MADAGASCAR 2009 INVESTMENT CLIMATE STATEMENT

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