Angola offers both high risks and great rewards to investors and exporters. The rules for setting up a company are complicated and the processes often slow. Nonetheless, the country is intent on attracting capital from abroad. We take a look at recent changes to investment legislation and what they mean for business.
As one of the world’s fastest growing economies, with a burgeon-ing middle class and an increasingly diversified industrial base, Angola is certainly an attractive destination for foreign investors - and the range of fiscal incentives available make it even more so.
The African continent’s global share of foreign destination investment (FDI) has grown from 3.2% in 2007 to 5.6% in 2012, and Angola has been one of the largest recipients of those capital inflows. The country is the seventh largest destination for FDI in Africa and third largest in the sub-Saharan region. Since the establishment of the first investment law in 2003 following the end of the civil war, Angola has attracted more than $50 billion of FDI, 80% of which has been in the coal, oil and gas sectors. While the oil, gas and mining industries will continue to dominate the foreign investment landscape, sectors such as real estate, construction, telecommunications, financial services, agri-business, and retail and consumer products have become increasingly attractive for foreign investors.
Angola has been open and eager to attract foreign investment since 2002, the year that saw the end of the civil war. To attract the private investment needed to drive economic growth and rebuild infrastructure, the government in 2003 established the National Agency for Private Investment (ANIP) and introduced the Basic.
Private Investment Law, which laid down the rules and incentives for both foreign and domestic investors.
This law stipulated that Angolan and foreign investors would be treated equally and offered similar opportunities with respect to the country’s policy on incentives related to taxation and customs duties.
The government introduced new investment legislation in 2011 in order to encourage more private investment in a range of industries and prioritized zones for economic development. The new legislation alters fiscal benefits and incentives, aims to reduce bureaucracy and facilitate legal procedures, and provides a range of guarantees to eligible investors, such as repatriation of capital.
One of the most notable changes to the private investment law is the minimum capital requirement for foreign investors to qualify for incentives. This has jumped from $100,000 to $1,000,000. Investors should be aware that this minimum project capital requirement figure is “per investor” and not “per company”. For example, if a company has five foreign partners, the law considers each to be a “private investor,” therefore raising the minimum capital investment for a project to $5 million. Large-scale investments between $10 and $50 million must be assessed and approved by the Council of Ministers. Projects above $50 million are subject to approval by a special presidential committee.
Investors are obliged to enter into a contract with the Angolan government, represented by ANIP. The agency acts as a one-stop shop for foreign investors, whose main function is to streamline bureaucratic procedures, and to provide advisory support, technical and legal assistance and investor protection. The 2011 legislation gave ANIP more power to approve projects and decide on incentives, in order to speed up processing and approval time. Each project is assessed on a case-to-case basis by the agency, which also lays out the incentives available accordingly.
As the government is determined to diversify the economy away from the oil and diamond industries, and to spread economic growth to areas outside of the main industrial centers such as Luanda, the size and range of incentives vary, depending on location and economic sector. Incentives are offered in sectors that the government has prioritized for development, such as: agriculture and cattle breeding; the processing industry; fishing and fish products; civil construction; health care; education; road and rail infrastructure; port and airport infrastructure; telecommunications; and energy and water supply.
Almost every sector of the economy is open to foreign investors. However the law prohibits investment in areas which by law are the sole responsibility of the State of Angola, such as: manufacturing, distribution and sales of warfare equipment; banking activities related to the central bank and treasury; administration of ports and airports, and the national network of basic telecommunication infrastructures.
Areas prioritized for development are broken into three zones: A, B and C. Investors are eligible for tax exemptions of up to five years in Zone A (province of Luanda and municipal centers of Benguela, Huila and Cabinda provinces, and the municipality of Lobito), up to eight years in Zone B (provinces of Kwanza Norte, Kwanza Sul, Bengo, Uíje, Lundas and interior municipalities of Benguela, Cabinda and Huíla ), and up to 10 years in Zone C (municipal centers of Benguela, Huila and Cabinda provinces, and the municipality of Lobito).
Investors are also eligible for an exemption of up to six years from customs duties and levies on goods and equipments, including heavy and special vehicles, from the start of the investment operations until the complete development. After that, investors are only liable to pay stamp duty and service-related fees.
It should be noted that in January of this year, the government increased import duties on items such as beer, water, fruits, soft drinks, agricultural products and livestock, from as high as 30% to 50%, to encourage local production and to reduce dependence on food imports. This would potentially impact investors in the hospitality and food retail sectors. However, the government has identified some goods for protection and has also eliminated duties on equipment and raw materials needed for industrial production.
In 2009, Angola established the Luanda-Bengo Special Economic Zone (SEZ) with the objective of lowering Angola’s high dependence on imports and consolidating the development of the Angolan business community.
The industrial activity at the Luanda-Bengo SEZ has generated more than 3,500 jobs since its establishment. While the SEZ does not offer the incentives available at the other development zones A, B and C (however the possibility of offering such incentives are currently being reviewed by the Ministry Economy of Finance), it does offer companies a convenient location in which to base their business activities and guarantees a reliable supply of water and energy.
Despite the country’s obvious attractions, investors should be aware of the complications of doing business in Angola. Like the majority of Sub-Saharan African nations, it faces serious problems with corruption, red tape and poor infrastructure. In its Angola investment climate report 2013, the U.S. State Department states that: “Angola offers both high returns and great risks to investors and exporters… the business environment remains one of the most difficult in the world. Investors must factor in pervasive corruption, an underdeveloped financial system, poor infrastructure and extremely high on-the-ground costs. Surface transportation inside the country is slow and expensive, while bureaucracy and port inefficiencies complicate imports and raise costs.”
In the World Bank’s Doing Business 2014 index, which sheds light on how easy or difficult it is for a local entrepreneur to open and run a small to medium-size business when complying with relevant regulation, Angola ranks 179th of the 189 economies evaluated, one place lower than the previous year.
The country scores considerably low in Starting a Business (178th) which, according to the Doing Business 2014 report, takes 66 days, requires 8 procedures and costs 130.1% of income per capita (IPC). This can be put in context when compared with the Sub-Saharan regional average: 29.7 days to start a business, requiring 8 procedures at a cost 67.4% of IPC.
Other notable areas in which Angola ranks particularly low include: 170th in Getting Electricity (which takes 145 days and costs 689.7% of IPC); 169th in Trading across Borders (time to exports: 40 days); 187th in Enforcing Contracts (time: 1,296 days at a cost 44.4% of the claim). However, Angola ranks better in indicators such as Protecting Investors (80th), Dealing with Construction Permits (65th), Registering Property (132nd) and Getting Credit (130th).
While doing business remains challenging, the situation has improved over the years. This is evident by the Doing Business Distance to Frontier measure. This measure shows how far on average an economy is from the best performance achieved by any economy on each Doing Business indicator. According to this measure, Angola has improved significantly since 2005, in the areas of Starting a Business, Registering a Property and Trading across Borders.
When dealing with the bureaucratic challenges and red tape, a recent report by consultants Ernst and Young (E&Y) advises foreign investors that “an understanding of the strategic objectives of government and aligning investor’s commercial interests to those objectives can go a long way to mitigating these challenges”.
Last year the government released The Angolan National Development Plan 2013-2017. The E&Y report goes on to say that: “An encouraging aspect of the NDP is the priority government has given to private investment to diversify the economy and create jobs. By 2017, the NDP expects ANIP to double the annual amount of private investment approved.” For this to happen, ANIP will have to continue to streamline and facilitate bureaucratic procedures.
Another serious concern for investors is corruption. In Transparency International’s Corruption Perceptions Index 2013, Angola ranks 153rd out of the 175 countries evaluated. In the World Bank’s Control of Corruption indicator, it ranks 5th (with the highest-ranking country being deemed the most corrupt of all countries evaluated).
However, there are signs that the situation is changing. The E&Y Angola report states that: “While there is undoubtedly substance to these concerns, the situation continues to improve. Over the last 18 months, a significant effort has been put in place by Angolan society to rescue the social and moral values lost during the 40 years of violence that ended in 2002. The associated rescue of business values initiative [is] being led by the Chamber of Commerce and Industry of Angola (CCIA)… by maintaining high anti-corruption standards and working with authorities to root out corruption, responsible investors will be aligning their objectives with those of the CCIA, ultimately ensuring long-term sustainability of commercial operations, hopefully providing investors with confidence that this risk is being addressed.”
Both the World Bank and the IMF have praised Angola for its efforts to improve transparency, particularly in the oil industry. A World Bank report released in June 2013 said that: “The government has improved collection and reporting processes for oil revenues and transfers,” and that “the authorities have made significant strides in improving the transparency and accountability of public financial management, but challenges remain.”
Likewise, an IMF report released in 2011 similarly stated that: “The government has stepped up its monitoring of oil revenue transfers to the budget, and work is ongoing to reduce the large unexplained residual in the fiscal accounts and to reduce quasi-fiscal operations by the state oil company.”
Angola’s rapidly developing economy, enormous natural resources and attractive investment incentives offer great opportunities for investors. While ANIP and the government have made an effort to streamline slow and costly procedures and tackle corruption, serious challenges remain. Still, it is worth noting that the challenges of bureaucracy, corruption and infrastructure have not deterred U.S. companies, which invested close to $25 billion 2003 and 2011, making the United States Angola’s top foreign investor.
By Jonathan Meaney