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Country Commercial Guides FY 2000: Eritrea Report prepared by U.S. Embassy Asmara, released July 1999 Note*

CHAPTER VII: INVESTMENT CLIMATE

OPENNESS TO FOREIGN INVESTMENT:

THE GSE ISSUED ITS INVESTMENT PROCLAMATION IN 1994, IN CONSISTENCE WITH ITS DEVELOPMENT STRATEGY, AIMED AT DEVELOPING AN OUTWARD LOOKING PRIVATE SECTOR-LED MARKET ECONOMY, ERITREA HAS ADOPTED LIBERAL INVESTMENT POLICIES. THE COUNTRY'S INVESTMENT POLICY TREATS DOMESTIC AND FOREIGN INVESTORS EQUALLY IN GETTING ACCESS TO LAND, UTILITIES, AND OTHER PRODUCTION UNITS. THE GSE VIEWS FOREIGN INVESTMENT AND COLLABORATION AS AN ESSENTIAL VEHICLE TO SUPPLEMENT ITS LIMITED SUPPLY OF PRODUCTION TECHNOLOGY, CAPITAL, AND MANAGEMENT AND MARKETING SKILLS.

THE INVESTMENT PROCLAMATION ELIMINATES JOINT VENTURE PRE-REQUISITES, OPENS ALL SECTORS OF THE ECONOMY TO FOREIGN INVESTMENT (EXCEPT FOR DOMESTIC RETAIL AND WHOLESALE TRADE, IMPORT AND COMMISSION AGENCY), REDUCES TAX ON PROFITS, ALLOWS REMITTANCE OF PROFITS IN FOREIGN EXCHANGE, AND MINIMIZES CUSTOMS DUTIES ON CAPITAL GOODS TO 2 PCT.

THE GSE VIEWS INVESTMENT PROPOSALS IN A NON-DISCRIMINATORY MANNER; THE SCREENING PROCESS, WHICH MAY TAKE A LONG TIME DUE TO LACK OF SKILLED MANPOWER, IS NOT REGARDED AS AN IMPEDIMENT TO INVESTMENT, A LIMIT TO COMPETITION OR AS A MEANS OF PROTECTING DOMESTIC INTERESTS.

THE GSE ENCOURAGES FOREIGN FIRMS TO TAKE PART IN THE PRIVATIZATION OF STATE OWNED ENTERPRISES. IN SOME INSTANCES THE GSE HAS BEEN PROMOTING JOINT VENTURES WITH THE GOVERNMENT OR THE LOCAL PRIVATE SECTOR RATHER THAN OUTRIGHT SALES. A DOZEN PUBLIC ENTERPRISES WERE PRIVATIZED OVER THE PAST TWO YEARS WHERE FOREIGN INVESTORS PARTICIPATED IN JOINT VENTURES AND OUTRIGHT PURCHASES OF PRIVATIZED PUBLIC ENTERPRISES. A NUMBER OF PUBLIC ENTERPRISES AND UTILITY COMPANIES INCLUDING TELECOMMUNICATIONS ARE ADVERTISED FOR JOINT VENTURE PARTNERSHIP OR OUTRIGHT SALE.

THERE ARE NO DISCRIMINATORY OR ONEROUS VISA, RESIDENCE, OR WORK PERMIT REQUIREMENTS REGARDING FOREIGN INVESTORS. WORK AND RESIDENCE PERMITS NORMALLY CAN BE OBTAINED WITHIN A FEW WEEKS, AND AT TIMES WITHIN 48 HOURS. FOREIGN INVESTORS DO NOT FACE UNFAVORABLE TAX TREATMENT, DENIAL OF LICENSES, DISCRIMINATORY IMPORT OR EXPORT POLICIES, OR INEQUITABLE TARIFF AND NON-TARIFF BARRIERS.

CONVERSION AND TRANSFER POLICIES:

THE INVESTMENT PROCLAMATION ALLOWS ALL FOREIGN INVESTORS TO FREELY REMIT PROFITS AND DIVIDENDS, PRINCIPAL AND INTEREST ON FOREIGN LOANS, AND FEES RELATED TO TECHNOLOGY TRANSFER. FOREIGN INVESTORS MAY ALSO REMIT PROCEEDS FROM THE SALE OF LIQUIDATION OF ASSETS, FROM THE TRANSFER OF SHARES OR OF PARTIAL OWNERSHIP OF AN ENTERPRISE, AND FUNDS REQUIRED FOR DEBT SERVICE OR OTHER INTERNATIONAL PAYMENTS. EXPATRIATE EMPLOYEES ARE GUARANTEED IN ACCORDANCE WITH THE BANK OF ERITREA REGULATIONS TO REMIT SAVINGS FROM THEIR SALARIES. THERE HAS BEEN NO COMPLAINT FROM U.S. BUSINESSES OPERATING IN ERITREA REGARDING CONVERSION AND TRANSFER OF PROFITS AND DIVIDENDS.

IN 1997 THE GSE ISSUED THE FINANCIAL INSTITUTIONS PROCLAMATION, OPENING THE BANKING AND INSURANCE SECTORS TO THE PRIVATE SECTOR AND FURTHER LIBERALIZING THE COUNTRY'S FOREIGN EXCHANGE MARKET. SEVERAL FOREIGN EXCHANGE BUREAUS RECEIVED LICENSES AND ARE NOW OPERATING IN THE FOREIGN EXCHANGE MARKET. ERITREA ISSUED ITS OWN CURRENCY, THE NAKFA, IN LATE 1997. THE NAKFA REMAINED FAIRLY STABLE IN 1998. IT DEPRECIATED FROM 7.2 TO THE U.S. DOLLAR IN 1997 TO 8.00 NAKFA TO ONE U.S. DOLLAR IN 1999. THE UNOFFICIAL MARKET EXCHANGE RATE IS HIGHER AT OVER 10 NAKFA PER ON U.S. DOLLAR.

EXPROPRIATION AND COMPENSATION:

FOLLOWING THE BORDER DISPUTE BETWEEN ERITREA AND ETHIOPIA AND SUBSEQUENT CLASHES ON MAY-JUNE 1998, EQUIPMENT AND PARTS SHIPPED BY CATERPILLAR INTENDED FOR ITS AGENT IN ETHIOPIA WERE STRANDED IN THE ERITREAN PORT OF ASSAB, WHEN IT WAS BOYCOTTED BY THE GOVERNMENT OF ETHIOPIA. IN ADDITION 44,000 MTS OF WHEAT BELONGING TO USAID, DESTINED TO ETHIOPIA AS PART OF A FOOD ASSISTANCE PROGRAM , WERE ALSO STRANDED. NEGOTIATIONS ARE UNDERWAY BETWEEN THE GSE AND THE U.S. AUTHORITIES TO RESOLVE THIS PROBLEM. THE ERITREAN GOVERNMENT HAS ASSURED FOREIGN GOVERNMENTS THAT ERITREA WOULD ASSUME RESPONSIBILITY FOR ALL GOODS STRANDED IN ITS PORTS AS PART OF AN OVERALL SETTLEMENT WITH ETHIOPIA ONCE THE CONFLICT HAS ENDED.

OTHER THAN THE BORDER DISPUTE RELATED CASES, NO ACTS OF EXPROPRIATION HAVE OCCURRED IN ERITREA. PER ERITREA'S 1994 INVESTMENT PROCLAMATION NO ASSETS OF A DOMESTIC OR A FOREIGN INVESTOR, OR EXPANSION MAY BE NATIONALIZED, CONFISCATED, FROZEN, OR EXPROPRIATED, EXCEPT IN ACCORDANCE WITH THE REGULATIONS OF THE GOVERNMENT AND UPON PAYMENT OF FULL AND FAIR COMPENSATION. GIVEN THE GSE'S COMMITMENT TO A PRIVATE SECTOR-LED MARKET ECONOMY AND ITS EARNEST INTEREST IN ATTRACTING FOREIGN CAPITAL, THE RISK OF NATIONALIZATION APPEARS MINIMAL.

DISPUTE SETTLEMENT:

THE INVESTMENT PROCLAMATION STIPULATES THAT DISPUTES ARISING FROM A FOREIGN INVESTMENT INVOLVING A FOREIGN INVESTOR OR THE GOVERNMENT MAY BE SETTLED BY MEANS AGREEABLE TO BOTH SIDES. IN ADDITION THE GOVERNMENT ACCORDS FOREIGN INVESTORS FURTHER PROTECTION BY ENTERING INTO APPROPRIATE BILATERAL AND MULTILATERAL INVESTMENT PROTECTION OR GUARANTEE TREATIES. FOREIGN INVESTORS MAY CHOOSE ANY ONE OF THE TWO ALTERNATIVES. ACCORDING TO THE PROCLAMATION DECISIONS REACHED SHALL BE EXECUTED IN ACCORDANCE WITH THE LAWS OF ERITREA. ERITREA IS SIGNATORY OF THE HAGUE CONVENTION FOR THE PACIFIC SETTLEMENT OF INTERNATIONAL DISPUTES AND THE MULTILATERAL INVESTMENT GUARANTEE AGENCY (MIGA)

MOREOVER, THE PROCLAMATION ALLOWS ANY INVESTOR, WHO FEELS GRIEVED IN RELATION TO THE PROCLAMATION, TO PRESENT HIS CASE TO THE ERITREA INVESTMENT CENTER AND THEN TO THE ADVISORY COMMITTEE IF HIS CASE IS NOT RESOLVED BY THE CENTER. THE ADVISORY COMMITTEE CONSISTS OF REPRESENTATIVES OF DIFFERENT MINISTRIES AND GOVERNMENT DEPARTMENTS AND IS CHAIRED BY A REPRESENTATIVE OF THE HEAD OF STATE. NO INVESTMENT DISPUTES ARE KNOWN TO HAVE OCCURRED IN ERITREA.

PERFORMANCE REQUIREMENT/INCENTIVES:

INVESTORS IN PARTICULAR SECTORS MAY BE ELIGIBLE FOR INVESTMENT INCENTIVES. THE GOVERNMENT GIVES STRONG PROMOTIONAL SUPPORT TO EXPORT INDUSTRIES THAT SHOW A CLEAR COMPETITIVE ADVANTAGE IN INTERNATIONAL MARKETS. IT ALSO GIVES SPECIAL CONSIDERATION TO INVESTMENT PROJECTS THAT EXPLOIT THE SPECIAL FACTOR ENDOWMENTS OF THE COUNTRY. EXPORTS ARE EXEMPT FROM EXPORT DUTIES AND SALES TAXES. LOSSES INCURRED BY AN INVESTOR IN THE FIRST TWO YEARS OF OPERATION MAY BE CARRIED FORWARD FOR THREE CONSECUTIVE YEARS, AND IN EXCEPTIONALLY CRITICAL CIRCUMSTANCES, FOR ONE MORE YEAR. IN AN EFFORT TO PROMOTE REGIONAL BALANCE, THE GOVERNMENT CAN USE FISCAL AND OTHER MECHANISMS TO ATTRACT PRIVATE INVESTMENT TO RELATIVELY DEPRESSED AREAS.

RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT: PRIVATE ENTITIES, BOTH DOMESTIC AND FOREIGN, HAVE THE RIGHT TO ESTABLISH, ACQUIRE, OWN, AND DISPOSE OF MOST FORMS OF BUSINESS ENTERPRISES. HOWEVER, COMPANIES AFFILIATED WITH THE RULING PARTY, THE PEOPLE'S FRONT FOR DEMOCRACY AND JUSTICE (PFDJ) OFTEN HAVE ADVANTAGES OVER PRIVATE FIRMS IN OVERCOMING REGULATORY AND BUREAUCRATIC CHALLENGES.

PROTECTION OF PROPERTY RIGHTS:

SECURED PROPERTY INTERESTS ARE PROTECTED AND ENFORCED, ALTHOUGH ALL LAND BELONGS TO THE STATE. PROPERTY SEIZED DURING THE DERGE REGIME IS BEING RETURNED TO ITS RIGHTFUL OWNERS, PARTICULARLY HOUSES AND REAL ESTATE. THE INVESTMENT CODE PROVIDES FOR THE ALLOCATION OF LAND TO INVESTORS THROUGH LEASE. THE SIZE, LOCATION, TERMS AND CONDITIONS OF ALLOCATION OF LAND AND WATER IS DETERMINED BY THE RELEVANT ERITREAN LAWS AND REGULATIONS, AND PARTICULARLY BY THE LAND PROCLAMATION.

THERE ARE PRESENTLY NO MEANS OF PROTECTING INTELLECTUAL PROPERTY RIGHTS, PATENTS, COPYRIGHTS AND/OR TRADEMARKS IN ERITREA. FIRMS USUALLY PLACE NOTICES IN LOCAL NEWSPAPERS TO EFFECT REGISTRATION OF THEIR TRADEMARKS WITH THE MINISTRY OF TRADE AND INDUSTRY.

TRANSPARENCY OF THE REGULATORY SYSTEM:

ERITREA'S REGULATORY SYSTEM IS FAIR AND HONEST. BUSINESS NEGOTIATIONS AND TRANSACTIONS ARE FAIRLY TRANSPARENT. GOVERNMENT LAWS AND POLICIES ON LABOR, HEALTH AND SAFETY, INSURANCE, AND FINANCE DO NOT IMPEDE INVESTMENT. ALTHOUGH NOT DISCRIMINATORY, GSE TARIFF AND TAXATION POLICIES ARE CONSIDERED EXORBITANT, BY SOME FOREIGN INVESTORS. BUREAUCRATIC RED TAPE IS NOT A PROBLEM, BUT DUE TO LACK OF SKILLED MANPOWER, THE PROCESS OF REGISTERING AN INVESTMENT AND GETTING IT OFF THE GROUND CAN BE A LONG, FRUSTRATING AND COSTLY ENTERPRISE.

EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENT:

COLLATERAL REQUIREMENTS FOR THE PROVISION OF LOANS, BY THE COMMERCIAL BANK OF ERITREA , AMOUNT TO 100 PCT WHICH OFTEN LIMITS THE ABILITY OF INVESTORS TO CAPITALIZE UPON BUSINESS OPPORTUNITIES. THE COMMERCIAL BANK IS BY FAR THE LARGEST FINANCIAL INSTITUTION IN THE COUNTRY. ALTHOUGH ERITREA'S "FINANCIAL INSTITUTIONS" PROCLAMATION ALLOWS FOREIGN BANKS TO OPERATE IN THE COUNTRY, NO FOREIGN BANK HAS OPENED YET. INTEREST RATES ON LOANS AND DEPOSITS ARE FIXED. AT PRESENT THE MAXIMUM INTEREST RATE ON LOANS AMOUNTS TO 12 PCT. INTEREST RATE ON DEPOSITS IS 6 PCT. THE BANK OF ERITREA OFFERS THREE YEAR INTEREST FREE FOREIGN CURRENCY DENOMINATED BONDS AND SIX, EIGHT AND TEN YEARS INTEREST BEARING FOREIGN CURRENCY DENOMINATED BONDS. THE MINIMUM DENOMINATION OF THE BONDS AND INTEREST RATES DIFFER DEPENDING ON THEIR MATURITY PERIOD. LOCAL CURRENCY DENOMINATED TREASURY BILLS WILL BE INTRODUCED IN THE FUTURE. THERE ARE NO PORTFOLIO INVESTMENTS IN ERITREA.

THERE ARE NO LAWS OR REGULATIONS AUTHORIZING PRIVATE FIRMS TO ADOPT ARTICLES OF INCORPORATION OR ASSOCIATION WHICH LIMIT OR PROHIBIT FOREIGN INVESTMENT, PARTICIPATION, OR CONTROL. THERE ARE NO PRIVATE SECTOR OR GOVERNMENT EFFORTS TO RESTRICT FOREIGN PARTICIPATION IN INDUSTRY STANDARDS-SETTING CONSORTIA OR ORGANIZATIONS. THERE ARE NO KNOWN INSTANCES OF PRIVATE FIRMS ATTEMPTING TO RESTRICT FOREIGN INVESTMENT PARTICIPATION, OR CONTROL OF DOMESTIC ENTERPRISES.

POLITICAL VIOLENCE:

SINCE LIBERATION IN 1991, ERITREA HAS ENJOYED POLITICAL STABILITY. THERE HAVE BEEN NO INCIDENTS OF POLITICAL VIOLENCE INVOLVING INVESTMENT PROJECTS AND/OR INSTALLATIONS. THE ONGOING BORDER DISPUTE WITH ETHIOPIA COULD RESULT IN ACCIDENTAL OR DELIBERATE DAMAGE TO INVESTMENTS. THERE HAVE BEEN SEVERAL AIR RAIDS ON CIVILIAN TARGETS BY ETHIOPIAN AIR FORCE; THE MOST RECENT ONE BEING THE BOMBARDMENT OF THE PORTS OF MASSAWA AND ASSAB.

CORRUPTION:

CORRUPTION IS NOT AN IMPEDIMENT TO FOREIGN DIRECT INVESTMENT. ERITREA TAKES STRINGENT LEGAL MEASURES AGAINST CORRUPTION. IN 1996 THE GSE ESTABLISHED A SPECIAL COURT THAT DEALS WITH CASES OF CORRUPTION AND EMBEZZLEMENT. THE COURT WAS ESTABLISHED, FOLLOWING A CORRUPTION SCANDAL INVOLVING SOME OF THE RULING PARTY (PFDJ) OFFICIALS WHO WERE RUNNING PARTY AFFILIATED TRADING COMPANIES. GIVING AND RECEIVING BRIBES ARE CONSIDERED CRIMINAL ACTS AND BRIBES ARE NOT TAX DEDUCTIBLE. TO OUR KNOWLEDGE, NO INVESTORS HAVE BEEN CHARGED WITH CORRUPTION. THE SPECIAL COURT ESTABLISHED IN 1996 IS ENTRUSTED WITH THE RESPONSIBILITY OF COMBATING CORRUPTION.

BILATERAL INVESTMENT AGREEMENTS:

ERITREA HAS BILATERAL INVESTMENT PROTECTION AGREEMENT WITH ITALY. THE GSE ALSO HAS AN INVESTMENT INSURANCE AGREEMENT WHICH IT RECENTLY SIGNED WITH QATAR. AT PRESENT ERITREA DOES NOT HAVE AN INVESTMENT PROTECTION AGREEMENT WITH THE UNITED STATES. THE GSE IS CONSIDERING THE SIGNING OF A SIMILAR AGREEMENT WITH OTHER COUNTRIES, INCLUDING THE UNITED STATES.

OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS: THE OVERSEAS PRIVATE INVESTMENT CORPORATION (OPIC) OFFERS RISK INSURANCE AND LOANS TO U.S. INVESTORS IN ERITREA. ERITREA IS A SIGNATORY OF THE MULTILATERAL INVESTMENT GUARANTEE AGENCY (MIGA) AND THE INTERNATIONAL CONVENTION ON THE SETTLEMENT OF INVESTMENT DISPUTES (ICSID). FOR SPECIFIC QUESTIONS ON OPIC PROGRAMS CONTACT THE COMMERCIAL SECTION OR OPIC DIRECTLY AT:

OVERSEAS PRIVATE INVESTMENT CORPORATION 1100 NEW YORK AVENUE, N.W. WASHINGTON, DC 20527 TEL. (202) 336-8799; FAX (202) 408-5142

LABOR:

ERITREA HAS AN INEXPENSIVE BUT HIGHLY MOTIVATED, INDUSTRIOUS AND DISCIPLINED WORKFORCE. SKILLED MANPOWER, HOWEVER, REMAINS SCARCE IN MANY FIELDS. THE COUNTRY ENJOYS LABOR PEACE. EXCEPT FOR CIVIL SERVANTS, WHOSE ADMITTANCE INTO THE CONFEDERATION IS UNDER CONSIDERATION, ALL OTHER EMPLOYEES OF THE PUBLIC AND PRIVATE COMPANIES ARE MEMBERS OF THE NATIONAL CONFEDERATION OF ERITREAN WORKERS. ERITREA'S LABOR PROCLAMATION PROHIBITS CHILD LABOR PRACTICES, ALTHOUGH THERE ARE NO ENFORCEMENT MECHANISMS, SPECIALLY IN THE INFORMAL AND AGRICULTURAL SECTORS. OVER THE PAST FEW YEARS THE NATIONAL CONFEDERATION OF ERITREAN WORKERS HAS FOCUSED, WITHIN THE PROVISIONS OF THE LABOR PROCLAMATION, ON LABOR CONCERNS SUCH AS HEALTH AND SAFETY REQUIREMENTS.

FOREIGN TRADE ZONES/FREE PORTS:

THERE ARE NO AREAS DESIGNATED BY THE GSE AS FOREIGN TRADE ZONES AND/OR FREE PORTS IN ERITREA. THE GOVERNMENT, HOWEVER, PLANS TO CONVERT MASSAWA INTO A FOREIGN TRADE ZONE AND ASSAB, PENDING THE RESOLUTION OF THE BORDER CONFLICT WITH ETHIOPIA, INTO A TRANSSHIPMENT PORT. UNTIL MAY 1998, ASSAB USED TO SERVE ETHIOPIA.

FOREIGN DIRECT INVESTMENT:

AS OF DECEMBER 31, 1998, THE ERITREAN INVESTMENT CENTER HAS LICENSED 661 INVESTMENT PROJECTS WORTH NAKFA 3,904,566 THOUSAND (APPROXIMATELY U.S. $561,823,100). THE FOREIGN COMPONENT OF THE INVESTMENT IS U.S. $234,875,100. (SOURCE: INVESTMENT CENTER) U.S. INVESTMENT CONCENTRATES ON THE MINERAL AND OIL EXPLORATION SECTORS CONSTRUCTION AND LIGHT MANUFACTURING. ALTHOUGH THERE ARE NO PRECISE FIGURES REGARDING THE BREAKDOWN OF FOREIGN INVESTMENTS BY SOURCE OF ORIGIN, U.S. INVESTMENT IN ERITREA IS ESTIMATED AT ABOUT ONE HUNDRED MILLION U.S. DOLLARS. OTHER MAJOR FOREIGN INVESTORS INCLUDE SOUTH KOREA, ITALY, AND CHINA. (NOTE: EXCHANGE RATE OF NAKFA TO U.S. DOLLAR: 1993 6.3 NAKFA, 1994/1995 6.7 NAKFA, 1996/97 7.125 NAKFA, AND 1998 7.4 NAKFA).

THE LARGEST U.S. COMPANIES WITH SUBSTANTIAL INVESTMENTS IN ERITREA INCLUDE ANADARKO PETROLEUM CORPORATION, MOBIL OIL ERITREA, COCA COLA COMPANY, CATERPILLAR, PHELPS DODGE EXPLORATION CORPORATION, NATURAL RESOURCES CONSULTING ENGINEERS (NRCE), AND HOTEL INTERCONTINENTAL. OTHER SMALLER FRANCHISES AND INVESTMENTS INCLUDE ERITREA BUILDING MATERIALS MANUFACTURING, IBM, DHL, FEDEX, XEROX CORPORATION, ACE HARDWARE, CARRIER & HONEYWELL, INGERSOLL-RAND, JOHN DEERE, AND BLACK AND DECKER COMPANY.