Transcript South Africa: Investment Overview & Analysis

South Africa: Investment
Overview & Analysis
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
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
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.
Apartheid
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.
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.
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%
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.
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.
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
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
FDI’s Presence in South Africa
Today
• What makes South Africa an attractive climate
for foreign investors?
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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
Challenges to South African FDI
• South Africa faces daunting challenges as it
competes with other emerging market countries
for FDI.
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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
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
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
Table 3: Major Recipie nts of FDI (US$ mn)
1990-95
South Africa
Nigeria
Egypt
Morocco
Angola
Tunisia
Alg eria
Cote d'Ivoire
Lesotho
Sudan
Zambia
Uganda
Mozambique
Tanzania
Namibia
Ghana
Equatorial Guinea
Zimbabw e
Ethiopia
Senegal
Swaziland
Mauritius
Mali
Kenya
Seychelles
Botsw ana
Sub total
Sub-Saharan Africa
North Africa
Aggregate
1,806
6,582
3,792
2,568
1 ,560
2 ,448
1 50
6 96
1,278
7 8
732
264
168
234
5 76
522
222
204
5 4
174
378
126
1 32
120
1 38
-144
1996-2001
Total inflow s
1 4,239
7 ,222
7 ,252
5 ,478
6,176
3,017
3 ,172
2 ,062
1 ,217
1 ,806
8 79
1 ,211
1 ,148
1 ,079
653
5 25
748
7 47
7 96
603
309
442
4 17
314
289
417
1 6,740
9 ,180
25,920
46,089
18,191
64,280
1 6,045
1 3,804
11,044
8,046
7,736
5 ,465
3,322
2,758
2,495
1,884
1,611
1 ,475
1,316
1,313
1,229
1,047
9 70
9 51
850
7 77
6 87
5 68
549
4 34
427
417
62,829
2 7,371
9 0,200
Investment in SA
• Recent Factors Impacting FDI
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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?
South Africa Indicators (#s in US $ millions)
GDP
Real GDP Growth
Inflation
Exports
Imports
FDI
Exchange Rate Avg.
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2000
127,962
3.5
5.4
31636
27320
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6.94
2001
114296
2.8
5.7
30716
25856
969
8.6
2002
104800
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9.3
31085
26713
7270
10.54
2003(e)
148302
2.8
7
32000
25900
739
7.8
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
2004(e)
151580
3.2
5.7
32704
26780
8.5
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
IPO Basics
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Govt. sale of assets to
underwriter (Deutsche
Bank/JP Morgan Chase
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Underwriter sale on
open exchange
(NYSE/Johannesburg)
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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
Basics of Privatization (case
study: Telkom)
– 25% of the Telkom shares were offered on the NYSE and Johannesburg
exchanges
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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)
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?
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
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?
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.
Privatization of Water Delivery
• Began in the late 1990’s
• Cost Recovery
• Water was available for more people
People’s argument against water
privatization
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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
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.
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
Notes
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CIA website
Apartheid
Amnesty
Privatization in Water Industry
Africa Action
Privatization of Telkom
Privatization Case Study
SA Liberalization
Country Profile and Analysis
Country Data