Reform and Regional Integration of Professional Services in East Africa Time for Action

1. Reform and Regional Integration of Professional Services in East AfricaTime for Action Dissemination Workshop October 7, 2010 Brussels

2. Motivation • Weaknesses in service sectors hinder economic growth and development in East Africa • In parallel with reforms of backbone service sectors, governments are beginning to prioritize reform in professional service sectors • Adoption of EAC Common Market Protocol in November 2009 initiated process of regional integration in professional services

3. Purpose of the study and the dissemination workshops • Remedy large gaps in information on policies and regulatory regimes, and market conditions for provision of professional services (accounting, engineering and legal services) in East Africa • Bring together regulators, professional associations, business representatives, negotiators, international organizations and other stakeholders to facilitate steps towards reform and regional integration in East Africa • What role for Europe to support the reform process and regional integration in East Africa? • EPAs, regulatory cooperation, technical assistance, knowledge platforms

4. Professional services matter • Professional services play a crucial role for functioning of modern economies • Accounting and legal services can help reduce transaction costs which are a significant impediment to growth in Africa • Share of business services in the GDP of East African countries is small (less than 3%) … • … but sector is very dynamic: business services grew at 8% per year in Kenya, 14% per year in Tanzania and 18% per year in Uganda in 2001-2007 • Business services are key inputs in terms of direct and indirect usage for other sectors (e.g., garments, leather, paper, metal products, chemicals, minerals, business services, education services, distribution and public administration)

5. Professional services matter • Higher labor productivity (sales/employees) is associated with greater usage of professional services in all East African countries, especially for small firms

6. Heterogeneity in level of development of professional services within EAC • Availability of professionals varies across countries and sectors

7. Market structure of professional services sectors • Elements of both oligopoly and competition are present • Accounting/auditing: Big Four (KPMG, Ernst & Young, PWC, Deloitte) dominate markets in EAC but in Kenya mid-sized local firms are gaining market share after being sub-contractors to Big Four • Engineering: small domestic providers dominate and some limited foreign presence • Legal: small domestic providers dominate and complete absence of foreign law firms

8. Skills shortages, skills mismatches and underdevelopment of professional services • Skills shortages • Most severe shortages of engineering and accounting professionals • Shortages of middle-level professionals (such as technicians or paralegals) and shortages of experienced professionals • Skills mismatches • Jobless professionals despite scarcity • Underdevelopment of professional services markets • Professional services are less efficient, more costly and less widely available than in many other comparable countries (for example, poor quality of auditing and reporting systems, poor enforcement of property rights)

9. Diagnostics Challenges What explains · Education issues · s kills shortages and skills m ismatches · Domestic regulation · u nderdevelopment of professional · Trade restrictions services · Labor mobility barriers t hat are observable in East Africa despite many positive developments in recent years? Diagnostics and Challenges

10. Challenges in education: High costs of professional education • Covering cost of professional education in East Africa is a challenge • Median costs are unaffordable for most due to liquidity constraints/ • absence of loans even if internal rates of return and skill premia are high

11. Policy Action at National Level: Education-related reforms • Develop and manage students’ loan programs to address financial constraints preventing individuals from acquiring professional education • Improve the quality and the capacity of secondary schools especially in maths and science and improve the quality of technical studies • Encourage improvements of existing institutions of professional education and emergence of new institutions: horizontal and vertical differentiation • Encourage collaboration between universities, professional associations, and private sector through internships could help students acquire relevant skills and practical training

12. Challenges of domestic regulation • Domestic regulations on entry and operations of professional services firms are heavy and can undermine competition despite social goals

13. Regulation of engineering services in Tanzania Entry Regulation Conduct Regulation

14. Restrictions on operations hurt professional services providers

15. Policy Action at National Level: Domestic regulation • BETTER REGULATION NOT DEREGULATION • Relax cumulative entry qualitative requirements • Narrow scope of exclusive tasks in certain professions e.g., by allowing services to be provided by less-regulated middle-level professionals • Eliminate disproportionate restrictions on operations that affect competition • Abolish fixed prices but improve access to information on services and providers • Reduce restrictions on business organization by allowing collaboration among members of same profession • Eliminate advertising prohibition but ensure that advertizing is relevant and not misleading

16. Challenges of trade restrictiveness and labor mobility • Explicit trade barriers, regulatory requirements, and immigration policies restrict trade through movement of professionals (mode 4) while restrictions on establishment and operations of foreign firms impede trade through commercial presence (mode 3)

17. Explicit barriers to trade in accountancy services in Kenya

18. Policy Action at International Level: Trade restrictiveness • Ideally trade liberalization should occur on a non-preferential or multilateral basis • Domestic users of professional services would have access to the world’s best service providers • Domestic professionals would benefit from exposure to those world’s best service providers • Minimize restrictions on forms of establishment for foreign providers (mode 3) • Instead of prohibiting incorporation, introduce ‘safeguards’ on corporate forms to ensure that foreign professionals are made accountable for their service

19. Policy Action at International Level: Trade restrictiveness and labor mobility • Reduce restrictions on movement of professionals (mode 4) • Replace nationality and residency requirements by less discriminatory measures: e.g. requiring foreign service providers to undergo professional assessment to ensure professional competence or using liability insurance • Develop transparent criteria/procedures for applying economic needs tests • Eliminate visa restrictions and other immigration related barriers

20. Role of Regional Integration and Cooperation Policy actions at international level – how should East African countries proceed at the regional level? • Regional markets for professional services and professional education in East Africa are fragmented by restrictive trade policies and regulatory heterogeneity that prevents EAC countries from exploiting gains from trade based on comparative advantage and economies of scale, and gains from enhanced competition and from higher investment • Reciprocal liberalization at regional level may be technically more feasible and politically more acceptable when impediments arise from differences in regulatory requirements

21. Policy Actions at Regional Level • Eliminate trade barriers • Address immigration policies • Eliminate fragmentation of regional market for education • Implement Mutual Recognition Agreements around appropriate standards

22. In conclusion • Economic benefits from regional integration of professional services sectors are evident • EAC countries have committed on paper to services liberalization and deeper regional integration in services sectors in context of EAC Common Market Negotiations • Burundi, Kenya, Rwanda, Tanzania, and Uganda have scheduled commitments in accounting and engineering services, have adopted annexes on removing restrictions on free movement of workers and on right of establishment, and on MRA of academic and professional qualifications • What role for Europe to support the reform process and regional integration in East Africa? • EPAs, regulatory cooperation, technical assistance, knowledge platforms

23. Thank you! Nora Dihel Africa Region - Poverty Reduction and Economic Management Unit ndihel@worldbank.org Ana M. Fernandes Development Economics Group – Trade and International Integration Unit afernandes@worldbank.org Aaditya Mattoo Development Economics Group – Trade and International Integration Unit amattoo@worldbank.org