Kenya's Sugar Sector and COMESA Safeguards

According to sources, Kenya’s sugar sector faces a gloomy future as the end of the COMESA safeguards beckons.

In March 2004, the government requested a four-year cover that was granted with conditions from the Common Market for Eastern and Southern Africa (COMESA) council of ministers. However, Kenya is yet to meet any of the conditions, and the government now indicates it will be seeking another extension when the current one ends March 2014.

Agriculture secretary Felix Koskei says the government is keen on an extension of the protection. “We will explain to COMESA why we need an extension; we understand that we have exhausted our limits, but we still have the reasons to be given one more extension,” says Mr Koskei.

Kenya has exhausted the required allowance for the extensions as put in place by the COMESA treaty, and it is not clear whether the window will be extended.  The cover came into effect in 2003 and Kenya was given a four-year waiver that would see the importation of duty-free sugar from the COMESA market regulated. Kenya got extensions in 2007 and in 2011. Initially, the treaty would provide for a maximum of eight years, however, the waiver in December 2007 was amended to avoid contravening COMESA Trade Remedy Regulation which provide for a maximum eight years for the application of safeguards under the bloc’s terms.  COMESA reviewed the regulations to be in tandem with the World Trade Organisation’s agreement on safeguards which provides for a total of 10 years for developing economies.

A former chairman with the Kenya Sugar Board (KSB) and currently a director at the agency says political will shall override the COMESA treaty on the protection.  “At the end of the day, political will shall prevail over the treaty; each member country has own interest of protecting their sugar sectors which provides a source of livelihood for more than a million people,” says Mr Saulo Busolo.  Kenya is considered a large-scale consumer of industrial sugar, used in making cakes, sweets and pharmaceutical products, which are later sold within COMESA.  Mr Busolo says Kenyan consumers are paying exorbitant prices for sugar as a result of shielding the local manufacturers from increased competition from neighboring African nations.  “Consumers are parting with high prices in buying sugar compared to other African countries such as Mauritius,” he said, adding that Kenyans were paying more than two times the world average. Mauritius exports all the locally produced sugar and imports cheap sugar from the COMESA market to sell it to its citizens cheaply, he said. 

A World Bank report on Kenya released last week says the protection measures have contributed to making Kenya a high-cost sugar producer, hurting the consumer.The high cost of producing sugar in Kenya is attributed to high cost of farm inputs. Kenya’s average production cost stands at $950 per metric tonne compared to regional countries like Malawi where the cost is as low as $350 per metric tonne.  When the safeguards were granted Kenya was asked to, among other conditions, come up with a formula for paying farmers and sell the State-owned millers. Some of the State millers are Miwani, Muhoroni, Awendo-based Sony, Nzoia, and Chemelil. Currently, the payment is based on a farmer’s supplies and the industry average. According to the COMESA safeguards, the payment would be quality-based judged by sucrose content, not the bulk. The KSB, the industry watchdog, says a pilot is running in Sony and Nzoia. The impending sale of the millers has been delayed for years, the Cabinet having given it a nod in 2010. But it could not take off, partly because there was no law and having the Privatization Commission in place also took a while.

Critics and reviewers, however, have voted overwhelmingly for the sale of the former giants to inject efficiency backed by new investment, talent, and limited political interference.  Before the window closed in the first four years of the first extension, all these millers had a combined debt of Sh50 billion, one of the factors that delayed their sale.  The minister has blamed the delay in privatization on the last Parliament, that, he says, did not give the government the go-ahead. “Parliament did not give the Treasury the privatization go-ahead that would have started early this year,” said Mr Koskei. 

The government negotiated for the COMESA lifeline to allow the importation of 200,000 tonnes to meet the country’s deficit, whose total annual consumption stands at 700,000 tonnes against the local production of 500,000 tonnes.This comes even as the regulator has warned that it will cancel the licences of the sugar factories that would not comply with the sugar policy that requires all the millers to have more than one income generating project. The policy, to be implemented in the next 24 months by the KSB is aimed at protecting the local sugar industry from collapsing in the weight of cheap sugar once the COMESA window closes. KSB chief executive officer Rosemary M’kok says that the 24-month window period is enough time for all the sugar factories to have complied with the requirement. “The factories that would not have complied with our policy will definitely have their licences cancelled as KSB will not renew them,” Ms M’kok said. It would be mandatory for all the millers to produce sugar, ethanol and electricity as a different source of generating income, instead of relying on sugar alone.

Africa's Competitiveness

The results of the Africa Competitiveness Report 2013 provides a good sense of the many factors that are holding back Africa’s competitiveness. The 2013 Executive Opinion Survey carried out in 2012 shows that access to financing, inefficient government bureaucracy, and corruption present the most important hindrances to doing business in Africa.

While access to finance represents business leaders’ biggest concern by a wide margin, this confirms the lack of depth of the financial market in a majority of African economies. In addition, the lack of a sufficiently skilled workforce including the inadequate supply of infrastructure presents a significant obstacle for businesses in sub-Saharan Africa. Sub-Saharan African business leaders are also more concerned about high tax rates including government instability and coups coupled with policy uncertainty which have become serious concerns for business leaders. Inflation also continues to receive attention from business leaders.

Many African countries continue to feature among the least competitive economies in the world. By competitiveness we mean all of the factors, institutions, and policies that determine a country’s level of productivity. Productivity, in turn, sets the sustainable level and path of prosperity that a country can achieve. In other words, more competitive economies tend to be able to produce higher levels of income for their citizens. Competitiveness also determines the rates of return obtained by investment. Because the rates of return are the fundamental drivers of growth rates, a more competitive economy is one that is likely to grow faster over the medium to long term. The basic building blocks for a competitive economy include governance and institutions, infrastructure, and education.

This Report provides recommendations which could facilitate trade and regional integration, and jointly could be important drivers for improving the region’s competitiveness. These include simplifying import export procedures and trade facilitation, developing and leveraging ICTs, improving energy, improving transportation and infrastructure and finally building growth poles to develop productive capacity.

WB 2013 Doing Business Report on the EAC

The World Bank Doing Business is a tool that measures regulations that enhance business activity and those that constrain it and it also measures regulatory quality and efficiency.

There has been a recognition that regional integration alone is not enough to spur growth. The EAC needs an investment climate—including a business regulatory environment—that is well suited to scaling up trade and investment and can act as a catalyst to modernize the regional economy. Despite the reform efforts of all 5 member economies, the EAC’s average ranking on the ease of doing business has remained fairly constant over the past 4 years, at around 117 and in fact comparing the 2010 Doing Business performance to 2013, the EAC has seemingly not registered much of an improvement. 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. Improving the investment climate in the EAC is therefore an essential ingredient for successful integration—the foundation for expanding business activity, boosting competitiveness, spurring growth and, ultimately, supporting human development.

The development of regional strategies and institutional frameworks that connect and streamline national reform programs is an indispensable condition for a well-functioning common market that can attract foreign investment. A lack of coordination among member countries and the implementation of “isolated” national reforms—which often focus on short-term gains and fail to consider the impact on the region—can hinder progress in fully implementing the common market. Conversely, continual exchange among different authorities across countries, the implementation of an agreed-on regional reform agenda and a focus on common goals and objectives create synergies and help the region as a whole to improve its investment climate.

Fostering economic growth by tapping the potential of the private sector is among the main objectives of the fourth EAC development strategy. In addition to increasing institutional coordination, other important steps to achieve this objective are better integrating small and medium-size enterprises into the financial sector and creating business-friendly administrative structures and tax regimes. Additional challenges are to ensure the availability of reliable data and statistics and to implement credible surveillance and enforcement mechanisms.

The EAC economies have an average ranking on the ease of doing business of 117 (among 185 economies globally). But there is great variation among them—from Rwanda at 52 in the global ranking to Burundi at 159. This wide variation in business regulations is among the issues that the EAC needs to tackle to achieve the desired level of integration. While the regional average ranking is less than ideal, if a hypothetical EAC economy were to adopt the region’s best regulatory practices in each area measured by Doing Business, it would stand at 26 in the global ranking on the ease of doing business. Burundi was among the world’s most active economies in implementing regulatory reforms in 2011/12. It implemented policy changes in 4 areas measured by Doing Business: starting a business, dealing with construction permits, registering property and trading across borders.

One area where the EAC shows strong performance is business start-up. To start a business in the EAC requires only 8 procedures and 20 days on average. As such the EAC’s average ranking on the ease of starting a business is 84, higher than those of other regional blocs in Africa—104 for the Southern African Development Community (SADC), 110 for the Common Market for Eastern and Southern Africa (COMESA) and 127 for the Economic Community of West African States (ECOWAS)

The 2013 Doing Business Report on the EAC can be downloaded here.

Role of the Bank of Industry in Nigeria's Industrialization

Manufacturing share of African GDP falling

Interesting piece.  In fact, Africa's agricultural and manufacturing GDP is falling. These realities should also be considered in light of the long standing WTO negotiations on agriculture and  non agricultural products. 
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Africa is uncompetitive, insufficiently export-driven, and situated too far from the world's main markets, argues economist Tony Hawkins.

"Africa has not been industrializing; it has de-industrialised. Since the 1990s, the GDP share of the continent's manufacturing sector has declined and now accounts for about 10% of the continent's GDP," said Tony Hawkins, economist and professor at the graduate school of management at the University of Zimbabwe.

"Over 60% of the industrial output from the whole of sub-Saharan Africa is generated in one country - SA."

"Asia's manufacturing industry, on the other hand, is growing fast. One of the reasons is that the industry in this part of the world is export-driven. In Asia, manufacturing accounts for 70% of the continent's total annual exports. In Africa, this is 20%," he said.

One of the reasons why Africa would not able to compete with China lay in the market it produced for. "Africa is manufacturing goods for their own, local markets," he added.

Africa is a small and poor market, with a low demand for high-tech products and a high demand for cheap goods. The problem is that the market for cheap goods is growing much slower than the high-tech markets the Asian manufacturing industries are producing for.

Let's not forget that Asia also produces cheap products for the export market and these are much more inexpensive compared with the goods made in Africa. They are often of a better quality. This hampers Africa's competitiveness.

Another major disadvantage was Africa's geographical location, Hawkins noted. Many African countries, especially in sub-Saharan Africa, are situated far away from the world's major markets such as Europe, Asia and Latin America. Exporting goods to these parts of the world requires high transport costs.

"Asia in this respect has taught us that having a competitive advantage globally no longer depends on natural resources and cheap labour," Hawkins continued. "It is about knowledge, strategic locations, and skills - among other things."

The situation in Africa could change for the better, he noted: "But only if African governments invest in their manufacturing industries and make them more competitive while upgrading the continent's export structures to overseas markets."

Why Investors are Flocking to Mauritius

Foreign companies with an eye on Africa’s emerging markets are apparently flocking to Mauritius to incorporate local subsidiaries in a move that could deny more than a dozen African governments billions in corporate taxes and position the island nation as the region’s economic hub.

Possibly the the range of incentives available to foreign firms in Mauritius. This includes a 15 per cent charge on a company’s taxable income such as business or trading profits. This amount is half the almost 30 per cent rate that other countries in the region apply to  similar income.

Foreigners living in Mauritius are also apparently spared royalty taxes compared to other countries in the region who in some cases tax at the rate of 20 per cent.  In addition, Mauritius has more than 30 double taxation treaties with African countries alone and has recently entered into Investment Promotion and Protection Agreements (IPPAs) with its double taxation partners.

Finally an efficient judicial and dispute resolution mechanisms has also given Mauritius an edge over the competition in Africa, with the The World Bank’s Doing Business 2011 report, ranking Mauritius’ judicial system as the best in Africa in terms of reforms aimed at facilitating business and investment transactions.

See related full article here.

Programme for Infrastructure Development in Africa (PIDA)

The Programme for Infrastructure Development in Africa (PIDA) was launched on 24 July 2010 in Kampala, Uganda, along the sidelines of the 15th African Union Heads of State and Government Summit.  PIDA is a continent-wide program to develop vision, policies, strategies and programs for the development of priority regional and continental infrastructure projects in transport, energy, trans-boundary water and the ICT sectors.

PIDA is a joint initiative of the African Union Commission (AUC), the New Partnership for Africa’s Development (NEPAD) Secretariat and the African Development Bank (AfDB) Group. PIDA's program scope is quite broad in coverage. It covers transport (air, sea, river and lake, lagoon, rail and road), energy (electricity, gas, petroleum products and renewable energy), ICT, and transboundary water resources (primarily irrigation, hydropower, and lake and rivers transport), and deals with the regional and continental aspects of these sectors. 

The motivation for this initiative is rooted in Africa's infrastructure deficiencies which continue to hamper the continents growth and economic development. Infrastructure deficiencies also lead to increased production and transaction costs which result in decreased competitiveness for businesses and thereby also hinder the implementation of social and economic development policies.  The 3 institutions further recognize that in Africa:

• There is access to electricity for only 30% of the population compared to rates ranging from 70 to 90% for other major geographical zones of the developing world (Asia, Central America and the Caribbean, Middle-East and Latin America)
• Transboundary water resources constitute approximately 80% of Africa’s freshwater resources. However, current levels of water withdrawal are low with 3.8% of water resources developed for water supply, irrigation and hydropower use, and with only about 18% of the irrigation potential being exploited.
• A telecommunications penetration rate of about 6% compared to an average of 40% for the other geographical zones, and a very low penetration rate for broadband services and fixed lines.
• A road access rate of 34% compared to 50% for the other geographical zones.
• The global competitiveness indices calculated by the World Economic Forum indicate that for Africa these indices are lower than those of other regions of the developing world and infrastructure appears to be the underlying factor that contributes most significantly to Africa's relatively low competitiveness.  In fact the 2009 Africa Competitiveness Report concluded that Infrastructure remains one of the top constraints to businesses in Africa.

Other issues to be addressed by PIDA will include: the need to fill information gaps on infrastructure deficits, causal analysis, development of prioritized strategic frameworks, establishment of infrastructure investment programs around RECs strategic priorities and improved implementation strategies for these programs.  All national aspects (including, without exception, physical infrastructure, national policies, institutional and regulatory frameworks, technical standards and benchmarks) will only be considered if they have an impact on, or could be affected by, the regional and continental aspects.

The PIDA initiative requires a total amount of USD 11,391,527, which includes the cost of an independent advisory panel of experts (supported by DFID), regional and sector consultative workshops (supported by NTCF and EU) and implementation of an infrastructure database (supported by the EU). The Sector Studies component alone requires a total amount of USD 7,552,343, with the ADF providing 25.6%; the African Water Facility (AWF) with 24.6%, the Islamic Development Bank (IsDB) with 23.3%, and the NEPAD-IPPF USD 2.0 million grant representing 26.5% of the cost.  

Sources can be accessed here.

African Competition Program

UNCTAD last year launched the Africa Competition Programme (AFRICOMP), a capacity-building and technical assistance programme on competition law and policy for the African countries.

The objective of the Programme is to:

• Assist African countries in formulating and enforcing competition law and policy.
• Encourage partnerships between international organizations and agencies; and interaction with regional organizations and civil society

AFRICOMP emphasizes ownership by beneficiary countries and demand-driven technical cooperation and it seeks to establish closer links with the private sector and more especially with NGOs and local learning institutions.

Competitive markets drive an economy’s resources towards their fullest and most efficient uses, thereby providing a fundamental basis for economic development. In Africa, effective enforcement of a competition policy system is expected to facilitate the process by which innovative, cutting-edge technologies replace the usually less efficient productive capacities now in use in parts of the continent. The market forces are expected to continuously prod the local enterprises to innovate – that is, to develop new products, services, methods of doing business, and technologies – that will enable them to compete more successfully on national, regional and international markets.

UNCTAD provides competition authorities from developing countries and economies in transition with a comprehensive development-focused intergovernmental forum for addressing practical competition law and policy issues 

Competition resources can be accessed here.

Private Sector Management of Ports in SSA

Although most SSA ports are state owned, the majority of shipping firms serving the region’s ports are private-sector entities. While private-sector management of SSA ports, as well as investment in physical infrastructure, has led to modest improvements in port productivity, problems remain. In particular, the region’s maritime operations continue to be adversely affected by burdensome customs procedures, inadequate access to land transport networks and governance. 

However the primary constraints facing SSA ports—inefficient operations and lack of sufficient capacity—have yet to be fully resolved. As a result, freight rates to and from SSA remain substantially higher than in other parts of the world, reducing the region’s export competitiveness. As an example, a small container ship may potentially incur an operating cost of $43,000 for each day that it is delayed from docking at a port and to mitigate such costs, some shipping firms impose ‘vessel delay surcharges which in turn are passed on to importers.

However certain ports in the region have been successful in addressing capacity issues for containerized traffic by attracting outside investment in infrastructure and improving port management. For example, at the port of Mombasa, the Kenya Ports Authority has established dedicated berths for one of the area’s largest shipping firms and now permits cargo to be processed on a 24-hour basis. Ultimately, Mombasa and other SSA ports are increasingly serving as regional hubs or transshipment ports and are investing in infrastructure and managerial expertise to handle the growing containerized trade in the continent.  Trade in services WTO negotiations in maritime services to liberalize the sector include  three main areas: access to and use of port facilities; auxiliary services; and ocean transport. Under the WTO/W120 list of services sectors, maritime services negotiations include the following sub-sectors: 

a. Passenger transportation
b. Freight transportation
c. Rental of vessels with crew
d. Maintenance and repair of vessels
e. Pushing and towing services 

f. Supporting services for maritime transport

Impact of Infrastructure Services on Sub Saharan Africa's Export Competitiveness

According to a World Bank Study poor infrastructure conditions increase production costs, economic distance (the time and cost of transporting goods) business uncertainty, and undermine Sub Saharan Africa’s (SSA) export competitiveness. Generally, roads in SSA are poorly maintained, some unpaved and truck fleets generally consist of aging, fuel-inefficient vehicles that are often overloaded and contribute to further road degradation. Poor roads and truck breakdowns result in the slow movement of goods, considerable damage to goods in transit (particularly to perishable goods), and high shipping costs relative to other areas of the world.

Rail networks in SSA are also limited and generally even less reliable than trucks, increasing the dependence on roads to transport goods. “Soft” infrastructure constraints, such as excessive check points, burdensome administrative procedures, and inefficient processing at border crossings, often cause longer delays than poor road conditions. These delays increase economic distance and often reduce product quality, particularly for perishable goods, leading to higher rejection rates, higher production costs, and lower income for producers.  

For instance,  a USITC Study titled Sub-Saharan Africa: Effects of Infrastructure Conditions on Export Competitiveness, Third Annual Report found that some SSA coffee exporters take almost 42 days to export (excluding maritime travel) due to poor roads, long distances to the ports, roadblocks and customs delays while Latin American exporters take only 14 days to export- excluding maritime travel.  This difference in competitiveness means that the SSA coffee farmers are facing a significant tariff equivalent barrier to exports when compared to Latin Americans.

Given the importance of these issues, I will be focusing on the impact of infrastructure services on Africa’s export competitiveness for the next few posts.