US embassy cable - 04PRETORIA3051

C O N F I D E N T I A L SECTION 01 OF 02 PRETORIA 003051 
 
SIPDIS 
 
DEPT FOR AF/EPS DKRZYWDA AND AF/S/TCRAIG 
COMMERCE FOR 4510/ITA/IEP/ANESA/OA/JDIEMOND 
TREASURY FOR BRESNICK, LSTURM, AND AJEWEL 
DEPT PASS USTR FOR PCOLEMAN AND WJACKSON 
 
E.O. 12958: DECL: 07/07/2014 
TAGS: ECPS, EINV, EFIN, ETRD, ECON, SF 
SUBJECT: U.S. MULTI-NATIONALS CONTINUE ICT CHARTER 
NEGOTIATIONS 
 
REF: A. REFTEL: A) PRETORIA 2651 
     B. B) PRETORIA 2164 
     C. C) PRETORIA 2092 
 
Classified By: Acting Econ Chief Alan Tousignant. Reasons 1.5 (b,d). 
 
1.  (C) SUMMARY.  Representatives of U.S. multi-national 
corporations (MNCs) and the Information and Communications 
Technology (ICT) Charter Working Group continue to negotiate 
proposed equity ownership requirements.  The MNCs have 
presented a list of barriers to transferring equity and 
suggested various equity models.  MNCs still hope for a 
balanced scorecard, but some are beginning to question the 
commercial viability of implementing black economic 
empowerment (BEE).  Several multi-national firms are 
considering exit strategies such as setting up 
distributorships in South Africa or relocating to neighboring 
countries.  END SUMMARY. 
 
2.  (U) Representatives of U.S. MNCs operating in South 
Africa and the American Chamber of Commerce in South Africa 
(AmCham) continue to meet with the Information and 
Communications Technology (ICT) Charter Working Group to 
negotiate how the terms of equity ownership requirements in 
the ICT Empowerment Charter will be implemented.  MNC 
representatives told Econoff that following the first meeting 
on June 5, 2004 (Reftel A), a "Group of 10" has met five more 
times.  The Group of 10 consists of AmCham and MNC 
representatives on one side and the ICT Working Group and 
black ICT businesses and associations on the other side. 
There are no government officials at the table. 
 
3.  (C) MNC representatives met internally June 14, 15 and 17 
and compiled the following list of obstacles that they argue, 
at a minimum, serve as a disincentive to transferring equity. 
 
COST 
-     Sales of equity involve higher costs to multinational 
companies than alternative non-equity approaches to Broad 
Based BEE, and hence are generally not approved by corporate 
headquarters. 
-     According to international accounting rules, any 
discount to fair market value on sales of equity must be 
recorded in the income statement and hence may impact the 
cost of capital. 
-     Vendor finance can distort the holding company balance 
sheet debt/equity ratio. 
-     U.S. companies are disadvantaged by U.S. tax rules on 
sub-part F income when subsidiaries are not wholly owned. 
-     Equity sales by foreign holding companies may be 
subject to capital taxes in foreign jurisdictions, which 
result in immediate cash outflows. 
-     Multinational companies will be disadvantaged by 
massive recourse to South African financial markets for loan 
finance and forex transfers for the sale of 25-35 percent of 
all foreign-owned IT companies in South Africa. 
 
LEGAL 
-     Multinational companies organized as South African 
registered branches of foreign companies have no South 
African equity to sell. 
-     The Companies Act section 38 prohibits a company from 
financially assisting the sale of its own shares, thus 
preventing the South African subsidiary from providing vendor 
finance. 
-     Foreign Exchange regulations provide barriers to equity 
solutions involving holding company stock. 
 
GOVERNANCE 
-     Minority stakes in South African subsidiaries create 
barriers to the free flow of capital and intellectual 
property across a wholly owned group of companies.  They 
force loan funding (as opposed to equity funding) for 
expansion plans (since equity funding would dilute the 
minority stake) and create barriers to inward foreign direct 
investment.  They increase the time to market of new 
innovations and technologies. 
-     South Africa does not have a broad range of black 
investors and therefore the potential for conflicts of 
interest between companies involving connected minority 
parties is higher. 
-     Minority shareholders add to the complexity of 
decision-making where decisions are taken at a global rather 
than a country level. 
-     Additional management time is required in 
non-operational statutory structures, when normal management 
decisions are taken in cross-border operational structures. 
 
OTHER RISKS 
-     There is a litigation risk that sales of equity will be 
challenged by holding company shareholders. 
-     There is litigation risk that minority shareholders in 
South Africa may proceed against the majority when a decision 
is taken in favor of the global group but against the 
interest of the local company (e.g.: treasury investments, 
top South African employee assignments elsewhere in the 
group, global sourcing, hedging of foreign exchange 
exposures, etc.). 
-     Holding companies believe themselves open to risk of 
prosecution under the Foreign Corrupt Practices Act (or 
similar regulations) due to the actions of minority 
shareholders acting under normal business practice in South 
Africa, which may be illegal in the foreign country of 
incorporation. 
-     Strict observance of USA export restrictions (or 
similar foreign regulations) may cause contention with 
minority shareholders who may claim unfair treatment under 
South African laws. 
-     Forced disclosure to minority shareholders under South 
African law may be illegal disclosure under SEC regulations 
for a USA listed company (or similar regulations in other 
jurisdictions). 
 
 
4.  (C) During these internal meetings, it became apparent 
that some MNCs are prepared to comply with equity ownership 
requirements while others are not.  Those who are willing to 
comply have proposed four specific models they could 
implement in their corporate environment:  joint venture, 
employee trust, holding company, or a branch.  Those who do 
not support equity requirements said that either a corporate 
global policy prevents them from selling equity or the risks 
are too high. 
 
5.  (C) The MNCs presented the ICT Working Group with the 
above list of concerns about equity ownership in a Group of 
10 meeting on July 5.  According to IBM Country Manager Mark 
Harris, who is leading the MNC side of the negotiations, the 
ICT Working Group did not object to any of the four equity 
models presented by the multi-nationals at the most recent 
Group of 10 meeting held on July 7.  With regard to those 
MNCs claiming to have a corporate global policy preventing 
the transfer of equity, the Working Group is demanding the 
following stipulations: 
a)    the policy must be global; 
b)    the policy must not have been created to avoid Black 
Economic Empowerment (BEE); 
c)    there is no precedent in any other country of the 
company transferring equity; and 
d)    the policy existed prior to BEE policy. 
 
6.  (C) Once the ICT Working Group reviews the barriers and 
equity models, MNC negotiators plan to press for a "balanced 
scorecard."  In terms of BEE policy, a "scorecard" is a 
generic measurement of five different types of empowerment 
activity.  A "balanced scorecard" would allow companies to 
achieve empowerment status (i.e., an acceptable overall 
score) by scoring enough points in the other areas to 
compensate for few or no points in the equity ownership 
category.  MNCs are prepared to ask senior South African 
government officials to intervene in the process if 
negotiations fail to produce an acceptable solution. 
 
7.  (C) Several U.S. multi-nationals question whether the 
implementation of BEE will be commercially viable.  These 
companies are privately considering exit strategies such as 
setting up distributorships in South Africa or relocating 
their operations to neighboring countries, e.g., Botswana, if 
BEE policy proves to be too costly for the continued 
operation of their companies in South Africa. 
HUME