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South Africa Environmental Export Market Plan

Country Background
South Africa is strategically located at a critical point on the sea-lanes between the South Atlantic and Indian Oceans. It is rich in deposits of mineral resources and strategic materials that include gold, diamonds, coal, and uranium. The mineral sector of South Africa's economy accounts for almost two-thirds of export earnings, yet employs less than 10 percent of the work force. Coal from South Africa mines generates about 85 percent of South Africa's electricity and a substantial amount of the country's air pollution.

A decade ago, 149 U.S. companies sold or closed their operations rather than cooperate with the apartheid government. These closures forced other U.S. firms to leave South Africa in large numbers. Most of the economic sanctions were lifted by 1991 when 256 U.S. companies had closed or sold their operations in South Africa. A significant reversal started with the arrival of South Africa's new democracy.

South Africa now has more than 700 U.S. firms involved in the South African economy with more than $9.5 billion assets and sales exceeding $10 billion. They provide almost 10,000 jobs. Since 1994, U.S. companies have been investing in South Africa at a rate double that for firms of all other countries combined.

South Africa is the United States’ largest trading partner in Africa. At the end of 1995, U.S. direct investment in South Africa was estimated at $1.3 billion, an increase of nearly 30 percent over 1994. In many respects, South Africa has an advanced economy. It has a market of nearly 42 million consumers and a gross domestic product (GDP) that is four times that of Egypt, its nearest competitor on the continent. On the other hand, development of South Africa's economy was significantly distorted and limited by the former policies of apartheid and the resulting imposition of international sanctions.

The South African rand began to stabilize throughout 1995, after a volatile post-apartheid period. High interest rates and a mildly appreciating currency attracted foreign capital during 1995. In mid-February 1996, the rand started to fall and created a volatile foreign exchange market. By mid-1998, the rand had plummeted to as low as 6.6 rands to the U.S. dollar, a drop of almost 30 percent during the calendar year, subsequent to the Asian financial crisis and mirroring widespread currency instability in emerging market countries.

Overall, the net increase in foreign capital has had an important influence on the recovery of the economy. It declined to 3.2 percent in 1996, 1.7 percent in 1997, and increased only 0.7 percent the first quarter of 1998. The rate of change in the gross domestic product became positive again at 3.5 percent in 1995. Inflation remained relatively low and continued to decline from double-digit figures to 5.5 percent in 1996.

South Africa imposes no restrictions on the type or extent of foreign investment. Nevertheless, some potential investors have hesitated because of concerns over intellectual property rights (IPR) protection, worker productivity, labor market flexibility, the country's low savings rate, and continued exchange controls. The South African Government is aware of these issues and has taken steps to improve its IPR protection and is in the process of relaxing exchange controls.

Legacy of Apartheid
The long-standing South African policy of apartheid, which toppled in 1994, directly contributed to the country's environmental problems. The Group Areas Acts and other apartheid-era legislation forced removals and crowding of migrant workers into overcrowded urban areas to work temporarily in the mines. Afterwards, they returned to the homelands. Consequently, the government made only a minimal investment in urban infrastructure. When apartheid ended in 1994, South Africans elected to stay in urban areas, complicating the delivery of basic services and worsening air pollution caused by coal and wood burning. The homelands in the countryside also lacked infrastructure development. Air pollution, municipal and industrial waste, a severe shortage of sanitation services and wastewater treatment infrastructure, and poor water quality and quantity remain at the core of South Africa's urban and rural environmental problems.

A New Beginning: Reconstruction and Development Program
The Reconstruction and Development Program (RDP) constitutes South Africa's new integrated socioeconomic policy framework. The African National Congress (ANC) first articulated the RDP prior to the April 1994 elections. The Government of National Unity (GNU) has adopted it to mobilize all South Africans and the country's resources to eradicate the effects of apartheid and to build a democratic, nonracial, and nonsexist future.

The RDP states that “all South Africans, present and future, have the right to a decent quality of life through sustainable use of resources.” To achieve this, the government has stated its commitment to equitable access to natural resources, safe and healthy living and working environments, a participatory decision-making process around environmental issues, and empowerment of communities to manage their natural environment. Moreover, the RDP indicates the need to build environmental considerations into every policy decision and incorporate environmental consequences in the course of planning development strategies.

The RDP asserts that measures such as land reform, provisions for basic infrastructure, housing, targeted rural assistance (including extension services), and “food security” should ultimately reduce the pressure on the natural environment. The RDP argues for revising existing environmental legislation and administration. The goals are to establish an effective system of environmental management, to use environmental auditing with public disclosure, and to monitor industrial activities that affect the environment.

The RDP recognizes that South Africa has wide-ranging environmental legislation and that responsibility for implementation is scattered over a number of departments (i.e., Land Affairs and Agriculture, Water Affairs and Forestry, Health, and Mineral Resources), and from national to local levels of authority (see chart below). The RDP also notes that the Department of Environmental Affairs and Tourism administers only a few of the relevant environmental acts. According to the RDP, this array of functions and responsibilities has resulted in “discrepancies, anomalies, and ineffectiveness.” Furthermore, the RDP acknowledges that the legal system makes it difficult to impose fines for environmental offenders.

Current Fragmentation of Regulatory Pollution Control

Department of Environmental Affairs and Tourism

Department of Agriculture

Department of Water Affairs and Forestry

Department of Mineral and Energy Affairs

Other departments with pollution control functions
Coordinating Committee
Council for the EnvironmentSea Fisheries InstituteNational Botanical InstituteNational Parks Board
The RDP recommends rationalizing environmental legislation into a cohesive and workable form. Furthermore, the RDP suggests transforming environmental management to promote active participation of civil society, establishing strong provincial departments of environmental affairs, and making the national Department of Environmental Affairs and Tourism responsible for overall standards and financing of environmental protection.

On June 14, 1996, Minister of Finance Trevor Manuel unveiled South Africa's economic policy called Growth, Employment, and Redistribution--A Macroeconomic Strategy. The policy spells out what the government needs to do to expand the economy for higher levels of growth, development, and an improved standard of living for all South Africans. The strategy seeks to introduce privatization of state assets through strategic equity partnerships; generate 10 percent annual growth in nongold exports; and induce large-scale public and private financial investment. To attract foreign investment, it aims to boost the economic growth rate to 6 percent and create 400,000 new jobs by the year 2000. Means to that end include a stable economy with low inflation, rational taxation, reduced interest rates, and flexible labor market conditions.

Spatial Development Initiatives
The South African Government is pursuing Spatial Development Initiatives (SDIs) or development “corridors” to promote the development process in regional areas. Eight areas have been identified by the government for priority development: Rustenburg, Phalaborwa, Maputo, Lubombo, KwaZulu-Natal, Wild Coast, Algoa-Kei, and North-Western Cape. Certain areas are designated for industrial or agricultural development or tourism. Priority industries include processing and preservation of fruit and vegetables, textiles, printing, and plastic manufacture. In essence, SDIs support and are characterized by a concentration of public-sector funding and private-sector investment areas. Typically, they seek anchor projects to boost new investment, growth, and employment opportunities. The SDI program shows great potential for growth. There already are a number of proposals for road, rail, and port infrastructure projects in the Witbank-Maputo development corridor.

There are two SDI incentive programs. The first is the Regional Industrial Development Program, intended for new manufacturing investments (not expansions) involving $700,000 in start-up assets, including land, buildings, machinery, and plant. The second is the Small and Medium Manufacturing Development Program, in which start-up assets amount to less than $700,000.

In the case of the Regional Industrial Development Program, a business can earn a two-year tax holiday by meeting one of three “components”; if it satisfies all three components, it gets a six-year tax holiday. The tax holiday can be extended to ten years should profitability seem unlikely in the first few years. The impact of the tax holiday works out to 100 percent retainment of profits by the company, making the venture tax exempt for all purposes during the period. Foreign companies are also eligible for a $250,000 foreign investment grant.

The Small and Medium Manufacturing Development Program, which applies throughout South Africa outside and inside SDIs, makes a business eligible for tax concessions over a six-year period. During the first three years, the venture is eligible for a cash, tax-free establishment grant of 10.5 percent of qualifying assets per year. In year four, the incentive is a tax-exempt cash grant equal to 25 percent. In this program, the foreign investment grant is $50,000.

The South African Government allocated approximately $2.2 billion for the fiscal year 1996–1997 for 22 RDP Presidential Lead Projects. President Nelson Mandela identified these projects as the government's highest priority. Included are the following projects relating to the environment:
--Infrastructure Development
--Extension of Basic Municipal Services
--Land Distribution and Restitution
--Urban and Rural Electrification

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