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2010 Investment Climate Statement - Sao Tome and Principe


2010 Investment Climate Statement
Bureau of Economic, Energy and Business Affairs
March 2010
Report
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Openness to Foreign Investment

The Government of Sao Tome and Principe welcomes foreign investment, current business regulations present foreign investors with significant bureaucratic and procedural hurdles. Since 2007, the new investment code has made the business environment more attractive to foreign investors. The consensus among government authorities and economic analysts is that considerable foreign investment is needed for the development of agriculture and fisheries, tourism, telecommunications, port and airport facilities and financial services.

The Investment Code of 2007 provides for both public and mixed capital investments, allowing foreign investment in every sector of economic activity except limited areas reserved to the State (activities related to the military and paramilitary sectors and the operations of the Central Bank). Areas open to foreign investment include agriculture; fisheries; tourism; construction; port and airport infrastructures and services; transportation; telecommunications; financial services; electricity, water and sanitation services; production of basic consumer goods, and natural resources (oil and gas).

The investment code sets forth a new legal framework under which only investments above $250,000 are eligible for benefits and guarantees. Investments under $250,000 are not eligible for incentives and benefits, but are protected against expropriation. Qualifying investment projects will benefit from fiscal incentives. Incentives include the use of state-owned buildings and/or land for the duration of investment projects, as well as provision of administrative services to facilitate the process of obtaining access to state-owned buildings and land.

Created in 1989, the national Chamber of Commerce serves to organize the private sector and encourage private sector participation in public works projects. In addition, the Chamber of Commerce works with the National Statistics Institute (INE) to collect and distribute information aimed at facilitating business decision-making.

The Millennium Challenge Corporation (MCC) has worked with Sao Tome to improve investment opportunities, including creating a "one-stop shop" to help encourage new investments. Component 4 (Business Environment) of the two-year MCC Threshold Program helped the Government to develop a decree and amendments to the commercial code (which is in the final stages of approval) that will reduce the cost and time to start new businesses in Sao Tome.

Conversion and Transfer Policies

The national financial system is supervised by the Central Bank of STP (BCSTP), which defines monetary and exchange rate policies in the country. Among other responsibilities, the BCSTP sells hard currencies and establishes indicative interest rates. The dobra (denoted by the acronym "STD") is the country's national currency. One U.S. dollar is equivalent to about 16,000 STD.

The government has been working closely with the BCSTP to ensure that greater inflows of foreign exchange translate into an increase in access to raw materials for business. Until July 2009, the BCSTP determined the STP exchange rate based on a specially weighted basket of currencies from countries that enjoy influential trade and financial relations with STP. Since 1998, this policy had been effective in achieving relative stability of the exchange rate against major world currencies, especially the U.S. dollar and the euro. The composition of this basket of currencies was subject to periodical reassessment given local and international economic and monetary developments. In July 2009, STP and Portugal signed an economic cooperation agreement with the objective of fixing the STD to the euro. This anchorage offers a credible parity, minimizes the monetary instability costs, and provides a better credibility for the exchange rate and monetary policy. It should contribute to a more favorable environment for direct foreign investment attraction and could alleviate the problems of exchange rates in the commercial relationship between STP and Europe. The GoSTP expects to remedy exchange rate parity issues in January 2010.

Repatriation of capital is possible with prior authorization. Transfer of profits outside of STP is also allowed after the deductions for legal and statutory reserves and the payment of existing taxes. Reinvestments are encouraged by The Government encourages reinvestments through associated reductions in income taxes.

Expropriation and Compensation

The Government maintains strong protection over of all types of property, including private property, and the right of citizens to own and use property. Expropriation is allowed for projects deemed to be in the national public interest, but only occur with adequate compensation. There is no evidence to suggest that repatriation would be undertaken in a discriminatory manner or in violation of established principles of international law.

Aside from a massive land expropriation from colonial farmers on September 30, 1976, which was later recognized as detrimental to the economy of STP, there have not been any documented cases of expropriation of foreign-owned properties.

Dispute Settlement

Disputes are generally solved amicably without litigation, and there are few known instances of disagreements involving foreign investors reaching international courts.

Performance Requirements and Incentives

There are no specific performance requirements imposed as a condition for establishing, maintaining or expanding investment. There are no requirements for investors to buy local products, to export a certain percentage of output or to invest in a specific geographical area. There is no blanket requirement that nationals own shares in foreign investments in STP.

Right to Private Ownership and Establishment

Foreigners are free to establish and own business enterprises and engage in all forms of business activity in STP with the exception of the military sector. Prohibitions exist in the ownership of certain types of guns. In addition, the form of public participation (percentage of government ownership in joint ventures) varies with each agreement.

The Government is gradually moving towards open competition in all sectors of the economy, and competitive equality is the official standard applied to private enterprises in competition with public enterprises with respect to access to markets, credit, and other business operations. Former public monopolies in farming, banking, insurance, airline services, telecommunications, and trade (export and import) have already been eliminated.

Protection of Property Rights

The Government guarantees private property rights, and expropriation for public use must be accompanied by a fair, adequate and effective payment in advance.

Transparency of Regulatory System

The laws and regulations that affect direct investment, such as environmental rules, health and safety regulations, etc., are non-discriminatory and apply equally to foreign and domestic firms. STP tax laws reward Santomeans who return to their home country, while also containing provisions for attracting non-Saotomean personnel to live and work in STP.

Labor, health, and safety laws exist but are not consistently enforced. There are some reports that the process of terminating unsatisfactory employees is cumbersome and that protective labor laws make it very difficult to bring skilled foreign-national specialists such as pilots, engineers, or architects into STP.

Components 1 and 2 (Tax) of the Millennium Challenge Corporation Threshold Program provide a wide range of assistance and training in audit, collection registration, returns processing, public affairs, forms development and information technology. With MCC assistance the Government has access to hardware and software to completely replace the information technology systems currently used by the Department of Taxation and to establish a network connecting the primary revenue producing departments of the Government.

Efficient Capital Markets and Portfolio Investment

The banking system in STP has seen significant development in recent years. Until recently, STP had only one commercial bank. Currently, there are seven private commercial banks, six of which were opened in the last three years. Portuguese, Angolan, Nigerian, Cameroonian, and Togolese interests (as well as those of Sao Tome & Principe) are represented in the ownership and management of the commercial banks.

Commercial banks offer mostly corporate banking services, or can procure them from overseas. Local credit to the private sector is limited and expensive, but available to both foreign and local investors on equal terms. The country's main economic actors obtain financing outside STP. Commercial banks have transferred excess liquidity to correspondent banks outside the region.

Political Violence

STP is characterized by its stability, untroubled ethnic interaction, and a relaxed lifestyle which locals refer to in Portuguese as leve-leve (take it easy). In a highly consensus-oriented society, political violence is rare. There were several coup attempts before 2003, but with very low levels of associated violence, and no casualties. Three elections in 2006 (legislative in March, presidential in July, and local in August) were all judged free and fair by international observers. However, STP's reputation as a vibrant democracy has suffered due to political instability that led to several changes in government. Strikes are not the primary means to settle labor disputes and labor strikes have been rare in recent times.

With almost 35 years of independent rule, there have been no incidents of politically motivated attacks on projects or installations. Anti-American sentiment is very limited and civil disorder is rare. There is a maritime piracy and terrorism threat in the Gulf of Guinea, but, to date, there have been no incidents involving STP.

Corruption

Corruption has increased during the past decade in step with greater economic development, and mainly consists of bribery, embezzlement, and mismanagement of public funds.

Analysts attribute the recent rise in corruption to escalating poverty, the absence of regulations, low wages for government workers and officials, and lack of strong leadership. Since democracy was introduced in 1990, various forms of infighting, high levels of corruption, and administrative mismanagement have plagued political life in STP.

The STP government has denounced corruption and pledged to take steps to prevent and combat it, and corruption is widely perceived as immoral. An anti-corruption law has been approved and publicized. In support of the government's anti-corruption agenda, the National Assembly approved an oil revenue management law, and the Government started reviewing and updating existing contracts with some foreign companies to favor liberalization and free market competition. In one example, the National Assembly ordered an investigation on the Joint Development Zone (JDZ) second round bid for the oil blocks of December 2004, which had been the focus of public criticism for corruption. The Attorney General undertook an investigation and concluded that the procedures used to award the licenses were seriously flawed and failed to meet minimum acceptable standards. To date, however, no arrests have resulted from the investigation. More recently, several high ranking government officials, including two former Prime Ministers, have been accused of corruption and mismanagement.

Corruption in customs has been a consistent problem for the Government and foreign investors but the situation is improving. The MCC Threshold Program was successful in obtaining the enactment of a modern Customs Code and related decrees. This modernization effort represents a fundamental legislative change from colonial-era customs law and processes to internationally recognized best practices and principles.

Bilateral Investment Agreements

As of January 2010, the U.S. and STP have no bilateral investment or taxation treaty. STP has signed bilateral investment agreements with Portugal, Angola and Gabon but is party to no bilateral taxation treaties.

OPIC and Other Investment Insurance Programs

There is currently no Overseas Private Investment Corporation or other investment insurance program in STP.

Labor

A significant portion of the STP workforce is well educated, although not at the university level. The workforce is multi-lingual (Portuguese and French) and young. Further training is needed as the economy continues to develop. The cost for basic unskilled labor is about $35-50 per month, and it is increasing over time. Minimum wage, workday, overtime, paid annual vacations and holidays are established by STP labor laws. Women are entitled to state-funded maternity leave for a period of 30 days before and after childbirth.

Foreign Trade Zones / Free Ports

STP currently has no free trade zones or free ports. However, the Free Zone Authority (AZF) was recently established to create a free trade zone in STP. The AZF is working with private institutions and companies to acquire funds for the implementation of the free trade zone. According to the GoSTP, there are many foreign companies interested in the development of a STP Free Zone, motivated by the recent oil discoveries both in the JDZ shared with Nigeria and in STP's Exclusive Economic Zone (EEZ).

Foreign Direct Investment Statistics

Detailed statistics are unavailable, but Foreign Direct Investment (FDI) appears to be increasing due to structural macroeconomic reforms that have increased investor confidence, as well as recent developments in the petroleum and tourism sectors and the process of privatization being undertaken in STP. In 2007, FDI reached $35 million. In 2008, U.S. exports were insignificant, with imports estimated at USD $3 million.



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