investment climate in south africa -regulatory environment, policies and trends
TRANSCRIPT
Investment Climate in South Africa Regulatory environment, Policies and Trends. This Report was prepared by Group number 7, PGDM-IB, BIMTECH in partial requirement for evaluation of subject International Financial Management. This Report contains study done on Investment climate in South Africa. It explores Regulatory and legal environment, Policies, FDI trends and opportunities in Southern most nation of African Continent.
2016
This report is prepared by Aayush Makkar, Bhanu Mahlotra, Vanya Gupta, Anchal Gupta (15IB316), VIkas Gupta and Prabhanshu Shekhar
Grizli777 9/6/2016
Contents
1) INTRODUCTION ........................................................................................................................ 3
Government Measures to Motivate or Restrict FDI ........................................................................... 3
Procedures Relative to Foreign Investment ....................................................................................... 5
2) FDI TREND AND ECONOMIC SCENARIO IN SOUTH AFRICA ......................................................... 7
3) A GLIMPSE OF SOUTH AFRICAN INDUSTRIAL SECTOR .............................................................. 10
MANUFACTURING ............................................................................................................................. 11
MINING ............................................................................................................................................. 12
AGRICULTURE ................................................................................................................................... 13
COMMUNICATIONS .......................................................................................................................... 14
TOURISM ........................................................................................................................................... 15
WHOLESALE AND RETAIL TRADE ...................................................................................................... 16
FINANCE AND BUSINESS SERVICES ................................................................................................... 17
SECTOR SPECIFIC INVESTMENT INCENTIVES..................................................................................... 19
4) MACROECONOMIC ENVIRONMENT ........................................................................................ 22
5) INVESTMENT CLIMATE OF SOUTH AFRICA ............................................................................... 25
Openness to, and Restrictions upon, Foreign Investment: .............................................................. 25
Conversion and Transfer Policies ...................................................................................................... 28
Expropriation and Compensation ..................................................................................................... 30
Dispute Settlement ........................................................................................................................... 32
Protection of Property Rights ........................................................................................................... 33
Transparency of the Regulatory System ........................................................................................... 33
Political Violence ............................................................................................................................... 34
Corruption ......................................................................................................................................... 34
Labour ............................................................................................................................................... 35
Foreign Trade Zones/Free Ports/Trade Facilitation .......................................................................... 36
Bilateral Investment Agreements ..................................................................................................... 36
6) CONCLUSION ......................................................................................................................... 37
Investment Opportunities ................................................................................................................. 38
1) INTRODUCTION
South Africa is largely a free economy; government encourages the investment in both
private and public sector. Most of the sectors are open for FDI with no restrictions to
foreign ownership. Large population, Natural resources, availability of cheap labour
and raw material, political stability, transparent regulatory framework makes South
Africa attractive place for doing business among investors.
Government Measures to Motivate or Restrict FDI
Nearly all business sectors are open to foreign investors. Government approval is not
required and there are few restrictions on how or how much foreign entities can
invest.
Additionally, the Government has put in place various measures to encourage foreign
investments, including simple tax rules, investment incentives, a better regulatory
policy on competition, protection of intellectual rights. Below are a few examples of
these measures:
- The Foreign Investment Grant, a cash grant, which provides up to 15% of the value
of new machinery and equipment;
- The Skills Support Programme which provides up to 50% of training costs and 30%
of workers' salaries; and
- The Strategic Industrial Project programme which offers tax allowances.
Economic recovery has been slow in South Africa due to the recession, the private
sector has struggled to create new opportunities, and unemployment rates are among
the highest in the world (25.1% in 2014). As a result, President Zuma announced that
the Government will provide up to USD 303 million to support business leaders and
employees who have faced difficulties due to the financial crisis.
Protection of Foreign Investment
Bilateral investment conventions signed by South Africa-
South Africa is a signatory to 40 bilateral investment treaties.
Country Comparison for the Protection of Investors
South Africa Sub-Saharan
Africa
United States Germany
Index of
Transaction
Transparency*
8.0 5.0 7.0 5.0
Index of
Manager’s
Responsibility**
8.0 4.0 9.0 5.0
Index of
Shareholders’
Power***
8.0 5.0 9.0 5.0
Index of
Investor
Protection****
8.0 4.5 8.3 5.0
Source: Doing Business - 2016.
Procedures Relative to Foreign Investment
Companies have to appoint a South African resident as the company's legal
representative. Moreover, foreign companies have to appoint an auditor.
No government approval is required for foreign investors to establish a new business
or invest in South Africa apart from the approval required under the exchange control
regulations.
The investor will be required to appoint a consultant, auditor, and/or legal advisor to
register a company on his/her behalf. The company should be registered within 21
days and must also register with the tax office.
For example, a foreign bank establishing a branch in South Africa may be required to
employ a certain minimum number of local residents in order to obtain a banking
licence and may be obliged to have a minimum capital base.
Restrictions also exist regarding the ownership of immovable property by foreign
companies. Foreign companies are required to register as external companies before
immovable property may be registered in their names.
Office Real Estate and Land Ownership
In case the foreign company is of national interest, the South African government
provides temporary space for a limited period, say up to 2 years.
Risk of Expropriation
As per 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.
Investment Aid
The various forms of aid and incentives provided by government are:
- Foreign Investment Grant: provide up to 15 % of the value of new machinery per
entity for relocation to South Africa.
- The Strategic Investment Project Program: offers a tax allowance of up to 100%
(maximum if USD 86 million per project) on the cost of buildings, plant and
machinery, for strategic investments of at least USD 70 million).
- The Critical Infrastructure Facility: supplements funds up to 30% of the development
costs of qualifying infrastructure projects.
- The Business Process Outsourcing & Off-Shoring (BPO&O): incentive for
companies offering services to offshore clients ($5400-8800 US and training support).
- Incentive for industrial projects using unused and new manufacturing assets (Green
field investments) and expansions of existing industrial projects: 12 % tax incentive.
- Sector Specific Assistance Scheme (SSAS): financial support for industry
associations, joint action groups and export councils.
- Film and Television Production Rebate Scheme: rebate of 15 % for foreign
productions and 25% for South African productions.
- Automotive Production and Development Program (APDP): scheme to promote the
automobile industry (20% of the value of investment in productive assets).
Privileged Geographical Zones
The first Industrial Development Zone (IDZ) was set up in South Africa 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. There are no exemptions from
other laws or regulations, such as environmental and labour laws.
IDZs are currently located at Coega near Port Elizabeth, in East London, Richards
Bay, and at Johannesburg International Airport.
2) FDI TREND AND ECONOMIC SCENARIO IN SOUTH AFRICA
Foreign Direct investment in South Africa has been moderate. Graph below shows the
Net flow of FDI into the country from 1975-2014.
Source: World Bank
FDI Inflow in the country has been weak and volatile, with FDI Outflow in many
years till 1996. However it picked up in 1997 for the first time touching $40 billion.
Again it touched high of $100 billion in 2007, which is highest ever FDI inflow in the
history of country. This depicts the potential investors see in the country. As it can be
seen after financial crisis of 2008, Country witnessed major dip in FDI inflow.
Overall FDI Inflow is quite volatile showing a zigzag trend, which depicts the
uncertainty investor feels about the potential and growth of country.
In 2015, FDI inflow in South Africa saw dramatic dip of 74% y-o-y, to USD $1.5
billion.
South Africa is largely a free economy; government encourages the investment in both
private and public sector. Most of the sectors are open for FDI with no restrictions to
foreign ownership. Large population, Natural resources, availability of cheap labour
and raw material, political stability, transparent regulatory framework makes South
Africa attractive place for doing business among investors.
-20.0
0.0
20.0
40.0
60.0
80.0
100.0
120.0
USD
Bill
ion
s
FDI In South Africa 1975-2014
Foreign Direct Investment 2013 2014 2015
FDI Inward Flow (million USD) 8,300 5,771 1,772
FDI Stock (million USD) 152,123 138,906 124,940
Number of Greenfield
Investments***
172 120 130
FDI Inwards (in % of GFCF) 11.3 8.1 2.8
FDI Stock (in % of GDP) 41.5 39.7 39.9
Source: UNCTAD, 2015
Despite this South Africa has done relatively poor in attracting FDI so far. However, it
tends to improve with the Uptick in FDI in infrastructure sector. Legislative and
regulatory uncertainties are the main culprits which discourage the investors and
depromote FDI inflow in the country. However, in December 2015 the Government
passed the Protection of Investment Act, which strengthens legal safeguards for
foreign investors.
Main Invested Sectors 2012, in %
Financial and insurance
services, real estate and
business services
36.0
Mining 30.9
Manufacturing 17.9
Transport, storage and
communication
9.4
Trade, catering, hotel
industry
5.3
Source: UNCTAD, 2015
FDI Inflows by Countries
Main Investing
Countries
2012, in %
United Kingdom 45.6
Netherlands 18.6
United States 7.2
Germany 5.0
China 3.1
Japan 2.6
Switzerland 1.6
Luxembourg 1.4
Source: UNCTAD, 2015
Nonetheless, South Africa dropped by a large number of places in the Doing
Business ranking published by the World Bank (placing 73rd out of 189 countries in
2016 compared to 69th of 189 in 2015). The country is looking for foreign investors
for its energy infrastructure projects. As a result, it has been strengthening its
partnership with China. FDI flows to South Africa dropped sharply (down 74%) in
2015 according to the UNCTAD Global Investment Trends Monitor. FDI is mostly
concentrated in the telecommunications sector.
The country is the third largest FDI recipient in Africa, after Nigeria and
Mozambique, and the largest FDI provider. Globally, South Africa ranked 15th among
the most attractive economies for transnational companies for 2013-2014. In addition
to structural issues in the electricity supply and logistics sectors, industrial strikes,
which regularly affect production, can also prove discouraging to investor.
3) A GLIMPSE OF SOUTH AFRICAN INDUSTRIAL SECTOR
South Africa is the world's largest gold, platinum, manganese, chromium, vanadium,
alumino-sillicates and titanium producer; and the second largest of
vermiculite and zirconium; third for fluorspar; fourth for antimony; and fifth for zinc,
coal,lead,uranium.
South Africa's economy was traditionally rooted in the primary sectors - the result of a
wealth of mineral resources and favourable agricultural conditions. But recent decades
have seen a structural shift in output.
Since the early 1990s, economic growth has been driven mainly by the tertiary sector -
which includes wholesale and retail trade, tourism and communications. Now South
Africa is moving towards becoming a knowledge-based economy, with a greater focus
on technology, e-commerce and financial and other services.
Among the key sectors that contribute to the gross domestic product and keep the
economic engine running are manufacturing, retail, financial services,
communications, mining, agriculture and tourism.
MANUFACTURING
The bottling section of South African Breweries’ plant in Alrode,
Johannesburg.
South Africa has developed an established, diversified manufacturing base that has
shown its resilience and potential to compete in the global economy.
The manufacturing sector provides a locus for stimulating the growth of other
activities, such as services, and achieving specific outcomes, such as employment
creation and economic empowerment. The sector contributed 15.2% to South Africa's
GDP in 2013, making it the third-largest contributor to the nation's economy.
Manufacturing is dominated by industries such as agro-processing, automotive,
chemicals, information and communication technology, electronics, metals, textiles,
clothing and footwear.
MINING
The massive Sishen open-cast iron-ormine in the Northern Cape.
The country is renowned for an abundance of mineral resources, accounting for a
significant proportion of both world production and reserves, and South African
mining companies dominate many sectors in the global industry. Mining and
quarrying contributed 4.9% to GDP in 2013.
South Africa is the world's biggest producer of gold and platinum and one of the
leading producers of base metals and coal.
The country's diamond industry is the fourth-largest in the world, with only Botswana,
Canada and Russia producing more diamonds each year.
Although well over a century old, South Africa's mining industry is far from fully
tapped. The country is a treasure trove, with mineral deposits only matched by some
countries of the former Soviet Union.
South Africa - while holding the world's largest reserves of gold, platinum-group
metals and manganese ore - has considerable potential for the discovery of other
world-class deposits in areas yet to be exhaustively explored.
The country produces 10% of the world's gold, and has 40% of the world's known
resources. It is estimated that 36 000 tons of undeveloped resources – about one third
of the world's unmined gold – still remains.
The sector spans the full spectrum of the five major mineral categories - namely
precious metals and minerals, energy minerals, non-ferrous metals and minerals,
ferrous minerals and industrial minerals.
AGRICULTURE
A maize field under centre-pivot irrigation near Hoedspruit, Mpumalanga.
Agriculture as a percentage of GDP has decreased over past four decades. This
implies that the economy has gradually become more advanced. In 1960, agriculture
constituted 9.1% of the total economy; this has decreased to only 2.2% in 2013.
Though this decrease would seem to be a negative trend from a farmer's perspective, it
signals that the South African economy is reaching maturity as the secondary and
tertiary sectors become more important.
Maize is most widely grown - followed by wheat, oats, sugar cane and sunflowers.
The government has been developing programmes to promote small-scale farming and
to boost job creation. Citrus and deciduous fruits are exported, as are locally produced
wines and flowers.
South Africa has both well-developed commercial farming and more subsistence-
based production in the deep rural areas.
Covering 1.2-million square kilometres of land, South Africa is one-eighth the size of
the United States and has seven climatic regions, from Mediterranean to subtropical to
semi-desert.
While 13% of South Africa's land can be used for crop production, only 22% of this is
high-potential arable land. The greatest limitation is the availability of water. Rainfall
is distributed unevenly across the country, with some areas prone to drought. Almost
50% of water is used for agriculture, with about 1.3-million hectares under irrigation.
COMMUNICATIONS
Telkom’s microwave communications tower on Naval Hill in Bloemfontein, Free
State.
The communications sector - which, together with transport and storage, accounted
for almost 10% of GDP in 2006 - has been one of the fastest growing of the South
African economy, reflecting the rapid expansion of mobile telephony across the
country.
Fixed line penetration is estimated at 10%, while mobile penetration is significantly
higher at around 93%, according to figures from the Department of Trade and
Industry.
The estimated revenue generated in the telecommunications sector during 2007 was
R126-billion, and telecommunications (hardware and software) contributed an
estimated additional R27-billion.
South Africa's cellular phone market has grown phenomenally since its inception in
1994. It is also the fourth fastest growing Groupe Speciale Mobile (GSM) market in
the world.
Cellular services are provided by three licensed operators: Vodacom, MTN and Cell
C. In June 2006 a virtual cellular service provider, Virgin Mobile, was brought to life
in partnership with Cell C.
The country has more than 33 million mobile phones. The introduction of number
portability in November 2006 has increased the flexibility of the mobile service
industry and is expected to bolster competition between various providers.
TOURISM
Camps Bay in Cape Town, the SouthAfrican city most favoured by international
travellers.
Tourism is regarded as a modern-day engine of growth and is one of the largest
industries globally. One of the advantages of tourism as an export earner is that it is
less volatile than the commodity sector.
Tourism has been earmarked as a growth industry in South Africa, as the industry is
ideally suited to adding value to the country's many natural, cultural and other
resources.
According to the World Travel and Tourism Council, tourism directly and indirectly
constitutes approximately 7% of GDP and employment in South Africa.
Some 74% of all visitors in 2006 were from mainland Africa and about 26% from
overseas. About 7.9 million of the 8.5 million foreign travellers (92%) visited the
country for a holiday and approximately 196,951 (2.3%) for business in 2006.
According to the World Tourism Organisation, sub-Saharan Africa attracted 2.9% of
the world's tourists in 2005. Of this percentage, South Africa has about 20.5% of
market share. South Africa's international tourism receipts amounted to $7.3-billion in
2005. Its share of total African tourist arrivals and tourism receipts was over 34% in
2005.
The outlook for the future of the industry is positive, especially after considering the
2010 Fifa World Cup. The build-up to the event, as well as the exposure that South
Africa has received before and after the event, has no doubt resulted in aggressive
growth in foreign tourism. This has been a proven fact in every country where the
event has been held.
WHOLESALE AND RETAIL TRADE
Maponya Mall in Soweto is just one of the many shopping malls springing up in
townships across South Africa.
Statistics SA produces a monthly survey of the retail trade industry, covering various
retail trade enterprises.
The survey generally covers retailers in specialised food, beverages, tobacco,
pharmaceutical and medical goods, cosmetics and toiletries, general dealers, textiles,
clothing, footwear, leather goods, household furniture, appliances and equipment,
hardware, paint and glass, as well as various other dealers in miscellaneous goods.
Retail trade sales at constant (2000) prices, for the year 2006, showed an increase of
9.7% from 2005. According to Statistics SA, this is the largest increase, together with
the 2004 increase, which was also 9.7%, for any year since 2000.
According to the survey, general dealers, other retailers and retailers in textiles,
clothing, and footwear and leather goods were the major contributors to the increase in
retail trade sales.
Real retail sales' growth decreased in the fourth quarter from the third quarter of 2006
from 10.7% to 9.1% year-on-year. The deceleration follows from the 200 basis point
hike in interest rates during the second part of 2006, making overall economic
conditions somewhat tougher.
Among the major retailing groups are Edcon, Massmart, Pick 'n Pay, Shoprite
Checkers, Mr Price Group, Foschini Group, JD Group and Ellerines Holdings.
FINANCE AND BUSINESS SERVICES
The Absa Bank contact centre in Auckland Park, Johannesburg.
South Africa, despite its "emerging market" status, has a sophisticated financial sector.
With the country's re-integration into the global sphere in 1994, corporate governance
rules, disclosure, transparency and accountability have become an integral part of
doing business in South Africa.
Consequently, regulations governing the financial sector, and particularly risk
management, have undergone considerable refinement to align them to internationally
recognised standards and best practice.
The financial, real estate and business service sector accounted for 22% of the
country's real value added (value of total production) in 2006 and, together with other
services sectors, has proved to be a pillar of the country's economic growth over the
years.
The sector boasts dozens of domestic and foreign institutions providing a full range of
services - commercial, retail and merchant banking, mortgage lending, insurance and
investment.
South Africa's banking sector compares favourably with those of industrialised
countries. Foreign banks are well represented and electronic banking facilities are
extensive, with a nationwide network of automatic teller machines (ATMs). Internet
banking is also available.
The Financial Services Board oversees the regulation of financial markets and
institutions - including insurers, fund managers and broking operations, but excluding
banks, which fall under the South African Reserve Bank.
The National Payment System Act of 1998 was introduced to bring the South African
financial settlement system in line with international practice. The Act confers greater
powers and duties on the SA Reserve Bank in respect of providing clearing and
settlement facilities.
.
Investment and merchant banking remains the most competitive front in the industry,
while the country's "big four" banks - Absa, Standard Bank, Ned bank and FNB -
continue to consolidate their grip on the retail market.
SECTOR SPECIFIC INVESTMENT INCENTIVES
South Africa offers various attractive investment incentives, targeted at specific
sectors or types of business activities. These are:
The Enterprise Investment Programme manufacturing programme
The EIP (manufacturing) is a cash grant for locally based manufacturers who wish to
establish a new production facility, expand an existing facility, or upgrade an existing
facility in manufacturing industries.
The Enterprise Investment Programme tourism support programme
The EIP (tourism) is an investment incentive grant, payable over a period of two to
three years, to support the development of tourism enterprises and in so doing,
stimulate job creation and encourage the geographical spread of tourism investment
throughout South Africa.
Tourism-related activities supported by the grant include the following:
Accommodation services
Passenger transport services
Tour operators
Cultural services
Recreational and entertainment services
Foreign investment grant
This grant seeks to compensate qualifying foreign investors for the cost of moving
qualifying new machinery and equipment from abroad to South Africa.
Critical infrastructure
The critical infrastructure fund is a cash grant for projects designed to improve critical
infrastructure in South Africa, including the following:
Transport systems - road and rail systems
Electricity transmission and distribution systems - power flow and regulation
systems
Telecommunications networks - cabling and signal transmission systems
Sewage systems - network and purification
Waste storage, disposal and treatment systems
Fuel supply systems - piping for liquid, gas, and solid fuel conveyer
transportation
Industrial development zones
IDZs are purpose-built industrial estates linked to international ports that leverage
fixed direct investments in value-added and export-oriented manufacturing industries.
These zones provide the following benefits:
Quality infrastructure
Expedited customs procedures
Duty-free operating environments
The location film and television production incentive
This incentive programme consists of a Large Budget Film and Television Production
Rebate Scheme, whereby foreign-owned qualifying producers are rebated a maximum
of R10-million for the production of large budget films and television productions.
The South African Film and Television Production and Co-Production Incentive
Financial assistance to South African feature films, tele-movies, television drama
series, documentaries and animation. The objective is to contribute to the local film
industry. Production budgets are required to be more than R10-million, with the rebate
being 35%, capped at R10-million.
Export marketing and investment assistance
The EMIA scheme partially compensates exporters in respect of activities aimed at
developing export markets for South African products and services, and to recruit new
FDI into South Africa.
The scheme provides assistance in the form of:
Air travel expenses
Subsistence allowances
Freight-forwarding of display materials
Exhibition space and booth rental costs.
The business process outsourcing and off shoring investment incentive
The BPO&O investment incentive comprises an investment grant, and a training
support grant, towards costs of company-specific training.
The incentive is offered to local and foreign investors establishing projects that aim
primarily to serve offshore clients.
Automotive production and development programme
This programme has four key elements:
Tariff reduction freeze from 2013 until 2020
Local assembly allowance
Production incentives
Automotive investment allowance
4) MACROECONOMIC ENVIRONMENT
Macroeconomic Background Since the transition to democracy, South Africa’s
macroeconomic performance has been solid but not spectacular. Between 1994 and
2003, annual gross domestic product (GDP) growth averaged about 2.9 percent, while
annual per capita GDP growth averaged less than 1 percent.
Although GDP growth fluctuated over this period, it has neither declined nor
exceeded 4.5 percent in any calendar year since 1993. In this respect, South Africa
appears locked into a path of sustained but moderate growth, particularly in light of
growth in comparator countries outside Africa.
Between 1994 and 2003, per capita growth was more than 3 times faster in Thailand
and Malaysia than in South Africa— despite the Asian financial crisis in the mid-
1990s, when GDP dropped by close to 10 percent in these countries—and 10 times
faster in China. Given the challenges that South Africa will face and its currently high
level of unemployment, faster growth is vital.
Investment has also been low, remaining between about 15 and 16 percent of GDP.
This rate is lower than the government’s “unofficial” target of 25 percent, lower than
in the middle-income comparator countries (Brazil and Poland), and far lower than in
the fastest-growing Asian economies. Public sector investment has been low, but
private investment, at about 12 percent of GDP, has also been low.
Macroeconomic Instability
Thirty-three percent of firms rated macroeconomic instability as a serious obstacle to
enterprise operations and growth—making it the second greatest constraint identified
through the ICS. Although growth has been positive for over a decade and inflation
modest, exchange rates have been unstable. Between 2000 and 2002, the rand
depreciated against most major currencies, falling by about 26 percent against the
British pound, 27 percent against the U.S. dollar, and 28 percent against the euro in
real terms.
But between 2002 and 2004 it appreciated 29 percent against the euro, 35 percent
against the pound, and 67 percent against the dollar in real terms. The idea that rapid
fluctuations in the exchange rate engender the perception that macroeconomic
instability is a serious problem is consistent with the finding that exporters were far
more concerned about the macro economy than non-exporters.
Forty-four percent of exporters rated macroeconomic instability a major or very
severe problem, compared with only 28 percent of non-exporters. Because many
South African manufacturing firms appear to be price takers in international markets,
changes in the exchange rate can have a serious impact on enterprise revenues.
Moreover, nearly three-quarters of exporters to the United States—the country with
the currency against which the rand has been most unstable— viewed macroeconomic
instability as a major concern. These results strongly suggest that exchange rate
instability is firms’ main concern with respect to the macro economy.
Crime
In South Africa, rates of violent crime, especially murder, have declined modestly,
but other crimes—particularly property crimes—have been increasing. Between 1994
and 2000, common robbery increased by 168 percent and aggravated robbery
increased by 31 percent.
Finance
Enterprise managers often view access to and the cost of financing as serious
obstacles to operations and growth. In Sub-Saharan Africa, access to and cost of
financing typically rank among the top five constraints.
Yet firms in South Africa were generally far less concerned about financing; fewer
than 20 percent rated either access or cost as a major or very severe obstacle, making
them 8th and 11th of 18 constraints. Objective data generally support the perception-
based data—particularly with respect to the cost of financing.
The real interest rates that firms reported paying for their most recent loan were lower
than the rates in most of the comparator countries for which data were available.
Although the formal firms in the survey were relatively unconcerned about access to
financing, they did not appear awash with bank credit.
Firms in South Africa finance less investment through banks than firms most of the
comparator countries (for example, China, Kenya, Poland, and Senegal), and fewer
firms in South Africa have overdraft facilities than firms in either Brazil or Kenya.
Moreover, South African firms rely heavily on retained earnings to finance both
investment and working capital.
Competition
South African economy is highly concentrated and that barriers to entry are high for
both domestic and foreign firms. Consistent with this finding, firms in South Africa
appear to be relatively profitable despite high wages. High observed wages could also
be consistent with the observation that the market is highly concentrated if managers,
owners, and workers share the rents created by low levels of competition. Directly
assessing the importance of competition using firm-level data is difficult, because
firms rarely complain about a lack of competition, and asking objective questions to
assess the state of competition is difficult
5) INVESTMENT CLIMATE OF SOUTH AFRICA
Openness to, and Restrictions upon, Foreign Investment:
Attitude towards foreign direct investment: The Govt. Of South Africa is
open to foreign investment in order to drive its economic growth,
improve their international competitiveness, and access to foreign
markets. Though M&A’s are still very sensitive issue and require more
work to answer stakeholder concerns.
In SA, most of the sectors are open to FDI, only some of them required
govt. Approval i.e. energy, mining, banking insurance and defence. Also
Department of Trade and Industry's (DTI) Trade and Investment South
Africa (TISA) division provides assistance to foreign investors.
Despite South Africa’s general openness to investment, actions by some South
African Government ministries and statements by politicians provide troubling
examples of a lack of awareness of the potential impact domestic policies can have on
investments.
At times, there also seems to be a lack of conviction in some political circles about the
importance of FDI to South Africa’s growth and prosperity. There is also a general
inability among South African Government ministries to consult adequately with
stakeholders before implementing laws and regulations, which has on occasion
produced unintended but serious consequences that hamper investors. Examples
include new regulations on obtaining visas, the private security industry bill and the
minerals and petroleum development act.
Other Investment Policy Reviews: Macroeconomic management was
initially strong for first half of the decade with reduced level of public
debt, low inflation and positive rate of economic growth .Inflation has
remained within the central bank’s target range of 3-6 percent since
2010, though it has pushed the upper limit since late 2012.
Growth has stalled, averaging 2 percent for the past 4 years, and
government revenue has been negatively affected to result in a projected
deficit of 3.9 percent of GDP through March 2015. In October 2014,
Moody’s downgraded South Africa’s credit rating to Baa2 from Baa1,
and maintained a negative outlook. The rating agency still cited the
government’s weakening institutional strength, lacklustre economic
growth despite low interest rates, infrastructure shortfalls, high labour
costs despite high unemployment, and increased concern about political
stability as the major factors for maintaining a negative outlook for
South Africa.
Laws/Regulations of Foreign Direct Investment: Laws/Regulations of
FDI After the end of apartheid in 1994, the government liberalized trade
and enhanced international competitiveness by lowering tariffs,
abolishing most import controls, undertaking some privatization and
reforming the regulatory environment. Since the 2008 financial crisis,
the government has adopted a more protectionist trade policy to incubate
developing industries. South African banks are well-capitalized and
have little exposure to sub-prime debt or other sources of financial
contagion.
Limits on foreign control: Currently there are no limitations on foreign
ownership, although the Private Security Industry Regulation Act
(PSIRA) which has passed Parliament and is awaiting presidential
signature to become law, has a clause requiring 51 percent ownership
and control by South Africans.
Screening of FDI: Mergers and acquisitions in South Africa are subject
to screening and approval under the Competition Act of 1998. This act
allows South Africa’s Competition Commission to review investment
for public interest considerations such as its effect on specific industrial
sectors, employment within South Africa, the ability of small businesses
to become competitive, and the ability of national industries to compete
internationally.
Investment Trends: South Africa’s Broad-Based Black Economic
Empowerment (B-BBEE) program has a significant effect on foreign
investment. B-BBEE is an affirmative action program assisting
historically disadvantaged South Africans to participate in the economy
those changes entering into force in April 2015.
The 2013 updates retain a Black Economic Empowerment (BEE)
“Scorecard” to rate a firm’s commitment to economic transformation
using five different dimensions—ownership, management control, skills
development, enterprise and supplier development, and socio-economic
development. Each dimension is weighted, with ownership receiving the
most empowerment points (25) and socio-economic development the
least (5). Equity equivalence deals provide multinational corporations
options for scoring on the B-BBEE ownership dimension without the
transfer of equity stakes, which could run against a company’s bylaws.
Such a deal would likely involve creation of a black-owned South
African joint venture valued at least 25 percent of the multinational’s
South African operations. However, the process for approving an equity
equivalent mechanism by the DTI is complicated and requires a
significant effort on the part of the multinational.
Conversion and Transfer Policies
Foreign Exchange: The South African Reserve Bank's (SARB)
Exchange Control Department 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.
Generally, there are only limited delays in the conversion and transfer of
funds. Due to South Africa’s relatively closed exchange system, no
private player, however large, can hedge large quantities of Rand for
more than five years.
While non-residents may freely transfer capital in and out of South Africa,
transactions must be reported to authorities. Non-residents may purchase local
securities without restriction. To facilitate repatriation of capital and profits, foreign
investors should ensure an authorized dealer endorses their share certificates as "non-
resident." Foreign investors should also be sure to maintain an accurate record of
investment.
Remittance Policies: Subsidiaries and branches of foreign companies in
South Africa are considered South African entities and are treated
legally as South African companies. As such, they 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 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).
While South African companies may invest in other countries, SARB
approval/notification is required for investments over R500 million
(USD 43.5 million). South African individuals may freely invest in
foreign firms listed on South African stock exchanges.
Individual South African 8 taxpayers in good standing may make
investments up to a total of R4 million (USD 340,000) in other
countries. As of 2010, South African banks are permitted to commit up
to 25 percent of their capital in direct and indirect foreign liabilities. In
addition, mutual and other investment funds can 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
Expropriation and Compensation
The Expropriation Act of 1975 (Act) and the Expropriation Act Amendment of 1992
entitles the government to expropriate private property for reasons of public necessity
or utility. The decision is an administrative one. Compensation should be the fair
market value of the property as agreed between the buyer and seller, or determined by
the court, as per section 25 of the Constitution.
In several restitution cases, in which the government initiated proceedings to
expropriate white-owned farms after courts ruled the land had been seized from blacks
during apartheid, the owners rejected the court-approved purchase prices. In most of
these cases, the government and owners reached agreement on compensation prior to
any final expropriation actions.
The government has twice exercised its expropriation power, taking possession of
farms in Northern Cape and Limpopo Provinces in 2007 after negotiations with
owners collapsed. The government paid the owners the fair market value for the land
in both cases. There is no record, dating back to 1924, of an expropriation or
nationalization of a U.S. investment in South Africa. A new draft expropriation law,
intended to replace the Expropriation Act of 1975, is currently under consideration in
Parliament. Some commentators have raised concerns about aspects of the new
legislation, including new clauses that would allow the government to expropriate
property without first obtaining a court order.
The Mineral and Petroleum Resources Development Act 28 of 2002 ("MPRDA"),
enacted in 2004, gave the state ownership of all of South Africa's mineral and
petroleum resources. It replaced private ownership with a system of licenses
controlled by the South African government.
Under the MPRDA, investors who held pre-existing rights were granted the
opportunity to apply for licenses provided they met certain criteria, including the
achievement of certain BEE objectives. Amendments to the MPRDA passed by
Parliament in 2014 but not signed into law by President Zuma grant the state de facto
expropriation rights for projects in the minerals and petroleum sectors; they also grant
broad discretionary powers to the person of the Minister to restrict exports and prices
for commodities the Minister deems strategic.
While seemingly written for the mining sector, the bill’s inclusion of petroleum could
complicate, if not obviate, new investment in oil and gas because of the carried
interest provisions. The South African government has been strongly urged to separate
out petroleum from the bill. In February 2015 the bill was returned to committee
because of constitutional concerns over process and policy.
In February 2014, the South Africa Parliament passed amendments to the 2001 Private
Security Industry Regulatory Act aimed at controlling national security risks
associated with foreign investors. President Zuma had not signed the bill into law as
of March 2015. This bill would require at least 51 percent domestic ownership of
foreign-owned private security companies, possibly including not only private security
services providers, but also security equipment manufacturers and service providers
like locksmiths and key makers.
The forced ownership transfer requirements likely would be found in violation of
South Africa’s commitments under the General Agreement on Trade in Services
(GATS). There is concern that passage of the bill with the local ownership
requirement would lead other industries to ask for similar provisions.
In 2013, the government published for comment a draft bill—the Promotion and
Protection of Investment Act—to put the rights of foreign and domestic investors on
an equal footing. The draft would provide the government the option to expropriate
commercial property at a price lower than market value based on a formulation in the
Constitution termed “just and equitable compensation.”
This considers market value but discounts it based on the current use of the property,
the history of the acquisition and use of the property, and the extent of direct state
investment and subsidy in the acquisition and beneficial capital improvement of the
property. The bill also would allow the government to expropriate under a broad range
of policy goals, including economic transformation and correcting historical
grievances. The government has underscored its intentions are not to expropriate
property, and was revising the draft in early 2015
Dispute Settlement Legal System, Specialized Courts, Judicial Independence, and Judgments of Foreign
Courts: South Africa has a mixed legal system of Roman-Dutch civil law, English
common law, and customary law.
Bankruptcy: South Africa has a strong bankruptcy law, which grants many rights to
debtors, including rejection of overly burdensome contracts, avoiding preferential
transactions and the ability to obtain credit during insolvency proceedings. South
Africa has a World Bank rank of 39 in the 2015 Doing Business report.
Investment Disputes: A major U.S. company sued the South African Government in
2014 over a disputed award on a government tender. The dispute is on-going in South
African courts.
International Arbitration: Arbitration in South Africa follows the Arbitration Act of
1965, which does not distinguish between domestic and international arbitration and is
not based on UNCITRAL model law. ICSID Convention and New York Convention
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 Settlement of Investment Disputes (ICSID).
South Africa recognizes the International Chamber of Commerce, which supervises
the resolution of transnational commercial disputes. South Africa applies its
commercial and bankruptcy laws with consistency, and has an independent, objective
court system for enforcing property and contractual rights. South Africa’s new
Companies Act also provides a mechanism for Alternative Dispute Resolution.
South African courts retain discretion to hear a dispute over a contract entered into
under U.S. law and under U.S. jurisdiction. The South African court will interpret the
contract with the law of the country or jurisdiction provided for in the contract,
however.
Duration of Dispute Resolution: Dispute resolution can be a time-intensive process in
South Africa. If the matter is urgent, and the presiding judge agrees, an interim
decision can be taken within days while the subsequent appeal process can take
months or years. If the matter is a dispute of law and is not urgent, it may proceed by
application or motion to be solved within months.
Where there is a dispute of fact, the matter is referred to trial, which can take several
years. The Alternative Dispute Resolution involves negotiation, mediation or
arbitration, and may resolve the matter within a couple of months. Alternative Dispute
Resolution is increasingly popular in South Africa for many reasons, including the
confidentiality which can be imposed on the evidence, case documents and the
judgment.
Protection of Property Rights
Real Property: 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 register mortgages as security when providing
finance for the purchase of property.
Intellectual Property Rights: South Africa has a strong legal structure
and enforcement of intellectual property rights through civil and
criminal procedures. Criminal procedures are generally lengthy, so the
customary route is through civil enforcement. There are concerns about
illegal commercial photocopying, software piracy, and internet policy.
Transparency of the Regulatory System South African laws and registrations are generally published in draft form for
stakeholder comment, and legal, regulatory, and accounting systems are generally
transparent and consistent with international norms.
South Africa implemented a new Companies Act in 2011, intended to encourage
entrepreneurship and employment opportunities by simplifying company registration
procedures and reducing the costs for forming new companies. It is also intended to
promote innovation and investment in South African markets and companies by
providing for a predictable and effective regulatory environment.
In the first action against a U.S. company under the new act, South Africa’s
Competition Appeals Court dismissed in March 2012 an appeal by the South African
Government to overturn the Competition Tribunal's approval of a U.S. company’s
purchase of a majority stake in a South African retailer.
. The court, however, ordered the South African firm to re-employ 503 workers fired
before the merger and commissioned a study to recommend the best means by which
South African small and medium sized suppliers could participate in the U.S.
Company’s global value chain. South Africa’s Consumer Protection Act (2008) went
into effect in 2011. The legislation reinforces various consumer rights, including right
of product choice, right to fair contract terms, and right of product quality. Impact of
the legislation will vary by industry, and businesses will need to adjust their
operations accordingly.
Political Violence Seven politically motivated killings occurred during 2014. Many more individuals
survived assassination attempts. According to press reports, since 2011 at least 47
ANC members, at least 17 members combined from the Inkatha Freedom Party (IFP)
and National Freedom Party, and one member of the Agang SA party were killed in
politically linked violence.
Although violence occurred, the Independent Electoral Commission (IEC) called the
2014 election the most peaceful on record. The election coincided, however, with a
record number of protests over poor government services and local grievances. The
government preemptively deployed a record 20,000 police and army personnel to
potential trouble spots to maintain order.
There were reports of electoral irregularities, including attempted vote rigging, but the
IEC responded quickly to incidents, and political parties had an opportunity to
challenge results in wards where incidents occurred.
Corruption Allegations of corruption in the public tendering process persist in South Africa at all
levels of government, despite the country's excellent anti-corruption regulatory
framework, as highlighted by the Prevention and Combating of Corrupt Activities Act
of 2004. The office of the Public Protector, among other agencies, is tasked with
conducting independent investigations into allegations of official corruption, and is
widely respected for its effectiveness and impartiality
Labour Over the last 21 years, the South African government has replaced apartheid-era
labour legislation with policies that emphasize employment security, fair wages, and
decent working conditions. Under the aegis of the National Economic Development
and Labour Council (NEDLAC), government, business and organized labour
negotiate all labour laws, with the exception of laws pertaining to occupational health
and safety. South African law allows workers to form or join trade unions without
previous authorization or excessive requirements.
Labour unions that meet a locally negotiated minimum threshold of representation
(often 50 percent plus one union member) are entitled to represent the entire
workplace in negotiations with management. As the majority union or representative
union, they may also extract agency fees from non-union members present in the
workplace.
South Africa’s three largest labor federations pledged to step up efforts to recruit
members in order to strengthen workers’ collective bargaining power. The right to
strike is protected under South African law. Improved labor stability is essential for
South Africa’s economic stability and development, and vital to the country’s ability
to continue to attract and retain foreign investment.
Government, business, and labor are attempting to address these challenges through a
process led by South African Deputy President Cyril Ramaphosa..The Labor Relations
Act (LRA), in effect since 1995 with amendments made in 2014, provides fair
dismissal guidelines, dispute resolution mechanisms, and retrenchment guidelines
stating 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
striking 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 called legally.
Foreign Trade Zones/Free Ports/Trade Facilitation South Africa designated its first Industrial Development Zone (IDZ) in 2001. IDZs
offer dutyfree import of production-related materials and zero VAT on materials
sourced from South Africa, along with the right to sell in 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 from DTI. There are no exemptions from other
laws or regulations, such as environmental and labor laws.
Bilateral Investment Agreements South Africa has bilateral investment treaties (BITs) with 41 countries, including
Argentina, Austria, Belgium and Luxemburg, Canada, Chile, the Czech Republic,
Finland, France, Germany, Greece, Mauritius, the Netherlands, the Republic of Korea,
Spain, Sweden, Switzerland, Turkey, and the United Kingdom. After a review of BITs
began in 2010, the DTI determined in 2012 that “first generation” BITs, an estimated
30 agreements mostly with EU states, exposed South Africa or created domestic
policy conflicts, and should be terminated. South Africa may adopt a new BIT model
for the future that exempts investor-state dispute and expropriation provisions, and
facilitates the government’s economic transformation goals including Broad-based
Black Economic Empowerment (B-BBEE). In September 2012, South Africa gave
notice to Belgium and Luxemburg that it will terminate their BITs in March 2013, and
informed the EU that remaining BITs would be allowed to expire. Article 52 of the
2000 EU-South Africa Trade, Development, and Cooperation Agreement covers
investment promotion and protection.
6) CONCLUSION
Why to Invest in South Africa
Strong Points
South Africa has high market potential, well developed infrastructures
and a reasonably competitive domestic economy.
The country's democracy is also well-established with transparent and
contested elections and an appreciation for the rule of law.
The country has put into place economic reforms, which have led to
macro-economic stability, as well as tax and customs reductions. It also
has a large and active stock exchange.
South Africa has shifted from its traditional industries to production and
financial services, which are the main contributors to the GDP. The
tourism and retail sectors also have great potential.
Why not to invest in South Africa
Weak Points
There are a number of problems in South Africa, which may discourage investors.
There has been an increase in labour strikes in recent years, which rating
agencies have warned could further lower South-Africa's credit rating.
Violent crime and corruption continue to be widespread.
Access to electricity is also increasingly problematic.
Additionally, although unemployment is high, high-skilled labour is in
short-supply and immigration laws make it difficult to hire foreign
workers.
The import-export process can also be cumbersome. Investors are also
concerned about the general direction of policy-making, in particular
economic policy, and structural reform issues.
Investment Opportunities
The Key Sectors of the National Economy Mineral exports, Manufacturing sector
which includes railway rolling stock, synthetic fuels, and mining equipment and
machinery, tourism, health and fruit production.
High Potential Sectors
Business process outsourcing which includes call centres.
Privatization Programmes
Postal service, the telecommunications services (TELKOM) and railway lines
scheduled for privatization.
Sectors Where Investment Opportunities Are Fewer
Monopolistic Sectors
Banking, insurance and broadcasting industries. Also there are some restrictions on
the borrowing levels of foreign-controlled companies.
Sectors in Decline
Textiles and clothing