South Africa: Investment Overview

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South Africa Investment Overview Analysis
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South Africa
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Introduction

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

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HistoryApartheid

• 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

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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.

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Apartheid
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HistoryAmnesty

• 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 grantedSouth African
  constitution
• Truth and Reconciliation Commission
• It was believed that not only the occurrence
  needed to be admitted, but also the wrongfulness.

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Now

• CurrentlyBlack 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.

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Economic Overview

• South Africamiddle-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

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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).
• Governments most ambitious program is the
  privatization of transport, telecommunications,
  electricity, and defense industriesa 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.

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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.

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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

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FDIs 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 1990s
• U.S. is now the largest source of new investment
  in South Africa

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FDIs 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

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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

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Addressing These Challenges

• Investment has been spurred by a number of steps
  designed to make South Africas 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

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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

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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?

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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 Africas total GDP

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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

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IPO Basics

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

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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

What
When
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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 15 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)

How
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Basic Principles of Privatization (Case Study
Telkom)

• IPO basics
• Underwriting- Deutsche Bank JP Morgan Chase
• Transfer of ownership
• State--gt Public through sale of assets
• Trasfer of money Public--gt 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?

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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.
• COSATUs viewpoints
• Privatization of state-owned utilities
• Focus Privatization of Water Delivery

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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, whats the
  labor forecast?

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Labor forecast

• President Mbekis 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.

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Privatization of Water Delivery

• Began in the late 1990s
• Cost Recovery
• Water was available for more people

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Peoples 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

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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.

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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

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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