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 public, however.
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
French civil law inspires largely Madagascar’s legal laws, which in their provisions contain protections of private property and rights. Local commercial law consists mainly of the Code of Commerce and annexed laws. Recent reforms have allowed reducing significantly the delay in processing of commercial case at the trade court (TC). Recent reforms of regulations and procedure accompanied with increasing competent staff have allowed to process commercial dispute within lesser than a year while it lasted double or longer in the past. Major cities and regions do have their own competent courts although some trials fall under the jurisdiction of the central courts.
Madagascar’s Constitution Law states the independency of judicial system to the executive branch; however there is often flagrant interference of the last in judiciary matters apart broadening corruption within the judicial system resulting somehow in unfair and unreliable judicial process. Regulations and enforcement actions are appealable within the prescribed period. They could as well be adjudicated in the “central” court system (established in the capital).
Laws and Regulations on Foreign Direct Investment
Madagascar’s law on investments (Law n°2007-036) was promulgated in January 2008. It states foreign investors can freely own up to 100 percent of the company shares in which they operate subject to the provisions applicable to the activities with a specific regulation, foreign investors are allowed to transfer freely without prior authorization all payments relating to current transactions, including after-tax profits, dividends, salary income, allowances and savings of expatriate employees.
Other major laws in force concern foreign investors:
- Law n°2007-037 on free zone export companies
- Law n°2001-031, n°2005-022 on large mining investment (LGIM)
- Law n°1996-108 on petroleum code
- Law n°2003-036 on commercial company
Four major laws have come out in the past two years which are of interest to foreign investors:
- Law n°2015-039 on public and private partnership (PPP)
- Law n°2017-047 on the industrial development associated with the Industrial Policy of Madagascar (LDI)
- Law n°2017-023 on the special economic zone of Madagascar (ZES)
- Law 2017-020 on the law of electricity of Madagascar
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 n°2005-020) assigns the Ministry of Commerce and Consumption overall responsibility for ensuring fair competition in business. The law also mandates the creation of an independent Council of Competition (CC) to rule on cases brought before it relating to unfair competition. The CC began functioning in November 2016 (a decade after the promulgation of the law) and has processed dozens of cases. The CC plans to publicize their judgements online through its website (which remains under construction).
Expropriation and Compensation
The Investment Law (n°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 n°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. If such cases arise, the administration cautioned the investor for a fair and prior compensation according to the market value of expropriated proprieties.
Aside from the above, there have been no government actions or shifts in government policy in the last five years that would indicate possible expropriations in the near 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 n°2007-036, disputes between foreign investors and the administration can be treated 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 Trade Court, the competent Malagasy jurisdiction. However, the Malagasy judicial system is slow and complex and has a reputation for opacity, corruption, and executive influence. Recent reforms of regulations and procedure accompanied with increasing competent staff have allowed to process commercial dispute within lesser than a year while it lasted double or longer in the past.
No specific domestic legislation provides for enforcement of awards under the 1958 New York Convention and/or under the ICSID Convention.
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 accepted as a mean of settling commercial disputes between private parties.
Madagascar has been a member of the Multilateral Investment Guarantee Agency (MIGA) since 1989.
International Commercial Arbitration and Foreign Courts
The independent 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 provisions that allow the CAMM to mediate eventual disputes.
According to its General Secretary, the CAMM only mediated 32 cases, none of which involved a U.S. party. Over the last few years, the CAMM has extended its partnership with similar foreign organization in France (CMAP), Mauritius, Reunion Island, Comoros, and Seychelles. They have also started to approach English speaking chambers of commerce to promote their service to other businesses from the commonwealth countries.
Madagascar has a law (n°2003-042) on collective debt settlement procedures, which treats all parties equally in bankruptcy proceedings. 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.
Law n°2003-042 removed bankruptcy offenses from the criminal code and transferred them to the provisions for bankruptcy in the law n°2007-018 on the collective debt settlement procedures itself.
Bankruptcy offenses are punishable by fines and imprisonment depending on the nature of the offense – ranging from simple, negligent, or fraudulent bankruptcy. The court system has reduced the associated prison sentences from those stipulated in the previous insolvency framework.
The central bank of Madagascar, in collaboration with a technical partner and equity, is planning to establish within the current year an independent Credit Reporting Office (BIC) which has to provide a full package of services to the stakeholders in the financial system of Madagascar.