WHY EAC: REFLECTING ON THE EAC BUSINESS ENVIRONMENT Presented during the 1st East African Investment

1
WHY EAC REFLECTING ON THE EAC BUSINESS
ENVIRONMENTPresented during the 1st East African
Investment ConferenceKigali, Rwanda 26 June
2008By Mr. Charles MbogoriExecutive
DirectorEast African Business Council
2
Overview

• Relevance of Topic
• Related to EABCs mandate ensure an enable
  business environment is created, which promotes
  private sectors regional and global
  competitiveness in trade and investment
• EAC is an emerging economy, high growth
  potential, many untapped opportunities.

3
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.

4
Presentation Outline

• How the World sees the EAC region based on the
  World Banks annual Doing Business Index
• Strengths of the EAC Business Environment the
  perspective from the Private Sector,
• Challenges and suggested recommendations to
  ensure an improved business environment for
  investors, both foreign and domestic.

5
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

6
DOING BUSINESS REPORT 2008

• Indicators
• Starting a Business
• Dealing with Licenses
• Employing Workers
• Registering Property
• Getting Credit
• Protecting Investors
• Paying Taxes
• Trading Across Border
• Enforcing Contracts
• Closing a Business

7
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.

8
Doing Business Survey, conti..

• Queries on the integrity of the index
• Questions by own WB-Internal evaluation group
• 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.

9
STRENGTHS OF THE EAC BUSINESS ENVIRONMENT

• 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.

10
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.

11
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.

12
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!

13
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.

14
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.

15
MACROECONOMIC STABILITYSource www.imf.org GDP
figures for 2007 estimates by IMF staff
16
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.

17
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).

18
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.

19
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.

20
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 regions 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.

21
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 Kenyas 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.

22
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).

23
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
  regions 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.

24
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.

25
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
  dIvoire 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.

26
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 EACs 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.

27
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.

28
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 EABCs 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.

29
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.

30
CONCLUSION

• 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.
• 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.
• 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.
• Thank you to Organisers - The EAC Rwanda
  Investment Export Promotion Agency, the
  Commonwealth Secretariat and EABC.
• Most particularly though, I thank everyone
  present today, for taking time off your busy
  schedules to attend this important forum.
• THANK YOU.

31
THANK YOU FOR YOUR ATTENTION!

• East African Business Council
• P.O. Box 2617, Arusha, Tanzania
• Office Tel./Fax [phone]
• Charles Mbogori
• Email charlesed_at_eabc-online.com