OBSTACLES TO INVESTMENT: THE VIEW OF A PROMINENT

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