BUSINESS ENVIRONMENT

INDUSTRIES


Energy

Production and Resources

Eskom, the state-owned electricity supplier, owns the national grid and power production facilities. It is thus at the moment impossible for independent power producers (IPP’s) to enter the market. Changes in the situation are unlikely before the turn of the century.

Coal

Coal dominates the South African energy system. The country has abundant deposits of coal and coal provides 75% of total primary energy needs. Even synthetic liquid fuels are produced from coal by one of the largest South African companies, the Sasol Group. Sasol is at present subsidised by the government but these subsidies should be removed by 1999. The 200 million tonnes annual coal production is projected to grow at a rate of 5% for the period to 2010. The rising costs of labour may, however, limit future returns. Cheap coal resources have resulted in a low cost of energy allowing South Africa to become one of the most energy and electricity intensive countries in the world. Another result is low energy efficiency. The low cost of energy has given some industries, such as base metals, chemicals and deep mining, a comparative advantage. Even if it were possible for IPP’s to enter the market, they would have serious difficulties competing against Eskom’s low prices.

Nuclear Power

There is one nuclear power plant in South Africa and new ones are unlikely to be built in the near future. South Africa also produces uranium as a by-product from its numerous gold mines. The present uranium enrichment plant was closed down in 1995 and will be replaced by a more competitive plant early in the next century.

Liquid Fuels

For liquid fuels South Africa is dependent on imported crude oil. The total annual consumption of liquid fuels is about 450,000b/d. Most of this is imported but about 195,000b/d is synthetic liquid fuel produced from coal by Sasol and from natural gas by the state-owned Mossgas. There are four petroleum refineries processing crude oil and a total of eight oil companies operating in South Africa. The petroleum industry is subject to government regulation, including financial support for synthetic fuels. Also, the distribution and marketing of petroleum products are still governed by the state even though deregulation is expected.

Natural Gas

There are some natural gas reserves offshore but gas as a whole plays a very small role in South African energy production. Currently the only natural gas production is in Mossel Bay by Mossgas although there is potential for wider use of gas. There are large gas reserves in the neighbouring countries. Sasol has developed a technique for converting natural gas into high-quality diesel and is, therefore, looking for foreign joint venture partners in possession of gas reserves.

Renewable Energy

South Africa is very rich in energy resources but much of it remains unused in renewable forms. The most important forms of renewable energy are firewood and solar energy. Firewood is widely used and is the largest source of household heat energy in rural areas. This is unfortunately leading to deforestation as the average consumption of wood per household is 10-19kg/d, most of which is used for heating the daily meal. The use of solar energy is still undeveloped and expensive but offers high potential, as South Africa is endowed with one of the world’s best locations for using solar energy, receiving on an average day 5kWh/m2 of solar energy. Solar energy is already used for cellular telephone base stations, domestic use, water pumping and some other purposes. People in rural areas are eagerly buying, for example televisions, offering high potential for solar panels and batteries as the rural areas have no electricity networks.

Transmission and Distribution

Electricity

Despite the high electricity intensity of South Africa, at present only about 50% of households are electrified. This reflects the country’s social history. White areas are well covered by distribution networks, making the black population a more interesting market for new ways of supplying energy. The government plans to electrify 2.5 million new households by 2000. Eskom is committed to electrifying 1.75 million homes by the same date. Electricity accounts for about 25% of the net energy consumption. Of this, Eskom provides around 96% at an average price of 11.15c/kWh. The average annual growth of electricity sales has been 2.4% during the past five years and it now totals about R25 billion.

The South African electricity distribution sector is highly fragmented. Eskom sells electricity to about 400 other distributors, of which most are municipal authorities, supplying electricity to consumers. Eskom also sells directly to large consumers such as industries and nowadays even directly to residential consumers. Nearly all of the distributors experience anomalies in Eskom’s pricing. It is a difficult situation as some distributors have to compete with Eskom who is at the same time their supplier.

Eskom has good connections to the rest of southern Africa. Organisations in these other countries often contact the South African company in energy matters. Business opportunities from outside South Africa therefore become available through Eskom.

The high number of distributors has made the government’s electrification programme more difficult and hence a regulator for the distribution of electricity was set up in 1995 in order to restructure the sector. This body, the National Electricity Regulator, grants licences for generators, transmitters and distributors of energy in South Africa. Private sector involvement in electricity distribution is being called for, but it will probably remain in public hands for the time being.

RDP Goals

One of the RDP’s specific goals is the non-grid electrification of 19,600 schools and 2,000 rural clinics by 2005. The use of solar energy appeared to be a possible solution for achieving these goals but it is now realised that the schedule is unrealistic. The average price to be spent on solar power for one school is about R45,000 and the total estimated additional capacity of new solar power systems by 2010 is 9MW. The government is also planning the electrification of 2.5 million rural homes by 2015 using solar energy.


Forest Industry

Paper Market

The pulp and paper market in South Africa is estimated at R10 billion and expected to continue growing at an average rate of 3% per annum. Paper consumption per capita was approximately 46kg in 1997. Along with the increasing standard of living, certain sectors of the paper market are projected to grow rapidly, at a rate of 8%. Development of the education system is giving rise to a demand for newsprint and office paper. Potential growth can also be seen within consumer packaging boards, for instance in the sector of fluid packaging. Demand for tissue is expected to increase 9% annually.

Mondi and Sappi are the two major pulp and paper companies dominating the markets in South Africa. They, together with Nampak and Carlton Paper, are responsible for 98% of the total production. Sappi is listed on the Johannesburg, London and Paris Stock Exchanges while Mondi is a major subsidiary of the Anglo American Industrial Corporation. The state-owned forest company SAFCOL will apparently be privatised by the end of 1998.

Raw Material

South Africa is one of the few African countries where there is an established pulp and paper manufacturing industry. Since the climate in South Africa, especially in KwaZulu-Natal and Mpumalanga, is exceptionally warm, the growth of pine forests is much quicker than in most pulp and paper producing countries situated north of the Equator. Eucalyptus is usually harvested after 8-10 years.

The forest area totals 1.5 million ha, 95% of which are plantation forests. The pulp, paper and board mills consume 65% of the total roundwood intake followed by sawmills (23%) and mining-timber sawmills (10%). For the present, the country is self-sufficient in the supply of fibrous raw material for the production of pulp, paper and board. However, the current forests are very effectively used and to expand plantations in South Africa, one has to obtain a permit from the Department of Water Affairs and Forestry, due to the scarcity of water. Both Mondi and Sappi are now looking for foreign markets and opportunities for offshore investments in Asia and Europe. Additionally, Sappi has established a plantation in Mozambique. Other neighbouring countries, such as Angola and Zimbabwe, can be considered potential future sources of raw material.

The Department of Water Affairs and Forestry has initiated a large project called Working for Water which aims at clearing invading alien plants and thereby enhancing water supply in South Africa. Despite the success of the project, the wood cut down in the problem areas is not being utilised in the most efficient way at the moment. Hence, they are looking for foreign know-how, for instance from Finland.

Waste paper as a source of secondary fibre is enjoying increasing attention. The emphasis placed on waste recycling by the South African industry has raised the country’s recovery rate of waste paper to 38%. The level of 75% in pre-consumer collection is comparable to those in most western industrialised countries but post-consumer collection only reaches 5%. The three major companies in the branch include Mondi Recycling, Nampak Paper Recycling and Sappi Waste Paper.

Harvesting

Most South African forests are carefully managed and the soil effectively cultivated. After burning off, the implantation is completed manually. The well-conditioned lines of trees are cut down by a mixture of various methods; ranging from manual felling to high-tech harvesting and transporting methods. The majority of plantations apply American harvesting methods. In some cases, though, the wood is procured right after harvesting in the forest according to Nordic methods.

In recent years, the market for forestry harvesting equipment has developed quickly with more specialised machinery being introduced. South African companies already use feller bunchers, forwarders, grapple skidders and full-tree length transport trailers. Timberjack is the major foreign player in this sector while Bell Equipment represents domestic technology.

Pulp and Paper Production

South Africa is ranked the 11th largest producer of pulp in the world and 21st largest in paper and board production. The total paper and board production capacity was 2,372,500 metric tons in 1995, the utilisation rate averaging 95%. In 1995, the total output of the pulp industry increased by 5% reaching a level of 2.3 million tons.

South Africa is a net exporter of paper and board; a positive trade balance of R1.7 billion was recorded in 1995. Approximately 22% of the total production, indicating 507,000t, was exported in 1996. The remaining 1.4 million tons were supplied to the domestic paper converting industry and end-user markets.

The wage level and energy costs are low compared to those in Europe. Further, given the rapid growth of forests, the margins in South Africa have traditionally been 5% higher than overseas. However, labour productivity in the South African pulp and paper industry is far from that in Europe, according to some approximations only 30%. The most modern mill, in Richards Bay, produces a ton of pulp at an estimated cost of USD370.

Pulp and Paper Machinery

There are 17 pulp and paper mills in South Africa: some of them equipped with very modern technologies. However, the stage of development varies from plant to plant, and a number of machines are becoming outdated. The whole industry is estimated to invest some R300 million in paper machinery and maintenance annually. For the projected growth in paper consumption to be reached, 3-4 new paper and five tissue machines are needed by 2010. Competition in pulp and paper machinery is generally high, with foreign companies such as Beloit, Voith and Allimand operating in South Africa. Process automation is increasingly penetrating South Africa, largely dominated by Valmet and ABB. On the other hand, the high rate of unemployment forces most companies to follow the recommendations set by the government. Instead of investing in machinery, they employ more labour and create new jobs.


Environment

Industrial and Urban Development

Since the removal of the sanctions, environmental aspects have become more important in all projects related to industrial development in South Africa. The increasing internationalisation is forcing most companies to pay more attention to environmental issues, and when exporting to European countries, trading partners suppose their counterparts subject themselves to their stringent standards. However, environmental technology in South Africa is still at an early stage of development. Problems arising from lack of interest in the surroundings are vast, and demand for foreign expertise is increasing.

The rate of urbanisation today being 60%, around 75% of the population will be living in towns or cities by 2010. Approximately 30,000ha of farmland are lost to urban development every year. For the present, more than eight million people are residing in informal settlements. Results of the slums can already be seen as high levels of pollution and as problems deriving from untreated water and inadequate sanitation. South African environmental legislation has always been somewhat confusing and most regulations are still under development. However, attention is put on environmental impact assessment (EIA). ISO 14000 standards were introduced in South Africa in September 1996 and large corporations have started programmes for their employees in environmental issues.

Water Quality Management

Water is a scarce resource in South Africa. The rapid economic and industrial growth has forced the Department of Water Affairs and Forestry to strictly control the consumption of water. Any person using more than 150,000l/d for industrial purposes is required to obtain a permit from the Department. The legislation is being renewed at the moment and the new Water Bill will be released in late 1998.

In general, tap water is of good quality all over South Africa. The current water and sanitation projects are aimed at ensuring an adequate supply of water to rural areas. Due to the uncontrolled urbanisation and informal settlements lacking sewage and water purification, the threat of nitrate pollution and resulting health problems has increased. For example, typhoid, cholera and gastro-enteritis are transmitted by water contaminated with untreated sewage. The Department is responsible for providing 25l of drinkable water for every citizen every day. The worst problems in surface water pollution result from mineralisation, while polluted water emanating from mining activities has become the most serious pollution problem in groundwater. The Polluter Pays Principle is applied in the South African legislation. The Department controls the concentrations of minerals and effluents in rivers and other waterways by regular samples.

Some large companies such as Sasol and Eskom already recycle water for use in their plants. Smaller amounts of water are also recycled by regional water suppliers. Water recycling will be highly recommended in the new Water Bill 1998. In addition, water usage is managed by a cumulative charging system. For an average consumer the present price being R1.70-2.00/m3 in Gauteng, even sinificant increases can be expected in the near future.

Control of Air Pollution

The industries, including coal burning power stations and large metal working plants, are the main atmospheric polluters in South Africa. Although the sulphur dioxide is emitted at considerable height and diluted before reaching the ground, some pollutants might cause acid rain over long distances. On the east coast, acid rain averages pH4.2, sometimes falling as low as pH3.7. Ozone levels in the Durban area have dropped by 0.2% each year since 1978. Low-level air pollution comes mainly from smaller installations in cities, such as coal stoves and coal-heated boilers that together emit some 50,000t of sulphur dioxide into the atmosphere annually.

A unique problem for South Africa grows from sand dumps and sludge dams formed by waste from the mining industry. Vegetating has turned out to be the most successful method of minimising the dust blown from these dumps.

The increasing use of private transport is becoming a serious problem especially in the highly populated Gauteng area. Most vehicles lack catalytic converters and there is little control over exhaust gas. No limits for the use of private cars have been implemented yet. Regulations on vehicle emissions are only applicable to diesel-powered vehicles. The concentration of airborne lead in the major cities is generally much lower than the commonly used international standard of 2mg of lead per m3 of air. Unleaded petrol has been available in South Africa since 1996 and at present, the allowed maximum concentration of lead is 0.4g/l.

Control of Marine Pollution

In South Africa, marine pollution results from both land and sea based factors. Storm-water run-off and pipelines account for land-based sources while marine sources include shipping and activities such as offshore oil-drilling operations. The total identified waste stream discharged into the ocean as effluents amounts to 780,000t annually. In general, the shipping routes are limited to a minimum distance of 20km from the coast. Dredging activities are restricted in main harbour areas. The technologies used for marine disposal of effluents are quite well developed.

There are 63 licensed pipelines along the South African coast. One-third discharge domestic sewage - about 66 million l/d, half discharge industrial wastes (230 million l/d), and the remainder mixed effluent (360 million l/d). While 27 of the older pipelines give off above the high water mark, the newer large pipelines have deep-water, offshore discharges.

Waste Control

Each South African household generates on average 1t of waste annually. A large amount of unpermitted waste disposal sites combined with the regional shortage of hazardous waste disposal sites form the basis of complex problems in South African waste control. In 1997, only 255 of the 1,200 existing waste-disposal sites had been issued with a permit. Even the systematically collected waste is generally taken to landfills without any further treatment than covering. These troubles can hardly be solved according to the existing, defective waste legislation and the government lacks qualified people to implement it.

South Africa produces approximately 460 million tons of waste annually, two million tons of which is defined as toxic, accounting for less than half a percentage of all hazardous waste generated in the world. Approximately 95% of all waste is disposed of on land. There are eight permitted sites for hazardous disposals.

The market for waste treatment systems is dominated by a few traditionally established stakeholders that might be hard to compete against. Demand for innovative and new solutions is vast but it will take a lot of time, money and effort to convince the authorities of the advantages of these alternative systems.

Recycling

The low standard of living has prevented South African authorities from concentrating more on recycling. However, awareness of the need for recycling is growing while both municipalities and communities have to find creative solutions to problems deriving from the increasing generation of waste. At present, almost every type of paper and board can be recycled in South Africa and 28% is returned for re-use. South Africa has founded three Recycling Forums, located in Western Cape, Natal and East Rand.

As far as plastics are concerned, the share of recycled material reaches a rate of 15% (100,000t) most of which is recovered from post-consumer waste. Some supermarkets supply bins for collection of plastic shopping bags. There is a growing concern that those carrier bags handed out free of charge will become the most frequent South African “flower”, polluting nature everywhere. Beverage cans are returned for re-use by 29% of the total output. The proportion of recycled glass has grown to 22%, mainly due to many shopping centres having igloos for glass collection.


Chemical Industry

The need to support mining and agriculture gave rise to the chemical industry in South Africa at the end of the 19th century. Local companies emerged from this historical base followed by development of different fertilisers and sulphuric acid. The chemical sector has gained a significant standing in South Africa’s economy, constituting around 22% of the country’s manufacturing sales and employing approximately 200,000 people. However, with a number of technologies imported, the domestic industry is not very highly developed. The main companies include Sasol, AECI, Polifin and Sentrachem, which strongly dominate their own segments and therefore, most foreign businesses have concentrated on various niche markets. The price level in South Africa is generally very low but there are regional differences. Chemicals are more expensive in Gauteng than in Durban and Cape Town.

The South African chemical industry is heavily based on oil derived from coal. During the years of isolation, most chemical plants were built at inland locations close to the sources of feedstock. These sites have been serving the densely populated Gauteng area, which is the largest domestic market. The plants are generally smaller than world scale and their cost structures are not highly competitive in export markets, partly because of the high transport costs to coastal ports. They are, nevertheless, well placed for exports to neighbouring African countries such as Zimbabwe, Namibia and Botswana. The current challenge is to improve quality and productivity and thus become more competitive.

Even though the market has not been growing significantly during recent years, demand for basic cosmetics is expected to increase with the advance in the standard of living. The black population especially is starting to buy cosmetics. In general, European companies importing both raw material and end-products largely dominate the fine chemicals industry. Some Asian enterprises, for instance from Korea and China, are now also entering the market. Distribution takes place via retailers and there is a number of local micro enterprises that distribute their products straight to end-users.

Industrial Chemicals

Industrial chemicals reached a volume of R51 million in 1996. In 1995, South Africa exported industrial chemicals worth R7 billion, while imports totalled R8.4 billion. The main end-users of inorganic chemicals in South Africa include agriculture as well as mining, and the paint, plastics and pulp and paper industries.

Accounting for around 300,000t of product, painting and coating constitute the largest market sector for chemicals at formulation level and provide apparently the biggest potential within industrial chemicals. The total paints market (180 million l) was estimated to be worth R1.5 billion in 1996 with some 300 companies employing 8,000 people. Although the industry has been growing at an average annual rate of only 2% since 1990, a rapid increase in the demand for paints can be expected with the implementation of the government’s housing projects. There is also a growing market for colorants and tinting systems as the share of white paint is estimated to decrease from the current 80% down to 70% by the year 2000. The South African paint industry mainly utilises imported raw materials. The two largest manufacturers, Plascon and Dulux, dominate around 60-70% of the total production. The next five companies such as Chemspec, Prominent and Universal contribute to 10-15% of the market while the rest is served by small and micro enterprises. Paint distribution is arranged via paint manufacturer-owned professional wholesale depots (40%), paint-manufacturer owned DIY (Do It Yourself) outlets (15%), hardware outlets (25%) and superstores or home warehouses (20%).

Plastics

Achieving a turnover of around R10 billion, the plastics industry has become highly diversified and is supplying products to almost every sector of the economy. However, the per capita consumption of plastics still remains very low; only 18kg per capita in 1995. Exceptionally, the South African plastics industry is coal-based and therefore dependent on feedstock from Sasol. The high volume commodity polymers (PVC, LDPE, LLDPE, HDPE and PP) are all manufactured in South Africa while other polymers are imported or produced from imported raw materials. Since the technologies used in the plastics industry are mainly of foreign origin, South African companies are excluded from certain foreign markets. The major items of processing plants are imported from Europe and the Far East. Polymer conversion in South Africa is generally up to world standards. In 1994 the plastics industry employed 35,000 people and the replacement value of investment was R30 billion.

Pharmaceuticals

The South African pharmaceutical industry comprises a complex network of pharmaceuticals manufacturers, distributors and dispensers. The sector is relatively well developed and highly fragmented, with no single company handling more than 10% of the market. According to official statistics, there are more than 200 manufacturers or importers. Only a few active ingredients – mainly aspirin, paracetamol, codeine phospate and morphine sulphate - are produced domestically. Local manufacturing therefore consists mostly of producing some excipients and mixing local and imported excipients with pharmacologically active ingredients to generate end-products. International organisations in South Africa are becoming a gateway into other African countries.

The sales of over-the-counter (OTC) drugs is estimated at R2.1 billion while prescription drugs account for more than R4 billion. The market for prescription medical supplies increased by around 19% during 1995.

Retail prices for pharmaceuticals have traditionally been high in South Africa. Compared to 8% in the US, 30% of private sector medical expenditure goes to pharmaceuticals in South Africa. This is mainly due to heavy cross-subsidisation of public-sector medicine costs by the private sector. The private sector contributes 66% to the sales in terms of rands but only 33% on a volume basis. Secondly, retail mark-ups are high compared with most countries. From July 1996 on, private doctors and pharmacy retailers are prohibited from placing a mark-up on the price of dispensed medicines. In the private sector, the market is largely determined by prescribing doctors. However, patients are becoming more cost-conscious and beginning to request generic alternatives to products available only with a doctor’s prescription, the so-called ethical preparations. Along with the new legislation, South African pharmacists are already allowed to dispense substituting medicals besides the high-priced patented brands.


Healthcare

According to the United Nations Children Fund, the infant mortality rate in South Africa is twice as high as expected of a country with its level of income. South Africa spends annually only R550 per capita on healthcare. For most of the population there is practically no public healthcare yet. On the other hand, high standard medical care is available in private and academic hospitals.

The government is trying to pass laws that would guarantee more universal access to healthcare. One of the proposals includes access to public healthcare for all formally employed persons and their dependants. The costs would be shared between employers and employees. Community rating, where contributions are based on income and family size, would balance the cost load.

People in urban areas have better access to health services and are more likely to be covered by insurance. In rural areas healthcare is organised through clinics, where nurses provide service. Many clinics do not have adequate equipment or basic resources such as access to clean water or reliable electricity supply. Distances are also a major problem in rural areas.

The Department of Social Welfare regulates various public and private welfare organisations, many of which receive assistance from the department and local authorities. A majority of social welfare is provided through non-governmental organisations.

Tuberculosis is still the leading cause of death, but in the future Aids will become the dominant problem. It has been estimated that around two million people are infected with HIV at the moment. Without behavioural change, even 25% of the population may be HIV positive by 2010.

The healthcare system needs to distribute its resources more efficiently in order to guarantee service for all. How to contain increasing costs and increase skilled workforce in rural areas are also major questions. To relieve the shortage of doctors in rural areas, one year of community service for new doctors was introduced at the beginning of 1998.

South Africa needs to improve basic services in rural areas at the cost of the urban population. The result is that the market for high-tech equipment is likely to decrease in the short run, in contrast to the demand for basic equipment and medicines.

Recent Changes

The last few years have brought major changes to healthcare. The Ministry of Health has committed itself to the District Health System (DHS). The decision on resource distribution has moved from national level to the provincial and district levels. From the beginning of the current fiscal year, 1997/98, each province received a block grant from the National Treasury. The allocation to various line departments, including health, within the provinces, is at the discretion of the provincial cabinet. At present it is still unsure how local governments will conduct the district health reform.

Free healthcare for children under six as well as free natal delivery and post-natal care for women were introduced in 1994. Abortion was legalised in 1997. In order to reduce the high medicine costs, which contribute around one-third of total healthcare costs, parallel importation laws for drugs were passed in 1997.

Fundamental changes are going to take place in the reform of the present Health Act of 1977. After the introduction of the new draft for the Health Bill in 1996 and with the adoption of a White Paper on the transformation of the health system in 1997, the guidelines for the the health system are clearer.

The Private Sector

South Africa’s private healthcare industry is large and highly developed, but it is estimated that only 20-25% of the population have regular access to the services. There have also been plans to give public healthcare providers access to private hospitals’ unused capacity. Also, buying the most expensive medical equipment is likely to be regulated in the future.

The South African private sector has mostly been based on Fee-for-service (FFS) medical schemes, where the provider is paid for all services provided. This has tempted providers to overtreat patients and use the most expensive treatments. Scheme premiums were spiralling at 24% in 1997. The current development is feared to lead into an elitist system, where the poor, elderly and permanently sick are left without medical cover. The government is about to introduce some changes, that would affect the screening of the medical scheme members.

Managed Care

Managed care is a formalised system where costs are controlled by shifting some risk to the healthcare providers. Managed care companies use broadly six different remuneration methods to contain costs:

1. Fee-for-service (FFS). The old standard, where the service provider is remunerated for the services. This method is risk-free for the provider.
2. Discounted Fee-for-service. The service providers agree to discount prices, getting in return guaranteed or faster payback.
3. Global fees. A single fee is paid for the entire treatment, including cost of accommodation, doctor’s fees, post-operative work etc. In this method, quality control should be paid atten-tion to.
4. Day rates. Providers get paid per day of service. Rates differ for different cases and some operations are excluded. Provider is tempted to increase the length of stay.
5. Diagnosis-related group. The fee is based on the diagnosis on single episode of care.
6. Capitation. Fixed fees based per capita are paid to the provider.


Mining

South Africa is one of the world’s leading producers of metals and minerals. Two of the world’s largest and four of the ten largest mining houses are located in South Africa. Besides being the largest mining house, the Anglo American Industrial Corporation is the most influential company in the country. No less than 80% of all mineral production is exported. In 1996 mineral exports from South Africa’s over 700 mines, which are predominantly underground, amounted to R60 billion or about 40% of the country’s total export income. When the processed minerals are included, the share increases to two-thirds. As a result, the industry contributes 8% of the GDP and 1.8% of the state revenue or approximately 15% of the GDP if the indirect multiplier effects associated with the industry’s impact on the economy are included.

Compared to those in Europe, South African mines are labour-intensive. This is true especially among the gold mines of which only a few have been suitable for mechanisation with current technology. During the new regime, the mining companies have had to improve the safety and the working conditions of their employees. Although these changes affect the industry as a whole, the strongest impact is on gold mining, which employs 60% of the approximately 520,000 miners. This has led South African gold mines to have the highest production costs in the world.

At the same time the price of gold has plummeted and both the tonnage and the grade of ore produced have declined. With the current gold price hovering around USD300/oz (March 1998) and assuming that the rand-dollar exchange rate does not change significantly, only 20% of gold production will remain profitable as it is. Although the mining houses are conservative, they are now forced to profoundly restructure their production processes. This means downsizing the headquarters and giving more responsibility to the individual mines. The efficiency drive resulted in 65,000 lost jobs in 1997 and more layoffs are about to come.

Over half of all exploration activity in Africa is carried out by South African mining houses. The fact that South Africa has already exploited the deposits that are the easiest to reach will even further increase the mining houses’ activity in the neighbouring countries. Thus, the South African mining equipment markets offer a gateway to markets in the whole of Africa.

Those of the South African mines that can be mechanised are already mechanised but as the mines did not follow the technological development during the sanctions era, the machine base is somewhat outdated. As most of the major global players are already present in South African markets, the competition is intense.

Perhaps the best way for a Finnish mining technology company trying to enter South Africa would be to contact Tamrock as they have a significant market share and they are interested in representing mining technology products which do not compete with their own products.


Construction

Although the construction industry has had a slight downward trend for the last five years, the RDP increases the activity in the sector. At the moment the industry’s share of South Africa’s GDP is around 3% and it employs 10.1% of the non-agricultural private sector. One of the largest construction companies is Murray & Roberts.

When the RDP was initiated in 1994 it had an ambitious goal of building over one million new houses in just five years. Even though the government has not been able to keep up with its initial plan, it is estimated that in 1997 some 75,000 low-cost houses in the price range of R30,000-65,000 were built. These houses were on average 42m2 in size and had a material cost of R17,200-20,500. The average governmental subsidy for a low-cost housing project is R12,500 per house, the maximum being R15,000. The subsidy is granted to households with a total income less than R3,500 per month.

The standards of the South African building industry are equal to those used in the more developed countries. However, the different South African design solutions lead to 17% savings in expenses compared to Finland and the savings in material costs are approximately 22%. The combined effect of these two factors makes the total building cost in South Africa 35% lower than in Finland.

Exporting the items that are more expensive in South Africa than in Finland, such as slab structures and staircases, might be only marginally profitable because of custom duties and relatively high transportation costs to and in South Africa. Due to the long distances in South Africa, movable pre-fabricated element factories and pre-mix concrete stations could prove to be competitive.

To reach the level of 200,000 houses annually, the production should be more than fourfold but even now the lack of skilled workforce, management and supervision staff is slowing down the development of the South African construction industry. Thus with the current resources and building techniques, this kind of an improvement is impossible.

Some equipment such as spray paint guns, which are common in Finland are only seldom used in South Africa. A methodological transfer could in these cases create a totally new market for the related equipment. However, training the buyers would be required.

A shortage of top quality office space is becoming a problem in the most desirable areas as several foreign companies have arrived in South Africa. Since the construction industry has not been able to meet the increased demand, rents have risen sharply.

Another factor affecting the construction industry is the booming tourism industry. In 1997 the number of foreign visitors grew by 15% creating a revenue of R12.5 billion. In particular, the Cape Town and Durban regions benefit from tourism.

Information on major construction projects, such as the SDI’s (see page 46), can be acquired from the chambers of commerce in each region.


Information Technology

Most of the major world-class IT companies are present in South Africa. The largest players in the market include IBM, PQ Holdings and Dimension Data. It has been estimated that less than 5% of the software and hardware sold in the country are of domestic origin.

The IT field in South Africa is at an amorphous stage where many new companies have been listed on the JSE and several mergers took place in 1997. It is expected that this kind of development will continue in 1998. Some companies have reported fast-growing revenues for the last year and have performed well on the JSE.

The government does not regulate the IT field strictly, but its role in the sector is seen more through black empowerment policies. There is a need to reorganise governmental and provincial level computer systems. The cash-stripped government tends to purchase rather low-cost systems in order to save initial cashflow.

IT in Figures

The total revenue generated in the South African IT sector in 1997 was estimated to be R18 billion and growing around 9% annually in real terms. The market is the 20th largest in the world and comprises 0.6% of the total world market. In 1994-95 large clients started to renew their PC’s, which fuelled revenue growth rates to around 15%. The growth is expected to moderate to the 9% level for 1998-99, reflecting world trends.

In addition to healthy growth rates, many international companies see South Africa as a springboard to other sub-Saharan countries. The size of the sub-Saharan IT market, outside South Africa, is estimated to be only 20% of that in South Africa, but with a large growth potential. There are, however, many unsolved problems in this market such as delivering goods across borders and widespread software and hardware piracy.

Network equipment and packaged software have been strong performers with 25% and 20-24% growth rates respectively during 1996 and 1997. SAP consulting growth is expected to moderate from 70% growth rates to around 30-35% in 1998.

The Internet

Banks in South Africa have invested heavily in computers in order to provide better customer service. The four largest banks’ share of the total money spent in the IT sector in South Africa is about 17%. In March 1998 the SARB introduced the National Payment Systems, which should enable on-line transactions. ABSA bank has a pilot project using the Secure Electronic Transactions system for more secure transactions via the Internet. If other companies follow suite, the rapidly growing Inter/intranet market will be one of the driving forces behind overall IT growth.

The largest Internet application provider is The Internet Solution (IS), which provides holistic solutions for corporate clients. IS expertise covers a wide range of services and technologies. IS also hosts the largest FTP site in Africa. http://www.is.co.za/

Current Trends

The IT sector has been especially vulnerable to the expatriation of highly skilled workers. Overseas salaries are noticeably higher than salaries offered in South Africa.

There are currently over 60 black-owned IT companies, half of which have only been established since 1996. The sector is growing rapidly and competing especially in government tenders, which comprise around 20% of the whole market.

Data warehousing and mining are not yet well-established in the market. The South African companies have realised the need for warehousing and have started to implement it. The size of the market is approximately R500-600 million.

Some companies in South Africa are studying the potential that computer telephone interactive (CTI) technology has to offer, but they have not started widespread use yet, because of the high implementation costs. However, CTI systems are likely to be more popular in the near future.

Previously South African IT companies have not been able to enter foreign markets. For this reason many of the companies have recently started to globalise in order to sustain rapid growth rates and a good return on investment. Black empowerment deals also generate cash for acquisitions. Using these resources, companies are entering the markets in Europe, Asia and South America mainly through acquisitions.


Telecommunications

Policies

Telecommunications in South Africa have changed radically since 1994. One of the main political aims of the changes is to provide basic services to everyone. All large telecommunications projects somehow contribute to this goal. Particularly important to the government is the provision of basic services quickly to historically disadvantaged areas. The Department of Communications makes the policies for telecommunications. The South African Telecommunications Regulatory Authority (SATRA) follows these policies. It is a separate government organisation regulating the telecommunications industry. South Africa is also a member of the Council of the International Telecommunications Union (ITU).

Telkom

The largest telecommunications service provider in South Africa is the mainly state-owned monopoly Telkom SA Ltd. Southern Bell Company from the US and Malaysia Telecom gained a 30% share of Telkom in 1997. Another 10% of the company was earmarked for black empowerment. Further privatisation is expected but uncertain. Telkom is the second largest listed industrial company in South Africa with a net turnover of R16.3 billion in 1997. Telkom is spending R6.9 billion on capital projects in 1998. As a typical monopoly, Telkom had very little concern over customer care in the past, but has undertaken projects to improve the service level. The results have been visible although service is still very poor. Connections may be out for weeks even though Telkom promises repairs.

Telkom has been granted protection from competition for five years in the following markets: national and international long-distance, local access, public pay phones and infrastructure for value-added network services. This means that no other licences will be granted in these areas for the five-year period ending by 2001. If Telkom reaches the targets set for it by the government, it is possible that protection will be extended to six years.

Fixed Telephone Networks

South Africa has an extensive transmission infrastructure which covers 120 million circuit km and which is 95% digital. Telkom says digitisation will be complete in 1999. There are 5.3 million telephones and 3.87 million installed exchange lines giving 96 lines for every 1,000 inhabitants. Telephone penetration for white South Africans is about 25% and 1% for blacks. The telephone instruments provided by Telkom are designed and manufactured in South Africa. Value-added services for fixed lines are relatively advanced.

It may be that a second fixed wire licence is issued within the next five years. This licence will probably include an obligation for community development, which means building phones into uneconomical areas.

Cellular

The telecommunications sector in South Africa is growing at about 45% per annum. The growth has mainly been induced by cellular telephony. Cellular is also one of the few market areas where private investment and competition have been allowed. The two cellular GSM service providers, Vodacom and Mobile Telephone Networks (MTN), started operation in 1994. They seem to be in fierce competition although they did meet a few years back to discuss the subsidies they were paying for each cellular phone. The operators still subsidise each handset by about R750-2,000. Vodacom has a market share of 55% and is 50% owned by Telkom, while MTN’s market share is 45% and growing. The distribution of the connections differs also from Finland in that the operators do not sell individual connections. The two operators do not deal with the end consumer. They are wholesalers of connections. A number of connections are sold to service providers, who then distribute the individual connections to consumers. Service providers include Vodec, M-Cell and a dozen others. Vodec is owned by Vodacom and M-Cell by MTN, which is even selling connections to a consumer goods retail outlet, which then sells them onwards. This way MTN profits from the 300 outlets of the chain and their credit card system. The number of service providers is, however, decreasing and it may be that in the future the operators will also sell connections directly to consumers.

In addition to the GSM networks, there is also a German analogue C-Netz network which has proved to be a less than impressive solution. A Terrestrial Trunked Radio (TETRA) system is planned for the officials’ radio network. Decisions on the network are expected in 1999.

A third cellular network may be built during 1998 to promote competition as the existing two operators have already been accused of operating a cartel. The third operator is meant to be self-financed and based on black ownership. It is not certain whether there will be a third network at all. One argument against it is that the markets do not demand it. The extra difficulty would be that the operator would be expected to be profitable in addition to participating in uneconomical community projects. The technology of the third network is equally undecided and alternatives include GSM1800 as well as CDMA. SATRA will grant the licence and make the final decision on the technology. If there is a third operator, their first calls will be expected in late 1998.

The cellular GSM networks have about 1.4 million subscribers and by the end of 1998 the figure is projected to reach two million. Around 50,000-60,000 new handsets are sold each month. GSM handset buyers are mainly white. About 20% of the white population own cellular telephones. A relatively large portion of the handsets are low-end models. Blacks also favour second-hand telephones.

South Africans tend to embrace new technologies and services readily. Value-added services for cellular telephones such as SMS are very popular. Pre-paid SIM cards have proved to be a perfect product for customers who do have money but cannot be given credit in the form of billing. It is also a useful solution for travellers.

The existing fixed telephone network covers major areas sufficiently. It is not cost-effective to extend the fixed network to rural areas where distances are long. Therefore, various possible new solutions, such as solar-powered phone exchanges, for supplying the rural areas with basic telephone services are being investigated. One solution is the application of wireless local loops (WLL) which are being built for rural areas. A major cost in building new fixed lines in poor areas is cable theft. Telkom loses annually about R40 million worth of copper cable to thieves.

Many African countries are getting GSM cellular networks through joint ventures with foreign companies. Malawi’s State telephone operator is working with Telekom Malaysia and Telia is teaming up with MTN for a network in Uganda. Mozambique has just put a GSM network on-line. In Zimbabwe the second operator licence has gone through some controversy as it was granted to the President’s relatives. It has been estimated that the total investment in telecommunications in sub-Saharan Africa for the period 1996-2000 will be USD2-5 billion.

Data Transmission

The Internet has quickly gained popularity in South Africa. One explanation is that South Africa is physically so remote that the Internet provides a way to get closer to the western world. Commercial activity on the Internet grew by 200% during 1995-96 and it is expected that by the end of 1998 over 90% of organisations will be connected to the Internet. At the moment the figure is at about 80%. Direct Internet access is available to one in 65 South Africans. There are approximately 700,000 Internet users and they are connected via the four major (including SAIX and The Internet Solution) Internet service providers and a plethora of smaller ones. The number of Internet users in 2000 is expected to be 1.25 million, of which 0.5 million will be university students and staff. ISDN is available from Telkom.

South Africans have not adopted intranets as rapidly as western countries have. This is due to the much lower incidence of TCP/IP based networks in the existing infrastructure. At the moment most companies are concentrating on getting to the Internet for pure marketing, research or email purposes. Many companies do have intranets in their IT strategy, though. For most companies, supply chain management is not yet in the network. This brings new growth expectations for the data communications market. South African banks are also outsourcing much of their communication and information services. The use of consulting in these sectors is becoming very popular.

The government aims at quickly preparing legislation for e-commerce, digital signatures, multimedia convergence and encryption. They also plan to develop a government intranet to serve the population. The government has also recognised a need for a multipurpose smartcard. Already several foreign companies have entered the South African data communications market, including Newbridge, Tellabs, Alcatel, Siemens, Ericsson and Nortel.

Obstacles for Growth

Education in the telecommunications sector is not advanced in western terms. Companies usually find workers with solid basic education and train them in the telecommunications business themselves. A serious problem is that skills and know-how tend to move abroad. Education for the sector is being increased especially in universities, but it will take a few years before the results of this become visible.

Although relatively advanced in the sector, South Africa finds development being slowed down by limited bandwidth. Concepts such as e-commerce, data mining, electronic malls, data silos and targeted marketing are still finding their feet in South Africa. Companies requiring increasing bandwidth in their data transmissions have complained that it takes months for Telkom to provide sufficient bandwidth for some areas.

Telkom’s protection in certain areas prevents any competition and hence curbs the growth for these areas. In order for telecommunications to become a full success in South Africa, it needs political commitment, buoyant local demand and local entrepreneurs. The commitment and demand are there, but the country still lacks the local entrepreneurs. It has also been claimed that the Internet self-help philosophy has been missing in South Africa.

The cellular operators are running out of frequency. They quickly need SATRA to grant them more frequency spectrum from the 1800MHz band, or growth will be limited.

The telecommunications industry in South Africa is still young. Therefore it is not always clear how the industry operates. It can be difficult to know exactly which organisation or person to contact and personal connections are therefore highly important.


SOUTH AFRICA - THE GOLDEN OPPORTUNITY
continues with chapter Entering the South African Market.

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