Africa for many reasons, including the confidentiality which can be imposed on the evidence, case documents and the judgment.

Performance Requirements and Incentives

DTI offers several investment incentives for manufacturing:

  • Business Process Services (BPS) replaced in 2010 the Business Process Outsourcing & Off-Shoring (BPO&O) investment incentive. BPS is aimed at attracting investment and creating employment in South Africa through off-shoring activities. The incentive consisted in 2011 of a tax exempt grant of R112,000 (US$12,600) paid over three years for each offshore job created and maintained. The value of the incentive declines in 2012 and 2013. Between FY13 and FY15, each job will net a grant worth R32,000 (US$3,600). There is an additional 20 percent incentive for creating 400-800 offshore jobs in a year, and 30 percent for more than 800 offshore jobs created. To qualify, companies must: be starting new operations or expanding existing BPS activities; must create at least 50 new off-shore jobs in South Africa within three years; and must commence operations no later than six months from the approval of the BPS incentive grant.
  • The 12i Tax Incentive supports 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 (US$235,000). Projects must be within the priority sectors identified in the Industrial Policy Action Plan (IPAP). Projects should: upgrade an industry within South Africa; provide general business linkages within South Africa; acquire goods and services from small, medium and micro-sized enterprises (SMMEs); create direct employment within South Africa; provide skills development in South Africa; and, in the case of a Greenfield project, be located within an Industrial Development Zone (IDZ).
  • The Manufacturing Investment Program offers local- and foreign-owned entities an investment grant of up to 30 percent 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 provided to Export Councils, Industry Associations, and Joint Action Groups. Export Councils represent the trade promotion efforts of specific industries, while Industry Associations represent sectors DTI has prioritized for development. Joint Action Groups are groups of companies or associations cooperating 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. To qualify, film projects must have begun after 2004 and investment in the film must reach R25 million (approximately US$3.67 million). Other requirements include completing 50 percent 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 (US$2.9 million U.S.).
  • The Automotive Investment Scheme was announced in 2010 as part of the Automotive Production and Development Program (APDP). It provides qualifying firms a taxable cash grant of 20 percent of the value of qualifying investment in productive assets. To qualify, a light motor vehicle manufacturer must introduce a new or replacement model with a minimum 50,000 units of annual production per plant within three years. A component manufacturer can qualify by proving that a contract has been awarded for the manufacture of components for the light motor vehicle manufacturing supply chain, and that the investment will generate revenue of R10 million (US$1.4 million). 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.
  • The Capital Projects Feasibility Programme (CPFP) is a cost-sharing grant that contributes to feasibility studies for projects to increase local exports and stimulate the market for South African capital goods and services. The cap on a feasibility study grant is R8 million or 50 percent of the total costs for projects outside Africa and 55 percent of the total costs for projects in Africa. A foreign entity will only be considered if it partners with a South African registered entity, and if the application is submitted by the South African entity.
  • The Critical Infrastructure Programme (CIP) is a cost sharing grant for projects designed to improve critical infrastructure in South Africa. The grant covers qualifying development costs from a minimum of 10 percent to a maximum of 30 percent towards the total development costs of qualifying infrastructure. It is made available upon the completion of the infrastructure project concerned. Private firms with a minimum B-BBEE level of four can qualify.
  • Incubation Support Programme (ISP) develops small, micro and medium enterprises (SMMEs incubators that create successful enterprises with the potential to revitalize communities and strengthen local and national economies. The program is available to applicants that want to establish new incubators or wish to grow and expand existing ones. Support is on a cost-sharing basis between the Government and private sector partner(s). It is available for infrastructure and business development services necessary to mentor and grow enterprises to ensure that within two to three years they achieve self-sustainability. The grant approval is capped at a maximum of R10 million (VAT inclusive) per financial year over a three year period and is subject to the availability of funds. The ISP offers a cost-sharing support of 50:50 for large businesses and a cost-sharing of 40:60 for SMMEs. Applicants can be a registered legal entity in South Africa in terms of the Companies Act, 1973 (as amended) or the Companies Act, 2008 (as amended); the Close Corporations Act, 1984 (as amended) or the Co-operatives Act, 2005 (as amended).
  • The Manufacturing Competitiveness Enhancement Programme (MCEP) introduced in the Industrial Policy Action Plan (IPAP) 2012/13 – 2014/15 encourages manufacturers to upgrade production facilities in a manner that sustains employment and maximizes value-addition in the short to medium term. The MCEP Production Incentive (provides grants for five areas: Capital Investment; Green Technology and Resource Efficiency Improvement; Enterprise-Level Competitiveness Improvement grant; Feasibility Studies; and Cluster Interventions. The Industrial Financing and Loan Facilities offers: the Pre- and Post-Dispatch Working Capital Facility - a maximum of R30 million for up to four years, at a preferential fixed interest rate of percent; and the Industrial Policy Niche Projects Fund - DTI-identified projects with potential for job creation, diversification of manufacturing output and contribution to exports, and that would otherwise not be candidates for commercial or IDC funding. Applicants can be a registered legal entity in South Africa in terms of the Companies Act, 1973 (as amended) or the Companies Act, 2008 (as amended); the Close Corporations Act, 1984 (as amended) or the Co-operatives Act, 2005 (as amended).
  • The Support Programme for Industrial Innovation (SPII) promotes technology development in South Africa’s industry through financial assistance for the development of innovative products and/or processes. SPII focuses on the development phase, which begins at the conclusion of basic research and ends at the point when a pre-production prototype has been produced. There are three schemes SPII uses to apply assistance. Assistance is linked to BEE levels. Criteria are that development and subsequent production takes place within South Africa; Intellectual Property to reside in South African registered company; and Participating businesses should (must) be South African registered enterprises.
  • The Clothing and Textile Competitiveness Improvement Programme (CTCIP) builds capacity among manufacturers and the apparel value chain in South Africa on issues of cost, quality, flexibility, reliability, adaptability and the capability to innovate. The Production Incentive (PI) forms part of the overall Clothing and Textile Competitiveness Programme (CTCP) for the clothing, textiles, footwear, leather and leather goods industries.

Details on these and other investment programs are available at the DTI website at: www.dti.gov.za – Trade Exports and Investment – Incentives, or Financial Assistance – Industrial Development Incentives, or Industrial Development – Incentives.

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 US$10 million must invest at least 30 percent of the value of the imported content of the tender in South Africa.

Several South African public 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 uses government procurement policies to promote domestic economic development and fight unemployment. South Africa’s Preferential Procurement Policy Framework Act of 2000 (the Framework Act) and associated implementing regulations created a legal framework and formula for evaluating tenders for government contracts. Certain provisions of the Act provide a pathway for government departments to issue tenders that favor local content providers. Moreover, in a bid to boost industrialization and to create jobs, the government signed with labor leaders in 2011 the “Local Procurement Accord,” which commits the government to increasing the proportion of goods and services procured from South African suppliers to an "aspirational target" of 75 percent.

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 an offer to minority shareholders when 30 percent of shareholding has been acquired in a public company with 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 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 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.

In August 2012, the Copyright Review Commission (CRC) released a report recommending amending laws to hold Internet Service Providers (ISPs) and Wireless Application Service Providers (WASPs) accountable for copyright violations occurring through the internet and improve royalty collection. The CRC’s recommendations should be proposed to parliament as bills in 2013. In September 2012, President Zuma referred back to the National Assembly for reconsideration a bill to amend four pieces of IP legislation to include protection of indigenous intellectual property. One potential source of concern was the legislation’s vague definition of “indigenous” intellectual property, which could have undermined the ability of existing IP rights holders to protect their rights in court. President Zuma’s decision, however, referred to questions of constitutional process.

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. In the first action against a U.S. company under the new act, South Africa’s Competition Appeals Court dismissed in March 2012 an appeal by the South African Government to overturn the Competition Tribunal's approval of a U.S. company’s purchase of a majority stake in a South African retailer. The court, however, ordered the South African firm to re-employ 503 workers fired before the merger and commissioned a study to recommend the best means by which South African small and medium sized suppliers could participate in the U.S. company’s global value chain.

South Africa’s Consumer Protection Act (2008) went into effect in 2011. 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: www.dti.gov.za/ccrdlawreview/DraftConsumerProtectionBill.htm

The implementing regulations can be found at: 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. There are 17 registered banks in South Africa and 12 are branches of foreign banks. Four banks - Standard, ABSA, First Rand, and Nedbank - dominate the sector, accounting for almost 84 percent of the country's banking assets, which total over US$466 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: www.banking.org.za/.

The Financial Services Board (FSB) governs South Africa's non-bank financial services industry (see website: 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 seventeenth largest exchange in the world measured by market capitalization. Market capitalization stood at R7.267 billion (US$835 million) in October 2012, with 388 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 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). A finance ratio of 1:1 also 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 limited 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. In November 2012, Standard and Poor's (S&P) downgraded seven large South African companies, including parastatals Telkom, Eskom and Transnet, and underscored a negative outlook for the corporate bond market by signaling more downgrades could follow. S&P cited problems in the global economy, economic policy uncertainty, and a weaker investment climate in South Africa.

Government plans to “ring-fence” Eskom’s power purchasing function from its power generating function have not materialized. This hinders the advent of independent power producers (IPPs) in the energy market. Draft legislation to create an independent system and market operator (ISMO) remains under review after nearly two years, further limiting competition in the domestic energy market. South Africa's renewable energy program, however, registered a success in November when the government signed contracts with 28 IPPs to add 1,400MW of renewable energy generation capacity to the national grid. The renewable program aims to add 3725 MW of new generation capacity by 2016, contributing towards the long-term goal of creating over 17000 MW of renewable energy generation capacity by 2030.

In February 2012, President Jacob Zuma announced a major infrastructure investment strategy to address South Africa’s unemployment and infrastructure needs. The Presidential Infrastructure Coordinating Commission (PICC) adopted the Infrastructure Plan, which outlines 17 Strategic Integrated Projects (SIPs) worth US$384 billion over a 20-year period. The SIPS are comprised of more than 150 individual projects spread throughout South Africa’s nine provinces. The PICC’s plan is separate from another major infrastructure initiative, Transnet’s Market Demand Strategy (MDS), announced in April 2012. MDS will channel more than US$33.9 billion into port and rail infrastructure upgrades. Transnet is a state-owned company that manages the country’s port, rail and pipeline networks.

Direct aviation links between the United States and Africa are limited, but have expanded over the past few years. The growth of low-cost carriers in South Africa has reduced domestic airfares, but private carriers are likely to struggle against national carriers without further air liberalization in the region and in Africa. In South Africa, the state-owned carrier, South African Airways (SAA), relies on the government for financial assistance to stay afloat. SAA dominates the southern Africa regional market, but faces competition from regional airlines such as Emirates. SAA underwent a contentious leadership change in late 2012 over public disagreements with the Department of Public Enterprises (DPE), its major shareholder.

While government efforts to liberalize the telecommunications sector and encourage competition have improved, regulatory uncertainty and fragmented competition have hampered growth. Key challenges include: strengthening the capacity of the sector regulator, the Independent Communications Authority of South Africa (ICASA), to implement a spectrum auction; ensuring digital migration remains on track; stabilizing the Department of Communication’s state-owned companies, including Telkom (national telephone operator), the South African Broadcasting Company (SABC), and Sentech (signals provider); and improving broadband penetration. ICASA falls under the Department of Communications.

South Africa’s telecommunications priority is effecting the migration from analogue to digital broadcasting. This will significantly improve South Africa’s broadcast capabilities as frequencies occupied by analogue will become available for next-generation mobile broadband networks. Progress has been sporadic, however, leaving industry concerned South Africa will miss the global deadline of June 1, 2015. With four ministers since 2006, leadership stability in the Department of Communications has been one obstacle. Industry insiders also argue the Department of Communications lacks personnel who understand the digital migration process. Meanwhile, technology reviews and legal challenges hamper ICASA's ability to regulate.

Political Violence

Political violence is a growing problem in South Africa, primarily in KwaZulu Natal, where over 30 persons appear to have been killed in 2012 for political reasons. 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 are frequent and occasionally turn violent. There were a number of violent strikes in 2012, including among gold and platinum miners, and farmer workers of the Western Cape (see labor section).

Corruption

Allegations of corruption in the public tendering process persist in South Africa at all levels of government, despite the country's excellent anti-corruption regulatory framework, as highlighted by 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, the “Hawks,” is thus far 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.

Bilateral Investment Agreements

South Africa has bilateral investment treaties (BITs) with 41 countries, including Argentina, Austria, Belgium and Luxemburg, Canada, Chile, the Czech Republic, Finland, France, Germany, Greece, Mauritius, the Netherlands, the Republic of Korea, Spain, Sweden, Switzerland, Turkey, and the United Kingdom. After a review of BITs began in 2010, the DTI determined in 2012 that “first generation” BITs, an estimated 30 agreements mostly with EU states, exposed South Africa or created domestic policy conflicts, and should be terminated. South Africa may adopt a new BIT model for the future that exempts investor-state dispute and expropriation provisions, and facilitates the government’s economic transformation goals including Broad-based Black Economic Empowerment (B-BBEE). In September 2012, South Africa gave notice to Belgium and Luxemburg that it will terminate their BITs in March 2013, and informed the EU that remaining BITs would be allowed to expire. Article 52 of the 2000 EU-South Africa Trade, Development, and Cooperation Agreement covers investment promotion and protection.

The United States and South Africa signed a Trade and Investment Framework Agreement (TIFA) in 1999. TIFA discussions were renewed in 2011, and the agreement was updated in 2012. The United States and SACU negotiated a Trade, Investment and Development Cooperation Agreement (TIDCA), which was signed in 2008. The U.S.-South Africa bilateral tax treaty eliminating double taxation entered into force in 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 (US$300 million focused on small- and medium-sized enterprise development), Africa Healthcare Fund (US$100 million focused on private healthcare delivery businesses, and ECP Africa Fund II, (US$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 currently supports a US$70 million loan to Blue Financial Services Limited to expand lending to South African SMEs. The project will have a significant developmental impact on South Africa’s unbanked SME sector by providing approximately 700 loans to urban and rural borrowers, over half of which are expected to be women. As such, the project will provide increased access to capital for many previously disadvantaged entrepreneurs. OPIC will open an office in Johannesburg in 2013 to support investment to key African countries through its financing and risk mitigation instruments. Additional information on OPIC programs that involve South Africa may be found on OPIC's website: http://www.opic.gov/investment-funds/africa.

Labor

Over the last 18 years, the South African government has replaced apartheid-era labor legislation with policies that emphasize employment security, fair 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 workers to form or join trade unions without previous authorization or excessive requirements. Labor unions that meet a locally negotiated minimum threshold of representation (often fifty percent plus one union member) are entitled to represent the entire workplace in negotiations with management. As the majority union or representative union, they may also extract agency fees from non-union members and any minority unions also present in the workplace. In some workplaces, this financial incentive has encouraged inter-union rivalries, including intimidation, as unions compete for the maximum share of employees in seeking the status of representative union. Trade union membership figures are imprecise but total membership as of 2011 was estimated at 3.5 million people, 26.1 percent of employment in the formal sector. This was a decrease of almost 5 percent from 2010.

The right to strike is protected under South African law. There were 2.8 million working days lost in 2011 as compared to 20.6 million working days lost in 2010. This represents a decline of 636 percent. About 208 working days were lost to work stoppages per 1,000 working South Africans in 2011, compared to 1,593 in 2010. The community, social and personal services industry endured 52.1 percent of all days lost, the most of any sector. In 2011, electricity, gas and water supply and the construction industries experienced relative industrial peace, recording two work stoppages each. Three employers locked out strikers during work stoppages in 2010 and 2011. There were few industrial disputes in 2011 involving municipal workers. In 2011, employees lost approximately R1.073 billion in wages due to participation in work stoppages, compared to R407 million in 2010. Data from the Department of Labor indicates more than 52.3 percent of strikes involving the mining and manufacturing sectors in 2011 lasted between 6 to 10 days, up 44.4 percent from the previous year.

For the first time in the post-apartheid era, almost all of the major 2012 strikes were wildcat strikes—strikes without the backing of trade unions—which left considerable uncertainty about the future of labor relations in the South African mining sector. Labor action started in the platinum sector in February, when workers at the Impala Platinum mine demanded a salary increment outside the collective bargaining process. Likewise, workers demanding a salary increment at the Lonmin Platinum mine in Marikana began a strike in August without regard to the collective agreement signed between unions and the company. Most of these strikes were extremely violent, with 45 killed and many others injured in Marikana, as well as much property damage. During this period, illegal strikes spread to other sectors such as gold and coal. Workers in the transport sector embarked on a legally protected two-week strike which turned violent, with at least two deaths and countless damage to property and injuries to bystanders and non-striking truck drivers. This strike led to some shortages of petroleum products, particularly in Gauteng Province. Farm workers, for the first time in the history of South African labor relations, also took to the streets in protest against low salaries. They demanded increases to the government-set minimum wage of R69-R75 per day. Protests by farm workers continued through the end of 2012. The South African Department of Labor was expected to review the minimum wage for farm workers in March 2013.

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, the Southern African Clothing and Textile Workers' Union (SACTWU) in October 2011 agreed to a novel deal that allowed for lower salaries for new hires.

The government proposed amendments to each of the four main labor laws in 2010. Business groups and analysts claimed the proposals would make South Africa’s labor regime more rigid and discourage job creation. Representatives of business, labor and government changed some of the more controversial amendments in extensive consultations at the National Economic Development and Labor Council (NEDLAC), and Parliament is expected to approve the four amendment bills in February 2013, after which President Zuma will sign them into law.

Major labor legislation includes:

The Labor Relations Act, in effect since 1995, provides fair dismissal guidelines, dispute resolution mechanisms, and retrenchment guidelines stating 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 and employees in the South African legal system. Amendments to the LRA deal with the regulation of labor brokers set the threshold for recognition of unions, strike ballots and protect temporary or contract workers.

The Basic Conditions of Employment Act, implemented in 1997, establishes a 45-hour workweek and minimum standards for overtime pay, annual leave, sick 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 Employment Equity Act amendments would increase fines for non-compliance with employment equity measures and have a new provision of equal pay for work of equal value.

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 in July 2012 listed the official unemployment rate at 24.5 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: 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 in 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 and Richards Bay. There were plans for an IDZ at OR Tambo International Airport near Johannesburg, which have not been realized. In August 2012, the parliament passed a bill establishing the framework for creation of Special Economic Zones (SEZs). The SEZs were intended to encompass the IDZs but also provide scope for economic activity beyond export-driven industry to include innovation centers and regional development. The DTI plans SEZs for Cape Town, Gauteng, Durban-Pietermaritzburg, East London and Port Elizabeth.

Foreign Direct Investment Statistics

Foreign direct investment (FDI) data is 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 to exclude announced but not completed "intended" investment. The SARB does not provide country-specific figures that distinguish between investment flows and changes in investment stocks from asset swaps, exchange rate adjustments, or mergers and acquisitions.

SARB statistics can be found at: www.reservebank.co.za – Publications – Quarterly Reports.

U.S. Companies with investment in South Africa of at least R10 million (US$1.4 million) 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, Silicon Graphics, Solar Reserve, Timken, Walmart, Westinghouse, and Whirlpool.

The following FDI statistics were drawn from the SARB's September 2012 Quarterly Bulletin. The conversion exchange rate used was the average exchange rate for each year cited. There was no update for 2011 figures.

Table A: Average Exchange Rates

Year

2005

2006

2007

2008

2009

2010

Rand/USD

6.36

6.76

7.05

8.25

8.43

7.32


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

USD (billion)

57.05

78.55

90.49

106.66

76.68

102.81

138.73


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

REGION/COUNTRY

2008

2009

2010

2008

2009

2010

CURRENCY(billion)

Rand

Rand

Rand

USD

USD

USD

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 D: FDI Flows into South Africa (USD millions):

2005

2006

2007

2008

2009

2010

6.65094

-0.5325

5.68794

9.01818

5.39383

1.22814



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