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Market Plans

South Africa Environmental Export Market Plan
Chapter 3
Challenges and Opportunities for U.S. Environmental Firms

Nearly 90 percent of South Africa's population resides in areas surrounding the five largest cities: Johannesburg, Cape Town, Durban, Pretoria, and Port Elizabeth. These metropolitan areas constitute the country's major centers of economic activity and consumer markets. As South Africa makes the transition to a more decentralized government and invests more authority in the individual provinces, it will be increasingly important for U.S. businesses to work directly with provincial authorities, perhaps by establishing an in-country presence.

Market Access

Of all the issues affecting market access and the competitiveness of U.S. exports to South Africa, the exchange rate is the most serious. By 1995, the South African rand (R) had lost 30 percent of its value with respect to the dollar. It now fluctuates at around R4.50 to one U.S. dollar, enhancing the prospects of small local manufacturers.

The new government is committed to reducing its role in the economy, promoting private-sector investment while it privatizes some assets. It has lowered the tax rates for foreign companies, eased currency exchange controls, and encouraged local manufacturers and exports. In addition, a competition board has been established to recommend policy and to look critically at the domination of the country's economy by relatively few conglomerates. Black economic empowerment--the process of involving black people at all levels of industry--and black consortiums are making inroads into previously white-dominated sectors of industry. There are black-owned businesses in most areas of the economy. As of June 1998, there were 14 black-owned companies on the Johannesburg Stock Exchange, where there were none just a few years ago. As environmental criteria, come to the forefront, major end-users of water and sewage equipment (e.g., water boards, councils, and the mining industry) are being directed to meet South Africa Bureau of Standards (SABS) criteria, or their overseas equivalents and to see that equipment carries the relevant mark of approval.

Doing Business in South Africa

There are a variety of ways to distribute products. A U.S. company with patents, trademarks, know-how, or skills in South Africa can enter into a licensing agreement with a South African company and provide intellectual property rights in return for royalties. Agents or distributors may be used to import and distribute the goods. It is also possible to establish a branch office, which requires registration as a foreign investor and the filing of tax returns in South Africa.

There are many advantages to establishing a local manufacturing facility:
--Avoidance of import costs (such as duties and tariffs, shipping, and freight charges);
--Immunity from the ever-fluctuating exchange rate;
--Corporate policies favoring a local, permanent presence and attempts to boost employment for the local population; and
--Empowerment of black business/local businesses (which many end-users are attempting to achieve by involving local manufacturers and suppliers in major contracts wherever possible).

Business-related activities are generally covered in the Companies Act of 1973 or the Close Corporations Act of 1984, which set out requirements relating to accounting, registration, and reporting. For example:
--Companies with sales of more than $33,000 must register for value-added tax (VAT). There is a 14 percent VAT on nearly all goods and services (exports and certain other foods are zero rated, and there are some other exemptions).
--U.S. companies with South African employees must register and comply with pay-as-you-earn (PAYE) provisions of the income tax and with the unemployment insurance and workman's compen-sation funds.
--Companies must register with the appropriate regional services council to pay the public service levies.

Corporations are taxed at a flat rate of 35 percent, and there is no capital gains tax. There is no dual taxation agreement between the United States and South Africa, and there are no restrictions on either the remittance of profits or the repatriation of capital.

Trade Regulations and Standards

South Africa is a member of the World Trade Organization (WTO). In October 1995, in conformance with its WTO commitments, South Africa eliminated the import surcharges on all goods. According to its market access proposal to the Uruguay Round, South Africa will rationalize 10,000 tariff lines down to 5,000–6,000 by the end of the five-year adjustment period in 2000. Thereafter, South Africa will replace all remaining quantitative controls and formula duties and cut remaining tariff lines up to 30 percent. American goods qualify for South Africa's most-favored-nation tariff.

Partnering

Finding a partner for a joint venture in South Africa can be a difficult task, but it is a necessary one for success. The difficulty lies in part with the fragmented business sector left over from apartheid policies that guaranteed only a small white business sector with readily available capital. The government aims to correct this historical imbalance by encouraging foreign investors to partner with emerging small, medium, and microenterprises. The challenge facing this emerging sector is that the availability of state-of-the-art technologies is limited and expertise remains to be developed.

To help alleviate this situation, the World Bank is sponsoring a $67 million project in South Africa known as the South Africa Industrial Competitiveness and Job Creation Project. The project's primary objectives are to increase the competitiveness of South Africa's small, medium, and microenterprises and to help them expand their domestic and export sales by taking advantage of the ongoing trade liberalization.

The project's components are:
--Competitiveness funds to support a matching grant scheme for individual enterprises to help them access business support services and enhance productivity and technology use;
--A catalyst fund to develop partnerships by fostering networking and information sharing; and
--Export finance guarantees to increase the access to short-term credit for small and medium-sized enterprises

Investment Incentives

Potential investors should be thoroughly familiar with South Africa's Macro-Economic Strategy for Development and give special consideration to the Regional Industrial Development Program, which grants cash incentives to foreign-owned businesses that establish manufacturing and assembly businesses in South Africa. There are no clear-cut incentives to businesses focusing on the environmental sector.

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