VII. INVESTMENT CLIMATE OPENNESS TO FOREIGN INVESTMENT In the past potential investors in Madagascar have been compelled to deal with a thicket of bureaucratic obstacles as they sought the necessary permits and approvals. Investors needed the authorization of those government ministries claiming technical competence in the targeted industry. Ministerial overlap was a serious problem and often investors had no idea which ministries to approach or where to start. It was a process lacking in transparency and rife with corruption. The recent introduction of a "guichet unique", or "one-stop shop", to serve as the focal point for new project proposals has the potential to simplify the approvals process. Now semi- operational, this office does not have decision-making authority, but is responsible for directing a proposal to the relevant technical ministries. After a two-year transitional period this office is slated to become autonomous. Another goal of this "streamlined" project examination process is to clarify the standards for project approval and the reasons for refusals. CONVERSION AND TRANSFER POLICIES Until May 1994 the foreign exchange value of the Malagasy franc was set administratively. The local currency remained highly over-valued in spite of several large devaluations since the mid- 1980's. The low levels of Central Bank foreign currency reserves meant that foreign exchange was essentially unavailable for holders of Malagasy francs wishing to convert them into foreign currency. All available foreign exchange was needed to finance the importation of petroleum products and other essential imports. The establishment of an interbank foreign currency market essentially floated the currency and quickly resulted in a fifty percent depreciation of the Malagasy franc vis a vis the French franc, the reference currency. Local businessmen are now free to bid for foreign exchange in this market. A Central Bank requirement that local banks repatriate a portion of their foreign currency reserves held in banks abroad has had the effect of keeping the interbank market supplied with foreign exchange in recent weeks. EXPROPRIATION AND COMPENSATION During the 1970's the socialist government of Madagascar pursued a policy of national "self-sufficiency" that included the expropriation of foreign-owned companies. The seizure of property owned by foreign oil companies to create SOLIMA, the government oil parastatal, was the most visible expression of this policy. The government has settled the expropriation claims of some of the affected companies, but others remain outstanding after nearly twenty years. In the future, expropriation of foreign-owned property by the Malagasy government is not likely. The present government is supportive of foreign investment and seems to realize the damage done by past policies to foreign perceptions of the business climate in Madagascar. DISPUTE SETTLEMENT The Malagasy government does not have a record of expeditious settlement of expropriation claims. The still unsettled claim of one U.S. oil company, whose assets were expropriated along with those of other foreign companies to create the Malagasy national oil company (SOLIMA) dates from 1976. Although recent negotiations toward a settlement have apparently been conducted in good faith, the government does not seem to place a high priority on coming to closure. To date the government has not accepted binding arbitration as a settlement option in these disputes. Investors in Madagascar face a legal environment in which the security of private property and the enforcement of contracts is inadequately protected by the judicial system. Legal traditions inherited from the French (pre-1960 French law) were superimposed on a system designed to facilitate state control under a socialist regime. Private sector dispute settlement mechanisms were not developed extensively. The legal framework in which the private sector operates in Madagascar suffers from 1) problems in the content of the law as written; 2) problems caused by insufficient dissemination and knowledge of the laws; and 3) problems related to inconsistent application and enforcement of the laws. POLITICAL VIOLENCE Political violence directed against foreign-owned projects or installations in Madagascar has not been a problem. PERFORMANCE REQUIREMENTS/INCENTIVES Potential foreign investors may be required to demonstrate that their project will generate local employment, maximize the use of local inputs, or train Malagasy workers for eventual technical or managerial roles in order to receive project approval. The approval process is not transparent and is subject to often capricious bureaucratic and political influence, making it impossible to determine in advance the precise requirements. Investment incentives are available for industries, under the Export Processing Zone (EPZ) regulations. foreign or Malagasy investors can benefit from tax exemptions provided their projects fall into certain qualifying categories: 1) investment in export-oriented manufacturing industries; 2) development or management of industrial free zones; or 3) provision of services to EPZ companies. RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT Foreigners are prohibited from owning real property in Madagascar, but are allowed to lease real property for a maximum of fifty years with the approval of the Minister of Interior. Property rights in the mining sector deserve special attention because Madagascar's mineral wealth is of particular interest to foreign investors. The Mining Law (#90-017 dated July 20, 1990) attributes ownership of all mineral deposits to the state, regardless of the identity of the owner of the surface land, and exploiters/investors can lease the land. Landowners can lose rights over their land if the government decides to excavate sub- surface materials. The same law allows mining authorities to classify mineral deposits according to national defense needs. An administrative decision can easily change a mineral's classification and affect the interests of a private investor. The criteria determining ministerial classification are not specified. PROTECTION OF PROPERTY RIGHTS Madagascar does not have in place a legal system that effectively protects and facilitates the acquisition and disposition of property rights, including intellectual property. REGULATORY SYSTEM: LAWS AND PROCEDURES In general the Malagasy regulatory apparatus leaves a great deal to be desired in terms of transparency and streamlining. A lack of transparency in the investment project approval process (see section "Openness to Foreign Investment") still constitutes a major disincentive for potential investors. Tax evasion is widespread in Madagascar with bribery of customs or other tax officials a routine occurrence. To the extent that businessmen engage in such tax evasive behavior without being called to account, other firms are placed at a competitive disadvantage if they do not follow suit. EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENT Until the recent introduction of an interbank foreign exchange market the rather rudimentary Malagasy financial system did little to support inward investment flows and the efficient allocation of capital resources. Local and foreign businessmen can now bid for foreign exchange in this market to meet external obligations. In the past, local bankers have complained that one of the principal factors constraining the extension of local credit has been the lack of bankable projects. Another has been the large fiscal deficits run by the central government, deficits which have compelled the central bank to restrict credit creation in the banking system to keep a lid on inflationary pressures. This situation is likely to persist until the central government institutes effective fiscal reforms. The banking system in Madagascar consists currently of five banks. European banking institutions hold a controlling interest in two banks: Banque Malgache de l'Ocean Indien (BMOI) and BNI- Credit Lyonnais Madagascar (BNI-CL), and Union Commercial Bank (UCB) is controlled by a Mauritian bank. Bankin'Ny Tantsaha Mpamokatra (BTM) is wholly-owned by the Malagasy government and Banky Fampandrosoana Ny Varotra is sixty-five-percent owned by the state. BTM is insolvent and the government is under pressure from the World Bank and IMF to privatize. There is no stock market in Madagascar and mergers, acquisitions and takeovers are not an element of the local commercial and financial environment. BILATERAL INVESTMENT AGREEMENTS According to the Ministry of Industry, the only country with whom Madagascar has concluded a bilateral investment protection treaty is France. OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS Madagascar is a member of the Multilateral Investment Guarantee Agency (MIGA). OPIC is not active in Madagascar because of little interest in direct investment by U.S. firms. LABOR With widespread unemployment and underemployment Madagascar is a labor surplus country. Wage rates in Madagascar are among the lowest in the world. Malagasy workers are relatively easily trained and skill availability is good for the types of manufacturing that dominate this sector, i.e. textiles and clothing. More sophisticated manufacturing skills are not available. Workers in Madagascar enjoy the right of free association and are free to organize and engage in collective bargaining. Safety standards in the workplace are generally not enforced. FOREIGN TRADE ZONES/FREE PORTS Export Processing Zone (EPZ) regulations in Madagascar allow foreign or Malagasy investors to qualify for tax exemptions provided their projects fall within one of three categories: 1) Investment in export-oriented manufacturing industries; 2) Development or management of industrial-free zones; or 3) Provision of services to EPZ companies. Depending on the nature of the investment, qualifying companies may qualify for tax holidays of varying terms. Personal taxes are reduced and EPZ firms are exempt from paying customs duties, import and value- added taxes, and export duties. EPZ firms may be set up in special zones or may establish themselves independently. They are still subject to the prohibition against foreign ownership of real property. Foreign investors may freely repatriate profits. Malagasy investors are required to repatriate foreign currency profits and convert them into Malagasy francs within ninety days of receipt. CAPITAL OUTFLOW POLICY There is little, if any, outward direct investment from Madagascar and the government has no programs to support such investment. MAJOR FOREIGN INVESTORS There are no comprehensive statistics available on foreign direct investments in Madagascar. Most of the foreign investment flows in recent years have taken place under the provisions of Export Processing Zone (EPZ) regulations. Of eighty EPZ companies operating in mid-1993, 45 were controlled by French investors either individually or in cooperation with local partners. Sixteen were majority owned by Malagasy entities. The remainder were divided between entities from Mauritius, Hong Kong, South Africa, Singapore, Germany, Italy and Spain.