Why East Africa is attracting less and less foreign investment

Saturday April 29 2017

Tanzania trucks loaded with goods from Kenya at

Tanzania trucks loaded with goods from Kenya at Namanga border crossing. PHOTO | FILE 

By JAMES ANYANZWA

East Africa’s investment climate is facing a litmus test following the decline in foreign direct investment, faltering intra-regional trade and continued poor performance of listed companies, which have left shareholders with reduced or no earnings at all.

Research financed by the UK’s Department for International Development in 2016 shows that the persistence of non-tariff barriers has hindered trade flows in the region and reduced the benefits of regional integration. According to the study by the Overseas Development Institute (ODI), a UK-based independent think tank, taxes account for 40 per cent of the unresolved NTBs while Customs and trade facilitation measures account for 28 per cent.

Although though 104 NTBs have been removed since the establishment of the NTB Monitoring Mechanism in 2009, the study shows that as of June 2016, 25 continued to restrict intra-EAC trade, according to the report, dated November 2016.

Impacted by NTBs
Kenya and Uganda have been impacted heavily by NTBs, most of which are generated by Tanzania. Kenya follows closely.

Foreign direct investment in the EAC declined in 2015 due to the failure by the member states to promote the region as a single investment destination.
A 2015 draft trade report by the EAC Secretariat shows that the level of FDI in the region dropped by 16 per cent to $7.2 billion in 2015, from $8.6 billion in 2014.

Intra-EAC trade fell by 13 per cent in three years, with the value of the trade dipping from $5.8 billion in 2013 to $5.06 billion in 2015. Between 2014 and 2015, the value of intra-EAC trade shrank by 10 per cent, from $ 5.6 billion to $5.06 billion, due to cumbersome regulatory and administrative policies that impacted on investment promotion.

According to the report, dated August 2016, EAC partner states have complicated the procedures for registering businesses and procuring business permits while differences in the implementation of tax exemptions and incentives have also failed to promote transparency in investment promotion at the regional level. Rwanda, for instance, has established special economic zones while Uganda, Tanzania and Kenya operate export processing zones.

According to a 2016 US department of State report, East African countries exhibit varying investment climates that make it difficult to attract investments.

The report says that, in the region, Kenya has a more positive investment climate that has made it attractive to international firms seeking a location for their regional or pan-African operations.

But the country’s consistent low ranking on measures against corruption, the ease of doing business and security risks from terrorism and crime pose a key challenge.
“Corruption and some weaknesses in the legislative frameworks continue to undermine Kenya’s business environment,” the report says.
“Allegations of irregularities in public tenders are frequent, and corruption scandals appear almost daily in local media. Foreign companies continue to complain of significant delays in work permits.”

Historically favourable
In Tanzania, the government has a historically favourable attitude toward foreign direct investment and has had success in attracting FDI. But, according to the report, corruption remains a major concern for donors and foreign investors.
It cites corruption in government procurement processes, privatisation, taxation, and Customs.
US investors identified corruption, particularly among Customs and immigration agents and traffic police, as an obstacle to investment in Tanzania.

Rwanda enjoys strong economic growth, high rankings in the World Bank’s Ease of Doing Business Index, and a reputation for low corruption. Kigali has instituted pro-investment policy reforms intended to improve the investment climate and increase FDI.

Rwanda presents a number of opportunities for FDI, including in renewable energy, infrastructure, agriculture, mining, tourism, and information and communications technology.

But potential and current investors still cite a number of hurdles, including Rwanda’s landlocked status and the resultant high freight costs, a small domestic market, limited access to affordable financing, and inconsistent application of tax, investment, and immigration rules.

In Uganda, the government has prioritised infrastructure, energy production, lower tariffs and trade barriers for regional trade, and generally welcomes FDI, according to the US State Department.

But bureaucracy, poor infrastructure, insufficient power supply and high costs, corruption, and government interference in the private sector make for a challenging investment climate.