Attitude toward Foreign Direct Investment
The current administration of President Hery Rajaonarimampianina came into office after elections in late 2013, ending five years of rule by an unelected coup regime that was largely characterized by corruption and rent seeking. Since coming into office, the new administration has emphasized the importance of improving the business and investment climate, citing private sector led growth as the engine for future economic development. The President and his administration have repeatedly underlined the importance of attracting foreign direct investment (FDI), and this commitment is enshrined both in the government's official policy document, the General Policy for the State, as well as in its National Program for Development, which prioritizes the country's development objectives in the short to medium term.
Although the administration is welcoming in its attitude towards foreign investment, there are many impediments that make investing in Madagascar a challenge. These include weakness of the judicial system and banking sector, the high cost and low reliability of electricity, limited road, rail and port infrastructure, and the high cost of air transportation. Additionally, despite repeated pronouncements on the importance of combatting corruption, the administration has made little concrete progress in this field, and corruption continues to be deeply entrenched in all levels of government. Though there is no formal discrimination against foreign investors, foreign companies are frequently the target of harassment by tax authorities and are often subject to nuisance suits regarding questionable tax assessments, labor law violations and other matters.
Foreign share-holding in the telecommunications sector is capped at 66 percent of shares. Aside from this limitation, the legislative framework governing investment in Madagascar does not discriminate against foreign investors, nor does it prohibit, limit, or condition foreign investments. Any natural person or legal entity, Malagasy or foreign, is free to invest in Madagascar in accordance with the laws and regulations in force, and national treatment is not denied to foreign investors in any sector. 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.
Other Investment Policy Reviews
The World Trade Organization (WTO) conducted an Investment Policy Review in the context of its last Trade Policy Review for Madagascar in July 2015. It is available at the following link: https://www.wto.org/english/tratop_e/tpr_e/tp418_e.htm.
At the request of the government, the United Nations Conference on Trade and Development (UNCTAD) also conducted an Investment Policy Review for Madagascar in October 2015. It too is available, in French, at the following link: http://unctad.org/en/pages/PublicationWebflyer.aspx?publicationid=1384.
The Organization for Economic Cooperation and Development (OECD) has not yet conducted an Investment Policy Review for Madagascar.
Laws/Regulations on Foreign Direct Investment
The major laws affecting foreign direct investment include: the Law on Investments (Law 2007-036), the Law on Free Zone Companies (Law 2007-037), the Law on Large Scale Mining Investments (Law 2001-031, modified by Law 2005-022), the Petroleum Code (Law 96-108), and the Law on Commercial Enterprises (Law 2003-036). A new law on Public Private Partnerships (Law 2015-039) was adopted in December 2015, establishing the first ever legal framework for public private partnerships in Madagascar, to include partnerships under the Build, Operate, Transfer (BOT) model and variants thereof.
In addition to the freedom of investment and equality of treatment for foreign and national investors, Madagascar's Investment Law (2007-036) includes articles on the protection of patent rights, freedom to transfer funds abroad without prior authorization, protections against expropriation and a stability clause guaranteeing investor privileges from future legal or regulatory measures. There is no legal requirement that nationals own shares of foreign investment (aside from the cap in the telecommunications sector), nor any restriction on the mobility of foreign investors.
The regime for visas, residence, and work permits is neither discriminatory nor excessively onerous. The Law on Free Zone Companies establishes a separate regime for companies exporting 95 percent or more of their production, as does the Law on Large Scale Mining Investments for companies invested in the mining sector above a certain dollar value threshold.
The government is in the process of updating its legislation pertaining to the mining and upstream petroleum industries and has a timeline for passage of the new legislation in the May-July 2016 parliamentary session. One of the stated objectives for these revisions is to make the legislative frameworks governing these sectors more attractive to foreign investment. Additionally, the government is developing new legislation on Special Economic Zones. This legislation will differ from the existing Law on Free Zone Companies by focusing on infrastructure and service provision incentives within specified geographic areas rather than on fiscal incentives for particular companies as in the existing legislation. The parliament is also expected to vote on this law during the May-July 2016 session.
The judicial system is nominally independent, though widely regarded as prone to corruption and subject to influence from the executive and other actors. Some foreign investors have complained that the courts abdicate their responsibility and do not rule on the substance of appeals, but rather dismiss cases based on technicalities.
The Economic Development Board of Madagascar (EDBM) is the one-stop shop for receiving, processing, and delivering the required administrative documents for establishment of all investment projects. The EDBM also certifies eligibility for companies to benefit from the special regime for Free Zone Companies and grants authorization for foreign investors to acquire land (though land lease titles must still be granted by the Ministry of Land Management). For other necessary authorizations, licenses and permits, the EDBM acts as the interface between the investor and the various agencies and institutions, though these agencies and institutions retain decision-making authority. The EDBM has significantly streamlined the process for establishing a business in Madagascar, and EDBM leadership is clearly dedicated to improving the investor experience in Madagascar. Nevertheless, some investors continue to report delays.
The EDBM has a website in English that can be found at the following link: http://www.edbm.gov.mg/. Online business registration is in development, though it is not currently operational. According to the Director of EDBM, the delay in setting up online business registration is the result of coordination challenges between the EDBM and the various agencies and institutions that play a role in establishing investments.
The agencies and institutions with which a new foreign investor must register vary by sector, but at minimum these include the Tax Administration, the National Statistics Agency (INSTAT), and the Ministry of Justice, which maintains the register of companies formally operating in Madagascar. Foreign investors will also require work permits and residence permits, which the EDBM also facilitates. The nominal timeline for business registration is within 3-5 days. Since the creation of the EDBM, processing of residence and work permits has been streamlined, though these can still take from 2 weeks to 3 months.
Madagascar does not officially define micro, small and/or medium-sized enterprises, and does not extend any special services or preferences to facilitate investment by such smaller enterprises.
The government incentivizes investment in manufacturing for export through its Law on Free Zone Companies (see section 15) and in the mining sector through its Law on Large Scale Mining Investments. English translations of these laws are posted on the EDBM website.
The Law on Large Scale Mining Investments (Law 2001-031, modified by Law 2005-022) establishes a special regime in terms of currency exchange, taxes, customs duties, and legal protections to large investments in the mining sector of approximately $25 million or more. These include attractive royalty and taxation rates designed to incentivize not only investment in the mining sector, but also local transformation of the mined substances. Tax rates on corporate profits are fixed at 25 percent, compared to 35 percent in the general tax regime, and fall to 10 percent if processing is done locally.
Limits on Foreign Control and Right to Private Ownership and Establishment
In general, no limit is set for foreign ownership or control. The Investment Law (Law 2007-036) stipulates that investors, foreign or Malagasy, are free to hold up to 100 percent of shares or stock in the company in which they carry out their activities. The one exception is the telecommunications industry, where there is a cap on foreign shareholding of 66 percent. Investment in certain sectors is subject to specific regulations, including licensing requirements in the banking, insurance, mining, petroleum, telecommunications, medical, and pharmaceutical industries. However, national treatment is not denied to any foreign investor even in these sectors.
Madagascar initiated a privatization program in 1996 and subsequently identified over fifty public enterprises for privatization. The targeted sectors included: agriculture, downstream petroleum, mining, transport, and telecommunications, among others. From 2003 to 2010, the government successfully privatized a number of firms through public tender processes, including a large cotton plantation and a telecommunications firm. Foreign investors were allowed to participate in these tenders. However, the privatization program stalled in 2010 and remains on hold with no timeline in place for further privatizations. The government continues to own shares in approximately 50 companies, and there is much public resistance to privatization of the remaining large state-owned enterprises, particularly the national airline and monopoly water and electric utility. Resumption of the privatization program will be contingent on the political will to overcome this resistance.
Screening of FDI
The government does not screen or approve investments, though some sectors (noted above) have specific licensing and permitting requirements that often include approval of investment plans.
The Law on Competition (Law 2005-020) assigns the Ministry of Commerce and Consumption the overall responsibility for ensuring fair competition. The law called for the creation of an independent National Council of Competition (NCC) to rule on cases brought before it relating to unfair competition, including concentration of market share with potential adverse effects on competition. Despite passage of the Competition Law in 2005, this council was established only in September 2015.