South Africa: INVESTMENT CLIMATE STATEMENT 2005

Reference ID: 05PRETORIA226

Created: 2005-01-19 05:14

Released: 2011-08-30 01:44

Classification: UNCLASSIFIED

Origin: Embassy Pretoria

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 19 PRETORIA 000226

SIPDIS

DEPT FOR EB/IFD/OIA; AF/S TCRAIG; AF/EPS

USDOC FOR 4510/ITA/IEP/ANESA/OA/J DIEMOND

COMMERCE ALSO FOR HVINEYARD

TREASURY FOR GCHRISTOPOLUS, BRESNICK AND AJEWEL

DEPT PASS USTR FOR PCOLEMAN AND WJACKSON

E.O. 12958: N/A

TAGS: EINV KTDB EFIN ELAB ECON ETRD PGOV SF

SUBJECT: INVESTMENT CLIMATE STATEMENT 2005 - SOUTH AFRICA

REF: (A) 04 STATE 250356, (B) 04 STATE 141379

1. In response to reftel A, here is post's 2005 investment

climate statement for South Africa, chapter 6 of the next

Country Commercial Guide.

2. BEGIN TEXT

Chapter 6 Investment Climate Statement FY 2005

6.1 Openness to Foreign Investment

The government of South Africa (SAG) welcomes foreign

investment as a key driver for the country's economic

development and integration into the global economy. Its

macroeconomic management is sound. Investment policies that

promote openness and raise productivity and growth are key

objectives of the SAG. In 2004 the government announced a

goal of investment reaching 25 percent of GDP by 2014.

Moody's gave South Africa (SA) a sovereign debt rating of

Baa1, three steps into the investment grade, in January

2005. Standard & Poor and Fitch also rank South Africa at

investment grade. The SAG has liberalized trade and

developed its competitiveness by lowering tariffs,

abolishing most import controls, and reforming the

regulatory environment.

South Africa's record of political and macroeconomic

stability over the past decade has helped to create a

promising medium to long-term economic climate for local and

international firms in South Africa. South Africa, through

its Trade and Investment South Africa (TISA) promotion

agency, provides investment facilitation services for

inbound investors. While investment opportunities are

abundant in many sectors of the economy, the agency

concentrates on sectors which research has indicated a high

SA comparative advantage. The agency offers the following

services to international investors:

Information on sectors and industries;

Consultation on the regulatory environment;

Facilitation on investment missions;

Links to joint venture partners;

Information on incentive packages;

Assistance with work permits;

Logistical support for relocation.

The Department of Trade and Industry (DTI) published a

comprehensive guide for investors about the dynamics and

principles involved in the South African business

environment. (For the "Investor's Handbook" see

"publications" on web site: www.dti.gov.za)

v.za)

The government has created a number of incentives for the

potential investor in South Africa. All business sectors

are open to investors, no government approval is required,

and there are almost no restrictions on the form or extent

of foreign investment. For example, in his February 2001

budget speech, the Finance Minister announced an R3-billion

incentive package for investors in strategic industrial

projects. It entails tax allowances of either 50 or 100% of

an approved investment, and is managed through the Strategic

Industrial Project (SIP) program of the Department of Trade

and Industry (DTI). Up to June 2003, investments worth R3.2

billion have been approved for tax break allowances under

the SIP, a program aimed at companies that will invest more

than R50 million and will contribute to the growth,

development and competitiveness of specific industry

sectors. The program will run until July 2005.

In July 2004, the Department of Trade and Industry (DTI)

announced a new incentive to attract investment, both

foreign and domestic, in the film industry. It established

the Film and Television Production Rebate Scheme that allows

eligible applicants to receive a rebate of 15% of the

production expenditures for foreign productions and up to

25% for qualifying South African productions. Film projects

must have begun after April 1, 2004 and must reach a

threshold of 25 million Rand in order to qualify for the

rebate. Other requirements include 50% completion of the

principal photography in South Africa and a minimum of four

weeks photography time. Eligible productions include

movies, tele-movies, television series, and documentaries.

The maximum rebate for any project will be 10 million Rand

(approximately $1.5 million). Details on the entire scheme

are available at the DTI web site at www.dti.org.za.

To encourage investors to establish or relocate industry and

business to areas throughout South Africa, the country's

various regions (provinces) have development bodies that

offer incentives. These incentives, which vary from area to

area, include reduced interest rates, reduced rentals for

land and buildings, cash grants for relocation of plant and

employees, reduced rates for basic facilities, rail age and

other transport rebates and assistance in the provision of

housing.

The Minister of Trade and Industry expressed the

government's view on foreign investment as "...our sincere

hope to attract real and growing international investor

commitment to South Africa and, at the same time, to fully

capitalize on the opportunities to bring about dynamic

growth in our country. In so doing we hope to enhance

commercial and industrial development, while creating

sustainable employment and providing training for our vast

resource pool." He continued to say that since the

inception of the new democratic government in 1994, South

Africa has effectively adhered to discipline, predictable

economic fundamentals. Through this arduous process, South

Africans have developed a strong entrepreneurial culture,

keen to jointly develop the country with international

partners. From a geographic perspective, South Africa is

proud of the role to be played in facilitating and

supporting the development of the region, offering a wide

array of skills and technical understanding.

SA's policy and regulatory frameworks can, however, serve as

disincentives to new investment or impediments to the

profitability of firms already operating in SA. Several

foreign companies have in the past complained that South

Africa's immigration legislation and the application of the

law made it difficult to get work permits for their foreign

employees. In particular they indicated that unnecessary

delays, rejections of applications and limits (quotas) on

foreign workers in a given field call into question

potential investors' ability to staff their operations with

the necessary skills at a given time. It was argued that

the immigration legislation was a remnant from the apartheid-

era and did not take into account recent developments and

the opening up of the South African market. The SAG

acknowledged this problem and during 2001 introduced an

Immigration Bill that would create more categories of

permits for temporary residents. The legislation was

contentious. Parliament finally approved the legislation in

May 2002. Critics have charged that the Act, which was

intended to assist with the process of bringing more skilled

workers into SA, created uncertainty and confusion.

Companies have also complained about the introduction,

through a regulation in early 2003, of a 2% training levy on

the salaries of expatriates in order to enter the country

under an expedited visa procedure. The levy does not apply

to expatriates already resident in the country or to inter-

company transfers. Expatriates who enter the country under

the normal visa procedure are exempt from the levy, but the

normal process is complex and time consuming. The

government's decision to implement the levy-based system

through regulation rather than legislation has also been

controversial. A legal challenge to the regulations further

delayed the implementation of the new immigration

legislation and this created more uncertainty about the

effective handling of applications for visas.

In January 2004, President Mbeki signed into law the Broad-

Based Black Economic Empowerment (BBBEE) Act of 2003, the

legislation enacting the Black Economic Empowerment (BEE)

strategy. The Act directs the Minister of Trade and Industry

to develop a national strategy for BEE, issue BEE

implementing guidelines in the form of Codes of Good

Practice, encourage the development of industry specific

charters, and establish a National BEE Advisory Council to

review progress in achieving BEE objectives.

The Minister released three codes in December 2004 with

seven more due in early 2005. The recently released codes

address specific issues pertaining to the BEE Framework,

Equity Ownership, and Management and include a new generic

scorecard with suggested targets for areas such as equity

ownership, management, procurement, and equality in

employment. The codes are intended to harmonize existing

and future industry empowerment charters. Sectors that have

completed or are close to finalizing empowerment charters

for their respective industries include: accounting,

agriculture, chemical, cosmetics, clothing and footwear,

construction, engineering services, financial services,

forestry, health, information and communications technology

(ICT), liquid fuels, liquor, marketing, mining, property,

tourism, transport, and wine. The Minister is expected to

establish the National BEE Advisory Council early in 2005.

U.S. companies support the broad goals of South Africa's

Black Economic Empowerment (BEE) policies. They have

contributed to the positive transformation of the economy,

including through their employment and management practices,

and have significant programs that support historically

disadvantaged individuals (HDIs). They do have questions,

however, about some of the details of BEE proposals and how

they will be implemented. They have concerns about the lack

of clarity and consistency in the BEE rules. A major

concern is whether HDI equity ownership will become

mandatory and a cost of doing business with the South

African government. The Minister of Trade and Industry is

developing a statement on equity ownership for

multinationals to be included in the Code of Good Practice

on Equity Ownership, which is expected to address the

concerns of U.S. companies.

Poor or unclear regulations in key sectors, such as

telecommunications, are also disincentives to investment.

In instances where the regulator is weak and unable to

enforce its own regulations, foreign firms are placed in a

weaker competitive position compared to the national

operator, thereby affecting their profitability. Costs

associated with pursuing legal action to resolve disputes

also cut into the bottom line. Improvement is expected in

the telecoms industry, however, following the Communications

Minister's September 2004 announcement liberalizing much of

the telecoms environment by February 2005. As part of this

announcement, the regulator plans to allow value-added

network service (VANS) providers self-provide their own

facilities or lease telecommunications facilities from

private telecommunications network operator. In addition,

the regulator is proposing that licensees as well as VANS

could resell spare network capacity.

In contrast to domestic investors, foreign investors face

local borrowing restrictions imposed by exchange control

authorities. Such restrictions apply to `affected persons'

- companies or other bodies in which (1) 75% or more of the

capital assets or earnings may be used for payment to, or

for the benefit of, a non-resident, or (2) 75% or more of

the voting securities, voting power, power of control,

capital, assets or earnings are vested in, or controlled by,

any non-resident. No person in SA may provide credit to a

non-resident or "affected person" without exchange control

exemption. Non-residents and "affected persons," however,

may borrow up to 100% of the South African Rand value of

funds introduced from abroad and invested locally.

Additionally, the ability to borrow locally increases if

both residents and non-residents own the local enterprise.

The SAG has an official policy on the restructuring of state

assets, which include privatization as an accepted option.

There are four big parastatals, all at different levels of

privatization: Eskom (power generation and distribution),

Denel (defense), Transnet (transportation) and Telkom

(telecommunications). Eskom supplies nearly 94% of South

Africa's electricity, makes substantial profits and has a

turnover of nearly R30 billion per year. Transnet dominates

the transport sector and contributes more than 3% of South

Africa's GDP. It comprises 13 companies involved in multi-

modal transport and includes railways, an airline, ports and

a pipeline. Transnet has reported that they will keep only

four of its businesses

Prior to May 2002, South African legislation provided Telkom

a monopoly on certain international and fixed line

telecommunications services. The government is in the final

stages of completing the shareholder structure of a second

fixed-line operator, however, to compete with Telkom. In

2004, the U.S./Malaysia Thintana Consortium sold its 30

percent stake in Telkom, which it had acquired in 1997, for

nearly $2 billion.

Following national elections in April 2004, the Government

unveiled plans to restructure state-owned enterprises rather

than to proceed with privatization at this time in an effort

to support the administration's two major policy objectives

of reducing unemployment and creating economic growth.

Consequently, in 2005 the SAG estimates much lower proceeds

from the sale of state-owned assets than in previous years.

Since the completion of the Telkom deal, government has been

left with fewer sizeable state entities to privatize.

Internationally economic conditions are not favorable to

attract partners, especially in the airline industry.

Proceeds in 2005 are expected from the planned

"concessioning" of the Durban port container terminal.

Other anticipated deals are the sale of "non-core"

businesses unbundled from Transnet and Airports Company

South Africa (ACSA), which manages South Africa's nine

principal airports.

The medium-term privatization of smaller parastatals such as

Sentech (radio transmission), Safcol (forestry), the SA Post

Office, or in the case of Denel (Defense R&D and

manufacturing), a hoped-for partial buy-in by foreign

suitors, may also afford lucrative opportunities for foreign

participation.

6.2 Conversion and Transfer Policies

Exchange control in South Africa is administered by the

South African Reserve Bank's (SARB) Exchange Control

Department and through commercial banks that have been

designated as "authorized dealers" in foreign exchange. All

international commercial transactions must be accounted for

through authorized foreign exchange dealers. There is no

difficulty in obtaining foreign exchange. The financial

sector in South Africa is well developed and there are only

limited delays in the conversion and transfer of funds. The

spot turnover in the South African foreign exchange market

is substantial, reaching a daily average of $1 billion

during the month of May 2003.

There are no restrictions on foreign firms wishing to invest

in share capital. Investors are advised to ensure that the

share certificates are endorsed "non-resident" by an

authorized dealer in order to return disposal proceeds and

dividends to their country of origin. A record of funds

introduced into South Africa should be kept. For every

purchase of exchange, irrespective of the amount involved,

authorized dealers are required to report to the SARB

details of payments received from foreign partners by South

African residents.

In general there are no controls over the removal by non-

residents of investment income or capital gains. Repayment

of foreign loans by South African residents, however,

requires prior approval. Dividends may be paid to a non-

resident without the approval of the SARB. Dividends due to

a non-resident and paid pursuant to a de-registration or

liquidation are transferable against documentation

confirming this fact. All loans from outside the Common

Monetary Area to South African residents require prior

Exchange Control approval. Approval is normally granted

provided the minimum tenor of the loan is for a period of at

least one month and a market-related interest rate is

charged - that is up to prime plus 3% for South African

denominated loans and up to prime plus 2% for foreign

denominated loans which are not shareholder-related funds,

with shareholder's funds restricted to prime.

For every sale of foreign exchange, irrespective of the

amount involved, authorized dealers are required to report

to the SARB details of payments made to foreign parties by

South African residents. Royalties, license and patent fees

to non-residents, where no local manufacturing is involved,

require the approval of the SARB. Manufacturing royalties

(as opposed to sales/marketing royalties) are subject to

approval by the DTI, which will communicate its decision to

the licensee or the Exchange Control Department where

applicable, which will enable an approach to a bank directly

to transfer the royalty payments. Authorized dealers on

production of an invoice may pay current account payments,

such as management fees and other fees for services

provided, provided that such payments are not calculated as

a percentage of sales, profits, purchases or income.

Significant progress has been made in the liberalization of

exchange controls since 1994. The financial Rand mechanism

was abolished in 1995, removing most controls on non-

residents. In June 1997, controls on South African residents

were considerably relaxed, and virtually all controls on

current account transactions were removed. Resident private

individuals who are over 18 and South African taxpayers in

good standing have also been permitted to invest up to R500,

000 abroad since 1 July 1997. The limit has since increased

to R750, 000 per person.

On February 26, 2003 the Minister of Finance announced

further measures to relax exchange controls. The changes

included the increase of the allowance governing South

African corporations' use of South African funds to finance

new approved direct investment in foreign countries as well

as the unwinding of blocked assets. It was also announced

that dividends repatriated from foreign subsidiaries will in

future be eligible for an exchange control credit, which

will allow them to be re-exported for approved foreign

direct investments. Furthermore, the tax payable on foreign

dividends was also removed in instances where a South

African taxpayer has a meaningful interest in the foreign

subsidiary paying the dividend. New emigrants wishing to

exit more than the permitted R750, 000 from South Africa

will in future be allowed to apply to the Exchange Control

Department of the SARB to do so, subject to an exiting

schedule and an exit charge of 10% of the amount.

In October 2004, the Finance Minister announced in his

Medium Term Budget Policy Statement (MTBPS) the relaxation

of exchange rate controls for corporations. The rules had

limited offshore investments to R2 billion per project for

investments in Africa and R1 billion elsewhere, in addition

to 20 percent of the excess cost. With the new

announcement, the limits on outward investments by local

corporations and restrictions on the repatriation for

foreign dividends are removed as well as restrictions on

individuals to invest in foreign firms listed on the South

African exchanges. Even though there are no restrictions on

corporations' foreign direct investment, corporations will

still be required to apply to the Reserve Bank for approval.

Limits on pension funds, insurance companies, mutual funds

(unit trusts) and individuals are still in place but

expectations are that they will be removed soon. More

relaxed exchange controls facing corporations should help

the government's goal of investment reaching 25 percent of

GDP by 2014.

Further questions on exchange control can be addressed to:

South African Reserve Bank

Exchange Control Division

P.O. Box 427, Pretoria, 0001

Tel: (27)(12) 313-3911; Fax: (27)(12) 313-3785

www.reservebank.co.za

6.3 Expropriation and Compensation

There is no record of any expropriation or nationalization

of American investment in South Africa since 1924. Under

the Expropriation Act of 1975 and the Expropriation Act

Amendment of 1992, the State is entitled to expropriate

property for public necessity or public utility. The

decision to expropriate is an administrative one vested in

the State. Compensation is determined by the amount the

property would have been realized in an open market

transaction by a willing seller to a willing buyer.

Skewed ownership of productive assets in South Africa is

still one of the most visible legacies of apartheid. The

racially discriminatory property laws of the past resulted

in highly disproportionate patterns of land ownership. The

government's Land Reform for Agricultural Development

Program (LRAD) has been designed to expand the range of

support measures that will be available to previously

disadvantaged South African citizens to access land

specifically for agricultural purposes. The SAG recognizes

that market-based programs of state directed land

redistribution perform better than programs that are

operated exclusively by the public sector. The government

regularly confirms its commitment to ensuring the success of

this program and ensuring that individuals from historically

disadvantaged groups obtain access to land in a speedy and

orderly fashion. In cases where expropriation has taken

place, the landowner was fully compensated.

6.4 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 International Center for

the Settlement of Investment Disputes. South Africa has an

objective system for enforcing property and contractual

rights. The government does not interfere in the court

system. South Africa applies its commercial and bankruptcy

laws with consistency. South Africa has signed various

investment agreements with a number of countries and

recognizes, and is recognized by, the International Chamber

of Commerce, which supervises the resolution of

transnational disputes. In 2004 some foreign companies

operating in the mining sector have suggested the

implementation of BEE policies may lead to investment

disputes.

6.5 Performance Requirements and Incentives

In September 2000, the Department of Trade & Industry (DTI)

announced that the manufacturing support schemes would be

replaced with a "six pack" of incentives consisting of the:

Small Medium Enterprise Development Program (SMEDP),

which offers manufacturing and tourism enterprises with

"significant expansions of their operations", tax-free cash

grants for two years, based on the cost of the investment in

land, buildings, machinery, equipment, and vehicles. A

maximum of R 3.05 million per year for enterprises with an

investment in qualifying assets of up to R 100 million.

Skills Support Programme (SSP) Skills Support Programme

(SSP) offers a maximum of 50% of the training costs, the

development of training curriculum and or land and buildings

related to training in order to encourage businesses to

introduce new and advanced skills to their workforce. This

grant will is payable for up to three years.

Critical Infrastructure Facility (CIF) supplements the

existing public or private sector infrastructure, by funding

a top-up grant between 9 and 30% of actual costs.

Industrial Development Zones (IDZ) consists of two

zones of operation: Customs secured area (CSA), and

industries and services corridor (ISC). A CSA is a delimited

area with entrance and exit points controlled by Customs

personnel. Each CSA has a dedicated customs office providing

inspection and clearance services, and a one-stop

administrative center to facilitate the approval and permit

processes. CSA-based enterprises are eligible for: duty-free

import of production-related raw materials and inputs; zero

rate on VAT for supplies procured from South Africa; and

right to sell into South Africa upon payment of normal

imported duties on finished goods. ISCs are industrial and

office park environments adjacent to CSAs, occupied by

service providers to CSA enterprises. The government first

designates areas suitable for IDZs. Prospective IDZ

companies then apply for permits to develop and operate an

IDZ.

Foreign Investment Grant (FIG) is open to foreign

investors (i.e. at least 50% foreign shareholding) located

outside SACU and/or the Southern African Development

Community (SADC). It offers up to 15% of the value of new

machinery and equipment (a maximum of R3 million per

entity), based on accepted relocation costs.

Strategic Investment Projects (SIP) offers a tax

allowance of up to 100% (a maximum allowance of R600 million

per project) on the cost of buildings, plant and machinery,

for strategic investments of at least R50 million.

In addition, the Industrial Development Corporation (IDC), a

self-financing, state-owned, development finance

institution, established in 1940, continues to provide

credit facilities to South African exporters. Aimed at

enabling them to offer competitive terms to foreign

purchasers, the credit facilities are still subject to a

South African local content requirement of at least 70%, and

the availability of export credit insurance cover. Local

content considerations are taken into account when comparing

tenders for government procurement purposes

The IDC also provides loan financing to the private sector

for the development of viable secondary manufacturing in its

target sectors and is often prepared to make an equity

investment or enter into joint ventures with foreign

investors.

There are several government-supported bodies that provide

technical assistance for new industries. These include the

Council for Scientific and Industrial Research (CSIR), a

multi-disciplinary research, development, and implementation

organization; Technifin, a government-owned firm financing

the commercialization of new technology and products; MINTEK

(formerly known as the Council for Mineral and Metallurgical

Technology); and the Council for Geoscience that fulfils the

role of a geological survey and undertakes geologically-

based investigations and services.

The SAG is not a member of the plurilateral WTO Government

Procurement Agreement (GPA). According to South African

government authorities, joining the GPA could limit South

Africa's objectives towards promoting small, micro, and

medium-sized enterprises and the "black economic

empowerment" (BEE) program.

The government procurement framework is still regulated

through the State Tender Board Act of 1968. However, South

Africa is trying to align the buying procedures of national,

provincial, local, and state-owned companies. As part of the

Public Finance Management Act Regulations of 1999, the state

and provincial tender boards ceased to exist on 31 March

2002, in order to devolve accountability to accounting

officers. Depending on their level of responsibility, the

accounting officers are now allowed to approve government

purchases up to a certain amount. There is also an

appointed independent ombudsperson to provide an interim

mechanism for quick and effective intervention on complaints

from businesses.

The basic principles for government procurement in South

Africa, in terms of socio-economic objectives, are set out

in the Constitution: procurement by an organ of State or any

other institution identified in national legislation must,

on the one hand, be "in accordance with a system which is

fair, equitable, transparent, competitive and cost-

effective," and, on the other hand, allow for categories of

preference and the protection, or advancement, of persons

disadvantaged by unfair discrimination, within a framework

to be prescribed by national legislation. Other principles

on which procurement must be based in South Africa are

accountability, and the just in time (JIT) delivery

principle.

Price preferences are taken into account for the purpose of

comparing tenders: the preferences are deducted from the

tender price after the tenders have been evaluated and

brought to a comparative basis. Price preferences, aimed at

promoting local manufacture, are based on such criteria as

use of the SABS (South African Bureau of Standards) mark and

locally manufactured electronic systems and components. The

preference is up to 10% if local content is more than 80%,

up to 10% for the use of locally manufactured electronic

systems and components, plus a minimum of 5% for local

design, provided that the two together do not exceed 10%,

and 2.5% for the use of products that carry the SABS mark.

Price preferences are generally cumulative.

The Preferential Procurement Policy Framework Act of 2000,

and amended draft regulations promulgated in November 2004,

stipulates that preferences will apply to all tenders,

irrespective of the amount. Preference points, calculated on

the basis of comparative and not tendered prices, may be

allocated within the following limits: an 80/20 point system

for tenders up to R1 million. A maximum of 80 points is

allocated to the lowest acceptable tender in terms of price;

higher price tenders receive fewer points. A maximum of 20

points is awarded to bidding firms who meet minimum industry

targets for ownership, management, procurement, and equal

employment of historically disadvantaged individuals (HDI).

For tenders above R1 million, a 90/10-point system is used

on the same basis. The contract must be awarded to the

bidder who scores the highest points, unless other

developmental objective criteria justify the award to

another bidder. An organ of State may be exempted from

provisions of the Framework Act if public or national

security interests justify such exemption, or if the likely

bidders are international suppliers. Foreign firms can only

bid through a local agent.

Parastatals also generally follow the government's

procurement policy. Eskom and Transnet have no preference

system, while Telkom grants preferences based on local

content. Any bidder for a parastatal contract, whose bid

contains imported content worth over $10 million, must

submit an "industrial participation" (IP) plan showing that

the bidder will invest in new or incremental business in

South Africa.

Under the National Industrial Participation Program (NIPP),

the seller must invest in a South African business to the

value of at least 30% of the value of the imported content

of the tender. The industrial policy of the Department of

Defense and the Armaments Corporation of South Africa

imposes an IP obligation on all defense purchases exceeding

$2 million; this obligation is known as "Defense Industrial

Participation" (DIP). Defense purchases exceeding $2 million

but less than $10 million require a DIP obligation of up to

50%, and defense purchases exceeding US$10 million require a

DIP obligation of at least 50%.

The NIPP, which became mandatory on 1 September 1996,

resembles an offset contract in the sense that goods and/or

services imported under the tender contract are partially

offset by exports of services, and, to a certain extent,

goods, during the period of fulfillment of the IP

obligation.

6.6 Right to Private Ownership and Establishment

Private property rights are strongly protected by South

African law. In general, all foreign and domestic private

entities are entitled to own business enterprises and engage

in profit-making activities. Private entities are allowed

freely to establish, acquire, and dispose of interests in

business enterprises. The acquisition of an existing

business enterprise is usually achieved through the purchase

of shares or assets. The securities regulation code applies

to public limited companies and to private companies with 10

or more shareholders, and capital and reserves in excess of

R5 million. If a stake of 30% or more is acquired, an offer

must be made to minority shareholders to acquire all their

shares at a price equal to the highest paid by the investor.

South Africa still has a number of sectors that are

dominated by state-owned enterprises. Eskom supplies nearly

94% of South Africa's electricity while state-owned Transnet

dominates the transport sector and contributes more than 3%

of South Africa's GDP. In 2004, Transnet unveiled a

strategy to focus solely on rail, port and oil pipeline

operations. All other companies previously administered by

Transnet, including South African Airlines (SAA), are being

discarded. Telkom, the fixed-line telephone operator,

continues to enjoy a monopoly on fixed-line

telecommunication services despite the end of legislative

protection in May 2002. A second national operator (SNO) is

close to resolving shareholder concerns and could be

licensed in early 2005. The South African Post Office still

enjoys a legislative monopoly on the delivery of mail.

South Africa's Competition Commission and Tribunal have

demonstrated an increased capacity to implement competition

policy effectively. The Competition Act of 1998 and its

1999 and 2000 amendments address anti-competitive mergers

and practices in both the private and public sectors. State-

owned enterprises that compete unfairly with the private

sector are being challenged with greater frequency.

Economic dominance by state-owned enterprises and previous

weak competition legislation could be partly to blame for

high concentration levels and business practices out of step

with the requirements of a competitive economy.

6.7 Protection of Property Rights

The South African legal system protects and facilitates the

acquisition and disposition of all property rights, such as

land, buildings and mortgages. Deeds of sales are

registered in the Deeds Office. Banks provide finance for

their clients to purchase a property through registering a

mortgage as security on the property.

All agreements relating to payment for the right to use know-

how, patents, trademarks, copyrights or other similar

property are subject to approval by the exchange control

authorities. A distinction is made between consumer goods

and capital goods. For consumer goods, a royalty of up to

4% of factory selling price is regarded as acceptable. For

intermediate and finished capital goods, a royalty of up to

6% will generally be approved.

Owners of patents and trademarks may license them, but when

this entails the payment of royalties to a non-resident

licensor, the royalty agreement must be approved by the DTI.

Patents are granted for 20 years - usually with no option to

renew. Trademarks (including service marks) are valid for

an initial period of 10 years and are renewable indefinitely

for further 10-year periods. The holder of a patent or

trademark must pay an annual fee to preserve its validity.

Literary, musical and artistic works, cinematographic films,

and sound recordings are eligible for copyright under the

the Designs Act of 1967, which grants copyrights for five

years.

The Counterfeit Goods Act was adopted to provide additional

protection to owners of trademarks, copyright and certain

marks under the Merchandise Marks Act of 1941. The 1997 Act

covers offenses related to counterfeit goods, including

possession of such goods. The Intellectual Property Laws

Amendment Act, adopted to amend the Merchandise Marks Act of

1941, the Performers' Protection Act of 1967, the Patents

Act of 1978, the Copyright Act of 1978, the Trade Marks Act

of 1993, and the Designs Act of 1993, aims to bring South

African intellectual property legislation fully in line with

the Trade-Related Aspects of Intellectual Property Rights

(TRIPS) Agreement. Amendments to the Patents Act of 1978

were also intended to bring it in line with TRIPS, and

provides for the implementation of the Patent Cooperation

Treaty (PCT), to which South Africa became a party in March

1999.

The International Intellectual Property Alliance continued

to note concerns about the piracy levels of optical discs,

which it estimated to be 40% in 2004. A local watchdog, the

SA Federation Against Copyright Theft (Safact), reported on

its website (www.safact.co.za) statistics on seizures of

counterfeit DVDs as well as a number of successful criminal

court cases against pirates in 2004, demonstrating an

increased commitment to IPR enforcement in 2004.

6.8 Transparency of the Regulatory System

Government promulgated the new International Trade

Administration Act in 2002. This Act established the

International Trade Administration Commission (ITAC) and is

responsible for tariff administration and trade remedies

(antidumping and countervailing measures). In terms of the

new Act, the Commission shall be responsible, among other

things, for investigating and evaluating applications with

regard to alleged dumping, or subsidized exports, safeguard

measures, and amendments of customs duties in the common

SACU area. The Commission is required to implement measures

to promote public awareness of the provisions of the new

Act.

In general, South Africa's Companies Act (1973) provides for

clear, transparent regulations concerning the establishment

and operation of businesses. Business organizations of more

than 20 persons that operate for gain must be registered as

a company under the Act. Foreign investors are organized

under the same rules and regulations as domestic firms, with

one exception: foreign companies that choose not to form a

firm in SA operate as "external companies." The legal

liabilities of an external company are not limited.

No government approval is required for foreign investors to

establish a new business in South Africa apart from the

approval required under the exchange control regulations.

The investor will be required to appoint a

consultant/auditor/legal advisor to register a company on

his/her behalf. The company should be registered within

21days; it should also register with the tax authority.

In South Africa there are no locations where a foreign-owned

business is prohibited or investment is officially

discouraged. The forms, which are to be filled by an

investor, are simple and understandable. The whole process

for foreign firms setting up in South Africa from beginning

to end on average may take six months, but if done through

Trade and Investment South Africa it can be finalized within

one month. Virtually all business activities are open to

foreign investors and there are generally no restrictions on

foreign investment. Restrictions would usually relate to a

particular industry and be applicable both to residents and

non-residents. Very few restrictions apply only to foreign

companies. For example, a foreign bank establishing a

branch in SA may be required to employ a certain minimum

number of local residents in order to obtain a banking

license and may be obliged to have a minimum capital base.

Restrictions also exist regarding the ownership of immovable

property by foreign companies. Foreign companies are

required to register as external companies before immovable

property may be registered in their names.

All businesses must obtain a business license from the local

authority, which is valid indefinitely unless the business

is relocated or acquired by a new owner. In general,

businesses must register with the local Regional Services

Council, Department of Labor, Workman's Compensation

Commissioner, the appropriate Industrial Council, the South

African Revenue Service, and the Department of Customs and

Excise.

6.9 Efficient Capital Markets and Portfolio Investment

South Africa's banks comply with international banking

standards and offer one of the most sophisticated banking

systems in the developing world. Customers have online, real-

time, nationwide access to bank accounts 24 hours a day, 365

days a year. South Africa's political transformation,

together with the relaxation of exchange controls and the

greater liberalization of African economies, has meant that

South Africa is now well positioned to provide global

services through its own banks' foreign offices as well as

the increasing presence of foreign bank representatives in

South Africa.

After a fairly turbulent first half year of 2002, which saw

the demise of a number of small and medium-sized banks,

stability returned to the sector. South African banks

remained well capitalized, and the average risk-weighted

capital-adequacy ratio for the sector increased to 12.6 per

cent at the end of December 2002, compared to 11.4% in 2001.

Growth in the total balance sheet moderated during 2002,

mainly as a result of a moderation in the growth of total

loans and advances. By the end of December 2002, the total

funds of banks - comprising capital, reserves, deposits and

loans - had increased by 4.8 per cent (measured over a

period of twelve months), to a level of R1.101 billion.

Concentration in the South African banking sector increased

noticeably during 2002, and the four biggest banks now

represent about 80 per cent of the total banking sector. The

participation of foreign banks in the local banking industry

decreased for the first time in six years, from 7.7 per cent

in 2001 to about 6.9 per cent of the total banking-sector

assets by the end of December 2002. South African banks

maintained adequate levels of liquidity despite liquidity

strains experienced by the system during the first half of

2002.

Oversight of South Africa's banks is the purview of the

South African Reserve Bank. The Bank Act of 1990 regulates

private banks. The SARB is nearing completion of meeting all

recommendations of the Basel Committee on Banking

Supervision. A variety of credit instruments are available

to the private sector, including bankers' acceptances, fixed

and variable rate securities, bonds, and equities. In May

1995, amendments to the Banks Act permitted foreign banks to

conduct banking operations via branches, ending the earlier

requirement that they establish subsidiaries. A complete

list of the registered banks, banking associations,

development banks, and related organizations that maintain a

presence in South Africa is available on an ABSA-sponsored

website at www.finforum.co.za/fininsts/bankdir.htm.

Any person, whether South African or foreigner, may control

a bank. There are three alternatives for conducting banking

operations in South Africa (all of which require prior

approval of the Registrar of Banks, who heads up the Bank

Supervision Division): a separate banking company, a branch

of an international bank or banking group, and a

representative office of an international bank. The criteria

for the registration of a bank are the same for domestic and

foreign investors. Foreign banks, however, are required to

include additional information with their application, such

as: foreign bank holding company resolution approving

proposed formation of the bank, a letter of "comfort and

understanding" from the foreign bank holding company, and a

letter of no objection from the foreign bank's home

regulatory authority.

The Financial Services Board (FSB) governs South Africa's

sophisticated non-bank financial services industry. The FSB

regulates insurance, pension funds, unit trusts (i.e.,

mutual funds), participation bond schemes, portfolio

management, and the financial markets. The financial

markets consist of:

The JSE Securities Exchange SA (www.jse.co.za)

The Bond Exchange of South Africa (www.bondex.co.za)

South Africa's financial markets are robust, liquid and well

developed. Turnovers remained brisk in 2002 to date. In the

bond market, for example, the value of turnover in a single

month is approximately equal to South Africa's annual gross

domestic product of one trillion Rand. Non-residents also

take a keen interest in these markets. In an average month

non-residents buy more than a R100 billion in bonds and R18

billion in shares on South African bourses. Although they

also are engaged in selling bonds and shares, often of a

roughly equal amount, some net inflow or outflow is recorded

from month to month. During the first half of 2002 non-

residents bought a net amount of R13 billion in shares and

bonds on the South African formal exchanges, and sold R17

billion during the third quarter. Further net sales in

October were followed by net purchases in November.

The JSE Securities Exchange is the 16th largest exchange

measured by capitalization in the world. At the end of 2002

the market capitalization stood at around $182 billion (R1.6

trillion) with a total of 472 firms listed. This is much

larger than all the exchanges in Africa combined. The JSE

Securities Exchange includes AltX, an exchange for small and

medium-sized companies launched in October 2003. AltX has

ten companies with a market capitalization of approximately

R1 billion. Early in 2005, the JSE plans to launch YieldX,

a trading platform for interest rate products. The JSE

Securities Exchange All Share Index broke through the 10,000

level during December 2001 when the Rand fell to record lows

against the U.S. dollar but in July 2003 it stood at 8,600.

The Index has since recovered with the strength of the Rand,

climbing back above 10,000 in 2004 and reaching nearly

13,000 by December 2004.

The Bond Exchange of South Africa (BESA) regulates the fixed-

interest securities market and is licensed under the

Financial Markets Control Act. Membership includes banks,

insurers, investors, stockbrokers, and independent

intermediaries. The bond exchange consists principally of

government bonds with some bonds from government parastatals

also available. There is a growing corporate bond sector,

however, as more companies seek to raise capital through

this mechanism.

The Financial Services Board continues to assess and

implement the recommendations of the International

Organization of Securities Commissions in order to bring the

non-banking financial services in line with international

best practices. There are presently discussions underway to

establish a single financial services regulator.

Financial services in South Africa are characterized by

extensive interlocking shareholding relationships between

the major banks and the large insurance companies. The

securities markets are well developed. Non-residents'

participation in the securities and stock markets has

increased sharply. The JSE began permitting foreign banks

and firms to join its registry in November 1995.

6.10 Political Violence

Political violence is not a major issue in South Africa.

Criminal violence, however, is high. National and

provincial governments have unveiled a number of programs

aimed at attacking crime in general, and South Africa is

working closely with donor countries to address this

problem.

6.11 Corruption

South African law provides for prosecution of government

officials who solicit or accept bribes. Penalties for

offering or accepting a bribe may include criminal

prosecution, monetary fines, and dismissal for government

employees, or deportation for foreign citizens. South Africa

boasts no fewer than ten agencies engaged in anti-corruption

activities. Some, like the Public Service Commission (PSC),

Office of the Public Protector (OPP), and Office of the

Auditor-General (OAG), are constitutionally mandated and

address corruption as only part of their responsibilities.

Others, like the South African Police Anti-Corruption Unit

and the Directorate for Special Operations (more popularly

known as "the Scorpions"), are dedicated to combating crime

and corruption. High rates of violent crime, however, are a

strain on capacity and make it difficult for South African

criminal and judicial entities to dedicate adequate

resources to anti-corruption efforts.

South Africa is not a signatory of the OECD Convention on

Combating Bribery. South Africa signed the UN Convention

against Corruption on December 9, 2003 and ratified it on

November 22, 2004. Transparency International South Africa,

an affiliate of Transparency International, has operated in

South Africa since 1997.

During the last few years, crime has been a far more serious

problem than either corruption or political violence and an

impediment to, and a cost of, doing business in South

Africa. The South African police forces have not been

effective or well accepted in many communities because of

their historical role in enforcing minority rule, their lack

of training, and internal crime and corruption within the

forces. The levels of crime, especially violent crime, are a

deterrent to attracting U.S. companies to South Africa.

New laws, such as the Promotion of Access to Information Act

signed into law in February 2000, have helped to increase

transparency in government in the last few years. The Public

Finance Management Act, which became effective on April 1,

2000, helped to raise the level of oversight and control

over public funds and improved the transparency of

government spending, especially with regard to off-budget

agencies and parastatals. Notwithstanding these efforts,

businesses complain about the lack of certainty and

consistency in interpreting and implementing some government

policies.

President Mbeki signed "The South African Prevention and

Combating of Corrupt Activities Act" (PCCAA) into law on

April 28, 2004. The PCCAA makes it more clear which

activities are considered graft. The act:

includes a list of codified corruption offenses related

to specific persons.

clearly defines that graft occurs between a "corruptor"

and a "corruptee."

declares that a bribe need not be monetary in nature,

nor need it be paid directly to the person who will be

undertaking the corrupt act.

bars the payment of bribes to foreign public officials

by South African citizens and firms.

provides a list of corruption-related offenses relating

ting

to specific matters in the public and private sectors.

allows for the investigation and seizure of

"unexplained wealth."

tasks the National Treasury to establish a register of

tender defaulters for corrupt individuals and firms.

obliges public officials to report any corrupt

activities.

prescribes strict penalties, including the possibility

of life imprisonment.

One shortcoming of the act is the failure to protect

whistleblowers against recrimination or defamation claims.

6.12 Bilateral Investment Agreements

South Africa has bilateral investment agreements 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 containing a Free

Trade Agreement (FTA) went into force between South Africa

ica

and the European Union on January 1, 2000, but it does not

have an investment chapter. Under the FTA, the EU is

committed to the full liberalization of 95% of South African

imports over a 10-year transitional period, while SA is to

liberalize 86% of EU imports over a 12-year transitional

period.

The U.S.-SA bilateral tax treaty, eliminating double-

taxation of business officials from one country working in

another was signed in February 1997 and became effective

January 1, 1998. Agreements Regarding Mutual Assistance

between the Customs Administrations of the United States and

South Africa came into force on August 1, 2001. The United

States and South Africa signed the Trade and Investment

Framework Agreement (TIFA) in February 1999, establishing a

Council on Trade and Investment consisting of

representatives of both governments. The council's last

meeting was held in February 2002. U. S. Trade

Representative Robert Zoellick visited South Africa in

February 2002 and January 2003 and met with his SACU

counterparts on both occasions. The United States and SACU

decided to pursue a Free Trade Agreement (FTA) and held six

rounds of negotiations since June 2003. The United States

is seeking an investment chapter in the FTA.

The rate of South African Normal Company Taxation applicable

to companies (other than small business corporations and

"employment companies" with financial years ending after 1

April 1999) is 30%. Prior to April 1999, the company tax

was 35% and prior to April 1994, the company tax rate was

40%. Companies are not entitled to any rebates except for

foreign royalty and foreign taxes paid. Companies are also

liable for secondary tax on companies (STC) at 12.5% in

respect of all dividends declared after 13 March 1996.

Close Corporations are treated as companies for taxation

purposes.

Beginning in January 2001, South Africa moved to a residence-

based income tax system. Taxes are levied on residents of

SA irrespective of where in the world the income is earned.

Although taxpayers are taxed on their worldwide income, some

categories of income and activities undertaken outside SA

are exempt from SA tax. External companies are taxed at a

flat rate of 35% on their South African source profits.

Effective October 1, 2001, SA also instituted a capital

gains tax. Individuals include 25% of net capital gains in

taxable income, and companies include 50% of capital gains

in taxable income. As a result, the effective capital gains

rate for individuals will vary from zero0 to 10.5% and the

rate for companies is 15%. SA also has a 14% value-added

tax (VAT). Exports are zero-rated and no VAT is payable on

imported capital goods.

To further encourage business investment, the Minister of

Finance in February 2003 made several proposals that will

offer tax relief to companies. These include:

The accelerated depreciation arrangements for

manufacturing assets, introduced as a temporary measure,

will be retained as a fixed element in the tax policy.

In keeping with practice in many other jurisdictions,

relief will be provided where business asset sale proceeds

are reinvested within 18 months.

Taxpayers will be allowed to claim losses from ordinary

revenue on the sale of devalued depreciable business assets

with short economic lives.

An accelerated four-year write-off period is proposed

for capital expenditure relating to research and development

in the field of natural and applied science.

A double deduction is introduced for the first R20, 000

of costs incurred in the start-up of new businesses. The

turnover limit for small businesses qualifying for a lower

company tax rate will be increased from R3 million to R5

million.

The government also introduced tax measures in 2003 to

encourage urban development. It announced that investment in

refurbishment or construction of buildings in certain urban

areas would receive special treatment. Taxpayers

refurbishing a building within designated zones will receive

a 20 per cent straight-line depreciation allowance over a

five-year period. Construction of new buildings within such

a zone will receive a 20 per cent write-off in the first

year and five per cent a year for a further 16 years. This

benefit will be available to owners as users of the building

or as lessors/financiers of these investments. A

complementary proposal extends tax advantages to public

benefit organizations that provide affordable housing to low-

income households in underdeveloped urban areas, as part of

a more comprehensive broadening of the list of activities

qualifying for tax-deductible donations. The Minister of

Finance also announced the scrapping of "a potentially

harmful tax practice" in the form of the International

Headquarter Company regime as the need for this exemption

was obviated by the removal of the foreign dividend tax.

6.13 OPIC and other investment insurance programs

The Overseas Private Investment Corporation (OPIC) supports,

finances, and insures U.S. overseas investment projects that

are financially sound. Its assistance contributes

significantly to the social and economic development of the

host country. OPIC aids U.S. investors through the

following four principal activities, which are designed to

promote overseas investment and reduce the associated risks:

Financing businesses through loans and loan guarantees.

Supporting private investment funds.

Insuring investment against a broad range of political

risks.

Engaging in outreach activities designed to inform the

American business community.

South Africa signed a bilateral investment incentive

ive

agreement with the United States in November 1993 with

respect to all of OPIC's programs. Today, OPIC backs a

number of investment funds focused on Sub-Saharan Africa

including the Africa Growth Fund ($25 million), the Modern

Africa Growth and Investment Fund ($105 million), and the ZM

Investment Fund ($120 million). OPIC also recently

established the $350 million Sub-Saharan Africa

Infrastructure Fund (SAIF) to target infrastructure projects

in all of Sub-Saharan Africa, including South Africa.

During 2003, OPIC helped the National Urban Reconstruction

and Housing Agency (Nurcha), a wholesale housing income

fund, to establish a scheme to lend directly to needy

contractors in a bid to ensure small developing contractors

have access to finance. Nurcha will use funds from the R200

million transaction to lend out R100 million this year to

fund projects, facilitating construction of about 24,000

affordable homes. The new scheme, which is intended to speed

up the delivery of affordable housing, will use

intermediaries to handle contractors' financial issues.

Previously the Nurcha Fund acted only as a guarantor for

loans from financial institutions to emerging contractors,

and the contractors had to handle their own finances.

Additional information is available at www.opic.gov. South

Africa is also a member of the World Bank's Multilateral

Investment Guarantee Agency (MIGA).

16.14 Labor

Since 1994, the South African Government has been

systematically removing the vestiges of the apartheid labor

system. The government is attempting to erect in its place

a labor market system that is characterized by employment

security, reasonable wages, and decent working conditions.

The new system, which was negotiated between government,

business, and organized labor under the aegis of the

National Economic Development and Labor Council (NEDLAC),

places a high value on worker rights and collective

bargaining between parties that are equally empowered.

The new labor dispensation rests on four legislative

pillars:

(1) The Labor Relations Act, in effect since November 1996,

is the cornerstone of the entire regulatory structure. It

enshrines both the right of workers to strike and also the

right of management to lock out workers and hire replacement

labor during a strike. The Act created the Commission on

Conciliation, Mediation, and Arbitration (CCMA). The

Commission currently has a caseload far in excess of that

which was originally projected because of the ease of access

to its services.

(2) The Basic Conditions Employment Act, implemented in

December 1998, establishes a 45-hour workweek and minimum

standards for overtime pay, annual leave, notice of

termination, and the like.

(3) The Employment Equity Act prohibits unfair employment

discrimination and requires large and medium employers to

prepare affirmative action plans to ensure that blacks,

women, and disabled persons are adequately represented in

the workforce.

(4) The Skills Development Act imposes a levy on employers

equal to 1.0% of payroll to be used for training programs

devised by industry-specific training authorities and

jointly administered by employer organizations and labor.

Many in business claim that the South African labor market

is over-regulated and have urged the government to scale

back some of the recently passed legislation. In response,

the Labor Minister proposed a number of amendments to the

labor laws, which were later, refined and agreed upon in an

informal business-labor body known as the Millennium Labor

Council (MLC). These amendments were passed by Parliament

in March 2002. In its 2002 Article IV Staff Report on South

Africa, released on 23 January 2003, the IMF noted that

conditions in the labor market had improved with the

introduction of legislation to streamline the arbitration

process and allow for more flexibility in employment.

According to the latest (March 2004) Labor Force Survey,

published by Statistics SA, the official unemployment rate

is 27.8%. This rate uses the International Labor

Organization (ILO) definition of unemployed, which excludes

persons who have not looked for work in the four weeks prior

to the interview.

There are about 3.3 million union members in South Africa,

composing 44% of the formal sector employment. Most union

members belong to affiliates of one of the three major union

federations: the Congress of South African Trade Unions

(COSATU), the Federation of Unions of South Africa (FEDUSA),

or the National Council of Trade Unions (NACTU). Although

COSATU, the largest federation with some 1.8 million

members, is formally allied with the ruling African National

Congress (ANC) and the South African Communist Party (SACP),

it often opposes the government on matters of economic

policy. One of COSATU's particular targets is governmental

efforts to privatize municipal services and state-owned

corporations. Striking is protected under South African

law, but, in general, labor militancy has been declining

since 1994.

16.15 Foreign Trade Zones/Free Ports

The DTI website states there are no foreign trade zones or

free ports in South Africa, though there are bonded

warehouses at various ports of entry. General rebates of

duty are available for specific situations, and duties may

be rebated on goods on re-export.

South Africa has what it terms "Industrial Development

Zones." They are fairly new as the first one was only

designated in 2001. The IDZ program and the regulations

were introduced in 2000. There are IDZs in Port Elizabeth

(Coega) and East London (both in Eastern Cape province),

Richards Bay (in KwaZuluNatal province) and Johannesburg

International Airport in Gauteng province. An IDZ is run by

an IDZ operator, which can be government-owned, privately

owned, or PPP (Public Private Partnership)- structured.

Customs control will be part of the IDZ operations and

handled by the South African Revenue Service (SARS).

Licensing of enterprises is part of the process and is

performed by the Manufacturing Dev Board as the adjudicating

authority in collaboration with SARS. The customs benefits

related to manufacturing or processing in the zone are duty-

free and VAT-suspension on imports and exports, provided

that the finished product is exported. Expedited services

and other logistical arrangements can be provided for SME

businesses or for new foreign direct investment. Co-funding

for infrastructure development is available. There are no

exemptions from other laws or regulations, such as

environmental and labor laws.

16.16 Foreign Direct Investment Statistics

Foreign direct investment (FDI) data is readily available in

South Africa, but published statistics vary depending on

their source and definition. Among the numerous

institutions that provide foreign investment data, the U.S.

Embassy in South Africa tends to rely mostly on the South

African Reserve Bank (SARB). The SARB statistics conform to

the IMF definition of FDI* and represent actual investment,

excluding announced but not completed, "intended"

investment. However, the SARB does not provide country-

specific figures that distinguish between actual new

investment flows and changes in investment stocks caused by

asset swaps, exchange rate adjustments, and mergers and

acquisitions. This situation makes it difficult to track

the United States' and other countries' FDI position in SA

on a yearly basis. Because SARB statistics only provide an

annual total for all the countries' flows combined,

observers also often consult more updated information

obtained from the South Africa-based firm "Business Map"

(BM). The latter offers fee-based services for a wide range

of investor-related data and analysis and may be contacted

via its web site at www.bmap.co.za.

(*FDI is generally defined as ownership of at least 10% 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.)

The following FDI statistics were drawn from the SARB's

September 2004 Quarterly Bulletin. The conversion exchange

rate used was that of the average for each year cited.

Table A: Average exchange rates used

1999 2000 2001 2002 2003

US$/Rand 6.11 6.94 8.60 10.52 7.56

Table B: Year-end stock of Foreign Direct Investment in

South Africa

1999 2000 2001 2002 2003

Rand (billion) 318.63 328.86 370.70 255.84 303.44

US$ (billion) 52.15 47.39 43.10 24.32 40.14

Table C: Year-end stock of South African Direct Investment

Abroad

1999 2000 2001 2002 2003

Rand (billion) 203.04 244.65 213.18 189.91 180.51

US$ (billion) 33.23 35.25 24.79 18.05 23.88

(Table D: GDP (in Rand billion at current prices) & FDI as a

percentage of GDP

1999 2000 2001 2002 2003

GDP 813.68 922.15 1020.01 1164.94 1251.47

FDI (%) 39.2 35.7 36.3 22.0 24.3

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

region/country (in billions)

REGION/COUNTRY RAND RAND US$ US$

2002 2003 2002 2003

EUROPE - Total 211.2 245.8 20.1 32.5

UNITED KINGDOM 158.2 188.4 15.0

24.9

GERMANY 22.1 22.9 2.1

3.0

SWITZERLAND 6.0 6.1 0.6 0.8

NETHERLANDS 12.8 16.1 1.2

2.1

FRANCE 3.6 4.1 0.4

0.5

ITALY 1.4 2.0 0.1 0.3

N&S AMERICA - Total 25.1 32.1 2.4 4.2

USA 23.9 29.5 2.3 3.9

AFRICA - Total 5.5 4.7 0.5 0.6

ASIA - Total 13.9 20.5 1.3 2.7

MALAYSIA 7.1 10.0 0.7 1.3

JAPAN 3.4 7.1 0.3 0.9

OCEANIA - Total 0.2 0.4 0.0 0.1

--------------------------------------------- ---------------

--------------------------------------------- ---

TOTAL 255.8 303.4 24.3 40.1

--------------------------------------------- ---------------

--------------------------------------------- ---

Table F: Year-end stock of South African direct investment

abroad by region/country

REGION/COUNTRY RAND RAND US$ US$

2002 2003 2002 2003

EUROPE - Total 152.4 137.4 14.5 18.2

UNITED KINGDOM 45.5 44.1 4.3 5.8

LUXEMBURG 46.8 43.7 4.5 5.8

AUSTRIA 27.0 11.2 2.6 1.5

OTHER 33.0 38.4 3.1 5.1

N&S AMERICA - Total 24.8 17.0 2.4 2.2

USA 22.9 14.9 2.2

2.0

AFRICA - Total 14.2 15.8 1.4 2.1

ASIA - Total 4.4 3.5 0.4 0.5

OCEANIA - Total 7.0 6.8 0.7 0.9

--------------------------------------------- ---------------

--------------------------------------------- -

TOTAL 202.8 180.5 19.3 23.9

--------------------------------------------- ---------------

--------------------------------------------- -

Table G: Year-end stock of FDI in South Africa by industry

sector (Billions)

INDUSTRY RAND RAND US$ US$

2002 2003 2002 2003

Agriculture,

Forestry & Fishing 0.7 0.5 0.1 0.1

Mining 80.6 103.1 7.7 13.6

Manufacturing 67.3 75.4 6.4 10.0

Construction 1.9 1.9 0.2 0.3

Trade, Catering,

& Accommodation 13.3 13.4 1.3 1.8

Transport, Storage,

& Communication 10.1 22.0 1.0 2.9

Finance, Insurance,

Real Est. &

Business Services 81.6 86.6 7.8 11.5

Social services 0.4 0.4 0.0 0.1

--------------------------------------------- ---------------

--------------------------------------------- --

TOTAL 255.8 303.4 24.3 40.1

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Table H: FDI Flows into South Africa: Investment by

foreigners in undertakings in SA in which they have at least

10% of the voting rights - Capital movements 1995 to 2002 in

Rand billions (inflows)

1995 4.5

1996 3.5

1997* 17.6

1998 3.1

1999 9.2

2000 6.2

2001* 58.4

2002 8.0

2003 5.8

*The high inflow in 1997 was due to the 30% privatization of

Telkom while the jump in 2001 is the result of the Anglo

American/ De Beers transaction.

Table I: FDI flows: Investment by South Africans in

undertakings abroad in which they have at least 10% of the

voting rights - Capital movements 1995 to 2002 in Rand

billions (outflows)

1995 9.1

1996 4.5

1997 10.8

1998 9.8

1999 9.7

2000 1.9

2001 -27.4 (inflow - decrease in investment abroad))

2002 -4.2 (inflow- decrease of investment abroad)

2003 5.4

*2001 De Beers/ Anglo American transaction resulted in the

return of capital, previously invested abroad, to South

Africa

For 2003, the Business Map Foundation, a non-profit South

African based research organization and think tank, *

reported that during the first quarter, FDI inflows were

slow. However, during the second quarter, plans for a

number of noteworthy investments were announced. Daimler

Chrysler announced a R2 billion-expansion deal. This, plus

a R123 million investment in improving the facilities at two

Da Gama Textile plants, made Germany the leading investor by

country in this quarter. Japan was the second largest

investor in quarter 2, 2003 with Toyota announcing that it

is to invest a further R1.7 billion to enhance its exports.

South Africa has been confirmed as one of five worldwide

locations approved by Toyota Motor Corporation for the

production of a new generation light commercial vehicle. On

U.S. investment, the Ford Motor Corporation of South Africa

announced its intention to expand into a R280 million

project to refurbish its paint shop.

(* The Business Map definition of FDI includes mergers and

acquisitions, new investments, privatization, expansions

that result in new productivity capacity, and plans or

intentions to invest, i.e., commitments.)

The South African branch of Barclays Bank PLC announced on

July 2, 2003 that it had received about R470 million in

additional capital from the UK banking group. The capital

will be used to further grow its operations in this country

and to establish a local business structure capable of

supporting its customers who are growing their Pan African

operations, it said. Barclays South Africa branch, which

provides corporate and investment banking services, has over

the first six months of 2003 strategically positioned itself

to become a more prominent player in the South African

market. This is evident in the appointment of an

experienced team of corporate bankers focused on expanding

its corporate and investment banking unit as well as moving

the Barclays Africa headquarters from London to South

Africa.

BusinessMap set third quarter 2004 FDI at R27.8 billion, due

to Barclays Banks' plans to obtain a majority share in ABSA

bank. Investment by vehicle makers is forecast to reach a

five-year high of R3.5 billion in 2004 and South African

Breweries has committed themselves to a R5 billion

investment over the next five years. Other major companies

with ambitious investment plans include Sasol, with capital

spending peaking at R15 billion, PPC to add capacity worth

almost R1 billion with Eskom and Telkom expected to spend

R165billion to improve infrastructure.

Since 1994 many foreign firms have opened up (or re-opened)

offices in South Africa. It is estimated that there are

nearly 700 American companies (including subsidiaries and

joint ventures, local partners, agents, franchises and

representatives.) doing business in South Africa. The

second and third highest numbers of companies per country

are from Germany and the U.K. respectively.

Key investment industries in South Africa:

South Africa is a food self-sufficient country and the bulk

of the population's food needs are produced locally from raw

materials. South Africa's well developed food and beverages

industry has become a global player. Some of the major

international agro-processing companies that have a presence

in South Africa are: Unilever, Nestle, Coca-Cola, Danone,

Parmalat, Kellogg, HJ Heinz, Cadbury-Schweppes, Virgin Cola,

McCain Foods of Canada, Pillsbury, and Minute Maid.

The South African Automotive and Components industry is on a

growth path and is well placed for investment opportunities.

BMW, Ford, General Motors, Volkswagen, Daimler-Chrysler and

Toyota all have production plants in South Africa. .

General Motors / Opel is also intent on significant

investments in its Port Elizabeth plant.

Four major commercial banking groups who provide retail and

investment banking services dominate the South African

banking industry. The European, Malaysian and U.S. banks

that have banking licenses have so far concentrated on

corporate as opposed to retail banking. Foreign banks are

gaining market share by charging aggressive lending margins.

The chemical industry is the largest manufacturing sector of

the SA economy, accounting for some 5% of GDP. The country

is a world leader in the manufacture of synthetic fuel from

coal. Four oil refineries dominate the petroleum and

petrochemical industry plus the Sasol and Mossgass (PetroSA)

Fischer-Tropsch based operations. The rest of the chemical

manufacturing sector consists mainly of AECI, Sentrachem and

fertilizer plants.

The following companies have invested in excess of R1

billion in South Africa since 1994:

Table F: TOP FOREIGN COMPANIES INVESTED IN SOUTH AFRICA

Canada - Placer Dome

Denmark - AP Moller

France - Lafarge

Germany - BMW

Italy - Cirio (Del Monte)

Switzerland - Movenpick Hotels

UK - Billiton; Lonrho Plc, SA Breweries, Anglo

American

U.S. - Caltex; Coca Cola; Dow Chemicals; IBM;

Saudi Arabia - Oger

Other significant U.S. investors include: Ford, McDonalds,

Levi Strauss, Minute Maid, Nike, Salem, Silicon Graphics,

Microsoft, HP, Dell, Sara Lee, Caterpillar, Goodyear, Eli

Lilly, Fluor and General Electric.

END TEXT

MILOVANOVIC

WWeek 2015

South Africa: INVESTMENT CLIMATE STATEMENT 2005 - SOUTH AFRICA