South Africa: A Natural Resources Giant - International Law Office

South Africa is undergoing rapid economic reform.

It is difficult to compare South Africa to other countries, but Russia may provide the best analogy. Like Russia, South Africa has witnessed the recent rise of a handful of powerful oligarchs resulting from black economic empowerment transactions. Moreover, the state has exercised significant influence in creating these oligarchs. Finally, these oligarchs have played a major role in state decision-making processes, including foreign investments.

The analogy to Russia is also appropriate in light of the importance of natural resources to the local economy and the considerable interest of the country - as the regional military and economic powerhouse - in its neighbouring countries (particularly the Southern African Development Community region). For example, South Africa accounts for nearly 45% of all mineral production, over half of all electricity production and nearly 40% of all industrial output in Africa.

The risks and complexity of doing business in South Africa are also analogous to those in Russia, although risks are somewhat different, except for risks relating to personal security. The main financial and transactional risks are:

• the volatility of the local currency (the rand);
  
  
• the impact of the South African Reserve Bank; and
  
  
• the pace and nature of recent legislative reforms.

Recent legislative reforms mainly implemented fiscal and anti-discriminatory measures. The new Mining Law and Mining Charter require mining companies to convert their existing mining rights into 'new order' rights and, in the process, must vest up to 26% of their interests in black economic empowerment hands. These legislative initiatives have been largely accepted in South Africa. However, many foreign investors baulk at the black economic empowerment requirements, which complicate and threaten the control over and value of their investments. Other legislative initiatives are in the pipeline, such as the Mineral and Petroleum Royalty Bill (which would impose new royalties on mineral production ranging from 3% for gold to 8% for diamonds).

The South African Reserve Bank's policies play a major role in structuring transactions. In particular, there is a general restriction on the holding of foreign stock by South African residents. Thus, a share exchange takeover bid of a company listed on the South Africa Securities Exchange by a company listed on the Toronto Stock Exchange is complicated by the fact that, were the transaction to be completed without special dispensation by the South African Reserve Bank, South African shareholders would be forced to sell their stock almost immediately and repatriate the proceeds.

Statistics support the view that South Africa will continue to attract significant capital from foreign investors. The country's future is built on the knowledge that it hosts nearly half of the world's reserves of gold, platinum group metals and vanadium, and has the vast majority of the world's chromium and manganese reserves. Therefore, it is not surprising that many law firms supporting the mining industry have followed their clients by establishing offices in Johannesburg - which has reasserted itself as the capital of Africa in terms of capital, trade and skilled labour - to better serve the mineral industry.