U.S. MULTI-NATIONALS CONTINUE ICT CHARTER

C O N F I D E N T I A L SECTION 01 OF 02 PRETORIA 003051 SIPDIS DEPT FOR AF/EPS DKRZYWDA AND AF/S/TCRAIG COMMERCE FOR 4510/ITA/IEP/ANESA/OA/JDIEMOND TREASURY FOR BRESNICK, LSTURM, AND AJEWEL DEPT PASS USTR FOR PCOLEMAN AND WJACKSON E.O. 12958: DECL: 07/07/2014 TAGS: ECPS EINV EFIN ETRD ECON SF SUBJECT: U.S. MULTI-NATIONALS CONTINUE ICT CHARTER NEGOTIATIONS REF: A. REFTEL: A) PRETORIA 2651 ¶B. B) PRETORIA 2164 ¶C. C) PRETORIA 2092 Classified By: Acting Econ Chief Alan Tousignant. Reasons 1.5 (b,d). ¶1. (C) SUMMARY. Representatives of U.S. multi-national corporations (MNCs) and the Information and Communications Technology (ICT) Charter Working Group continue to negotiate proposed equity ownership requirements. The MNCs have presented a list of barriers to transferring equity and suggested various equity models. MNCs still hope for a balanced scorecard, but some are beginning to question the commercial viability of implementing black economic empowerment (BEE). Several multi-national firms are considering exit strategies such as setting up distributorships in South Africa or relocating to neighboring countries. END SUMMARY. ¶2. (U) Representatives of U.S. MNCs operating in South Africa and the American Chamber of Commerce in South Africa (AmCham) continue to meet with the Information and Communications Technology (ICT) Charter Working Group to negotiate how the terms of equity ownership requirements in the ICT Empowerment Charter will be implemented. MNC representatives told Econoff that following the first meeting on June 5, 2004 (Reftel A),a "Group of 10" has met five more times. The Group of 10 consists of AmCham and MNC representatives on one side and the ICT Working Group and black ICT businesses and associations on the other side. There are no government officials at the table. ¶3. (C) MNC representatives met internally June 14, 15 and 17 and compiled the following list of obstacles that they argue, at a minimum, serve as a disincentive to transferring equity. COST - Sales of equity involve higher costs to multinational companies than alternative non-equity approaches to Broad Based BEE, and hence are generally not approved by corporate headquarters. - According to international accounting rules, any discount to fair market value on sales of equity must be recorded in the income statement and hence may impact the cost of capital. - Vendor finance can distort the holding company balance sheet debt/equity ratio. �A;- U.S. companies are disadvantaged by U.S. tax rules on sub-part F income when subsidiaries are not wholly owned. - Equity sales by foreign holding companies may be subject to capital taxes in foreign jurisdictions, which result in immediate cash outflows. - Multinational companies will be disadvantaged by massive recourse to South African financial markets for loan finance and forex transfers for the sale of 25-35 percent of all foreign-owned IT companies in South Africa. LEGAL - Multinational companies organized as South African registered branches of foreign companies have no South African equity to sell. - The Companies Act section 38 prohibits a company from financially assisting the sale of its own shares, thus preventing the South African subsidiary from providing vendor finance. - Foreign Exchange regulations provide barriers to equity solutions involving holding company stock. GOVERNANCE - Minority stakes in South African subsidiaries create barriers to the free flow of capital and intellectual property across a wholly owned group of companies. They force loan funding (as opposed to equity funding) for expansion plans (since equity funding would dilute the minority stake) and create barriers to inward foreign direct investment. They increase the time to market of new innovations and technologies. - South Africa does not have a broad range of black investors and therefore the potential for conflicts of interest between companies involving connected minority parties is higher. - Minority shareholders add to the complexity of decision-making where decisions are taken at a global rather than a country level. - Additional management time is required in non-operational statutory structures, when normal management decisions are taken in cross-border operational structures. OTHER RISKS - There is a litigation risk that sales of equity will be challenged by holding company shareholders. - There is litigation risk that minority shareholders in South Africa may proceed against the majority when a decision is taken in favor of the global group but against the interest of the local company (e.g.: treasury investments, top South African employee assignments elsewhere in the group, global sourcing, hedging of foreign exchange exposures, etc.). - Holding companies believe themselves open to risk of prosecution under the Foreign Corrupt Practices Act (or similar regulations) due to the actions of minority shareholders acting under normal business practice in South Africa, which may be illegal in the foreign country of incorporation. - Strict observance of USA export restrictions (or similar foreign regulations) may cause contention with minority shareholders who may claim unfair treatment under South African laws. - Forced disclosure to minority shareholders under South African law may be illegal disclosure under SEC regulations for a USA listed company (or similar regulations in other jurisdictions). ¶4. (C) During these internal meetings, it became apparent that some MNCs are prepared to comply with equity ownership requirements while others are not. Those who are willing to comply have proposed four specific models they could implement in their corporate environment: joint venture, employee trust, holding company, or a branch. Those who do not support equity requirements said that either a corporate global policy prevents them from selling equity or the risks are too high. ¶5. (C) The MNCs presented the ICT Working Group with the above list of concerns about equity ownership in a Group of 10 meeting on July 5. According to IBM Country Manager Mark Harris, who is leading the MNC side of the negotiations, the ICT Working Group did not object to any of the four equity models presented by the multi-nationals at the most recent Group of 10 meeting held on July 7. With regard to those MNCs claiming to have a corporate global policy preventing the transfer of equity, the Working Group is demanding the following stipulations: a) the policy must be global; b) the policy must not have been created to avoid Black Economic Empowerment (BEE); c) there is no precedent in any other country of the company transferring equity; and d) the policy existed prior to BEE policy. ¶6. (C) Once the ICT Working Group reviews the barriers and equity models, MNC negotiators plan to press for a "balanced scorecard." In terms of BEE policy, a "scorecard" is a generic measurement of five different types of empowerment activity. A "balanced scorecard" would allow companies to achieve empowerment status (i.e., an acceptable overall score) by scoring enough points in the other areas to compensate for few or no points in the equity ownership category. MNCs are prepared to ask senior South African government officials to intervene in the process if negotiations fail to produce an acceptable solution. ¶7. (C) Several U.S. multi-nationals question whether the implementation of BEE will be commercially viable. These companies are privately considering exit strategies such as setting up distributorships in South Africa or relocating their operations to neighboring countries, e.g., Botswana, if BEE policy proves to be too costly for the continued operation of their companies in South Africa. HUME