2009 INVESTMENT CLIMATE STATEMENT SOUTH AFRICA (PART

UNCLAS SECTION 01 OF 08 PRETORIA 000081 DEPT FOR AF/S/; AF/EPS; EB/IFD/OMA USDOC FOR 4510/ITA/MAC/AME/OA/DIEMOND TREASURY FOR TRINA RAND USTR FOR JACKSON SIPDIS E.O. 12958: N/A TAGS: ECON EFIN EINV ETRD ELAB PGOV OPIC KTDB USTR SF SUBJECT: 2009 INVESTMENT CLIMATE STATEMENT SOUTH AFRICA (PART 2 OF 2) REF: 08 State 123907 PRETORIA 00000081 001.2 OF 008 ¶1. (U) Summary. In response to Ref A, this cable presents part two of post's two-part 2009 Investment Climate Statement for South Africa. This is also Chapter 6 of the Country Commercial Guide for South Africa ¶2. (U) BEGIN TEXT Chapter 6 Investment Climate Statement FY2009, continued 6.8 Transparency of the Regulatory System The Companies Act of 1973 provides for the 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. 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. The forms to be filled out by investors are straightforward. The process takes six months on average, but can be done in one month through TISA. Almost all buisness activities are open to foriegn 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 maintain a minimum local capital base to obtain a banking license when these requirements are not applied to domestic banks. In addition a foreign company must register as an external company before immovable property can be registered in its name. 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. Barclays' acquisition of ABSA received government approval in 2005. The International Commercial Bank of China purchased a 20% stake in Standard Bank in late 2007 and the government approved the sale in early 2008. 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. These include the establishment of: 1) a separate company; 2) a branch; or 3) a representative office. The criteria for the registration of a foreign bank are the same as for domestic banks. Foreign banks must include additional information, such as holding company approval, a letter of "comfort and understanding" from the holding company, and a letter of no objection from the foreign bank's home regulatory Qletter 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: 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 fourteenth largest exchange measured by market capitalization in the world. Market capitalization stood at R4.4 billion ($466 million) in December 2008 with over 400 firms listed. The Bond Exchange of South Africa (BESA) is licensed under the Financial Markets Control Act. Membership includes banks, insurers, investors, PRETORIA 00000081 002.2 OF 008 stockbrokers, and independent intermediaries. The exchange consists principally of bonds issued by government, state-owned enterprises, and private corporations. The JSE is seeking to acquire the BESA. More information on financial markets may be obtained from the JSE (website: 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 (approximately $2,100). "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, a 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. The ability to borrow locally increases if both residents and non-residents own the local enterprise. 6.10 Political Violence South Africa's political landscape is changing as the nation approaches national elections in 2009. The Congress of the People (COPE) is a new opposition party that was formed largely as an offshoot of the ruling African National Congress (ANC). There were isolated cases of political violence in 2008, and there exists some potential for sporadic campaign violence in the run-up to 2009 elections. 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 The 2000 Promotion of Access to Information Act and the 2000 Public Finance Management Act helped to increase transparency in government. The 2004 Prevention and Combating of Corrupt Activities Act (PCCAA) defines graft, bars the payment of bribes by South African citizens and firms to foreign public officials, and obliges public officials to report corrupt activities. One shortcoming of the PCCAA has been its failure to protect whistleblowers against recrimination or defamation claims. South African law also provides for the prosecution of government officials who solicit or accept bribes. Penalties for offering or accepting a bribe may include criminal prosecution, monetary fines, dismissal from government employment, or deportation (for foreign citizens). South Africa has no fewer than 10 agencies engaged in anti- corruption activities. Some, like the Public Service Commission, the Office of the Public Protector, and the Office of the Auditor-General, are constitutionally mandated to address corruption as only part of their responsibilities. High rates of violent crime are a strain on capacity and make it difficult for South African criminal and judicial entities to dedicate adequate resources to anti-corruption efforts. Parliament voted to disband the South African Police Anti- Corruption Unit and the Directorate for Special Operations (more QCorruption Unit and the Directorate for Special Operations (more popularly known as the "Scorpions") and fold its jurisdiction into the National Police in October 2008. Transparency International's 2008 Corruption Perceptions Index reports that corruption in South Africa is perceived to be greater than it was in 2007. South Africa was ranked 43rd out of 179 countries (where 1 is the country where corruption is perceived to be the lowest, and 179 is the one where corruption is perceived to be the greatest) in 2007 to 54th out of 180 countries in 2008. South Africa was the second least corrupt country in Africa in 2007; it was the fourth least corrupt country in Africa in 2008. Public perception of widespread official corruption, particularly in the police and the Department of Home Affairs, continued. 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. PRETORIA 00000081 003.2 OF 008 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. South Africa, as part of SACU, is currently in negotiations for free trade agreements with Mercosur and India. The United States began free trade agreement (FTA) negotiations with the five Southern African Customs Union (SACU) countries (South Africa, Botswana, Lesotho, Namibia, and Swaziland) in June 2003, but active negotiations were suspended in April 2006. In lieu of a U.S.-SACU FTA, the United States and SACU negotiated a Trade, Investment and Development Cooperation Agreement (TIDCA),which was signed in July 2008. The four areas singled out for special attention under the TIDCA are customs cooperation, technical barriers to trade, sanitary/phytosanitary (SPS) issues, and trade and investment promotion. 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 South Africa and the United States signed an agreement to facilitate Overseas Private Investment Corporation (OPIC) programs in 1993. OPIC has since invested in a number of 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. OPIC entered into an agreement with the Homeloan Guarantee Company (HLGC) to fund low-income home loans for HIV-positive South Africans in 2004. 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. OPIC announced in June 2008 that it will provide up to $250 million to banks and financial institutions to expand their lending to small businesses. 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 South African government has worked to remove all vestiges of apartheid-era labor legislation over the last 14 years. In its place, the government created a labor market characterized by employment security, reasonable wages, and decent working Qby 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. The law allows almost all workers to form or join trade unions of their choice without previous authorization or excessive requirements. As of March 2008, total trade union membership was roughly three and one half million persons, or 31 percent of the economically active population employed in the formal sector. Most union members belong to affiliates of the Congress of South African Trade Unions (COSATU). Other unions are PRETORIA 00000081 004.2 OF 008 affiliated to the Federation of Unions of South Africa (FEDUSA) or the National Council of Trade Unions (NACTU). COSATU, the largest of the federations, is strongly allied with the African National Congress (ANC) and the South African Communist Party in a tripartite alliance and vigorously lobbies the ruling party to implement its policy positions. The right to strike is protected under South African labor law. A Department of Labor bulletin reported 102 strikes in the 2006- 2007 year ending March 2007, with 264,426 workers participating and over four million work days last. Data for 2007-2008 has not yet been released. Sectors most affected have historically been community services, manufacturing, mining, and retail. South African business argues that the labor market is rigid and over-regulation has constrained employment. Trade unions argue that employers evade labor legislation through the use of labor brokers who supply casual workers. COSATU has lobbied for and welcomed a pledge by the Minister of Labor that the next ANC government will outlaw all labor brokers. Other areas of contention between business and trade unions revolve around workplace safety, the application of wage structures to all firms in an industry whether or not firms participated in wage negotiations, wage increases, and complex requirements and appeal procedures for the dismissal of workers. Major labor legislation includes: -- The Labor Relations Act, in effect since November 1996, provides retrenchment guidelines, stating that employers must consider alternatives to retrenchment and must consult all relevant parties when considering possible layoffs. The Act enshrines the right of workers to strike and of management to lock out 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. No employer may require or permit overtime expect by agreement, and overtime may not be more than ten hours per week. -- The Employment Equity Act of 1998 prohibits unfair employment discrimination and requires large and medium-sized employers to prepare affirmative action plans to ensure that black Africans, women, and disabled persons are adequately represented in the workforce. -- The Occupational Health and Safety Act, last amended in 1993, provides for occupational health and safety standards and gives the Department of Labor the right to inspect the workplace. The Mine, Health and Safety Act authorizes the Inspector of Mines to provide regulatory oversight for the mining industry. -- The Skills Development Act of 1998 imposes a levy on employers equal to one percent of the payroll that is to be used for training programs devised by industry-specific training Qfor training programs devised by industry-specific training authorities (SETA?s). Employers who provide job skills training can claim back much of their contribution from government. According to the March 2008 Labor Force Survey (LFS),the official unemployment rate was 24.2 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. Despite the high unemployment rate, South Africa has a shortage of skilled workers across many sectors and businesses allege that their statutory contributions to government sponsored training authorities are wasted or misused and that those authorities have done little to increase the skills base. South Africa has no country-wide minimum wage, but the Minister of Labor has issued determinations that set a minimum wage for certain occupations where collective bargaining is not common. These occupations include domestic workers, farm workers, taxi- PRETORIA 00000081 005.2 OF 008 drivers, and retail employees. In addition, the Minister can apply collective bargaining agreements to firms that did not participate in negotiations. 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. This money goes directly to industry- specific training authorities (SETA's). 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. 6.15 Foreign Trade Zones/Free Ports South Africa designated its first 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 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 combinatioQof both. IDZs are currently located at Coega near Port Elizabeth, in East London, Richards Bay, and at OR Tambo International Airport near Johannesburg. An IDZ in Mafikeng is expected to be approved by Cabinet in 2009. 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. AmQg 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. 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 Qcountries' 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: http://www.businessmap.co.za/). The following FDI statistics were drawn from the SARB's December 2008 Quarterly Bulletin. The conversion exchange rate used was the average exchange rate for each year cited. Table A: Average Exchange Rates Rand/US$ 2002 10.52 2003 7.56 2004 6.45 2005 6.36 2006 6.77 2007 7.05 Table B: Year-end Stock of Foreign Direct Investment in South PRETORIA 00000081 006.2 OF 008 Africa Rand (billion) US$ (billion) 2002 255.84 24.33 2003 303.55 40.14 2004 355.09 55.05 2005 489.32 76.94 2006 611.72 90.36 2007 751.92 106.65 Table C: Year-end Stock of South African Direct Investment Abroad Rand (billion) US$ (billion) 2002 189.91 18.06 2003 180.51 23.87 2004 216.66 33.59 2005 232.93 36.62 2006 354.25 52.33 2007 448.62 63.63 Table D: GDP (in billion rand at current prices) and year-end FDI Stock as a percentage of GDP GDP FDI(%) 2002 1,168.7 21.9 2003 1,260.7 24.1 2004 1,398.6 25.4 2005 1,541.07 31.8 2006 1,741.06 35.1 2007 1,999.09 37.7 Table E: Year-end stock of FDI in South Africa by region/country (billions) REGION/COUNTRY 2006 2007 2006 2007 RAND RAND US$ US$ EUROPE - Total 535.6 656.1 79.1 93.1 UNITED KINGDOM 440.3 524.2 65.0 76.9 GERMANY 34.1 41.3 5.0 5.9 NETHERLANDS 22.1 28.9 3.3 4.1 SWITZERLAND 12.3 21.3 1.8 3.0 FRANCE 9.2 12.3 1.4 1.7 ITALY 2.9 3.5 0.4 0.5 N&S AMERICA (total) 51.2 64.1 7.6 9.1 USA 37.4 46.3 5.5 6.6 AFRICA (total) 4.1 5.7 0.6 0.8 ASIA (total) 19.8 24.7 2.9 3.5 MALAYSIA 2.4 2.3 0.4 0.3 JAPAN 14.7 12.9 2.2 1.8 OCEANIA (total) 1.0 1.2 0.1 0.2 TOTAL 611.7 751.9 90.36 106.6 Table F: Year-end Stock of South African Direct Investment Abroad by Region/Country (billions) REGION/COUNTRY 2006 2007 2006 2007 RAND RAND US$ US$ EUROPE (total) 238.8 276.4 35.3 39.2 LUXEMBURG 106.4 122.1 15.7 17.3 UNITED KINGDOM 79.8 92.7 11.8 13.1 AUSTRIA 22.3 22.7 3.32.8 3.23.3 OTHER 30.3 40.0 4.54.0 5.64.5 N&S AMERICA (total) 23.7 26.8 3.52.6 3.83.5 USA 21.7 23.8 3.22.3 3.43.2 AFRICA (total) 59.1 84.4 8.73.0 11.98.7 ASIA (total) 25.8 44.3 3.80.2 6.33.8 OCEANIA (total) 6.8 16.6 1.01.1 2.41.0 TOTAL 354.3 448.6 36.6 52.363.6 Table G: Year-end Stock of FDI in South Africa by Industry Sector (billions) INDUSTRY 2006 2007 2006 2007 RAND RAND US$ US$ Agriculture, 0.9 0.8 0.1 0.2 Forestry & Fishing Mining 250.4 332.2 37.0 47.1 Manufacturing 165.4 197.1 24.4 27.9 Construction 2.0 1.9 0.3 0.2 Trade, Catering, 16.2 27.7 2.4 3.9 & Accomodation Transport, Storage 13.8 12.8 2.0 1.8 QTransport, Storage 13.8 12.8 2.0 1.8 PRETORIA 00000081 007.2 OF 008 & Communication Finance, Insurance, 162.5 178.6 24.0 25.3 Real Estate & Business Services Social Services 0.5 0.5 0.1 0.1 TOTAL 611.7 751.9 90.4 106.6 Table H: FDI Flows into South Africa: Investment by foreigners in undertakings in South Africa in which they have at least ten 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 2007* 40.1 *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. *The inflow in 2007 was due to ICBC?s purchase of Standard Bank. Table I: FDI Flows out of South Africa: Investment by South Africans in undertakings abroad in which they have at least ten percent of the voting rights (R billions): 2001* -27.4 (inflow - decrease in investment abroad) 2002 -4.2 (inflow - decrease in investment abroad) 2003 4.3 2004 8.7 2005 5.9 2006 45.5 2007 -20.9 (inflow ? decrease in investment abroad) *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 beer producer SAB Miller. Major international agro-processing companies with a presence in South Africa include Unilever, Nestle, Coca-Cola, Groupe 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 through acquisition, as in the case of ABSA, 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 APDP QChrysler, Nissan, and Toyota, all of which benefit from the APDP and have production plants in South Africa. PRETORIA 00000081 008.2 OF 008 Table J: Top Foreign Companies Invested In South Africa Australia BHP Billiton Canada Placer Dome Denmark AP Moller France Lafarge Germany BMW, Volkswagon India Neotel, Tata Italy Cirio (Del Monte) Switzerland Movenpick Hotels U.K, Anglo American, Barclays, British Petroleum, Lonrho Plc, Old Mutual, SA Breweries, Virgin, Vodafone U.S. Caltex, Coca Cola, CSX, Dow Chemicals, Ford, Forrest,General Motors, Pioneer Energy, Timkin, Westinghouse Saudi Arabia Oger UAE Victoria and Alfred Waterfront This 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: Caterpillar, Cisco, CitiGroup, Dell, Eli Lilly, Fluor, Forrest, General Electric, Goodyear, HP, IBM, Levi Strauss, Johnson and Johnson McDonalds, Microsoft, Nike, Proctor & Gamble, Sara Lee, Silicon Graphics, Westinghouse.