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Country Commercial Guides for FY 2000:
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CHAPTER VII: INVESTMENT CLIMATE
OPENNESS TO FOREIGN INVESTMENT
In the past, potential investors in Madagascar have been compelled to deal with a thicket of bureaucratic obstacles as they sought the necessary permits and approvals. Investors needed the authorization of those government ministries claiming technical competence in the targeted industry. Ministerial overlap and bureaucratic struggles for dominance were serious problems. Often, investors had no idea which ministries to approach or where to start. While there has been a recent move to simplify, the process is still lacking in transparency, and rife with corruption.
In September, 1994, the GOM introduced a "guichet unique," or "one-stop office," to serve as the coordinating body for new project proposals. This office does not have decision-making authority, but is responsible for transmitting an investment proposal to the relevant technical ministries and for following up. The guichet unique claims a 45-60 day processing time, though delays are frequent. Investors who have used it claim it is helpful in centralizing the application process, but could be quicker and more responsive.
Since 1996, as part of the structural adjustment process negotiated with the World Bank and the IMF, the GOM has made an effort to reform the business and investment environment by dismantling some of the regulatory and tax constraints impeding private sector development, particularly for small and medium-sized local enterprises and foreign investors.
In addition, over the past two years the Government has adopted a series of legal frameworks to eliminate public enterprise monopolies in the energy, mining, hydrocarbon, telecommunication, and air transportation sectors.
The following measures were adopted in 1998-99 to promote foreign investments:
The passage of the measures listed above is a positive development, but it is important to note that many of these laws have not been implemented. There are frequent discrepancies between stated policies and their implementation. For example, some foreign investors have encountered discriminatory measures, such as unexplained failure to receive required licenses from the Government. Screening mechanisms are often used for political reasons, or to protect domestic or individual interests, particularly in the telecommunications, mining and fishing sectors. This lack of transparency does not appear to have affected the privatization process, however, where public bidding has generally been open and foreign investors have been welcome to participate.
- Government approval, which is needed for long-term leases on land, will be granted or denied within 2 months of application;
- Visa regulations for foreign investors and tourists have been relaxed;
- The requirement of prior approval for equity capital contributions by foreign investors (above a threshold of 20 percent of a company's authorized capital) has been abolished;
- Procedures for registering corporations have been simplified (by regulation, should take no more than 2 weeks; in practice, takes approximately one month);
- Legal and institutional frameworks to combat anti-competitive practices have been adopted;
- Treaties eliminating double taxation with some countries that are potential sources of private capital have been negotiated and signed (does not include the U.S.);
- A law providing for arbitration has been adopted for the first time;
- A proposed new mining law has been presented to the National Assembly and a legal framework to promote mining projects of more than 200 million dollars investment is being prepared;
- A new office has been created within the Ministry of Industry to promote local and foreign investments.
CONVERSION AND TRANSFER POLICIES
In 1996, the Government lifted all restrictions on current payment and transfers and accepted the obligations of Article VIII of the IMF Articles of Agreement, which provides for the complete elimination of exchange controls. There are no restrictions on converting or transferring funds associated with a foreign investment, including remittances of investment capital, earnings, loan repayments, lease payments into a freely usable currency and at a legal market clearing rate.
However, money transfers may be subject to availability of foreign exchange on the interbank foreign exchange market. Foreign investors are permitted to hold bank accounts in foreign currencies. As there is no restriction on the conversion and transfer of funds associated with foreign investment, any delays in transfer are due to the availability of foreign exchange. By law, foreign investors must make remittances through banks, rather than through parallel market mechanisms (i.e., dollars or other foreign currency used for remittances must be purchased from recognized banks). There is no limitation on the inflow or outflow of funds for remittance of profits, debt service, capital, capital gains, returns on intellectual property, etc.
EXPROPRIATION AND COMPENSATION
During the 1970's, the socialist government pursued a policy of national self-sufficiency that included the expropriation of foreign-owned companies. The seizure of property owned by foreign oil companies to create SOLIMA, the state oil company, was the most visible expression of expropriation in the country. The government has settled the expropriation claims of some of the affected companies (Esso, which was resolved in 1997, and Caltex), but others remain outstanding after nearly 20 years.
Since the country is under a structural adjustment program, there is little risk of future expropriation because state divestiture from public enterprises is now a cornerstone of government policy.
DISPUTE SETTLEMENT
Investors in Madagascar face a legal environment in which security of private property and enforcement of contracts are inadequately protected by the judicial system. Government interference in the court system is frequent.
In order to improve the business and investment environments, the Government has committed to setting up before the end of 1999 an operational system of arbitration for commercial conflicts through the application and implementation of the new arbitration law.
The government, through the Malagasy Office of Industrial Property (OMAPI) supervises all aspects of copyright and trademark protection. The Malagasy commercial law is very old and plans are in the works for it to be revised.
Investment amounts are calculated according to the value in Malagasy francs of the currency being used for the investment. As of mid-July, 1999, one U.S. dollar equals approximately 6,700 Malagasy francs (FMG).
The government has not signed, and does not abide by, international agreements calling for arbitration of investment disputes between foreign investors and the state.
While efforts are being made to improve the legal system, the legal framework in which the private sector operates suffers from:
Madagascar is not yet a member of the ICSD (International Center for the Settlement of Investment Disputes), nor of the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards.
- inadequate laws;
- insufficient dissemination and knowledge of laws;
- inconsistent application and enforcement of the laws.
PERFORMANCE REQUIREMENTS/INCENTIVES
Investment incentives are available for industries operating in the export processing zones (EPZ). Foreign or local investors can benefit from tax exemptions provided their project falls into one of the following categories:
Beginning in 1999, the Government adopted a new law requiring that EPZ companies pay a refundable 20 percent value added tax (VAT) on imports of raw materials. The refund is to be made within one month upon proof of export. The law took effect in June, 1999. Many EPZ companies have complained about the law, concerned that the refund system will prove inadequate.
- investment in export-oriented manufacturing industries;
- development or management of industrial free zones; or
- provision of services to EPZ companies
Performance requirements are no longer imposed as a condition for establishing, maintaining or expanding an investment, or for accessing tax and investment incentives. There are no requirements that investors purchase from local sources, or export a certain percentage of output (other than EPZ companies which must export 100% of their output), or have access to foreign exchange only in relation to the quantity of their exports.
There are no requirements that nationals own shares, that the share of foreign equity be reduced over time, or that technology be transferred on certain terms.
There are no Government-imposed conditions on permission to invest, including location in specific geographical area, specific percentage of local content or local equity, substitution for imports, export requirements or targets, employment of host country nationals or technology transfer. Investors are not required to disclose proprietary information to the Government as part of the regulatory approval process.
U.S. and other foreign firms are able to participate in Government-financed and/or subsidized research and development programs on a national treatment basis.
Although fees for long-term visas were recently raised significantly, the fees do not discriminate and are uniformly applied to all foreign residents. In addition, for residence and work permits, there is no discrimination against foreign investors. There are no restrictions placed on the employment of foreign managers brought in to supervise foreign investment projects. There are no discriminatory or preferential export or import policies which would affect foreign investors, nor discriminatory tariff or non-tariff barriers, or other measures such as import controls.
RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT
Since mid-1996, foreign entities as well as domestic private entities have had the right to establish and own business enterprises and engage in all forms of remunerative activity. By law, private entities have the right to freely establish, acquire, and dispose of interests in business enterprises, as well.
By law, competitive equality is the standard applied to private enterprises in competition with public enterprises with respect to access to markets, credit, and other business operations, such as licenses and supplies.
However, the reality is somewhat different from the law. While it is technically legal for foreigners to own property, it is very unusual. To facilitate investments, the Malagasy Government passed a law in 1996 allowing foreigners easier access to 99-year leases which can be traded and used as collateral in business deals. In order to promote foreign investments, the Government, in its new Policy Framework Paper, commits to granting or denying applications for long-term land leases within 2 months of application, beginning September 1999.
PROTECTION OF PROPERTY RIGHTS
Madagascar has a legal system that, de jure, protects property rights. However, de facto, the legal system works capriciously, and legal recourse for foreign investors does not generally favor them. The Government claims to comply with the Uruguay Round's Trade Related Aspects of Intellectual Property (TRIPS) Agreement. Madagascar is a member of the World Intellectual Property Organization WIPO) and, in 1994, the Government established OMAPI (Malagasy Office for Industrial Property) to supervise all aspects of copyright and trademark protection. Compliance with these Intellectual Property Rights regulations is highly uneven. Major brand names and franchise rights are generally respected, but pirated copies of videotape movies and music cassettes sell openly in the capital. A number of local television stations regularly show pirated copies of first run U.S. and European movies.
In order to fight against counterfeiting, the Ministry of Industry has just adopted a decree to combat counterfeit goods. However, resources must still be found to fund implementation of this decree.
TRANSPARENCY OF THE REGULATORY SYSTEM
Since 1996, the GOM has made an effort to increase transparency in the investment approval process. However, as bureaucratic procedures are not sufficiently streamlined and transparent, red tape is a common problem. In its 1999-2000 program, the Government commits to reforming the public administration in order to create a favorable environment for business and investment. The reforms are intended to simplify procedures for registering companies and to establish a legal and institutional framework to fight against anti-competitive practices.
EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENT
The banking system is still too weak to support inward investment flows and to allocate capital resources. As a result, most foreign investors negotiate financing needs abroad.
The banking system consists of six commercial banks. European banking institutions hold a controlling interest in two banks: Banque Malgache de l'Ocean Indien (BMOI) and BNI-Credit Lyonnais BNI-CL). UCB (Union Commercial Bank) and SBM (State Bank of Mauritius) are branches of Mauritian parent companies of the same name. The former state bank BFV was purchased by the French bank, Societe Generale, and BTM bank is also in the process of privatization. The primary purchaser of BTM is Bank of Africa.
The total assets of the country's largest bank (BNI-CL) are around USD 200 million. There is no stock market in Madagascar, although discussion has begun regarding establishment of an equities market. There are no private sector and/or government efforts to restrict foreign participation in developing industry standards, or in creating consortia or organizations to pursue legitimate business purposes. We know of no attempts by Government to restrict foreign investment, participation, or control in domestic enterprises.
POLITICAL VIOLENCE
There have been no incidents in recent years involving politically motivated damage to projects and/or installations. The political environment of the country is stable and there are no nascent insurrections, belligerent neighbors or other politically motivated activities that make it difficult to conduct business.
CORRUPTION
Madagascar has laws to combat corruption, but they are not efficiently enforced. Corruption is most pervasive in the administrative sector (project approval, government procurement, licenses, judicial matters, etc.).
Tax evasion is widespread in Madagascar, accompanied by bribery of customs or other tax officials. To the extent that businesspersons engage in such tax evasion without being called to account, other firms are placed at a competitive disadvantage if they do not follow suit. A bribe to a local or foreign official is considered a criminal act, but to Post's knowledge, no one has ever been found guilty of corruption in Madagascar. The government is now establishing a legal and institutional framework to fight anti-competitive practices and corruption.
BILATERAL INVESTMENT AGREEMENTS
According to the Ministry of Industry, the only country with which Madagascar has concluded a bilateral investment protection treaty is France.
OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS
On March 31, 1998, OPIC and the Malagasy Government signed a bilateral Investment Incentive Agreement which updates the old agreement dating from 1963. On April 21, 1999, the Agreement was ratified by the National Assembly. OPIC currently finances one U.S.-based investment in Madagascar, the cellular telephone company Telecel.
Madagascar is a member of the Multilateral Investment Guarantee Agency (MIGA).
The 1998 estimated annual USD value of local currency (FMG) is 5,500 FMG for one USD. As of mid-July, 1999, the rate had dropped to 6,700 FMG to one USD.
LABOR
With widespread unemployment and underemployment, Madagascar is a labor surplus country. Wage rates in the country are among the lowest in the world. Malagasy workers are relatively easily trained and skill availability is good for the types of production that dominate the manufacturing sector: textiles, knitting, and clothing assembly. More highly sophisticated skilled workers are, however, very limited.
Madagascar is a member of ILO and workers enjoy the right of free association and are free to organize and engage in collective bargaining. Safety standards in the workplace are generally not enforced and would not meet U.S. standards.
FOREIGN TRADE ZONES/FREE PORTS
Since 1991, Export Processing Zone (EPZ) regulations in Madagascar have allowed foreign or Malagasy investors to qualify for tax exemptions. EPZ firms can qualify for tax holidays of varying terms. Personal taxes are reduced and EPZ firms are generally exempt from paying customs duties. However, beginning in June 1999, the Government began applying a value added tax (VAT) to EPZ companies, refundable upon proof of export, as a deterrent against fraudulent production for the local market. Many EPZ companies have complained about this decision and question whether the refunds will be timely. EPZ firms may be set up in special zones or may establish themselves independently. Like any foreign investment, EPZ companies are legally eligible to hold real property, but encounter similar obstacles both to outright ownership and acquiring long-term leases.
The EPZ is currently the major focus of direct foreign investment in Madagascar. Of the 125 companies granted status as EPZ companies, about 50% are European (mainly French) investments, 30% are Mauritian, 10% are Asian, and 10% are Malagasy.
The value of foreign direct investment in 1998 was around 16 million USD. Data on foreign investment by country of origin and by industry sector are not available.
MAJOR FOREIGN INVESTORS
Major foreign investors are from France. Investments in the EPZ are mainly French and Mauritian. The remainders are from Hong Kong, Singapore, Germany and Italy.
HOST COUNTRY CONTACT INFORMATION FOR INVESTMENT
Ministry of Industry and Crafts P.O. Box 527 Antananarivo, Madagascar Tel: (26120) 22 255 15 Fax: (26120) 22 277 90 (Att: Office de la Promotion des Investissements) Ministry of Energy and Mining P.O. Box 257 Antananarivo, Madagascar Tel: (26120) 22 342 19 Fax: (26120) 22 325 54 Ministry of Privatization Anosy, Antananarivo, Madagascar Tel: (26120) 22 202 84 Fax: (26120) 22 648 56 Ministry of Finance and Economy P.O. Box 61 Antananarivo, Madagascar Tel: (26120) 22 216 32 Fax: (26120) 22 345 30
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[end of document] Note* International Copyright, United States Government, 1999 (or other year of first publication). All rights under foreign copyright laws are reserved. All portions of this publication are protected against any type or form of reproduction, communications to the public and the preparation of adaptations, arrangement and alterations outside the United States. U. S. copyright is not asserted under the U.S. Copyright Law, Title17, United States Code.
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