South Africa

South Africa

South Africa gearing up for accelerated growth South Africa is now experiencing positive growth rates after the global financial crisis. The government’s focus is therefore on implementing a shift from macro-economic stabilisation to micro-economic transformation, and increasing the productive capacity of the domestic economy by strengthening industrial and economic infrastructure.  Furthermore, the ‘New Growth Path’ plan of action of government seeks to create 5 million jobsin the next decade.

The centrepiece of the New Growth Path is a massive investment in infrastructure and people. Smart government and better coordination with the private sector and organised labour, can assist with skills development, which will help government to achieve the national goals.

South Africa has geared itself up for further growth, exhibiting development in a dynamic spread of economic sectors, integrating small and medium enterprises in the wider economy, lowering the cost of doing business in South Africa, reducing regulatory hindrances to development, and supporting labour-absorbing activities.

 These cross-cutting economic interventions are evidence of the country’s dedication to generating growth, employment and realising the equitable distribution of wealth among the people of South Africa.

Key drivers of the South African economy

South Africa’s economy has traditionally been rooted in the primary sectors – the result of a wealth of mineral resources and favourable agricultural conditions. However, the economy has been characterised by a structural shift in output over the past four decades. Since the early 1990s, economic growth has been driven mainly by the tertiary sector – which includes wholesale and retail trade, tourism and communications. Now South Africa is moving towards becoming a knowledgebased economy, with a greater focus on technology, e-commerce and financial and other services.

 Among the key sectors that contribute to the gross domestic product and keep the economic engine running are manufacturing, retail, financial services, communications, mining, agriculture and tourism.

Increasingly the Green Economy is taking prominence as the country is moving away from traditional coal fired power stations to cleaner energy production. South Africa’s strategy is to make cleaner, more efficient use of the country’s abundant, low-cost coal reserves in the near term while at the same time expanding the use of low-emission energy technologies and renewables.

Economic outlook

The South African economy has been significantly affected by global developments and domestic constraints to the recovery. The domestic recovery remains hesitant and confidence low. Domestic demand pressures on inflation are restrained at this point in time but various supply-side factors have resulted in a deterioration of the inflation outlook.

Investment Environment

South Africa has removed almost all investment approval processes to focus on data collection and monitoring via registration and reporting processes. There is no limit on foreign ownership, except in banking and the media. There is a choice of the type of entity through which a South African or foreign investor may carry out business in South Africa.

The choice is influenced by factors such as limited liability, reporting requirements and tax efficiency.

There are no restrictions on property ownership by non-residents, provided that there is compliance with procedures, including the local registration of entities registered outside South Africa and the appointment of a public officer residing in South African for a South African-registered company owned by a non-resident.

 Non-residents may borrow up to 50% of the purchase price in South Africa, but must transfer the other 50+% to South Africa from a recognised foreign bank.

Mining and minerals

South Africa is a world leader in mining. The country is famous for its abundance of mineral resources, accounting for a significant proportion of world production and reserves, and South African mining companies are key players in the global industry.

Apart from its prolific mineral reserves, South Africa’s strengths include an extremely high level of technical and production expertise, and comprehensive research and development activities.

The country has world-scale primary processing facilities covering carbon steel, stainless steel and aluminium, in addition to gold and platinum. It is also a world leader of new technologies, such as a ground-breaking process that converts low-grade superfine iron ore into high-quality iron units.

 South Africa is the world’s biggest producer of gold and platinum. Mining remains an important foreign exchange earner, with gold accounting for over one-third of exports. South Africa is also a major producer of coal, manganese, chrome, platinum, and diamonds, accounting for a significant proportion of both world production and reserves.

 While holding the world’s largest reserves of gold, platinum-group metals and manganese ore, the country has considerable potential for the discovery of other world-class deposits in areas yet to be exhaustively explored. Its prolific mineral reserves include precious metals and minerals, energy minerals, non-ferrous metals and minerals, ferrous minerals and industrial minerals. Only two strategic minerals (crude oil and bauxite) are not available in the country.

For this purpose the Government has developed a minerals beneficiation strategy which seeks to fundamentally transform the industry from being largely resource based to knowledge based. It also compliments programmes of Government, such as the New Growth Path, NIPF (IPAP 2) energy security, skills development and others.

South Africa’s financial sector

South Africa’s financial services sector boasts dozens of domestic and foreign institutions providing a full range of services including commercial, retail and merchant banking, mortgage lending, insurance and investment.

 The South African banking system is well developed and effectively regulated, comprising a Central Bank, a few large, financially strong banks and investment institutions, and a number of smaller banks. Investment and merchant banking is competitive. The country’s “big four banks” (Absa, First National Bank, Standard Bank and Nedbank) dominate the retail market.

The country’s banking sector compares favourably with those of industrialised countries. Many foreign banks and investment institutions have set up operations in South Africa over the past decade.

 Ongoing amendments to exchange controls, as well as financial market legislation, make South Africa an attractive investment prospect and brings it in line with international best practice.

 Recent developments in South Africa’s exchange control environment include amongst others, the withdrawal of the application process to make new outward foreign direct investments where the total cost of such investment does not exceed R50 million per company per year. Under this new dispensation, the responsibility for ensuring that the foreign investment purposes has been placed on the authorised dealer (i.e. a commercial bank) facilitating the transaction. South African companies who want to use this dispensation are still required to show anticipated benefits to South Africa as a result of the foreign direct investment.

Additional reforms proposed in 2011 include, removing controls on emigrant blocked assets. South African emigrants are currently allowed to take R8 million offshore upon emigration. The rest of the assets are blocked and may only be released upon the payment of a 10% exit  levy. Treasury proposed releasing these blocked assets without any exit levy.

Furthermore, regarding individuals, the R4 million lifetime limit has increased to R4 million per calendar year, subject to compliance with all tax and financial integrity legislation. Investments above the proposed threshold would require the approval of the Financial Surveillance Department of the South African Reserve Bank. Individuals (resident-natural persons) over the age of 18 years may avail of a single discretionary allowance of up to R1 million per calendar year (previously, R750 000 per year).

Tourism

Tourism is regarded as a modern day engine of growth and is one of the largest industries globally. In addition to being a labour intensive industry, tourism holds potential to drive increases in export earnings in a trading environment that isgenerally less volatile than that of commodity exports.

 In 2010, South Africa received approximately 8.1 million foreign tourists of which 71% originated from Africa followed by Europe and the Americas. Total Foreign Direct Spend (excluding capital expenditure) by these tourists amounted to R72.6 billion in 2010. In the same year, it is estimated that 13.5 million South African adults took a total 29.7 million overnight trips resulting in Total Direct Domestic Spend of approximately R21 billion. This excludes the impact of an estimated 12.2 million adults that took an average of18.6 day trips during 2010.

South Africa’s advanced infrastructure combined with magnificent scenic beauty, rich biodiversity, sunny climate, cultural diversity and a reputation for delivering value for money experiences have made it one of the world’s fastest growing tourism destinations.

 Agriculture

South Africa has a dual agricultural economy, with both well-developed commercial farming and more subsistence based production in the deep rural areas. Agriculture (even though it has contributed only about 3% to the GDP in the past) is an important provider of direct and indirect employment. However, there are strong backward and forward linkages into the economy, so that the agro industrial sector is estimated to contribute about 12% of the GDP.19

South Africa is not only self-sufficient in virtually all major agricultural products, but is also a net food exporter.  Farming remains vitally important to the economy and development of the Southern African region. Agricultural activities range from intensive crop production and mixed farming in winter rainfall and high summer rainfall areas to cattle ranching in the bushveld and sheep farming in the arid regions.

 Maize is most widely grown, followed by wheat, oats, sugar cane and sunflowers. While 13% of South Africa’s land can be used for crop production, only 22% of this is high potential arable land.

The most important limiting factor is water availability.

 Investment opportunities in South Africa

 

Business process outsourcing (BPO) and IT-enabled

services:

• Call centres;

• Back-office processing;

• Shared corporate services;

• Enterprice solutions, e.g. fleet management and asset management; and

• Legal process outsourcing

 

Electro-technical industries:

• Software and mobile applications;

• Smart metering;

• Embedded software;

• Radio frequency identification;

• Process control, measurement and instrumentation;

• Security and monitoring solutions; and

• Financial software.

 

Clothing, textiles, leather and footwear:

• Manufacturing of industrial textiles using polyester;

• Production of other natural fibre textiles such as flax; and

• Wool and mohair production – downstream opportunities

for yarns, knitwear and fabric.

Agro-processing:

• Fisheries and aquaculture, i.e. freshwater aquaculture and marine culture;

• Food processing in the milling and baking industries;

• Beverages, viz. fruit juices and the local beneficiation, packaging and export of indigenous teas;

• High-value natural fibres, viz. organic cotton and downstream mohair production;

• High-value organic food for the local and export markets; and

• Biofuels production, viz. biodiesel and bioethanol.

 

Automotives and components:

• Engine parts/components, vehicle interiors, electronic drive train components, body parts, catalytic converters, aluminium forgings and castings, diesel particulate filters and leather products.

 

Chemicals and plastic fabrication:

• Beneficiation of polypropylene used in automotive components and building and construction industries, and packaging materials;

• Medical (drips and syringes), and manufacture of active pharmaceutical ingredients (APIs) for key anti-retroviral (ARVs);

• Manufacture of reagents for AIDS/HIV diagnostics; and

• Production of vaccines and biological medicines.

Metal fabrication, capital and transport equipment:

• Downstream processing and value adding of iron, steel, aluminium, stainless steel, ferroalloys and the platinum group of metals (PGMs);

• Conversion processes of metal products, i.e. metal fabrication, pipe and tube, foundry products, wire and jewellery;

• Manufacturing and assembly of mining, agricultural and construction equipment;

• Utilities, i.e. reticulation plants and pipe lines;

• Machine tools and tooling (auto, packaging, mining and aerospace industries);

• Electrical motors;

• Services in the engineering and construction sectors;

• Rolling stock, i.e. locomotives, wagons and coaches;

• Production of permanent ways, i.e. railway lines, signalling equipment, electrification, bridges and stations;

• Harbour construction and equipment; and

• Ship and oil platform building and maintenance.

 

Tourism

• Accommodation – hotels, boutique hotels, lodges and resorts;

• Urban integrated tourism/entertainment precincts;

• Adventure, eco-, sport, conference and cultural tourism;

• Infrastructure development;

• Leisure complexes and world-class golf courses;

• Harbour and waterfront developments;

• Transfrontier conservation areas;

• Tourism transport – aviation, rail, cruise liners, etc.;

• Green building and green technologies for tourism;

• Attractions and activity-based tourism;

• Museums and heritage; and

• Cultural, music, arts festivals and events.

 

Aerospace

• Aviation-related services, including maintenance, repair

Rotary and fixed-wing components;

• Aviation training services;

• Specialised manufacturing of avionics, including health

usage monitoring systems;

• Aerostructure components, specifically composites and sheet metal (aluminium and titanium);

• Small and micro-satellite capability, including sensor platforms;

• Satellite-related services (including tracking and control and applications development);

• Specialised design expertise, systems level as well as first-tier level; and

• Unmanned aerial vehicles (UAVs).

 

Power generation and distribution:

• Independent power generation, energy infrastructure and alternative energy.

Renewable energy and energy-saving industries:

• Solar water heating, evacuated tube plants, concentrated solar heating, wind and biomass energy production.

Advanced manufacturing

• Nano-materials:

»» High-performance materials based on natural resources (advanced bio-composites);

»» Composites (intelligent textiles used in medical, building and construction industries); and

»» Continuous fibre-reinforced thermoform composites.

• Nuclear build programme, i.e. joint ventures, consortiums and the establishment of new companies to grow South Africa’s nuclear manufacturing capability and nuclear supply industry to supply into the nuclear build programme; and

• Electricity demand-side management solutions to improve

efficiency of electricity usage.

Creative and design industry:

• Film and media: »» Film studios, treaty film co-production ventures,

distribution infrastructure, servicing of foreign productions; and

»» Production of films and documentaries, commercials, stills photography and multi-media.

Design:

»» Jewellery manufacturing and design; and »» Fashion design

 

Investment Incentives

South Africa offers various attractive investment incentives, targeted at specific sectors or types of business activities.

 

Some of these are listed below.

Research and Development (R&D) Tax Incentive Programme

The R&D Tax Incentive Programme was introduced in November 2006, in terms of Section 11(d) of the Income Tax Act, 1962 (Act No. 58 of 1962). It is administered by the Department of Science and Technology (DST) in conjunction with SARS, to encourage innovation, and scientific and technological R&D by taxpayers/companies in South Africa.

The incentive consists of a deduction of 150% in respect of eligible expenditure on suitable scientific or technological R&D undertaken by taxpayers within South Africa, and an accelerated depreciation of assets for the purposes of scientific and technological R&D over three years at a rate of 50:30:20, starting from the year of assessment in which the asset is brought to first use. Taxpayers can claim for the eligible scientific or technological R&D expenditure on salaries and wages, materials, buildings, machinery, equipment andcontracted R&D. Expenditure on the following activities is deductible:

 

o Exploration and prospecting;

o Management of trademarks;

o Market research, sales or marketing promotion;

o Management of internal business processes; and

o Social sciences and humanities.

 

Enterprise Investment Programme (EIP): Manufacturing Investment Programme (MIP)

The EIP MIP is a cash grant for locally based manufacturers who wish to establish a new production facility, expand an existing facility, or upgrade an existing facility in manufacturing industries. The grant is equal to 15 ─ 30% of the value of the qualifying investment

 

Enterprise Investment Programme (EIP): Tourism Support Programme (TSP)

The EIP TSP is an investment incentive grant payable over a period of two to three years to support the development of tourism enterprises, and in so doing stimulate job creation and encourage the geographical spread of tourism investmentcountrywide. Tourism-related activities supported by the grant include the following:

o Accommodation, recreation/entertainment and cultural services;

o Tour operator and passenger transport services; and

o Water transport services.

 

The grant is equal to 15 ─ 30% of the value of the qualifying

investment costs, depending on the size of the investment.

 

Foreign Investment Grant (FIG)

The FIG seeks to compensate qualifying foreign investors for the cost of moving the necessary new machinery to South Africa. The grant constitutes either the value (15%) of the qualifying imported machinery or the actual transport cost from abroad, to a maximum of R10m.

Section 12i Tax Allowance Incentive (12i TAI)

The 12i TAI is designed to support greenfield investments, i.e. new industrial projects that utilise only new and unused manufacturing assets, as well as brownfield investments, i.e. expansions or upgrades of existing industrial projects.

The new incentive offers support for both capital investment and training. The incentive offers a tax deduction to a maximum of R900 million in the case of any greenfield project with a preferred status, a maximum total additional training allowanceper project amounting to R20 million in the case of a qualifying project, and R30 million in the case of a preferred project.

 Critical Infrastructure Programme (CIP)

The Critical Infrastructure Fund (CIF) is a cash grant for projects designed to improve critical infrastructure in South Africa, including the following:

o Transport systems – road and rail systems;

o Electricity transmission and distribution systems – power flow and regulation systems;

o Sewage systems – network and purification;

o Waste storage, disposal and treatment systems; and

o Fuel supply systems – piping for liquid, gas and solid fuel conveyer transportation. The CIP is a non-refundable scheme that covers between 10% and 30% of the total development costs of the qualifying infrastructure.

 

Industrial Development zones (IDZs)

IDZs are purpose-built industrial estates linked to international ports that leverage fixed direct investment in value-added and export-oriented manufacturing industries. These zones provide the following benefits:

o Quality infrastructure;

o Expedited customs procedures; and

o Duty-free operating environments.

 

Clothing and Textile Competitiveness Programme (CTCP)

The purpose of the CTCP is to grow South African-based clothing, textiles, footwear and leather goods manufacturers to be globally competitive. Such competitiveness encompasses issues of cost, quality, flexibility, reliability, adaptability and the capability to innovate.

The CTCP provides investment support to both local- and foreign-owned entities by offering a cost-sharing grant incentive of 75% of project cost on cluster projects and 65% of project cost for company level projects. These incentives will not cover costs pertaining to machinery, equipment, commercial vehicles, land or buildings in an existing clothing and textile production facility.

Production Incentive (PI)

The PI is aimed at structurally changing the clothing, textiles, footwear, leather and leather goods manufacturing industries by providing funding assistance for these sectors to invest in competitiveness improvement intervention. The PI comprisesan upgrade grant facility and an interest subsidy for working capital facility. It is a market-neutral incentive offered to specific sectors, resulting in an incentive benefit equal to 10% for the year ending March 2011 of a company’s manufacturing value addition (MVA).

South African Film and Television Production and Co-Production Incentive

This incentive provides financial assistance for South African feature films, tele-movies, television drama series, documentaries and animation. The objective is to contribute to the local film industry. Production budgets are required to be over R10m, with the rebate being 35%, capped at R10m.

 Export Marketing and Investment Assistance (EMIA)

The EMIA scheme partially compensates exporters in respect of activities aimed at developing export markets for South African products and services and to recruit new foreign direct investment (FDI) into South Africa. The scheme providesassistance in the form of:

o Air travel expenses;

o Freight-forwarding of display materials;

o Subsistence allowances; and

o Exhibition space and booth rental costs.

 Business Process Outsourcing and Offshoring (BPO&O) Investment Incentive

The BPO&O Investment Incentive comprises an investment grant and a training and skills support grant towards the costs of company-specific training. The incentive is offered to local and foreign investors establishing projects that aim primarilyto serve offshore clients.

Automotive Investment Scheme (AIS)

The AIS replaces the Productive Assets Allowance (PAA) scheme of the Motor Industry Development Programme (MIDP), which lapsed in December 2009. The AIS is intended to grow and develop the automotive sector through investment in new and replacement automotive models, as well as the manufacturing of automotive components. The objective is to increase plant production volumes, sustain employment and strengthen the automotive value chain. The scheme aims to provide qualifying firms with a taxable cash grant of 20% of the value of qualifying investment in productive assets. An additional taxable cash grant of 5% or 10% over and above the 20% taxable cash grant is available to projects, should they maintain specific targets.

 

Support Programme for Industrial Innovation (SPII)

The SPII is designed to promote technology development in South Africa’s industry through the provision of financial assistance for the development of innovative products and/or processes. SPII is focused specifically on the development phase, which begins at the conclusion of basic research and ends at the point when a pre-production prototype has been produced.

Co-Operative Incentive Scheme (CIS)

The CIS is a 90:10 matching cash grant for registered primary co-operatives (a primary co-operative consists of five or more members). The CIS is an incentive for co-operative enterprises in the emerging economy to acquire competitive business development services, and the maximum grant that can be offered to one co-operative entity under the scheme is R350 000.

Black Business Supplier Development Programme (BBSDP)

The BBSDP is a cost-sharing grant offered to black owned small enterprises to assist them to improve their competitiveness and sustainability in order to become part of the mainstream economy and to create employment. The programmeprovides grants to a maximum of R1 million.