SOUTH AFRICA: 2006 INVESTMENT CLIMATE

UNCLAS SECTION 01 OF 13 PRETORIA 000171

SIPDIS

DEPT FOR AF/S, AF/EPS, EB/IFD/OIA/NHATCHER
USDOC FOR 4510/ITA/MAC/AME/OA/JDIEMOND, SMATHEWS
TREASURY FOR OAISA/BCUSHMAN, DBRESNICK
DEPT PASS USTR FOR EDUNLOP, PCOLEMAN, WJACKSON

SIPDIS

E.O. 12958: N/A
TAGS: EINV EFIN ETRD ELAB OPIC USTR PGOV SF
SUBJECT: SOUTH AFRICA: 2006 INVESTMENT CLIMATE
STATEMENT

REF: (A) 05 STATE 201904 (B) 05 PRETORIA 0226


1. (U) In response to Ref A, this cable presents post's
2006 Investment Climate Statement for South Africa.
This is also Chapter 6 of the 2006 Country Commercial
Guide for South Africa.


2. (U) BEGIN TEXT

Chapter 6 Investment Climate Statement FY 2006

6.1 Openness to Foreign Investment

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

Over the past decade, macroeconomic management has been
strong, resulting in a strengthened rand and a
consistently positive rate of economic growth. Since
1994, the government has sought to liberalize trade and
enhance international competitiveness by lowering
tariffs, abolishing most import controls, undertaking
some privatization, and reforming the regulatory
environment. The government would have liked to have
experienced more foreign direct investment during this
time, but it did not materialize. Several large
acquisitions in the banking and telecommunications
sectors promise to change this for 2006 and beyond, but
are not likely to add much to the government's primary
goal of increasing employment. In January 2005,
Moody's assigned South Africa a sovereign debt rating
of Baa1, three steps into investment grade. Standard
and Poor's and Fitch also rank South Africa at
investment grade.

To alleviate very high unemployment (26.5%),the
government has focused on quickening the pace of
economic growth and job creation. Given steady
domestic investment and the relative lack of foreign
direct investment, the government has become convinced
that the public sector must take the lead by investing
in the nation's deteriorating infrastructure. State
owned enterprises plan to invest more than $25 billion,
mainly on transportation infrastructure and energy,
over the next three years. Other key elements of the
government's new Accelerated and Shared Growth
Initiative (ASGI),to be unveiled in February 2006,
include labor market reform, improved delivery of
public services, skills development, a revamped
industrial policy, and support to small business.

A 2005 survey of South African business sponsored by
the World Bank and the Department of Trade and Industry
queried domestic and foreign firms about South Africa's
investment climate. Constraints most often mentioned
were the lack of skilled labor, the strong rand
limiting exports, labor relations, and crime. A 2005
survey conducted by the American Chamber of Commerce in
South Africa re-enforced these views. While supporting
the need for affirmative action, most foreign investors
acknowledge that the lack of clarity surrounding the
application of Black Economic Empowerment has had a
dampening effect on their plans to further invest in
South Africa.

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Black Economic Empowerment has been at the center of
business-government relations for the past several
years. In January 2004, President Mbeki signed into
law the Broad-Based Black Economic Empowerment Act of
2003, the legislation enacting the Black Economic
Empowerment (BEE) strategy, a program to increase the
participation in the economy of previously
disadvantaged South Africans. The Act directed the
Minister of Trade and Industry to develop a national
strategy for BEE, issue implementing guidelines in the
form of Codes of Good Practice, encourage the
development of industry specific BEE charters, and to
establish a National BEE Advisory Council to review
progress on BEE. While firms are not legally required
to meet BEE criteria, in practice they are less
competitive if they do not.

On November 1, 2005, the Department of Trade and
Industry released the final version of the "Framework
for Measurement" and the first two "Codes of Good
Practice." The first two Codes of Good Practice deal
with how firms can comply with targets for BEE equity
ownership and BEE management. The Framework identified
seven criteria to be measured by means of a scorecard
with specific targets and scoring rules. These
included the percentage to which blacks own, manage,
and work in an enterprise as well as targets for
training black South Africans, purchasing supplies from
BEE compliant firms, and assisting the development of
black-owned business.

All firms must have their BEE compliance audited
annually by an accredited verification agency, and be
assigned a BEE compliance status based upon its BEE
performance. A firm's BEE status will factor into the
award of government contracts, and contributes to the
BEE compliance status of a firm's customers.

On December 20 2005, DTI released drafts of the
remaining codes for public comment. These codes deal
with employment equity, skills development, enterprise
development, preferential procurement, small and medium
sized enterprises, as well as guidelines on the
transfer of equity to BEE firms/individuals for
multinationals. Only after all the Codes of Good
Practice are in final form will the Minister of Trade
and Industry promulgate them together in the government
Gazette according to Section 9(1) of the BEE Act 53 of

2003. BEE Codes of Good Practice and other pertinent
BEE legislation may be found on DTI's website:
www.dti.gov.za.

Poor or unclear regulations in key sectors, such as
telecommunications, has sometimes acted as a
disincentive to investment. In instances where the
regulator is weak and unable to enforce its own
regulations, foreign firms may find themselves at a
disadvantage to domestic companies. Costs associated
with pursuing legal action to resolve disputes can cut
into the bottom line.

Following national elections in April 2004, the
government unveiled plans to restructure most remaining
state owned enterprises rather than proceed with plans
for privatization. Nevertheless, in the short to
medium-term, the government expects to sell a number of
non-core businesses owned by Transnet (transportation),
such as the Airports Company South Africa (ACSA),which
manages South Africa's nine principal airports.
Transnet also expects to enter into a concession for
the operation of a container terminal at the Port of
Durban. The planned privatization of smaller
parastatals, such as Sentech (radio transmission),
Safcol (forestry) and, in the case of Denel (Defense),
a hoped-for partial buy-in by foreign suitors may also
afford opportunities for foreign participation in the
medium-term.

6.2 Conversion and Transfer Policies


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

Foreign investors may purchase local securities without
restriction. To facilitate repatriation of capital and
profits, foreign investors should make sure that an
authorized dealer endorses their share certificates as
"non-resident." Foreign investors should also be sure
to maintain an accurate record of investment.

For South African residents and companies, the
government has made significant progress in
liberalizing the foreign exchange regime. Since 2004,
South African companies may invest in other countries
without restriction (although SARB
approval/notification is still required) and South
African individuals may freely invest in foreign firms
listed on South African stock exchanges. Individual
South African taxpayers in good standing may invest up
to R750,000 (app. $115,000) in other countries. In
October 2005, the government announced that South
African banks would be able to commit up to 40 percent
of their domestic capital in other countries, but only
20 percent outside Africa. In addition, mutual and
other investment funds may now invest up to 25 percent
of their retail assets in other countries. Pension
plans and insurance funds may invest 15 percent of
their retail assets in other countries.

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

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: www.reservebank.co.za

6.3 Expropriation and Compensation

Under the Expropriation Act of 1975 and the
Expropriation Act Amendment of 1992, the government is
entitled to expropriate private property for reasons of
public necessity or utility. The decision is an
administrative one. Compensation should be the price
that the property would have realized in an open market
transaction. There is no record, dating back to 1924,
of an expropriation or nationalization of an American
investment in South Africa.

Racially discriminatory property laws during apartheid
resulted in highly disproportionate patterns of land
ownership in South Africa. As a result, the post
apartheid government has committed to redistributing 30
percent of the country's farm land to black South
Africans by 2014. Thus far, only 4 percent of total
farm land has been redistributed under the government's
land reform program. The government has embarked on
market-based land reform, but wants to speed
redistribution. In 2005, the government indicated that
it was willing to use its power to expropriate land
should farm owners refuse court approved purchase

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prices. Shortly thereafter, the government initiated
proceedings to expropriate a white owned farm after the
owner refused the court approved purchase price. The
owner has appealed to the courts.

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 recognizes the International
Chamber of Commerce, which supervises the resolution of
transnational disputes. South Africa applies its
commercial and bankruptcy laws with consistency and has
an independent, objective court system for enforcing
property and contractual rights.

6.5 Performance Requirements and Incentives

DTI offers six investment incentives for manufacturing.
Foreign Investment Grants may provide up to 15 percent
of the value of new machinery and equipment to a
maximum of R3 million (app. $500,000) per entity for
relocation to South Africa. Industrial Development
Zones provide duty-free import of production-related
materials and zero VAT on materials sourced from South
Africa, along with the right to sell into South Africa
upon payment of normal imported duties on finished
goods. The Skills Support Program provides up to 50
percent of training costs and 30 percent of worker
salaries for a maximum of three years to encourage the
introduction of advanced skills. The Strategic
Investment Project program offers a tax allowance of up
to 100 percent (a maximum allowance of R600 million
(app. $100 million) per project) on the cost of
buildings, plant and machinery, for strategic
investments of at least R50 million (app. $85 million).
The Critical Infrastructure Facility supplements funds
up to 30 percent of the development costs of qualifying
infrastructure projects. The Small and Medium
Enterprise Development Program offers a tax free grant
of up to R3.05 million (app. $500,000) to manufacturers
with assets less than R100 million (app. $15 million)
for a maximum of three years. The first two years the
grant is based on the investment in operating assets
and the third year on the level of employment
generated.

In July 2004, DTI announced an incentive to encourage
investment, both foreign and domestic, in the local
film industry. It established the Film and Television
Production Rebate Scheme that allows eligible
applicants to receive a rebate of 15 percent of the
production expenditures for foreign productions and up
to 25 percent for qualifying South African productions.
Film projects must have begun after April 1, 2004 and
must reach a threshold of R25 million (app. $4 million)
to qualify for the rebate. Other requirements include
50 percent completion of the principal photography in
South Africa and a minimum of four weeks photography
time. Eligible productions include movies, tele-
movies, television series, and documentaries. The
maximum rebate for any project will be R10 million
(app. $1.5 million). Details on the entire scheme are
available at the DTI website at www.dti.gov.za.

To encourage investors to establish or relocate
industry to areas throughout South Africa, the
country's various provinces have development agencies
that offer incentives. These vary from province to
province and may include reduced interest rates,
reduced rental cost for land and buildings, cash grants
for the relocation of plant and employees, reduced
rates for basic facilities, rail age and other
transport rebates, and assistance in the provision of
housing.

The Industrial Development Corporation, a self-
financing, state-owned development finance institution
that reports to DTI, provides equity and loan financing

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to support investment in target sectors. It also
provides credit facilities for South African exporters.

Several government-supported bodies provide technical
assistance to industry. The Council for Scientific and
Industrial Research provides multi-disciplinary
research and development for industrial application.
Technifin is a government-owned corporation which
finances the commercialization of new technology and
products. MINTEK develops mining and mineral
processing technology for company application. The
Council for Geoscience undertakes geological surveys
and services related to minerals exploration.

Under the National Industrial Participation Program,
foreign companies winning large tenders must invest at
least 30 percent of the value of the imported content
of the tender. The Department of Defense and the
Armaments Corporation of South Africa impose an
obligation of up to 50 percent on all defense purchases
exceeding US$2 million, and an obligation of at least
50 percent on purchases exceeding US$10 million.

The government initiated the Motor Industry Development
Program (MIDP) in 1995 to restructure the South African
automotive industry over a period of twelve years. The
program was deigned to encourage local manufacturing by
means of a duty rebate scheme on imported vehicles and
component parts, to be phased out over the life of the
program. In 2002, the Minister of Trade and Industry
extended the program from 2007 to 2012. Import duties
and duty rebates will continue to decline over this
extended period. The import duty on built-up light
vehicles will fall to 25 percent and the import duty on
original equipment components will fall to 20 percent by

2012.

6.6 Right to Private Ownership and Establishment

The right to private property is protected under South
African law. All foreign and domestic private entities
may freely establish, acquire, and dispose of
commercial interests. The securities regulation code
requires that an offer to minority shareholders be made
when 30 percent shareholding has been acquired in a
public company that has at least 10 shareholders and
net equity in excess of R5 million.

State owned enterprises dominate a number of key
sectors in South Africa. Eskom supplies 94 percent of
South Africa's electricity. Transnet operates the bulk
of the nation's rail, port, and air transportation.
The South African Post Office is a legislated monopoly.
Telkom, still 37 percent owned by government, is the
sole fixed-line telephone operator (a second operator
was licensed in December 2005).

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

6.7 Protection of Property Rights

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

Owners of patents and trademarks may license them
locally, but when a patent license entails the payment
of royalties to a non-resident licensor, DTI must
approve the royalty agreement. Patents are granted for
twenty years - usually with no option to renew.
Trademarks are valid for an initial period of ten years
and thereafter renewable for ten-year periods. The

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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.
For consumer goods, a royalty of up to four percent of
factory selling price is standard. For intermediate
and finished capital goods, generally a royalty of up
to six percent will be approved.

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

The International Intellectual Property Alliance
reported an increase in border seizures of pirated
goods, as well as increased police raids in the optical
disc market during 2005. A local watchdog, the South
African Federation Against Copyright Theft 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 2005,
demonstrating the government's commitment to IPR
enforcement.

6.8 Transparency of the Regulatory System

In general, the Companies Act of 1973 provides for
transparent regulations concerning the establishment
and operation of businesses. Under the Act, for-profit
businesses employing more than 20 persons must register
as a company within 21 days. The same rules apply to
foreign companies, with the exception that foreign
companies may elect to operate as an "external company"
(with no limit on legal liabilities). In general,
businesses must also register with the local Regional
Services Council, Department of Labor, Workman's
Compensation Commissioner, the appropriate industry
council, and the South African Revenue Service. In
addition, all businesses must obtain an operating
license from local authorities. The validity of an
operating license is indefinite unless a business is
sold or relocated. Forms to be filled out by investors
are straightforward. The process takes six months on
average, but can be done in one month through Trade and
Investment South Africa, a division of DTI.

Virtually all business activities are open to foreign
investors. The government does not prohibit or
officially discourage a foreign-owned business from
locating in a particular region of the country.
Restrictions that apply to a particular industry apply
to both domestic and international investors.
Exceptions exist in the areas of banking and defense.
For example, a branch of a foreign bank may be required
to employ a certain number of South Africans and
locally maintain a minimum capital base to obtain a
banking license. In addition, a foreign company must
register as an external company before immovable
property can be registered in their names.

6.9 Efficient Capital Markets and Portfolio
Investment

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South Africa's banks are well-capitalized and comply
with international banking standards. Non-performing
loans as a percentage of total loans and advances was
1.6 percent as of June 2005. Six of the thirty-five
banks in South Africa are foreign owned and fifteen are
branches of foreign banks. The "Big Four" (Standard,
ABSA, First Rand, and Nedcor) dominate the sector,
accounting for almost 85 percent of the country's
banking assets, which total over $240 billion. In
2005, the government approved Barclays' acquisition of
ABSA, the first of the Big Four to become foreign
owned. (Technically it is the second. Old Mutual,
which moved its primary listing from the Johannesburg
to the London Stock Exchange in 1999, owns Nedcor.)

The SARB regulates the sector according to the Bank Act
of 1990. There are three alternatives for foreign
banks to establish local operations, all of which
require SARB approval: 1) a separate company, 2) a
branch, or 3) a representative office. The criteria
for the registration of a bank are the same as for
domestic banks. Foreign banks, however, 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 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,
pension funds, unit trusts (i.e., mutual funds),
participation bond schemes, portfolio management, and
the financial markets. The JSE Securities Exchange is
the sixteenth largest exchange measured by market
capitalization in the world. As of November 2005,
market capitalization stood at $514 billion with a
total of 364 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 increasingly private corporations. More
information on financial markets may be obtained from
the JSE Securities Exchange SA (website: www.jse.co.za)
and the Bond Exchange (website:
www.bondexchange.co.za).

Foreign investors deemed "affected persons" must obtain
SARB approval to borrow amounts greater than R20,000
(app. $3,100). "Affected persons" are defined as
companies or other bodies in which (1) 75 percent 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 percent 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 South Africa may provide credit to a non-
resident or "affected person" without an exchange
control exemption. Non-residents and "affected
persons," however, may borrow up to 100 percent 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.

6.10 Political Violence

Political violence is no longer a serious issue in
South Africa, but criminal violence remains high.
National and provincial governments have pursued a
number of programs to control criminal violence and
levels of most violent crimes have stabilized or fallen
in recent years.

6.11 Corruption


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South African law provides for prosecution of
government officials who solicit or accept bribes.
Penalties for offering or accepting bribes include
criminal prosecution, fines, dismissal (for government
employees),and deportation (for foreign citizens).
The South African Prevention and Combating of Corrupt
Activities Act of 2004 clarified what should be
considered as corruption and allows for the
investigation and seizure of "unexplained wealth." The
act also obliges public officials to report corrupt
activities, prescribes strict penalties, including the
possibility of life imprisonment, and tasks the
National Treasury to create a register of corrupt
individuals and firms that will not be allowed to
submit bids on government tenders. One shortcoming of
the Act is the provision of protection for
whistleblowers.

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, has 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.

At least ten agencies are engaged in fighting
corruption. Some, like the Public Service Commission
(PSC),Office of the Public Protector and Office of the
Auditor-General are constitutionally mandated. The
South African Police Anti-Corruption Unit and the
Directorate for Special Operations (popularly known as
the Scorpions) have dedicated units to combat
corruption. In a much celebrated case, the National
Prosecuting Authority indicted former Deputy President
Jacob Zuma on charges of corruption in 2005. The trial
is set to take place in 2006.

According to the 2004 Institute for Security Studies'
"National Victims of Crime Survey," which drew from a
nationally representative sampling of South African
households, petty corruption - mainly bribery - was the
second-most experienced crime in South Africa after
burglary. According to Transparency International's 2005
Corruption Perceptions Index, South Africa ranked 46 out
of 158 and was third least corrupt in Africa.

South Africa is not a signatory of the OECD Convention
on Combating Bribery, but is a signatory of the UN
Convention against Corruption. Transparency
International maintains an office in South Africa.

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 went into force
between South Africa and the European Union on January
1, 2000, but it does not contain an investment chapter.

In 2003, the United States initiated free trade
negotiations with the Southern African Customs Union
(including South Africa, Botswana, Lesotho, Namibia,
and Swaziland) with the goal of concluding an agreement
that would include a chapter on investment. Seven
negotiating rounds have been held, but much work
remains.

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

6.13 OPIC and Other Investment Insurance Programs


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In 1993, South Africa signed an investment incentive
agreement with the United States to facilitate Overseas
Private Investment Corporation (OPIC) programs. To
date, OPIC has invested in a number of investment funds
supporting sub-Saharan Africa development, including
the Africa Growth Fund ($25 million),the Modern Africa
Growth and Investment Fund ($105 million),and the ZM
Investment Fund ($120 million). OPIC also established
the $350 million Sub-Saharan Africa Infrastructure Fund
(SAIF) to fund infrastructure projects in sub-Saharan
Africa. OPIC helped the National Urban Reconstruction
and Housing Agency (NURCHA) to establish a $31 million
scheme to lend to small contractors for the
construction of affordable houses. In 2004, OPIC
entered into an agreement with the Homeloan Guarantee
Company (HLGC) to fund low-income home loans for HIV-
positive South Africans. The pilot program for this
project was initiated in 2005. Additional information
on OPIC programs that involve South Africa may be found
on OPIC's website: www.opic.gov.

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

6.14 Labor

The right to strike is protected under South African
labor law. Although labor militancy has declined since
1994, the number of work days lost to strikes has risen
to 2.2 million as of September 2005. As of 2003, total
trade union membership was approximately 3.3 million
persons, or roughly 42 percent of the economically active
population employed in the formal sector. Most union
members belong to affiliates 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 of the federations, is
allied with the African National Congress (ANC) and the
South African Communist Party (SACP),it often opposes
the government on issues of economic and health policy.
COSATU is opposed to efforts to privatize government
services and state-owned corporations.

According the March 2005 Labor Force Survey (LFS),the
official unemployment rate is 26.5 percent. This rate
uses the International Labor Organization (ILO)
definition of unemployment, which excludes persons who
have not actively sought employment during the previous
four weeks. To help counter unemployment and contribute
to economic growth, the government has shifted
substantial resources to skills development, and
undertaken a growth and employment policy.

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 include domestic
workers, farm workers, taxi-drivers, and retail
employees. In addition, the Minister can apply
collective bargaining agreements to firms that did not
participate in negotiations.

Since 1994, the South African Government has systemically
sought to remove all vestiges of apartheid labor
legislation. In its place, the government has sought to
install a labor market characterized by employment
security, reasonable wages, and decent working
conditions. Under the aegis of the National Economic
Development and Labor Council (NEDLAC),government,
business, and organized labor negotiated all labor laws,
with the exception of laws pertaining to occupational
health and safety. NEDLAC negotiations placed a high
value on worker rights and collective bargaining.

Major labor legislation includes the following:

-- The Labor Relations Act, in effect since November
1996, enshrines the right of workers to strike and of
management to lock out workers. The Act created the
Commission on Conciliation, Mediation, and Arbitration

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(CCMA) which can conciliate, mediate, and arbitrate in
cases of labor dispute, required to certify an impasse in
bargaining council negotiation before a strike can be
legally called. The CCMA currently has a caseload in
excess of what was anticipated.

-- The Basic Conditions of Employment Act, implemented in
December 1998, establishes a 45-hour workweek as well as
minimum standards for overtime pay, annual leave, and
notice of termination.

-- The Employment Equity Act prohibits unfair employment
discrimination and requires large and medium-sized
employers to prepare affirmative action plans to ensure
that black African, women, and disabled persons are
adequately represented on the workforce.

-- 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. For the mining industry, the
Inspector of Mines provides regulatory oversight under
the Mine Health and Safety Act.

-- The Skills Development Act imposes a levy on employers
equal to one percent of the payroll that is to be used
for training programs devised by industry-specific
training authorities. Employers who provide job skills
training can claim back much of their contribution from
government.

Companies have complained about the introduction,
through a regulation in early 2003, of a two percent
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.

Despite amendments to some of the above labor laws passed
in 2002, business argues that over regulation of the
labor market has constrained employment and contributed
to the rise in unemployment. On the other side, trade
unions argue that employers evade labor legislation
through the use of labor brokers who supply casual
workers. Other areas of contention revolve around the
application of wage structures to all firms in an
industry, whether or not firms participated in wage
negotiations, and complex requirements and appeal
procedures for the dismissal of workers.

6.15 Foreign Trade Zones/Free Ports

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

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6.16 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
relies mostly on the SARB. SARB statistics conform to
the IMF definition of FDI (i.e., FDI is generally
defined as ownership of at least 10 percent of the
voting rights in an organization by a foreign resident
or several affiliated foreign residents, including
equity capital, reinvested earnings, and long-term loan
capital.) and represent actual investment, excluding
announced but not completed "intended" investment.
However, the SARB does not provide country-specific
figures that distinguish between actual investment
flows and changes in investment stocks caused by asset
swaps, exchange rate adjustments, and mergers and
acquisitions. This makes it difficult to track the
United States' and other countries' FDI position in
South Africa on an annual basis.

Because SARB statistics only provide an annual total
for all the countries' flows combined, observers also
often consult more updated information obtained from
the South Africa-based firm "Business Map" (BM). The
latter offers fee-based services for a wide range of
investor-related data and analysis (website:
www.businessmap.co.za).

The following FDI statistics were drawn from the SARB's
December 2005 Quarterly Bulletin. The conversion
exchange rate used was that of the average for each
year cited.

Table A: Average Exchange Rates

2000 2001 2002 2003 2004
Rand/US$ 6.94 8.83 10.52 7.56 6.45

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

2000 2001 2002 2003 2004
Rand (billion) 328.86 370.70 255.84 303.55 355.09
US$ (billion) 47.42 41.96 24.33 40.14 55.05

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

2000 2001 2002 2003 2004
Rand (billion) 244.65 213.18 189.91 180.51 216.66
US$ (billion) 35.28 24.13 18.06 23.87 33.59

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

2000 2001 2002 2003 2004
GDP 922.1 1,020.0 1,168.8 1,257.0 1,386.7
FDI (%) 35.7 36.3 21.9 24.1 25.6

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

REGION/COUNTRY RAND RAND US$ US$
2003 2004 2003 2004
EUROPE - Total 245.8 301.0 32.5 46.7
UNITED KINGDOM 188.4 228.0 24.9 35.3
GERMANY 22.9 25.8 3.0 4.0
SWITZERLAND 6.1 6.4 0.8 1.0
NETHERLANDS 16.1 16.2 2.1 2.5
FRANCE 4.1 6.5 0.5 1.0
ITALY 2.0 2.1 0.3 0.3
N&S AMERICA (total) 32.1 34.1 4.2 5.3
USA 29.5 31.2 3.9 4.8
AFRICA (total) 4.7 4.2 0.6 0.7
ASIA (total) 20.5 15.2 2.7 2.4
MALAYSIA 10.0 2.4 1.3 0.4
JAPAN 7.1 7.4 0.9 1.1

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OCEANIA (total) 0.4 0.5 0.1 0.1

-------------- --------------
TOTAL 303.4 355.1 40.1 55.1
-------------- --------------

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

REGION/COUNTRY RAND RAND US$ US$
2003 2004 2003 2004
EUROPE - Total 137.4 165.5 18.2 25.7
UNITED KINGDOM 44.1 65.0 5.8 10.1
LUXEMBURG 43.7 51.1 5.8 7.9
AUSTRIA 11.2 16.7 1.5 2.6
OTHER 38.4 2.2 5.1 0.4
N&S AMERICA (total) 17.0 17.5 2.3 2.7
USA 14.9 15.3 2.0 2.4
AFRICA (total) 15.8 23.6 2.1 3.7
ASIA (total) 3.5 3.2 0.5 0.5
OCEANIA (total) 6.8 6.8 0.9 1.1
-------------- --------------
TOTAL 180.5 216.7 23.9 33.6
-------------- --------------

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

INDUSTRY RAND RAND US$ US$
2003 2004 2003 2004
Agriculture,
Forestry & Fishing 0.5 0.7 0.1 0.1
Mining 103.1 111.6 13.6 17.3
Manufacturing 75.4 111.4 10.0 17.3
Construction 1.9 2.0 0.3 0.3
Trade, Catering, 13.4 14.5 1.8 2.3
& Accommodation
Transport, Storage, 22.0 14.1 2.9 2.2
& Communication
Finance, Insurance, 86.6 100.2 11.5 15.5
Real Estate &
Business Services
Social services 0.4 0.5 0.1 0.1
-------------- --------------
TOTAL 303.4 355.1 40.1 55.1
-------------- --------------

Table H: FDI Flows into South Africa:

Investment by foreigners in undertakings in South Africa
in which they have at least 10% of the voting rights:

2000 6.2
2001* 58.4
2002 8.0
2003 5.6
2004 5.2

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

Table I: FDI Flows out of South Africa:

Investment by South Africans in undertakings abroad in
which they have at least 10% of the voting rights:

2000 1.9
2001 -27.4 (inflow - decrease in investment abroad)
2002 -4.2 (inflow - decrease of investment abroad)
2003 4.3
2004 8.7

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

Since 1994 many foreign firms have opened or re-opened
offices in South Africa. There are an estimated 700
American companies (including subsidiaries, joint
ventures, local partners, agents, franchises, and

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representative offices) 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. The bulk
of the population's food needs are supplied locally. In
certain instances, South African food and beverage
companies have become global players. Major
international agro-processing companies with a presence
in South Africa include Unilever, Nestle, Coca-Cola,
Danone, Parmalat, Kellogg, HJ Heinz, Cadbury-Schweppes,
Virgin Cola, McCain Foods of Canada, Pillsbury.

The chemical industry is the largest manufacturing sector
in the South African economy, accounting for 5 percent of
GDP. The country is a world leader in the manufacture of
synthetic fuel from coal. In addition to Sasol and
PetroSA Fischer-Tropsch based synthetic fuel operations,
four oil refineries dominate the petroleum and
petrochemical industry. The rest of the chemical
manufacturing sector consists mainly of AECI, Sentrachem,
and fertilizer plants.

Four major commercial banking groups that provide retail
and investment banking services dominate the South
African banking industry. The European, Malaysian, and
U.S. banks with banking licenses have so far concentrated
on corporate rather than retail banking. Foreign banks
have gained market share by offering competitive lending
rates.

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

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
U.K. - Billiton; Lonrho Plc, SA Breweries,
Anglo American, Barclays, Vodafone,
British Petroleum, Old Mutual
U.S. - Caltex; Coca Cola; Dow Chemicals;
General Motors, Ford
Saudi Arabia - Oger

These companies have invested in excess of R1 billion in
South Africa since 1994.

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

END TEXT

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