12 November 2012

East Africa: EAC Partners Hesitant to Take Great Leap Forward

Since 2004, when the idea of an EAC Customs Union was launched, its deadline to deliver the much awaited Single Customs Territory (SCT) has come and gone two years ago. And don't expect it anytime soon. "We don't have a new deadline," admits George William Kayonga, the permanent secretary at Rwanda's ministry of East African affairs (MINEAC).

The concept of an SCT for the EAC region remains a subject of contest in partner states, as was the case recently when Minister Monica Mukaruliza convened a debate on the implications of the Destination Model (DM) of SCT on the Rwandan economy.

On April 28 this year, the summit of EAC heads of state adopted in principle the DM where assessment and collection of revenue is made at the point of entry and revenues are remitted to the destination partner states. According to Kayonga, under the destination model, Rwanda's customs operations offices and officers would have to move to the Mombasa and Dar-es-Salaam ports, the entry points accounting for 99 per cent of Rwandan total imports.

That would mean all goods destined for Rwanda would be assessed for taxation and clear the required duty before heading for Kigali. The same would be the case for the other portless states, Uganda and Burundi.

Sadly, the debate which attracted policy makers, traders and scholars was characterized by fears and worries over issues many would think should have been ironed out over the past decade. Apparently, so far the biggest achievement of the SCT talk is that at least, the heads of the partner states have decided which model of single customs they want to use - but only in principle.

They have chosen the destination model over pooling of revenues option but even then, it seems the choice was made in a state of indecision because there remains key areas of contest that Rwanda for instance is worried may make the model fail to work for all.

Ceding power

There are three major conditions for the success of the destination model.

John M. Kasanga, a Zambian consultant hired by the EAC to advise them on the development of the SCT, said that for the DM to work, port owners Kenya and Tanzania must regionalize their jealously guarded ports to create terminals for all five partner states.

"This would make the duty collection process very easy," he explained.

The major worry is how ready or willing the two port owners are to actually cede powers over their ports, a natural endowment that makes the difference between them and their land-locked partners. All this depends on whether the partner states really want the same things. Kayonga says while in principle the member states share mutual interests, there's a tendency to differ when they want those interests and how they are to achieve them.

The issue of regionalizing the ports means port owners will obviously lose some income and ongoing negotiations should focus on how they are to be compensated, how much and by whom. There are three landlocked partners - Uganda, Rwanda and Burundi - and they must strategize how they are going to convince their sea port partners that they need a share of those ports.

"It's going to be very difficult," admitted Kayonga.

Kasanga questioned the rationale of investing over US$ 60 million on the one-stop border post at Rusumo while using the same resources to develop and expand ports would be much more important under the SCT approach.

But Kasanga advised that unless states adopt a regional attitude over the national interests, very little will be achieved.

In the event that this hurdle is taken, a second issue: the capacity of the current ports to accommodate three other terminals.

Kasanga questioned the rationale of investing over US$ 60 million on the one-stop border post at Rusumo while using the same resources to develop and expand ports would be much more important under the SCT approach.

The debate also showed that Rwanda is not willing to entirely lose its internal borders as both Minister Mukaruliza and representatives of the private sector said they are scared of the impact of free inflow on the locally made goods.

What is lacking is competitiveness and a really defined area where Rwanda has a comparative advantage; with a young manufacturing industry, the Private Sector Federation made it clear that diving into the EAC ocean is most likely to cause floods that might wash away local entrepreneurs.

Customs revenue

Justin Murekatete, who presented Rwanda Revenue Authority's stand on the DM, expressed the tax collector's fears of losing custom revenues if internal borders were to be abolished for a fully fledged SCT; but then, so would other members.

But Kasanga said it is high time Rwanda shifted efforts to increase its domestic tax base through manufacturing and other activities rather than banking on the anyway dwindling returns from customs.

He also emphasized that internal borders have no place in an SCT undertaking. But what the ministry officials made clear was they are not sure they want to lose their borders.

The conclusion was, as the Kayonga put it, that while in principle member states want the same things, they want them in different colors.

The dream of an SCT might still be far from becoming reality.

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