The Department of Economic and Statistics, the Tata Group think tank, analyses the pros and cons of South Africa as an investment destination

South Africa has the most advanced economy in the African continent and its geographical position provides an ideal gateway to Sub-Saharan Africa. The country has many opportunities for international investors, particularly Indian investors, but it does hold potential risks.

After the end of apartheid, the main opposition party, the ANC, won the country's first-ever free and fair elections, in April 2004. The ANC won a two-thirds majority in the national assembly, enabling it to amend South Africa's constitution. The Black Economic Empowerment (BEE) charters across all sectors began being implemented.

Economy
A firmer recovery in external demand, growth in tourism and continued expansion in total domestic demand is expected to boost South Africa's real GDP growth in 2005. There has been a recent revision in the country's GDP data, with improved coverage of the manufacturing, agricultural, retail and services sectors. Thus, real GDP growth is estimated to grow at over 3.5 per cent in 2005.

The most important contributors to the South African economy are mining, manufacturing and agriculture. Most economic activity takes place in Gauteng, where the majority of mining occurs.

The country's financial and industrial infrastructure is well developed and has excellent growth potential. But South Africa is plagued by the problem of huge socio-economic inequalities, which were fostered by the apartheid regime. This problem continues to manifest itself in the form of high unemployment rates, widespread poverty and steep increases in crime. An informal sector has developed as a result of unemployment and this poses another challenge to the country's economic development.

South Africa's economic policies are focused on increasing both economic growth and investment in order to create employment. Inflation is under control in the country, external debt is manageable and the degree of political stability is high. Thus, the economic outlook for the South African economy is positive.

Industry sectors
Mining is South Africa's largest industry sector, followed by manufacturing, oil and gas, chemicals, agriculture, and tourism. The country is globally recognised as a leading supplier of a variety of minerals and mineral products, which are exported to as many as 87 countries. Approximately 55 different minerals are produced from more than 700 mining facilities, with gold, platinum group elements, coal and diamonds dominating exports and revenue earnings.

However, the structure of the mining industry is set to change dramatically following the introduction of South Africa's new mining charter, which cedes all mineral rights to the state as well as introducing an empowerment component for all future mining developments in the country.

Agriculture contributes 4 per cent to South Africa's GDP and consists largely of cattle and sheep farming (only 13 per cent of land is used for growing crops). Clothing, textiles, the financial services, and banking sectors have recorded significant growth in recent years. The clothing and textiles industry has ridden the Africa Growth and Opportunity Act to earn Rand 791 million in 2001 from exports to the US alone, an increase of 51 per cent from the previous year.

The conference and exhibition industry earned South Africa Rand 17.4 billion in 2001 and created 250,000 new jobs. The country has a 2.5-per cent share of the global market for this industry.

Investment
Since 1994, the government of South Africa has taken steps to make the country more open to foreign investment. In 1997, the Department of Trade and Industry launched a national investment agency called Investment South Africa, tasked with the promotion of investment at the national and provincial levels.

The agency also provides investment requirements and makes opportunities available in every province. There is no restriction on the extent or type of foreign investment in South Africa. The government has tried to encourage both foreign and domestic investment through the introduction of incentives.

Opportunities
A stable government and its commitment to reforms and economic progress have made South Africa a favourite investment destination. The country holds a good potential market for India, though the prevalence of highly inequitable incomes has created a heavily distorted market.

But, with the ruling ANC determined to remove these distortions by implementing the Black Economic Empowerment (BEE) agenda and going ahead with other major reforms, South Africa holds a lot of promise in the medium term.

• South Africa is the world's fourth fastest-growing GSM market, with a growth rate of 50 per cent each year.
  
• The Southern African Development Community (SADC), with an estimated 250 million consumers, is a large regional market, but demand from there will depend on the pace of economic growth and this has been slow.
  
• The auto industry is a high-value market but, due to heavy income inequalities, it is distorted. Once the BEE is implemented, it will result in a more equitable income distribution. In such a scenario, the market will develop and provide good opportunities for auto manufacturers.
  
• The largest South African steel producer is highly cost-competitive. Input material costs are below the international average in all cases save for scrap. Wages are less than half the average, while labour productivity rates are above average. Process costs are also lower due to the high quality of iron ore used.
  
• Countries having plants with lower 'through stage' costs than the main South African steel plant producing hot-rolled coil are: Brazil, China, India, Russia and Ukraine. Most of these have been targets of anti-dumping actions by South Africa.
  
• South Africa has about 80 per cent of the world's total chrome reserves, most of it derived from ores in the Bushveld Igneous Complex.
  
• Tourism will remain an important sector for South Africa, which has considerable untapped potential, particularly in the two- and three-star segment of the market. However, there is a need for more investment in the sector if it is to fulfil its potential.

Key issues
The South African government is keen to attract foreign investment, but has been slow to remove many of the hurdles investors face, notably securing work permits for even senior managers. It has also proved unwilling to provide specific incentives for foreign investors, although the prospect of this has been raised on several occasions.
There has been a lot of foreign direct investment in the country's automotive industry. There is, thus, a potential for investors seeking domestic, regional and wider export markets. However, investors will have to address two key issues:

• BEE: The South African government is firmly committed to promoting BEE, and investors need to have plans to include training black workers at all levels of the company and working with other BEE companies. This is especially the case if a company has any plans to deal with the government.
  
• HIV / AIDS: All companies investing in South Africa should have a carefully developed HIV / AIDS policy, given the high rates of infection. This should range from direct provision of healthcare and policies affecting direct relatives to training staff members.