P 050731Z NOV 08
FM AMEMBASSY ANTANANARIVO
TO SECSTATE WASHDC PRIORITY 1749
INFO AFRICAN UNION COLLECTIVE PRIORITY
DEPT OF TREASURY WASHDC PRIORITY
DEPT OF COMMERCE WASHDC PRIORITY
DEPT OF AGRICULTURE WASHDC PRIORITY
MILLENNIUM CHALLENGE CORP  PRIORITY

UNCLAS ANTANANARIVO 000744 
 
 
STATE FOR AF/EPS AND AF/E - MBEYZEROV 
USDOC FOR BECKY ERKUL - DESK OFFICER 
TREASURY FOR FBOYE 
 
E.O. 12958: N/A 
TAGS: ECON EINV EIND ETRD MA
SUBJECT: OBSTACLES TO INVESTMENT: THE VIEW OF A PROMINENT 
INDUSTRIALIST 
 
¶1. (SBU) Summary:  Malagasy industrial magnate Salim Ismail 
outlined the negative factors confronting potential investors 
in Madagascar during a recent meeting with the Ambassador. 
These factors include a complicated business environment, an 
unfair legal system, problems with the state-owned power 
company, high shipping costs, and an uncertain international 
economic situation.  Despite these obstacles, Ismail is still 
considering moving his garment factories from Mauritius to 
Madagascar, which remains internationally competitive due to 
the relatively low cost of Malagasy labor.  End summary. 
 
Madagascar: To Invest or Not to Invest? 
--------------------------------------- 
¶2. (SBU) Malagasy industrial magnate Salim Ismail -- owner of 
Socota Group textile mill and garment factories (partially 
U.S.-owned) and a shrimping business -- discussed the 
negative factors confronting potential investors in 
Madagascar with the Ambassador on October 30.  He explained 
that appreciation of the Mauritian currency, increase in 
Mauritian per capita GDP to over USD 7,000, Mauritius' move 
up the value chain of production, and the tremendous increase 
in Mauritian property values were all pushing his company to 
consider closing its Mauritian garment factories and possibly 
exploiting those properties for tourism or commercial 
purposes.  As the company already has a cotton mill in 
Madagascar, he is pondering moving those garment investments 
here, but is hesitant due to a number of factors detailed 
below. 
 
Complicated Business Environment 
-------------------------------- 
¶3. (SBU) Ismail opined that despite the Ravalomanana 
administration's push to transform the country in terms of 
trade and infrastructure, there has been very little job 
creation.  He asserted that this was due to the complicated 
business environment, which did not encourage the creation of 
small and medium enterprises.  He complained that the GOM was 
not proactive in solving business problems, and pointed out 
the gap between the GOM's intentions and actions. 
 
Poor Legal Environment 
---------------------- 
¶4. (SBU) Ismail argued that the legal system treated 
companies unfairly, explaining that his company had never 
once won a case against an employee in twenty years, even if 
the employee had been stealing from the company.  He 
complained that legal agreements and contracts were often not 
enforced. As an example, he cited the legal dispute that his 
company has had with the national power company (Jirama) 
since 2006.  They reached agreement, but it was subsequently 
withdrawn by Jirama. 
 
Electricity Disaster 
-------------------- 
¶5. (SBU) Continuing the Jirama theme, Ismail noted the poor 
state of that company's operations.  Although Socota Group is 
the country's largest concumer of electricity, the GOM has 
not helped resolve its problems with Jirama, which frequently 
cancels meetings after company representatives have driven 
three hours to the capital to attend them.  He was 
particularly distressed that a major decision by the Board 
that would have allowed a more advantageous pricing scheme 
for Socota -- one of the few firms here to have 24/7 demand 
-- was never implemented by the firm's administration. He is 
among many here who do not understand the longevity of the 
German Jirama manager in the wake of such poor performance. 
 
Cotton Meltdown 
--------------- 
¶6. (SBU) Socota Group is the only partially 
vertically-integrated garment manufacturer in Madagascar, as 
the owner of the cotton mill Cotona.  As such, the company 
would be particularly well-placed to continue taking 
advantage of AGOA benefits if the third-country fabric 
exception were to expire in 2012.  However, Ismail explained 
that cotton cultivation in Madagascar has melted down.  The 
French firm Geocoton took over cotton cultivation when it was 
privatized, but is suffering financial difficulties and can 
not afford to pay its workers.  As a result, cotton is 
rotting on the vines, Ismail lamented.  To meet demand, 
Socota will have to start importing cotton. 
 
High Overland Shipping Costs 
---------------------------- 
¶7. (SBU) Another strike against investing in Madagascar 
mentioned by Ismail was the high cost of overland shipping to 
the main port at Tamatave.  He explained that this leg of 
shipping was just as expensive as shipping from the Tamatave 
port to Marseilles, France. Also, there is no longer a direct 
sea route available to Europe, which means that exports with 
a time-sensitive "fashion content" are heavily disadvantaged 
vis-a-vis producing countries with faster, more direct 
connections (e.g. China). 
 
Uncertain International Economic Situation 
------------------------------------------ 
¶8. (SBU) In addition to the domestic factors outlined above, 
Ismail said that making an investment decision was even more 
difficult due to the uncertainty of the international 
economic situation.  He explained that all factors were 
coinciding against the garment industry at the same time -- 
high food and fuel prices, the appreciation of Malagasy and 
Mauritian currencies, and the financial crisis in the U.S. 
and Europe which was reducing western consumer demand.  The 
Malagasy currency, although recently depreciating slightly 
vis-a-vis the US dollar, remains fairly strong against the 
Euro, hurting the company's European sales. 
 
Comment 
------- 
¶9. (SBU) Despite these obstacles, Madagascar remains an 
attractive destination for investments in the garment sector 
mainly due to the relatively low cost of labor.  Although 
garment manufacturers have seen their margins decline over 
the past year, recent depreciation of the ariary vis a vis 
the U.S. dollar by over 15 percent should provide a boost to 
those focusing on the U.S. market.  While Ismael (a French 
citizen) and his family have lived in Madagascar for 
generations and have ties here that might favor continuing 
investment here, Ismael thinks globally and seems willing to 
invest further here only if competitiveness can be 
maintained, and improved.  In this respect, his hesitation is 
shared by most others in the export sector.  End comment. 
 
 
MARQUARDT