Transparency of the Regulatory System
Bureaucracy and inconsistency in the application of regulations hinder investment and can lead to corrupt practices. Though existing legislation attempts to establish clear rules, a lack of enforcement and a shortage of resources and capacity have led some international investors to allege unfair competition from unscrupulous actors. A lack of transparency in government regulatory decisions is a common complaint.
The National Council on Competition, instituted under law no. 2005-020 (Law on Competition) 17 October 2005, was finally established in November 2016. The body has responsibility to hear cases of unfair competition, but has not rendered any major decisions related to unfair competition.
Tax, labor, environment, health, and safety standards are generally not used to impede foreign investment, though, as mentioned above, bureaucratic procedures and red tape are often opportunities for corruption. There are no informal regulatory processes managed by non-governmental organizations or private sector associations.
Proposed laws and regulations are generally not published in draft form for public comment. The only opportunity for comment is usually at the parliamentary level. However, the current government has developed a track record over the last year of seeking comment on proposed laws and regulations from a limited pool of stakeholders. These consultations typically do not include the general public.
International Regulatory Considerations
Madagascar is a member of the following economic blocks: Indian Ocean Commission (IOC), Southern African Development Community (SADC), and Common Market for Eastern and Southern Africa (COMESA). Regional regulatory systems prevail over the national system. As a former French colony, most of Madagascar’s norms and standards are French. However, in the last decade, British and other international norms or standards increasingly have been adopted in response to global market requirements. The government commits to notify all draft technical regulations to the WTO Committee on Technical Barriers to Trade (TBT).
Legal System and Judicial Independence
Madagascar’s legal system is based on French civil law, and its provisions contain protections for private property rights. Local commercial law consists largely of the Code of Commerce and annexed laws, which are reportedly applied in a non-discriminatory manner. However, the Malagasy judicial system is slow and complex and has a reputation for opacity, corruption, and executive influence.
Laws and Regulations on Foreign Direct Investment
The major laws affecting foreign 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). The mining and Petroleum codes are under review with the assistance of the World Bank and a U.S. consulting firm.
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 and protections against expropriation, freedom to transfer funds abroad without prior authorization, 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, nor any restriction on the mobility of foreign investors. The regime for visas, residence, and work permits is neither discriminatory nor excessively onerous. Since the creation of the EDBM, processing of residence and work permits has been streamlined.
Although the judicial system is independent, and the government has no right to interfere in its proceedings, some foreign investors have complained that the courts abdicate their responsibility and do not rule on the substance of tax appeals, but rather dismiss cases based on technicalities. Harassment by tax collectors assessing extraneous taxes is a frequently cited complaint by many investors. In addition, large companies nearly always lose court trials on issues related to personnel, such as layoffs or dismissal of workers, because of the rigidity of Malagasy labor laws. Investors frequently allege interference by government officials and corrupt judges in the judicial system.
Competition and Anti-Trust Laws
The Law on Competition (Law 2005-020) assigns the Ministry of Commerce and Consumption the overall responsibility for ensuring fair competition. The law also mandates the creation of an independent National Council of Competition (NCC) to rule on cases brought before it relating to unfair competition.
Expropriation and Compensation
The Investment Law (2007-036) provides foreign and local investors protection against nationalization, expropriation, and requisition, with the exception of public interest cases as established by regulation (Ordinance 62-023). Infrastructure projects requiring the expropriation of private property must receive an official proclamation by the government that defines the public interest of the proposed project. In these cases, the investor is to be granted a fair and prior compensation according to the market value of expropriated interests.
There are no recent cases of expropriation actions by the government of Madagascar, though as reported in local and international media, there were attempts by the previous de facto coup regime to expropriate oil blocks belonging to an international oil company in 2010. The company and the ruling regime resolved this case without resorting to expropriation.
Aside from the above, there have been no government actions or shifts in government policy occurring in the last five years that would indicate possible expropriations in the foreseeable future.
ICSID Convention and New York Convention
Madagascar is a member state to the International Centre for the Settlement of Investment Disputes (ICSID Convention) and under the Investment Law (2007-036), disputes between foreign investors and the State are handled through arbitrage proceedings administered by the ICSID. If the foreign investor is the initiator of the proceedings, he or she may also choose to submit the dispute to the Commerce Tribunal, the competent Malagasy jurisdiction. However, the Malagasy judicial system is slow and complex and has a reputation for opacity, corruption, and executive influence. A poll conducted by the national statistics agency, INSTAT, in 2014 found that 45.5 percent of the Malagasy population has no confidence in the judicial system, compared to 35 percent for the government and 34 percent for the police.
Investor-State Dispute Settlement
As a signatory to the convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention), Madagascar also accepts international arbitration as means of resolving investment disputes. Based on the obligation of the New York convention, domestic courts should recognize and be willing to enforce foreign arbitral awards. International arbitration is also accepted as a means of settling commercial disputes between private parties.
Madagascar has also been a member of the Multilateral Investment Guarantee Agency (MIGA) since 1989.
International Commercial Arbitration and Foreign Courts
The Malagasy Arbitration and Mediation Center (known by its French acronym, CAMM) was created in 2001 as a private organization to promote and facilitate the use of arbitration to resolve commercial disputes, both international and domestic, and to lessen reliance on an overburdened court system. As a result, many private contracts now include arbitration clauses, which allow the CAMM to mediate eventual disputes. However, the CAMM only mediated a total of 25 cases in year 2016, according to its General Secretary.
Madagascar has a bankruptcy law (2003-042). According to the latest World Bank Doing Business report, creditors have the right to initiate insolvency proceedings only when seeking liquidation of the debtor, but not when seeking reorganization.
In reorganization proceedings, all creditors have the right to vote on the reorganization plan, not just those whose rights are modified or affected by the plan. Creditors are not divided into classes for the purpose of voting on the reorganization plan. Dissenting creditors are not required to receive as much under the reorganization plan as they would have under liquidation.
Creditors have the right to object to a decision of the court to approve or reject claims against the debtor brought by the creditor itself or by other creditors. The insolvency framework does not afford creditors the right to participate in the selection of an insolvency representative, to approve the sale of substantial assets of the debtor, nor to access information about the insolvency proceedings.
Law 2003-042 removed bankruptcy offenses from the Penal Code but maintained them in the bankruptcy law itself. Bankruptcy offenses are punishable by fines and imprisonment depending on the nature of the offense – ranging from simple, to negligent, to fraudulent bankruptcy. The associated prison sentences were reduced from those stipulated in the previous insolvency framework