printable banner

U.S. Department of State - Great Seal

U.S. Department of State

Diplomacy in Action

2010 Investment Climate Statement - Madagascar


2010 Investment Climate Statement
Bureau of Economic, Energy and Business Affairs
March 2010
Report
Share

OVERVIEW OF FOREIGN INVESTMENT CLIMATE
------------------------------------------

The Government of Madagascar (MOG) officially welcomes foreign investment. However, the current political instability, following a March 2009 coup, has had a negative impact on foreign investment in the country. In 2009,
only four foreign companies representing a total investment of USD 5
million invested in the country under the Export Processing Zone
regime (EPZ). Overall foreign investment declined by 17 percent
during the first three quarters of 2009 compared to that same time
period in 2008. In addition to the political turmoil, factors such
as a complex business environment, an unfair legal system, and high
shipping costs are among the chief obstacles to foreign investment
in the country. Large mining investments in the South and the East
of Madagascar continue to move forward despite threats by the de
facto Malagasy authorities (HAT) to review the contracts for those
investments.

On May 19, the Millennium Challenge Corporation (MCC) Board
decided to terminate the MCC program with Madagascar. Most donors,
including the World Bank and the IMF, have suspended or frozen their
funding, with the exception of humanitarian aid. On December 24,
the U.S. Government determined that Madagascar no longer met the
African Growth and Opportunity Act (AGOA) criteria regarding
political pluralism and rule of law. Madagascar's suspension from
AGOA could cause the closure of over 30 apparel firms and the
lay-off of up to 50,000 workers.

Despite the temporary suspension of funding from the World Bank,
the Economic Development Board of Madagascar (EDBM) continues to
provide support to foreign investors.

Prior to the March coup, the Bretton Woods institutions had
generally endorsed the government's macro-economic regime, although
they questioned certain non-transparent budget and tax decisions in
late 2008. During the latter three quarters of 2009, the de facto
authorities maintained fiscal discipline and continued sound
monetary policies, keeping inflation in check. Madagascar moved up
10 rankings in the World Bank 2010 Doing Business report, ranking
134 out of 181 countries compared to 144 in the 2009 report. The
creation of the American Chamber of Commerce (AMCHAM) in late 2008
also benefited American and other investors by providing a new forum
to lobby for their interests. However, better governance, including
a return to constitutional rule, the improvement of the regulatory
system and the fight against corruption, are urgent priorities.
Since the beginning of the crisis, the Madagascar Action Plan (MAP),
a five-year development strategy paper (2007-2011) has been
suspended.

There is no law or regulation authorizing private firms to adopt
articles of incorporation or association that limit or prohibit
foreign investment, participation or control. Further, there is no
official practice to restrict foreign investment, participation in,
or control of domestic enterprises. There is no mandatory screening
of foreign investment and there is no discrimination against foreign
investors at the time of the initial investment or after the
investment is made, such as through special tax treatment, access to
licenses, approvals, or procurement. To show transparency and good
governance in the management of revenues from extractive resources,
the GOM and the main operators in the extractive industries (e.g.
Exxon Mobil, Rio Tinto, Madagascar Oil, and Sherritt) continued to
take the necessary steps to implement the Extractive Industries
Transparence Initiative (EITI) in 2009. Due to lack of financing,
however, the international audit scheduled for 2009 to allow
Madagascar to become a full member of EITI was not carried out.
Hence, it is unlikely that the country will become a full member by
March 2010 as previously projected.

CONVERSION AND TRANSFER POLICIES
------------------------------------

In 1998, the GOM 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 foreign investment, including
remittances of investment capital, earnings, loan repayments, and
lease payments into a freely usable currency at legal market
clearing rate. When delays occur in conversion or funds transfer,
they are due to temporary shortages of foreign exchange. By law,
foreign investors must make remittances through banks. There is no
limitation on the inflow or outflow of funds for remittances of
profits, debt service, capital, and returns on intellectual
property. Exporters and foreign investors may maintain bank
accounts in foreign currencies. Madagascar has a flexible exchange
rate policy, allowing underlying exchange market pressures to
determine rates and limiting central bank intervention to dampening
temporary shocks and achieving its external reserves objectives.

In August 2009, Madagascar joined the Pan Africa e-network
project which links 53 African countries by satellite or optical
fiber. The project will benefit telemedicine, e-governance, and
e-education services.

EXPROPRIATION AND COMPENSATION
-----------------------------------

There are no recent cases of expropriation actions by the GOM nor
do Government policies suggest that it is likely to take such
actions in the near future. The state divestiture from public
enterprises has been a cornerstone of government policy. There are
no laws requiring local ownership in specific economic sectors
except in oil exploration, in which the Government office called
OMNIS must be the partner of all foreign companies.

DISPUTE SETTLEMENT
-----------------------

Madagascar's legal system is based on French civil law and its
provisions contain adequate protections for private property rights.
Malagasy commercial law consists largely of the Code of Commerce and
Annexed laws, which are reportedly applied in a non-discriminatory
manner. Madagascar has a written bankruptcy law, created in 1996
and currently included in the Code of Commerce. However, Madagascar
ranked last in the World Bank's 2010 Doing Business Report in terms
of closing a business due to the difficulties of bankruptcy and
business closure procedures. The Malagasy judicial system is slow
and complex and has a reputation of opacity and corruption. U.S.
assistance has supported the development of alternative dispute
resolution systems to provide more rapid, more transparent, and less
costly resolution of commercial disputes.

Under the privatization law, the GOM accepts binding
international arbitration of investment disputes between foreign
investors and the state. The courts recognize and enforce foreign
arbitral awards and international arbitration is accepted as a means
for settling investment disputes between private parties. The
Malagasy Arbitration and Mediation Center (CAMM, in its French
acronym) was created in 2000 as a private organization to promote
and facilitate the use of arbitration to resolve commercial disputes
and to lessen reliance on a court system that is, at a minimum,
overburdened. As a result, many private contracts now include
arbitration clauses. The EDBM is also responsible for investment
dispute resolution; however, it has been unable to resolve several
concerns raised by American companies regarding conflicts of
interest and the lack of transparency in contracting and in
government regulatory decision making.

Madagascar is a signatory to the International Center for the
Settlement of Investment Disputes (ICSID) Convention. Madagascar is
also a signatory to the New York Convention of 1958 on the
Recognition and Enforcement of Foreign Arbitral Awards and
Madagascar has been a member of the Multilateral Investment
Guarantee Agency (MIGA) since 1989.

PERFORMANCE REQUIREMENTS AND INCENTIVES
--------------------------------------------

As a signatory of the WTO Agreement, Madagascar is bound by the
WTO TRIMS (Trade Related Investment Measures). Performance
requirements are not imposed as conditions for establishing or
maintaining investments, except in the Export Processing Zones (EPZ)
regime under which firms must export 95 percent of output to qualify
for EPZ investment incentives. Foreign or local investors can
benefit from tax exemptions provided their EPZ projects fall into
the following categories:
- Investment in export-oriented manufacturing industries;
- Development or management of industrial free zones; or
- Provision of services to EPZ companies.

The EPZ law approved in December 2007 granted the following
advantages and tax incentives to EPZ companies:
- The EDBM is in charge of EPZ companies' approval. The EDBM has to deliver an eligibility certificate within 20 days of deposit of
file.
- 15 years tax exemption for EPZ companies
- No VAT or customs duties on imports of raw materials
- No registration taxes
- No customs tax on exported goods
- Income tax on expatriate not exceeding 30 percent of the taxable basis
- Free access to foreign currency deposited in the company's foreign currency bank account.

The new export promotion law that was adopted in December 2008
determined that these EPZ provisions (advantages and tax incentives)
would only be offered until December 2010. Already existing EPZ companies will continue to enjoy the advantages described above after that date.

There are no requirements restricting the mobility of foreign
investors. The regime for visas, residence and work permits is, on
its face, neither discriminatory nor excessively onerous. Since the
creation of the EDBM, processing of residence and work permits has
been streamlined.

There is no requirement that investors purchase from local
sources, or export a certain percentage of output (except for EPZ
companies), or only have access to foreign exchange in relation to
their exports. There is no requirement that nationals own shares
of foreign companies, that the share of foreign equity is reduced
over time, or that technology is transferred on certain terms.
There are no government-imposed conditions on permission to invest
(although investors must apply for such permission), including
location in a 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. There are
officially 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 or
price controls.

RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT
-------------------------------------------------

Foreign and domestic private entities may establish and own
business enterprises and engage in all forms of remunerative
activity. They may freely establish, acquire, and dispose of
interests in business enterprises. The government remains a minority
shareholder in some privatized companies, such as in the Malagasy
telecommunications company (Telma), and continues to own Air
Madagascar, but competitive equality is the official standard
applied to all private enterprises with respect to access to
markets, credit, and other business operations such as licenses and
supplies. The USG and other donors had criticized ousted President
Ravalomanana's use of position to unfairly benefit his company, TIKO
Group. Since his departure, monopolies that were held by TIKO, for
example on flour and vegetable oil, have been broken up, enabling
increased - but very uneven - competition in those sectors.

PROTECTION OF PROPERTY RIGHTS
----------------------------------

Secured interests in property are recognized, but not entirely
enforced in the country. Banks and insurance companies use
mortgages to guarantee loans relating to commercial property.

A prohibition on land ownership by foreigners impedes access to
real property, and the entire issue remains highly controversial and
problematic despite legal advances, for cultural reasons. A system
of long-term leases - up to 99 years - was established in 2008
following the adoption of investment law 2007-036 to address the
issue, but there have been long delays and few successes so far in
the approval of land leases for foreigners. The new investment law
grants land and properties to companies registered in Madagascar
under certain conditions fixed by EDBM, which issues authorization
documents. In addition, MCC's contribution to the land tenure issue
somewhat improved the land rights process prior to early termination
of the program in late 2009.

Madagascar is a member of the WIPO (World Intellectual Property
Organization) and is a signatory to the WTO TRIPS agreement on trade
related aspects of intellectual property. Two government offices
share responsibility for the protection of intellectual property
rights: the Malagasy Office for Industrial Property (OMAPI) and the
Malagasy Copyright Office (OMDA). Protection of intellectual
property rights is uneven. Officially, authorities protect against
infringement, but in reality, enforcement capacity is quite limited.
major brands are generally respected but pirated copies of movie
DVDs, music CDs and tapes, electronic equipment and spare parts are
sold openly. Some television stations regularly show pirated copies
of first-run U.S. and European movies. On July 17, 2006, an
inter-ministerial decree was issued to reinforce measures to fight
counterfeiting of literary and artistic works. Upon evidence of
illegal activity, OMDA and its partners (police, customs officers,
tax officers, controllers of the ministry of commerce) should seize
all illegally reproduced recorded products, be they illegally
manufactured or imported, and specific materials used for such
dealings. Those products are subject to public destruction in
presence of the contravener(s). A control committee was set up in
2004, and this committee is in charge of implementing the 2006
decree. In 2009, the committee conducted 26 operations and seized
25,000 counterfeit music CDs and movie DVDs. Despite these
initiatives, overall enforcement of intellectual property rights
remains limited due to a shortage of trained personnel, legal
capacity and resources.

TRANSPARENCY OF REGULATORY SYSTEM
--------------------------------------

Excessively complex and inconsistently applied bureaucratic
regulations are an impediment to investment and can be a breeding
ground for corrupt practices. The lack of transparency in
government regulatory decisions has generated complaints from
current investors. For unknown reasons, two companies - a brewery
and a mobile phone company - were refused licenses in 2009.
Although regulatory decisions can impede start-up in particular
industries, the normal business registration process has been
streamlined by EDBM and generally takes less than two weeks now.

Tax, labor, environment, health, and safety standards are
generally not used to impede foreign investment, and there are no
informal regulatory processes managed by non-governmental
organizations or private sector associations.

Accounting systems are transparent and consistent with
international norms, and there are no private sector and/or
government/authority efforts to restrict foreign participation in
industry standard-setting consortia or organizations.

EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENT
-------------------------------------------------------

In spite of the general under-development of the banking system,
banks are free to support the flow of resources in the product and
factors markets. Credit is usually allocated on market terms and
the private sector/foreign investors are able to get credit on the
local market. However, many of the EPZ companies use the services
of banks in neighboring Mauritius, where the sector is more
developed.

There are no cross-shareholding arrangements used by private
firms to restrict foreign investment through mergers and
acquisitions. There are no visible private sector and/or government
efforts to restrict foreign participation in industry or control of
domestic enterprises.

Within the Malagasy law, there is an effective regulatory system
established to encourage and facilitate portfolio investment and the
estimated total assets of the country's largest bank are around USD
400 million.

The creation of the Malagasy Bank for Construction and
Development (BMCD) planned for 2009 by the ousted president was
cancelled. A new bank BGFI (Banque Gabonaise et Frangaise
Internationale) has just obtained an agreement and will be
operational in 2010.

COMPETITION FROM STATE-OWNED ENTERPRISES (SOEs)
----------------------------------------------------

Private enterprises are allowed to compete with public
enterprises under the same terms and conditions with respect to
access to markets, credit, and other business operations, such as
licenses and supplies. The main SOEs are the airline Malagasy
Company (AIRMAD) and the Malagasy Water and Energy Company (JIRAMA).
SOEs have boards of directors for which seats are specifically
allocated to senior government officials or politically-affiliated
individuals.

A sovereign wealth fund (SWF) does not exist in the country.

SOEs are required by law to publish an annual report, and they
are also required to submit their books to independent audit.

CORPORATE SOCIAL RESPONSIBILTY (CSR)
-----------------------------------------
There is a lack of general awareness of corporate social
responsibility among producers and consumers, but CSR principles are
applied by several large, formal sector companies. Although those
companies do not follow the OECD Guidelines for Multinational
Enterprises, public opinion is favorable regarding those firms who
pursue CSR.

POLITICAL VIOLENCE
------------------------

During 2009, Madagascar experienced frequent political
demonstrations that on occasion became violent. Opposition political
meetings are frequently blocked by the administration, and security
forces at times use excessive force, sometimes resulting in death or
injury, to abrogate the rights of assembly and free speech.

Public safety is fairly adequate, although standard warnings to
guard against street crime and theft from vehicles and to minimize
or avoid nighttime road travel apply, particularly in rural areas.
Madagascar, being an island, has no belligerent neighbors.

CORRUPTION
----------------

Complicated administrative procedures introduce delays,
uncertainties and multiply the possibilities for corruption.
Corruption is most pervasive in the following sectors: justice,
police, tax, customs, land, trade, mining, industry, environment,
education, and health.

Despite the existence of the Independent Anti-Corruption Bureau
(BIANCO), corruption at high levels exists in nearly all sectors.

Smuggling of precious stones and hardwood is increasingly a
drain on Madagascar's natural resources, and one that also breeds
criminality. In early September, the GOM decided to create a
special task force composed of different departments to combat
hardwood smuggling, but shortly thereafter it temporarily authorized
the export of illegally-felled hardwood to raise revenue,
encouraging further pillaging of the forests.

Madagascar created a Financial Intelligence Unit (SAMIFIN) in
mid-2008 to carry out research and financial analysis related to
money laundering. Despite insufficient funding, SAMIFIN received 45
suspicious transaction reports in 2009 and referred 10 cases to the
public prosecutors.

Giving or accepting a bribe is a criminal act and is sentenced
by court.

In 2009, Transparency International ranked Madagascar 99th out
of 180 countries surveyed, as it scored 3 on the Corruption
Perception Index (CPI), indicating a severe corruption problem.

41. Madagascar has not yet signed the Convention on Combating
Bribery of Foreign Public Officials in International Business
Transactions.

BILATERAL INVESTMENT AGREEMENTS
-------------------------------------

According to ICSID (International Center for the Settlement of
Investment Disputes) and UNCTAD, Madagascar has concluded bilateral
investment agreements with Switzerland, Sweden, Norway, Mauritius,
Germany, France, Thailand, Belgium, China, and Canada. Also,
Madagascar has signed double taxation treaties with France and
Mauritius. The Malagasy government had expressed interest in
negotiating a bilateral investment treaty with the U.S. Initial
discussions began in late 2008, but stalled due to the
unconstitutional change of government in March 2009.

OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS
--------------------------------------------------

On March 31, 1998, OPIC and Madagascar signed a bilateral
Investment Incentive Agreement, which updates the old agreement of
1963.

Madagascar is a member of the MIGA (Multilateral Investment
Guarantee Agency). The average annual exchange rate for 2009 was
1956 ariary per one USD. As of January 2010, the ariary had
depreciated to around 1974 per one USD. To the benefit of Malagasy
exporters, further depreciation is expected in 2010.

LABOR
-----------

Madagascar has a significant pool of available labor, due to the
combined impact of unemployment and under-employment. Private
sector wages have been relatively stable and are below those in most
competitor countries; indeed, this fact, combined with the high
quality of much Malagasy labor, may constitute the country's
strongest asset for foreign investors. The minimum wage for the
non-agricultural private sector in 2009 was 70,025 ariary per month,
approximately USD 36. The Constitution and Labor Code grant workers
in the private and public sectors the right to establish and join
labor unions, and to bargain collectively. The National Labor Code
and implementing legislation prescribe working conditions, wages,
and standard for worksite safety. As a member of the ILO
(International Labor Organization), Madagascar adheres to the ILO
convention protecting workers rights.

FOREIGN TRADE ZONES/ FREE PORTS
-------------------------------------

The incentives available in the Export Processing Zone (EPZ) are
described in "Performance Requirements and Incentives". There is no
distinction between foreign and domestically owned firms in terms of
eligibility for EPZ treatment, which has been granted by the EDBM
since December 2007. Again, as stated earlier, EPZ incentives will
be offered only through December 2010, but pre-existing EPZ firms
will maintain their incentives and status beyond that date.

FOREIGN DIRECT INVESTMENT STATISTICS
------------------------------------------

According to a World Bank survey, Madagascar is among the 50
most difficult countries in the world in which to conduct business.
The main reasons are the weaknesses of the judicial system and the
banking system (high interest rates and unavailability of credit),
the high cost and low quality of electric power, high tax rates, red
tape, corruption, a lack of transparency in decision-making, and the
high costs of ground and air transport.

According to Central Bank figures, in 2008, FDI inflows to
Madagascar amounted to USD 1.12 billion, or 11.8 percent of GDP
compared to 10.5 percent in 2007. Despite an increase of 31 percent
between 2007 and 2008, the actual FDI inflows in 2008 were 76
percent lower than previously projected. FDI flows were concentrated
in the following sectors: extractive industry (USD 958.5 Million or
85.5 percent), telecommunication (USD 86.5 Million or 7.71 percent)
and vehicle trading (USD 24.8 Million or 2.22 percent). The main
countries of origin of FDI inflows were respectively: United Kingdom
(USD 563.3 Million or 50.3 percent), Canada (USD 260.6 Million or
23.2 percent), Bahrain (USD 71.2 Million or 6.4 percent), Japan (USD
62.2 Million) and South Korea (USD 57.6 Million or 5.1 percent).
Bahraini investments were concentrated in the telecommunication
sector with Life investing in the mobile telephony sector. Life
plans to become the fourth mobile operator in the country, but is
not yet operational due to a dispute regarding its license.

Central Bank statistics indicate that total FDI stock amounted
to USD 3.12 billion in 2008 compared to USD 1.99 billion in 2007, an
increase of 56 percent. Between 2005 and 2008, FDI stock increased
tenfold due to investment in the extractive industry triggered
mainly by the ilmenite investment project of QIT Madagascar Mineral
(Rio Tinto) and by the nickel and cobalt investment project of
Ambatovy, a joint venture including Sherritt International,
SNC-Lavalin, Sumitomo Corporation and Korea Resources Corporation.
FDI stock in the extractive industry represented 73 percent of the
total, followed by building and public works (5.6 percent),
telecommunication (4.4 percent), and financial services (3.9
percent).

FDI flows from the US amounted to USD 12.9 million in 2008 which
represents 1.15 percent of the total. If one considers only
non-extractive industry FDI, the US represents 7.95 percent of the
total. U.S. investment covers a broad spectrum of sectors including
oil exploration, apparel, mining, and handicrafts.

During the first three quarters of 2009, FDI inflows to the
country amounted to USD 954 million, mainly to support pre-existing
mining projects. This represents a 17 percent decrease from the
same time period in 2008, during which FDI amounted to USD 1.15
billion. Most potential private investors have put new projects on
hold pending greater political stability. Foreign donors have
suspended most of the external financing which represented nearly 70
percent of the government's investment expenditure, thus public
investment projects are stalled as well. Once the political
situation stabilizes, several additional large mining projects,
particularly in coal and bauxite, are expected to be developed. In
the long term, the agribusiness sector has the potential to attract
sizable, job-generating investments, particularly in palm oil, corn
and sugar, but land tenure complications have deterred such
investments to date. Tourism also has the potential to attract
foreign investment, but the industry has also been hampered by the
political crisis which has reduced the number of visitors to the
island.



Back to Top
Sign-in

Do you already have an account on one of these sites? Click the logo to sign in and create your own customized State Department page. Want to learn more? Check out our FAQ!

OpenID is a service that allows you to sign in to many different websites using a single identity. Find out more about OpenID and how to get an OpenID-enabled account.