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MINISTRY OF FINANCE, PLANNING

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Title: MINISTRY OF FINANCE, PLANNING


1
MINISTRY OF FINANCE, PLANNING ECONOMIC
DEVELOPMENTTHIRD NATIONAL COMPETITIVE
FORUMRegional Integration Opportunities
Challenges for Investment
  • Presented by
  • Mr. Charles Mbogori
  • Executive Director
  • EABC
  • 25th September 2008

2
CONTENTS
  • Introduction - About EABC Role
  • Why Regional Integration?
  • Integration Blocs Uganda is a Member in
  • EAC Integration
  • Opportunities for Investment
  • Challenges and Recommendations
  • Conclusion

3
Introduction About EABC Role
  • Importance of topic to EABC
  • Observer Status in the EAC. But do not only
    observe private sector agenda articulated in
    all EAC decisions
  • Lobby to ensure that creation of a conducive
    business environment that enhances private sector
    competitiveness
  • EABC is working closely with EAC towards status
    change independent institution of the EAC, with
    ability to generate agenda.

4
WHY REGIONAL INTEGRATION?
  • Increased returns and increased competition -
    the enlarged market makes it possible to enjoy
    economies of scale and greater productive
    efficiencies. On the other hand, increased
    competition induces firms to cut prices, expand
    sales and reduce internal inefficiencies.
  • Trade gains If goods are sufficiently strong
    substitutes, regional integration causes demand
    for third party goods to decrease, with increased
    demand for goods produced cheaply within the
    region.
  • Investment Regional integration attracts
    investment from within and outside the region as
    a result of the enlarged market particularly for
    large investment that are viable above a given
    critical mass.

5
WHY REGIONAL INTEGRATION, conti..
  • Specialisation - based on comparative advantage
    at macro (national) level and at micro
    (enterprise) level.
  • Improved resource mobilisation utilisation -
    especially of huge projects such as
    infrastructure which may often be difficult to
    attract resources at country level.
  • Predictability of policy - especially as it
    progresses through various levels (Customs Union,
    Common Market, Monetary Union etc) becomes a
    commitment to agreed policies and an instrument
    for joint commitment to a reform agenda.
    Effectiveness is subject to the cost associated
    with exiting from the bloc and / or the threat of
    penalties or any other punishment imposed on
    those who do not adhere to agreed policies.
  • - Although working best as commitment
    mechanism for trade policy, regional integration
    can also serve to lock the country into
    macroeconomic reforms, especially where policies
    or rules are stipulated within the integration
    arrangements.

6
WHY REGIONAL INTEGRATION, conti..
  • Co-ordination and collective bargaining power -
    easier than through multilateral agreements since
    negotiation rules accustom countries to a
    give-and-take approach, which makes tradeoffs
    between different policy areas possible. A region
    stands with more visibility and more bargaining
    power (often with better negotiation outcomes) in
    multilateral negotiations than would any of its
    countries. (Case of EAC with the EPA
    negotiations).
  • Security It is often argued that regional
    integration links countries through
    intra-regional trade and investment, thereby
    creating a web of positive interactions and
    interdependency. This is likely to build trust,
    raise the opportunity cost of war, and hence
    reduce the risk of conflicts within or between
    countries. This can be argued as one of the
    contributing factors towards the quick resolution
    of the post election crisis in Kenya.

7
Integration Blocs Uganda is a Member in
  • COMESA Uganda is at the level where it has
    liberalised up to 80, meaning that it charges
    20 of the agreed tax level to member states.
    Other countries like Kenya, Burundi and Rwanda
    are at the Free Trade Area (FTA) level whereby
    products from member countries who are also in
    the FTA trade without paying import duty. are
    also in this category.
  • EU-ACP As a member of the ACP group, Uganda has
    enjoyed the trade relationship with EU with the
    final arrangement officially ending on 31st
    December 2007. The Cotonou Agreement is
    transiting to the Economic Partnership Agreement
    (EU-EAC EPA). Agreement to ensure a win-win
    situation is being negotiated and an agreement is
    expected to be signed in July 2009.
  • EAC Possibly the most important integration bloc
    for Uganda now and from which the opportunities
    and challenges shall be addressed in relation to.

8
EAC Integration
  • EAC Integration The second EAC (1st Collapsed in
    1977). Traces its legality from the EAC Treaty by
    the Partner States
  • In Article 5(2) of the EAC Treaty Partner States
    commit to establish among themselves a
    Customs Union, a Common Market, subsequently a
    Monetary Union and ultimately a Political
    Federation.. These indicate the integrations
    process envisaged.
  • Customs Union - agreed as the 1st stage of the
    Regional Integration. It was established in 2005.
    Current negotiations on the EAC Common Market.
    Preparations in terms of studies are also going
    to begin soon for establishing a Monetary Union.
  • According to the EAC Treaty, all the integration
    efforts are geared to strengthen and regulate the
    industrial, commercial, infrastructural, social,
    cultural, political and other relations of
    Partner States..that there shall be,
    accelerated harmonious and balanced development
    and sustained expansion of economic activities.
  • Contributing factor to the collapse of former EAC
    (1967-77) inadequate provision for private
    sector participation in development of the
    Community. New EAC Treaty (1999) places private
    sector at the heart of its strategy. Role of
    Private sector is articulated in various articles
    i.e.
  • Article 5 enhancement and strengthening
    partnership with the private sector
  • Article 127 undertake to provide an enabling
    environment so that Private Sector can take
    advantage of the Community

9
EAC Integration- Customs Union
  • The main objectives of the EAC Customs Union are
    to -
  • Deepen the integration process through
    liberalization and promotion of intra-regional
    trade that is mutually beneficial to all Partner
    States,
  • Promotion of efficiency in production,
  • Enhancement of domestic, cross border trade and
    foreign investment and
  • Promote industry diversification and
  • Economic development.

10
EAC - Customs Union cont
  • Common External Tariff
  • 0 (Raw Material Capital Goods) 10
    (intermediate) and 25 Finished
  • 55 sensitive products with advarolem tariffs
    ranging between 35 to 66 on 44 products with 11
    products attracting specific tariff
  • Internal Tariff Elimination
  • Exports of Tanzania and Uganda to Kenya attract
    no import duty
  • Exports of Kenyas 413 products to Uganda attract
    4 tariff in 2008 down from 10 in 2005
  • Exports of Kenyas products to Tanzania attract
    between 0-10 in 2008, down from between 5-25 in
    2005

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15
Explanation of the data
  • The above two slides, (which are drawn from the
    EABC Study on the Customs Union on Businesses)
    show that Uganda is taking advantage of the
    opportunities availed by EAC. 60 of interviewed
    Ugandan firms reported expansion of businesses
    since the launch of EAC Customs Union in 2005
    (86 in Kenya and 78 in Tanzania) In terms of
    business turnover, the Study showed that Uganda
    has benefited most in terms of increase in export
    to the EAC region, a position supported by 48 of
    the surveyed companies, against 28 in Kenya and
    25 in Tanzania. In addition, 93, 64 and 80 of
    companies in Kenya, Tanzania and Uganda,
    indicated EAC Customs Union as an important
    factor in the coming years in sustenance of their
    business operations. However, what the data above
    has not captured is unrecorded trade especially
    of agricultural trade with Kenya. Conservative
    figures put this to over USD 40 -60 Million.
  • Report showed that the price boom of agricultural
    commodities especially in the Eastern and
    Northern part of Uganda has been more pronounced
    after establishment of the Customs Union.
  • This is certainly an advantage and a case for
    Uganda to deepen the regional economic
    integration.

16
OPPORTUNITIES FOR INVESTMENT
  • 1. Support to the Agricultural Sector
  • Agriculture is important - provides a livelihood
    to about 80 of the EACs region combined
    population and is a leading economic sector in
    the EAC and is supported by nature (climate,
    soil, water).
  • Most farming is still subsistent and at best
    small to medium scale. With enlarged market of
    over 120 consumers and a vast amount of arable
    and irrigable land - opportunity exists for large
    scale farming - with the enlarged market,
    investors in the EAC region can exploit economies
    of scale and its attendant benefits such as
    greater production efficiencies.
  • Consequently - it should then be feasible to
    engage in value addition - the region is heavily
    dependent on export of unprocessed agricultural
    commodities because of the uncompetitive cost of
    processing. For common products such as coffee,
    tea and cotton, value addition is possible.
    Others include specialty markets products like
    green tea, organic products, washed robusta
    coffee (which earns better than what the region
    currently exports).
  •  

17
OPPORTUNITIES FOR INVESTMENT
  • Related, there is opportunity to investment in a
    well functioning commodities exchange market,
    with a view to linking farmers with the market.
    This removes the exploitative middle man,
    increasing the profit for the farmer and giving
    him/her an incentive to improve and invest in
    better agricultural practices.
  • There is also need to educate the farmer on
    market access issues including such requirements
    like bar-coding even for locally traded goods and
    other trends demanded by the export markets, such
    as organic farming, traceability and post harvest
    technologies.
  • From the recent EABC Customs Union Impact study,
    regional sourcing of agro-based raw materials at
    a lower prices for the food and beverage industry
    was cited as a direct benefit from the EAC
    Customs Union.

18
OPPORTUNITIES FOR INVESTMENT
  • 2. Infrastructure
  • Key impediment to doing business in the region is
    the state and inefficiency of infrastructure.
  • For the community shared infrastructure such as
    roads, railways, ports, energy and communication,
    for which benefits and costs spill over national
    borders, effective supply requires shared
    commitment and collective actions. This has
    resulted in joint infrastructure development and
    here is an EAC Masterplan for energy, roads,
    railway and ports.
  • Expanded market implies increased consumers to
    allow for private sector investment in
    infrastructure development as the returns are
    more assured. (example - EASSy project)
  • Energy Sector, EABC is championing private sector
    investment in the regions abundant untapped
    energy resources and we are scheduled to host a
    Conference in December focusing on this.

19
OPPORTUNITIES FOR INVESTMENT
  • Water transport in the region is underdeveloped
    and underexploited there are opportunities for
    passenger and freight cargo on L. Tanganyika
    (Tanzania / Burundi) Lake Nyasa (Tanzania,
    Malawi, Mozambique). Population around these
    water sources is estimated at 30 million people,
    involved in fishing, agriculture and trading.
  • The railway sector presents perhaps the best
    opportunity for private sector within the region
    to pool resources and take charge of its
    development. This would be complete with the
    necessary track gauge that is more productive and
    in line with world standards. Such investment has
    guaranteed returns as it will bring down the cost
    of transport by between 15-20. Transport is a
    main contributor to the regions
    uncompetitiveness.

20
OPPORTUNITIES FOR INVESTMENT
  • 3. Establishment of Free Ports
  • The two available ports in the Community (at Dar
    es Salaam and Mombasa) are characterised by port
    delays and congestion. The Customs Union Protocol
    provides for the establishment of free ports
    within the community.
  • The functions of these ports include the
    promotion and facilitation of trade, provision of
    facilities such as storage, warehouses and
    simplified customs procedures and provisions for
    the establishment of international supply-chain
    centres, which would enhance the Communitys
    international competitiveness. The Customs Union
    also provides regulations for the operations of
    these ports, which are intended to ensure that
    there is uniformity among the Partner States in
    port operations.
  • Opportunity exists therefore to establish free
    ports at seaports, river ports and airports.
    Activities to be carried out include preserving
    of goods, improving packaging and preparing for
    shipment (but not manufacturing or processing)
    labelling, grading, cleaning, breaking bulk,
    among others.

21
OPPORTUNITIES FOR INVESTMENT
  • 4. Expansion into the Region
  • Opportunity to expand into the regional market
    has been created. The local financial
    institutions have shown lead in such expansion,
    with a view to spreading their risk and
    increasing market share. Such include Kenya
    Commercial Bank, Diamond Trust Bank and Equity
    Bank - with the latter opting for mergers and
    acquisitions. There is also concerted effort to
    integrate the capital markets, with the Safaricom
    and Stanbic IPOs being sojourners. In addition,
    international financial services organisations
    are also entering the market. Such include AIG
    Global and Renaissance Capital.
  • Related, there is opportunity created for mergers
    and acquisitions in all sectors, with a view to
    increasing their capital base, expanding market
    share and cutting costs (e.g. management costs,
    production costs etc). With the principle of
    Asymmetry, companies with cross border investment
    can now rationalise their production activities
    to the cheaper market, with the guaranteed access
    to all markets. (Example Bidco manufacturing in
    Uganda / Tanzania, but still accessing the Kenyan
    market, duty free.)

22
OPPORTUNITIES FOR INVESTMENT
  • 5. Tourism
  • An important contributor to the economies of the
    5 EAC countries and the sector continues to show
    vibrancy and potential despite issues like
    security and bad politics.
  • Given that each country has unique selling
    points, opportunity exists to start selling the
    region as one tourist circuit, complete with one
    visa and free entry across the region.
  • As a consequence, there should be systematic
    development of the circuit in terms of the
    support industries and activities such as more
    accommodation facilities of international
    standards in all the 5 countries identifying and
    improving cultural heritage sites and historical
    locations.
  • Other activities that are only now offered in
    select areas can be further developed for
    example deep-sea fishing, diving and sea and lake
    cruising and white-water rafting.

23
CHALLENGES FOR INVESTMENT RECOMMENDED
POLICIES
  • 1. Protectionist Tendencies
  • Within the EAC region, there is still the
    tendency to protect industries under the guise of
    letting them grow. This is either against
    internal competition from other EAC partner
    States, or through insisting on high tariff rates
    that do not allow competition from firms outside
    the region. This does not take into consideration
    the future needs of the region and whether the
    technologies in use are sufficient to enable
    industries to be competitive.
  • As a policy, any protection extended must be
    guided by the sector interests, in terms of local
    capacity to produce that enables the region to be
    competitive.

24
CHALLENGES FOR INVESTMENT RECOMMENDED POLICIES
  • 2. Non Tariff Barriers (NTBs)
  • 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. This discourages
    investment.
  • One of the ways to address this challenge is to
    operationalise the NTB Monitoring Mechanism,
    which was developed in 2006 by EABC and EAC. This
    will provide the private sector with a systematic
    way of reporting NTBs, which in turn should work
    towards fast tracking the elimination of NTBs
    within the EAC region.
  • Another policy to deal with the NTB issue is to
    harmonise standards across the region.
    Differences in standards cause disruption to
    trade and compliance usually means extra costs,
    ergo uncompetitiveness. The Standards Quality
    Measurement and Testing (SQMT) law, which was
    passed in 2007, underlines the spirit of mutual
    recognition of standard marks from national
    bureaus of standards. This law should be
    domesticated across the region, with a view to
    streamlining the national laws to fit into the
    regional law. This will improve access of
    products across the region.

25
CHALLENGES FOR INVESTMENT RECOMMENDED POLICIES
  • 3. Inability to think East African
  • To quote what H.E. President Museveni is wont of
    saying there are no giants in the EAC region
    economy-wise. There are only dwarfs. It is
    necessary to stop competing and start
    complementing each other, especially in the area
    of specialisation and division of labour. Each
    country should concentrate on the area that gives
    them the most comparative advantage. In
    addition, activities and sectors that are better
    handled at regional level, such as development
    and improvement of ports and other
    infrastructure, must be developed as community,
    rather than country specific activities.
  • At firm level, this will involve establishing
    collaborative partnerships with either
    competitors or producers of complementary goods.
    This increases capital, market share and spreads
    the risk.

26
CHALLENGES FOR INVESTMENT RECOMMENDED POLICIES
  • 4. Lack of Commitment to EAC policies
  • There is a lack of commitment to policies reached
    at the EAC level, manifested in unilateral
    decisions especially on CET implementation that
    are still taken by some States, without the due
    consultation with all affected stakeholders. A
    major guiding factor on investment decisions is
    predictability of policies and as such any
    unilateral decision works against investment.
  • Related to this is the time it often takes to
    resolve issues especially related to the CET. For
    example, the issue of tariff heading / rules of
    origin has been pending for the motor vehicle
    assemblers sector since 2006. For any investor,
    such a duration and uncertainty is a deterrent.
  • There is need to establish a timetable on the
    duration of time any amendment / dispute etc
    should take, taking into consideration all the
    necessary consultations with stakeholders should
    be made. Such a time table should be no more than
    6 months and should be included in the calendar
    of activities of EAC counting down to the
    pre-budget Ministers of Finance meeting / next
    Council of Ministers meeting. The process should
    be transparent and consultative.

27
CHALLENGES FOR INVESTMENT RECOMMENDED POLICIES
  • 5. Poor Perception by the Potential Investor
  • According to Transparency International, the EAC
    Countries fare very badly in the Corruption
    Perception Index. In 2007, Kenya fared the worst
    amongst the EAC countries, with its placing at
    position 150 out of the 180 Nations surveyed
    (similar score with 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.
  • While most of the EAC Partner States may say the
    situation is not as reported by the TI study,
    perception by the potential investor, be they
    domestic or foreign is what 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.

28
CHALLENGES FOR INVESTMENT RECOMMENDED POLICIES
  • 6. INFRASTRUCTURE IMPEDIMENTS
  • In order to have an environment conducive to
    investment, it is necessary to leverage issues
    affecting private sector competitiveness at the
    EAC level. All aspects of the infrastructure
    require improvement.
  • In energy, the cost of production in the region
    is very high 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 intensive expansion. EABC
    recommends that the EAC Partner States fast track
    the implementation of the East African Power
    Master Plan and also put the necessary framework
    and enabling environment for private sector
    involvement in energy investment.
  • In 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.

29
CHALLENGES FOR INVESTMENT RECOMMENDED POLICIES
  • In 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)
  • In 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
  • The above challenges are only the key ones
    affecting the region as a whole. They are not
    exhaustive as some impediments are at national
    levels. The panel discussants 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.
  • Because of the pressures of globalisation,
    especially considering that smaller economies
    such as those of individual EAC member countries
    may not withstand the onslaught singly, it is
    meaningful to go the path of regional
    integration.

31
CONCLUSION
  • Lastly, but definitely not least, the private
    sector in the region in general and Uganda
    specifically needs to actively lobby to improve
    the environment for doing business in the region.
  • Specifically, I am calling on them to join EABC,
    to make louder the voice of the private sector.
    Under the EABC lobby to the Summit in June, Kenya
    in particular have removed or put in place
    actions which will reduce cost of Ugandas doing
    business, including 24 hour / 7 days a week port
    and border operations, removal of police road
    blocks from 47 to about 17, reduction of
    weighbridges to 2, among others. These were made
    possible because of advocacy of EABC, created
    within the regional integration framework.

32
END
  • THANK YOU FOR YOUR ATTENTION!
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