ANGOLA - OPIC FUND NEEDED, BUT INVESTMENT CLIMATE IS DIFFICULT

UNCLAS SECTION 01 OF 03 LUANDA 000300 SIPDIS C O R R E C T E D C O P Y (SUBJECT LINE) SENSITIVE SIPDIS E.O. 12958: N/A TAGS: EINV ECON AO SUBJECT: ANGOLA - OPIC FUND NEEDED, BUT INVESTMENT CLIMATE IS DIFFICULT REF: STATE 27714 LUANDA 00000300 001.3 OF 003 ¶1. (SBU) Summary: Although awash in cash from its extractive industries, Angola's private sector is severely stunted by a lack of human capacity and a business climate that ranks among the worst in the world due to bureaucratic and legal inefficiencies. Nevertheless, a high rate of return is attracting interest in investment here, albeit with politically connected and well-funded Angolan partners. There is a need in Angola for investment from OPIC's proposed Africa Consumer Fund, especially in the areas of agriculture and fisheries. Most foreign companies invest in Angola through sovereign lines of credit extended by their home countries. OPIC's proposed Africa Consumer Fund would help create a more equal investment field. The capacity to succeed in these sectors exists, but is currently underdeveloped. END SUMMARY Economics -------------- ¶2. (U) Angola's economy is one of the fastest growing in the world, driven by booming oil production and high oil prices. Production, although officially capped by OPEC at 1.9 million barrels per day (bpd),is projected to reach over 2.2 million bpd by the end of 2008. Angola's economy grew by 19.5 percent in 2006 and 23.4 percent in 2007, and is expected to match or beat that pace in 2008. Inflation was reduced from triple digits near the end of the war to just under 12 percent last year. Thanks again to petroleum revenues, foreign exchange reserves are growing. Angola is our seventh largest source of foreign oil. With increasing oil revenues and extensive lines of credit supplied by the Chinese, Portuguese, Brazilian, and other governments, Angola is now in the midst of major infrastructure rebuilding. ¶3. (U) Angola's tremendous oil wealth has allowed it to come out from under a severe debt burden generated during the civil war years. The government deficit is under control and foreign reserve accounts are flush with capital from extractive industries, namely oil and diamonds. Outside these industries, however, the Angolan economy continues to sputter. Agriculture is slowly returning to the countryside, while manufacturing and service industries are scarce and generate few jobs to address the nation's burgeoning unemployment problem. ¶4. (U) According to the World Bank's 2007 "Doing Business" index, Angola ranks 167 out of 178 countries in promoting an open and efficient business climate. Angola's rankings in the categories of "starting a business" (173 out of 178) and "enforcing contracts" (176 out of 178) are of particular concern. ¶5. (U) Most foreign companies invest in Angola through sovereign lines of credit extended by their home countries (China, Brazil, and Germany are examples). OPIC's proposed Africa Consumer Fund would help create a more equal investment field. Transparency -------------- ¶6. (SBU) Under pressure from the international community, the Angolan government has made strides towards greater transparency by publishing financial information and working to limit extra-budgetary expenditures. Published budget documents have grown more detailed from year to year, but the 2006, 2007 and 2008 budgets still place a substantial portion of expenditures under vague headings like "administrative costs." The government has been implementing a government-wide accounting system, but the poor execution rate of budgeted expenditures remains a problem. The accountability of budgeted yet unspent funds and oil revenue beyond the published reference price (USD 56 per barrel) remain areas of concern. The Court of Accounts (Tribunal de Contas) reviews cases of official financial misconduct, but the published case load shows few convictions. Angola is a signatory to the UN Convention Against Corruption. ¶7. (SBU) Angola lacks a conflict of interest restriction that would limit the participation of government officials in private sector opportunities related to their public responsibilities. Petty corruption is a problem worsened by low civil service salaries and a proliferation of bureaucracy and regulations that present opportunities for rent-seeking. Complicated procedures and long bureaucratic delays sometimes tempt investors to seek quicker service and approval by paying "gratuities" and "facilitation fees." Transparency International's 2007 Corruption Perception Index (CPI) placed Angola at 147 out of 163 countries. ¶8. (SBU) Although Angola's public and private companies historically did not use transparent accounting systems LUANDA 00000300 002.3 OF 003 consistent with international norms, IMF enagement has spurred audits of Angola's largest public companies by major international accounting firms. In 2007, the Government of Angola announced that it would not enter into a formal program with the IMF, but did agree to continue Article IV consultations with the IMF. The Angolan Government does not participate in the Extractive Industries Transparency Initiative, although it has taken some of the steps necessary to qualify for the program. The government approved an audit law in 2002 that requires audits for all "large" companies, but it has not yet been possible to enforce this rule due to the lack of a professional accounting oversight body. The National Bank of Angola hopes to foster a professional body of accountants to enforce standards and certify qualified accountants. US firms operating in Angola are required to adhere to the Foreign Corrupt Practices Act. Agriculture a Key Sector -------------- ¶9. (U) Outside of the extractive industries sector, the agriculture sector provides the greatest opportunities for investment and growth. Angola is experiencing an economic boom with extensive infrastructure development. Agricultural outputs have not been able to keep up with demand. Recent examples of investment in Angolan agriculture include the Portuguese financing of the Buaco agriculture and livestock complex, that created 250 direct hire jobs in the Ganda municipality; and the funding of a $20 million agri-business projects financed by Chevron-Texaco, Agip and Totalfina Elf. Agro-processing has growth potential as the government continues its efforts to revitalize the agriculture sector. The result has been higher prices and an increasing demand for imports to supply what domestic producers cannot provide. The central planalto (including the provinces of Huambo, Bie, parts of Benguela, Kwanza Sul and Huila) are the documented "bread basket" of Angola. The staple crops in the central planalto are potatoes, cattle, and coffee to a degree. Agricultural output has increased since the 2002 peace accord, but yields, except for cassava production, are still remarkably low. In the government's view, large investments to improve the quality of the soil will be required before large scale agricultural production can in a significant way contribute to the country's economic output. Investors in Angola's agriculture sector can take advantage of investment incentives including a three year customs duty exemption, a five year capital gains tax exemption, and an eight year industrial tax exemption. Post supports programming in this sector. In March 2008, Chiquita Banana announced it had reached a USD 60 million agreement with an investor group to purchase bananas for export to Europe. ¶10. (U) Angola's fisheries sector will need significant investment in the coming years to take full advantage of the country's cold water coast line. Angola's fishery sector is an important part of Angola's domestic food production and is the fourth most important economic sector after the oil, diamond and agriculture sectors, contributing about 3.5% to GDP in 2005. Roughly 70% of marine landings are distributed in fresh or frozen form in the domestic market. Fish is part of the traditional diet in Angola and production is consumed mainly domestically. There is a strong demand for fish and the demand is not fully satisfied. Angola seafood and fish captured reached 600,000 tons in 2007. The government in the last several years has taken steps to revitalize its fisheries sector by creating new laws that allows for more investment. Law No.8/A/04 stipulates that foreign firms can fish in Angolan waters only when they are part of a joint venture with an Angolan company. Roughly 5% of the national production is exported, mainly to EU and US markets. ¶11. (U) Angola declares that it welcomes investment and has created the National Private Investment Agency (ANIP) to help investors and facilitate new investment under the 2003 Basic Law for Private Investment (Law 11/03). Law 11/03 lays out the general parameters, benefits, and obligations for foreign investors, and provides for equal treatment, offers fiscal and custom incentives, simplifies the investment process and sets capital requirements. Decrees and regulations issued by other government ministries may take precedence over the 2003 Law. Present and future rules may erode or negate investment protections offered by the 2003 Investment Law. ANIP must approve foreign investments of USD$100,000 to $5 million. The Council of Ministers must approve investments of over USD$5 million, as well as any investments that requires a concession or involves the participation of a parastatal. After obtaining contract approval from ANIP or the Council of Ministers, the investor must register the company, publish the company's statutes in the official gazette (Diario da Republica),obtain a business license, and register with the fiscal authorities. Foreign investment under USD$ 100,000 do not require ANIP approval. Obtaining the proper permits and LUANDA 00000300 003.3 OF 003 business licenses to operate in Angola can be time-consuming. The World Bank Doing Business in 2008 report documented that it took 166 days to register a business in Angola. Since 2003, the "Guiche Unico", or one-stop shop, led by the Ministry of Justice has brought various ministries together in one place in an effort to simplify and speed up registration. ANIP projects that the Guiche Unico will increase annual number of registered companies in the country and with greater efficiency. Comment -------------- ¶12. (SBU) Comment: Although foreign investors can set up fully-owned subsidiaries in many sectors, the investment climate strongly encourages them to take on local partners who are both financially and politically connected. However, even with a well connected partner it still can take a long time to start a business. Foreign investors may find it even more difficult to function in Angola without a local partner, but examples do exist of foreign investors dropping their local partners and becoming profitable. The biggest obstacle that investors face is the government itself. Although the government is trying to create a more investor-friendly climate, existing laws governing the economy have vague provisions that permit wide interpretation and are applied inconsistently across all sectors. The government has made clear its intentions to improve the investment climate, but their actions have not caught up with their rhetoric. MOZENA