SOUTH AFRICA'S INVESTMENT ENVIRONMENT by cuiliqing

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									              SOUTH AFRICA’S INVESTMENT ENVIRONMENT



Basic facts
Geography
Location:     Southern Africa, at the southern tip of the continent of Africa
Total Area: 1,219,912 sq km
Land Area: 1,219,912 sq km
              note: includes Prince Edward Islands (Marion Island and Prince
Edward Island)
Area - comparative:Slightly less than twice the size of Texas
Land boundaries: 4,862 km
Climate:      mostly semiarid; subtropical along east coast; sunny days, cool
              nights
Terrain:      vast interior plateau rimmed by rugged hills and narrow coastal
              plain
Natural resources: gold, chromium, antimony, coal, iron ore, manganese,
                       nickel, phosphates, tin,   uranium, gem diamonds,
                       platinum, copper, vanadium, salt, natural gas
People
Population: 43,647,658 (July 2002 est.)
Population growth rate: 0.02% (2002 est.)
Birth rate:   20.63 births/1,000 population (2002 est.)
Death rate: 18.86 deaths/1,000 population (2002 est.)
Net migration rate: -1.56 migrant(s)/1,000 population (2002 est.)


Ethnic groups:
Black 75.2%
White 13.6%
Coloured      8.6%
Indian        2.6%




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Religions:
Christian                    68%
Muslim                       2%
Hindu                 1.5% (60% of Indians)
Indigenous beliefs and animist        28.5%


Languages: 11 official languages, including Afrikaans, English, Ndebele,
Pedi, Sotho, Swazi, Tsonga, Tswana, Venda, Xhosa, Zulu


Literacy:
Definition:   age 15 and over can read and write
Total population:     85%
Male: 86%
Female:       85% (2000 est.)


Economic Overview


Growth in South Africa’s real gross domestic product slowed down from 3.5
percent in 2000 to 2 percent in 2001 before accelerating to an annualised rate
of about 2.5 percent in the first half of 2002. The slowdown in 2001 was
particularly noticeable in the manufacturing sector, but healthy growth in most
of the goods-producing industries contributed to the promising growth
recovery in the first half of 2002.


The agricultural sector was also a source of weaker growth in 2001. The real
value added by this sector fell by 3 percent in that year, following an
expansion of 7.5 percent in 2000. The real value added by the mining sector
declined by 2 percent in 2000 and then remained at this lower level in 2001.
This pause in the medium-term decline in real mining production was short-
lived, however, and output levels declined again at an annualised rate of 0.5
percent in the first half of 2002. The gold, coal and platinum sectors recorded
lower output volumes in the first half of 2002. The major part of output in these
sub sectors is destined for the export market, signalling that the current



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recovery in the international economy might lead to a greater future demand
for mining output.


The manufacturing sector was directly affected by the worldwide slowdown in
economic activity and weaker growth in domestic demand. Growth in this
sector fell from 5 percent in 2000 to 3 percent in 2001 and was particularly
weak in the third quarter of 2001 when output was seriously disrupted by
industrial action in industries such as the automobile and rubber industries.
Output growth in the manufacturing sector began to recover towards the end
of 2001, spilling over into the first half of 2002 at an annualised rate of 4 (5,4)
percent. This compares favourably with most other middle income
industrialising countries. Confidence in the manufacturing sector is strong and
expectations are that moderate to good growth will continue for at least
another 24 months. The decline in manufacturing has bottomed-out and there
are encouraging signs of possible employment growth in manufacturing


Fairly solid growth in aggregate domestic final demand, the recovery in the
international economy and the greater price competitiveness of domestic
producers in export markets, all contributed to the recovery in the
manufacturing sector in the first half of 2002. A lowering of inflation and likely
cuts in interest rates, in addition to reduction in personal income tax, will
support significant increases in domestic consumer expenditure thus
increasing domestic demand.         Forecasts by the Bureau for Economic
Research based on surveys of manufacturing enterprises show continued
strong growth in manufacturing output over the next four years. In terms of
manufcturing output, the sector is expected to be 40% larger in 2007 than was
in 1995


The real value added by the sector supplying electricity, gas and water
declined by 2.5 percent in 2000 and 0.5 percent in 2001, and then remained
roughly unchanged from the second half of 2001 to the first half of 2002. The
recent declines and subdued growth in electricity production, which is the
dominant sector among the utility industries, could be attributed to mild
winters in 2000 and 2001, electricity imports from Mozambique and to the


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decline in the importance of the goods-producing industries relative to the
services sectors.


The growth in output originating in the construction sector accelerated from
2.5 percent in 2000 to 4 percent in 2001, mainly due to strong demand for
residential buildings. When the demand for residential buildings decelerated in
the first half of 2002, growth in the real value added by construction
enterprises slowed down to an annualised rate of just 1 percent. Growth in the
real value added by the commercial sector, i.e. essentially the wholesale,
retail and motor trade, slowed down from 4.5 percent in 2000 to 3.5 percent in
2001, and to 2.5 percent at an annualised rate in the first half of 2002. The
slowdown in 2001 was consistent with the weaker economic conditions
around the world, but in 2002 part of the slowdown could be attributed to the
bunching of automobile sales towards the end of 2001 and the return to more
normal sales volumes in the first half of 2002. Apart from the motor trade, the
general retail trade sector continued to grow robustly in the first half of 2002.
The continued expansion of the country’s cellular telecommunications network
provided a strong impetus to growth in the real value added by the transport,
storage and communication sector in 2001 and in the first half of 2002. In
addition, high volumes of import and export traffic have created opportunities
for the transportation sector to generate extra income during the past eighteen
months. Growth in the real value added by the financial intermediation,
insurance, real estate and business services sector slowed down from 6
percent in 2000 to 4 percent in 2001 and to a still relatively lively rate of 3.5
percent in the first half of 2002. The latest slight slowdown was mainly
confined to the life assurance and pension fund industries, securities traders
and to micro-lending activities, and occurred despite fairly lively conditions in
the real-estate industry.


Real gross national income per head of the South African population
increased by 1 percent in 2000 and remained roughly unchanged in 2001.
Then there was a strong pick-up at an annualised rate of 3 percent in the first
half of 2002 when dividend payments by resident companies to non-resident
parent companies and other shareholders were cut back quite drastically.


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However, real national income per capita in the first half of 2002 was about
equal to the level of the early 1990s.


In the first half of 2002 the growth in real aggregate domestic expenditure
accelerated at an annualised rate of about 3.5 percent. Spending in the first
half of 2002 was boosted by fairly aggressive inventory build-ups and by
strong aggregate final demand. Gross fixed capital formation and higher
consumption expenditure by households and general government contributed
materially to the strong growth in final demand in the first half of 2002.


Growth in real gross fixed capital formation accelerated from 0.5 percent in
2000 to 3.5 percent in 2001 and at an annualised rate of 6.5 percent in the
first half of 2002.
                                                                source:
www.reservebank.co.za




Natural Resources


South Africa is one of the world’s and Africa’s most important mining countries
in terms of the variety and quantity of minerals produced. It has the world’s
largest reserves of chrome, gold, vanadium, manganese and platinum group
metals. South Africa is the leading producer for nearly all of Africa's metals
and      minerals production apart from diamonds, uranium, copper and cobalt
and phosphates.


The history of South Africa's oil industry goes back to 1884 when the first oil
company was established in Cape Town to import refined products. Since
then the industry has grown and matured. Today the country processes
approximately 20 million tonnes per annum of crude and consumes 23 million
tonnes of liquid fuel products of which 45 percent is gasoline and 26 percent
diesel.

                                                                          source:
www.mbendi.co.za




                                                                                    5
POLICY ENVIRONMENT: MACROECONOMIC STABILITY



The South African economy has since 1994 been through a process of
structural transformation. The country implemented macroeconomic policies
that seeked to make the economy more outward orientated, promote
domestic competitiveness, growth and employment.


   Monetary Policy


-   The main objective of monetary policy is to secure a stable financial
    environment, which includes low and stable inflation.        To achieve this
    objective, the Reserve Bank adopted inflation targeting. Department of
    Finance and the Reserve Bank agreed on an inflation band of 3% to 6%.
    The target range remained unchanged for 2003, and is set at an annual
    average of 3% to 5% for 2004 and 2005. For targeting purposes, inflation
    is measured by a consumer price index termed CPIX, which excludes
    mortgage interest rate costs.


-   Inflation targeting improves the transparency of the Reserve Bank’s
    policy framework; and it includes accountability by the Reserve Bank to
    the Cabinet with regard to meeting inflation targets.


-   Inflation targeting allows for a positive real interest rate, which is to be
    used as a policy instrument to control domestic inflation. Furthermore the
    exchange rate is allowed to fluctuate at competitive levels with minimum
    intervention from the Reserve Bank.


-   The Reserve Bank has full independence to adjust its policies and
    operations in order to achieve its inflation targets. It is therefore protected
    from any political objectives, something that is generally perceived to
    improve investor confidence.


-   The forward book of the Reserve Bank reflects all unsettled future
    foreign exchange commitments of the Bank. The forward book of the

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    Bank was used, inter alia, to provide forward cover to residents in respect
    of their offshore loans. This resulted in an oversold (negative) balance on
    the forward book. Both the National Treasury and the Bank have
    expressed their determination to reduce the NOFP as it has been
    perceived negatively by market participants and commentators, including
    the International Monetary Fund, the rating agencies and the investment-
    banking community. The Reserve Bank has reduced the negative balance
    on the forward book from US$ 22 billion in 1996 to 1.8 US$ billion in 2002.


-   The government is committed to an open capital market and the gradual
    relaxation of exchange controls.        In February 2000, the government
    increased the private individual investment allowance from R500 000 to
    R750 000.    In addition, the amount of investment applicable to SADC
    countries has also increased significantly. The SADC countries’ limit of
    R250 million per new approved investment has been increased to R750
    million and also applies to the rest of Africa.    The amount of foreign
    investment allowed in other countries across the globe was increased from
    R50 million to R500 million. With regard to the final and full abolition of
    exchange controls, the government is likely to remain cautious as long
    as capital flows remain of a predominantly short-term or volatile nature.
    To give the economy time to adjust and to avoid instability, one can expect
    that certain limits will remain for the moment.
-   The Government announced in the 2003/4 Budget that there will be a
    foreign exchange amnesty for individuals and institutions. This amnesty
    will permit the repatriation of capital by those persons who desire to bring
    back funds but fear the consequences of previous illegal acts.


   Fiscal Policy


-   Fiscal policy priorities are focused on restructuring government
    expenditure towards social services that would contribute to a better life
    for all South Africans.       Given the constraints facing government,
    remarkable success in respect of sustainable macro-economic and fiscal



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    balances has been achieved since 1994. These have created a platform
    for sustainable increases in government expenditure in the future.


-   Key fiscal achievements since 1994 include:


       -   The fiscal deficit as a % of GDP was systematically reduced from
           4.5% to an estimated 2.4% for 2003/04;
       -   Fiscal prudence has provided scope for declining debt service
           costs from 5.5% of GDP in 1994 to 4.1% of GDP in 2003/4;
       -   A very low foreign debt to GDP ratio of 27% compared to most
           other emerging markets. This coupled with strong export growth
           and FDI inflows make the risk of default on foreign debt negligible.
           Moody’s and Standard and Poor also reflect this in their recent
           upgrades in South Africa’s investor ratings.
       -   A decline in government consumption expenditure as a % of
           GDP from 20% in the mid-1990s to 19% in 2003/4;
       -   A sharp decline in general government dissavings from 5.8% in
           1994 to 0.5% in 2001; and
       -   Improved tax revenue collection has consistently outperformed
           targets, thanks to the successful restructuring of the South African
           Revenue Service (SARS) and an expanded tax base;


-   Key fiscal policy reforms include:


       -   The introduction of a three-year Medium-term Expenditure
           Framework (METF) has brought greater transparency and certainty
           to the budget process. It has also strengthened the links between
           policy priorities and government’s long-term expenditure plans;


       -   Restructuring of the Inland Revenue and Customs and Excise
           Directorates in the Department of Finance (currently the National
           Treasury) into an autonomous revenue collection agency, known
           as the South African Revenue Service (SARS);



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       -   Real tax relief for individuals has been provided to low- and
           medium-income taxpayers. Total income tax relief for the period
           1994-2002 was about R50 billion;


       -   A reduction of the rate of secondary tax on companies in 1996
           from 25% to 12.5%. This was followed by a reduction in the
           standard corporate tax rate from 35% to 30% in 1999. These
           changes have reduced the combined tax rate (for non-mining
           companies) from 48% to 38.7% since 1996. These reforms have
           attempted to create a tax environment that is internationally
           competitive, thereby improving the investment climate;


       -   Initiatives to broaden the tax base include the introduction of
           Capital Gains Tax (CGT), taxation of foreign income earned by
           South African individuals and companies, and a simplification of
           individual tax returns;


       -   Shift   from    harmful   tax   practises   (i.e.   tax   holidays)     to
           internationally     acceptable     investment       incentives        (i.e.
           accelerated depreciation for qualifying assets)




POLICY ENVIRONMENT: GLOBAL AND DOMESTIC COMPETITIVENESS


   Accession to the global trading system


South Africa was a signatory to the General Agreement on Tariffs and Trade
(GATT) and participated in the Uruguay Round of negotiations. In December
1994, the country ratified the Marrakesh Agreement, which concluded the
Uruguay Round of negotiations and led to the establishment of the World
Trade Organisation.       As a member of the organisation, South Africa was
compelled to undertake commitments with regard to tariff reform, among
others.



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-   Key aspects of South Africa’s trade reform include:


    -   South Africa’s offer to the WTO consisted of a five-year tariff
        reduction and tariff rationalisation programme. The latter includes a
        commitment to reduce the number of tariff categories to six, which
        had previously numbered over 100. These were to be at the rates of
        0%, 5%, 10%, 15%, 20% and 30%, with any discretionary changes to
        the system being disallowed. The only exceptions to the five-year tariff
        liberalisation process were the clothing and textiles and automotive
        sectors, which were granted 8 years to attain the levels made in the
        WTO offer;
    -   Average weighted import duties were also to be reduced from 34%
        to 17% for consumption goods, 8 % to 4% for intermediate goods, and
        11% to 5% for capital goods; and
    -   South Africa’s average tariff declined from 11.7 % to 4.7 % in 2003.


-   Other aspects of the WTO offer included:


    -   Increasing the proportion of bound tariffs from less than 20% to just
        over 50%;
    -   Increasing the percentage of bound zero-rated tariff lines to just
        over 25%;
    -   Reducing the simple average tariff for industrial tariffs by one third
        in a phased reduction programme; and
    -   For the agricultural sector, liberalisation first took the form of
        tariffication of QRs, followed by the reduction in diversity of ad
        valorem tariffs.


   Market Access


Intensifying competition for export markets, investment and technology is the
hallmark of the current global economic environment, and access to these
markets is the measure for international competitiveness. Therefore
dismantling barriers to trade and gaining increased market access is a critical


                                                                             10
component of South Africa’s global economic strategy, which is focused
on improving the country’s export performance.


The global economic strategy as formulated by the Department of Trade
and Industry takes into account national political and economic conditions
and developmental imperatives confronting South Africa. The strategy also
responds to the economic marginalisation of neighbouring countries in
Southern Africa and the African continent.


South Africa, since its democratic transition in 1994, has engaged in a series
of trade negotiations, which led to: the signing of a free trade agreement
(FTA) with the EU; a SADC protocol which includes a FTA by 2008; WTO
membership and thus market access on a multilateral level; preferential
market access to countries such as Japan, Norway, and Canada through the
Generalised System of Preferences (GSP); and increased preferential market
access to the United States resulting from the African Growth and
Opportunity Act (AGOA).


South Africa, in line with its “Butterfly Strategy”, is also developing bilateral
trade relations with markets in Africa, Latin America and Asia. These offer
vast export opportunities to South Africa because of their rapid growth and
also because the structure of our trade reflects a higher proportion of value-
added exports. Currently, South Africa is in the early stages of trade talks
with countries in these regions such as Mercosur and India with a view to
negotiate bilateral free trade agreements.               In the light of     the
complementarities that emerge from comparable levels of industrial
development, these economies also offer unique opportunities in terms of
investment, joint ventures, and technology transfer.


-   Market access under current trade agreements


    -   SA–EU FTA came into effect on 1 January 2000 as part of the Trade
        Development and Cooperation Agreement (TDCA).           The agreement
        provides duty-free access to 95 per cent of South Africa’s exports


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    to the EU within the next 10 years. This will be the most extensive
    and rapid in the case of industrial goods. Most of the latter which are
    produced in South Africa, and which qualify under the rules of origin,
    will receive duty free entry to the EU market within three years of the
    implementation of the agreement, that is, by the end of 2002. The
    agreement also includes agriculture, unlike several comparable
    agreements that the EU has concluded with the Mediterranean
    countries. In turn South Africa is required to remove duties on 86 per
    cent of its total imports from the EU. The phase-out schedule on these
    duties is spread over a maximum of 12 years. Commodities such as
    steel, ferro alloys, aluminium, furniture and automotive products
    will gain substantially from the FTA. Furthermore, the possibility of
    establishing completely new industries to produce for the EU has been
    made a reality by this agreement.


-   SA-SADC FTA is to be implemented by 2008. Tremendous progress
    in negotiations has been made towards this end, which includes the
    launching of the SADC Protocol on Trade in September 2000.
    Outstanding issues such as the need to improve market access and to
    resolve the rules of origin for certain commodities are currently
    receiving attention. This agreement is an extremely important tool to
    foster regional prosperity in so far as it encourages intra-regional
    trade and promotes investment and technology transfers.


-   AGOA builds on existing U.S. programs designed to increase trade
    and investment between the United States and developing countries.
    The act expands benefits available under the GSP, which offers duty-
    free treatment to imports of selected products from specific beneficiary
    countries. AGOA provides three important benefits to Sub-Saharan
    African exporters. Firstly, it extends the duty-free treatment under
    the GSP program to September 2008. Secondly, the AGOA eliminates
    most of the limitations of the GSP program for Sub-Saharan African
    countries. Thirdly, it AGOA expands the product coverage of the
    GSP program exclusively for products of Sub-Saharan Africa.


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      Naturally, South Africa as a Sub-Saharan African country stands to
      gain from all these benefits.


      The act includes duty-free treatment of 1800 tariff line items in
      addition to the standard GSP list of approximately 4 600 items currently
      available to non-AGOA GSP beneficiary countries. These tariff line
      items includes all major industries and also additional commodities,
      which were previously excluded from GSP treatment such as footwear,
      luggage, handbags and flatware. Furthermore, AGOA provides duty-
      free and quota-free access to the U.S. market without limits for
      apparel made in Sub-Saharan African countries from U.S. fabric,
      yarn and thread. It also provides for substantial growth of these
      commodities given the relatively high limits set on the volume of their
      exports to the U.S.


      SACU - US FTA negotiations


      SACU is negotiating a FTA with the US in order to build on the success
      of the AGOA and to develop a stable long-term trade & investment
      relationship between SACU and US.


South Africa is also exploring additional FTA’s with EFTA, China and Nigeria.


Membership of International Organisations


Common Monetary Area (CMA)
Southern African Customs Union (SACU)
Southern African Development Community (SADC)
Organisation for African Unity (OAU)
Commonwealth
Indian Ocean Rim Association for Regional Cooperation
United Nations Cooperation for Trade and Development (UNCTAD)
World Trade Organisation (WTO)
World Bank and International Monetary Fund (IMF)


                                                                            13
   Industrial Policy


In the period up to the mid-1990s, South Africa’s industrial policy was
predominantly focused on import-substituting industrialisation using by
demand side measures (i.e. tariffs and export subsidies). The government
and parastatals also invested in what were seen as strategic capital-intensive
mega projects, whose products were highly protected and resulted in
significant high costs for down-stream industries. There has since been a
significant shift in policy focus, currently the objective is to build an
internationally competitive industrial base in South Africa which is well
integrated in the global economy. The current industrial policy is designed to
stimulate   competitiveness,    create   a   value   added   export   oriented
manufacturing sector, and increase employment.


The key instruments of the present industrial policy are aimed at reducing
costs and improving the efficient use of inputs, hence they are termed
supply-side measures and includes:
-   Incentives for value added manufacturing projects;
-   Support for industrial innovation;
-   Improving access to finance;
-   Creating an enabling environment for SME development;
-   Industrial development zones;
-   Export incentives; and
-   Promoting competition and consumer protection.


The above supply-side measures are all encapsulated by the Integrated
Manufacturing Strategy (IMS).
The IMS is a strategy for all processes that transform natural products into
manufactured products, and all associated processes as well as various
related activities and services. These include the extraction of raw materials
and procurement of inputs, the production of intermediate goods and final
products, packaging, marketing, distribution and retail.


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The IMS is also the integration of interventions related to competitiveness.
These interventions include market access, beneficiation and value addition,
regional production equity and economic participation, knowledge intensity
and services integration, and the development of integrated value matrices.


The table below is a summary of the interventions as well as the
implementation mechanisms for those interventions.




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Key areas of intervention               Implementation mechanisms
Market access                           Increased market access
   -   Increase access to developed       -   International trade negotiations
       countries                          -   Export development and
   -   Establish new links with other         promotion
       countries in the South
Regional production                     Investment           promotion       and
   -   Develop regional value chains    development
   -   Focus on continental               -   Marketing SA as an investment
       production systems                     destination
   -   Greater harmonization of           -   Investment missions,
       standards, policy instruments,         facilitation, and incentives
       systems for production inputs,     -   Industrial Development Zones
       etc
Beneficiation and value-addition        Broad based programmes and
   -   Use value-matrix analysis to     customized services
       identify opportunities             -   These programmes will seek to
   -   Address innovation and                 promote market access,
       locational issues                      investment, access to finance
                                              and policy coherence in
                                              general


Equity and economic participation       Reforms         in     the   regulatory
   -   Improve access to government     environment
       services                           -   Modern consumer protection
   -   BEE and SMME development               legislation
       and promotion                      -   Improved international trade
   -   Formation of cooperatives (eg          administration
       cultural                           -   Corporate law reform
         industries)                      -   Promotion of good corporate
                                              governance
                                          -   Establishment of a standards-
                                              quality
                                               assurance-and-trade

                                                                              16
metrology institutional
     framework




                          17
Knowledge-intensity and services Policy coherence
integration                               -Effective intergovernmental relations
   -   Promote the diffusion of ICT,      and sound policy management (incl.
       R&D, and innovation                strategic alignment of the mandates of
   -   Cooperate with DAST to             the DTI Group)
       generate and protect                  -Cooperation with provincial role
       indigenous knowledge                  players and local government
                                             structures to align economic
                                             development strategies
Integrated value matrices                 Customised Sector Programmes
   -   Build capacity for greater value   (CSP)
       addition within the economy           -    Formulation of government’s
   -   Aim to position SA in                      vision and strategic objectives
       transnational value chains                 for the sub-sector, based on
       where the opportunities for                intensive consultation with key
       value addition and                         stakeholders
       employment are the largest;           -    Identification of levers, both
   -   Remove constraints to                      existing and potential,
       competitiveness and growth                 necessary to realize the sub-
       throughout the value chain                 sector vision
                                             -    Implementation of the CSP to
                                                  realize the vision of the sub-
                                                  sector in the following areas:
                                                  (1) Competitiveness
                                                  (2) Exports
                                                  (3) Investment
                                                  (4) Employment
                                                  (5) Equity


                                          Access to finance
                                             -    Building closer linkages
                                                  between existing development
                                                  finance institutions and
                                                  schemes

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                                            -    Development of new offerings
                                                 for SMME sector
                                            -    Development of innovative
                                                 delivery mechanisms




   Competition and Regulatory Policy


South African authorities embarked on a major overhaul of competition policy,
which led to the formulation of a new policy, the Competition Act, 1998 (Act
No. 89 of 1998). It seeks to achieve the following objectives:


-   To promote the efficiency, adaptability and development of the
    economy;
-   To provide consumers with competitive prices and product choices;
-   To promote employment and advance the social and economic
    welfare of South Africans;
-   To expand opportunities for South African participation in world markets
    and recognize the role of foreign competition in the Republic;
-   To ensure that small and medium-sized enterprises have an equitable
    opportunity to participate in the economy;
-   To promote a greater spread of ownership, in particular to increase the
    ownership stakes of historically disadvantaged persons.


In meeting these objectives, it is focused on restricting anti-competition
practices, eliminating abuse of dominant positions and strengthening
merger control.


Three institutions are created in terms of the Act to achieve the above
objectives:




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-   The Competition Commission, which is independent but its decisions
    may be appealed to the Competition Tribunal and the Competition Appeal
    Court;
-   The Competition Tribunal, which has jurisdiction throughout South Africa
    and is independent from the competition institutions; and
-   The Competition Appeal Court, which has status similar to that of a High
    Court and has jurisdiction throughout South Africa.


POLICY ENVIRONMENT: MICROECONOMIC REFORM


Government’s microeconomic reform strategy implemented in 2002, is
focused on removing factors that limits accelerated growth and
development within the micro-economy.           It aim’s to restructure South
Africa’s economy in order to enhance economic growth, create employment
and promote equity.


   Microeconomic reforms to date include:


-   The replacement of GEIS with new supply-side measures;
-   Negotiation of a new labour relations dispensation;
-   Development of new legislation and an institutional framework for
    skills development; and
-   Development of a new small business institutional framework and
    supporting legislation.


   Key cross-cutting areas targeted by the microeconomic reform
    strategy include:


-   Technology:
    Strategy includes improvement of research capacity in the private sector;
    an increase in the rate of technology take-up through technology
    incubators; and further specialisation in biotechnology, among others.




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-   Human resource development:
    Individual government departments will align their departmental priorities
    with the human resource development strategy.


-   Access to finance:
    Access to finance for SMME’s and BEE businesses will be enhanced
    through the integration of existing financing vehicles into one financing
    mechanism.        This is done with a view to improve the coordination of
    financing activities within government.


-   Infrastructure:
    Critical infrastructure projects receive priority, they include: industrial
    development zones, spatial development initiatives, steel, aluminium and
    ICT hubs, and municipal and metropolitan investment projects, among
    others.


   Key       input    sectors    targeted    to     improve   microeconomic
    competitiveness include:


-   Transport:
    Transport issues, which will be addressed, include: freight and wharfage
    charges, airline frequencies, and the integration of SADC transport
    systems, among others.


-   Telecommunications:
    Telecommunication        issues   which   will    be   addressed   include:
    competitiveness of local fixed line operators, implementation of new
    technologies to lower industry costs, and creating opportunities for
    SMME’s and BEE businesses through the managed liberalisation of the
    sector, among others.


-   Energy:
    Government is prioritising the following issues in the energy sector: an
    integrated energy plan, greater utilization of renewable energy sources,


                                                                            21
    implementation        of   energy   efficiency   program     mes,   and   the
    institutionalisation of the liquid fuels charter, among others.




   Key sectors targeted which have considerable potential to increase
    output, exports and employment include:


    Export Sectors
-   Agro-processing
-   Automotives
-   Chemicals
-   Clothing and Textiles
-   Crafts
-   ICT
-   Mining and Metal based industries
-   Transport


    Other Sectors
-   Agriculture
-   Cultural Industries
-   Tourism
-   Information and Communication Technologies (ICT)


   Specific strategies has been developed to address some key
    performance areas for equity and growth, these include:


-   Black Economic Empowerment (BEE)
    Government defines Black Economic Empowerment (BEE) as an
    integrated and coherent socio-economic process that directly contributes
    to the economic transformation of South Africa and brings about significant
    increases in the numbers of black people that manage, own and control
    the country’s economy, as well as significant decreases in income
    inequalities.



                                                                              22
    Impact of SA’s BEE strategy on the country’s investment climate
   The South African Government places heavy emphasis on the link
    between economic growth, development and BEE.                    These are not
    mutually exclusive processes, and as such BEE is part of the country’s
    economic growth strategy.          No economy can meet its full economic
    potential, if any part of its citizens are not fully integrated into all aspects of
    the economy. The BEE strategy will ensure that more people are brought
    into the economic mainstream. This will done in part by ensuring that BEE
    is not only about shifting assets from white people to black people, the
    government is also focussed on growing the size of the economy.


   BEE is associated with good governance. A fundamental part of our
    economic reform and transformation is improving the quality and
    transparency of all economic activity in South Africa. Accordingly, BEE
    must be associated with the highest standards of corporate governance.


   South Africa’s BEE strategy recognises that financing BEE is strategically
    important for the economy and will be pursued without jeopardizing
    domestic or foreign sources of saving or investment. Government
    has set aside R10 billion, which would be administered by the National
    Empowerment Fund, to finance the country’s BEE strategy. However, it
    must be stressed that commercial risks will remain with enterprises,
    government’s role is only to facilitate access to capital and collateral for all
    emerging enterprises.


   The implementation of an offical BEE strategy provides clarity and
    certainty with regard to government’s future actions towards promoting
    BEE in South Africa


   The development of South Africa’s BEE strategy has been an all inclusive
    process, based on the inputs from government, business and labour.
    The strategy has at its core the promotion of partnerships between the
    public and private sector.



                                                                                    23
-   Small Business Development
    Key components of the new small business development strategy include:
    sectoral initiatives, creation of new products to support SMMEs,
    amendments to the National Small Business Act, improved access to
    finance and markets, and the expansion of business support infrastructure,
    among others.


-   Employment
    Medium-term strategies for job creation include: increased public sector
    capital expenditure, improved labour market information, SMME and BEE
    development.     Short-term actions for job creation include: specific
    programmes in rural areas, and urban nodes as well as programmes for
    new labour entrants.


-   Geographic Spread
    Policies already in place include the Integrated Sustainable Rural
    Development     Strategy,   the   Urban   Renewal    Strategy,   Industrial
    Development Zones, Spatial Development Initiatives, and Integrated
    Development Plans. The current aim is to improve the coherence of these
    strategies and ensure more coordinated implementation.


MACROECONOMIC PERFORMANCE




   Macroeconomic fundamentals


    The South African Government has shown a continued commitment over
    the past few years to building a credible macroeconomic framework.
    Since the country’s transition to democracy in 1994, the Government has
    established a stable macro-economic environment.            In 1996, this
    commitment was anchored through the Growth, Employment and
    Redistribution (GEAR) policy.




                                                                            24
   International Rankings: Sovereign Long-term debt rating


    Sovereign long-term debt ratings aim to measure a country’s ability and
    willingness to service its foreign debt obligations. These ratings are
    considered necessary since there is always a risk that a country may not
    honour its commitments. Country risk assessments are based on political
    and economic factors. Political risk criteria usually include factors such as
    the constitutional dispensation, leadership succession and foreign policy,
    among others. Economic risk criteria include factors such as economic
    growth, the exchange rate, the balance of payments and quality of
    economic policies, among others.


    Ratings ranging from AAA/Aaa to BBB/Baa indicate investment quality.
    On the other hand, ratings from BB/Ba and lower are regarded as having
    speculative characteristics with respect to the capacity to pay interest and
    the principal amount of debt.


    South Africa recently received upgrades from both Moody’s (from Baa3 to
    Baa2) and Standard and Poor (from BBB stable to BBB positive).
    Furthermore, the country also has investment grade status from all
    three rating agencies.


   Economic Outlook


    The Bureau for Economic Research provides a detailed medium-term
    forecast of the South African economy for the coming 5-6 years. The focus
    of the forecast is on the expected medium-term business cycle, also
    analyzing changed and emerging trends in the economy. On the whole,
    the medium-term forecast for South Africa’s key indicators are
    positive.


-   Real GDP growth
    Expectations are for real economic growth to gain momentum during 2004
    and 2005.    This is based on the view that the country’s economy will


                                                                              25
    become more resilient and robust due to inherent structural changes. The
    South African business cycle is expected to reach an upper turning point in
    2005/2006.


-   Inflation (CPI % change)
    It is anticipated that further progress will be made with the structural
    lowering of inflation, to bring it more in line with that of South Africa’s main
    trading partners.


-   R/$ and R/Euro Exchange Rate
    Given the relatively low level of South Africa’s foreign exchange reserves,
    the rand is expected to remain a comparatively weak currency over the
    medium-term. This contributes to further enhance the country’s export
    competitiveness.


-   Exports and Imports: Goods and Services (R Billion)
    Both exports and imports of goods and services are expected to show
    significant growth over the next five years. This is primarily due to factors
    such as: higher domestic economic growth, increased international
    demand for South African products as the global economy recovers from
    its current downturn, and continued export competitiveness as structural
    impediments to trade are removed.


-   Total Investment (R Billion)
    Total investment including both foreign and domestic investment is
    expected to show increased growth over the next five years. This is based
    on expectations regarding the ability of the South African Government to
    continue with the structural reform of the economy on both a macro and
    microeconomic level, thereby leading to a positive growth outlook.




                                                                                 26
   Business Confidence


-   BER/RMB Business Confidence Index
    The Bureau of Economic Research together with Rand Merchant Bank
    produces a business confidence index (BCI). The BCI is calculated as the
    unweighted average of business confidence in five sectors, namely
    manufacturing, building and construction, retail trade, wholesale trade and
    the new vehicle trade.     An average of 3000 participants are included in
    the business confidence survey.


    As indicated by the graph, business confidence is currently at a 13-
    year high.     This bodes well for the future in terms of the economy’s
    resilience to adverse international developments i.e. the debt
    problems of Brazil and Argentina which affected investor sentiment
    towards emerging markets; the lurking possibility of a US-Iraq war and
    concomitant oil price increases, etc.


-   Registration of business entities
    The number of newly registered business entities is a good indication of
    business confidence and commercial activity in the South African
    economy.       Since 1994 there has been a continued surge in the
    registration   of   new   business   entities.   The   latter   includes   close
    corporations, private and public companies, and Section 21 companies,
    among others.        This trend can partly be attributed to increased
    participation of SMME’s and BEE businesses in the country’s economy.


   Business Environment: Infrastructure


-   World Class Legal Framework


    The South African legal framework is progressive, particularly within
    commercial, labour and maritime law regimes.            It instills commercial
    certainty and a legal environment facilitating investment and trade.



                                                                                 27
    Furthermore, South African law pertaining to trade and investment
    conforms to international norms and conventions. A range of
    legislation regulates business activities, protects patents and intellectual
    property rights and supervises disputes and labour relations.


    Sanctity of contract is protected under the common law and
    independent courts ensure respect for commercial rights and obligations.
    Damages are compensatory, not punitive. Mediation, arbitration and other
    forms of dispute resolution are routinely used.


    The independence of the judiciary is guaranteed by the Constitution.
    No person or organ of the state may interfere with the functioning of the
    courts.


-   Financial System / Markets


    The South African financial system is robust and well regulated.          In
    February 2001, the IMF released a report with the following findings:
    -   South African banks remain well capitalized and the rate of non-
        performing loans has declined; and
    -   The financial risk management system continues to improve.


    The South African banking system consists of a central bank and five large
    commercial banks underpinned by a range of smaller banks and financial
    institutions. There are more than 80 foreign banks in South Africa, and
    they operate exclusively in the corporate and investment markets. The
    banking sector of South Africa compares favourably with that of
    industrialized countries, bearing in mind that four of South Africa’s
    banks are included in the world top 500.


    Businesses operating in South Africa are well served by a variety of
    merchant banks, brokerages, corporate finance- and investment houses
    and insurance companies.



                                                                             28
    The Federation of International Stock Exchange (FIBV) has ranked the
    Johannesburg Stock Exchange (JSE) number 15 in terms of market
    capitalization (August 2001), number 20 in terms of listed companies
    (31 July 2001), number 23 in terms of market turnover and number 29 in
    terms of liquidity (31 August 2001).


    In the first half of 2003 South Africa issued a Euro bond to the value of
    Euro                                                                  1.25
    billion and a maturity of 10 years. It has got an annual coupon rate of
    5.250%.
    South Africa also has a Futures Exchange (SAFEX) and a Bond
    Exchange (BESA).       SAFEX provides price risk management through
    future options to the agriculture industry, which was recently deregulated.
    BESA offers three-day rolling settlement and implements a bond
    automated trading settlement system. It is one of the most liquid emerging
    bond markets in the world.


-   Modern and Efficient Infrastructure


    -   Transport: Roads, Rail and Air:


    South Africa has one of the most modern and extensive transport
    infrastructures in Africa, which is crucial for the development of the
    country’s economy and those of its neighbouring states.


    The country’s national road network currently covers over 8 000km, with
    20 000km of primary roads in the future. The roads include 1 440km of
    dual-carriage freeway, 292km of single-carriage freeway and 4 401km
    of single-carriage main road with unlimited access. Government
    projects to expand and maintain existing roads, as well as the construction
    of several new toll road developments, are currently underway.


    Spoornet, a division of Transnet, runs the largest rail service in
    Southern Africa, with over 30 600km of single rail track, 3 549


                                                                            29
locomotives, 1 848 passenger coaches and 123 750 freight wagons. It
aims to invest R15bn in new wagons and locomotives by 2015, and during
this period, it also plans to lease 1600 existing locomotives to other
countries.


Portnet is the largest port authority in Southern Africa with the best-
equipped and most efficient network of ports on the continent. The
privatisation of operations where ports are concerned (infrastructure will
remain in government control) is designed to lower costs and increase
efficiency.   There are currently, four main ports in South Africa: Cape
Town, Durban, Port Elizabeth and East London.              Richards Bay and
Saldanha Bay handle bulk cargoes of coal and iron ore respectively.
Mossel Bay, the smallest port, is near the offshore Mossgas natural gas
field. Maputo in Mozambique is the closest port to Gauteng and should
realise greater traffic as the Maputo Corridor develops.


South Africa has approximately 148 licensed airports/aerodynamics,
categorised as either public or private, including the nine major airports
operated by ACSA (Johannesburg International, Cape Town International,
Durban International, East London, Port Elizabeth, George, Bloemfontein,
Kimberly and Upington).


Twenty scheduled domestic airlines are currently licensed to provide
air services within South Africa. These airlines provide internal flights,
which link up with the internal and international networks of SAA, British
Airways (BA)/Comair, Interair, SA Express and SA Airlink.


-   Telecommunications


South Africa currently ranks 23rd in telecommunications development.
The country boasts the largest and most developed telecommunications
network in Africa, including the latest in fixed-line, wireless, satellite
and cellular technology. There are approximately 5.5 million installed



                                                                         30
telephone lines and 4.3 million installed exchange lines in South Africa.
This is more than 30% of the total lines installed in Africa.


South Africa also has a large transmission infrastructure, necessitated
by the country’s vast geographical area of 1.2 million km 2 utilising about
156 million km of transmission circuits. This transmission network
constitutes the backbone of all telecommunication services.


Almost 99% of the network is digital with expectations of Telkom’s
exchanges becoming fully ISDN-enabled in 2001. Digital microwave and
optical fibre serve as the main transmission media for the inter-primary
network interconnecting all major centres.


In 1999/2000, Telkom had 5,626 million telephone lines – in 2000/2001
this increased to 6 301 million lines. The number of exchange lines is
expected to increase to 7 million. Two-thirds of new lines are designated
for under-serviced urban and rural areas.


Until March 1997, Telkom was Government owned.              Since then major
changes have occurred in the fixed line arena. A 30% equity stake in
Telkom was sold to consortium comprising of United States (US)-based
SBC Communications and Telecom Malaysia. Some R4.4 billion of the
R5.6 billion equity sale proceeds was injected into Telkom to help fund its
network expansion and modernisation programme.


The Government has parallel to this, also adopted a process of
managed liberalisation in the telecommunications sector which allows for
a Second National Operator (SNO) in 2002.




                                                                          31
-   Mobile Communications


South Africa is the fourth-fastest growing GSM (Global Systems for
Mobile Communications) market in the world and is growing at a rate of
50% per annum; hence the cellular subscriber base has long exceeded
the number of installed fixed lines.


9.5 Million people form the current cellular subscriber base of which
80% are active users and it is estimated that 2005 might see 18 million
users. Over 9000 (mostly pre-paid) users sign up daily.
The cellular market is currently worth around R14bn and is expected to
grow to about R23bn by 2004. Currently three operators Vodacom, MTN,
and Cell C service the cellular market in South Africa. The country’s third
cellular licence was granted to Cell C in June 2001, which includes
Verizon Communications, the biggest cellular operator in the US, as
operating partner.


-   Information Technology


South Africa is the 20th largest consumer of IT products and services in
the world and the 18th largest in terms of internet usage. Not
surprisingly, the country also has among the highest densities in the
number of personal computers and internet hosts.


The IT industry has technology leadership, most notably in the
deployment of electronic banking services.       Currently, the financial and
retailing sectors are the most effective users of IT and there has also been
substantial growth in the usage of IT in the manufacturing sector. This
industry   is   also   characterised   by   fierce   competition   with   price
competitiveness, service reliability, a high demand for after-sales, and
value-added services




                                                                            32
    A number of multinational IT companies operate subsidiaries in South
    Africa, including IBM, Unisys, Microsoft, Intel, Systems Applications
    Protocol (SAP), Dell, Novell and Compaq.


    The ICT Development Council was established by the Minister of Trade
    and Industry in 2001 and focuses on IT training and certification, wireless
    development, pilot labs, niche software development and niche application
    enhancement, call centres and the establishment of infrastructure and
    application hosting for Africa.


    Other key features of IT in South Africa include:


    -   South Africa is the leader in IT development in Africa;
    -   A continuous expansion of the skills base in the IT field.       South
        Africa’s universities and technikons are delivering graduates who are
        skilled in many fields of IT, software development (programming), and
        network management;
    -   The accelerated rollout of IT infrastructure. With the passing of the
        Telecommunications Bill of 1996, the South African government is
        involved in a continuous effort to improve the national information
        infrastructure and to increase its usage.


COST OF DOING BUSINESS


   Electricity


South Africa has among the lowest electricity prices in the world and is
known for its superior supply quality with regard to this utility. A recent
survey by the Economist Intelligence Unit (EIU) ranked South Africa as highly
cost competitive ( 22nd of 31 countries surveyed – 1 being the highest cost).


The current challenge is to maintain low price increases by creating a
competitive market and large-scale investment in production capacity, among
others. Privatisation of Eskom seems to be the way forward, and currently a


                                                                                33
proposal is under review whereby a 15% stake will be sold to the private
sector - which is estimated to inject about 100bn into the South African
economy.


   Petroleum


South Africa compares favourably with both developed and developing
countries in terms the cost of petroleum. Private sector and multi-national
oil companies refine and market nearly all imported petroleum products
in Southern Africa, thereby re-investing some R1.5 billion annually in the
country. Sasol, a former government parastatal, produces 41% of the
country’s fuel using primarily its oil-from-coal technology. This provides South
Africa with a significant cost advantage compared to countries such as Italy,
UK, Germany, Ireland and Spain.


The continued depreciation of the South African Rand and rising oil prices
have prompted interest in exploiting natural gas which is available in
Namibia and Mozambique. Furthermore, Mossgass, a state-owned entity
(CHECK), is supplying the nation with offshore natural gas.


   Telecommunications


The privatisation of Telkom and the subsequent expansion of its network with
the proceeds of its sale of equity has been a driving force for the parastatal to
become more competitive. It has lowered the cost of international calls to
become more competitive with international carriers. A recent survey by the
Economist Intelligence Unit (EIU) shows that the cost of an international 3-
minute call from South Africa is significantly lower than would be the case in
the US, Hong Kong or Japan.


   Manufacturing wages


SA’s manufacturing wages are amongst the lowest compared to a number of
our competitor countries.


                                                                              34
Ireland has the highest manufacturing wages per hour (US$) amongst those
countries, followed by Singapore.


   Growth in labour productivity and wages


Since 1996 the growth of labour productivity have been higher than that
of real wage increases. In effect this means that there has been a reduction
in unit labour costs in the South African economy. This trend has become
most prominent in the past three years due to a surge in labour productivity.


   Person days lost due to strikes


Mandays lost are calculated as the amount of workers on strike times the
days absent from work. The peak in 1987 was at the height of a large-scale
strike action in South Africa during the declared state of emergency.
South Africa has since 1994 experienced a marked decline in the number
of mandays lost. A factor supporting this performance is the establishment
of the National Economic Development and Labour Council (NEDLAC) in
1994. This organisation facilitates discussions to reach consensus between
Government, organised business, organised labour and organised community
groupings on various issues of social and economic policy.


   Corporate Tax Rate


The Economist Intelligence Unit (EIU) used a standard rate of corporate tax to
benchmark a selected group of countries. The standard rate of corporate tax
is calculated as the average of different rates that apply to distributed and
undistributed profits and which is payable by a medium to large corporation.
South Africa compares favourably to a number of developing countries
that have tax rates higher than 30%.


INDUSTRIAL CAPABILITIES


   Technological composition of Manufacturing Value Added


                                                                                35
The high-tech manufacturing sectors of South Africa, for example,
machinery, scientific equipment, and motor vehicles have the highest share
in total manufacturing value added. These sectors have also managed to
increase their share ratio over the period 1995-2001. Both the medium- and
low-tech sectors, which includes rubber, plastic, glass, food, and textiles,
among others; have experienced a decline in their share of total
manufacturing value added.     Hence one can conclude that South Africa’s
manufacturing output have become more technology intensive.


Note that this analysis is based on the United Nations Industrial Development
Organisation (UNIDO) classifications for high-, medium- and low-tech
manufacturing sectors.


   South Africa – Comparative Industrial Performance


The growth rate of South Africa’s industrial production in 2002 was 5.3%.


   Investor Success


-   BMW
BMW in South Africa has received a stunning award, winning for its Munich
parent the vote of the best BMW manufacturing plant in Europe and second-
best vehicle manufacturing plant in the world in a major US ratings survey.


Since BMW’s 1998 investment in the upgrade of the Rosslyn plant in Pretoria,
quality, on-time delivery and productivity has shown significant improvement.
This led to a further investment commitment of R2 billion made by BMW AG in
December 2001.


-   Boeing - Aerosud
A joint venture between Boeing and Aerosud was established in 2001 to
produce aviation components in South Africa. Boeing invested R20 million
into the joint venture and projections are that it will generate a turnover of


                                                                              36
R200 million after three years.      To date Aerosud has already made two
production lines fully operational and has successfully shipped the first locally
manufactured production parts to the Boeing plant in Seattle.




INCENTIVES


   Strategic Industrial Projects (SIP)


This incentive is for large investments of a strategic nature to the South
African economy. The allowance is a deduction against taxable income for
investment in specified industrial assets. A 50% or 100% (preferred status)
investment allowance is granted. The 50% investment allowance is capped
at R300 million, and the 100% investment allowance is capped at R600
million.


The mandatory criteria include:
-   The project has to be equal to or exceed R50 million in qualifying assets;
-   It applies to manufacturing, IT, and R&D activities;
-   The project must show long-term commercial viability;
-   It should not displace existing industries; and
-   It should not be benefiting from any another schemes.


A point score system determines the allowance, and includes the
following criteria:
-   The introduction of new products or production processes;
-   Filling a critical gap in an industrial cluster;
-   Involving a process that represents at least 35% value added;
-   Sourcing inputs from SMME’s;
-   Provision of infrastructure that is accessible to the general public; and
-   Creating new employment opportunities.


A maximum of ten points can be allocated. Four out of ten points provides for
a 50% allowance. Six out of ten points provides for a 100% allowance.


                                                                              37
   Small and Medium Enterprise Development (SMEDP)


The SMEDP aims to reduce the investment cost for small and medium
investors, generate employment, develop entrepreneurship, promote
empowerment, and to raise fixed investment in the economy. .            It only
applies to projects with qualifying assets that are less than R100 million. The
minimum and maximum amount of assistance received by the company is
based on the amount of qualifying assets that it possesses.


The minimum equity requirements are:
-   10% for projects with qualifying fixed assets up to R5 million;
-   25% for projects with qualifying fixed assets between R5 million and R15
    million; and
-   35% for projects with qualifying fixed assets above R15 million.


The scheme is available to both local and foreign investors engaged in
manufacturing, high-value agricultural projects, agro-processing, aquaculture,
biotechnology, tourism, ICT, recycling and cultural industries.


Incorporated legal entities i.e. Companies (Private and Public), Close
Corporations, Co-operatives, etc can apply for assistance.
Non-qualifying entities include:
-   An entity formed by the same members or owners to engage in more than
    one independent project in the same industrial area to manufacture
    generically the same product (specific to manufacturing);
-   Projects may not qualify for both the SIP and SMEDP. Once approval has
    been granted for a specific program, entities will not be allowed to
    randomly convert their incentive approval to another program.
-   Trusts, profit centres, branches and divisions are explicitly excluded from
    participating in the program.


   Skills Support Programme (SPP)



                                                                            38
The Skills Support Programme offers training grants to local and foreign
firms with the objective of encouraging greater investment in training and
creates opportunities for the introduction of new skills. The training grant
is in the form of a cash grant and applies to a new or expansion of an existing
project or an approved training program.


SPP is an enhancement of the SIP and the SMEDP. Companies that
qualified for either one of these two incentives can also qualify for SPP.
Furthermore, the grant will benefit investors engaged in manufacturing, high-
value agricultural projects, agro-processing, aquaculture, biotechnology,
tourism, ICT, recycling and cultural industries.


A maximum of 50% of the training costs, the development of a training
curriculum, and or land and buildings related to training, and up to 30%
of the total salaries of the company will be granted for approved training
programmes. Capital cost of up to R3 million may be provided for capital
training equipment in respect of an approved training school. The grant is
payable for up to three years.


   Industrial Development Zone Program (IDZ)


The Industrial Development Zone Program (IDZ) aims to generate sustainable
local and foreign investment while creating employment; encouraging
skills and technology transfer; promoting SMME development; and
increasing foreign exchange earnings.


The IDZ is designed to improve the international competitiveness of South
Africa’s manufacturing sector. The program involves government provision
of demand driven infrastructure. The objective of this provision is to attract
investment as well as to make the location ideal for exporting.


There are currently twelve potential IDZ locations in South Africa all of which
are strategically positioned close to an international port. The IDZs will consist



                                                                               39
of two zones of operations – a Custom Secured Area and Industries and
Service Areas.


The following are some of the benefits available to companies located in
an IDZ:
-   Exemption from value added tax (VAT);
-   Duty-free import of production related equipment, raw materials and
    inputs for export;
-   A right to sell into South Africa by paying normal import duties on
    finished products;
-   Minimum export quotas does not apply;
-   Shared souring and logistics infrastructure which allows for economies
    of scale;
-   A shared industrial relations system that seeks to encourage the rapid
    resolution of labour disputes;
-   The Department of Labour and/or accredited agents will offer services
    such as learnerships programs to IDZ operators with a view to stimulate
    local human resource development;
-   A single window facility for services to investors and efficient
    customs administration, which will greatly reduce the turnaround time for
    businesses;
-   The ability to additively benefit from investment incentives that
    investors might qualify for such as: SIP, SMEDP, and the Critical
    Infrastructure Programme (CIP). Note however that incentive schemes are
    structures such that investors may not benefit from two investment
    incentives in addition to the IDZ program;
-   The environmental standards maintained throughout the establishment
    phase of design and utilities provision will provide IDZ enterprises with a
    competitive advantage as ‘green accreditation’ becomes increasingly
    critical to access developed markets.




                                                                            40
   Foreign Investment Grant (FIG)


The Foreign Investment Grant (FIG) aims to encourage foreign entrepreneurs
to invest in new manufacturing concerns in South Africa by compensating
the foreign entrepreneur for the qualifying costs of moving new machinery and
equipment from abroad to South Africa.


Companies operating in the manufacturing and tourism sectors qualify for
this grant. For manufacturing, however, the sub-sector must not be over-
saturated, as per dti evaluation.    Thus for example, investments in the
following manufacturing sub-sectors would not apply: televisions, cigarettes
and plastics.


Foreign entities must be registered as incorporated legal entities in South
Africa. This grant is not available to foreign investors from the Southern
African Development Community (SADC) or from countries in the South
African Customs Union (SACU).


FIG is dependant on the approval of the SMEDP or the SIP. Furthermore,
applications for this grant should be submitted before shipment from abroad.


Compensation includes costs incurred regarding:
-   Freight expenditure (machinery equipment transfer and personnel
    transfer cost);
-   Traveling expenditure (personnel and commissioning technicians);
-   Statutory requirements (wharfage, handling and duties); and
-   Local expenditure (inland transport, offloading, insurance and agency
    charges).


A maximum of R3 million per project can be allocated. The grant is only
available to new qualifying investments and is offered only once to any foreign
entity. The amount of the grant cannot exceed the actual cost of 15% of the
value of new machinery and equipment relocated from overseas.



                                                                            41
   Critical Infrastructure Programme (CIP)


The Critical Infrastructure Programme (CIP) provides subsidised support for
economic infrastructure required for committed productive investments. The
latter includes new investment projects, expansion of existing investment, or
in exceptionally special cases, existing investment projects.


Critical infrastructure supplements the infrastructure provided by the existing
public sector or private sector providers by funding a top-up grant. The
range of the funding is 10% to 30% of the qualifying infrastructure
development costs. It is not intended to be a substitute for funds necessary
to complete the basic infrastructure required by the investment project.


The funding provided is determined by a point scoring system, which
includes key criteria such as:
-   Contribution to investment and economic growth;
-   Contribution to industry development in economically depressed areas;
-   Contribution to social equity and black economic empowerment;
-   Contribution to employment creation; and
-   Contribution to improving the competitiveness of South Africa’s
    industrial base;


Qualification criteria for the CIP includes:
General
-   Financial capacity to provide the major complement of 70% to 90% of
    funds required to complete the infrastructure development;
-   Organisational capacity to undertake the infrastructure project;
-   Evidence of commitment to establish investment projects;
-   Investment projects must have long-term commercial viability; and
-   Where applicable, the applicant must be a taxpayer in good standing.


Infrastructure
-   Transportation systems including roads and railroad systems;
-   Electricity transmission and distribution systems;


                                                                            42
-   Telecommunication networks;
-   Water storage, purification and distribution systems, bulk supply piping,
    etc;
-   Sewerage systems;
-   Waste storage, disposal and treatment systems; and
-   Fuel supply systems such as piping for gas and liquid fuel.




   Black Business Supplier Development Programme (BBSDP)


The BBSDP is aimed at fast tracking into the mainstream of the formal
economy existing SMME’s that exhibit a good potential for growth. It also
aimed at growing black owned enterprises by fostering linkages between
black SMME’s and the corporate and public sector enterprises. This
Programme complements current affirmative procurement and outsourcing
initiatives of corporate and public sector enterprises.


Who qualifies for the BBSDP:
-   Enterprises that are majority black owned (fifty plus one share) and
    have a significant representation of black managers on their management
    team
-   Enterprises / firms with a maximum annual turnover of R12 million per
    annum
-   The firm / company must have a minimum trading history of one year
-   Enterprises accessing the scheme must also comply with commercial
    regulatory requirements applicable to their area of business, e.g.
    registration with CIPRO and SARS


The incentive benefits of the BBSDP are:
-   A maximum grant of R100 000 for a single firm
-   An enterprise will be allowed to apply for multiple projects, provided
    that the cumulative grants awarded do not exceed R100 000.




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-   All fees related to the rendering of business development services,
    including travel and subsistence costs, will qualify for cost-sharing
    assistance.
-   Cost for the acquisition of printed materials and software, which
    constitute an integral component of the implementation of a project, will
    also qualify, provided they do not exceed 50% (fifty percent) of the total
    cost of the project.




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