VII. Investment Climate Openness to Foreign Investment The government looks to private investment as the future engine of economic growth in Cape Verde. It seeks to attract investment that will modernize the country's economic structure and stimulate any and all business activities. This favorable attitude towards private initiative is embodied in the legislation passed between 1989 and 1990 which specifies that neither discrimination nor distinction will occur between foreign and national investors. Recently, the government refined these laws and related regulations in order to expedite approval for new investments destined to start up new ventures or expand existing ones. In the new law all sectors of activities are now open to foreign investment. Conversion and Transfer Policies Upon request at the Bank of Cape Verde, revenue/profits, capital gains, and loan repayments may be transferred overseas within 60, 90, and 30 days, respectively. The Bank of Cape Verde will pay interest on all transfers with waiting periods of more than 30 days, starting on the 31st day. Timely transfers may not always be possible when requests cover large sums and affect Cape Verde's balance of payments; in such instances, the government will order that the transfer be made in installments, generally every three months over a period of no longer than two years. Expropriation and Compensation In the event of expropriation, or acquisition of privately owned property by the government for the public's interest, the government will compensate the owner fairly, on the basis of prevailing market prices, or the actual market value of the property on the day of expropriation. Compensation will be prompt and may be repatriated at the exchange rate in effect on the day of expropriation. Dispute Settlement Disputes between foreign investors and the government will be settled either through a single referee or an arbitration commission. Referees may be foreigners. If so, they may not have the same nationality as the parties involved in the dispute. Should there be difficulty in reaching an agreement over the nomination of the referees, referees may be appointed by a recognized national body or international organization, with the ultimate authority being the international center of settlement of investment disputes (ICSID). Generally, the arbitration will be carried out in Cape Verde and in Portuguese, unless another site and language is requested and agreed upon by both parties. The decision of the single referee or the arbitration committee is final and cannot be appealed. Performance Requirements/Incentives The government does not place a premium on investments that respond to a long list of overall development objectives. Instead, it favors investments that are either export-oriented or diversify geographically and technologically the country's industrial bases. Incentives to firms that export their entire output are the most generous, but all firms, regardless of the location of their markets, can benefit from the following incentives: -- No corporate income and complementary taxes during the first three years of operations. -- No taxes on profits reinvested in the same or in other industrial establishments based in Cape Verde. -- No restrictions on imports as long as Cape Verde's reserves of foreign exchange are not required to purchase the imports. -- Duty-free imports of construction materials and capital equipment, destined to start up new -- Tariff exemptions on raw materials and other inputs imported for production during the initial two years of operation, with progressively higher custom duties in the successive three years of operation (equal to 25, 50 and 75 percent of the full rate). -- Rebates on custom duties paid for imported raw materials and other imports used in the production of goods destined to be sold overseas. -- Provision for private, bonded warehouses; operators of such warehouses may pay custom duties at the moment sales are made locally (instead of relying on a duty drawback system). -- No approvals or tariffs for exporting/ re-exporting industrial products (other products require registration). -- Provision for freely recruiting foreign workers, up to 10 percent of the total work force; foreign workers, in turn, benefit by the repatriation of up to 70 percent of the salary earned while working, repatriation of up to 100 percent of the salary earned while on vacation, and duty-free import of personal goods and one car. -- Tax deduction for expenses incurred in training of local workforce. Right to Private Ownership and Establishment The right to private ownership and establishment is guaranteed in the constitution. Protection of Property Rights Protection of property rights is guaranteed in the constitution. Regulatory System: Laws and Procedures The basic Capeverdean legislation affecting foreign investment is contained in the external investment law and the law of industrial development. These laws establish the principal of equal treatment for foreign investment, affirm the government's commitment to a dynamic business environment and the industrial development statute to regulate the granting of incentives and a simplified investment approval process. The industrial statute defines the approval process and incentives for industries, with special consideration for export-oriented industries. The entrepot law permits the creation of areas both for industry and warehousing, where merchandise is considered to be extraterritorial and thus not subject to customs duties. Recently approved laws on promotion of exports, on incentives to exports and on single-factory free zones stress the commitment of the government to encourage investment in export-oriented industries. The investment approval process has been greatly expedited with the recent revision of the external investment code. The center for investment and export promotion, Promex, has become a one-stop shop for external investors. In general, external investment operations are subject to prior authorization from the minister in charge of planning. An application is submitted to Promex, and within thirty days the investor should get a reply. If government action is not forthcoming, a tacit approval is assured. In order to benefit from incentives regarding capital transfers, external investment operations must be registered at the Bank of Cape Verde. Efficient Capital Markets and Portfolio Investment There is no capital market as yet in Cape Verde. The World Bank is currently assisting the government of Cape Verde to restructure its financial sector. The first step in this process has been the division of the Bank of Cape Verde, a monobank system, into a central and a commercial bank. The postal savings and loan system has also been restructured and modernized. No stock market or stock exchange exists in Cape Verde. Venture capital or other private financial services are also absent. Bank credit is available to foreign investors under the same conditions as those for national investors. The private sector has access to some credit instruments such as: loans, letters of credit and lines of credit. The legal accounting systems are clear but are not totally consistent with international norms. Portfolio investment in Cape Verde is extremely limited and depends on the limited ability of the Bank of Cape Verde. Even the social security funds are kept in non-interest bearing accounts because the Bank of Cape Verde is unable to effectively lend and guarantee the proper interest return to the accounts. Political Violence One of Cape Verde's strengths lies in its political and social stability. Bilateral Investment Agreements Cape Verde has bilateral investment agreements with Austria, Germany, Holland, Portugal and Switzerland. Agreements with Italy and Russia are being negotiated. OPIC and MIGA Cape Verde is a member of the multi-lateral investment guarantee agency (MIGA) and it benefits from the loan guarantee program of the overseas private investment corporation (OPIC). Labor The cost, productivity, and availability of labor is favorable. Prevailing wages, although not among the world's lowest, are competitive at under USD 0.70 per hour. Unemployment, however, is high and there is inadequate business and technical training. Foreign-Trade Zones/Free Ports Taken together the following five laws: the external investment law, the industrial development law, the industrial statute, the entrepot law, and the law of free- enterprises constitute a package of free zone legislation in everything but the name. They constitute a strong package of incentives for export-oriented industrial firms, which permit broad flexibility of location. Capital Outflow Policy The regulatory legislation specifies that for the initial five years of operation, dividends may be freely expatriated without tax, and that for the next fifteen years dividends may be expatriated with a flat tax of ten percent. Incentives for investment in developing countries are not included in the legislation but they have been provided on a "ad hoc" basis. Foreign Direct Investment Value of foreign investment in 1993 was approximately USD 3.5 Million. Major Foreign Investors Most important foreign investors have come from Asia (China Rising - promotor- and involving China Shanghai Corporation and You Huang Hai Knit Wear Factory), Portugal and Italy. In 1993, the agency in charge of investment promotion, Promex, was contacted by about 65 potential investors of which 50% were Portuguese and French, and the remaining Asian, Italian and Dutch.