South Africa: Investment Overview Analysis

1. South Africa: Investment Overview & Analysis

2. South Africa

3. Introduction History Economic Overview Government Situation Foreign Direct Investment Privatization in South Africa Potential Problems with Privatization in South Africa Summary Video

4. History�Apartheid Apartheid Racial segregation of blacks and whites Similar to the separation experienced in America, but more harsh. Laws began in 1948 and racial discrimination was institutionalized Touched every aspect of social life Prohibition of marriage between non-whites and whites Sanctioning of �white-only� jobs

5. Apartheid Population Registration Act All South Africans racially classified into one of three categories: white, black (African), or colored (of mixed decent). Classification into these categories was based on appearance, social acceptance, and descent. For example, a white person was defined as ``in appearance obviously a white person or generally accepted as a white person.'' A person could not be considered white if one of his or her parents were non-white. The determination that a person was ``obviously white'' would take into account ``his habits, education, and speech and deportment and demeanor.'' A black person would be of or accepted as a member of an African tribe or race, and a colored person is one that is not black or white. All blacks were required to carry ``pass books'' containing fingerprints, photo and information.

6. Apartheid

7. History�Amnesty Any measure that immunizes a person who has committed serious crimes from criminal and civil liability. Why? Without amnesty agreements, a new constitution would not have been drafted and elections would not have taken place. ��The legacy of hatred, fear, guilt, revenge� can now be addressed on the basis that there is a need for understanding, not vengeance, a need for reparation but not for retaliation� In order to advance such reconciliation and reconstruction, amnesty shall be granted��South African constitution Truth and Reconciliation Commission It was believed that not only the occurrence needed to be admitted, but also the wrongfulness.

8. Now Currently�Black majority vs White minority Wide disparities in education, health care, and the economy widely favor the 13% of the population who are white. An estimated 40% or more who are black cannot find work. 8% of the population, almost entirely white, control 90% of the wealth. 50% of the population, mostly blacks, live in poverty, and live in shacks, outbuildings, and huts. But, the black middle and upper class in expanding, and 6% of black are now classified as wealthy.

9. Economic Overview South Africa�middle-income, emerging market with abundance of natural resources. World's largest producer of platinum, gold, chromium Possess well-developed legal, communications, energy, transport, and financial sectors; with a stock exchange that ranks among the 10 largest in the world. Employment by sector: agriculture 30%, industry 25%, services 45%

10. Government Situation President Thabo Mbeki (African National Congress) is both the chief of state and head of government; since June 16. Tripartite alliance between African National Congress (ANC), South African Communist Party (SACP), and Congress of South African Trade Unions (Cosatu). Government�s most ambitious program is the privatization of transport, telecommunications, electricity, and defense industries�a move officials hope will generate $13 billion. Resistance to privatization is coming from the other members of the tripartite alliance. Biggest question mark related to government stability is whether this alliance will be maintained.

11. Foreign Direct Investment FDI � is generally defined as ownership of at least ten % of the voting rights in an organization by a foreign resident or several affiliated foreign residents. Includes: Equity Capital Reinvested earnings Long-term loan capital. Foreign direct investment is a key ingredient in economic growth.

12. Foreign Direct Investment FDI can impact the host economy through a variety of channels: adding new resources and capital formation transferring technology, skills, innovative capacity, and organizational and managerial practices between countries accessing international marketing networks These positive effects may vary in their magnitude depending on the quality of the business environment in the host economy and the characteristics of the multinational company

13. FDI�s Presence in South Africa Today Presently, South Africa is proactively seeking foreign investment as a key part of its economic policy. Offers an attractive climate for foreign investment Result: A large number of U.S. firms have invested or reinvested in SA since the lifting of apartheid sanctions in the early 1990�s U.S. is now the largest source of new investment in South Africa

14. FDI�s Presence in South Africa Today What makes South Africa an attractive climate for foreign investors? Substantial market with significant growth potential Economy moving towards market orientation Access to other markets in Africa Well developed financial institutions and capital markets Excellent communication and transport links Lower labor costs compared to industrialized countries Inexpensive electrical power and raw materials Strong macroeconomic policies

15. Challenges to South African FDI South Africa faces daunting challenges as it competes with other emerging market countries for FDI. Include: Unemployment & Crime Poor education systems Housing shortages Health care challenges (HIV/AIDS) Shortage of skilled labor Due in part to lack of sufficient educational institutions

16. Addressing These Challenges Investment has been spurred by a number of steps designed to make South Africa�s markets more attractive to foreign investment. Reducing import tariffs Eliminating the discriminatory non-resident shareholder tax Eliminating most foreign exchange controls Halving the secondary tax on corp. dividends Lowering corp. tax rate on earnings to 30% Allowing foreign investors 100% ownership

17. S. Africa FDI Perspective S. Africa is the leading recipient of FDI in Africa S. Africa is the leading provider of FDI to the rest of Africa Benefits of investment in SA outweighs costs Stability in the region Improvement of African infrastructure

19. Investment in SA Recent Factors Impacting FDI Currency appreciation (Rand) Governmental control of core industries Strong Labor Unionization Zimbabwe conflict and instability Well developed financial services and banking sectors Goal of the government is liberalization, but to what degree is this possible?

20. South Africa Indicators (#s in US $ millions) GDP consistent growth Trade Surplus Contraction in terms of GDP is due to depreciation of Rand SA GDP is about 1/3 of Africa�s total GDP

21. Liberalization/Privatization SA Govt. has recently privatized Telkom by offering a 25% stake to investors Govt. has plans to privatize Eskom (energy), and Transnet (transportation) Privatization is the process whereby stakes of state-owned companies are sold to private investors

22. IPO Basics Govt. sale of assets to underwriter (Deutsche Bank/JP Morgan Chase Underwriter sale on open exchange (NYSE/Johannesburg) Purchase of shares by institutional investors and individuals

23. Basics of Privatization (case study: Telkom) The government announced that it would privatize a 30% interest in Telkom Largest telecommunications provider in Africa based on revenue and sales No real competition in the fixed-line sector (monopoly) Telkom owns 51% of Vodacom, the largest wireless provider in Africa Vodafone (Europe) owns 32% of Vodacom 30% of Telkom is already owned jointly by SBC (US.) and Telekom Malaysia Originally planned for 2002, but did not happen until March 4, 2003

24. Basics of Privatization (case study: Telkom) 25% of the Telkom shares were offered on the NYSE and Johannesburg exchanges Mechanics of the deal Pricing Foreign investors paid between $4.00 and $5.00 for the shares (NYSE) �Historically disadvantaged� individuals received a price per share 20% less than other investors Other S. African residents received a 5% discount off the price 2nd day shares to institutional investors offered at a 20% discount All S. African residents receive a 1:5 split for their retained shares after two years time Shares are offered through an IPO (Initial public offering) What is the logic in privatizing a monopolized Telkom sector (fixed)

25. Basic Principles of Privatization (Case Study: Telkom) IPO basics Underwriting- Deutsche Bank & JP Morgan Chase Transfer of ownership: State--> Public through sale of assets Trasfer of money: Public--> State $500 million raised by Govt. Implies that SA govt. is willing to free up markets and allow certain assets to be sold How far will this trend of privatization continue in the future?

26. Problems with Privatization Government vs. COSATU Happening in the form of protests for selling public assets and labor strikes. COSATU has organized labor strikes within the important steel and mining industries for higher wages. COSATU�s viewpoints Privatization of state-owned utilities Focus: Privatization of Water Delivery

27. Government vs. COSATU Tensions between the government and COSATU have risen since mid-2001. Labor conditions have been particularly troubled as workers in steel production, auto manufacturing, mining, and several other industries have struck for higher wages. Increase in unemployment. 31.5% in Sept. 2002, Real rate � 41.8% Rise from 17% in 1995 and 23% in 1998 With the increase in privatization, what�s the labor forecast?

28. Labor forecast President Mbeki�s most immediate policy concerns are the need to create jobs and strengthen the social safety net for workers displaced by privatization. Tension between the government and COSATU show no sign of easing. As long as the government insists on pursing its privatization program, incidents of labor unrest are like to increase, creating general disruptions to business operations in affected areas.

29. Privatization of Water Delivery Began in the late 1990�s Cost Recovery Water was available for more people

30. People�s argument against water privatization Job Losses Leads to rate increases Neglect for quality Secret Contracts Reduces local control and public rights Can significantly affect the poor people Cholera outbreak Multinationals typically insist that the contract which defines their responsibilities under the concession be kept a commercial secret. The contract documents involving the multinationals invariably state that none can even see the terms without the permission of the multinational. A typical example of such a secrecy clause is in the contract between Suez-Lyonnaise�s subsidiary in South Africa, WSSA, and the municipality of Fort Beaufort, which prevents any member of the public from seeing the contract without the explicit approval of Lyonnaise des Eaux': �2.2.2: Confidentiality: the documentation contained herein has been developed exclusively by the operator (WSSA) and shall not be disclosed to third parties without the written approval of the operator." [i][i] Agreement for Management, Operation and Maintenance of the Water and Sewage Systems of Fort Beaufort and Associated Customer Management, 05/10/95, p. 6. Multinationals typically insist that the contract which defines their responsibilities under the concession be kept a commercial secret. The contract documents involving the multinationals invariably state that none can even see the terms without the permission of the multinational. A typical example of such a secrecy clause is in the contract between Suez-Lyonnaise�s subsidiary in South Africa, WSSA, and the municipality of Fort Beaufort, which prevents any member of the public from seeing the contract without the explicit approval of Lyonnaise des Eaux': �2.2.2: Confidentiality: the documentation contained herein has been developed exclusively by the operator (WSSA) and shall not be disclosed to third parties without the written approval of the operator." [i]

31. Cons to private provision of services 1) Without good regulatory systems, private companies may raise tariffs too quickly or steeply, provide low quality service, ignore contractual commitments or damage the environment. 2) By definition, private monopolies are not subject to market discipline and do not provide the benefits in price and quality commonly associated with competition.3) In the absence of significant state subsidies, private providers lack the incentives to invest in improving access for poor populations that lack buying power and often cost more to serve.

32. Privatization in South Africa Questions to consider: Is privatization in South Africa a good thing? To what extent should South Africa privatize? True South African speaks on: Accounting in South Africa

33. Notes CIA website Apartheid Amnesty Privatization in Water Industry Africa Action Privatization of Telkom Privatization Case Study SA Liberalization Country Profile and Analysis Country Data