Foreign investment

South Africa: Foreign investment

FDI in Figures

The potential attractiveness of South Africa is high, compared to other countries in the region, but its performance is relatively weak for FDI attraction, despite progress owing to investment potential in infrastructure. However, the country leads in terms of FDI inﬂux in Africa. According to data published by UNCTAD in the World Investment Report 2018, FDI inflows contracted by 41% between 2016 and 2017, reaching $1.3 billion. Domestic demand, lower than investor expectations, is among the key factors explaining this decline. The country is the 68th receiver of FDI in 2017, 13 places less well than the previous year. FDI stocks are on the rise, reaching almost $150 billion in 2017.

The new ANC administration led by Ramaphosa is expected to be more encouraging to foreign investors than the the previous president Jacob Zuma (as an example, the latter had previously announced his intention to revise the Land Law in order to restrict propriety rights for foreigners).

In 2016, European countries were active investors in South Africa (United Kingdom, Netherlands, Germany, Luxembourg and Switzerland), as well as the United States, China, Australia and Japan. Most of the investment went to the financial, manufacturing, mining, transportation and retail sectors. The automotive sector has seen its investments increase in recent years.

South Africa has many attractive assets for investors such as an important demography, a diversiﬁed, productive and advanced economy, abundant natural resources, a transparent legal system and a certain political stability. However, the country suﬀers from a high crime rate, increasing social unrest (strikes and demonstrations), high levels of corruption and structural issues in electricity supply and logistics. Investors are also worried about the lack of clarity concerning policy and structural reforms. Investment potential is hampered by certain legal uncertainties which discourage foreign investors, despite the promulgation of the Protection of Investment Act in December 2015, which reinforces legal guaranties for foreign investors. South Africa ranks 82nd in the World Bank 2018 Doing Business ranking (out of 190 economies).

Foreign Direct Investment	2015	2016	2017
FDI Inward Flow (million USD)	1,729	2,235	1,325
FDI Stock (million USD)	126,755	135,454	149,962
Number of Greenfield Investments***	150	140	101
FDI Inwards (in % of GFCF****)	2.7	3.9	n/a
FDI Stock (in % of GDP)	40.3	46.5	n/a

Source: UNCTAD, Latest available data.

Note: * The UNCTAD Inward FDI Performance Index is Based on a Ratio of the Country's Share in Global FDI Inflows and its Share in Global GDP. ** The UNCTAD Inward FDI Potential Index is Based on 12 Economic and Structural Variables Such as GDP, Foreign Trade, FDI, Infrastructures, Energy Use, R&D, Education, Country Risk. *** Green Field Investments Are a Form of Foreign Direct Investment Where a Parent Company Starts a New Venture in a Foreign Country By Constructing New Operational Facilities From the Ground Up. **** Gross Fixed Capital Formation (GFCF) Measures the Value of Additions to Fixed Assets Purchased By Business, Government and Households Less Disposals of Fixed Assets Sold Off or Scrapped.

FDI INFLOWS BY COUNTRY AND INDUSTRY

Main Investing Countries	2016, in %
United Kingdom	38.4
The Netherlands	21.4
United States	6.8
Germany	5.0
China	4.2
Japan	3.8
Australia	3.1
Luxembourg	2.9
Switzerland	1.1

Main Invested Sectors	2016, in %
Financial and insurance services, real estate and business services	42.1
Manufacturing	20.8
Mining	20.5
Transport, storage and communication	10.4
Trade, catering and accomodation	4.5
Community, social and personal services	1.5

Source: South African Reserve Bank, Quarterly Bulletin June 2018 - Latest available data.

Form of Company Preferred By Foreign Investors: Private Limited
Form of Establishment Preferred By Foreign Investors: Simple process of establishment, do not require to have statutory general body meetings like public companies, and do not have to submit their annual financial statements with the Registrar.
Main Foreign Companies: Global companies in South Africa
Sources of Statistics: Department of trade and industry
South African Reserve Bank
Business Map

What to consider if you invest in South Africa

Strong Points

South Africa has large market potential, well developed infrastructure and a competitive domestic economy. The country's democracy is also well-established and the rule of law is observed. The country has put into place economic reforms, which have led to macro-economic stability, as well as tax and customs reductions.

South Africa main assets are:

The business climate is good and state financial management is competent.
The country enjoys a good-sized and active stock exchange.
South Africa has shifted from its traditional industries to production and financial services, which are the main contributors to GDP.
The tourism and retail sectors have great potential.
The mining sector is a major part of the economy. It is the world's largest producer of chrome, manganese, platinum, vanadium and vermiculite. It is the second largest producer of ilmenite, palladium, rutile and zirconium. It is the world's third largest coal exporter. South Africa is also a huge exporter of diamonds and iron ore (U.S. Geological Survey).
The country also enjoys a strategic geographical location, that makes it an ideal hub to access the sub-Saharan markets.

Weak Points

The economic stability of the country has been weakened by the corruption scandal that hit former President Zuma. In addition, investors are worried by the general orientation of public policies, in particular economic policies, and the issue of structural reforms. Other problems may discourage foreign investors:

Increased labour strikes in recent years, which rating agencies have warned could further lower South-Africa's credit rating
Violence and corruption continue to hinder the economy, while income inequality remains high
Access to electricity is insufficient because of a lack of investment.
Lack of high-skilled labour force
Immigration laws make the employment of foreign workers more complicated.
Import-export process may be difficult.
Economy depends on the ore prices and FDI inflows.
Market entry is very competitive, as the market is very mature.

Government Measures to Motivate or Restrict FDI

Nearly all business sectors are open to foreign investors. Government approval is not required and there are few restrictions on how or how much foreign entities can invest. Additionally, the Government has put in place various measures to encourage foreign investments, including simple tax rules, investment incentives, a better regulatory policy on competition and protection of intellectual property. Below are a few examples of these measures:

The Foreign Investment Grant, a cash grant, which provides up to 15% of the value of new machinery and equipment
The Skills Support Programme, which provides up to 50% of training costs and 30% of workers' salaries
The Industrial Policy Project programme, which offers tax allowances

For a list of other government incentives for FDI, please visit the Department of Trade and Industry's website. The government created a Unique Investment Desk in 2017.

Despite these measures and a developed economy, some elements may indicate that the government is not convinced of the importance of FDI. Thus, some laws are approved without an initial analysis of the consequences they may have on certain economic sectors.

Protection of Foreign Investment

Bilateral Investment Conventions Signed By South Africa: South Africa is a signatory to 40 bilateral investment treaties. These treaties are available to view and download on UNCTAD's Investment Policy Hub.
Organizations Offering Their Assistance in Case of Disagreement: ICCWBO , International Chamber of Commerce
Member of the Multilateral Investment Guarantee Agency: Yes, Visit: MIGA

Country Comparison For the Protection of Investors

	South Africa	Sub-Saharan Africa	United States	Germany
Index of Transaction Transparency*	8.0	5.0	7.0	5.0
Index of Manager’s Responsibility**	8.0	4.0	9.0	5.0
Index of Shareholders’ Power***	8.0	5.0	4.0	8.0
Index of Investor Protection****	7.0	4.3	6.5	6.0

Source: Doing Business - Latest available data.

Note: *The Greater the Index, the More Transparent the Conditions of Transactions. **The Greater the Index, the More the Manager is Personally Responsible. *** The Greater the Index, the Easier it Will Be For Shareholders to Take Legal Action. **** The Greater the Index, the Higher the Level of Investor Protection.

Procedures Relative to Foreign Investment

Freedom of Establishment: Guaranteed
Acquisition of Holdings: Possible.

Companies have to appoint a South African resident as the company's legal representative. Moreover, foreign companies have to appoint an auditor.
Obligation to Declare: No government approval is required for foreign investors to establish a new business or invest in South Africa apart from the approval required under the exchange control regulations.

The investor will be required to appoint a consultant, auditor, and/or legal advisor to register a company on his/her behalf. The company should be registered within 21 days and must also register with the tax office.
Competent Organisation For the Declaration: South African Reserve Bank (SARB)
Requests For Specific Authorisations: Virtually all sectors are open to foreign investors. Very few restrictions apply only to foreign companies.

For example, a foreign bank establishing a branch in South Africa may be required to employ a certain minimum number of local residents in order to obtain a banking licence and may be obliged to have a minimum capital base.

Restrictions also exist regarding the ownership of immovable property by foreign companies. Foreign companies are required to register as external companies before immovable property may be registered in their names.

Office Real Estate and Land Ownership

Possible Temporary Solutions: Renting.
However in case the foreign company is of national interest, the South African government provides temporary space for a limited period, say up to 2 years.
The Possibility of Buying Land and Industrial and Commercial Buildings: Yes
Risk of Expropriation: As per the Expropriation Act of 1975 and the Expropriation Act Amendment of 1992 , the government is entitled to expropriate private property for reasons of public necessity or utility.

Investment Aid

Forms of Aid

The various forms of aid and incentives provided by government are:

Foreign Investment Grant: provide up to 15 % of the value of new machinery per entity for relocation to South Africa.
Industrial Development Zones: provide duty-free import of production-related materials and zero VAT on materials sourced from South Africa.
The Skills Support Program : provides up to 50% of training costs and 30% of worker salaries for a maximum of three years to encourage the development of advanced skills.
The Strategic Investment Project Program : offers a tax allowance of up to 100% (maximum if USD 86 million per project) on the cost of buildings, plant and machinery, for strategic investments of at least USD 70 million).
The Critical Infrastructure Facility: supplements funds up to 30% of the development costs of qualifying infrastructure projects.
The Business Process Outsourcing & Off-Shoring (BPO&O): incentive for companies offering services to offshore clients ($5400-8800 US and training support).
Incentive for industrial projects using unused and new manufacturing assets (Green field investments) and expansions of existing industrial projects: 12 % tax incentive.
Sector Specific Assistance Scheme (SSAS): financial support for industry associations, joint action groups and export councils.
Film and Television Production Rebate Scheme: rebate of 15 % for foreign productions and 25% for South African productions.
Automotive Production and Development Program (APDP): scheme to promote the automobile industry (20% of the value of investment in productive assets).

For more details on investments aids, visit the DTI website.

Privileged Domains

Infrastructure development (sectors like transportation, telecommunications, and energy), job creation, environment protection, development of manpower skills, creation of healthy competitiveness.

Privileged Geographical Zones

The first Industrial Development Zone (IDZ) was set up in South Africa in 2001. IDZs offer duty-free import of production-related materials and zero VAT on materials sourced from South Africa, along with the right to sell into South Africa upon payment of normal import duties on finished goods. There are no exemptions from other laws or regulations, such as environmental and labor laws.

IDZs are currently located at Coega near Port Elizabeth, in East London, Richards Bay, and at Johannesburg International Airport.

Free Zones

No free zones or free ports exist in South Africa.

Organizations Which Finance

Industrial Development Corporation (IDC)

Development Bank of Southern Africa (BDSA)

Overseas Private Investment Corporation (OPIC)

African Development Bank.

Small Business Development Corporation (SBDC)

Investment Opportunities

The Key Sectors of the National Economy: Mineral exports, industrial sector which includes railway rolling stock, synthetic fuels, and mining equipment and machinery, tourism, financial services, health, fruit production, energy (electricity, renewable, petrol), transport infrastructure, telecommunication and information technologies and the online sale sector.
High Potential Sectors: Business process outsourcing and notably call centres.
Tourism, which benefits from the beauty of the landscape, is a buoyant sector.
FDI in the manufacturing sector is desired, South Africa stresses its comparative advantage in terms of costs of production.
Privatization Programmes: The government is considering privatisation of the postal service, the telecommunications services (TELKOM) and railway lines.
In 2017, the government announced its intention to partially privatise numerous state-owned assets, including South African Airways.
Tenders, Projects and Public Procurement: South African Government Information, Tenders
SA-Tenders, Tenders in South Africa
Cape Business News, Trade Offers
Tenders Info, Tenders in South Africa
DgMarket, Tenders Worldwide

Sectors Where Investment Opportunities Are Fewer

Monopolistic Sectors: Investments in banking, insurance and broadcasting industries. FDI in mining, energy and defence sectors must be submitted to the government for approval. Restrictions on the level of borrowing for foreign companies also exist.

Finding Assistance For Further Information

Investment Aid Agency: Department of Trade and Industry South Africa
The New Partnership for Africa's Development
Other Useful Resources: Economic Developments and Prospects in South Africa - African Economic Outlook
Doing Business Guides: Brand South Africa
Country Commercial Guide for South Africa - export.gov
Deloitte Guide on international tax system and on business in South Africa (p 337-396)

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