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2013 Investment Climate Statement - Cape Verde


2013 Investment Climate Statement
Bureau of Economic and Business Affairs
April 2013
Report
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Openness To, and Restrictions Upon, Foreign Investment
 

The Government of Cape Verde (GOCV) looks to both domestic and foreign private investment as the engine for the country's future economic growth, with a focus on export-oriented industries, tourism, and transportation services. A great effort has been made over the past ten years to promote a market-oriented economic model. The World Bank, IMF, United States, and many other donors have endorsed and supported the GOCV’s economic liberalization policies.

There are few regulatory barriers to foreign investment in Cape Verde. Foreign investment in Cape Verde is concentrated in tourism and light manufacturing. Sectors such as construction (public infrastructure), transportation, maritime security, and energy are attracting most of the investment. In terms of transportation, Cape Verde’s strategic and geographic location places the country in a position to become a regional and international shipping hub for both passengers and cargo. Nevertheless, the country remains underserved, with insufficient and inefficient maritime transportation, especially for passengers. The energy sector in Cape Verde is undergoing important regulatory changes and attracting investment, but it is going through a financial crises.
 

The government of Cape Verde is considering a number of solutions to overcome these major development challenges, and has begun to invest in alternative energy resources. For instance, the GOCV met and exceeded its goal to produce 25 percent of electricity from renewable sources by end of 2011. The goal is to have 50 percent of electricity come from renewable energy sources by 2020. There are also plans to power the entire island of Brava with nothing but green energy (a combination of solar, wind, wave, and bio-fuel) within the next five to ten years. Cape Verde’s ambitious growth plans will require big investments in power and water infrastructure, and their use of alternative energy presents great opportunities for American companies.

Starting in the mid-1990s, the GOCV implemented a series of reforms that have transformed a centrally-planned economy into a market-oriented economy. The number of publicly-owned enterprises has decreased from forty in the 1990s to six as of today. Privatization came either through private sector sales or through liquidation. The two main utility companies, Electra (electricity and water) and Cape Verde Telecom, the country's three banks, and the main state-owned entities in the tourism sector have all been sold off. All privatization or liquidation processes ran smoothly with the exception of Electra, which returned to government ownership. The decision to repossess Electra resulted from a breach of contract with the Portuguese investor. Consensual agreement was reached during the negotiations.
 

In January 2008, four years after the United Nations Resolution 59/210 recommendation, Cape Verde graduated from a Least Developed Country to a Lower Middle Income Country. On May 26 of the same year (five months after the World Trade Organization (WTO) approved GOCV application) Cape Verde’s legislatures unanimously ratified the agreement and formally acceded to the WTO. In compliance with WTO regulations, Cape Verde legislation does not discriminate against foreign investors in terms of tax treatment, access to licenses approvals nor exchange rate controls.

Cape Verde is the first country to have successfully concluded a Millennium Challenge Corporation (MCC) compact. Moreover, in February 2012, Cape Verde became the first country to ever sign a second compact after consistently displaying good economic and political governance. The first compact (US$110 million) has been used to improve the country's investment climate and reform the financial sector; improve infrastructure to support increased economic activity and provide access to markets, employment, and social services; and increase agricultural productivity, and raise the income of the rural population as well as carry out key policy reforms needed for sustained economic growth. The second compact (US$66.2 million) will be used to carry out wide-reaching reforms in the water and sanitation and land management sectors. The second compact continues to support Cape Verde's overall national development goal of transforming its economy from aid-dependency to sustainable, private-sector led growth.


Measure

Year

Index/Ranking

TI Corruption Index

2012

39th Worldwide

2nd Africa

Heritage Economic Freedom

2013

Rank 140th

Score 66.9

World Bank Doing Business

2013

122

MCC Gov’t Effectiveness

2013

Score 0.56

% Ranking 94%

MCC Rule of Law

2013

Score 0.91

% Ranking 97%

MCC Control of Corruption

2013

Score 1.32

% Ranking 100%

MCC Fiscal Policy

2013

Score -8.8

% Ranking 7.7%

MCC Trade Policy

2013

Score 66.9

% Ranking 17%

MCC Regulatory Quality

2013

Score 0.41

% Ranking 88%

MCC Business Start Up

2013

Score 0.967

% Ranking 75%

MCC Land Rights Access

2013

Score 0.74

% Ranking 64%

MCC Natural Resource Mgmt

2013

Score 14.6

% Ranking 13%


Conversion and Transfer Policies

The government gives foreign investors important guarantees such as privately managed foreign currency accounts, which can be credited from abroad or from other foreign accounts in Cape Verde. In addition, it allows undisputed repatriation of dividends, profits and capital from foreign investment operations. To receive these benefits the investor has to qualify for foreign investor status through GOCV’s official agency Cabo Verde Investimentos.

The regulatory legislation specifies that for the first five years of operation, dividends may be freely expatriated without tax and that for the next fifteen years dividends may be expatriated with a flat tax rate of ten percent. Incentives for outward investment in developing countries are not included in the legislation, but they have been provided on an ad hoc basis.

Current law permits a foreign investor to request the Bank of Cape Verde to transfer loan repayment, revenue/profits, and capital gains overseas within 30, 60 and 90 days respectively.

Cape Verde’s exchange-rate fluctuation risk is low, and dependent on the Euro (CVE is pegged to the Euro). Since 1998, Cape Verde has pursued a fixed exchange rate policy by pegging the CVE to the PTE and, since 4 January 1999, to the euro, at a rate of CVE110.27 per euro. This fixed exchange rate arrangement is a credit facility granted by Portugal to Cape Verde –Credit Facility Contract – and managed by a joint CapeVerdean and Portuguese body named Comissão do Acordo de Cooperação Cambial (COMACC).

Both residents and non-residents may hold foreign exchange accounts, subject to government approval and regulations. Most payments and transfers are subject to controls.


Expropriation and Compensation

In the event of expropriation, or acquisition of privately owned property by the government for the public’s interest, the government will compensate the owner, on the basis of prevailing market prices, or the actual market value of the property on the day of expropriation. Compensation may be repatriated at the exchange rate in effect on the day of expropriation.


Dispute Settlement

Disputes between foreign investors and the government will be settled either by recourse to a single referee or an arbitration commission. Referees may be foreigners. If so, they may not have the same nationality as the parties involved in the dispute. Should there be difficulty in reaching an agreement over the nomination of the referees, referees may be appointed by a recognized national body or international organization, with the ultimate authority being the International Center for Settlement of Investment Disputes (ICSID). The ICSID is an autonomous international institution established under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ICSID or the Washington Convention) with over one hundred and forty member States. Generally, arbitration will be carried out in Cape Verde and in Portuguese, unless the parties agree on another location and language. The decision of the single referee or the arbitration committee is final and there is no appeal.


Performance Requirements/Incentives

The government offers local and foreign investors the same incentives. The incentives do not carry performance requirements. Instead, the government favors investments that are either export-oriented or diversify geographically and technologically the country’s industrial base.

Through existing international agreements, exporters have preferential access to the markets of Europe, West Africa and the United States. Incentives for firms that export their entire output (free-zone enterprises) are the most generous, but all foreign firms investing in Cape Verde, regardless of the location of their markets, can benefit from the following incentives:


Right to Private Ownership and Establishment

The right to private ownership and establishment is guaranteed under the constitution.

Property rights are recognized and guaranteed by several Cape Verdean laws, as well as by the constitution. There is a legal entity that records secured interests in property, both chattel and real estate. There is also a legal system that protects and facilitates acquisition and disposition of all property rights.


Protection of Property Rights

Cape Verde is in the process of implementing its second MCC Compact in the amount of US$66.2 million of which US$17.3 million is for Land Management for Investment Project. This investment is expected to improve Cape Verde’s investment climate by refining the legal, institutional and procedural environment to create conditions for increased reliability of land information, greater efficiency in land administration transactions, and strengthened protection of land rights. The project consists of developing and implementing a new land information management system, and clarifying parcel rights and boundaries on targeted islands with high investment potential.

The Land Management and Investment Project supports the Government of Cape Verde in creating a single reliable and easily accessible source of land rights and land boundaries information, which is expected to strengthen Cape Verde’s investment climate for large and small investors, and reduce land registration time and costs. The project is expected to be finalized within the next four years.
 


Transparency of the Regulatory System

Cape Verde is an example in Africa because of its transparency and good governance. Its government is committed to improving the conditions for foreign investment and to encouraging a more transparent and competitive economic environment. In 2012, Cape Verde ranked 39th on Transparency International’s Corruption perception index, it was second among African nations trailing only Botswana. In addition, the MCC control of corruption score cards ranked on 100% with a score of 1.32. According to the 2013 Heritage Foundation’s Index of Economic Freedom, Cape Verde’s economic freedom was ranked 140 th in the world with a score of 66.9.

The basic Cape Verdean legislation affecting foreign investment is contained in the External Investment Law and the Law of Industrial Development. These laws establish the principle of equal treatment for foreign investment and confirm the government’s commitment to the creation of a dynamic business environment. The Industrial Development Statute regulates the granting of incentives and simplifies the investment approval process.

Laws to promote exports, incentives to export, and free-zone enterprises stress the commitment of the government to encourage investment in export-oriented industries.

The overall entrepreneurial environment benefits from high levels of regulatory flexibility and efficiency. The tax regime encourages entrepreneurial activity, and government policies support free trade and open markets.

Although bureaucratic procedures have been simplified in a number of cases, there is still room for improvement. The Investment Approval Process has been expedited within the revision of the external investment code. The Capeverdian Agency for the Promotion of Investment, Cabo Verde Investimentos (CI), has become a one-stop shop for external investors. However investing in Cape Verde is still a slow process.


Efficient Capital Markets and Portfolio Investment

Cape Verde has a small but relatively strong, efficient and well managed financial sector supervised and regulated by a single institution: the Central Bank of Cape Verde.

The financial sector consists of:

  • Credit institutions (banks and other institutions that are qualified by law);
  • Special credit institutions (credit unions and savings banks);
  • Nonbanking institutions;
  • Insurance companies;
  • Stock Exchange;

In the 1990s, the statute of International Financial Institutions (IFI) was created for institutions whose activities are directed primarily to non-residents. Most IFI banks in Cape Verde are "foreign branches" or subsidiaries of Portuguese banks, which were established in Cape Verde to benefit from tax advantages in their transactions with non-residents.

In December 2011, the financial sector consisted of:

  • Nine commercial banks (Banco Comercial do Atlântico, Caixa Económica de Cabo Verde, Banco Interatlântico, Banco Cabo-Verdiano de Negócios, Banco Espírito Santo, Banco Africano de Investimentos, Ecobank, Green Bank, and Novo Banco);
  • Thirteen nonbanking institutions;
  • Fourteen International Financial Institutions Off Shores;
  • Three management companies for Securities and Pension Funds;
  • One Stock Exchange (BVC);
  • Two insurance companies (Garantia and Impar).

Overall, the banking sector is still relatively small, with a limited supply of financial products. However, it is well-managed and exhibits good performance indicators. Credit risk is mainly controlled through a limited exposure and strict compliance with prudential ratios.

At the end of 2010 (latest information available), the banking sector, excluding the IFIs and offshore banks, had:

  • A network of 105 branches covering all municipalities in the country;
  • 141 ATMs and 1985 debit machines available in all islands;
  • Internet banking offered by the four major banks; and
  • Debit cards, credit cards and prepaid Visa.

Bank credit is available to foreign investors under the same conditions as for national investors. The private sector has access to some credit instruments such as loans, letters of credit and lines of credit. The legal guidelines for accounting systems are clear but are not totally consistent with international norms.

The Export-Import Bank of the United States (http://www.exim.gov/) has institutional ties to national commercial banks.

The Cape Verdean stock market, Bolsa de Valores de Cabo Verde (BVC), is fully operational. It has been most active in the issuance of Bonds. Foreign investors must open a bank account with a local bank in Cape Verde before buying stocks or bonds from BVC.

Financial Sector Main Legislation:

  • Banks the Special Credit Institutions: Law No. 3/V/96 - 1 July;
  • Insurance: Decree Law No. 52 F/90 4 July and Decree-Law No 1 /2000, January 31;
  • The Securities Market: Laws No. 51, 52 and all 53/V/98, May 11, 98;
  • IFIs: Laws No. 43/III/88 of 27 December, 60/VI/2005 - April 18, DL No 12/2005- February 7, and 44/2005 - June 27;

Banking, Insurance, and Securities Market Regulations are in compliance with International regulations and meet international best practice.


Competition from State-Owned Enterprises (SOEs)

In industry, interference in state-owned enterprises (SOEs) in Cape Verde is a relatively minor concern. With the exception of certain industries which remain protected (e.g., freight handling at the airport, port authority, importation of pharmaceutical products and distribution of electricity), private and state-owned enterprises compete freely and without major interference from the government. In these “liberalized” markets, both private and state-owned enterprises have the same access to credit, markets, and business opportunities. SOEs in Cape Verde are most active in the transportation sector. SOEs are generally managed by a board of directors which is nominated by the Minister in charge of the respective sector. Overall, there is little government interference in the day-to-day management of SOEs and they are generally evaluated based on their economic or financial performance. However, even though most directors are not politically appointed, they must maintain the confidence and support of the government. All SOEs are required to produce annual reports and must submit their books to independent auditors.


Corporate Social Responsibility (CSR)

The private sector, government and regulators are becoming increasingly aware of the importance of environmental and social responsibility in Cape Verde. Many companies conduct campaigns to promote social awareness in areas such as health, environmental protection, and cultural preservation. For instance, all investment projects are required to provide an environmental impact study prior to approval. However, companies’ specific CSR efforts in Cape Verde tend to be more reactive than proactive. For example, a recent outbreak of Dengue Fever in the country was met by public awareness campaigns launched by some local companies.

In terms of women’s issues, the government of Cape Verde is a leader in the region, if not in the world. During previous governments, women have equally been represented in ministerial level positions. For example, eight of eighteen ministerial positions are currently held by women. While there is still room for improvement, relative to other countries in the region, Cape Verdean women tend to have good representation among businesses in the country.


Political Violence

Cape Verde’s strengths are its political and social stability. There have never been any political or religious conflicts resulting in violence. In recent years there have been some incidences of strikes, promoted by labor unions, but they were all peaceful.


Corruption

In 2012, Cape Verde ranked 39th on Transparency International’s Corruption perception index, it was second among African nations trailing only Botswana.

Corruption is a crime punishable by law. Giving or accepting a bribe is a criminal act and conviction could result in up to eight years in prison. To combat corruption effectively, the Cape Verdean government established the High Authority Against Corruption, and parliament has added three additional prosecutors to enforce the law. Other institutions active in combating corruption include the Judicial Police, the Prosecuting Counsel and the courts. Corruption or the bribery of political officials and/or public servants is not a major issue of concern in Cape Verde. There have been rumored incidents of corruption in the recent past, which earned a lot of public criticism and media coverage.

Under U.S. law, American companies and their affiliates are subject to the Foreign Corrupt Practices Act, which strictly prohibits the bribery of foreign officials.


Bilateral Investment Agreements

Cape Verde has bilateral investment agreements with Angola, Austria, Belgium, China, Germany, Holland, Italy, Portugal, Russia, United Kingdom, Sweden, and Switzerland.

Since, Cape Verde has enjoyed a Special Partnership with to the European Union as a Peripheral Region Nation.


OPIC and Other Investment Insurance Programs


The Overseas Private Investment Corporation (OPIC) (http://opic.gov/) offers political risk insurance, which includes coverage for exchange inconvertibility, expropriation, and war. Cape Verde is also a member of the Multilateral Investment Guarantee Agency (MIGA).


Labor

With the unemployment rate above 12 percent, creating jobs is a major concern for the Cape Verdean government. Unemployment among youth and highly skilled labor is higher; 27.1 percent for ages between 15 and 24, and 16.8 percent among the highly skilled workforce (university degree).

The government is striving to stimulate national production and attract foreign investment to create jobs and support entrepreneurial initiatives.

The low cost, high productivity and wide availability of labor in Cape Verde is economically enviable. Unskilled labor represents some 30 to 40 percent of the total labor force and is readily available. However, technical, managerial, and professional talent is more difficult to find.

There is no minimum legal wage in Cape Verde. In general, wages are established according to each employer’s policy. There have been proposals to establish the minimum wage at CVE 15,000 per month, which is approximately US$180 per month, but consensus is yet to be reached.


Foreign Trade Zones/Free Ports

The following five laws, the External Investment Law, the Industrial Development Law, the Industrial Statute, the Enterpot Law, and the Law of Free-enterprises, constitute a package of free zone legislation. These laws allow for flexibility of location and provide strong incentives for export-oriented firms. The free-zone enterprise law introduces a new status for enterprises that produce goods and services exclusively for export or to sell to other free-zone enterprises in Cape Verde.


Foreign Direct Investment Statistics


 

2006

2007

2008

2009

2010

2011

CVE in Millions

11,484.1

15,339.30

15,618.80

9,477.70

9,647.90

8,425.80

Exchange Rate (Avg)

87.93

80.62

75.34

79.38

83.28

79.28

USD in Millions

130.6

190.3

207.4

119.4

115.9

106.3

 

 

 

 

 

 

 

% by country of origin

Spain

Italy

UK

Ireland

Portugal

Others

2006

0.40

44.30

11.40

9.60

8.20

26.00

2007

20.30

16.20

14.20

-

10.10

39.20

2008

14.90

6.00

11.20

11.20

11.00

45.70

2009

25.10

6.20

7.70

10.50

11.10

39.40

2010

27.80

4.50

27.50

21.20

3.00

16.10

2011

24.50

26.00

6.60

4.80

20.50

17.60

2012 (3rd Q)

2.80

5.20

13.40

12.60

17.70

48.40

 

 

 

 

 

 

 

% by island

Maio

Boavista

Sal

Santiago

S Vicente

Others

2006

3.5

0.1

78.3

11.8

5.8

0.5

2007

1.5

19.0

38.1

34.9

1.9

4.7

2008

0.5

13.1

38.4

37.1

1.3

9.5

2009

0.2

21.3

30.5

47.4

0.4

0.2

2010

-

27.7

52.7

18.3

0.2

1.2

2011

-

0.2

60.1

29.7

10.1

-

2012 (3rd Q)

0.8

-

20.2

77.2

1.8

-

 

 

 

 

 

 

 

by activity in %

Tourism & Real Estate Services

Financial Services

Other Services

Industry

Commerce

Others

2006

91.0

1.3

5.6

1.6

0.5

-

2007

79.8

7.8

6.1

-

2.4

3.8

2008

79.3

8.1

3.2

-

2.6

6.8

2009

88.6

2.7

3.7

-

4.9

0.1

2010

89.6

8.7

0.1

0.6

0.1

0.9

2011

68.9

10.9

7.1

13.1

-

-

2012 (3rd Q)

83.3

5.4

8.5

2.8

-

-



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