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2009 Investment Climate Statement - Senegal


2009 Investment Climate Statement
Bureau of Economic, Energy and Business Affairs
February 2009
Report
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Summary

Senegal offers investors a relatively stable political environment, democratic institutions, two-day business registration, a relatively robust telecommunications infrastructure, an advantageous geographic location, a major sea port, non-stop flights from the U.S., a bilateral investment treaty with the United States, a stable regional currency (pegged to the Euro), easy repatriation of capital and income, and abundant semi-skilled and unskilled human resources. Despite these obvious strengths, overly rigid and demanding labor laws, high factor costs, lack of clear title to property outside the greater Dakar area, non-transparence for public procurement and tenders, an inefficient and inconsistent judiciary, and a significant reduction in local commercial bank liquidity have restrained private foreign and domestic investment. Judicial, tax, customs, and regulatory decisions are frequently slow to be issued, influenced by political considerations, and non-transparent.

The country's Investment Code offers incentives to companies willing to locate off the Cap Vert peninsula. In theory, Senegal accepts binding foreign arbitration of investment disputes. French companies are the largest foreign investors, and U.S. direct investment is estimated at USD 50 million.

Openness To Foreign Investment

The Government of Senegal officially welcomes foreign investment, but potential investors, and indeed all businesses, face obstacles, including non-transparent regulation and high factor costs. There is no legal discrimination against businesses conducted or owned by foreign investors. There are no barriers regarding 100 percent ownership of businesses by foreign investors in most sectors. In some key sectors such as electricity, telecommunications, water and mining, and security-related services, foreign investors may have majority control, but may not acquire 100 percent ownership.

In recent years, Senegal has pursued major investment deals with foreign partners, both private and government-controlled companies. Some projects have been offered via public tenders and some have been negotiated privately. Foreign investors have recently secured contracts to exploit mineral resources, provide garbage services, and manage Dakar's maritime port. A new law to enhance transparency in public procurement and public tenders entered into force in 2008. In September 2008 waivers to the public procurement code were controversially granted for a 125 MW coal power plant. At the same time, the government has taken a more active public stance on promoting Public-Private Partnerships, although major new investments of this kind have not been realized.

The Government does some screening of proposed investments, mostly to verify compatibility with the country's overall development goals. Foreign investors are encouraged to utilize the "one stop" service of Senegal's Investment Promotion Agency (APIX) for registration and obtaining APIX, Ministry of Finance, Senegalese Customs, and other approvals needed to secure a business license, which can now be completed in approximately eight days. Depending on the proposed business activity, other approvals from specific ministries, such as Agriculture and Interior, can take additional time. There is no provision in Senegalese law permitting domestic businesses to adopt articles of incorporation or association that limit or control foreign investment. There is no pattern of discrimination against foreign firms making investments in Senegal.

Senegal's 2004 Investment Code remains the main body of law regulating foreign investments. The Code provides basic guarantees for the repatriation of profit and capital and equality of treatment. It also specifies tax and customs exemptions according to the size of the investment, classification of the investor (such as small or medium-sized enterprise versus a larger corporation), and location (investments outside of Dakar receive longer periods of exoneration from taxes). Following recommendations by major donors, Senegal established a Presidential Investors Council (PIC) designed to improve the business climate and reduce obstacles to domestic and foreign private investment. The PIC has had some success in lobbying for certain "pro-business" changes in Senegal's tax code, such as lowering the corporate tax rate from 33 to 25 percent, eliminating the equalization tax on the informal sector, and lowering the VAT on tourist industries from 18 percent to 15 percent.

Both foreign and domestic firms tend to cite the same problems in doing business in Senegal -- inefficient regulation and bureaucracy, ineffective commercial courts, high factor costs, labor laws that makes it difficult to fire for cause, and occasional disputes over customs classification, valuation, and taxation. The country's private sector, as well as donors who are focusing on enhancing Senegal's potential for rapid economic growth, are specifically encouraging the full implementation of a 1997 revision of Senegal's Labor Code. Out of 88 decrees needed, only 25 are "on the books," but in 2008 both USAID and the World Bank are assisting the Government to implement an additional 22 decrees.

Conversion And Transfer Policies

Commercial transfers are normally carried out rapidly and in full by local banking institutions. Companies find that the import and export of funds can be accomplished in a manner similar to commercial bank transactions. The African Financial Community Franc (CFA), used by Senegal and 13 other African countries, is pegged to the Euro at the rate of 100 CFA to 0.152 euros. There are no restrictions on the transfer or repatriation of capital and income earned, or on investments financed, with convertible foreign currency. However, the Government does limit the amount of foreign exchange individuals may obtain for trips outside Senegal. Outgoing travelers may obtain a maximum of 6 million CFA in Euros or other foreign currency/travelers checks (approximately USD 13,000) upon presentation of a valid airline ticket at banks. There is a small informal market for currency exchange in Senegal. Remittances to Senegal from its citizens living overseas are routine and provide a significant source of foreign currency for the country. In 2007, the estimated value of remittances, formal and informal, was estimated by Senegalese authorities at USD 1.8 billion, which is equal to 17 percent of GDP.

Expropriation And Compensation

In recent history, there have been no major expropriations in Senegal. There have been some instances recently in which the Government has revoked minerals concessions or contracts to develop housing projects, alleging failure to pay taxes or meet contractual obligations. Foreign investors have generally failed to obtain compensation or damages through the courts. In other cases, the Government has failed to intervene to resolve disputes between foreign investors and firms with local ownership or substantial local participation. This failure to provide mediation, or any decision in some cases, has been noted as less-than-equitable treatment for foreign investors. However, there is no indication of discriminatory treatment against U.S. investors.

Dispute Settlement

Senegal is a signatory to the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. However, dispute actions are more likely to be taken through the International Center for the Settlement of Investment Disputes (Washington Convention), of which Senegal is a member, or through the Dakar Arbitration Center, which is administered by the Dakar Chamber of Commerce. In November 2008, the government announced it was revoking the mobile phone license of Sentel, the country’s second operator for alleged failure to meet contractual obligations. The company, which continues to operate, denies the allegations and has instituted arbitration proceedings against the government of Senegal at the International Center for the Settlement of Investment Disputes. In response, the government has submitted a breach of contract case against Sentel in Senegalese courts.

Foreign creditors receive equal treatment under Senegalese bankruptcy law in making claims against liquidated assets. Monetary judgments are normally in local currency.

While Senegal has well-developed commercial and investment laws, and a legal framework for regulating business disputes, settlement of disputes within the existing framework is cumbersome and slow. Few judges or lawyers are conversant in commercial laws.

Court cases are expensive and rarely resolved expeditiously. Decisions can be inconsistent, arbitrary, and non-transparent. Foreign investors have found it difficult to fire employees for cause or malfeasance. Foreign firms are often sued in the Senegalese courts by terminated employees who are frequently awarded damages and placement in their former positions. Although these decisions are sometimes overturned on appeal, the appeals process is costly and time consuming. Foreign firms in Senegal often cite burdensome labor law and arbitrary rulings by courts on labor cases as their number one frustration in doing business in Senegal.

Performance Requirements And Incentives

Senegal's Investment Code defines eligibility for investment incentives according to a firm's size and type of activity, the amount of the potential investment, and the location of the project. To qualify for significant investment incentives, firms must invest above 100 million CFAF (approximately USD 200,000) or in activities that lead to an increase of 25 percent or more in productive capacity.

Investors may also deduct up to 40 percent of retained investment over five years. However, for companies engaged strictly in "trading activities," defined as "activities of resale in their existing state products bought from outside the enterprises," investment incentives might not be available.

Eligible sectors for investment incentives include agriculture and agro-processing, fishing, animal-rearing and related industries, manufacturing, tourism, mineral exploration and mining, banking, and others. All qualifying investments benefit from the "Common Regime," which includes two years of exoneration from duties on imports of goods not produced locally for small and medium sized firms, and three years for all others. Also included is exoneration from direct and indirect taxes for the same period.

Exoneration from the Minimum Personal Income Tax and from the Business License Tax is granted to investors who use local resources for at least 65 percent of their total inputs within a fiscal year.

Enterprises that locate in less industrialized areas of Senegal benefit from exemption of the lump-sum payroll tax of three percent, with the exoneration running from five to 12 years, depending on the location of the investment. The investment code provides for exemption from income tax, duties and other taxes, phased out progressively over the last three years of the exoneration period. Most incentives are automatically granted to investment projects meeting the above criteria as well as to those with the "Enterprise Franche d'Exportation" (EFE) status, which is directed at export-oriented firms.

Furthermore, an existing firm requesting an extension of such incentives must be at least 20 percent self-financed. Large firms -- those with at least 200 million CFA (USD 400,000) in equity capital -- are required to create at least 50 full-time positions for Senegalese nationals, to contribute the hard currency equivalent of at least 100 million CFAF (USD 200,000), and keep regular accounts that conform to Senegalese standards. In addition, firms must provide APIX with details on company products, production, employment and consumption of raw materials.

The government does not, by statute, impose specific conditions or performance requirements on investment activities. However, the government does negotiate with potential investors on a case-by-case basis special terms, especially within extractive industries. For example, Arcelor Mittal's agreement for the exploitation of iron ore reportedly includes provision for approximately USD 2 billion in investments by Mittal to improve rail and port facilities should iron ore deposits prove out to expectations.

Acquiring work permits for expatriate staff is typically not an onerous process. Citizens from the other seven West African Economic and Monetary Union (WAEMU) member countries are permitted to work freely in Senegal.

Right To Private Ownership And Establishment

In addition to traditional guarantees offered to investors, e.g., free transfers of capital and income, and national treatment, private entities are permitted to establish and own businesses and to engage in most forms of remunerative activity. Foreign nationals are permitted to buy and hold land. Local majority ownership is not necessary. Land holdings for investors are frequently offered on the basis of long-term leases (i.e., 99 years). Several of the state-owned firms privatized in recent years were sold in part or in whole to foreign entities.

Protection Of Property Rights

The Senegalese Civil Code, based on French law, enforces private property rights. The code provides for equality of treatment and non-discrimination against foreign-owned businesses. Property title and a land registration system exist in Senegal, but application is uneven outside of Senegal's urban areas. The government streamlined procedures for registering property these procedures and reduce the associated costs in 2008 so that property can be duly registered within 18 days. Confirming ownership rights on real estate can be difficult, but once established, ownership is protected by law. Investors have also expressed concerns about the lack of investment-ready, developed business sites.

The government generally pays compensation when it takes private property through eminent domain actions. Senegal's housing finance market is underdeveloped and few long-term mortgage financing vehicles exist. There is no secondary market for mortgages or other bundled revenue streams. The judiciary is inconsistent when adjudicating property disputes.

Senegal is a member of the African Organization of Intellectual Property (OAPI), a grouping of 15 francophone African countries, which established a common system for obtaining and maintaining protection for patents, trademarks and industrial designs. Senegal has been a member of the World Intellectual Property Organization (WIPO) since its inception. Local statutes recognize reciprocal protection for authors or artists who are nationals of countries adhering to the 1991 Paris Convention on Intellectual Property Rights. In particular:

  1. Patents: Patents are protected for 20 years. An annual charge is levied during this period. Trade secrets and computer chip designs are respected.
  2. Trademarks: Registered trademarks are protected for a period of 20 years. Trademarks may be renewed indefinitely by subsequent registrations.
  3. Copyrights: Senegal is a signatory to the Bern Copyright Convention. The Senegalese Copyright Office, part of the Ministry of Culture, attempts to enforce copyright obligations. The bootlegging of music cassettes and CDs is common and of concern to the local music industry. The Copyright Office undertook actions in 2001, 2002, 2003 and 2006 to combat media piracy, including seizure of counterfeit cassettes and CD/DVDs and in 2008 established a special police unit to better enforce the country's anti-piracy and counterfeit laws.

However, despite an adequate legal and regulatory framework, enforcement of intellectual property rights is weak. In general, the Government has not committed the resources to combat IPR violations or to seize counterfeit goods. Customs screening for counterfeit goods coming from China, Nigeria, Dubai and other centers of illegal production is weak and confiscated goods occasionally re-appear in the market. Nonetheless, there has been a recent effort by Customs to understand the impact of counterfeit products on the Senegalese marketplace, and officers have participated in trainings offered by manufacturers to identify counterfeit products.

Transparency Of The Regulatory System

There is no requirement for public comment process for proposed laws and regulations, however, the Government frequently holds public hearings and workshops to discuss proposed initiatives and programs. The National Assembly, though currently dominated by the ruling party, does host open debates on substantive legislation.

Efficient Capital Markets And Portfolio Investment

In general, domestic investment is hampered by an under-developed financial sector. French and Moroccan-owned banks with conservative lending guidelines and high interest and collateral requirements dominate bank lending. In 2008-2009, Senegal's banking sector is dealing with a severe lack of liquidity, further diminishing credit opportunities for enterprises.

Few firms are eligible for long-term loans, and small and medium sized enterprises have little access to credit. However, because the Senegalese banking sector is dominated by foreign banks, foreign investors can take advantage of parent banks in France and the United States (Citibank). U.S. firms also have access to U.S. Overseas Private Investment Corporation (OPIC) and Export-Import Bank (EXIMBANK) facilities.

Private bond issuances have yet to make a tangible impact on investment in Senegal. Public bonds equaling USD 285 million were issued in 2008. In general, the infrastructure for expanding business lending, credit risk analysis, skilled commercial law specialists, and auditors, etc. does not exist. The West African Regional Stock Exchange (BRVM), headquartered in Abidjan, with local offices in each of the WAEMU member countries offers additional opportunities to attract increased foreign capital and to give private investors access to more diversified sources of financing. However, to date only one Senegalese company, Sonatel, is currently traded on the BRVM. There is no system to encourage and facilitate portfolio investment.

Legal, regulatory and accounting systems closely follow French models and WAEMU countries present their financial statements in accordance with the SYSCOA system, which is based on Generally Accepted Accounting Principles in France.

Political Violence

Senegal is a moderately decentralized republic dominated by a strong Presidency.

President Abdoulaye Wade's Senegalese Democratic Party (PDS) holds an overwhelming majority of seats in National Assembly and Senate. In 2008, Human rights organizations underlined their concerns about the arbitrary arrest of opposition activists and journalists. There have been incidents of sporadic civil disturbances over the past two years, but they have generally taken place as unions, opposition parties, merchants or student demand better salaries, living or working conditions. Sporadic incidences of violence as result of petty banditry continue in the Casamance region, which has suffered from a two-decade-old conflict ignited by a local rebel movement seeking independence for the region.

Corruption

The potential for corruption is a significant obstacle for economic development and competitiveness in Senegal, in spite of the country's anti-corruption laws, regulations, penalties, and agencies. Credible allegations of corruption have been made concerning government procurement, dispute settlement, and decisions by the judiciary and regulatory and enforcement agencies. Transparency International, in its 2008 Perceptions of Corruption Index, ranked Senegal 85 out of 180 countries.

Senegal has several government agencies authorized to fight corruption and fraud. These include the National Commission against Corruption and Non-Transparency, "L'Inspection Generale d'Etat," a cabinet-level office; "La Commission de Verification des Comptes," "La Cour des Comptes," and Cotecna S.A., a pre-shipment inspection contractor hired by the Government. At a higher level, President Wade has made numerous pronouncements against corruption, but a significant gap persists between the rhetoric and its implementation. A new procurement code was established in 2008 which should reduce the number of projects that are sole-sourced or receive exemptions from following international tender procedures.

Bilateral Investment Agreement

Senegal and the U.S. have a Bilateral Investment Treaty, which allows for international arbitration. (U.S. companies entering the Senegalese market should ensure that their contracts with third parties make a provision for binding international arbitration in case of a dispute.) The treaty also provides for Most Favored Nation treatment for investors, internationally recognized standards of compensation in the event of expropriation, free transfer of capital and profits, and procedures for dispute settlement, including international arbitration. Senegal has signed similar agreements for protection of investment with France, Switzerland, Denmark, Finland, Spain, Italy, the Netherlands, South Korea, Romania, Japan, Australia, China, Iran, Morocco, and Sudan. Senegal has concluded tax treaties with France, Mali, and WAEMU member states. There is currently no tax treaty and no imminent prospect of one between the United States and Senegal.

OPIC And Other Investment Insurance Programs

OPIC has been examining possible investments in Senegal but has no current projects. Senegal is a member of the Multilateral Investment Guarantee Agency (MIGA), an arm of the World Bank. In 2008, USAID launched a loan guarantee program for small and medium-sized enterprises in Senegal.

Labor

Unskilled and semi-skilled labor is abundant in Senegal, but there are relatively few highly-trained workers in the fields of engineering, information systems, and management. In-country opportunities for these workers are not numerous, and as a result, many look outside Senegal for employment.

Relations between employees and employers are governed by the labor code, collective bargaining agreements, company regulations and individual employment contracts. There are two powerful industry associations that represent management's interests: the National Council of Employers (CNP) and the National Employers' Association (CNES). The principal labor unions are the National Confederation of Senegalese Workers (CNTS), and the National Association of Senegalese Union Workers (UNSAS), a federation of independent labor unions. Labor issues are often high on the list of complaints by investors.

Foreign Trade Zones/Free Ports

Senegal's Free Trade Zone initiatives have largely been replaced with the Entreprise Franche d'Exportation (EFE), which reduces taxes and provides for duty-free imports as noted above. The Dakar Free Industrial Zone (ZFID) is largely inactive and stopped issuing new licenses in 1999. Firms already located there may continue receiving benefits until 2016. In 2007 the government of Senegal signed an agreement with Jafza International of Dubai to establish a "special economic zone" outside of Dakar. The project remains in the development phase and the zone's incentives portfolio is not yet known.

Major Foreign Investors

The dearth of reliable investment statistics makes it difficult to provide a detailed breakdown of foreign direct investment in Senegal. FDI assessments also tend to not include overseas remittances, estimated at more than one billion dollars per year, which fuel much of the growth in the country's real estate market and also contribute as capital investments in small and medium size businesses.

For FY 2008, APIX forecast USD 456 million in new foreign investment thanks to new investment in port and road infrastructures. The majority of Senegal's stock of foreign investment comes from France, whose companies are dominant in many sectors in the economy. Approximately 235 subsidiaries of French groups are present in Senegal, accounting for 25 percent of all formal enterprises. French investors are present in the major multinational import-export firms, shipping companies, banking, food production, mechanical engineering, agribusiness, petroleum distribution, industrial equipment, vehicles, chemicals and pharmaceuticals, tourism and insurance industries. Privatizations in telecommunications and public utilities have confirmed and increased the predominance of France as Senegal's leading foreign investor, with Bouygues present in the water sector and telecommunications giant Orange the operating partner of Sonatel.

Investments by Senegalese citizens of Lebanese origin are significant in light import-substituting industries such as food products, textiles, chemicals, plastics and rubber. Swiss investment includes the multinational Nestle and a waste management company. Germany, Japan, and South Korea have moderate investments in Senegal. Taiwan was active in Senegal's fish and canning industry.

Indian interests have historically been a major investor in Senegal's phosphates industry and purchase nearly all phosphate output, while Mittal's investment in iron ore extraction could be the largest foreign investment in Senegal to date. Moroccan investment has substantially increased since Royal Air Maroc took a controlling interest in Air Senegal International in 2000 and ATTI purchased the majority of shares of Banque Senegalo-Tunisienne (BST) and Compagnie Bancaire de l'Afrique de L'Ouest (CBAO) to become one of the largest commercial banks of Senegal. Sudan's tele-communications company Sudatel recently won an international tender for a new license to provide fixed and mobile telephone and internet services. Iran Khodro Auto Company has recently opened an assembly plant for Samand sedans near Senegal's second largest city, Thies. In recent years, China has increased its commercial presence in Senegal but has not made significant investments.

U.S. direct foreign investment in Senegal is estimated at more than USD 150 million. Significant U.S. investors include General Electric, Fortesa International, Crown Manufacturing, Phillip-Morris, Pfizer, and Citibank. In 2006, Delta Airlines began non-stop Atlanta-Dakar service, continuing to Johannesburg and Cape Town, South Africa. In 2007, Colgate-Palmolive sold its Senegalese production facility for tooth-paste, soap, and similar products.



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