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WHY EAC: REFLECTING ON THE EAC BUSINESS ENVIRONMENT Presented during the 1 st East African Investment Conference Kigali, Rwanda: 26 June 2008 By Mr. Charles Mbogori Executive Director East African Business Council Overview Relevance of Topic:

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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


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Overview

Relevance of Topic:

  • Related to EABC’s 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.


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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.


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Presentation Outline

  • How the World sees the EAC region – based on the World Bank’s 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.


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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


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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


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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.


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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.


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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.


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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.


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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.


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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!


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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.


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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.


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MACROECONOMIC STABILITY:Source: www.imf.orgGDP figures for 2007 estimates by IMF staff


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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.


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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).


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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.


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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.


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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.


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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.


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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).


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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.


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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.


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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.


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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.


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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.


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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.


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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.


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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.


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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


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