South Africa Country Profile
General Information
Political Climate
South Africa has undergone substantial changes during the last 10-15 years, transforming itself from an international pariah during apartheid rule into a democratic regional power with well-developed economic and political ties to countries in the region and beyond. Unlike many other African countries, South Africa has a large private sector and a growing private tax base. The government has openly committed itself to liberal economic policies with a focus on macroeconomic stability, financial discipline and an increase in foreign direct investments. Furthermore, South Africa has been relatively successful in building independent public institutions. The political climate has been and is most likely to remain stable as the African National Congress party (ANC), which has been the ruling party since the end of the apartheid, again won the presidential elections in April 2009 in an election that was described as free and fair by the US Department of State 2011. As expected, the controversial leader of the ANC, Jacob Zuma, won the presidency by a large margin.
The country's political life has been plagued by major corruption scandals, the most famous of which is the so-called 'Arms Deal'. The scandal involves the leader of the ANC and now President, Jacob Zuma, who allegedly took kickbacks in a major public procurement scandal exposed in 1999. Zuma's former financial adviser, Schabir Schaik, has been sentenced to 15 years imprisonment for his involvement in the scandal. Charges against Zuma himself were repeatedly dropped and revived, only to be ultimately dismissed on a technicality just two weeks before the 2009 presidential elections. Zuma's political supporters expressed concerns over the years that the charges were driven by a political vendetta by former President Mbeki who, due to these allegations, was eventually dropped by his own party and forced to resign as President in September 2008. In September 2011, the government announced the reopening of the ‘Arms Deal’ case, and a commission of inquiry will be set up to probe corruption allegations that surround the ZAR multi-billion arms deal, which took place in the late 1990s. According to an October 2011 article by Times Live, the commission will have power to subpoena anyone, including members of the executive. Furthermore, the commission is scheduled to complete its task within two years, after which a final report will be submitted to the president with recommendations. Other high-profile cases, such as the 'Travelgate scandal', in which more than 20 Members of Parliament were accused of defrauding the Parliament of ZAR millions by using fake travel vouchers, have seriously harmed public trust in the ANC. The scandals involving Members of Parliament and high-ranking officials, coupled with the dismantling of the elite anti-corruption investigation agency, the 'Scorpions' (see 'Public Anti-Corruption Initiatives' in the Initiatives section), have made some observers question the government's commitment to fight corruption. According to the Bertelsmann Foundation 2010, among other factors, ANC dominance on the political scene has in fact weakened institutional checks and balances, and its political power has been used to strategically influence or impede investigations into corruption scandals. President Zuma's cabinet of ministers have also been posing some integrity issues, as highlighted in May 2009 by the Global Integrity Commons which reports that 42% of the executive is in positions of potential conflicts of interest. Moreover, the Economist in its October 2010 article reports that the Special Investigating Unit (SIU), one of South Africa's anti-corruption bodies, had identified 400,000 civil servants receiving welfare payments to which they were not entitled. A further 6,000 senior government officials had failed to declare their business interests, as required by the law, and were awaiting disciplinary hearings. According to the head of the SIU, as cited in the same article, the state's ability to convict and punish the guilty was, 'pretty limited and, in some cases, almost completely non-existent'. Furthermore, it is interesting to note that there is no law regulating private funding of political parties in South Africa. Moreover, this lack of regulation enables the political process to be corrupted through party donations. Most South African political parties have been implicated in scandals linked to party funding and it is an issue that is not unique to any one political party.
Despite the overall success of South Africa in transforming itself into a democratic state with regionally unmatched economic performance, many social problems remain unsolved. Corruption is certainly a serious problem for South Africans, and according to the SIU’s estimate, each year, between EUR 2.5 and 3 billion from the government procurement budget was either stolen, or deemed untraceable due to annual negligence, as reported in an October 2011 article by The Irish Times. However, figures from the Afrobarometer 2008 show that the public expected the government to address other issues first, such as immense unemployment and the management of the economy, despite that the vast majority of the surveyed citizens viewed the previous government's efforts against corruption in the public administration as highly ineffective. According to the Global Corruption Barometer 2010, households' perceptions of the Zuma government's fight against corruption are fairly mixed, with 44% viewing it as 'effective' and 45% as 'ineffective'. In the same survey, 62% of the respondents believed that corruption had increased over the past three years, and the police were viewed as the most corrupt public institution.
Business and Corruption
Over the past decade, the Government of South Africa has sought to liberalise trade and enhance its international competitiveness. While the media frequently reports on corruption scandals involving high-ranking civil servants, petty corruption is not perceived as being particularly pervasive compared to other African countries. According to the World Bank & IFC Enterprise Surveys 2007, only 17% of the companies operating in South Africa identify corruption as a major obstacle to business operations, compared to a regional average of more than 34%. These figures are supported by the World Economic Forum Global Competitiveness Report 2011-2012, where companies rank corruption as the fourth most problematic factor for doing business in the country. The largest constraints for business operations are reportedly inefficient government bureaucracy, followed by an inadequately educated workforce and restrictive labour regulations. Yet, tendencies in the labour market indicate that this might be linked indirectly to corruption. There have been reports of personnel officers from the private sector who accept bribes in exchange for awarding jobs, especially with respect to unskilled or semi-skilled jobs. A Business Against Crime South Africa & GTZ Study on Corruption in the Private Sector 2006 highlights how favouritism and nepotism are commonplace in the private sector. The driving force behind this bribery may be due to the very high unemployment rate.
Business operations in South Africa cannot be called corruption-free. The World Bank & IFC Enterprise Surveys 2007 show that 15% of companies surveyed expect to make facilitation payments to public officials to 'get things done', with the figure for SMEs being higher than that for large companies. Companies surveyed by the Business Against Crime South Africa & GTZ Study of Corruption in the Private Sector 2006 report that 61% of bribes paid are under ZAR 10,000, which likely take the form of facilitation payments. However, 18% of bribes paid are reportedly between ZAR 10,001 and 50,000, whereas 11% are between ZAR 50,001 and 100,000. These bribes are substantial and point to bribery at higher levels. According to the same study, there is a very high level of agreement among companies surveyed that bribes are paid in order to bypass arduous regulatory requirements to get approvals to which companies are legally entitled. This suggests that many companies pay bribes in order to deal with the country's cumbersome regulatory environment. However, a greater number of companies surveyed agree that bribes are paid in order to avoid adverse regulatory interventions (fines, fees) and to get approvals to which they are not legally entitled, indicating that the tendency towards 'true corrupt intent' outweighs the tendency to act corruptly 'out of necessity'. The fight against corruption in connection to business operations has apparently not shown any progress. In fact, 73% of the business executives surveyed perceive the government's efforts in fighting corruption as 'ineffective' or 'very ineffective', according to the Transparency International Bribe Payers Index 2008. In addition, South Africa ranks 15th out of 28 economies in the Bribe Payers Index 2011, in relation to the perceived likelihood of companies from South Africa paying bribes abroad.
Public procurements are seriously hampered by corruption and negligence, as demonstrated by an estimated figure given by the head of the Special Investigating Unit (SIU). According to him, as stated in a 2011 article by The Irish Times, around 20% (between EUR 2.5 and 3 billion) of all government procurements are lost annually due to theft or negligence. In addition, public procurement is often cited as an area of business activity in which foreign companies are very likely to encounter corruption and other unethical practices. For example, approximately one-third of the surveyed companies from the World Bank & IFC Enteprise Surveys 2007 stated that they expect to give gifts to secure a government contract. In the aforementioned study of the private sector corruption from 2006, both collusion between competitors before bidding on a public contract and the payment of kickbacks to the awarding civil servant emerge as common practices. The problem was also recently acknowledged by the Minister of Finance in his 2009-2010 budget vote speech. In order to root out corruption in public sector procurement, President Zuma announced in the parliament in February 2010 that his government plans to establish a tender compliance unit and introduce supply chain fraud audits, in addition to improving spending data and establishing a ministerial committee on corruption, as reported in a 2010 article by Supply Management. This announcement was made days after five public officials were arrested on account of procurement fraud. In order to best reduce the risk of extortion and demands for bribes in the procurement process, foreign investors considering bidding on public tenders are advised to use a specialised due diligence tool on public procurement. All in all, due to the likelihood of encountering corruption, companies are generally advised to consult with experienced attorneys, to develop, implement and strengthen integrity systems, and to carry out extensive due diligence before committing funds or when already doing business in South Africa.
Regulatory Environment
In the World Economic Forum Global Competitiveness Report 2011-2012, surveyed companies rank inefficient government bureaucracy as the most serious constraint for doing business in South Africa. The Bertelsmann Foundation 2010 reports that increasing levels of corruption within the public service and particularly at the local government level is a growing concern. Nevertheless, the tax system is efficient. According to the US Department of State 2011, regulations and application forms regarding operating licences are straightforward, and data from the World Bank & IFC Doing Business 2012 reveals that bureaucracy is not as unwieldy in South Africa as in other countries in the region. The data indicates that it only takes an average of 5 procedures and 19 days to start a company in the country at a cost of 0.3% of GNI per capita, compared to a regional average of 8 procedures and 37 days at a cost of 81% of GNI per capita. In total, the World Bank & IFC Enterprise Surveys 2007 reveals that senior managers can expect to spend almost 6% of their time annually on complying with regulatory requirements. Amendments to the Corporate Act have eased company start-ups considerably by allowing for electronic submission of documents and by no longer requiring entrepreneurs to obtain legal assistance to start a company. Compared to the Sub-Saharan regional average, companies in South Africa encounter less complicated and less costly import/export procedures, less complicated procedures related to starting and closing a company and securing property rights, and smoother interaction with tax officials.
The South African Services website provides comprehensive information about the services offered by the South African government, including information on regulations, licences and permits. The Department of Trade and Industry (DTI) provides information and assistance to foreign investors. Its one-stop shop for investment offers information on sectors, industries and the regulatory environment, provides links to joint venture partners and assists with work permits. Investors will find several useful publications on its website, including The Cost of Doing Business in South Africa 2008 and Investors Handbook 2010 Part 1, 2, 3 and 4. The DTI also offers investment incentives in several sectors among which the most prominent are the incentives offered to the Business Process Outsourcing and Off-Shoring (BPO&O). Investors should note that the national government enacted a Broad-Based Black Economic Empowerment Act 2003, which is the legal framework behind a Broad-Based Black Economic Empowerment (BBBEE) strategy aiming at increasing the participation of black citizens in the South African economy. Companies are not required to meet BBBEE criteria, but are less competitive for government tenders if they do not. All companies must have their BBBEE compliance audited every year by an accredited verification agency under the Department of Trade and Industry. The BBBEE requirements are specified in the Codes of Good Practice, which were approved by the Parliament in 2006 and deal with employment equity, skills development, company development, preferential procurement and SMEs. However, the BBBEE strategy has also been criticised for providing too much preferential treatment to wealthy black elites in relation to getting government contracts, which has led to an increase in procurement corruption. For a critical assessment of the BBBEE strategy in relation to procurement corruption, see the Institute for Democracy in South Africa 2008.
South African courts have been struggling with considerable backlogs for many years, which have delayed cases involving private companies. A positive response to this problem has been the establishment of Specialised Commercial Crime Courts that have proven to be successful in dealing with white-collar crime. Business Against Crime South Africa has added financial backing to ensure the success of these courts. Dispute settlement and enforcement of commercial contracts is now relatively easy and not as costly as in other countries in the region, which is also reflected in the fact that companies operating in South Africa have greater confidence in the judicial system. The US Department of State 2011 reports that South Africa applies its commercial and bankruptcy laws with consistency and has a court system for enforcing property and contractual rights which is objective and independent. According to Global Integrity 2010, small companies have the possibility to uphold their rights in court thanks to the Contingency Fee Act 1997, where the fees are not rendered unless the client is successful in his/her claim. South Africa is not a member of the World´s Bank International Center for the Settlement of Investment disputes, yet it is a member of the New York Convention of 1958 and it recognises the International Chamber of Commerce, which supervises the resolution of transnational disputes. Access the Lexadin World Law Guide for a collection of legislation in South Africa.
