Business reforms in EA stagnate as other blocs improve on competitiveness

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New data released by the World Bank shows that business reforms in the East African Community have stagnated, leaving the bloc behind its continental rivals: 

By A JOINT REPORT, The EastAfrican

East Africa’s standing as one of the continent’s most attractive destinations for foreign investment has come under threat from other blocs, which are cashing in on the region’s lengthy licensing procedures and sluggish commercial dispute settlement procedures to improve their competitiveness.

New data released by the World Bank shows that business reforms in the East African Community have stagnated, leaving the bloc behind its continental rivals: Southern African Development Community (SADC), the Common Market for Eastern and Southern Africa (Comesa) and the Economic Community of West African States (Ecowas).

(Read: Slow execution of protocol hampering EAC growth - report)

The EAC’s average ranking on ease of doing business has remained fairly constant over the past four years, at around 117, while the other blocs have made major strides. In the 2013 Doing Business report, the World Bank ranked the EAC at 117, SADC at 105, Comesa at 110 and Ecowas at 127.

The report shows that EAC countries continued to lag behind on some of the most pressing challenges facing investors, in most cases retaining prohibitive licensing processes and foreign ownership restrictions in key sectors of the economy. The EAC nations have been found to restrict foreign ownership in more sectors than most of their African counterparts.

For the second year in a row, the five EAC economies — Kenya, Uganda, Tanzania, Rwanda and Burundi — implemented just nine institutional or regulatory reforms between them.

“This is a clear indication that critical obstacles to entrepreneurial activity remain and that economies in other regions have picked up the pace in improving business regulation. But good regulatory practices do exist in the EAC,” notes the World Bank in the report. “Indeed, if a hypothetical EAC economy were to adopt the best practices among partner states as measured by all Doing Business indicators, it would stand at 26 in the global ranking on the ease of doing business,” states the report.

Rwanda was the best performer in the region and was ranked at position 52 globally, followed by Uganda at position 120, Kenya at 121, Tanzania at 134 and Burundi well behind at position 159.

Non-tariff barriers

As individual countries dithered over business reforms, frustration is growing among business executives in the region over the continued erection of non-tariff barriers (NTBs). Over the past seven years, reforms in the EAC have focused on simplifying regulatory processes, such as trading across borders and starting a business in the region.

This, analysts said, is denying the region larger markets, economies of scale, and promotion of local, regional, and global trade — the benefits envisaged from free trade among the member states.



This means businesses will have to continue incurring huge costs arising from NTBs — mainly weighbridges, roadblocks, poor infrastructure, unnecessary delays at border posts, and lack of harmonised import and export standards, procedures and documentation.




Rwanda, the second top business reformer globally since 2005 and the top reformer in the EAC, has reduced the gap and is now approaching the frontier of the top 10 in the European Union. Rwanda still has the most efficient processes in the EAC to start a business, with a global ranking of eight, followed by Burundi at 28, Tanzania at 113, Kenya at 126 and Uganda at 144.

However business executives and experts argue that regulatory reforms alone will not yield all the results. “Such reforms must be complemented by investments in energy and transport infrastructure,” said Hannington Namara, chief executive officer of the Rwanda Private Sector Federation.

The report is critical of EAC countries in areas such as business licensing; simplifying commercial law; company formation; bankruptcy; and land and tax issues.

David Stanton, deputy chief executive officer of Trademark East Africa, said the EAC region, while growing very fast, is however billed as the second most expensive in the world in terms of trade and transport.

For instance, for Rwanda alone, 47 per cent of the cost of importing goods is represented by the cost of just getting them from the Mombasa port to Kigali.

“There are lots of things in connection with the investment climate. The cost of transport is still an obstacle to trade… this is absolutely critical to productivity and to making the region more competitive and less dependent on imports,” said Mr Stanton.

Gerald Ssendaula, the chairman of the East African Business Council, said improving the investment climate will require concerted efforts by governments, the private sector and the region’s development partners.

“The problem is not only just cost and red tape; the less than business-friendly environment also means weaker legal protections for minority shareholders, weak collateral laws and weaker institutions such as courts, credit bureaus and collateral registries. We need a significant reduction in the variations we face in commercial laws. We need to significantly lower our production costs, time to market and increase our competitiveness,” said Mr Ssendaula.

The World Bank cited Uganda’s decision to introduce a requirement for property purchasers to obtain an income tax certificate before registration as a big hurdle, as it was resulting in delays at the Uganda Revenue Authority and the Ministry of Finance. But Uganda emerged second best in the EAC as an investment destination. The country strengthened its insolvency process by clarifying rules on the creation of mortgages, establishing the duties of mortgagors and mortgagees.

President Yoweri Museveni last month promised to ensure the country’s regulatory framework reduces the cost of doing business; improves efficiency and increases private sector competitiveness. The intervention will seek to reduce the lengthy procedures needed to obtain business licences to ensure that investors have their businesses running within the shortest time possible. It currently takes an investor up to 34 days to get a business licence in Uganda after going through 16 different procedures.

“The government of Uganda is taking a leading role in ensuring that all NTBs are eliminated to foster economic growth in the country,” said Amelia Kyambadde, the Minister of Trade, Industry and Co-operatives.

Kenya’s ranking dropped to position 121 out of 185 economies from position 109 out of 183 economies in a year that saw it increase the number of procedures needed to get a construction permit and register property.

An investor now requires nine procedures to acquire a construction permit, up from eight according to the Doing Business 2012 report, but the number of days remains the same at 125. Registering property now takes 73 days and requires one to go through nine procedures compared with the 64 days previously needed at a time when the applicant was required to go through eight procedures.

Improvements were however registered in paying of taxes, getting an electricity connection and starting a business — moves that if leveraged could see the country become more competitive and improve in its global ranking.

“Kenyan companies have reported improvements in the processing speed of filing of returns with the Kenya Revenue Authority, a major source of delay in previous years. In addition, the revenue authority exempted companies that file monthly payroll taxes online from additional quarterly and annual filing requirements. This reduced the time required to comply with labour taxes,” notes the report.

The report also notes that the time required to process corporate income tax, including inputting data, has also declined and that this has made paying taxes faster for companies through the electronic filing system.

To get an electricity connection in Kenya, one has to go through six procedures, up from four, but the number of days to get the connection dropped to 146 from 163, indicating that the additional procedure saves time for an investor.

The number of procedures required to start a business in Kenya dropped to 10 from 11, and the number of days required for these procedures dropped to 32 from 33; as a result, Kenya’s ranking in terms of starting a business improved to 126 from 132. Tanzania has the most efficient contract enforcement within the EAC.

Although the country ranked 113 on the procedures, time, cost and paid-in minimum capital for starting a business, enforcing a contract in Tanzania is easiest in the region, where it takes 462 days and 38 procedures.

Government authorities made starting a business easier by eliminating the requirement for inspections by health, town and land officers as a prerequisite for a business licence.

Licensing regime

According to the report, Tanzania makes information more easily accessible than such high-income economies as Greece, Kuwait and the United Arab Emirates. Tanzania reformed its licensing regime in 2008, abolishing the licence fee for small and medium-size enterprises and reduced the cost for companies with a turnover of more than Tsh20,000 ($12.2).

It also simplified the licence category system and reduced the number of licensed activities to two from 15 and consolidated and digitised registered company names, allowing the company name search to be done online and speeding up name clearances.

The Tanzania Revenue Authority established tax service centres in Dar es Salaam, intensified risk-based and quality tax audits and encouraged greater use of electronic filing and payment systems.

Burundi managed to implement a one-stop shop at its revenue authority, thus eliminating four procedures and reducing the time to start a business by five days and the cost by 98.4 per cent of income per capita.

The country is ranked among the 10 economies improving the most across three or more areas measured — and it moved up 10 places in the global ranking on the ease of doing business, to 159 from 172.

By John Gahamanyi, David Mugwe, Scola Kamau, Christabel Ligami and Peterson Thiong’o