2008 INVESTMENT CLIMATE STATEMENT - SOUTH AFRICA

UNCLAS SECTION 01 OF 11 PRETORIA 000077 SIPDIS DEPT FOR EB/IFD/OIA; USTR FOR COLEMAN SIPDIS E.O. 12958: N/A TAGS: ECON EFIN EINV ETRD ELAB PGOV OPIC KTDB USTR SF SUBJECT: 2008 INVESTMENT CLIMATE STATEMENT - SOUTH AFRICA REF: 07 State 158802 ¶1. (U) In response to Ref A, this cable presents post's 2008 Investment Climate Statement for South Africa. This is also Chapter 6 of the 2008 Country Commercial Guide for South Africa. ¶2. (U) BEGIN TEXT Chapter 6 Investment Climate Statement FY 2008 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 obtain 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 to foreign investors. The agency concentrates on sectors in 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: http://www.thedti.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. While this has resulted in several large acquisitions in banking, telecommunications, tourism, and other sectors, foreign direct investment has fallen short of the government's expectations. In January 2005, Moody's assigned South Africa a sovereign debt rating of Baa1, three steps into investment grade, and raised the outlook from stable to positive in June 2007. Standard and Poor's and Fitch also rank South Africa at investment grade. To alleviate high unemployment (25.5 percent as of March 2007),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 is convinced that the public sector must take the lead by investing in the nation's inadequate infrastructure. Under the government's new Accelerated and Shared Growth Initiative of South Africa (ASGISA),unveiled in 2006, state-owned enterprises plan to invest more than $50 billion over the next four years, mainly on transportation infrastructure, telecommunication networks, and energy. Other key elements of ASGISA include labor market reform, improved delivery of public services, skills development, a revamped industrial policy, and support to small business. In August 2007, the DTI launched its National Industrial Policy Framework, and accompanying Industrial Policy Action Plan, to promote a more labor-absorbing and broader-based industrialization path in four lead sectors: capital or transport equipment; automotive; chemical, plastic fabrication and pharmaceuticals; and forestry, paper and furniture. Business process outsourcing, clothing and textiles, tourism, and biofuels were also identified Qclothing and textiles, tourism, and biofuels were also identified for immediate attention. The Policy Framework anticipates initiatives in the form of tariff reductions, increased industrial financing, and additional incentives for investors. A 2005 survey of South African businesses sponsored by the World Bank and DTI 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 reinforced these views. In January 2004, President Mbeki signed 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 historically 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 establish a National BEE Advisory Council to review progress on BEE targets. While firms are not legally required to meet BEE criteria, they are less competitive for government tenders if they do not. On December 6, 2006 cabinet approved Codes of Good Practice specifying BEE requirements. These codes deal with employment equity, skills development, enterprise development, preferential PRETORIA 00000077 002 OF 011 procurement, and small and medium-sized enterprises. They also permit multinational corporations to score equity ownership "points" through the use of mechanisms not involving the transfer of equity if these mechanisms are approved by DTI and the multinationals have a global corporate policy of owning 100 percent of the equity in their subsidiaries. The American Chamber of Commerce and many individual U.S. companies had pressed for the right to use such "equity equivalent" mechanisms. These Codes were published in the Government Gazette in February 2007. A firm's BEE "score" will be considered by government departments when awarding contracts. The BEE Codes of Good Practice and other pertinent BEE legislation may be found on DTI's website: http://www.thedti.gov.za/. Following national elections in April 2004, the government unveiled plans to restructure most of the remaining state-owned enterprises rather than proceed with plans for privatization. Transnet (transportation) is focusing on core sectors that support its freight transport and logistic business. Assets or businesses that are not part of this strategy are in the process of being sold to the private sector or being transferred back to the government. SA Express, Transnet's remaining aviation interest, will be transferred to the Department of Pubic Enterprises, Transtel Telecom was sold to Neotel, and the disposal of Luxrail (The Blue Train),Autopax, a passenger bus operation, and the IT service subsidiary arivia.kom are underway. The Department of Minerals and Energy (DME) has tendered and awarded a preferred bidder status to AES for a 1000 MW power project. Other opportunities for private investment in the power sector are likely to follow with the DME's announced policy to grant up to 30 percent of new energy projects to the private sector. The planned privatization of smaller parastatals, such as Safcol (forestry) and, in the case of Denel (Defense),with partial buy-ins by foreign suitors of Denel subsidiaries, also afforded opportunities for foreign investment. 6.2 Conversion and Transfer Policies The Exchange Control Department at the South African Reserve Bank (SARB) administers foreign exchange policy. An authorized foreign exchange dealer, normally one of the large commercial banks, must handle international commercial transactions and report every purchase of foreign exchange, irrespective of the amount, that is received by South African residents or companies. As a rule, there are only limited delays in the conversion and transfer of funds. Non-residents may freely transfer capital into and out of South Africa, although transactions must be reported to authorities. Non-residents may purchase local securities without restriction. To facilitate repatriation of capital and profits, foreign investors should make sure that an authorized dealer endorses their share certificates as "non-resident." Foreign investors should also be sure to maintain an accurate record of investment. South African subsidiaries and branches of foreign companies are considered to be South African residents, and, are subject to exchange control by the SARB. South African companies may, as a general rule, freely remit the following to non-residents: repayment of capital investments; dividends and branch profits (provided such transfers are made out of trading profits and are Q(provided such transfers are made out of trading profits and are financed without resorting to excessive local borrowing); interest payments (provided the rate is reasonable); and payment of royalties or similar fees for the use of know-how, patents, designs, trademarks or similar property (subject to prior approval of SARB authorities). 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 in total (approximately $107,000) 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. SARB approval is also required for the sale of all forms of South African-owned intellectual property rights (IPR). Approval is generally granted by SARB if the transaction occurs at arms length PRETORIA 00000077 003 OF 011 and at fair market value. IPR owned by non-residents is not subject to any restrictions in terms of repatriation of profits, royalties, or proceeds from sales. Further questions on exchange control may be addressed to: South African Reserve Bank Exchange Control Department P.O. Box 427, Pretoria, 0001 Tel: +27 (0) 12 313-3911; Fax: +27 (0) 12 313-3197 Website: http://www.reservebank.co.za/ 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 a U.S. 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. As of 2006, only 4.1 percent of total farm land had been redistributed under the government's land reform program. The government employs market-based land reform, but wants to speed redistribution. In 2005, the government indicated that it was willing to use more proactive land acquisition strategies to accelerate redistribution. In several restitution cases, the government has initiated proceedings to expropriate white-owned farms after courts ruled that the land had been seized from blacks during apartheid and the owners subsequently refused court-approved purchase prices. In most of these cases, the government and owners have reached agreement prior to any final expropriation actions. However, in March 2007, the government took possession of a farm in Northern Cape Province after negotiations collapsed. As required by South African law, the government paid the previous owners the fair market value for the land, which had been established by independent auditors. This marked the first time the government has exercised its expropriation power in a restitution or redistribution case. 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 World Bank's International Center for the Settlement of Investment Disputes. South Africa recognizes the International Chamber of Commerce, which supervises the resolution of transnational disputes. South Africa applies its commercial and bankruptcy laws with consistency and has an independent, objective court system for enforcing property and contractual rights. 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 (approximately $430,000) 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 import duties on finished goods. The Skills Support Program provides Qimport 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 development of advanced skills. The Strategic Investment Project program offers a tax allowance of up to 100 percent (a maximum allowance of R600 million (approximately $86 million) per project) on the cost of buildings, plant and machinery, for strategic investments of at least R500 million (approximately $70 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 (approximately $435,000) to manufacturers with assets of less than R100 million (approximately $14 million) for a maximum of three years. The first two years of 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 (approximate $3.6 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 PRETORIA 00000077 004 OF 011 be R10 million (approximate $1.4 million). Details on the entire program are available at the DTI website at http://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 costs for leasing land and buildings, cash grants for the relocation of plant and employees, reduced rates for basic facilities, railage 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 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 (NIPP),foreign companies winning large government tenders exceeding $10 million must invest at least 30 percent of the value of the imported content of the tender in South Africa. 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 designed 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. The DTI has indicated that the MIDP would be sustained beyond 2012. In August 2007, the government launched its National Industrial Policy Framework with an accompanying Action Plan. As noted above in Section 6.1, the Policy Framework provides for import tariff reductions, tighter competition legislation, increased industrial financing, and an improved incentive scheme for investors in specific industrial sectors. 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 railways and ports. The South African Post Office is a legislated monopoly. Telkom, 37 QSouth African Post Office is a legislated monopoly. Telkom, 37 percent-owned by government, is the dominant fixed-line telephone operator. A second national operator, Neotel, began limited business-only operations in October 2006 and is 30 percent government owned. Neotel entered the business-to-business market in 2007 and plans to enter the residential market. InfraCo, a 100 percent government-owned broadband provider, was formed using the fibreoptic networks of Eskom and Transnet in December 2006 and approved for operations by Parliament in October 2007. 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 in recent years against state-owned enterprises that compete unfairly or otherwise abuse their dominant position. 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 PRETORIA 00000077 005 OF 011 thereafter renewable for ten-year periods. The holder of a patent or trademark must pay an annual fee to preserve ownership rights. All agreements relating to payment for the right to use know-how, patents, trademarks, copyrights, or other similar property are subject to approval by exchange control authorities in the South African Reserve Bank. For consumer goods, a royalty of up to four percent of the factory selling price is the standard approval. For intermediate and finished capital goods, 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 of 1997 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 and 2006. A local watchdog, the South African Federation Against Copyright Theft reported on its website (http://www.safact.co.za/) statistics on seizures of counterfeit DVDs as well as a growing number of successful criminal cases, including imposition of prison sentences, against pirates in 2007, 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, the Department of Labor, the 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 Qforeign-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 maintain a minimum local 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 South Africa's banks are well-capitalized and comply with international banking standards. Six of the 35 banks in South Africa are foreign-owned and 15 are branches of foreign banks. 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. As of early 2008, Standard is awaiting government approval of the sale of 20 percent of its equity to the International Commercial Bank of China. The South African Reserve Bank (SARB) regulates the sector according to the Bank Act of 1990. There are three alternatives for foreign banks to establish local operations, all of which require SARB approval: 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 South African Banking Association at the following website: PRETORIA 00000077 006 OF 011 http://www.banking.org.za/. The Financial Services Board (FSB) governs South Africa's non-bank financial services industry (see website: http://www.fsb.co.za/). The FSB regulates insurance companies, pension funds, unit trusts (i.e., mutual funds),participation bond schemes, portfolio management, and the financial markets. The JSE Securities Exchange SA (JSE) is the nineteenth largest exchange measured by market capitalization in the world. As of December 2007, market capitalization stood at $842 billion with a total of 456 firms listed. The Bond Exchange of South Africa (BESA) is licensed under the Financial Markets Control Act. Membership includes banks, insurers, investors, stockbrokers, and independent intermediaries. The exchange consists principally of bonds issued by government, state-owned enterprises, and private corporations. More information on financial markets may be obtained from the JSE (website: http://www.jse.co.za)and/ the Bond Exchange (website: http://www.bondexchange.co.za/). Foreign investors deemed "affected persons" must obtain SARB approval to borrow amounts greater than R20,000 (approximate $2,900). "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 in an attempt to control or stabilize the level of criminal violence. 6.11 Corruption 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 lack of 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 Qtransparency 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 National Prosecuting Authority's Directorate for Special Operations (popularly known as the Scorpions) have dedicated units to combat corruption. The Special Investigating Unit (SIU) under the Presidency investigates corruption in government departments and in the process has recently identified hundreds of civil servants alleged to have improperly received state housing subsidies. The SAG took administrative action to recover these subsidies. According to Transparency International's 2007 Corruption Perceptions Index, the perception of corruption in South Africa substantially improved, although the public perception of widespread official corruption, particularly in the police and the Department of Home Affairs, continued. South Africa 2007 Index ranking was 43 out of 179 countries and was the second 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 PRETORIA 00000077 007 OF 011 between South Africa and the European Union on January 1, 2000, but it does not contain an investment chapter. South Africa, as part of SACU, is currently in negotiations for trade agreements with Mercosur and India. The United States began free trade agreement (FTA) negotiations with the five Southern African Customs Union (SACU) countries (including South Africa, Botswana, Lesotho, Namibia, and Swaziland) in June 2003, but active negotiations were ended in April 2006. In lieu of a U.S.-SACU FTA, the United States and SACU agreed to negotiate a new type of agreement (called a Trade Investment and Development Cooperation Agreement or "TIDCA"). An agenda for the U.S.-SACU TIDCA will be defined in 2008. 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 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),which intends 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. Net proceeds from a $300 million investment pool will be used to purchase medication for HIV-positive South African homeowners holding HLGC guaranteed mortgages. Additional information on OPIC programs that involve South Africa may be found on OPIC's website: http://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. Labor militancy rose sharply in 2007, with over 12.6 million workdays lost to strikes over the first nine months of 2007, as inflation accelerated to 7 percent, and food price inflation hit 11.3 percent in August 2007. By comparison, only 2.9 million workdays were lost to strikes for all of 2006. As of March 2007, total trade union membership was approximately three million persons, or roughly 30 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 has opposed President Mbeki's policies on issues of economic and health policy. COSATU is also opposed to Qissues of economic and health policy. COSATU is also opposed to efforts to privatize government services and state-owned corporations. According to the March 2007 Labor Force Survey (LFS),the official unemployment rate was 25.5 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 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 PRETORIA 00000077 008 OF 011 workers. The Act created the Commission on Conciliation, Mediation, and Arbitration (CCMA) which can conciliate, mediate, and arbitrate in cases of labor dispute, and is required to certify an impasse in bargaining council negotiation before a strike can be legally called. The CCMA enjoys substantial popularity among workers and 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. It outlaws child labor. -- 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 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 import duties on finished goods. Expedited services and other logistical arrangements may be provided for small to medium-sized enterprises, or for new foreign direct investment. Co-funding for infrastructure development is available. There are no exemptions from other laws or Qdevelopment 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 operators may be public, private, or a combination of both. IDZs are currently located at Coega near Port Elizabeth, in East London, Richards Bay, and at Johannesburg International Airport. An IDZ in Mafikeng is expected to be approved by Cabinet in ¶2008. 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 PRETORIA 00000077 009 OF 011 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: http://www.businessmap.co.za/). The following FDI statistics were drawn from the SARB's December 2006 Quarterly Bulletin. The conversion exchange rate used was the average exchange rate for each year cited. Table A: Average Exchange Rates 2002 2003 2004 2005 2006 Rand/US$ 10.52 7.56 6.45 6.36 6.77 Table B: Year-end Stock of Foreign Direct Investment in South Africa 2002 2003 2004 2005 2006 Rand (billion) 255.84 303.55 355.09 489.32 611.72 US$ (billion) 24.33 40.14 55.05 76.94 90.36 Table C: Year-end Stock of South African Direct Investment Abroad 2002 2003 2004 2005 2006 Rand (billion) 189.91 180.51 216.66 232.93 354.25 US$ (billion) 18.06 23.87 33.59 36.62 52.33 Table D: GDP (in billion rands at current prices) and year-end FDI Stock as a percentage of GDP 2002 2003 2004 2005 2006 GDP 1,168.7 1,260.7 1,398.6 1,541.07 1,741.06 FDI(%) 21.9 24.1 25.4 31.8 35.1 Table E: Year-end stock of FDI in South Africa by region/country (billions) REGION/COUNTRY RAND RAND US$ US$ 2005 2006 2005 2006 EUROPE - Total 436.3 535.6 68.6 79.1 UNITED KINGDOM 350.5 440.3 55.1 65.0 GERMANY 29.9 34.1 4.7 5.0 NETHERLANDS 14.1 22.1 2.2 3.3 SWITZERLAND 10.6 12.3 1.7 1.8 FRANCE 7.7 9.2 1.2 1.4 ITALY 1.2 2.9 0.2 0.4 N&S AMERICA (total) 33.8 51.2 5.3 7.6 USA 31.2 37.4 5.1 5.5 AFRICA (total) 4.0 4.1 0.6 0.6 ASIA (total) 14.3 19.8 2.3 2.9 MALAYSIA 2.4 2.4 0.4 0.4 JAPAN 9.9 14.7 1.7 2.2 OCEANIA (total) 0.8 1.0 0.1 0.1 -------------- -------------- TOTAL 489.3 611.7 76.9 90.36 -------------- -------------- Table F: Year-end Stock of South African Direct Investment Abroad by Region/Country (billions) REGION/COUNTRY RAND RAND US$ US$ 2005 2006 2005 2006 EUROPE - Total 189.1 238.8 29.7 35.3 UNITED KINGDOM 70.9 79.8 11.1 11.8 LUXEMBURG 74.8 106.4 11.8 15.7 AUSTRIA 18.0 22.3 2.8 3.3 OTHER 25.4 30.3 4.0 4.5 N&S AMERICA (total) 16.3 23.7 2.6 3.5 USA 14.4 21.7 2.3 3.2 AFRICA (total) 19.1 59.1 3.0 8.7 ASIA (total) 1.5 25.8 0.2 3.8 OCEANIA (total) 6.8 6.8 1.1 1.0 -------------- --- TOTAL 232.9 354.3 36.6 52.3 -------------- --- Table G: Year-end Stock of FDI in South Africa by Industry Sector (billions) INDUSTRY RAND RAND US$ US$ 2005 2006 2005 2006 Agriculture, Forestry & Fishing 0.7 0.9 0.1 0.1 Mining 168.3 250.4 26.5 37.0 Manufacturing 136.0 165.4 21.4 24.4 Construction 2.0 2.0 0.3 0.3 Trade, Catering, 14.7 16.2 2.3 2.4 QTrade, Catering, 14.7 16.2 2.3 2.4 & Accommodation Transport, Storage, 9.4 13.8 1.5 2.0 & Communication Finance, Insurance, 157.6 162.5 24.8 24.0 Real Estate & Business Services Social services 0.5 0.5 0.1 0.1 -------------- -------------- TOTAL 489.2 611.7 77.0 90.4 -------------- -------------- PRETORIA 00000077 010 OF 011 Table H: FDI Flows into South Africa: Investment by foreigners in undertakings in South Africa in which they have at least 10 percent of the voting rights (R billions): 2001* 58.4 2002 8.0 2003 5.6 2004 5.2 2005* 42.3 2006 -3.6 *The high inflow in 2001 was due to the DeBeers/Anglo American transaction. *The inflow in 2005 was due to the Barclays/ABSA and Vodafone/Vodacom transactions. Table I: FDI Flows out of South Africa: Investment by South Africans in undertakings abroad in which they have at least 10 percent of the voting rights (R billions): 2001* -27.4 (inflow - decrease in investment abroad) 2002 -4.2 (inflow - decrease of investment abroad) 2003 4.3 2004 8.7 2005 5.9 2006 45.5 *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 600 American companies (including subsidiaries, joint ventures, local partners, agents, franchises, and representative offices) doing business in South Africa. Key Investment Industries in South Africa: South Africa is largely a food self-sufficient country, with imports of wheat, oilseeds, poultry and pork largely offset by exports of fresh fruits, vegetables, fruit juice, and wine. The bulk of the population's food needs are supplied locally. In certain instances, South African food and beverage companies have become global players, such as SAB Miller. 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, and Pillsbury. The chemical industry is the largest manufacturing sector in the South African economy, accounting for five 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. The Standard, ABSA, First Rand, and Nedcor commercial banking groups provide retail and investment banking services and 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 J: Top Foreign Companies Invested In South Africa Australia - BHP Billiton Canada - Placer Dome Denmark - AP Moller France - Lafarge Germany - BMW India - Tata Italy - Cirio (Del Monte) Switzerland - Movenpick Hotels U.K. - Lonrho Plc, SA Breweries, Anglo American, Barclays, Vodafone, British Petroleum, Old Mutual, Virgin U.S. - Caltex; Coca Cola; Dow Chemicals; General Motors, Ford, Pioneer Energy, CSX, Timkin Saudi Arabia - Oger UAE - Victoria and Alfred Waterfront This is an illustrative listing of companies that have invested in QThis is an illustrative listing of companies that 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 PRETORIA 00000077 011 OF 011 BOST