2011 Investment Climate Statement - Madagascar

2011 Investment Climate Statement
Bureau of Economic, Energy and Business Affairs
March 2011

Overview of Foreign Investment Climate

According to a World Bank survey, Madagascar is among the 50 most difficult countries in the world in which to conduct business. Political turmoil, weaknesses in the judicial system and the banking sector (high interest rates and unavailability of credit), the high cost and low quality of electric power, high tax rates, a complex business environment, corruption, a lack of transparency in decision-making, and the high costs of ground and air transport make investing in Madagascar a challenge. While the government officially welcomes foreign investment, a 2009 military coup d’état established a de facto regime that remained in power at the end of 2010, and the continued political instability had a negative impact on foreign investment in the country. In the final weeks of 2010, the de facto regime targeted foreign investments in the oil and mining sectors for potential expropriation, but by year’s end, no formal documentation or action had occurred.

In 2010, only one foreign company (WISCO-a Chinese firm) invested in the mining sector, and after the 2009 termination of AGOA, the once thirty company strong textile industry only had five firms still exporting apparel to the U.S. Economic prospects in 2011 highlight two mining projects, the QMM mineral sands operation (Rio Tinto) with an annual export estimate of 750,000 tons of ilmenite and the Ambatovy Project (Sherritt International Corporation, Sumitomo Corporation, and Korea Resources Corporation), which begins nickel and cobalt extraction this year.

Prior to the March 2009 coup d’état, the Bretton Woods institutions had generally endorsed the government's macro-economic regime, although they questioned certain non-transparent budget and tax decisions in late 2008. The creation of the American Chamber of Commerce (AMCHAM) in late 2008 benefited Americans and other investors by providing a new forum to lobby for their interests. Due to lack of financing, the international audit scheduled for 2009 to allow Madagascar to become a full member of the Extractive Industries Transparence Initiative (EITI) was not carried out. Hence, Madagascar is not yet a full member of EITI. Since the beginning of the crisis, the Madagascar Action Plan (MAP), a five-year development strategy paper (2007-2011) has been suspended.

In 2010, the de facto authorities continued to maintain fiscal discipline and sound monetary policies, keeping inflation in check. However, better governance, including a return to constitutional rule, the improvement of the regulatory system and the fight against corruption, ought to be urgent priorities. In October 2010, the World Bank noted that the economic situation remained fragile, especially on the fiscal front, where limited revenues and direct financing have restricted public spending and investment, with both short and long-term negative implications on the delivery of social and infrastructure services. Most recent projections anticipate an inflation rate of 9 percent and a GDP growth rate of negative 2 percent in 2010. Macroeconomic forecasts for 2011 predict a GDP growth rate of 2.8 percent and an inflation rate of 7.6 percent.

Despite the temporary suspension of funding from the World Bank, the Economic Development Board of Madagascar (EDBM) continues to provide support to foreign investors. 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. Officially 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, but allegations have been made that some foreign investments have been targeted in such a fashion.




TI Corruption Index



Heritage Economic Freedom



World Bank Doing Business


140 out of 181

Conversion and Transfer Policies

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 followed an exchange rate policy to counter underlying exchange market pressures to keep commodity prices stable.

Expropriation and Compensation

There are no recent cases of expropriation actions by the GOM. However, on December 16, 2010, the Ministry of Mines and Hydrocarbon verbally informed Madagascar Oil (MO) of its interest in acquiring four of its oil exploration blocks. As MO’s licenses are all valid and all obligations are legally binding, MO intends to strongly defend its position. Since November 2010, the Ministry of Mining has been conducting audits of mining companies to assess if those companies are in compliance with their commitments; of note, the auditors are reported to be foreign nationals from a country with alleged interest in some mining and petroleum concessions already granted to other investors. In the telecommunication sector, the regime adopted a decree in December 2010 granting a foreign company the right to serve as a gateway of all international communications; however, by year’s end, the company had not yet been installed and the regime made no move to implement the decree. Local and foreign investors fear a return of monopoly or the nationalization of a few key sectors (particularly telecommunications and mining) although the state divestiture from public enterprises has for some time been a cornerstone of government policy.

Dispute Settlement

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. However, Madagascar ranked last in the World Bank's 2011 Doing Business Report in terms of closing a business due to complexities of bankruptcy and business closure procedures. The Malagasy judicial system is slow and complex and has a reputation of opacity and corruption. In the past, 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.

Under the privatization law, the GOM accepts binding international arbitration of investment disputes between foreign investors and the state. The courts in theory 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.

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.

Performance Requirements/Incentives

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: (1) investment in export-oriented manufacturing industries; (2) development or management of industrial free zones; or (3) provision of services to EPZ companies.

The EPZ law approved in December 2007 granted the following advantages and tax incentives to EPZ companies: (1) the EDBM is in charge of EPZ companies' approval and has to deliver an eligibility certificate within 20 days of deposit of file; (2) 15 years tax exemption for EPZ companies; (3) no VAT or customs duties on imports of raw materials; (4) no registration taxes; (5) no customs tax on exported goods; (6) income tax on expatriation not exceeding 30 percent of the taxable basis; and (7) free access to foreign currency deposited in the company's foreign currency bank account.

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. Existing EPZ companies will continue to enjoy the advantages described above after that date.

There are no requirements restricting the mobility of foreign investors. The regime for visas, residence and work permits is neither discriminatory nor excessively onerous. Since the creation of the EDBM, processing of residence and work permits has been streamlined.

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 in 2010, the de facto regime periodically attempted to enforce price controls on rice and oil imports.

Right to Private Ownership and Establishment

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 in the Malagasy Telecommunications Company (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.

Protection of Property Rights

Secured interests in property are recognized, but not entirely enforced in the country. Banks and insurance companies use mortgages on commercial property to guarantee loans.

A prohibition on land ownership by foreigners impedes access to real property, and the entire issue remains highly controversial and problematic on a cultural level despite legal advances. 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, MCC's contribution to the land tenure issue improved the land rights process prior to early termination of the program in late 2009 due to the political crisis.

Madagascar is a member of the WIPO (World Intellectual Property Organization) and is a 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.

Transparency of the Regulatory System

Excessive complexities 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. Although regulatory decisions can impede start-up in particular industries, the normal business registration process has been streamlined by EDBM and generally takes less than two weeks.

Tax, labor, environment, health, and safety standards are generally not used to impede foreign investment, and there are no informal regulatory processes managed by non-governmental organizations or private sector associations.

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

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.

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.

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.

Competition from State-Owned Enterprises (SOEs)

Private enterprises are allowed to compete with public enterprises under the same terms and conditions with respect to access to markets, credit, and other business operations, such as licenses and supplies. The main SOEs are the Airline Malagasy Company (AIRMAD) and the Malagasy Water and Energy Company (JIRAMA). SOEs have boards of directors for which seats are specifically allocated to senior government officials or politically-affiliated individuals. SOEs are required by law to publish an annual report, and they are also required to submit their books to independent audit.

A sovereign wealth fund (SWF) does not exist in the country.

Corporate Social Responsibility

There is a lack of general awareness of corporate social responsibility (CSR) among producers and consumers, but CSR principles are applied by several large, formal sector companies. Although those companies do not follow the OECD Guidelines for Multinational Enterprises, public opinion is favorable regarding those firms who pursue CSR.

Political Violence

During 2010, Madagascar experienced intermittent political demonstrations primarily in the capital city of Antananarivo that on occasion became violent. Opposition political gatherings are frequently blocked by the regime, and security forces at times use excessive force, sometimes resulting in injury, to abrogate the rights of assembly and free speech.

Public safety is fairly adequate, although standard warnings to guard against street crime and theft from vehicles and to minimize or avoid nighttime road travel apply, particularly in rural areas. Madagascar, being an island, has no belligerent neighbors.


In 2010, Transparency International ranked Madagascar 123th out of 178 countries surveyed with a score of 2.6 on the Corruption Perception Index (CPI), indicating a severe corruption problem. While giving or accepting a bribe is a criminal act and is subject to trial by court, complicated administrative procedures introduce delays and uncertainties increasing possibilities for corruption. Corruption is most pervasive in the following areas: judicial, police, tax, customs, land, trade, mining, industry, environment, education, and health. Despite the existence of the Independent Anti-Corruption Bureau (BIANCO), corruption at high levels exists in nearly all sectors.

Smuggling of precious stones, hardwood, and animals is increasingly a drain on Madagascar's natural resources, and one that also breeds criminality. In April 2010, the de facto regime, amidst allegations of high level involvement in rosewood trafficking, adopted a decree to prohibit all exports of rosewood and precious timber. Despite this ban, it was reported that containers of rosewood are still being shipped. In September 2010, the Ministry of Environment decided to include rosewood in Annex III of CITES, so now each rosewood importing country needs an import permit signed by CITES authorities.

Madagascar created a Financial Intelligence Unit (SAMIFIN) in mid-2008 to carry out research and financial analysis related to money laundering. Despite insufficient funding, SAMIFIN received 76 suspicious transaction reports in 2010 and referred 14 cases to the public prosecutors, although there is no information available that any of the 14 cases were, in fact, prosecuted.

Madagascar has not yet signed the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

Bilateral Investment Agreements

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. Madagascar has also signed double taxation treaties with France and Mauritius. The Malagasy government had expressed interest in negotiating a bilateral investment treaty with the U.S. Initial discussions began in late 2008, but stalled due to the unconstitutional change of government in March 2009.

OPIC and Other Investment Insurance Programs

On March 31, 1998, OPIC and Madagascar signed a bilateral Investment Incentive Agreement, which updated the old agreement of 1963. Madagascar is a member of the MIGA (Multilateral Investment Guarantee Agency). The average daily exchange rate in 2010 was 2,090 Ariary per one USD.


Madagascar has a significant pool of available labor, due to the combined impacts 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 attraction for foreign investors. The minimum wage for the non-agricultural private sector in 2010 was 77,062 Ariary per month, approximately 36 USD. 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 standards 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

The incentives available in the Export Processing Zone (EPZ) are described in "Performance Requirements/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. 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

According to Central Bank figures, in 2009 FDI inflows to Madagascar amounted to USD 542 million compared to 1.12 billion in 2008 (52 percent decrease). Slowdown of economic activities stemming from political and economic crises constitutes the main reason for these decreasing FDI inflows. Although the mining and extractive industry continues to attract FDI, data show that in 2009, FDI in this sector was more than 50 percent lower than in 2008, falling from USD 960 Million to USD 447.5 Million. Apart from the extractive industry sector, FDI flows were concentrated in the following sectors: manufacturing (USD 36 Million, 6.6 percent of total FDI inflows), hotels and restaurant industry (USD 17.7 Million, 3.3 percent) and financial services industry (USD 16 Million, 3 percent). The five top origin countries of FDI inflows were respectively the United Kingdom (USD 162 Million), Canada (USD 148 Million), South Korea (USD 65.4 Million) and Japan (USD 62 Million).

Central Bank statistics indicate that total FDI stock amounted to USD 3.19 billion in 2009 compared to USD 3.12 billion in 2008, an increase of two percent. Between 2007 and 2008, FDI stock increased by 56 percent, but in 2009, it slowed down due to the end of the construction phase of the QMM mineral sands operation (Rio Tinto). Furthermore, the domestic political crisis combined with the global financial crisis discouraged investors from coming to Madagascar.

FDI flows from the U.S. amounted to USD 37 million in 2009 representing 3.8 percent of the total. If one considers only non-extractive industry FDI, the U.S. represents 39 percent of the total.

While the mining sector continues to drive foreign direct investment in Madagascar, the 2011 government budget projections expect substantial investment in infrastructure with the unlikely assumption that foreign aid will resume. Therefore, the public works and construction sector constitutes a potential area for foreign direct investment, assuming that the political crisis will come to an end and foreign donors will resume their financial aid to the country. Nearly two-thirds of government investment expenditures are financed by external funding.