VII. INVESTMENT CLIMATE STATEMENT Openness to Foreign Investment The Government of South Africa encourages foreign investment and treats it the same as domestic investment. A few areas of economic activity are reserved for domestic ownership, usually those already dominated by state enterprise or related to national security. Foreign investors are permitted 100 percent ownership. Screening of foreign investment does not normally occur. No performance requirements are levied in order to obtain permission for foreign investment. The government encourages investments that strengthen, expand and/or update various industries but does not require that new investments comply with specific requirements. The only significant differences for the foreign investor are access to domestic financing and the two- tiered foreign exchange system that has a special exchange rate for investment from abroad. South Africa offers substantial inducements for foreign investors, inter alia: a substantial market with significant growth potential, a market oriented tradition, access to other markets in Africa, excellent communication and transportation links, liberal repatriation of profits and other earnings, lower labor costs than in Western industrialized countries (although productivity is also lower), and availability of inexpensive electrical power and raw materials. Foreign firms are eligible for various investment incentives and are treated the same as domestic companies in terms of the various export incentive programs, tariffs and other trade regulations. Tariff protection is afforded by the Board of Tariffs and Trade which makes recommendations on tariffs. The Board must establish a need for protection and determine whether it is in the national interest. Customs tariffs include ordinary as well as anti-dumping duties, general rebates, industrial rebates, and refunds of duties paid to stimulate exports. Certain tariffs are designed to protect domestic industry under the principle of "infant industries." Conversion and Transfer Policies Foreign direct investment normally enters through the financial rand which trades at a discount, currently around 30 percent, over the commercial rand. Funds entering via the financial rand can be used to acquire equity or share capital (as distinct from loan capital) and purchase fixed assets such as land, buildings and plant. Financial rand cannot be used to fund current assets/working capital. Loans enter through the commercial rand, and loan repayments and proceeds are via the commercial rand. South Africa places no restrictions on the reinvestment of profits and earnings. Dividends and profits are repatriated at the commercial rand rate. Capital gains and proceeds from the sale of equities and securities by non-residents are repatriated at the financial rand rate. Royalty payments must be approved by the Reserve Bank. If a licensing agreement involves manufacturing a product in South Africa, an application must also be made to the Department of Trade and Industry. Royalty fees are based on a percentage of ex-factory sales with a maximum of 4 percent for consumer goods and 6 percent for intermediate and final capital goods. Approval is normally for five years. Minimum or annual payments are not acceptable, and down payments are approved only for the costs of transferring technology items. Expropriation and Compensation Under the Expropriation Act of 1975 and the Expropriation Act Amendment of 1992, the state is entitled to expropriate property for public necessity or public utility. The decision to expropriate is an administrative one vested in the state. Compensation is determined by the amount the property would have realized in an open market by a willing seller to a willing buyer. Compensation is not payable for any rights where there has been no registration of such rights. Due process and transparency are established; however the legal process of determining compensation can require 18 months to three years. Interest is not payable during this period. Dispute Settlement There is no record of any expropriation or nationalization of American investment in South Africa. The one known case of nationalization in South Africa occurred in 1924 and involved an airline in financial difficulties. South Africa is not a member of the International Center for the Settlement of Disputes (Washington Convention) but is a member of the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. Political Violence South Africa is one of the most violent societies in the world. Most political violence has been concentrated in the townships east of Johannesburg and in Natal. It is usually attributed to rivalry between the Inkatha Freedom Party and the ANC. Factors contributing to this violence: competition for resources (water, housing, grazing lands), ethnic conflict, and the influence of elements in the security forces who oppose the democratic process (the "third force"). Sadly, in many places, violence has taken on a life of its own, fueled by revenge killings. Of even greater dimension than the political violence is crime. Because of their role in enforcing minority rule, the police are discredited in much of the black community. As a result, criminal gangs and vigilantes now hold sway in many urban areas. The elections proceeded fairly peacefully throughout the country, even in areas that had been wracked by violence earlier. Voters of all races waited patiently together in long lines for the chance to participate in the democratic process as equals. Apart from a vicious bombing campaign, ended quickly by decisive police action, there were no election related fatalities. Nevertheless, if the new government is to restore stability and economic growth it must address the problems of crime and violence. To do this, it must restore faith in the security forces and work to eliminate the poverty and squalor in which violence breeds. Performance Requirements/Incentives Performance requirements are not normally imposed as a condition for establishing, maintaining or expanding an investment or for access to tax and investment incentives. The South African government offers a variety of investment incentives that apply equally to domestic and foreign investment. Government contacts are listed in Appendix C. The Industrial Development and Investment Center of the Department of Trade and Industry provides information and assistance to prospective investors, including identification of investment opportunities and joint venture partners and sourcing of technology and capital. The Industrial Development Corporation provides development capital for both new and existing industries. Facilities include: term loans at favorable rates for land, buildings, plant and machinery; finance for exporters of capital goods and services; and venture capital, usually for small, high technology businesses. Several government supported bodies provide technical assistance for new industries. These include the Council for Scientific and Industrial Research, a multi-disciplinary research, development, and implementation organization; Technifin, a government owned firm financing the commercialization of new technology and products; The Council for Mineral Technology (Mintek), metallurgy research and development; and the South African Bureau of Standards. Regional Industrial Development Program: In May 1991, the South African government adopted a new regional industrial development policy in place of the broad range of decentralization incentives that had been used to lure businesses to areas in and around the "homelands." New or relocating businesses can no longer apply for subsidies on wages, interest payments, rent, transportation, electricity, housing and employee training expenses that had been offered to encourage industrial development at government- designated "deconcentration points." The new incentive program is profit, rather than production, based to guard against attracting firms requiring perennial subsidies to stay afloat. Under the new regional industrial development program, a new or relocating business can apply for incentives under a uniform, five-year program by locating anywhere outside the Johannesburg- Pretoria and Durban areas. The first two years an establishment grant is offered, equal to 10.5 percent of total operations assets, and thereafter a three-year profit-based tax break is available. The tax incentive formula could enable a relatively profitable firm to gain a full tax exemption up to an effective tax rate of 32 percent, the average effective corporate tax rate in South Africa. Tax Incentives: The Income Tax Act provides capital allowances for new factory buildings and improvements (5 percent) and for new manufacturing plant and machinery (20 percent). The act also provides allowances for capital expenditure on recognized scientific research (25 percent). Export Incentives: Five different programs provide incentives for local exporters. The General Export Incentive Scheme (GEIS) encourages the export of manufactured products with a high value- added content. Payments are based on export value, degree of processing, and the percentage of value added in South Africa up to a maximum of 25 percent of FOB value. Section 37E of the Income Tax Act provides tax allowances for capital goods and property used to beneficiate (add value to) base metals and intermediate products for export. Section 11 (bis) of the Income Tax Act allows exporters to obtain an income tax allowance for expenses incurred in promoting or maintaining an export market. The Export Marketing Assistance Scheme, a limited program, provides assistance for export market research and trade fairs and missions. The Structural Adjustment Program provides export incentives tailored to specific industries, most notably motor vehicles and textiles and clothing. Local Content Requirements: A local content program for the automotive sector sets a value-based minimum content level of 50 percent for locally built vehicles or 55 percent when exports are included. Inducements are provided to companies to reach 75 percent local content value by 1997. The program's rebates are managed on a company-by-company basis. A development program for the television manufacturing industry has an import tariff rebate incentive that reaches full value at 40 percent local content. Right to Private Ownership and Establishment Private property rights, whether foreign or domestic, are equally protected by law and the same opportunities exist for both foreign and domestic private entities. In general, all foreign and domestic private entities are entitled to own business enterprises and engage in remunerative activity; i.e., make a profit. Private entities are allowed freely to establish, acquire and dispose of interests in business enterprises. The acquisition of an existing business enterprise is usually achieved through the purchase of shares or assets. The Securities Regulation Panel Code applies to public limited companies and to private companies with 10 or more shareholders and capital and reserves in excess of R5 million. If a stake of 30 percent or more is acquired, an offer must be made to minorities to acquire all their shares at a price equal to the highest paid by the acquiror. Present government policy is to refrain from competing with private entities in the private sector, and competitive equality is applied to private enterprises in competition with public enterprise, with certain exceptions. The following firms enjoy a degree of protection or direct of indirect allowances from the government which give them a financial advantage vis-a-vis private entities: ISCOR (iron and steel products), ADE (diesel engines), SASOL (synthetic fuels and petrochemicals), and CSIR (scientific and industrial research). Protection of Property Rights Property rights, including intellectual property, are protected under a variety of laws and regulations. Patents may be registered under the Patents Act of 1978 and are granted for 20 years. Trademarks can be registered under the Trademarks Act of 1963, are granted for ten years and may be renewed for an additional ten years. New designs may be registered under the Designs Act of 1967 which grants copyrights for five years. The Patent Office of the Department of Trade and Industry administers these acts. Literary,musical and artistic works, cinematographic films and sound recordings are eligible for copyrights under the Copyright Act of 1978. This act is based on the provisions of the Bern Convention as modified in Paris in 1971 and was amended in 1992 to include computer software. South Africa is a member of the Paris Union and acceded to the Stockholm text of the Paris Convention for the Protection of Industrial Property. South Africa is also a member of the World Intellectual Property Organization. Although South Africa's intellectual property laws and practices are generally in conformity with those of the industrialized nations, software piracy occurs frequently in South Africa. The Business Software Alliance (BSA) estimates that as much as 60 to 70 percent of South Africa's software is pirated, resulting in a loss of USD 56 million to computer companies. Regulatory System: Laws and Procedures All business organizations of more than 20 persons that operate for gain must be registered as a company under the Companies Act of 1973, which is based on British company law. Foreign investments are organized under the same rules and regulations as domestic firms with one exception. Foreign companies that choose not to form a firm in South Africa operate as "external companies." External companies do no normally pay tax on undistributed profits; however, share capital duty is based on the shares of the parent firm. The legal liabilities of an external company are not limited. Foreign investors may normally buy into local firms without limitation. Restrictions on foreign ownership in the 1990 privatization of ISCOR were an isolated case. No local equity requirements exist. In practice, foreign firms invite domestic participation when it is suitable for the business of the firm. It is not necessary for any shares in a firm to be held by a South African resident. Shares of any denomination may be issued, and no-par shares are permitted. The subscription of a minimum amount of shares is not required. Public firms must have at least two directors and private firms one director. The directors need not be South African residents. External firms must appoint a South African resident to accept services of notices on the firm. All firms must keep proper financial records, but only public companies and external companies must file annual financial statements with the Registrar of Companies. External companies must file with the Registrar their South African financial statements and the financial statements for the foreign company as a whole. An application for exemption from this requirement may be requested. The Maintenance and Promotion of Competition Act of 1979 provides for the prevention of, or control over restrictive trade practices, and the monitoring of the acquisition of controlling interests in businesses, and monopoly situations. The act is implemented by the Competition Board which has power to investigate but not to prosecute. All businesses must obtain a business license from the local authority which is valid indefinitely, unless the business is relocated or acquired by a new owner. In general, businesses must register with the local regional services council, Department of Manpower, Workmen's Compensation Commissioner, the appropriate industrial council, the Receiver of the Revenue and the Department of Customs and Excise. Corporate Taxes: All corporations are taxed at a flat rate of 40 percent on total taxable income deemed to be sourced within South Africa. Taxes are levied only on income derived from a source within or deemed to be within South Africa. This applies to resident and non-resident individuals and companies. Income taxpayers are divided into two categories: individuals who are taxed at progressive rates, and companies, taxed at 40 percent of taxable income (mining companies have different tax rates). Companies make provisional tax payments at six months after the beginning of the financial year, at the end of the financial year, and six months after the end of the financial year. Withholding taxes are imposed on interest and royalties remitted to non-residents. Capital gains are tax free, and a new 15 percent tax on distributed profits went into effect on March 17, 1993. Although no bilateral tax agreement is in force between South Africa and the United States, the two governments are reviewing the possibility of an agreement in the near future. Efficient Capital Markets and Portfolio Investment Within the foreign exchange control system and the financial rand mechanism, financial resources move in response to market signals. Private financial services companies make an active market in government and private securities and equities. The Johannesburg Stock Exchange provides a regulated market for company shares, negotiable instruments, and securities. Total market capitalization is approximately USD 188 billion (August 1993). A variety of credit instruments are available to the private sector, including bankers' acceptances, fixed and variable rate securities, bonds and equities. Foreign owned firms do not have unlimited access to local credit. An "affected person" is a company or other body in which 25 percent or more of the capital assets or earnings may be utilized for payment to, or to the benefit of, a non-resident or 25 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 give any financial assistance to a non-resident or "affected person" without Exchange Control exemption. A company falling into the category of an "affected person" may receive local financial assistance up to a specified percentage of its total "effective capital" which mainly comprises issued share capital, share premium accounts, reserves created from profits, unappropriated profits and approved shareholders' loans. The normal maximum level of domestic financial assistance which an "affected person" may receive is 50 percent of the total "effective capital," plus an amount determined by the following formula: South African participation/non-resident participation X 50 percent. Requests to borrow in excess of the formula are granted for operations that are considered to be in the national interest such as import replacement. Bilateral Investment Agreements The United States and South Africa have no bilateral investment treaty. South Africa has bilateral investment agreements with several governments, including Paraguay and Taiwan. The Southern African Customs Union agreement with Botswana, Lesotho, Namibia and Swaziland and the Common Monetary Area agreement with Lesotho, Namibia and Swaziland facilitate investment flows between the participating countries. In essence, these agreements allow the free flow of trade and investment between the member countries. South Africa became a member of the Multilateral Investment Guarantee Agency (MIGA) in 1993. Overseas Private Investment Corporation (OPIC) Programs South Africa signed a bilateral investment incentive agreement with the United States in November 1993 offering a full range of OPIC programs including political risk insurance, loan guarantees, investment financing and investment missions. Labor South African labor is characterized by the anomaly of massive unemployment coupled with a critical shortage of skilled labor. The Chairman of South Africa's Parliamentary Standing Committee on Manpower has estimated that by the year 2000 there will be almost four times the number of unskilled workers as job opportunities, but twice as many skilled job opportunities as qualified workers. Most observers estimate that as many as 5 million workers are unemployed in South Africa, or at least 40 percent of the economically active population. The National Manpower Commission calculates that, in the past ten years, formal employment opportunities have grown only 0.4 percent creating just 500,000 jobs. In contrast the labor supply has grown by an average of 2.8 percent per year. The employment outlook in the future is equally bleak. With over 350,000 people entering the labor market each year, the South African economy needs to grow at a rate of 5 percent annually to keep unemployment from growing worse. Currently, only 7 of every 100 entrants to the job market find work. Apartheid can account for most of that incongruity, with the country's Bantu education system the most oft-cited villain. Tough bargaining distinguishes labor negotiations. The time between the tabling of initial demands at the negotiating table and final settlement can often be 2 to 3 months, indicating that employers sometimes spend nearly on-quarter of the year locked in the wage bargaining process. Nevertheless, trade unions are becoming increasingly mature in their approach to negotiations. There is a marked tendency for unions to engage in industrial action during wage bargaining. Although the rate varies depending on the year, more than 50 percent of negotiations see some sort of action. Strikes normally make up one-quarter to one-third of industrial actions during the year, but unions also flex their muscle at bargaining time through slowdowns and refusals to work overtime. Despite poor economic conditions and workforce reductions, trade union membership in South Africa continues to increase and probably exceeds 3 million workers. At the end of 1991, 200 trade unions with total membership of 2.75 million were registered with the Department of Manpower. An estimated 300,000 workers belong to some 47 unregistered trade unions. Total union membership represents approximately 45 percent of the employed economically active population. Foreign Trade Zones/Free Ports No foreign trade zones or free ports are established in South Africa, however, a report by the Industrial Development Corporation recommends the development of export processing zones provided they are privately financed and operated. The report is being reviewed by government and other interested parties. Provisions of the Customs and Excise Act allow exporters to obtain either a rebate or refund of customs duties on imported materials used for the manufacture, processing, finishing, equipping or packing of goods for export. These provisions provide many of the practical benefits of an export processing zone. Capital Outflow Policy In contrast to its liberal attitude toward inward direct investment, South Africa severely restricts investment abroad by South Africans. Permission is required from the Reserve Bank to obtain foreign exchange for investment abroad and is normally only granted when the foreign investment will serve to expand South Africa's economy; for example, a sales operation in another country to sell South African produced goods. The Reserve Bank normally stipulates the use of the financial rand for such transactions. Major Foreign Investors American, as well as other foreign investors, were under extreme pressure from the mid-1980's until recently to disinvest from South Africa. With the political reforms initiated in February 1990 and the satisfactory conclusion of the election in May 1994, companies are either coming back to reinvest in South Africa or exploring the possibility. According to the Washington-based Investor Responsibility Research Center (IRRC), the number of U.S. companies with direct investment in South Africa declined from 324 in 1986 to 111 in 1992. The U.S. Department of Commerce reports that the value U.S. direct investment in South Africa declined from USD 1.5 billion to USD 1 billion over the period. However, since South Africa's political transition became underway, over 60 American companies have returned or entered the market. Most of these new investments are sales and distribution offices, several are manufacturing licensing agreements, and a few are actual investment buy-backs of formerly-owned operations. A list of American investors may be found in the "Fifteenth Report of the Signatory Companies to the Statement of Principles for South Africa," October 31, 1991. This report is available from: Industry Support Unit Inc., 601 Elkcam Circle, Suite A-2, Marco Island, Florida 33937. Another list of American investors is available from: Fifth Annual Report, South Africa and Fair Labor Standards, December 1991; Office of Southern African Affairs, U.S. Department of State, Washington, D.C. 20520. In addition, the IRRC compiles a comprehensive annual directory of U.S. and multinational companies operating in South Africa. The IRRC can be reached at telephone (202) 234-7500 in Washington, D.C. The most recent data on the value of U.S. direct investment in South Africa, by industry, follows: U.S. Direct Investment in South Africa (USD million, year-end) 1992 Petroleum * Manufacturing 501 Wholesale Trade 67 Banking 0 Other Finance * Services 5 Other 76 Total 875 (EST.) *Proprietary information of individual companies. Source: Country Reports on Economic Policy and Trade Practices - South Africa.