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