A precarious stability in Madagascar has not restored investor interest

November 19th last year, a group of potential investors gathered in the rarefied surroundings of Lancaster House in London, a stunning 19th century building, all gilded ceilings, stately rooms and grand staircases. They were attending the UK-Madagascar Trade and Investment Forum, a conference organised to generate interest in the African island country’s economic potential.
The speakers included Hery Rajaonarimampianina, president of Madagascar, as well as ministers from key sectors such as energy, mining, tourism and trade. The delegation was keen to convey the message that Madagascar was open for business.

Mr Rajaonarimampianina’s election in December 2013 had followed “a long period of economic and political crisis (2009-2013), marked by the country’s suspension from various international bodies and a stark decline in foreign investment”, according to the website of Developing Markets Associates, an investment advisory company that helped to organise the conference. The election of President Rajaonarimampianina “appears to have ushered in a new era of relative political normalcy, accompanied by steady economic recovery”, it said.
“Madagascar has extraordinary potential for foreign direct investment (FDI) attraction as it is endowed with rich natural resources, a young population and vast fertile land,” according a December 2015 report by the United Nations Conference on Trade and Development (UNCTAD). It was an unusual endorsement. “‘Extraordinary’ is not a word we use a lot at the UN,” says Stephania Bonilla-Féret, an economist who led the UNCTAD review of the country’s investment policy.

More specifically, the country’s natural resources include graphite, chromite, coal, bauxite, salt quarts, tar sand, semiprecious stones, mica, fish and hydropower, according to the UN Pubic-Private Alliance for Rural Development. In addition, Madagascar has an estimated 20 billion barrels in oil reserves, according to consulting firm Moore Stephens.
The question is why there hasn’t been a mad scramble to invest in the country. Economic recovery, since the president’s election, has proved disappointing: estimates of growth in GDP for 2015 range from 1.9% to 2.3%, while the Economist Intelligence Unit expects growth to average 3% in 2016 and 2017. And the recent decline of FDI flows to the country from $812m in 2012 to $351m in 2014 indicates that investors are keeping their distance.

A number of factors have come into play, chief amongst them political instability, according to Geoffrey Tassinari, chairman and CEO of Madagascar Development Partners, a private equity fund based in Madagascar. Though the democratic presidential and parliamentary elections of December 2013 passed off successfully, Mr Rajaonarimampianina, whose party was formed only after he was elected, has struggled to secure a majority in parliament, where shifting coalitions are involved in “wrangling for…dominance”, says a 2014 report by the International Crisis Group.
In May 2015, parliament impeached Mr Rajaonarimampianina, but the constitutional court rejected the vote. This was followed by a vote of no confidence in the government a month later, which was narrowly defeated. This tempestuous relationship between president and parliament has created a climate of uncertainty. Senate elections were only held in January 2016, almost two years after the end of the crisis.

The uncertainty has also prevented Madagascar from getting on with political and economic reforms, says Ms Bonilla-Féret. And the endless politicking has also had a knock-on effect on donor funding. Donors such as the World Bank, the EU and the IMF had announced they would resume funding after the 2013 elections, and made substantial commitments. But disbursements have been slow, held up by unmet conditions of reforms and governance improvements. Mr Tassinari says that this reticence has put off investors. “Until donors release their funding, [investors] will remain bystanders,” he says.

Then there are the hard realities of doing business in Madagascar. The country ranks 164th out of 189 in the World Bank’s Doing Business 2016 report, which ranks the ease of starting and operating a firm in a country. One of the biggest challenges is the dismal state of the infrastructure. Rolling blackouts are a daily occurrence, for instance, while the 2016 World Bank report ranks Madagascar as the second-worse country for electricity access.

Most companies must rent generators to secure their power supply, at great cost. Many must also fund their own schools, clinics and fire services. “We can only rely on ourselves,” says Mr Tassinari. “That’s an obstacle to entry for smaller investors who don’t have the…financial, technical or human means [of] big companies.”

Roads are few, and in dreadful condition, making imports and exports long and costly. The banking sector is small and rather conservative, making it hard for investors to finance their projects, Mr Tassinari explains. In its 2015 review, UNCTAD identified a number of regulatory shortcomings that hindered investments, including uncertainties regarding land ownership by foreigners, poor implementation of regulations and insufficient resources to prevent and fight corruption.

Critics say that the government has displayed plenty of good will, but that it does not seem to be enough to overcome the inertia in the system. They also blame the vested interests of a few established players who, they say, would rather maintain the status quo.

Such challenging circumstances are not unique in Africa. But what many feel has really let Madagascar down is lack of vision. One exasperated conference delegate in London said that he was appalled by the government’s lack of ambition. “Everything I heard today smacks of the old growth model—natural resource exploitation, big hotels for tourism. Madagascar keeps making these tiny baby steps but it needs to make a giant leap.”

Mr Tassinari says that it was former president Marc Ravalomanana’s Madagascar Action Plan (MAP) that spurred his company to invest in Madagascar back in 2004-5. “The MAP really set out a vision for Madagascar, and it had the backing of the donors,” he says. “The Plan National de Développement [PND, the current administration’s blueprint] isn’t as compelling—it’s too vague.”
One prospective investor in the power sector said he wanted more clarity on government projects, along with electricity tariff adjustments and reforms of Jirama, the flailing state-owned power utility. “If the government came to market with a few well-prepared projects they wanted to prioritise, asking developers for their interest and putting the regulatory framework in place to develop these projects, Madagascar would become a much higher priority than it currently is,” he said.

Ms Bonilla-Féret says that it is essential for Madagascar to refine its policy objectives if FDI is to be an engine of development there. “The question is: who do you want to invest [in the country]? And what do you want from them?”

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