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

Openness To, and Restrictions Upon, Foreign Investment

The Government of Sao Tome and Principe has enjoyed a more attractive business environment since the new investment code was established in 2007, although business regulations still present foreign investors with significant bureaucratic and procedural hurdles. Since 2007, the new investment code has made the business environment more attractive to foreign investors. The consensus among government authorities and economic analysts is that considerable foreign investment is needed for the development of agriculture and fisheries, tourism, telecommunications, port and airport facilities and financial services.

The Investment Code of 2007 provides for both public and mixed capital investments, allowing foreign investment in every sector of economic activity except limited areas reserved to the State (activities related to the military and paramilitary sectors and the operations of the Central Bank). Areas open to foreign investment include agriculture; fisheries; tourism; construction; port and airport infrastructures and services; transportation; telecommunications; financial services; electricity, water and sanitation services; production of basic consumer goods, and natural resources (oil and gas).

The investment code sets forth a new legal framework under which only investments above $250,000 are eligible for benefits and guarantees. Investments under $250,000 are not eligible for incentives and benefits, but are protected against expropriation. Qualifying investment projects will benefit from fiscal incentives. Incentives include the use of state-owned buildings and/or land for the duration of investment projects, as well as provision of administrative services to facilitate the process of obtaining access to state-owned buildings and land.

Created in 1989, the National Chamber of Commerce serves to organize the private sector and encourage private sector participation in public works projects. In addition, the Chamber of Commerce works with the National Statistics Institute (INE) to collect and distribute information aimed at facilitating business decision-making.

The Millennium Challenge Corporation (MCC) has worked with Sao Tome to improve investment opportunities, including creating a “one-stop shop” to help encourage new investments. The Government has reduced the time required to establish a business from over a month to 3 days. The cost has also been reduced to its current price of approximately USD$285.

If a scroll bar appears below the following table, swipe the table to move left/right of the dashed line.

Measure

Year

Index/Ranking

TI Corruption Index

2009

108

Heritage Economic Freedom

2010

116

World Bank Doing Business

2010

156

MCC Gov’t Effectiveness

2009

153

MCC Rule of Law

2009

142

MCC Control of Corruption

2008

177

MCC Fiscal Policy

2010

140

MCC Trade Policy

2008

118

MCC Regulatory Quality

Unavailable

Unavailable

MCC Business Start Up

2010

153

MCC Land Rights Access

2010

132

MCC Natural Resource Mgmt

Unavailable

Unavailable

Conversion and Transfer Policies

The Central Bank of STP (BCSTP) supervises the national financial system and defines monetary and exchange rate policies in the country. Among other responsibilities, the BCSTP sells hard currencies and establishes indicative interest rates. The dobra (denoted by the acronym "STD") is the country’s national currency. One U.S. dollar is equivalent to about 16,000 STD.

Since January 2010, the STD is pegged to the Euro at the exchange rate of 1 Euro equal to STD 24,500.00. The exchange rate for the U.S. dollar fluctuates depending on that of the Euro. In July 2009, STP and Portugal signed an economic cooperation agreement with the objective of fixing the STD to the Euro rather than a weighted basket of currencies. This anchorage offers a credible parity, minimizes the monetary instability costs, and provides a better credibility for the exchange rate and monetary policy. It should contribute to a more favorable environment for direct foreign investment attraction and could alleviate the problems of exchange rates in the commercial relationship between STP and Europe.

The Government has been working closely with the BCSTP to ensure that greater inflows of foreign exchange translate into an increase in access to raw materials for business. Repatriation of capital is possible with prior authorization. Transfer of profits outside of STP is also allowed after the deductions for legal and statutory reserves and the payment of existing taxes. The Government encourages reinvestments through associated reductions in income taxes.


Expropriation and Compensation

The Government maintains strong protections over all types of property, including private property, and the right of citizens to own and use property. Expropriation is allowed for projects deemed to be in the national public interest, but only occur with adequate compensation. There is no evidence to suggest that repatriation would be undertaken in a discriminatory manner or in violation of established principles of international law.

There have not been any documented cases of expropriation of foreign-owned properties since 1976 when the newly independent government expropriated land from colonial-era farmers.

Dispute Settlement

Disputes are generally solved amicably without litigation, and there are few known instances of disagreements involving foreign investors reaching international courts.

Performance Requirements and Incentives


There are no specific performance requirements imposed as a condition for establishing, maintaining or expanding investment. There are no requirements for investors to buy local products, to export a certain percentage of output or to invest in a specific geographical area. There is no blanket requirement that nationals own shares in foreign investments in STP.


Right to Private Ownership and Establishment


Foreigners are free to establish and own companies and engage in all forms of business activity in STP with the exception of the military sector. Prohibitions exist in the ownership of certain types of guns. In addition, the form of public participation (percentage of government ownership in joint ventures) varies with each agreement.

The Government is gradually moving towards open competition in all sectors of the economy, and competitive equality is the official standard applied to private enterprises in competition with public enterprises with respect to access to markets, credit, and other business operations. Former public monopolies in farming, banking, insurance, aviation services, telecommunications, and trade (export and import) have already been legislatively eliminated by the regulatory authority, although market size and consumer purchasing power have discouraged foreign competition. In areas such as telecommunications and transport, state-owned enterprises remain dominant.

Protection of Property Rights

The Government guarantees private property rights, and expropriation for public use must be accompanied by a fair, adequate and effective compensatory payment in advance.

Transparency of the Regulatory System


The laws and regulations that affect direct investment, such as environmental rules, health and safety regulations are non-discriminatory and apply equally to foreign and domestic firms. STP tax laws reward Santomeans who return to their home country, while also containing provisions for attracting non-Saotomean personnel to live and work in STP.

Labor, health, and safety laws exist but are not consistently enforced. There are some reports that the process of terminating unsatisfactory employees is cumbersome and that protective labor laws make it very difficult to bring skilled foreign-national specialists such as pilots, engineers, or architects into STP.

The MCC Threshold Program provided a range of assistance and training in audit, collection registration, returns processing, public affairs, forms development and information technology. The Government has replaced the information technology systems currently used by the Department of Taxation and established a network connecting the primary revenue producing departments of the Government (the Central Bank, the “one-stop shop,” and the Department of the Treasury) to increase revenue collection.

Efficient Capital Markets and Portfolio Investment


The banking system in STP has expanded significantly in recent years. Until recently, STP had only one commercial bank. Currently, there are seven private commercial banks, six of which were opened in last three years. Portuguese, Angolan, Nigerian, Cameroonian, and Togolese interests (as well as those of Sao Tome and Principe) are represented in the ownership and management of the commercial banks.

Commercial banks offer most corporate banking services, or can procure them from overseas. Local credit to the private sector is limited and expensive, but available to both foreign and local investors on equal terms. The country's main economic actors obtain financing outside STP. Commercial banks have transferred excess liquidity to correspondent banks outside the region.


Competition from State-Owned Enterprises (SOEs)

When the cocoa plantations were shut down, most SOEs also were closed. There are now four SOEs operating as a monopoly in the market (EMAE – Water and Power Supply Company, ENAPORT – Port Authority Company, ENASA – Airport Authority Company and CST – Telecommunication Company). CST is operating under a joint venture with the Portuguese Telecommunication Company (PT). The Government holds 49% of CST, while PT owns 51% of the company. The Government has recently stated they may withdraw their shares in order to invite more investment in the telecommunications sector.

The other three state-owned companies operate under Government management but with a certain financial autonomy separate from Government coffers. The Ministry of Finance and the Court of Auditors audit the SOEs on an annual basis.

Corporate Social Responsibility (CSR)

There are no rules or legislation pertaining to CSR in STP, but CSR is permitted.

Political Violence

STP is a vibrant democracy where politicians and the public accept government changes resulting from elections. STP is characterized by its stability, untroubled ethnic interaction, and a relaxed lifestyle which locals refer to in Portuguese as leve–leve (take it easy). Political violence is rare, as a high premium is placed on consensus in decision-making. There were several coup attempts before 2003, but with very low levels of associated violence, and no casualties. Three elections in 2006 (legislative in March, presidential in July, and local in August) were all judged free and fair by international observers. Strikes are not the primary means to settle labor disputes and labor strikes have been rare in recent times.


Since independence in 1975, there have been no incidents of politically motivated attacks on projects or installations. Anti-American sentiment is very limited and civil disorder is rare. There is a maritime piracy and terrorism threat in the Gulf of Guinea, but, to date, there have been no incidents involving STP, which has been an active partner in regional maritime security efforts.

Corruption


Corruption has increased during the past decade and mainly consists of bribery, embezzlement, and mismanagement of public funds.

Analysts attribute the recent rise in corruption to escalating poverty, the absence of regulations, low wages for government workers and officials, and lack of strong leadership. Since democracy was introduced in 1990, infighting amongst power players in public and private sectors, high levels of corruption, and administrative mismanagement have plagued political life in STP.

The Government has denounced corruption and pledged to take steps to prevent and combat it. Corruption is widely perceived as immoral. An anti-corruption law has been approved and publicized. The National Assembly approved an oil revenue management law to ensure transparency in the oil sector. The Government started reviewing and updating existing contracts with some foreign companies to favor liberalization and free market competition. In one example, the National Assembly ordered an investigation of the Joint Development Zone (JDZ) second round bid for the oil blocks of December 2004, which had been the focus of public criticism for corruption. The Attorney General undertook an investigation and concluded that the procedures used to award the licenses were seriously flawed and failed to meet minimum acceptable standards. To date, however, no arrests have resulted from the investigation. More recently, several high ranking government officials, including two former Prime Ministers, have been accused of corruption and mismanagement.

Corruption in customs has been a consistent problem for the Government and foreign investors, but the situation is improving. Through the MCC Threshold Program, the Government enacted a modern Customs Code and related decrees. This modernization effort represents a fundamental legislative change from colonial-era customs law and processes to internationally recognized best practices and principles.

Bilateral Investment Agreements

STP has signed bilateral investment agreements with Portugal, Angola and Gabon, but is party to no bilateral taxation treaties. As of January 2011, the United States has no bilateral investment or taxation treaty with STP, although preliminary negotiations towards a bilateral investment agreement have been underway for several years and the ball is now in Washington’s court.


OPIC and Other Investment Insurance Programs


The Overseas Private Investment Corporation (OPIC) is open to coverage in STP, but there are no entities currently using these programs.

Labor


A significant portion of the STP workforce is well-educated, up to the high-school level. The workforce is multi-lingual (Portuguese and French) and young. Further training is needed as the economy continues to develop. The cost for basic unskilled labor is about $35-50 per month, and it is increasing over time. Minimum wage, workday, overtime, paid annual vacations and holidays are established by STP labor laws. Women are entitled to state-funded maternity leave for a period of 30 days before and after childbirth.

Foreign Trade Zones/Free Ports


STP currently has no free trade zones or free ports. However, the Free Zone Authority (AZF) was recently established to create a free trade zone in STP. The AZF is working with private institutions and companies to acquire funds for the implementation of the free trade zone. According to the Government, there are many foreign companies interested in the development of a STP Free Zone, motivated by the recent oil discoveries both in the JDZ shared with Nigeria and in STP’s Exclusive Economic Zone (EEZ).

Foreign Direct Investment Statistics


Detailed statistics are unavailable, but Foreign Direct Investment (FDI) appears to be increasing due to structural macroeconomic reforms that have increased investor confidence, as well as recent developments in the petroleum and tourism sectors and the process of privatization being undertaken in STP. In 2007, FDI reached $35 million. In 2008, U.S. exports were insignificant, with imports estimated at USD $3 million. More current statistics are unavailable at this time.

[This is a mobile copy of Sao Tome and Principe]