Scorecard Points Out Key Barriers To Investing In East Africa

Avatar
Written by Isaac Mwangi

For the first time, a new scorecard offers investors the opportunity to assess the attractiveness of individual East African countries in allowing free movement of capital, services and goods.

The inaugural report, “East African Common Market Scorecard 2014: Tracking EAC compliance in the movement of capital, services and goods,” tracks the progress of the five partner states of the East African Community in fulfilling their commitments under the Common Market Protocol. It examines selected commitments, outlining progress in removing legislative and regulatory restrictions, and recommends reform measures.

The report says that many of the restrictions on the free movement of capital, services, and goods inhibit or make entry into the market unduly expensive.

“But several forms of discrimination persist even after entering the market – such as different fees for transactions and government services, ceilings on the value of transactions, limits on the type and length of projects for service providers, and higher taxes for foreign firms,” the report says.

“Some barriers, such as restrictions on personal capital transactions and on the transfer of shares in firms, affect even firms seeking to exit a particular economy.”

It also points out that national laws and regulations in the partner states present barriers to increased cross-border trade and foreign direct investment into the region.

For capital, neither securities nor direct investment operations – except repatriation of proceeds from sale of assets – are free of legal restrictions across the bloc. For services, 67 percent of identified measures negatively affect foreign direct investment.

The report says that capital controls are the most severe restriction on the movement of capital across the EAC, affecting the majority of transactions covered under the protocol. Kenya’s laws and regulations make it easiest to move capital across the EAC, while Tanzania and Burundi make it hardest.

These restrictions affect much more than just movement of capital: Some restrictions remain during the life of the investment, favoring domestic investors. Uganda, for example, reserves a set of incentives available only to domestic investors.

Strong and integrated financial markets, the report says, will help make the EAC a more attractive destination for both foreign and domestic investment by shoring up the liquidity of the region’s capital markets and creating financing avenues for investors and issuers.

It recommends that the EAC should prioritize the rollback of laws, regulations, and investment codes that impede investment.

In the services category, the report identified 63 non-conforming measures that are inconsistent to commitments to the EAC protocol. Of these, Tanzania was responsible for the highest number, 17, followed by Kenya at 16, Rwanda 11, Uganda 10, and Burundi nine.

Non-Tariff Barriers

Professional services accounted for nearly three-quarters of these non-conforming measures, led by engineering, accounting, and legal services.

Some of the regulations in the professional services sub-sector are discriminatory, the report says, affecting the entry and operations of service providers in areas such as licensing, education requirements, restrictions on the number of suppliers, and mandatory membership in professional associations.

Under the freedom of movement of goods, the report says that since 2008 all partner states except Rwanda have imposed measures with equivalent effect to tariffs on intraregional trade, including additional charges and taxes that affect import costs or import unit values.

Formally, all the five countries have eliminated tariffs on intraregional trade.

These additional taxes and charges account for 17 percent of the total number of non-tariff barriers (NTBs) reported between 2008 and June 2013. They affect most intra-regional trade, including dairy, agricultural, pharmaceutical, aluminium and alcoholic products.

Tanzania was responsible for most of these additional taxes and charges, while Rwanda did not have any of these charges.

Issues related to rules of origin accounted for nearly a quarter of the non-tariff barriers reported between 2008 and June 2013. Tanzania accounted for 50 percent of the reported problems related to recognition of EAC certificates of origin at borders. Uganda followed with 30 percent, and Kenya and Rwanda 10 percent each. Burundi had no such problems.

Although all products traded within the EAC were affected by the reported NTBs, those more seriously affected were manufactured foodstuffs, rice, tea, dairy products, and alcoholic beverages.

Small Combined GDP

Among other recommendations, the report urges development of a methodology to assess and quantify the impact of NTBs, to demonstrate to partner states how these NTBs were undermining the free circulation of goods in the region.

The Secretary General of the EAC, Richard Sezibera, said that a predictable business environment across the EAC Common Market was an important criterion for cross-border investment and foreign direct investment. “A critical aspect of this is that rules, regulations and other administrative actions governing the movement of capital, services and goods should exist only to ensure public safety and fair competition – never to stifle legitimate businesses.”

Some partner states, Sezibera said, had introduced new violations despite their obligations under the Common Market protocol. “At least 10 restrictions on the movement of capital have been introduced since the protocol was signed. In services, several new restrictions have been introduced or carried over from older laws since the protocol was signed.”

Phyllis Kandie, Kenya’s Cabinet Secretary for East African Affairs, Commerce and Tourism, said that investors operating across a common market always have assets and operations in the different partner states. “They would want to move capital across markets, optimize their operations by allocating human resources at their best fit across the market, and produce and sell goods in different parts of the market.”

Catherine Masinde, the head of investment climate for East and Southern Africa at the International Finance Corporation, said that $22.7 billion in inter-regional trade was lost to other regional blocs such as the Southern African Development Community and the Common Market for Eastern and Southern Africa between 2005 and 2012. This was because a large number of measures agreed in the Common Market Protocol were not observed by the partner states, she said.

The report’s lead author Alfred K’Ombudo, pointed out that even as a region, East Africa still has a lower GDP than some individual countries in Africa, making it critical for the Common Market to succeed. While the total GDP of all five EAC countries in 2013 was $111 billion, South Africa had a GDP of $354 billion, followed in Africa by Nigeria at $292 billion. Egypt’s GDP was $124 billion, while Angola had $124 billion.

The scorecard initiative was developed by the East African Community Secretariat with the support of the World Bank Group.