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