Rwanda has come up with a new investment code, which is before parliament as part of a broader strategy to fast-track private investment needed to reduce heavy reliance on aid — which in recent years has become unpredictable, making the country vulnerable to external shocks.

While details are not yet public, The EastAfrican has learnt that the tax proposals will see export-oriented projects get a lower rate up to zero per cent for large projects, from the current 30 per cent.

Lower power tariffs for industries could be introduced as an incentive to build the country’s manufacturing base. Rwanda is targeting increasing investment in agro-processing and manufacturing of construction materials.

READ: Rwanda to lower power tariff for industries

The country also plans to offer specific incentives to local entrepreneurs and African investors whose investments in the country have been increasing in recent years.

“We have a new investment code that is going to give more incentives for businesses that will reduce their costs further — in particular fiscal costs — and this will leave money for businesses to take home in terms of profit,” said Francis Gatare, the chief executive officer of the Rwanda Development Board (RDB), the country’s investment promotion agency.

“We are seeing more domestic investments play a critical role in our economy — more than 60 per cent of any new investment in our country is always driven by Rwandan investors,” he added.

Last year, the board registered investments worth $1.3 billion. Tax experts say a review of the tax incentives granted to foreign investors is necessary considering that it will be taking place almost eight years after the enactment of the first Rwandan investment code.

Over the years, Kigali has generously dished out a raft of tax exemptions that experts are warning are denying the country the revenue needed for growth.

A 2011 report by ActionAid estimated that Rwanda is forgoing at least 25 per cent of potential revenue and 14 per cent of the country’s annual budget in incentives and exemptions to businesses.

Rwanda has the most generous incentives in the EAC for both domestic and foreign investment, ActionAid researchers noted, which could potentially be seen as harmful taxes, distorting competition in the region.

READ: Mixed reactions as govt reviews tax incentives law

While the specifics are yet to be made public, other sectors that are set to benefit include information and communications technology the financial sectors and health and education.

The government is specifically targeting promoting software, call centres and outsourced business processes that can be traded like value-added and manufactured products.

READ: Rwanda begins export of ICT services, netted $4m last year

It is aiming to access new markets within the region by stepping up investment in cross-border infrastructure including setting up one-stop border posts and markets on its different border posts.

However, analysts say that while Rwanda has done well in improving the policy environment for businesses, the high cost of doing business remain a major constraint to the country’s economic aspirations.

And while the country has developed and has sustained high growth of over 6 per cent over the past decade, this has largely been driven by public sector investment while relying on significant amounts of aid.

Rwanda’s private investment, estimated at 12 per cent of GDP, is still low, with government still the largest investor and employer in the economy.

Yet Rwanda will need to rely more on a private sector led growth with greater reliance on foreign inflows, including foreign direct investment, if economic growth is to be sustained.

This is because in recent months, donor aid disbursements to the country have become increasingly volatile, creating a financing dilemma for government. Moreover, donor funding has now shifted to budgetary loans instead of funds.

For instance, in this financial year, total grants are at Rwf147 billion ($210 million—2.4 per cent of GDP), lower than the original estimate of Rwf544.8 billion ($777 million), recent figures from the IMF show.

Yet tax revenue collections are projected to rise by just 1 per cent to 16 per cent of GDP for 2014/15.

“A key issue is the need to reduce the cost of doing business in Rwanda-including the cost of electricity, the cost of transportation, the cost of domestic financing and improving access to finance,” said Paulo Drummond, the International Monetary Fund chief of mission for Rwanda recently.

"Improving the cost of labour adjusted for skills levels will be key. Reducing these costs is fundamental if the private sector is to develop,” he said.

But business executives argue that priority should be placed on reducing the cost of doing business in the country which they say continues to make it difficult for investors to get a good return on investment.

In particular, investors single out the high input costs estimated at $0.22 per kilowatt hour (Kwh), which is higher than in other EAC countries, where it is $0.08 to $0.10, according to the World Bank figures.

This is in addition to limited access to land, high cost of finance and high labour costs.

“Operating costs are high in Rwanda relative to many other parts of the regions. Staffing is among the biggest costs — labour is very costly in Rwanda,” KCB Rwanda managing director Maurice Toroitich said, underscoring the critical skills shortage in the Rwandan market.