R 150541Z JAN 09
FM AMEMBASSY ANTANANARIVO
TO SECSTATE WASHDC 1961
USDOC WASHDC
DEPT OF TREASURY WASHDC
DEPT OF AGRICULTURE WASHDC
MILLENNIUM CHALLENGE CORP
CIMS NTDB WASHDC

UNCLAS ANTANANARIVO 000027 
 
 
STATE FOR AF/E - MBEYZEROV AND FOR EB/IFD/OIA 
STATE PLEASE PASS USTR 
USDOC FOR DESK OFFICER - BECKY ERKUL 
TREASURY FOR FBOYE 
 
E.O. 12958: N/A 
TAGS: ECON EINV OPIC KTDB USTR MA
SUBJECT: MADAGASCAR 2009 INVESTMENT CLIMATE STATEMENT 
 
SUMMARY 
------- 
¶1. This cable responds to the call in 08 STATE 123907 for updated 
investment climate statements.  A separate Word version has been 
emailed per instructions.  End summary. 
 
OPENNESS TO FOREIGN INVESTMENT 
------------------------------ 
 
¶2. The GOM officially welcomes foreign investment and the country's 
regulatory framework is evolving to become more investor-friendly. 
Administrative level implementation, however, often lags official 
policy.  Madagascar has generally not been an easy place to launch 
and grow a business - for nationals and foreign investors - but the 
significant stock of foreign investment is evidence of the rewards 
available. Although the current government has expressed a 
commitment to improve the investment climate, in practice, conflicts 
of interest and the lack of a level playing field continue to plague 
investors.  A lack of transparency in contracting and in government 
regulatory decisions also dampens the investment climate. 
 
¶3. According to the Malagasy Central Bank, foreign direct investment 
(FDI) inflows to Madagascar in 2007 amounted to USD 777.1 million 
representing 10.5 percent of GDP.  The most active sectors in FDI in 
2007 were extractive industries, telecommunications, and public 
works.  The projection for 2008 is to reach an FDI inflow of USD 
1.35 billion, driven again by the same sectors. 
 
¶4. The Bretton Woods institutions have generally endorsed the 
government's macro-economic regime, although they questioned certain 
non-transparent budget and tax decisions in late 2008.  Better 
governance is a priority, which the government and donors agree must 
be given special attention, including the improvement of the 
regulatory system and the fight against corruption.  The poor 
quality and high cost of physical infrastructure (road, electricity, 
telecommunications, port efficiency, air cargo capacity) and the 
limited availability of credit and financing instruments constitute 
investment climate bottlenecks that offset Madagascar's advantage 
from a low-wage, productive work force.  The Malagasy government, in 
collaboration with donor institutions and countries, is analyzing 
impediments to investment with a view towards eliminating the most 
serious drawbacks.  Madagascar moved up 7 rankings in the World Bank 
2009 "Doing Business Report," ranking 144th out of 181 countries, 
compared to 151st in the 2008 report. 
 
¶5. In September 2006, the Madagascar Action Plan (MAP), a five-year 
development strategy paper (2007-2011), was presented to the public 
and private sectors, as well as to donors.  The MAP is guiding 
government strategy in encouraging growth as a market-based economy, 
in attempting to alleviate poverty and improve social indicators, 
and in attracting foreign investment. 
 
¶6. A new export promotion law adopted by the Parliament in December 
2008 grants some benefits to exporters, including the reduction of 
the customs tax rate on imported capital goods and raw materials to 
five percent (previously ranging from 10 to 20 percent).  Additional 
benefits include export tax exemption, freedom of opening bank 
accounts abroad, and the creation of an export agency under the 
economic ministry to facilitate and promote exports.    In 2008, the 
Economic Development Board of Madagascar (EDBM) continued to assist 
foreign investors and conducted various road shows abroad to attract 
foreign investments.  The creation of the American Chamber of 
Commerce in Madagascar (AMCHAM) in December 2008 should help boost 
trade and investment between the U.S. and Madagascar. 
 
¶7. The first country to sign a Millennium Challenge Account (MCA) 
Compact, in April 2005 in the amount of USD 110 million, Madagascar 
is making strides in implementing various activities in the areas of 
financial services, land tenure, and agribusiness investment. 
 
¶8. There is no law or regulation authorizing private firms to adopt 
articles of incorporation or association that limit or prohibit 
foreign investment, participation or control.  Further, there is no 
official practice to restrict foreign investment, participation in, 
or control of domestic enterprises.  There is no mandatory screening 
of foreign investment and 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. 
 
¶9. To show transparency and good governance in the management of 
revenues from extractive resources, the GOM and the main operators 
in the extractive industries such as Exxon Mobil, Rio Tinto, 
Madagascar Oil, and Sherritt continued to take the necessary steps 
to implement the Extractive Industries Transparence Initiative 
(EITI) in 2008. 
 
CONVERSION AND TRANSFER POLICIES 
-------------------------------- 
 
¶10. In 1998, the GOM lifted all restrictions on current payment and 
transfers and accepted the obligations of Article VIII of the IMF 
articles of Agreement, which provides for the complete elimination 
of exchange controls.  There are no restrictions on converting or 
transferring funds associated with foreign investment, including 
remittances of investment capital, earnings, loan repayments, and 
lease payments into a freely usable currency at legal market 
clearing rate.  When delays occur in conversion or funds transfer, 
they are due to temporary shortages of foreign exchange.  By law, 
foreign investors must make remittances through banks.  There is no 
limitation on the inflow or outflow of funds for remittances of 
profits, debt service, capital, and returns on intellectual 
property.  Exporters and foreign investors may maintain bank 
accounts in foreign currencies.  Madagascar has a flexible exchange 
rate policy, allowing underlying exchange market pressures to 
determine rates and limiting central bank intervention to dampening 
temporary shocks and achieving its external reserves objectives. 
 
¶11. Madagascar, through donors' assistance, is working to pass 
comprehensive legislation to regulate and facilitate electronic 
transactions (e-commerce). 
 
EXPROPRIATION AND COMPENSATION 
------------------------------ 
 
¶12. There are no recent cases of expropriation actions by the GOM 
nor do Government policies suggest that it is likely to take such 
actions in the near future.  Since the country is under an IMF 
poverty reduction and growth facility (PRGF) agreement, there is 
little risk of future expropriation. The state divestiture from 
public enterprises has been a cornerstone of government policy; 
however, government proposals in late 2008 to recreate a state oil 
company have called this policy into question.  There are no laws 
requiring local ownership in specific economic sectors except in oil 
exploration, in which the Government office called OMNIS must be the 
partner of all foreign companies. 
 
DISPUTE SETTLEMENT 
------------------ 
 
¶13. Madagascar's legal system is based on French civil law and its 
provisions contain adequate protections for private property rights. 
 Malagasy commercial law consists largely of the Code of Commerce 
and Annexed laws, which are reportedly applied in a 
non-discriminatory manner.  Madagascar has a written bankruptcy law, 
created in 1996 and currently included in the Code of Commerce.  The 
Malagasy judicial system is slow and complex and has a reputation of 
opacity and corruption.  U.S. assistance has supported the 
development of alternative dispute resolution systems to provide 
more rapid, more transparent, and less costly resolution of 
commercial disputes. 
 
¶14. Under the privatization law, the GOM accepts binding 
international arbitration of investment disputes between foreign 
investors and the state.  The courts recognize and enforce foreign 
arbitral awards and international arbitration is accepted as a means 
for settling investment disputes between private parties.  The 
Malagasy Arbitration and Mediation Center (CAMM, in its French 
acronym) was created in 2000 as a private organization to promote 
and facilitate the use of arbitration to resolve commercial disputes 
and to lessen reliance on a court system that is, at a minimum, 
overburdened.  As a result, many private contracts now include 
arbitration clauses.  The EDBM is also responsible for investment 
dispute resolution; however, it has been unable to resolve several 
concerns raised by American companies regarding conflicts of 
interest and the lack of transparency in contracting and in 
government regulatory decision making. 
 
¶15. Madagascar is a signatory to the International Center for the 
Settlement of Investment Disputes (ICSID) Convention.  Madagascar is 
also a signatory to the New York Convention of 1958 on the 
Recognition and Enforcement of Foreign Arbitral Awards and 
Madagascar has been a member of the Multilateral Investment 
Guarantee Agency (MIGA) since 1989.  The Malagasy government has 
expressed interest in negotiating a bilateral investment treaty 
(BIT) with the U.S.  Initial discussions began in late 2008. 
 
PERFORMANCE REQUIREMENTS AND INCENTIVES 
---------------------------- 
 
¶16. As a signatory of the WTO Agreement, Madagascar is bound by the 
WTO TRIMS (Trade Related Investment Measures).  Performance 
requirements are not imposed as conditions for establishing or 
maintaining investments, except in the Export Processing Zones (EPZ) 
regime under which firms must export 95 percent of output to qualify 
for EPZ investment incentives.  Foreign or local investors can 
benefit from tax exemptions provided their EPZ projects fall into 
the following categories: 
- Investment in export-oriented manufacturing industries; 
- Development or management of industrial free zones; or 
- Provision of services to EPZ companies. 
 
¶17. The EPZ law approved in December 2007 granted the following 
advantages and tax incentives to EPZ companies: 
- The EDBM is in charge of EPZ companies' approval.  The EDBM has to 
deliver an eligibility certificate within 20 days of deposit of 
file. 
- 15 years tax exemption for EPZ companies 
- No VAT or customs duties on imports of raw materials 
- No registration taxes 
- No customs tax on exported goods 
- Income tax on expatriate not exceeding 30 percent of the taxable 
basis 
- Free access to foreign currency deposited in the company's foreign 
currency bank account. 
 
¶18. The new export promotion law that was adopted in December 2008 
determined that these EPZ provisions (advantages and tax incentives) 
would only be offered until December 2010.  Already existing EPZ 
companies will continue to enjoy the advantages described above 
after that date. 
 
¶19. There are no requirements restricting the mobility of foreign 
investors.  The regime for visas, residence and work permits is, on 
its face, neither discriminatory nor excessively onerous.  Since the 
creation of the EDBM, processing of residence and work permits has 
been streamlined. 
 
¶20. There is no requirement that investors purchase from local 
sources, or export a certain percentage of output (except for EPZ 
companies), or only have access to foreign exchange in relation to 
their exports.   There is no requirement that nationals own shares 
of foreign companies, that the share of foreign equity is reduced 
over time, or that technology is transferred on certain terms. 
There are no government-imposed conditions on permission to invest 
(although investors must apply for such permission), including 
location in a specific geographical area, specific percentage of 
local content or local equity, substitution for imports, export 
requirements or targets, employment of host country nationals, or 
technology transfer.  Investors are not required to disclose 
proprietary information to the government as part of the regulatory 
approval process.  U.S. and other foreign firms are able to 
participate in government-financed and/or subsidized research and 
development programs on a national treatment basis.  There are 
officially no discriminatory or preferential export or import 
policies, which would affect foreign investors, nor discriminatory 
tariff or non-tariff barriers, or other measures such as import or 
price controls.  However, as of January 2009, the government was in 
the process of recreating a state oil company with exclusive rights 
to import certain petroleum products, as well as implementing an 
administrative pricing mechanism for these products.  Also, in 
practice, there is at times an unlevel playing field in terms of 
tariff and tax burden among private companies. 
 
RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT 
------------------------- 
 
¶21. Foreign and domestic private entities may establish and own 
business enterprises and engage in all forms of remunerative 
activity.  They may freely establish, acquire, and dispose of 
interests in business enterprises. The government remains a minority 
shareholder in some privatized companies, such as Telma, and 
continues to own Air Madagascar, but competitive equality is the 
official standard applied to all private enterprises with respect to 
access to markets, credit, and other business operations such as 
licenses and supplies.  In practice; however, politically-connected 
companies are sometimes given preferential market access.  The 
private sector often complains about government interference in some 
sectors of the economy, including flour and vegetable oil. 
 
PROTECTION OF PROPERTY RIGHTS 
----------------------------- 
 
¶22. Secured interests in property are recognized, but not yet 
enforced in the country.  Banks and insurance companies use 
mortgages to guarantee loans relating to commercial property. 
 
¶23. A prohibition on land ownership by foreigners impedes access to 
real property.  A system of long-term leases - up to 99 years - was 
established in 2008 following the adoption of investment law 
2007-036 to address the issue, but there have been long delays and 
few successes so far in the approval of land leases for foreigners. 
The new investment law grants land and properties to companies 
registered in Madagascar under certain conditions fixed by EDBM, 
which issues authorization documents.  In addition, MCA's 
contribution to the land tenure issue is improving the land rights 
process. 
 
¶24. Madagascar is a member of the WIPO (World Intellectual Property 
Organization) and is signatory to the WTO TRIPS agreement on trade 
related aspects of intellectual property.  Two government offices 
share responsibility for the protection of intellectual property 
rights:  the Malagasy Office for Industrial Property (OMAPI) and the 
Malagasy Copyright Office (OMDA).  Protection of intellectual 
property rights is uneven.  Officially, authorities protect against 
infringement, but in reality, enforcement capacity is quite limited. 
Major brands are generally respected but pirated copies of movie 
DVDs, music CDs and tapes, electronic equipment and spare parts are 
sold openly.  Some television stations regularly show pirated copies 
of first-run U.S. and European movies. On July 17, 2006, an 
inter-ministerial decree was issued to reinforce measures to fight 
counterfeiting of literary and artistic works. Upon evidence of 
illegal activity, OMDA and its partners (police, customs officers, 
tax officers, controllers of the ministry of commerce) proceed to 
the seizure of all illegally reproduced  recorded products, be they 
illegally manufactured or imported, and specific materials used for 
such dealings. Those products are subject to public destruction in 
presence of the contravener(s). A control committee was set up to 
follow-up the application of such decree. To conclude, enforcement 
of intellectual property rights is limited due to a shortage of 
trained personnel, legal capacity and resources. 
 
TRANSPARENCY OF REGULATORY SYSTEM 
-------------------------- 
 
¶25. Excessively complex and inconsistently applied bureaucratic 
regulations are an impediment to investment and can be a breeding 
ground for corrupt practices.  The lack of transparency in 
government regulatory decisions has generated complaints from 
current investors.  As part of its emphasis on good governance, the 
GOM is seeking to streamline processes and improve administrative 
efficiency and transparency at all levels. Thanks to the EDBM, 
registration of companies now only takes around 4 days. 
 
¶26. Tax, labor, environment, health, and safety standards are not 
used to impede foreign investment, and there are no informal 
regulatory processes managed by non-governmental organizations or 
private sector associations. 
 
¶27. Accounting systems are transparent and consistent with 
international norms, and there are no private sector and/or 
government/authority efforts to restrict foreign participation in 
industry standard-setting consortia or organizations. 
 
EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENT 
------------------------- 
 
¶28. In spite of the general under-development of the banking system, 
banks are free to support the flow of resources in the product and 
factors markets.  Credit is usually allocated on market terms and the 
private sector/foreign investors are able to get credit on the local 
market.  However, many of the EPZ companies use the services of 
banks in neighboring Mauritius, where the sector is more developed. 
 
¶29. There are no cross-shareholding arrangements used by private 
firms to restrict foreign investment through mergers and 
acquisitions.  There are no visible private sector and/or government 
efforts to restrict foreign participation in industry or control of 
domestic enterprises. 
 
¶30. Within the Malagasy law, there is an effective regulatory system 
established to encourage and facilitate portfolio investment and the 
estimated total assets of the country's largest bank are around USD 
400 million. 
 
¶31. The government announced in January 2009 that the Malagasy Bank 
for Construction and Development (BMCD) would be launched in 2009. 
The bank's main mission will be to assist small and medium 
enterprises. 
 
POLITICAL VIOLENCE 
------------------ 
 
¶32. Political violence is relatively uncommon in Madagascar.  The 
political crisis of January-June 2002 involved a division of the 
country between two rival governments but was remarkably restrained 
in terms of violence.  Civil disturbances are uncommon and there 
have been no notable cases of politically motivated damage to 
projects.  Public safety is adequate; although standard warnings to 
guard against street crime and theft from vehicles and to minimize 
or avoid night time road travel, particularly in rural areas apply. 
Madagascar, being an island, has no belligerent neighbors. 
 
CORRUPTION 
---------- 
 
¶33. Complicated administrative procedures introduce delays, 
uncertainties and multiply the possibilities for corruption. 
Combating corruption is a stated priority of the Malagasy government 
and senior officials appear to be taking that effort seriously. 
BIANCO, the Anti-corruption Independent Office created in 2004, 
continues to implement the anti-corruption policy.  Ten sectors are 
targeted in the fight against corruption: justice, gendarmerie, 
police, tax office, customs, treasury, land, trade, education, and 
health. 
 
¶34. Giving or accepting a bribe is a criminal act and is sentenced 
by court. 
 
¶35. In 2008, Transparency International ranked Madagascar 85th out 
of 180 countries surveyed, as it scored 3.4 in the Corruption 
Perception Index (CPI), indicating a severe (albeit improving) 
corruption problem. 
 
¶36. On July 19, 2008, SAMIFIN, the office in charge of the fight 
against money laundering was created.  Its objective is to 
investigate all allegations of money laundering coming from 
financial institutions, including those involving corruption. 
 
BILATERAL INVESTMENT AGREEMENTS 
------------------------------- 
 
¶37. According to ICSID (International Center for the Settlement of 
Investment Disputes) and UNCTAD, Madagascar has concluded bilateral 
investment agreements with Switzerland, Sweden, Norway, Mauritius, 
Germany, France, Thailand, Belgium, China, and Canada.  Also, 
Madagascar has signed double taxation treaties with France and 
Mauritius. The Malagasy government has expressed interest in 
negotiating a bilateral investment treaty with the U.S.  Initial 
discussions began in late 2008. 
 
OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS 
------------------------- 
 
¶38. On March 31, 1998, OPIC and Madagascar signed a bilateral 
Investment Incentive Agreement, which updates the old agreement of 
¶1963. 
 
¶39. Madagascar is a member of the MIGA (Multilateral Investment 
Guarantee Agency).  The average annual exchange rate for 2008 was 
1708 ariary per one USD.  As of January 2009, the ariary had 
depreciated to around 1890 per one USD.  To the benefit of Malagasy 
exporters, further modest depreciation is expected in 2009. 
 
LABOR 
----- 
 
¶40. Madagascar has a significant pool of available labor, due to the 
combined impact of unemployment and under-employment.  Private 
sector wages have been relatively stable and are below those in most 
competitor countries; indeed, this fact, combined with the high 
quality of much Malagasy labor, may constitute the country's 
strongest asset for foreign investors.  The minimum wage for the 
non-agricultural private sector in 2008 was 70,025 ariary per month, 
approximately USD 41.  The Constitution and Labor Code grant workers 
in the private and public sectors the right to establish and join 
labor unions, and to bargain collectively.  The National Labor Code 
and implementing legislation prescribe working conditions, wages, 
and standard for worksite safety.  As a member of the ILO 
(International Labor Organization), Madagascar adheres to the ILO 
convention protecting workers rights. 
 
FOREIGN TRADE ZONES/ FREE PORTS 
-------------------- 
 
¶41. The incentives available in the Export Processing Zone (EPZ) are 
described in "Performance Requirements and Incentives".  There is no 
distinction between foreign and domestically owned firms in terms of 
eligibility for EPZ treatment, which has been granted by the EDBM 
since December 2007.  Again, as stated earlier, EPZ incentives will 
be offered only through December 2010, but pre-existing EPZ firms 
will maintain their incentives and status beyond that date. 
 
FOREIGN DIRECT INVESTMENT STATISTICS 
------------------------ 
 
¶42. According to a World Bank survey, Madagascar is among the 40 
most difficult countries in the world in which to conduct business. 
The main reasons are the weaknesses of the judicial system and the 
banking system (high interest rates and unavailability of credit), 
the high cost and low quality of electric power, high tax rates, red 
tape, corruption, conflicts of interest, a lack of transparency in 
decision-making, and the high costs of ground and air transport and 
telecommunications. 
 
¶43. In 2007, FDI inflows to Madagascar amounted to USD 777.1 million 
or 10.5 percent of GDP.  Compared to 2006, FDI inflows more than 
doubled in 2007.  Although this increase boosted GDP figures, it did 
not create significant numbers of jobs.  FDI was concentrated in the 
following sectors: extractive industry (USD 472.9 million, or more 
than 60 percent of the total), telecommunications (USD 191.6 
million), building and public works (USD 58.2 million), financial 
activities (USD 21.3 million) and oil product distribution (USD 12 
million).  This rebound was fuelled essentially by investment in 
mineral exploration, particularly by the ilmenite investment project 
of QIT Madagascar Mineral (Rio Tinto) and by the nickel and cobalt 
investment project of Ambatovy, a joint venture including Sherritt 
International, SNC-Lavalin, Sumitomo Corporation, and Korea 
Resources Corporation. 
 
¶44. The main partner countries of Madagascar in terms of 2007 FDI 
flows were Canada with 46 percent of new FDI, followed by France 
with 21 percent, and Mauritius with 16 percent.  The United States 
contributed 4.5 percent to 2007 FDI inflows.  Canadian investment 
increased by 146 percent in 2007. Ninety-nine percent of Canadian 
investment was concentrated in the extractive industry. French 
investments in 2007 were six times higher than in 2006 and were 
allocated in the telecommunication sector (54 percent), building and 
public works (36 percent), and financial activities (7 percent). 
Mauritian investments increased five times and were concentrated in 
the telecommunications sector (81 percent), but also included oil 
product distribution (10 percent), manufacturing (4 percent), and 
financial sector (4 percent). 
 
¶45. U.S. investment covers a broad spectrum of sectors including oil 
exploration, apparel, mining, and handicrafts. 
 
¶46. Several additional large mining projects are on the horizon, and 
the government is in the final stages of liberalizing the 
telecommunications sector.  Thus, the investment trends of 2008 - 
which have not generated the significant employment opportunities 
that are badly needed -- will likely continue in 2009.  However, the 
agribusiness sector has the potential to attract sizable, 
job-generating investments, particularly in palm oil, corn and 
sugar, if land tenure complications can be resolved.  Tourism is the 
other sector most often cited for its potential for both foreign 
investment and job creation. 
 
¶47. FDI inflows in 2008 are projected to reach USD 1.35 billion. 
 
MARQUARDT