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SUBJECT: SOUTH AFRICA ECONOMIC NEWS WEEKLY NEWSLETTER APRIL 5, 2007
ISSUE
1. (U) Summary. This is Volume 7, issue 14 of U.S. Embassy
Pretoria's South Africa Economic News weekly newsletter.
Topics of this week's newsletter are:
- Mineral Rights Expropriation Claims Push SA to Extend Claim
- Mittal Steel's New Kiln Project Draws Criticism
- Wine Industry Falters in 2006
- Africa's Only Green Bank - Nedbank
- Disapproval of Antidumping Law Proposal
- Record Tax Revenues - Again
- Growth Projections to Be Revised Upward
End Summary.
Mineral Rights Expropriation Claims Push SA to Extend Claim
---------------------------------------------
2. (U) Italian investors in two major South African granite
companies launched expropriation claims of 266 million Euro (2.5
billion rand or $349 million) against the South African government
at the World Bank's International Centre for Settlement of
Investment Disputes (ICSID) in January. The lawsuit claims a loss
of mineral rights to the state and the cost of having to sell a 26%
share in their operations. This action is the first lawsuit
alleging that SA's mining charter, which seeks to boost involvement
of black South Africans under Black Economic Empowerment (BEE) in
this sector, amounts to expropriation. The mining charter transfers
all mining rights to the government and requires mining firms to
meet specific conditions to obtain a new license, including selling
26% ownership to black investors by 2014. According to the Italian
firms' attorney, Peter Leon, the main part of the claim relates to
the expropriation of mineral rights occurring from unused old order
mining rights that were not able to be converted to new mineral
rights, not to Black Economic Empowerment (BEE) requirements. The
Italian mining companies are suing on the grounds the legislation is
a breach of international investment law and bilateral investment
treaties between SA and the Italian and Belgo-Luxemburg economic
union. The hearing will likely take place over the next two years.
3. (U) The lawsuit, if successful, could be a catalyst for other
mining companies to bring similar actions under SA law. The SA
government recently announced it had extended the deadline for
mining companies to file for compensation for the loss of mining
rights by two years to avoid a deluge of filings before the current
deadline of April 30, 2007. The extension will also allow potential
claimants to obtain the results of the lawsuit before the claim
deadline. (Mail and Guardian, March 9, 2007; Business Day, February
16 & March 23, 2007)
Mittal Steel's New Kiln Project Draws Criticism
--------------------------------------------- --
4. (U) Mittal Steel recently began construction of two new kilns to
expand its liquid steel capacity in its Vanderbijlpark plant.
According to Mittal, the surge in steel demand and the flurry of
activity in infrastructure expansion require greater capacity to
meet growing demand. However, Mittal's use of foreign contractors
has cast a shadow over the project. The bulk of this 600 million
rand ($85.7 million) project has been contracted to a Chinese firm
to build the kilns and an Indian firm to build the accompanying
power plant. These firms will import skilled labor to complete the
job. Mittal was criticized last year for using a Chinese consortium
to build a coke oven battery. The trade union, Solidarity, objects
to the use of foreign labor citing that Mittal did not provide
skills transfer as promised in its last project. The union believes
Mittal's mode of operations undermines SA's objectives to promote
growth and jobs. (Business Day, March 30, 2007)
Wine Industry Falters in 2006
-----------------------------
5. (U) For the first time since 1992, wine exports fell in 2006.
The 3.5% drop in exports is being blamed on the strength of the
rand, which reduced margins and left less money for marketing, and
the twice ownership change of the biggest single brand, Kumala,
according to the CEO of Wines of SA (Wosa), the industry's export
arm. Kumala's exports to the UK, the industry's largest market,
declined 26%. Tough competition from Australia for promotional
slots in the large supermarkets is also cited for the downward
slide. Another worrying trend is the rise in bulk exports and the
decline in bottled wines, which has implications for the local
bottling industry and undermines the drive by wine exporters to
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create strong brand awareness. Bottled wine fell 7% year-on-year in
2006, while bulk sales went up 4%. However, not all is doom and
gloom. Wosa believes that projecting a more "premium image" of
wines bottled at the source can turn the industry around and volume
sales are already up for 2007. Wosa also hopes for more government
support as the industry is SA's second largest exporter after cars
and car parts and employs 250,000. (Business Times, April 1, 2007;
Business Day - The South African Exporter, April 2007)
Africa's Only Green Bank - Nedbank
----------------------------------
6. (U) Nedbank financier and environmental lawyer Justin Smith
announced that Nedbank has become the first and only bank in Africa
that has adopted an environmental benchmark for promoting
sustainable development, known as the "Equator Principles."
Nedbank's environmental advisor, Christina Wood, defines the Equator
Principles as "a comprehensive set of environmental and social
guidelines for the financing of projects." Forty-one financial
institutions have adopted the principles worldwide, representing 80%
of this year's global project financing. The benchmark is aimed at
promoting socially responsible development, and ensuring that
projects financed by the banks reflect sound environmental
management practices. Nedbank has begun recycling programs for
paper and water and has also adopted the use of a variety of low
energy devices. A Nedbank study reports that over 70% of the staff
is proud to be working for a bank with a commitment to the community
and the environment.
7. (U) Smith notes that most South African leading firms are not
participating in this initiative. He said that more than 40 percent
of the top 40 companies in the Johannesburg Securities Exchange do
not have an environmental officer, and about 16% have either weak or
no sustainable development reports. Smith also opines that the SA
government has not worked well on commercially sustainable
development policies. He notes that the government did not include
sustainable development in the Black Economic Empowerment (BEE)
charters. He also commented that the civil society has remained too
silent on the issue of sustainable development promotion within
financial institutions. (Business Day, February 19, 2007)
Disapproval of Antidumping Law Proposal
---------------------------------------
8. (U) The International Trade Administration Commission (ITAC) is
facing criticism for its proposed revisions to SA's antidumping
regulations released on March 29, 2007 for comment. Trade
specialists argue that the changes miss the mark and that the entire
proposal needs to be scrapped and re-started through proper
consultation with the export/import sector. The most significant
changes include new provisions for oral hearings, which trade
experts think provides too much discretion in the hands of ITAC as
to whether to hold hearings and lacks clarification as to the
hearing format. The experts say this is dangerous given that ITAC
recently refused to hold oral hearings despite good cause and the
planned changes may not conform to World Trade Organization
requirements. They state that the proposal should provide for both
adverse parties' meetings and individual meetings with interested
parties, and should not allow ITAC the ability not to impose
provisional measures even where all requirements for imposition have
been met. Revisions that reintroduce public interest as a factor
may cause further delays in the investigation process and may lead
to political interference. Lastly, an amendment to the definition
of assembly operations was criticized because it will likely
disqualify at least 50% of all industries in SACU from lodging
antidumping applications. (Business Day - The South African
Exporter, April 2007)
Record Tax Revenues - Again
---------------------------
9. (U) The South African Reserve Bank (SARB) announced record tax
revenues at the end of the tax year ending March 31, 2007.
Preliminary 2006-07 gross revenue was 495.1 billion rand ($67.6
billion). This is 5.5 billion rand ($751 million) more than the
revised target announced on February 21, and 39 billion rand ($5.3
billion) more that the February 2006 budget forecast. Finance
Minister Trevor Manuel identified higher-than-anticipated corporate
profits as the most important source of unexpected revenue, but
additional revenues were received in all major tax categories. The
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breakdown of unexpected revenue was: corporate taxes (23.3 billion
rand); individual taxpayers (7.5 billion rand); secondary tax on
companies (1.7 billion rand); value added tax (3.5 billion rand);
and other taxes and duties (2.5 billion rand). The additional
revenues suggest that the projected revenues for 2007-08 will also
have to be revised upward from 557 billion rand ($76.1 billion) when
the mid-term budget review is presented to Parliament next October,
since there is little reason to believe that economic growth will
slow in the coming year. Furthermore, the budget surplus for
2006-07 will increase from the 0.3% of GDP projected in February to
0.8%. Manuel said he would use the surplus to reduce the country's
debt load "as far as it can go and as fast as we can" in order to
spend less money on interest and leave more money for other
government programs, such as education and infrastructure.
(Business Day and Business Report, April 2 & 3, 2007)
Growth Projections to Be Revised Upward
---------------------------------------
10. (U) The higher-than-expected tax revenues suggest that the
economy is growing much more rapidly than had been thought.
Treasury Director General Lesetja Kaganyago said SA's economy would
grow at more than 5% this year, up from the February 21 budget
projection of 4.8%. Kaganyago said it was heartening that domestic
demand was shifting from consumption to capital formation that would
"add to the future growth of the economy." He noted that if mining
and agriculture were excluded, the economy was already growing at
6%, the government's GDP growth target for 2010. Finance Minister
Manuel said the trend line of growth had shifted from 4.5 to 6%, but
the challenge remained to raise this rate even higher by removing
constraints such as red tape and inadequate infrastructure.
(Business Report, April 2, 2007)
BOST