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2013 Investment Climate Statement - Sao Tome and Principe


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

Sao Tome and Principe (STP) has been making positive efforts toward foreign investment, but foreign investors still face bureaucratic and procedural hurdles. Political changes in late 2012 have put in question the viability of some investment projects. In 2012, under now-ousted Prime Minister Patrice Trovoada, the government stressed its democratic credentials and strategic position as a safe harbor in the volatile Gulf of Guinea to overcome detractors who do not view its small population as an attractive market. As a former Portuguese colony, ties with Portugal and other Lusophone countries, such as Angola and Brazil, are strong. The consensus among government authorities and economic analysts is that considerable foreign investment is needed for STP to realize its development goals and potential. With increased foreign investment, STP wants to build a deepwater port and tank farm, improve its airport, develop its tourism industry, and explore deepwater oil and gas possibilities.

A recent change in government ousted Trovoada, who was instrumental in investment promotion of STP. On December 4 2012 the parliamentary government of STP was dissolved by STP President Manuel Pinto da Costa after a motion of censure passed by opposition members of the National Assembly acting in absence of a quorum. The ruling Independent Democratic Action (ADI) party challenged the actions of the opposition with the STP Constitutional Court, which declined to hear the petition. On December 10 2012 President da Costa named a new head of government, after the Independent Democratic Action (ADI) party, the ruling party in the National Assembly, failed to garner support for its proposed new government. Former Prime Minister Trovoada and his ADI colleagues submitted to the President December 7 a proposed new government that named Trovoada as Prime Minister again. President Pinto da Costa deemed ADI’s proposal unacceptable, noting that it essentially reestablished the same government as before. President Pinto da Costa selected Gabriel Arcanjo Fereira da Costa as the new Prime Minister. Peaceful pro-Trovoada protests took place and no violence was reported. Trovoada and ADI still contend the machinations that led to the formation of the new government were illegal, but no African regional or sub-regional organization has spoken against Pinto da Costa’s moves and, absent some unforeseen change in circumstances, it appears the current government will be treated internationally as the legal government. New elections are scheduled for 2014 but there is the possibility that the early elections could be held before then. It remains to be seen whether several projects Trovoada was spearheading will continue under the country’s new government, but the new Prime Minister has said that the government still seeks to attract foreign investment.

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 2007 investment code sets forth a legal framework under which only investments above US$250,000 are eligible for benefits and guarantees.

STP has taken steps to facilitate investment and improve the business environment in recent years. The Millennium Challenge Corporation (MCC) worked with STP on a Country Threshold Program to improve investment opportunities, including creating a “one-stop shop” to help encourage new investments and improving its tax and customs administration. Tax revenues increased by 35% and customs revenues consistently exceed expectations, ranging from 50% to 230% over the previous year’s monthly revenues. The International Financial Corporation (IFC) determined in 2011 that registering a business in STP required an average of ten days and cost US$294, which represented a significant improvement from the prior year. STP states that opening a business currently takes only five days.

The government passed an Oil Revenue Management Law in 2004 in anticipation of oil discoveries. If oil production begins, oil revenues will accrue in the National Oil Account (NOA) and will help finance the government budget. Under optimistic scenarios, the income generated by the NOA would cover all STP’s public budget needs in the long term. The possibility of oil discoveries has boosted private investment in the banking and services sector. However, to date, there have not been any major oil finds and the prospects for oil production remain uncertain. Both the Joint Development Zone (JDZ) with Nigeria and the Exclusive Economic Zone (EEZ) has potentially lucrative oil blocks that will soon be opened for international bidding. A range of foreign firms have shown interest in investing in these zones.

To date, there are 6 blocks in exploration in the JDZ. Companies exploring in these blocks include Total, Anadarko, Addax, and Sinopec. In the EEZ, five blocks have been granted for exploration to three companies - Oranto, Equator Exploration, and ERHC. While exploration has commenced in two blocks, none are producing yet.

STP has expressed interest in building a deep water port that could serve as a regional transportation hub and “safe harbor” in order to accommodate large ship sizes and volume. With such a port, STP hopes to leverage its strategic location in Africa and become a significant transshipment service provider between Africa and the rest of the world. The government has divided the program into smaller projects in the hopes of attracting investors. Some companies, including French and Russian private sector showed interest in investing in the deep water port but the government has not made any official decision yet.

In early 2012, STP, Nigeria, and the Joint Development Authority of the JDZ signed a Memorandum of Understanding which laid out the construction of a 400 meter jetty proceeding seaward from Neves, on the island of Sao Tome. This construction would allow tie-up berths in 20 meter water depths. The jetty will be built to accommodate two PANAMAX-sized vessels simultaneously. The construction will be financed by Joint Development Authority Investment funding as well as direct financial contributions from the government of Nigeria. STP will provide the necessary land, concessions, and a tax holiday for the involved investors. The Nigerian side will offer a processing contract, the construction of the tank farm, and a related storage agreement. Construction has not yet started.

In October 2012 STP was connected to the ACE fiber optic cable which runs from France along the coast of West Africa. The installation of the ACE cable will increase STP’s internet speed by 100 and should be commercially available in January 2013.

It is important to note that in Transparency International’s 2012 Corruption Index, STP was the highest ranked country in the sub-region coming in at 72 (improved from 100 in the previous year’s ranking).

Measure

Year

Index/Ranking

TI Corruption Index

2012

72

Heritage Economic Freedom

2012

148

World Bank Doing Business

2012

160

MCC Gov’t Effectiveness

2009

153

MCC Rule of Law

2009

142

MCC Control of Corruption

2008

177

MCC Fiscal Policy

2010

140

MCC Trade Policy

2008

118

MCC Regulatory Quality

2011

25%

MCC Business Start Up

2012

100

MCC Land Rights Access

2010

132

Conversion and Transfer Policies

The Central Bank of STP (BCSTP) supervises the national financial system and defines monetary and exchange rate policies in the country. Among other responsibilities, the BCSTP sells hard currencies and establishes indicative interest rates. There is no difficulty in obtaining foreign exchange. The dobra (denoted by the acronym "STD") is the country’s national currency. One U.S. dollar is equivalent to about 18,500 STD.

In July 2009, STP and Portugal signed an economic cooperation agreement with the objective of fixing the STD to the Euro rather than a weighted basket of currencies. As a result, the STD is pegged to the Euro at an exchange rate of 1 Euro equal to STD 24,500.00. This anchorage offers a credible parity, minimizes the monetary instability costs, and provides better credibility for the exchange rate and monetary policy. It should also attract more direct foreign investment alleviate the problems of exchange rates in the commercial relationship between STP and Europe.

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 State with associated reductions in income taxes.

Expropriation and Compensation

The government maintains strong protections over 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 occurs 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 in 1976 -- 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. The visa application process is straight forward and transparent and it is very easy to get a visa and/or work permit. The scarcity of Sao Tomean Embassies and Consulates worldwide remains a challenge to obtaining a visa.

According to the 2007 Investment Code, investments above US$250,000 are eligible for benefits and guarantees. Investments under US$250,000 are no longer eligible but would be protected against expropriation. Qualifying investment projects will benefit from fiscal incentives. Incentives also include the use of state-owned buildings and/or land for the duration of investment projects, as well as the provision of administrative services to facilitate the process of obtaining access to state-owned buildings and land.

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.

STP 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 been eliminated.

Protection of Property Rights

STP guarantees private property rights, and expropriation for public use must be accompanied by a fair, adequate, and effective payment in advance. U.S. companies have not raised intellectual property rights concerns with the Embassy.

Transparency of Regulatory System

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

Labor, health, and safety laws exist but are not properly 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.

The MCC Threshold Program provided a range of assistance and training in auditing, collection registration, returns processing, public affairs, forms development, and information technology. STP has replaced the information technology systems previously used by the Department of Taxation and established a network connecting the primary revenue producing departments of the government (the Central Bank, the “one-stop shop,” and the Department of the Treasury) to increase revenue collection.

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 STP) are represented in the ownership and management of the commercial banks. The Gabonese Investment Bank (BGFI) opened its Sao Tomean operation in March 2012.

Commercial banks offer most 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 finance themselves outside STP. Commercial banks have transferred excess liquidity to correspondent banks outside the region.

Competition from State-Owned Enterprises (SOEs)

When the cocoa plantations were shut down in the late 1990s, most SOEs also were closed. There are now four SOEs operating as a monopoly in the market (EMAE – Water and Power Supply Company, ENAPORT – Port Authority Company, ENASA – Airport Authority Company, and CST – Telecommunication Company). CST is operating under a joint venture with the Portuguese Telecommunication Company (PT). The government holds 49% of CST, while PT owns 51% of the company. The government has recently stated they may withdraw its shares in order to invite more investment in the telecommunications sector.

The other three state-owned companies operate under government management but with a certain financial autonomy separate from government coffers. The Ministry of Finance and the Court of Auditors audit the SOEs on an annual basis. STP has begun privatizing the remaining SOEs. ENAPORT and ENASA have already been privatized to the Angolan Company, SONANGOL, for a period of 40 years, but the STP still holding 20% of the share of each of the two companies.

STP is dependent on foreign aid for budget support and it does not have a Sovereign Wealth Fund (SWF) or Asset Management Bureau (AMB). The oil revenue management law does instruct the Government to manage oil revenue in a manner that will save for future generations. However, oil discovery is still only a potential and not yet a reality.

Corporate Social Responsibility (CSR)

There are no rules or legislation pertaining to CSR in STP, but CSR is permitted.

Political Violence

STP is a vibrant democracy where politicians and the public accept government changes resulting from elections. 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). Political violence is rare, as a high premium is placed on consensus in decision-making. There were some coup attempts before 2003, but with very low levels of associated violence, and no casualties.

STP has a commendable human rights record and demonstrates a respect for citizens' and workers' rights. Strikes are not the primary means to settle labor disputes and labor strikes have been rare in recent times.

Since independence in 1975, 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, which has been an active partner in regional maritime security efforts.

Corruption

Corruption is decreasing in STP as reforms are taking hold in the Customs and Tax Departments as well as other public institutions. The government has denounced corruption and pledged to take steps to prevent and combat it. An anti-corruption law has been approved and publicized. The National Assembly approved an oil revenue management law to ensure transparency in the oil sector. 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 of 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. Through the MCC Threshold Program, the Government enacted a modern customs code and related decrees. Additionally, through MCC, STP implemented a modern customs tracking software and eliminated manual procedures to remove the link between the customs agents and cash payments. As a result, customs revenues have significantly increased. This modernization effort represents a fundamental legislative change from colonial-era customs law and processes to internationally recognized and transparent best practices and principles.

STP has also reformed how it transfers money to government agencies and civil servants. All payments to government entities over US$5 must be made directly at the Central Bank while all salaries are paid directly to the employees' accounts at commercial banks.

STP remains committed to oil sector industry transparency despite the absence of oil discoveries to date and was readmitted into the Extractive Industries Transparency Initiative (EITI) in October 2012. In May 2012, STP applied for EITI candidate status. In May 2012, Prime Minister Trovoada issued a decree to establish the nine-member Sao Tomean National EITI Committee. The EITI International Board approved STP’s application in October 2012. STP initially became an EITI Candidate country in 2008 but requested a voluntary suspension in 2010. The main barrier to implementation was the lack of effective coordination with the Joint Development Zone (JDZ) with Nigeria.

Sao Tome and Principe still lacks an effective Anti-Money Laundering (AML) regime, although there is no evidence that there are actual money-laundering operations ongoing. Despite its high-level political commitment to work with the Financial Action Task Force (FATF) and Inter-Governmental Action Group against Money Laundering in West Africa (GIABA) to address its strategic AML/CFT deficiencies, STP has not made sufficient progress in implementing its action plan, and certain strategic deficiencies remain. STP continues to work to improve its AML regime. STP became a member of the Inter-Governmental Action Group against Money Laundering in West Africa (GIABA), a FATF-style regional body, in May 2012.

Bilateral Investment Agreements

As of December 2012, the U.S. has no bilateral investment or taxation treaty with STP. 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

The Overseas Private Investment Corporation (OPIC) is open to coverage in STP, but there are no entities currently using these programs.

Labor

A significant portion of STP’s workforce is young, relatively well–educated and multilingual (Portuguese and French). However, further training is needed as the economy continues to develop. The cost for basic unskilled labor is about US$35 to US$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 30 days after childbirth. The law does not prohibit anti-union discrimination or retaliation against strikers. Labor laws, including occupational health and safety standards, are poorly enforced due to a lack of resources. Workers’ collective bargaining agreements remain relatively weak due to the government’s role as the principal employer and key interlocutor in labor matters, including wages.

Foreign Trade Zones / Free Ports

STP currently has no free trade zones or free ports. The Free Zone Authority (AZF) which was established to create a free trade zone in STP was ended in late 2011 because of no development that resulted in concrete businesses during its existence. All the activities related to the free trade zone are now done directly through the Minister of Planning and Development.

Foreign Direct Investment Statistics

STP’s size, combined with its lack of human and financial resources, has made it difficult for the country to attract foreign direct investment (FDI). STP is heavily reliant on foreign aid. Foreign Direct Investment (FDI) appears to be slightly increasing due to structural macroeconomic reforms that have increased investor confidence, as well as recent developments in the petroleum and tourism sectors. According to the United Nations Conference on Trade and Development (UNCTAD), FDI inward stock in STP reached US$234 million in 2010, up from US$79 million in 2006. Most investment has come from Portugal, with a small amount from Angola and, more recently, from Nigerian and Cameroonian banks. U.S. goods exports to STP in 2011 were US$6 million (plastics, chemical products, and electrical machinery). U.S. imports from STP totaled US$1 million (precious stones and metals and cocoa).



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