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

11
(No Transcript)
12
(No Transcript)
13
(No Transcript)
14
(No Transcript)
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!