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WHY EAC: REFLECTING ON THE
EAC BUSINESS ENVIRONMENT
Presented during the 1st East African
Investment Conference
Kigali, Rwanda: 26 June 2008
By
Mr. Charles Mbogori
Executive Director
East African Business Council
Overview
Relevance of Topic:
o Related to EABC’s mandate – ensure an
enable business environment is created,
which promotes private sectors regional
and global competitiveness in trade and
investment
o EAC is an emerging economy, high growth
potential, many untapped opportunities.
Overview, continued:
What makes up the Business Environment?
World Bank – risks and transaction costs of
investing in and operating a business; in
turn determined by the legal and regulatory
framework, barriers to entry and exit, and
conditions in markets for labour, finance,
information, infrastructure services and
other productive inputs.
Presentation Outline
1. How the World sees the EAC region –
based on the World Bank’s annual
Doing Business Index;
2. Strengths of the EAC Business
Environment – the perspective from the
Private Sector,
3. Challenges and suggested
recommendations to ensure an
improved business environment for
investors, both foreign and domestic.
4
HOW THE WORLD SEES THE EAC
REGION: THE DOING BUSINESS
INDEX
Doing Business Index:
Annual Survey carried out by IFC of the World Bank
Ranks 178 countries, on ease of doing business.
(ranking for EAC as follows – Burundi (174), Kenya (82),
Rwanda (150), Tanzania (130) and Uganda (118)
Position 1 – best destination to carry out business –
meaning regulatory environment is conducive to
operation of business.
Uses 10 indicators, as shown in your handouts
5
DOING BUSINESS REPORT 2008:
Indicators:
o Starting a Business
o Dealing with Licenses
o Employing Workers
o Registering Property
o Getting Credit
o Protecting Investors
o Paying Taxes
o Trading Across Border
o Enforcing Contracts
o Closing a Business
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Doing Business Index
EAC - improvements from 2007 against the
following indicators:
• Burundi - in employing workers and in registering
property.
• Kenya – in starting a business, dealing with licenses
(ranked at 9), getting credit (13) and slight improvement
in paying taxes.
• Rwanda – in dealing with licenses, paying taxes and
trading across borders. Good ranking in starting a
business at 63.
• Tanzania - in starting a business. Good ranking at
enforcing contracts at 35.
• Uganda - trading across borders. Plus good ranking at
11 in employing workers and 48 at closing a business.
7
Doing Business Survey, conti..
o Queries on the integrity of the index
o Questions by own WB-Internal evaluation
group
o EABC annual Business Survey (BCI). Last
one is outdated (February 2007) Currently
carrying out one. Workshops in all
countries after August. (few remaining
copies of summary – available. Full BCI
Report on our website.
8
STRENGTHS OF THE EAC
BUSINESS ENVIRONMENT:
1. THE EAC INTEGRATION PROCESS:
CUSTOMS UNION:
Came into force in 2005
Rwanda & Burundi – accede in July 2009
Zero tariff regime in Jan 2010 / CET / NTB elimination, plus NTB
Monitoring System
Reduced unilateral / sporadic decisions at State Level. Consensus
approach through EAC institutional framework of Council of
Ministers, Sectoral Council on Trade & Industry, Finance &
Investment, Pre-budget consultation
Created a predictable business environment by minimising
discretionary powers earlier enjoyed by partner States.
9
EAC INTEGRATION PROCESS Cont..
EAC Competition Policy & Act (2006):
Protect smaller players / consumers against
monopolies, price hikes, cartels, merges /
acquisitions
Enacted & passed in 2006
Objective – promote & protect fair competition,
provide consumer welfare
Establish EAC competition Committee & Authority
Creates an environment conducive to investment
Enhances competition by exposing local firm to
competition
EAC competition policy & practice in line with
international best practice. 10
EAC INTEGRATION PROCESS Cont..
EAC Standardisation, Quality Assurance, Metrology
& Testing Act (2006)
Health, safety and environmental issues of concern
EAC enacted in 2006 the above Act
Objective of enhancing the quality, reliability and
reputation of products produced / traded in the
community
harmonising national and East African Standards with
international standards to reduce costs, enhance
compliance and develop trade opportunities.
Once fully operational, this Act is important in facilitating
of trade opportunities with the EAC region and
externally.
11
EAC INTEGRATION PROCESS Cont..
EAC Model Investment Code:
Currently a guiding instrument, without any binding effect on Partner States
Aims at improving Partner States’ national investment codes and policies
through capturing best practice while working towards harmonisation of
investment policies.
By adopting any or all the provisions of the Code, Partner States enhance
their quantitative and qualitative foreign and local investment in the region,
while reducing fiscal incentives provided to investors; thereby reducing
competition for investment in the region and associated costs.
Efforts are underway to upgrade the Code into a binding Investment
Protocol.
In the interim, there initiatives to market the region as one; which include
various tourism promotion activities and joint investment missions in Africa
and overseas have taken place; for example EAC trade Mission to Sweden
organized by EABC and the Energy Mission to Munich, both in late 2007.
And not to forget this Conference today!
12
MARKET SIZE & MARKET ACCESS
Market Size:
Once regional integration is completed, EAC will have the 2nd
largest single market in Africa of around 120 million consumers.
Growing / expanding market – steady growth and growth prospects
remain strong with projections for 2008 at over 9% for Uganda,
7.5% for Tanzania, 4% for Kenya (down from 6.9% in 2007 due to
the post election violence) as per the recently read budgets. For
Rwanda, over 6% and 5.9% for Burundi is estimated by the IMF.
Annual Survey carried out by IFC of the World Bank
Market Access:
COMESA – through Kenya, Uganda, Rwanda & Burundi, investors
have access to 385M consumers
through Tanzania, to the SADC market of 215M for export products
All the EAC Partner States also have preferential access to the EU
market and qualify under AGOA for access to the US Market for a
variety of products.
13
RESOURCES AND OPPORTUNITIES:
Agricultural potential – ideal soil and climate conditions for a
variety of agricultural products, including tea, coffee and
horticulture (fruits, flowers and vegetables). Success in
horticultural industry
In tourism, all the Partner States have enviable natural resources,
from the mountain gorillas in Rwanda, the wildebeests of
Serengeti and Masai Mara.
In addition, the region has a 2000km coastline and two major
ports.
In energy there is oil in Uganda, methane gas in Rwanda,
Geothermal in Kenya and gas in Tanzania.
Other opportunities are in mining
Manufacturing
Infrastructure and services.
14
MACROECONOMIC STABILITY:
Source: www.imf.org
GDP figures for 2007 estimates by IMF staff
BRD BRD KEN KEN RWA RWA TAN TAN UGAN UGA
2006 2007 2006 2007 2006 2007 2006 2007 2006 2007
GDP (US Billion) 0.9 1.0 22.8 29.3 2.9 3.3 14.2 16.2 9.5 11.2
Population (Million) 7.6 7.7 34 35 9.2 9.4 38.2 39 29.8 30.9
Population Growth (%) 2 3 3 2 4
GDP Growth 5.1 3.6 6.1 6.9 5.4 6.2 6.7 7.2 5.7 6.5
(%)
Inflation (%) 2.8 8.3 14.4 9.8 8.8 9.4 7.2 7.0 6.6 6.8
GDP per Capita (US $) 120 128 670 854 311 353 371 415 318 363
15
Macroeconomic Stability, Conti..
Economically, the EAC Partner States have all embarked on
comprehensive reforms that seek to reduce government intervention
in the economy.
Stable macroeconomic environment, marked by steady economic
growth as highlighted in the table above
manageable inflation rates, which although in some of the states it
has reached double digits is fuelled mainly by the rising oil costs. In
addition, the inflation rate in the region increased by 1.5% on
average, which means the region experiences stable commodity
prices.
Per capita income has also increased steadily, meaning income is
being generated; and a population growth rate of 2.8%, pointing to
an increased market.
Interest rates to be determined by market forces.
Investors also have good access to affordable skilled labour.
• The above, coupled with the largely stable political environment and
governments that are, in principle, open to listening to the private
sector and addressing its concerns, should be attractive to investors.
16
BUSINESS SUPPORT SERVICES
Investment Promotion Agency (IPA) in each Partner State.
These are the Burundi Chamber, Rwanda Investment and Export
Promotion Agency, Kenya Investment Authority, Tanzania
Investment Centre and Uganda Investment Authority.
Responsible for promoting and facilitating both local and foreign
direct investment.
Objective to offer a “one stop shop” that cuts through the hassle of
having to deal with different offices for the various requirements
before actually commencing business.
Offer a variety of incentives such as tax breaks to attract investment.
To point to how well the IPAs perform, Tanzania Investment Centre
was in 2007 awarded the Best Investment Promotion Agency of the
Year in Aftercare Services by the World Association of Investment
Promotion Agencies (WAIPA)/United Nations Conference on Trade
and Development (UNCTAD).
17
REFORMED FINANCIAL SECTOR
Over the years, financial sector reforms aimed at achieving macroeconomic
stability and boosting overall economic growth.
Deregulation of credit controls to ensure efficient allocation of credit among
competing sectors.
Interest rates are no longer controlled by government
Removal of bank entry barriers so as to increase the number of banks and
therefore competition and efficiency. This has been coupled with partial
privatisation of the state owned banks.
The foreign exchange market has been liberalised (although Rwanda is
currently carrying out reforms).
All Partner States (except Burundi) have a securities market.
For investors, access to finance has improved over the years and big
projects are now often funded through consortia of local banks. Stock
Exchanges have become a vibrant source of funding for firms seeking
expansion. Two recent Initial Public Offers (IPOs) – the Safaricom (Kenya)
and Stanbic Bank (Uganda) have been open to all EAC residents and
foreigners.
18
INFRASTRUCTURE & POWER
Power Supply & Energy:
Sector characterised by very high energy prices, insufficient and
unreliable supply of power and very low rates of electrification.
Effort, through the East African Power Master Plan, the EAC region
seeks to improve the power situation by having a fully integrated
power sector.
The proposal is to create an East Africa Power Grid through
interconnection of the national grids and to establish an East African
Power Pool, which will establish the technicalities of automatic
sharing of power generation, transmission and distribution and
management.
Also seeks to harmonise policies of rural electrification.
Ensure uninterrupted power supply to operations in production and
provision of services across sectors.
This will ultimately bring down the cost of power and ultimately,
enhance the competitiveness of businesses in the region.
19
INFRASTRUCTURE & POWER, Conti..
Road Transport:
During the Strategic Retreat of the East African Community
Ministers in April 2008, it was reported that 52% of the region’s road
network is in poor condition, with poor maintenance and poor level
of service.
Effect - increases the operating costs of business due to long transit
times and long turn around times, frequent need for repairs and
lengthy clearance procedures among others.
There is commitment by the EAC Partner States government to
improving the road transport network (and already a lot of
improvements for example on the Northern and the Central corridors
have been made).
There is also effort to carry out other on-transit facilitation activities
such as harmonisation of axle-load limits and overload control,
simplification of customs documentation and procedures at ports
and border posts, among others.
20
INFRASTRUCTURE & POWER, Conti..
Air Transport:
Region has 9 international airports – 3 in Kenya,
3 in Tanzania and 1 each in Burundi, Rwanda
and Uganda and several regional and local
airstrips.
The EAC region, particularly through Kenya’s
Jomo Kenyatta International Airport has a large
number of airlines flying to and from many
international destinations.
Connectivity is therefore good in terms of air
transport, making the region attractive to an
investor.
21
INFRASTRUCTURE & POWER,
Conti..
Ports:
The region has 2 ports – in Mombasa – run by the Kenya Ports Authority
(KPA) and Dar es Salaam, run by the Tanzania Port Authority.
Both ports experience problems such as delays and congestion,
Both are committed to improved service, including operation on 24 hour
basis to ease congestion.
KPA - plans to have more terminal facilities, carry out modernisation in
terms of computerising of the container handling systems, improve
documentation and cargo clearance, cargo verification and scanning,
among others. In addition, KPA has special representatives for each of the
landlocked countries (Rwanda, Burundi, Uganda, DRC), who are allowed to
participate in stakeholder meetings.
TPA intends to build 5 inland container depots, special treatment for cargo
that needs quick clearance such as fuels, purchase of more equipment and
plans are underway to extend the port to enable it handle 600, 000 TEU
(current capacity is 250,000 TEU).
22
INFRASTRUCTURE & POWER, conti..
Communication:
Communication in all Partner States has improved
tremendously especially with the advent of mobile
telephony.
Current mobile telephone users in the region are
estimated at over 25 million.
Internet usage has also improved, as has broadband
connectivity (although the latter is more at national level)
There is limited use of e-commerce.
There are also joint efforts to improve the region’s
connectivity with the rest of the world through initiatives
like the Eastern Africa Submarine Cable System
(EASSy) which seeks to connect eastern Africa via high
bandwidth fibre optic cable.
23
POWER & INFRASTRUCTURE,
Conti..
Railway:
The current railway systems (Kenya Railways / Rift
Valley Consortium, Tanzania Railways / Tazara) are
antiquated and are over 100 years old.
In addition, there is no urban rail and no significant
new/efficient inter-urban rail.
However, there has been effort to improve the railway
systems, with the partial privatisation of the Kenya-
Uganda rail (joint) and the Tanzania railway. Already,
Tazara has carried out some improvement on the
system and made some expansion.
24
CHALLENGES /
RECOMMENDATIONS:
POOR EXTERNAL PERCEPTION:
Transparency International rating - EAC Countries fare very badly in
the Corruption Perception Index.
In 2007, Kenya worst amongst the EAC countries at position 150 out of
the 180 nations surveyed. (as bad as countries facing stability
problems in Africa including DRC Congo, Liberia, Cote d’Ivoire and
Sierra Leone)
Tanzania leads in the region as the least corrupt in the T.I study taking
position 94 out of 180, followed by Uganda (110), Rwanda (111) and
Burundi (134). Yet, even for Tanzania, the score is poor, considering
that it is placed 57 places below Botswana with the cleanest graft
record in Africa.
Perception of the would be investor matters!
EAC as a region needs to respond to the challenges related to
corruption, as it does affect the business climate in the region. The
newly formed anti-corruption association in East Africa needs to
proceed and address the substantive corruption problems the region
faces.
25
Challenges & Recommendations
NTBs
Continue to manifest themselves in various forms
ranging from administrative and legislative measures
to infrastructure hindrances.
NTBs increase the cost of doing business and
render the region uncompetitive, thereby defeating
EAC’s integration objective of developing a
competitive private sector both in the region and
globally.
EABC recommends that the Monitoring Mechanism
be operationalised as soon as possible to fast track
the elimination of NTBs within the EAC region.
26
Challenges & Recommendations
LACK OF COMMITMENT TO EAC POLICIES:
There is a lack of commitment to policies reached at the EAC
level, manifested in unilateral decisions that are still taken by
some States, without the due consultation with all affected
stakeholders.
The cases of the Plastics Industry and the Motor Vehicle
manufacturers industries come to mind.
Any unilateral decision works against investment, as a major
guiding factor on investment decisions is predictability of
policies.
EABC therefore recommends where changes become
necessary, the provisions that allow for changes in the policy in
question should be followed to avoid unilateral decisions.
In addition, it is necessary that heavy penalties be levied on
those who violate the EAC policies, to act as deterrents to
Partner States.
27
Challenges & Recommendations
INFRASTRUCTURE & ENERGY IMPEDIMENTS:
Necessary to leverage all issues affecting competitiveness All aspects
of the infrastructure require improvement.
Energy – high cost of production in the region compared to our
competitors like South Africa and Egypt due to high energy prices,
insufficient and unreliable supply of power.
In addition, there is a low rate of electrification, which hinders utilisation
of resources, value addition and any power reliant expansion.
EABC recommends that the EAC Partner States fast track the
implementation of the East African Power Master Plan.
In addition, it is EABC’s contention that the region has relied too long
on conventional sources of energy. In recognition of this, EABC intends
to hold, in the coming months, an energy forum to promote local
innovative sources of energy such as biomass systems, bio-fuels, use
of solar energy, co-generation, and mini hydro systems, among others.
The aim is to target alternative sources of energy that do not require
large capital outlay or long duration of implementation, to act as interim
measures.
28
Challenges & Recommendations
Ports, though both operators have indicated that efforts to reduce congestion,
enhance capacity and service delivery are underway, speed is of the essence.
In addition, it is necessary to enhance capacity at the Tanga and Lamu ports.
Transport, on both the Central and Northern corridors, the physical conditions of the
roads need to be improved, coupled with proper and regular maintenance.
Harmonisation of the axle load controls needs to be speeded up as do simplification
of customs documentation and procedures at ports and border posts.
In addition, there is need to reduce the number of weighbridges and police road
blocks which not only cause delays, but sometimes became sources of illegitimate
charges and bribes.
Rail transport improvements also need to be speeded up.
Alternative routes need to be developed, such as using of L. Victoria to Rwanda and
Burundi through river Akagera (as suggested during the April Strategic Retreat)
Communications, there is need to embrace e-commerce, improve connectivity
speeds in the region and use of communication concepts to enhance other business
operations such as regional cargo tracking system, regional transport database,
computerised monitoring of the corridors and networked systems that will enable
exchange of information e.g. on customs clearance, among others.
29
CONCLUSION
o Above challenges are only the key ones affecting the region as a
whole. They are not exhaustive as some impediments are at
national levels. I am sure my fellow presenters and distinguished
delegates will add more.
o That said, the EAC region offers great potential to the willing
investor. Impediments to realising this potential are being removed,
although not at the pace that the private sector would like to see.
o It is important that the Partner States governments and the private
sector work together, through a forum such as this one, to ensure
that a conducive business environment is created.
o Thank you to: Organisers - The EAC; Rwanda Investment & Export
Promotion Agency, the Commonwealth Secretariat and EABC.
o Most particularly though, I thank everyone present today, for taking
time off your busy schedules to attend this important forum.
o THANK YOU.
30
THANK YOU FOR YOUR ATTENTION!
East African Business Council
P.O. Box 2617, Arusha, Tanzania
Office Tel./Fax: +255 27 250 9997
Charles Mbogori
Email: charlesed@eabc-online.com
31
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