Why Madagascar is An Intriguing FDI Destination?

By Moin Siddiqi, Economist

Madagascar is courting foreign investors and improving bilateral ties with countries across the globe in its drive to reignite economic growth. There are ample opportunities in tourism, agribusiness, manufacturing (mainly textiles/ apparel), mining, petroleum, energy and transportation, among other sectors where strategic investors can participate in long-term projects.

Located in the Africa-Asia axis and on major maritime routes (not far from the Middle East), Madagascar offers advantages to international businesses – with preferential trade agreements (quota free, duty free) access to the American and European markets as well as other advanced economies. As a member of regional economic blocs, Madagascar is also a good location for the ease of exporting goods and services to SADC (Southern African Development Community), COMESA (Common Market for Eastern and Southern Africa) and IOR-ARC (Indian Ocean Rim Association for Regional Cooperation). 

Madagascar has an open economy and has favoured regional economic integration; however exports to sub-Saharan African countries remain low. Europe, the USA and Asia to date remain the most important markets. Competitive advantages include abundant local raw materials, a large pool of young/trainable labour, with private sector wages below those in most countries and situated near business platforms in South Africa and Mauritius, which offer access to expertise, input and logistical preparations.

The largest FDI is in the extractive industry (especially mining), which is capital (as opposed to labour) intensive. These jobs are often highly specialised, skilled ones for which not many Malagasy citizens qualify.  This ‘skills gap’ suggests the need to train more Malagasy technicians to take advantage of high-quality jobs. Integrating more SMEs in the value chain of foreign firms investing in Madagascar would also boost job creation.

In recent years, a large amount of FDI also went into export-processing zones (EPZs) to benefit mainly from preferential access to the American market. These investments are in labour-intensive sectors. Prior to 2009, Madagascar was sub-Saharan Africa’s largest exporter of textiles. The government provides numerous fiscal incentives to export-oriented firms with EPZ status, providing at least 95% of total production is exported.  An incentive scheme includes exemption from customs duties and taxes.The country offers an open and favourable FDI regulatory regime and firm guarantee against expropriation. Most business sectors are fully open to foreign equity ownership and the Investment Promotion Act offers a level-playing field for domestic and foreign investors with respect to ownership of local companies. There is no direct quantitative capital control (inflows and outflows). The government has also set up a ‘one-stop shop’ for investors. 

The legal system, based on French civil law, contains adequate protections for private property rights, and the government accepts the binding international arbitration of investment disputes between foreign investors and the state. Madagascar is a signatory to the International Centre for the Settlement of Investment Disputes (ICSID) Convention, as well as the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. 

Fiscal incentives have been revised to attract inward investment and new regulations allow for tax breaks and mutual agreements to avoid double taxation. Madagascar has signed bilateral investment treaties with several countries: Belgium, Canada, China, France, Germany, Mauritius, Norway, Sweden, Switzerland, and Thailand. It has also signed double taxation treaties with France and Mauritius. Major investing countries are France, Spain, Mauritius, China, USA, Britain, Singapore, Germany, Canada and India. 

The government aims to improve the business climate in coming years by addressing key challenges such as the high cost of electricity, difficulty in obtaining credit despite a relatively liquid banking system, cumbersome procedures for the registration of property, high cost of export operations and the complexity of dispute settlement procedures.

Strengths & Opportunities
Madagascar offers several possibilities in major sectors: 

MINING: Geological studies and explorations have established the existence of mineral resources of varying importance in Madagascar. These include industrial and metallic minerals: titanium (ilmenite), of which Madagascar holds the world’s largest reserves, graphite, gypsum, dolomite, silica, mica, quartz, gold, platinum, silver, iron ore, copper, zinc, nickel, cobalt, chromite, zircon, coal and rutile; precious and gemstones: ruby, sapphire (half of globe’s supply), emerald, aquamarine, beryl, tourmaline, topaz, garnet, cordierite, rose quartz; and decorative stones: crystal, marble, silicified wood, jasper and limestone. Some of them have already been industrially exploited, such as chromite, nickel and ilmenite. Some are currently under exploration, such as iron ore and coal. While others gemstones, decorative stones and rare metals have been exploited by small-scale extraction projects.

Madagascar's extractive sector is being transformed from a largely artisanal into a large-scale mining industry. The Ambatovy Cobalt and Nickel Mining Project owned by international consortium comprising of Sherritt International Corp’s (40%) and SNC-Lavalin (5%) – both Canadian-based – Korea Resources Corp (27.5%) and Japan’s Sumitomo Corp (27.5%) is the largest-ever FDI in Madagascar and one of the biggest in sub-Saharan Africa and the Indian Ocean region, whose total project costs exceed US$7bn. Ambatovy is poised to become the world’s largest lateritic nickel mines with annualised capacities of 60,000 tons of refined nickel, 5,600 tons of cobalt, and 210,000 tons of ammonium sulphate fertilisers for nearly 30 years. Another mega-project is QIT Madagascar Minerals (QMM), which is 80% owned by Rio Tinto and 20% by the government of Madagascar – supported by the World Bank. QMM plans extracting ilmenite and zircon from heavy mineral sands over an area of 6,000 hectares along the coast during the next 40-50 years. Annual production will eventually expand to 750,000 tons.

Madagascar is now entering an era of significant natural resource extraction, which will generate high income and growth potential. The mining sector’s contribution to GDP – led by Rio Tinto ilmenite and Ambatovy nickel mining operations -  is expected to surge from less than 1 to 15% in the coming decade, whilst exported production is forecast to contribute between 30 and 60% of national export earnings and 18% of the government’s fiscal revenues by 2018. 

PETROLEUM: In addition to minerals, Madagascar has potentially significant hydrocarbon deposits. The existence of oil has been known for over a century but exploration and development (E&D) was until recently deemed commercially unviable. The country is on the verge of becoming a small oil producer. Recoverable reserves are sizeable and are estimated by the National Office of Mines and Strategic Industries at 1.5bn barrels. Around 18 international oil companies (IOCs) are currently at the exploration phase, including Ophir Energy, ExxonMobil, Sterling Energy Ltd, Tullow Madagascar and Madagascar Oil (MOIL). 
According to a 2013 report, there were some 20 onshore and 200 offshore oil blocks. MOIL is developing a massive onshore heavy oilfield at Tsimiroro and ultra-heavy oilfield at Bemolanga through the application of various thermal techniques – with 1.7bn barrels of contingent resource already identified. It is targeting a production rate of 10,000 barrels per day (bpd) by 2018.  

TOURISM: Madagascar's natural beauty and diversity are among its greatest assets. The Island is a privileged tourist destination thanks to niches such as sport/adventure, cultural and eco-tourism, as well as 5,000km of beaches. In 2014, the tourism sector (plus its indirect and induced impacts) accounted for 19.7% and 16.5% of GDP and total employment, respectively, according to the World Travel & Tourism Council (WTTC). Madagascar is one of the world’s most distinct and important environmental hotspots, with more than 80% of flora (black and white orchids, palm trees, ravinala, baobab, pitcher plants, medicine plants) and a higher rate for the fauna. The country is also known for its rosewood and its diverse wildlife, including lemurs and tortoises. In fact, over 70% of the 250,000 wildlife species found in Madagascar are found nowhere else on planet earth.

There are opportunities in the hospitality business related services (air, sea and ground transportation, tours operations, and building new hotels). In terms of accommodation facilities, Madagascar lacks (4 and 5 star hotels).

ENERGY: Madagascar boasts under-exploited potential in renewable energies – including hydro, solar and wind power. There are around 660 hydroelectric sites with capacities to generate up to 7,800 megawatts (MW) in the eastern and northern regions of the Island as well as in the central highlands. Furthermore, Madagascar has 2,800 hours of sunshine per year providing an average of 2,000 kilowatt hour per square metre a year (kWh/sq.m/year).  At 50 metres altitude, a sufficient wind force reaches a speed of 6 to 8 metre per sound (m/s) in the north, 6 to 6.5m/s in the centre and of 8 to 9m/s in the southernmost region. The ground temperatures reported within eight areas, amounting to 250°C, present significant geothermal potentials.

Given massive private investments and strong legal/regulatory framework, Madagascar can expand its current 500-plus MW thermal energy output to 8, 000MW sourced from renewable energies, particularly hydro and solar power. 

AGRICULTURE: Madagascar boasts agricultural and agro-industrial potentials, reflecting large, fertile land with miscellaneous climates for any agriculture activities, which account for over 25% of GDP, employing 80% of the population and contributing more than 70% to export earnings. The country has 18 million hectares (ha) of cultivable land and plentiful water resources for irrigation and production (2,000km of rivers). Exports consist of low-volume high-value products like vanilla (of which Madagascar is the world’s largest producer), litchies and essential oils. Other crops include Arabica coffee, tea, cocoa, rice (Africa’s third largest producer), cotton, exotic fruits and vegetables as well as cereals and starchy foods: maize, potato, cassava, leguminous plant. It is also endowed with large herd of live stocks. 

Madagascar is geo-strategically situated for greenfield projects in the agribusiness in the Indian Ocean area. Since other islands of the Indian Ocean Commission (IOC) are tiny and net importers of food products, Madagascar could be the region’s breadbasket. The World Bank advised that to promote this potential, Madagascar should develop sustainable land and water management practices, while improving agricultural productivity and land tenure security. Amid soaring global food demand and insufficient production, investment in food production in Madagascar is potentially lucrative. 

As an Island, Madagascar has a halieutic and fish farming potential of more than 50,000 tons per year, 60% of which has a commercial value. An exclusive economic zone covering 115mnha and a large continental shelf of about 12mnha are full of ichtyologic resources.


In sum, Madagascar can realise its ambitions of becoming a true emerging market – contingent on political/economic stability, better governance and increased growth-enhancing reforms (namely, PPPs, competition and taxation). However, given the country’s low capital accumulation and limited advanced technologies, private investment (including FDI) and donor funding are needed to put Madagascar on the path of sustainable robust growth trajectory in coming years.

Investors are eager to resume business ties with the country - there are large profits to be made in the extractive, agriculture, renewable energies, transport, construction, tourism, and textile sectors.  The resource-rich nation is actively seeking new trade and investment ties with global partners. Diversified natural resources can become the engine of development.

Excerpt taken from The Madagascar Investment Report 2015 published by DMA and available here, was presented at the UK-Madagascar Trade & Investment Forum, London, on 19th November 2015.