The Independent (Kampala)

Uganda: Bridging Trade Deficit

analysis

Rwanda's one-time plan to increase exports and reduce the country's trade deficit through the Export Processing Zone (EPZ), has appeared to have lost ground. Instead, the focus has now shifted to the Special Economic Zones (SEZs), which will be developed and managed by Rwanda Special Economic Zones (RSEZ). The RSEZ was created after the government discovered that the initial idea of having a Free Trade Zone Area, which was supposed to house the EPZ, was not viable.

The RSEZ is a joint venture between the government, which owns 30%, and private companies such as Bond Trading and Sonarwa and public institutions such as Magerwa, a bonded warehouse and the Rwanda Bank of Development (BRD).

The SEZ concept is designed to help firms produce more for the domestic market, as well as East African Community (EAC) and beyond.

RSEZ is now focusing on the development of Kigali Special Economic Zone (KSEZ), which is its first project. The project, located in Nyandungu, Gasabo district, will be developed in two phases. The first phase, according to the project engineer Egide Mukono, will see 98 hectares of land developed, while the second phase will develop the remaining 175 hectares.

Within the SEZ, there will be different businesses, but most of them will be engaged in manufacturing and processing. The SEZ, moreover, will have three components--EPZ, an Industrial Park, and additional space for businesses such as garages and warehouses.

The new Kigali Industrial Park had initially been designed as a separate entity by the Rwanda Investment Group (RIG), a private holding company, in partnership with the government. RIG had 75% equity in the 100-hectare park while the government controlled the remaining 30%. But RIG was kicked out after the industrial park was merged with the KSEZ.

The KSEZ, which has about 81 plots, range between 2,000 square meters (sqm) and 3,200sqm, with each sqm costing Rwf20, 000 or $33. 96% of the zone has been booked and 70% of the investors come from Rwanda, Kenya and Uganda, while the remaining 30%, are shared equally between Chinese and Indian firms. The Chinese and Indian firms are all engaged in manufacturing and processing activities

An investor willing to book space in the zone pays a down payment of 30% of the value of the land and is given a grace period of three years to construct an office or a factory. The remaining 70% is paid in five years with an interest of 10%.

KSEZ is equipped with basic service infrastructures such as electricity, sewage system and road networks, as well as fibre optic cables to facilitate businesses access to the internet. All of these have been developed to the rate of 96%.

On Mar.31, the Minister of Trade and Industry François Kanimba officiated at the ground breaking ceremony to mark the beginning of construction works for nine light factories which the Ministry seeks to relocate from the Gikondo, at the old industrial park, to the special economic zone.

At the cost of Rwf7.5 billion, Beijing Construction Engineering Group (BCEG), which is constructing the light factories buildings, says they can be completed by Mar. 2013. The ministry will also relocate another five heavy factories in the second phase and Kanimba says the tender to design them has been awarded and the selected company has started the designs.

Alexis Ruzibukira, the director general in charge of industry in the ministry of trade and industry (MINICOM), says that that the new model for the economic zone seeks to position Rwanda in the regional market. With an industrial-development policy in place, Ruzibukira says that the government is also focusing on initiating provincial industrial parks to increase locally produced products for local and regional consumption. Each of the four provinces--Eastern, Western, Southern and Northern provinces--will have an industrial park.

With the four parks, which will focus on uplifting the Small and Medium Enterprises (SMEs) sector, Ruzibukira says that production of primary raw materials is expected to increase and this will help the local manufacturers such as the giant brewery Bralirwa to source raw materials. Such initiatives will reduce their import bill and contribute to reducing the country's trade deficit, which was estimated at $1.242 billion at the end of 2011.

Short of exports

Rwanda is currently experiencing a wide trade deficit because of limited export products. The export sector continues to depend on old-age products mainly coffee, tea and minerals. Export diversification also remains a big challenge although the country has potential to export horticultural products such as flowers and vegetables in both regional and international markets.

The country 's manufacturing sector is underdeveloped and suffers from a number of setbacks such as the high operating cost because of costly electricity, high cost of transport of raw materials from the coastal ports of Mombasa in Kenya and Dar es Salaam in Tanzania, and limited access to long-term financing.

The sector is also dogged by the lack of highly skilled labour force, which is one of the biggest hindrances to the foreign investors willing to set up operations in Rwanda. Access to the market, especially the external markets is also a big challenge because of Rwanda's landlockedness. This makes it quite expensive to export Rwandan products to the western and Asian markets.

But with the Export Promotion Policy that was completed last year, the focus is on the SME sector to increase their operations and to generate more export oriented products. The policy also focuses on issues of value addition and capacity building.

Incentives

In order to grow the manufacturing sector, the government has put in place various incentives aimed at attracting foreign investors to manufacturing businesses in order to increase the share of locally produced goods and create jobs for the local population.

These incentives include exemption of an import tax on machinery and raw materials and exemption of 30% income tax to an investor operating in a free economic zone. Importation of medical equipment, medicinal products, agricultural equipment, livestock, and fishing and inputs are also exempted from import duty.

The investor is also exempted from withholding tax on payment and tax on profit repatriation abroad. Exports of commodities or services that bring between $3 million and $5 million in a tax period are also entitled to a tax discount of 3%. If the value is above $5 million, the exporter can enjoy a discount of 5%.

Meanwhile, a report published by ActionAid last year showed that Rwanda loses a lot of money through tax incentives, which may not necessarily help attract investors. The report added that investors follow business prospects not incentives and urged the government to carry out a study on cost-benefit in order to take the right course.

Death of Export Processing Zone (EPZ) concept

According to the World Bank (WB), export-processing zones are potentially useful tools for export promotion. To foster development, however, they must be set up properly, managed well, and integrated with other reforms. Asian countries such as China, India, Taiwan, Hong Kong and Singapore have developed because of a mix of EPZs and SEZs.

China, currently the world's second largest economy after the U.S., has managed to attract massive foreign investments in its special zones because of good infrastructure and skilled labour force. Chinese SEZs are said to be employing 30 million people, contribute 40% of the country's GDP and account for 60% of the country's exports.

Rwanda was also hoping to use the EPZ and SEZ concepts to accelerate the growth of its export sector. The government was hoping to attract foreign direct investment into the much-publicized EPZ that was planned to be set up in the current economic zone. The move was also expected to create jobs and fuel economic growth in the East African economy.

But since Rwanda's entry into the regional customs union, which lifted restrictions on intra-EAC trade, the EPZ idea is quickly fading away, although the government insists that investors willing to operate in the EPZ can still apply.

Requirements issue

Because of the regional customs union requirements, which treats all five partner states as a single customs territory, firms that would operate within the EPZ would be required to export at least 80% of their annual production outside the five partner states of the EAC--Rwanda, Kenya, Uganda, Tanzania and Burundi. The remaining 20% would be sold in Rwanda and in any of the five partner states.

Moreover, the export requirement automatically loses its meaning because goods originating from any of the partner states are treated like domestic goods and they enter each state duty free when they have certificate of origin.

With this requirement, Ruzibukira says, "the overall model could not be sustainable; to find investors who would export 80% of their production outside the EAC would be challenging."

Joining Kenya and Tanzania

Rwanda was not the first African country to embrace the EPZ/SEZ concept. Other countries that believe in the EPZ concept include Egypt, Zambia, Morocco, Mauritius, Cameroon, South Africa, Nigeria, Ivory Coast, Ghana, Uganda, Senegal, Tunisia, Namibia, and Mozambique.

In East Africa, Rwanda was particularly going to join Kenya and Tanzania, the other member states of the EAC that have EPZs and SEZs.

Kenya started its EPZs in 1990 as part of the Export Development Program (EDP) by the government to move the East Africa's largest economy from import substitution to a path of export led growth. The move saw the creation of two publicly developed EPZs--Athi River EPZ, which was developed in 1990, and covers 339 hectares of land including 229 hectares of the main site--and Kipevu EPZ in Mombasa coastal town, which was created in September 1996, and covers 48.84 hectares.

The Kenya Export Processing Zones Authority (KEPZA) website says that over 40 zones, including 31 that have been privately developed, have been created and they employ close to 40,000 people. Currently, plans are underway to set up more EPZs into the country's arid and semi-arid areas especially in the north.

The EPZs, KEPZA notes, contribute 10.7% of Kenya's exports and over 70% of EPZ output is exported to the USA under the African Growth Opportunity Act (AGOA)--a U.S. government initiative put in place in May 2000 to allow sub-Saharan African countries to export some of their products to the U.S. market. Through AGOA, Kenya's exports from EPZ/SEZ to the U.S are said to be over $200 million.

But until late last year, Kenya's EPZs were not working properly because of the high cost of doing business in the country. The cost of electricity had gone up and investors were pulling out of the zones to other countries where they could make profits. Meanwhile, the government, through the KEPZA, announced a plan to revive the EPZ concept with more infrastructures such as affordable power and to turn the EPZs into special economic zones for investors to stay there and make returns on their investment.

Tanzania's EPZ concept is relatively young compared to that of Kenya. The EPZ programme in Tanzania was established in 2002 following the enactment of the EPZ Act, 2002. The scheme provides for the establishment of export oriented investments within the designated zones with the views of creating international competitiveness for export led economic growth.

Tanzania, for its part, created Export Processing Zones Authority (EPZA) in 2006. The authority's website says that EPZA is charged with promoting investments in Tanzania's economic zones particularly the EPZs and SEZs. The authority also develops infrastructure for the EPZ and SEZ and facilitates the investors to establish themselves. The government has earmarked 14 regions for EPZ/SEZ development and most of them have land of between 2000 and 9000 hectares.

Tanzania has good and attractive investment policies but poor infrastructure, bureaucracy and corruption that scare away investors, especially in EPZs and SEZs, according to EPZA director general Adelhelm Meru.

The concept favours Kenya and Tanzania but not Rwanda

Rwanda's EPZ would be less competitive compared to Kenyan and Tanzanian EPZs. Rwanda is a landlocked country and so it depends on Kenya's coastal port of Mombasa and Tanzania's port of Dar es Salaam to ship its goods to and from the international markets. The cost of transport from Kigali to these ports is quite high, which affects the cost of the product.

Although the quality of products can determine its price on the market, the product that would be produced in Rwanda at a high cost would also be sold in the external markets at a high cost in order to make a profit.

Kenyan and Tanzanian products, on the other hand, don't suffer from the high cost of transport, which makes their products more competitive in terms of pricing compared to those from Rwanda. Another factor, according to Ruzibukira, is the access to the markets beyond EAC.

Since Kenya and Tanzania have access to the water to ship their products, they also have more chances to access a bigger market quickly at affordable costs.

An example is Kenya' proximity to the Sudanese market--both Sudan and South Sudan. Kenya can also sell to Somalia, Ethiopia, Djibouti and many other markets around it apart from EAC countries. Tanzania, meanwhile, can sell extensively to the Southern African countries where it is a member of the 15-member country bloc-- Southern Africa Development Community (SADC), in which South Africa is dominant player.

But for Rwanda the market is small. Out of the four countries that share borders with Rwanda, three of them--Uganda, Tanzania and Burundi--are in the EAC leaving Democratic Republic of Congo (DRC) the only available market for Rwanda. However, DRC is also unstable, which could hinder rapid growth for Rwanda's exports.

Government insists the EPZ concept is still alive

Ruzibukira insists that the idea to create an EPZ is still alive despite the fact there is no single investor who has expressed interest in operating in it. "The model is still there but within the special economic zone concept," he says. "If there are investors who can prove that they can export outside the EAC and are able to meet the requirement of EPZ status, their enterprises can live within KSEZ with a status of an EPZ."

Whereas EPZ firms focus on exporting more outside the country, firms in economic zones can target both export and domestic markets but they are subject to different incentives, and this clearly draws distinction between the two concepts.

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