As a stable and growing economy located just a short distance from the EU, Tunisia has done well by regional standards at attracting FDI. At first glance, British investment in Tunisia appears strong. However, looking beyond BG (formerly British Gas), which is the single biggest foreign investor in Tunisia, there is a relative dearth of UK investment.

From the British side, there has been a recent push towards closer economic relations. Baroness Symons, secretary of state for North Africa and the Middle East, and Michael Savory, Lord Mayor of the City of London, staged official visits to Tunis within weeks of each other early this year.

Give and take

During his visit, Mr Savory called for higher levels of British investment in the Tunisian financial sector and in industry. However, he warned that Tunisia must raise its image abroad and quicken the pace of privatisation if it is to attract more investment. Alan Goulty, the UK ambassador to Tunisia, has sought to draw attention to niche investment areas, such as Saharan and cultural tourism, golf, health infrastructure and ecology.

Tunisia is thought to want to diversify its investor base away from French domination. British business consultant John Blair, who moved to Tunisia 15 years ago as Levi Strauss’s sourcing director, argues that the country’s Francophone image puts off British people who are worried about language barriers. However, he also attributes the lack of British investment to the fact that UK firms have been among the slowest in Europe to recognise the opportunities offered by Tunisia.

Mr Blair says: “Tunisia has a very good mentality towards investment and is very progressive at attracting FDI.” He emphasises the country’s political and economic stability as major factors. While there are medium-term to long-term concerns about political succession and the authoritarian nature of the system, long-serving president Zine al-Abidine Ben Ali looks set to remain in power until at least 2009.

Although unemployment remains above 10% and real incomes have not yet risen to the lower-tier Organisation for Economic Co-operation and Development (OECD) country level, Tunisia’s recent economic performance has been strong enough to mute public disenchantment.

Additional attractions come in the form of investment incentives, particularly the tax breaks for income derived from export. Offshore companies (those with at least 66% foreign ownership and 80% export-directed production) pay no customs duties on imports of capital goods, raw materials or semi-finished products.

BG leads the way

Tunisia’s advantages as an investment destination are well recognised by BG if not in the broader British marketplace. The company has had a presence there since 1989 and employs about 300 people in its Tunisian natural gas production operations, of which about 75% are Tunisian nationals. It is the largest gas producer in Tunisia, supplying about 50% of the country’s gas demand from its offshore Miskar field; this gas is processed at the onshore Hannibal plant, which is BG owned and operated.

According to Adrian Goodworth, BG Tunisia’s external affairs manager, the company has invested more than $1bn to date and is considering a number of further significant investments. This, he says, “attests to our commitment here. We hope to make further investments in Tunisia, as we’ve been in the country for more than 15 years, and we know that it is a good place to invest.”

In particular, Mr Goodworth notes that BG has benefited from the country’s political and economic stability, high levels of security, a well-educated workforce and respect for the “transparency and sanctity of contracts”. He says that BG Tunisia “is looking to maintain its existing production portfolio and to continue to expand and extend its production plateau”.

BG’s executive vice-president and managing director for the Mediterranean Basin and Africa, Stuart Fish, says that the company is “looking for the next big piece of growth” but must “make sure that our aims are aligned with the government’s”.

Beyond energy

Apart from BG and the energy sector, there is little British investment in Tunisia. This is particularly so in the textiles sector, which accounted for just over 7% of GDP in 2002. According to Régis Tavernier, general manager of Coats Tunisie, the mood in the sector is pessimistic following the abolition of trade quotas in the textiles sector in January.

UK-based Coats is the world’s largest manufacturer of industrial sewing thread and consumer needlecraft products. It first came to Tunisia in 1988 and began by setting up Coats Tunisie to handle production and Sartel Tunisia for distribution. According to Mr Tavernier, both were set up as offshore, 100% exporting companies under Law 72: they produce and sell thread to companies that are themselves 100% export-oriented. Coats’ Tunisian operations were merged with those of the DMC group in 2001 and their single factory underwent a E2m upgrade from 2001 to 2003. The company employs 134 people, of whom just three are expatriates.

Asked why Coats chose to invest in Tunisia, Mr Tavernier explains: “Our western European customers chose Tunisia and we followed them.” Although he stresses that the recent factory investment indicates that Coats is not expecting to close its Tunisian operations any time soon, he concedes that some slowdown in their activities is inevitable. “Globally, the export garment market will decrease in the next few years due to the multi-fibre agreement. The question is how fast, and this is difficult to predict,” he says.

With regards to British investment in the textiles sector, Mr Tavernier notes that some big companies (such as Marks & Spencer) have already left. Today Coats supplies just a handful of Tunisia-based British subsidiaries, such as Lee Cooper and Fashionware. Most of its customers are French and Italian.

The trend, he says, is for foreign companies to use Tunisian contractors rather than set up subsidiaries there. Although Tunisia is cheaper than western Europe, it cannot compete on cost with eastern Europe and the Far East, and quality is uneven, meaning that its main attraction is its proximity to the EU. Thus, Mr Tavernier concludes, FDI prospects for the textiles sector look grim: “It’s a bit too late for investment,” he says.

Burned fingers

Nor is the picture perfect for investors in the financial sector, despite Mr Savory’s entreaty. Mourad Ayachi, managing director of BUPA International’s Tunis contact office, cautions British companies against investing in the country.

The medical insurance giant arrived in Tunisia in 1996 to set up a contact office to serve customers in Libya, Algeria and Tunisia. After four years of what he describes as “embarrassing” procedures for registration, the contact office was finally opened.

Despite these obstacles, Mr Ayachi convinced his bosses about the feasibility of opening a fully-fledged, Tunisian-licensed insurance company in partnership with some Tunisian insurance companies and bankers, of which BUPA would have a 15%-20% share. However, three years after first applying for approval from the Tunisian authorities, he has given up hope of ever setting up such a company.

Red tape

“The official reason [for the delay] is that a study is going on as to whether to keep insurance private or to switch to some sort of third body,” explains Mr Ayachi.

But he says he believes that the delay is also the result of an excess of red tape and hostility to companies starting “something new and unknown”.

He declares that BUPA now has “no interest whatsoever in investing here. I’ve lost faith. There is great potential here – human resources, political stability, infrastructure, logistics – but we need people who want to let us work,” he says.

Comparing the experiences of BG and BUPA, it appears that British investors will find Tunisia a more fruitful FDI destination if their strategy is in line with the government’s aims. If not, British investors might be advised to look elsewhere.