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.

EAC Industrialization Policy 2012-2032

The EAC Industrialization Policy and Strategy provides general contours of policy intentions and strategic areas of focus to guide EAC towards achieving the set goals and in particular, attaining industrialized economic status by 2032. The EAC Industrialization Policy is intended to address the challenges facing the region particularly, the need to build a more diversified regional economic structure. 

The formulation of the policy was accomplished through a comprehensive and inclusive process, based on analysis and wide consultations with stakeholders in the Partner States. The policy is aligned to the relevant Articles of the Treaty in particular Article 79 and 80 which provide for regional co-operation in matters of industrial development as well as Article 44 of Common Market Protocol in which the Partner States undertake to adopt common principles to cooperate in Industrial Development in the region. 

The Partner States have set themselves ambitious targets to be met within the timeframe, of the policy as follows: 

a) Diversifying the manufacturing base and raising local value added content (LVAC) of resource based exports to 40% from the currently estimated value of 8.62 % by 2032; 

b) Strengthening national and regional institutional frameworks and capabilities for industrial policy design and implementation; and delivery of support services to ensure sustainable industrialization in the region; 

c) Strengthening R&D, Technology and Innovation capabilities to facilitate structural transformation of the manufacturing sector and upgrading of production systems; 

d) Increasing the contribution of (i) intra regional manufacturing exports relative to total manufactured imports in to the region from the current 5% to about 25% by 2032 

e) increasing the share of manufactured exports as a percentage of total merchandise exports to 60% from an average of 20%; and

f) Transforming Micro Small and Medium Enterprises into viable and sustainable business entities capable of contributing up to 50% of manufacturing GDP from 20% base rate.

To address the industrialisation challenges, the following broad policy measures will be undertaken:

1. Promoting the Development of Strategic Regional Industries/Value Chains; and enhance Value Addition

2. Strengthening national and regional institutional capabilities for industrial policy design and management

3. Strengthening the capacity of industry support institutions (ISIs) to develop and sustain a competitive regional industrial sector

4. Strengthening the Business and Regulatory Environment

5. Enhancing access to financial and technical resources for Industrialization

6. Facilitating the development of, and access to appropriate industrial skills and know-how

7. Facilitating the Development of Micro, small and medium enterprises (MISMEs)

8. Strengthening Industrial Information Management and Dissemination Systems

9. Promoting equitable industrial development in the EAC region

10. Developing supporting infrastructure for industrialisation along selected economic corridors

11. Promoting regional collaboration and development of capability in industrial R&D, technology and innovation

12. Promoting sustainable Industrialisation and environment management

13. Expansion of trade and market access for manufactured products

14. Promoting Gender in industrial development.

To exploit the resource endowment in the region and enhance the region’s industrialisation levels, the EAC Industrialisation Policy has earmarked six strategic resource-based industries, in which the region has a comparative advantage and which will be developed to facilitate productive integration (PI) through industrial deepening, diversifying, specialisation and upgrading. The strategic regional industries to be promoted include:

1. Agro processing

2. Iron steel processing and other mineral processing

3. Chemicals (fertilizers and agro chemicals)

4. Pharmaceuticals

5. Energy

6. Oil and gas processing

See the Policy and related documents here.

New Tanzanian Mining Law Requires 50% Local Public Ownership

News From The East African

A new mining law, requiring foreign-owned companies to cede a 50 per cent stake to the public in Tanzania, is threatening to cripple the thriving $500 million Tanzanite gemstone business.  One company, TanzaniteOne, has rejected a demand by the government to relinquish half of its shares to the State Mining Corporation (Stamico), setting the stage for a major dispute.

TanzaniteOne, a multinational listed on the London Stock Exchange, said it could not dispossess its investors of their shares.  Instead, the firm, which extracts Tanzanite in the Mererani Hills, about 40 kilometres southeast of Arusha, offered to offload 20 per cent of its shares through an IPO at the Dar es Salaam Stock Exchange Executive chairman Ami Mpungwe said the firm’s shareholders comprised institutions like pension funds, whose interests could not be taken for granted. They could not be dispossessed of their shares through a “simple announcement.”  But Mr Mpungwe said the company was negotiating a solution with the State.

The new Mining Act of 2010, which became effective this year, requires foreign-owned companies to cede 50 per cent of their stake to the public or lose their mining permit.  The matter is urgent for TanzaniteOne, as its licence expired in August 2012 and the government is threatening not to renew it until the firm surrenders the 50 per cent shares.  Deputy Minister for Energy and Minerals Stephen Masele told The EastAfrican that the firm must relinquish the stake to Stamico as a precondition for renewing its operating licence.  “The company wants the state to buy the shares, but our position is that the firm ought to offload the stocks to Stamico free of charge or else lose the licence,” said Mr Masele.

The new law stipulates that gemstones will be exclusively mined by Tanzanian nationals, unless the mining requires heavy investments and sophisticated technology, where foreign investors will be allowed, but on condition they offload 50 per cent of their shares to the public.  Lusekelo Mwakalukwa TanzaniteOne corporate governance manager told The EastAfrican that the company has invested heavily in its designated mining block and has just started to realise profits.  He adds that the firm has also been paying revenue, including corporate taxes, royalties and other related income to the government.

Increased production

Bernard Olivier, chief executive officer of Richland Resources, which owns TanzaniteOne, says production at the   mine is still rising at a record 2.4 million carats in 2011 with decent grades.  The firm employs 650 people and has paid $26 million in tax over the past five years.C  ash costs per carat are rising too, however, from $1.41 a carat in 2005 to $3.69 in 2010. While the company made a $6 million profit in 2008, today that figure is less than $1 million. Mr Olivier says prices are still 20 per cent below those of 2008.

TanzaniteOne, operating in an eight square km block ‘C’ tanzanite site, planned to produce and export 2.5 million carats worth $24 million in 2012.  Records show that TanzaniteOne has invested over $100 million, but analysts say the company has provided marginal contributions to the communities surrounding its area of operation.  “I don’t see a significant impact of TanzaniteOne’s investment on nearby communities,” said Dr Gasper Mpehongwa, a lecturer in development studies at Tumaini University.  However, records show that TanzaniteOne provides over 2,000 villagers and 4,500 cattle with water at Neisinyai village in Mererani Hills.

South Africa's Skills Shortage Dilemma

There is no doubt that the conundrum of an acute skills shortage alongside mass unemployment constitutes the most critical issue threatening the future of South Africa. This year the country has recorded a growth rate of 2.7% and the unemployment rate is about 33%, including those who have given up looking for work. Seventy percent of those unemployed are said to be under the age of 35. A woman leaving school in Limpopo stands a one in eight chance of ever getting a job. 

The skills shortage and high unemployment interact with each other in a devastating way. It is insightful to note that SA’s key problem is how it is going to maintain the growth rate it needs to feed its growing population. SA won’t be able to use the method employed by the Southeast Asian ‘tigers’ of using cheap labour to undercut its export competitors while it grows its economy and expands its skills base, because its labour unions will prevent that.

One solution is to develop a skills-training model based on systems that have been used for years in Germany, Switzerland and several Scandinavian countries. This would involve not only vastly improving the education system but also integrating it with a system of apprenticeships. 

The essence of the German education system is that it is channelled into different streams. There are three streams, actually, but for our purposes we need focus only on two — an academic and a vocational stream. Students should be given a choice, after passing, say, grade 9 or 10, whether they want to continue in the academic stream and go on to university, or learn a vocational skill through an apprenticeship programme. 

Those who drop out of high school earlier should also have the opportunity of entering an apprenticeship course. 

These apprenticeships should be wide-ranging, from becoming a skilled baker or hairdresser, to a motor mechanic, a construction worker or an electrician. A student deciding to enter an apprenticeship must find an employer who will take him or her on to train for the career the individual has chosen — which is usually three years. 

During that time, the student will spend part of his time gaining practical on-the-job experience working for the employer, and part of it attending classes at a vocational school. The classes will focus mainly on the technical side of the job; the shop-floor work on the practical side. Running records have to be kept by both the employer and the vocational school instructors so that the training can be co-ordinated. 

The apprentices are paid a small salary throughout the apprenticeship period, which usually goes up a little each year as their skills advance. At the end, they have to write an exam run by the Chamber of Commerce and Industry. When they pass that they are qualified as a skilled professional in the chosen work category — and receive a certificate testifying to that. 

School-leavers in SA today have no craft certification of any sort, which makes getting that critical first-time job in the face of sceptical employers faced with labour regulation requirements cruelly difficult. 

However salary is the thing that troubles the trade unions. 

But the suggestion of how to get around this political problem is to enact a law establishing that the apprenticeship period falls under the Department of Education, not the Department of Labour. 

The Congress of South African Trade Unions actually recognises the need for on-the-job training at lower pay, but it has become so entrenched in its commitment to the principle of "decent work" that it can’t lose face by backing off from it. 

Classifying an apprenticeship as part of an individual’s education may be a way around that difficulty, because the labour regulations could remain unchanged and become applicable to the apprentice only after he has graduated from his apprenticeship. 

A further advantage of the German system is that, after successfully completing a full apprenticeship course, a student can continue at the vocational school for another year or two to acquire higher certification as a "master" baker, mechanic or whatever, which rates as the equivalent of matric — thus opening the way to go to university and, beyond that, to a graduate school of business for an MBA. 

SA's graduates would then be able to seek a job in management with the special advantage of knowing what life is like for workers on the shop floor and earning their respect in turn for having that knowledge. 

Flexibility is the essence of any such system, so that German students from the academic stream can also switch to become apprentices after passing matric if they so wish, enabling them to follow the same route to a job in management. 

SA is going to need skilled workers every bit as much as she needs to reduce the unemployment rate. 

Original Article by Allister Sparks: Business Day

New Database On Global Value Supply Chains

The European Union has launched the new "World Input-Output Database" which allows trade analysts to assess the global value chains created by world trade. These added-value chains have become an essential feature of economic reality as trade is becoming increasingly globalised as today's traded products are not produced in a single location but rather are the end result of a series of steps carried out in many countries around the world. Instead of counting the gross value of goods and services exchanged, the new database reveals the value added embodied in these goods and services as they are traded internationally. The findings are significant as they change the perception of the competitiveness of certain sectors in some countries. 

In addition, policy makers and societies at large are facing increasingly pressing trade-offs between socio-economic and environmental developments. Increases in production induce growth in the use of non-renewable resources such as fossil fuels, materials, land and water. Furthermore, they generate higher levels of waste and emissions of environmental pollutants. Simultaneously, increasing global integration through international trade and technological developments creates a tension. In this regard, the database considers satellite accounts with environmental and socio-economic indicators, from which industry-level data can provide the necessary input to several types of models used to evaluate policies aimed at striking a suitable balance between growth, environmental degradation and inequality across the world.

Karel De Gucht, the EU commissioner for trade has said that the change in statistical accounting for trade applied in the database has been developed to determine the consequences of the fragmentation of supply chains. For example a third of world trade happens within firms while two thirds of European imports are not of final products but of intermediate goods and raw materials, to which EU firms add one or more layers of value before they are finally sold, often for export.  The EU trade commissioner gave the example of a Nokia smartphone, "it is listed as being made in China, but in reality 54% of its value comes from tasks that are carried out in Europe. Key components are produced in other parts of Asia and only the assembly itself actually happens in China.  Today, we measure trade by counting the total price of the good that is being exported or imported, but because we do this both for components and for final products we get a distorted picture of what is really happening.  Hence according to the database, when we look at trade in value as opposed to traditional statistics, EU trade deficit with China is reduced by 36%. In 2011, the trade deficit between the EU and China stood at EUR155.9 billion however using this new method China-EU deficit starts to look like less of a problem."

On services, interestingly when looking at trade in supply chain terms,  the classic distinction in trade policy between goods and services is increasingly artificial. This is because services represents almost 60% of the value European firms add to the products exported from Europe. 

The database covers 27 EU countries and 13 other major countries in the world for the period from 1995 to 2009. It is notable that not a single African country is included in the database which possibly says something about Africa's non-participation or rather minuscule contribution to global supply chains. In addition, all BRICS economies are included in the database with the notable exception of South Africa.  One wonders why the EU wants African countries to eliminate export taxes (under the EPAs) when in essence the contribution of African exports to global trade and supply chains is too insignificant to be in included in the database.

African countries generally export largely raw materials (e.g fuels, metals) and some agricultural products to the EU and generally lack capacity to add value domestically especially for manufactured products. Other supply capacity barriers to Africa's participation in global value chains include limited foreign ownership and lack of global networks which are a significant factor in characterizing the intensity of global exports but not necessarily for regional exports. The lack of technological advancement is also a significant barrier especially in global exports. Public infrastructure constraints, such as inferior power services and customs delays, seem to have more immediate impacts on regional exports as does customs efficiency and poor trade facilitation which is also hampers the competitive participation of African producers in global supply chain industries. 

In a related article, we saw that China overcame similar challenges by exploiting joint ventures.  China allowed foreign firms access to the domestic market in exchange for technology transfer through joint production or joint ventures. In fact, 100% foreign owned firms were a rarity among the leading players in the industry in China, unlike Export Processing Zones in Africa. China’s openness to foreign investment and its willingness to create Special Economic Zones (SEZs) where foreign producers could operate with good infrastructure and with minimum hassles must therefore receive considerable credit. However if China  welcomed foreign companies, she always did so with the objective of fostering domestic capabilities.

Role of the Bank of Industry in Nigeria's Industrialization

Rwanda-US Bilateral Investment Treaty and the EAC Common Market Protocol

The Rwanda-US Bilateral Investment Treaty (BIT) was signed in Kigali in 2008 and the United States Senate unanimously approved the treaty on September 26, 2011. Meanwhile, the EAC-US Trade and Investment Framework Agreement (TIFA) was signed in July 2008 between USTR and the EAC.  In addition, the EAC Common Market Protocol (CMP) to which Rwanda is a member came into force into force on 1st July 2010. 


The Rwanda-US BIT is the first to be concluded between the US and a sub-Saharan African country since 1998 (when a BIT was signed with Mozambique). Although there are over 40 BITs in force to which the US is a Party, this Treaty with Rwanda is only the second concluded on the basis of the ambitious 2004 U.S. model BIT. Other African countries with BITs currently in force with the US include: DRC, The Congo, Morocco, Senegal, Egypt, Cameroon and Tunisia. The BIT with Rwanda will remain in force for ten years after its entry into force and will continue in force unless terminated by a Party by providing one year’s advance notice to the other Party. 

The BIT provides investors with legal protections which include non-discriminatory treatment of investors and investments and the right to freely transfer investment-related funds.  Unlike the EAC CMP however, the BIT also provides for prompt, adequate, and effective compensation in the event of an expropriation; freedom from specified performance requirements, such as domestic content or technology transfer requirements; and provisions to ensure transparency in governance. The BIT also gives investors in all sectors the right to bring investment disputes to neutral international arbitration panels.  

In comparison, EAC CMP Article 29 on the Protection of Cross-Border Investments, undertakes to protect investors and their returns in a non-discriminatory manner however the modalities for doing so are not yet finalised. Article 29:3 proposes that within 2 years after the coming into force of the CMP, Partner States will take measures to ensure necessary protections in the Community.


In contrast, the EAC-US TIFA establishes a EAC-US Council On Trade and Investment to monitor trade, identify and remove impediments to trade and investment.

The BIT contains provisions on National Treatment and Most-Favoured-Nation Treatment whereby it protects investors of a Party and their covered investments from discriminatory measures by the other Party during the full life-cycle of an investment, including the establishment phase. Each Party commits to provide to investors of the other Party and to their covered investments treatment no less favorable than that which it provides, in like circumstances, to its own investors (National Treatment) or to investors from any third country and their investments (MFN Treatment). In this instance, Rwanda has committed in the BIT to give US investors similar treatment it is providing to EAC Partner States, in like circumstances, under the Common Market Protocol. 

In contrast however, the EAC CMP Article 13 on the Right of Establishment, EAC States have committed to the principle of MFN but not the principle of National Treatment. However in Article 16 on the Free Movement of Services, the principles of MFN and National Treatment are addressed. Hence National Treatment is applicable in the EAC CMP for investment in the services sectors but seemingly not investment in industrial sectors e.g. agriculture, manufacturing, hunting, and forestry, mining and quarrying, energy production/transmission and distribution. 

On Transfers, the BIT has free transfer obligations which require that a Party permit capital and other transfers related to an investment be made freely both into and out of its territory. Additionally, a Party must permit transfers to be made in a ‘‘freely usable currency,’’ as designated by the IMF, at the market rate prevailing at the time of the transfer. Parties may however prevent transfers through the equitable and non-discriminatory application of certain laws. The EAC CMP on the other hand has provisions on the Free Movement of Capital Articles 24-28 which corresponds to the CMP Schedule on the Removal of Restrictions on Free Movement of Capital (Annex VI).

On Performance Requirements, the BIT prohibits the imposition by the Parties of several requirements relating to the performance of investments, including a requirement to achieve a given level of exports or domestic content or requirements linking the value of imports or domestic sales by an investment to the level of its export or foreign exchange earnings. The Article also prohibits Parties from offering advantages, such as tax holidays, in exchange for a more limited set of performance requirements. In the WTO context, the Agreement on Trade Related Investment Measures (TRIMS) takes a similar prohibitive approach however only in the context of trade in goods. 

So as not to place U.S. and Rwandan investors at a competitive disadvantage, the disciplines on performance requirements also apply to all investments in the territory (non-discrimination) of a Party, including those owned or controlled by host-country investors (domestic investors) and those owned by non-Parties. The EAC CMP does not impose performance requirements however it would seem that by virtue of the BIT, Rwanda cannot impose such measures even in the services sectors vis a vie any third Party. In practice, Rwanda may want as a policy to impose some performance requirements e.g. the technology transfer in targeted sectors, vis a vie more developed countries and justifiably so, in order to meet key development objectives.  This provision is therefore not in the interest of Rwanda given her level of development. It should be mentioned that the development of China is linked to performance requirements (local content) the Chinese government put in place for foreign investors. See related piece here. Fortunately however Rwanda has exempted performance requirements in her Annex II on non conforming measures (discussed below).

On Senior Management and Boards of Directors, the BIT prohibits measures requiring that persons of any particular nationality be appointed to senior management positions in a covered investment. A Party may require that a majority of the board of directors of a covered investment be of a particular nationality, or that a director be a resident of the host country, so long as such requirements do not materially impair an investor’s control over its investment. This provision would prevent Rwanda from implementing broad-based local empowerment policy to foster development of its own nationals into senior management positions and fortunately Rwanda exempted this in her list of non conforming measures (discussed below). Meanwhile in this context, the EAC CMP does not discipline the composition of Boards of Directors and the nationality of Senior Management by virtue of the principles of free movement of workers and right of establishment. The CMP only requires that juridical persons be established in accordance with the national laws of a Partner State.  

In the Publication of Laws and Decisions the provisions in the BIT seek to promote transparency in the legal framework governing investment. It requires the Parties to ensure that laws, regulations, procedures, administrative rulings of general application, and adjudicatory decisions that relate to any matter covered by the Treaty are promptly published or otherwise made publicly available. The EAC CMP contains a mildly similar provision in the Free Movement of Services chapter Article 19 whereby notification is required but not publication and the notification only applies after the introduction of the measure. 

In the BIT, each Party is obligated, to the extent possible, to publish in advance any laws, regulations, procedures, or administrative rulings of general application with respect to matters covered by the Treaty that the Party proposes to adopt, and to provide interested persons and the other Party a reasonable opportunity to comment on the proposed measures. In the EAC CMP, provisions on advance publication and comments are not addressed.  In practice this means that the US would have the opportunity to view, comment  and make recommendations in advance, on Rwanda's proposed laws and regulations however EAC Partner States would not.

On the rules of origin (Denial of Benefits) the BIT establishes that a Party may deny the benefits of the Treaty to an investor of the other Party if persons of a third country own or control the enterprise and the denying Party either (1) has no diplomatic relations with the third country; or (2) adopts or maintains measures, such as foreign policy sanctions, with respect to the third country or to a person of the third country that prohibit transactions with the enterprise or that would be violated or circumvented if the benefits of the Treaty were accorded to the enterprise or to its investments. This provision impacts on third Parties that are on sanctioned lists of either Party.

The provisions on Denial of Benefits also establishes that a Party may deny the benefits of the Treaty to an investor of the other Party if the enterprise has no substantial business activities in the territory of the other Party and persons of a third country, or of the denying Party, own or control the enterprise. 

The Agreement also lists Non-Conforming Measures (equivalent to negative lists) and in these Annexes, each Party lists existing measures to which any or all of four key obligations of the Treaty do not apply, and sectors or activities in which each Party reserves the right to adopt future measures to which any or all of those obligations will not apply. Annex III of the BIT is reserved for financial services NCMs. 

Annex I:

Rwanda: Exemption from MFN and National treatment in all sectors to allow for differential minimum capital requirements for investment registration. Here Rwanda identifies "local investors" to include Rwandese and COMESA investors who are entitled to a lower capital threshold (USD 100,000) than "foreign investors" (USD 250,000). While EAC is not mentioned in the BIT given the common market was not yet in place, one can argue that the EAC falls in the "local investor" category since the common market is technically working towards a single market.

United States: Atomic Energy; Mining; Air Transportation; Customs Brokers; Radiocommunications Licenses; and restrictions on securities registration and OPIC insurance eligibility. 

Annex II 

Rwanda: Preferences for socially or economically disadvantaged communities and differential treatment pursuant to existing international treaties. Here Rwanda reserves the right to adopt  measures in all sectors that are not consistent with the provisions on National Treatment, Performance Requirements and Senior Management and Boards of Directors in order to accord rights or preferences to socially or economically disadvantaged communities. 


Rwanda also reserves the right in all sectors to deviate from MFN provisions in order to adopt or maintain any measure that accord differential treatment to countries under any bilateral or multilateral international agreement in force or signed before the BIT. For agreements signed or in force after the date of entry into force of BIT, Rwanda reserved the right to deviate from MFN treatment with regard to: (a) aviation; (b) fisheries; and (c) telecommunications.  

United States: Radio/Satellite Communications, Cable Television, Social Services, Minority Affairs, measures relating to U.S.-flagged maritime vessels, and differential treatment pursuant to existing international treaties. 

Annex III 

Rwanda: On insurance, Rwanda states that the entry shall cease to have effect on the earlier of: (i) the date that Rwanda enacts an insurance law that eliminates the non-conforming aspects of the measure as set forth above;' or (ii) September 1, 2009.

United States: Financial Services/Banking, Insurance, and general Financial Services. 

****************

Overall the US has more detailed sector specific Non Conforming Measures than Rwanda especially in the services sectors (transport (maritime, aviation), communication (audio visual, telecom), financial services (banking, insurance and other financial services). However Rwanda also made useful exemptions but at a sectoral level made general carve-outs in insurance, aviation, telecommunications and fisheries.  

The key take away from this comparison is the Rwanda-US BIT is highly asymmetrical and is more ambitious than the EAC CMP. Theoretically it can prejudice the regional processes given its objectives of MFN, National Treatment, Dispute Settlement (including Expropriation, Compensation), Intrusion in Law Making Processes (governance) and broad-based elimination of: performance requirements, empowerment measures including elimination of legitimate development oriented requirements for foreign investment and repatriation. 


Whether such comprehensive coverage is desirable for African countries is an important question, the answer to which is highly context- and situation-specific, and needs to be assessed against the overall objective of ensuring that investment treaties promote investment that actually exists or has the compelling potential to exist and that fosters sustainable development. The propensities to invest and hence the need for protection through an ambitious BIT is an important consideration before signing BITs as such needs may change over time. In closing its important to note that several countries receiving high FDI receipts in Africa e.g. Angola, Sudan have very few BITs and in a previous post we found that strict FDI provisions in BITs do not increase investment.

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."

India's National Innovation Council

There is much we can learn from India on innovation (viewed as the transformation of knowledge into goods and services for the marketplace).  Realising that innovation is the engine for the growth of prosperity and national competitiveness in the 21st century, the President of India declared 2010 as the ‘Decade of Innovation’. To take this agenda forward, the Office of Adviser to the PM on Public Information Infrastructure and Innovations (PIII) developed a national strategy on innovation with a focus on an Indian model of inclusive growth. The idea is to create an indigenous model of development suited to Indian needs and challenges.

Towards this end, the Prime Minister has approved the setting up of a National Innovation Council (NIC) under the Chairmanship of Mr. Sam Pitroda, Adviser to the PM on PIII to discuss, analyse and help implement strategies for inclusive innovation in India and prepare a Roadmap for Innovation 2010-2020. NIC would be the first step in creating a crosscutting system which will provide mutually reinforcing policies, recommendations and methodologies to implement and boost innovation performance in the country.

One of the outcomes of this process has been a proposal to set up 14 new “universities for innovation” that will aim at stimulating economic growth.  Africa can learn a lot from India’s experiences, especially in regard to the importance of bringing technical knowledge to bear on development through a new species of universities.  These universities will aim at doing for India in the 21st century what its institutes of technology did in the last century.  India is showing Africa that the secret of economic success is not a secret: it lays in re-inventing the university system.

Africa should therefore no longer be an enclave reserved for mineral and raw material extraction.  There is alot of potential in the African continent however the limiting factors include Africa’s low level of training in engineering sciences and the lack of venture capital to turn ideas of products for the marketplace. On education, a new generation of technology/innovation schools directly linked to the productive sector, will be an effective way to move to the frontiers of technological innovation.

Useful discussion on innovation in Africa can be accessed here.

Why Export Bans Fail to Spur Local Value Addition

Exports of raw cashews nuts by Kenyan farmers were banned last year in a bid to revive the local cashew nut industry. The ban provided that only Government and the National Cereals and Produce Board would be authorized to buy raw nuts from farmers. The purpose of the ban was to attract investors to set up cashew nut processing units in the country, however, the low volumes of nuts produced meant that a year later, no factory of viable capacity has been established.

There could have been some implementation weaknesses. The national task force that recommended the ban, also proposed that the National Cereals and Produce Board (NCBP) should become the buyer of last resort and market regulator, as is the case with maize and wheat. However since  no funds were channeled to NCPB for the task, this gave middlemen a field day as they bought the nuts at about a third of the price prevailing before the ban. As a result, farmers are now bracing themselves for substantial losses following cashew nut harvests and government delays in providing alternative marketing channels. 

If I may think out loud- I wonder if the authorities made specific efforts to increase production of local cashew nuts, identify investors, provide incentives and jointly venture with them, to help establish cashew processing plants in the country. 

See recent article here.

Need for Capacity for Value Addition in Natural Resources

We need to build capacity in Africa in order to add value to natural resources. 

In a recent post, we discussed a proposal from African countries to ban exports of natural resources. Tanzania reportedly has in place a ban on the export of raw gemstones. However, in a recent news piece, the Tanzania Government Ministry of Minerals and Energy has proposed to lift the ban on exports of gem stones with a weight of over one gram, due to lack of local capacity to cut stones, stating "as there is no point of people staying with uncut stones while there is no capacity."

The Ministry's Commissioner for Minerals, Dr Peter Kafumu, also stated that the government move was propelled by the fact that the lapidary is still at infant stage and exporters need additional time. He also added "In actual fact we were not ready when we imposed the ban. I think politicians pushed us a bit harder."

It is interesting to note that investors such as TanzaniteOne are pushing for exemption from the export ban while the labour market opposes lifting of the ban, which could reduce employment opportunities locally. What is Government to do?

Trade in Natural Resources: A look at Norway

The WTO World Trade 2010 Report on Trade in Natural Resources illustrates that Russia, Saudi Arabia, Canada, United States and Norway are the top five global exporters of natural resources, with Algeria and Nigeria (ranked globally at 13th and 15th respectively) included in the top 15 in the world (data includes intra EU trade).

This is a focus on Norway, an EFTA Member but not part of the European Community EC.  Norway is the fifth highest exporter of natural resources globally and a European country whose exports display some similarities with Africa’s overall export profile. Like many African economies, Norway is particularly rich in commodities and energy resources (oil, natural gas and water for hydro power production).  Commodities include fish, timber, and some minerals, including thorium as a potential resource base for new technologies of nuclear power generation. Norway however has not suffered many of the curses that plague some resource-rich countries, such as corruption, inequitable benefit sharing, capital flight or the “Dutch disease”. Norway has consistently been ranked by the UN Human Development Index as the best country in the world to live in, and the World Economic Forum has ranked Norway as one of the top 15 most competitive countries globally. The small size of the country (population 4.8 million), its geographic location on the outskirts of Europe, makes its development trajectory which is based on sustainable natural resource management, an interesting case study for Africa.

While industrial products typically make up 85 per cent of OECD countries’ total merchandise exports, the OECD figure for Norway is around 28 per cent. Norway’s reputation as raw materials supplier however, should be understood in light of the fact that major segments of its raw materials industry are highly knowledge- and technology-intensive, even though the end products are not considered to be processed industrial goods. A good example is the petroleum industry, in which technology and know-how have in themselves become an increasingly important business sector. In fact, the increase in oil and gas revenues has resulted in a reduction in the share of export revenues attributable to services, from around 28 per cent in 1991 to around 24 per cent in 2004. While services typically account for a growing share of world trade, the opposite trend in Norway is due to the fact that its petroleum exports are growing even more strongly than its services exports.

Norway’s direction of trade is unlike that of most African countries. For geographical and historical reasons Norwegian trade largely takes place with its European neighbors while African countries trade primarily with other continents. Crude petroleum and natural gas remain Norway's most important export products which together account for about 56.8% of the exports, 25.8% of Norway's GDP and 65.1% of the total value of merchandise exports (however Norway is not an OPEC Member). Within the food sector, Norway is the tenth biggest fishing nation in the world in terms of quantity produced, and the world's second largest exporter of seafood in terms of value. Forests cover 38% of Norway's land area, and are mainly privately owned (88%) and export financing in the forestry sector is subject to local content requirements. In addition, Norway is the largest producer of hydropower in Europe; about 96% of electricity generation in Norway is hydroelectric. 

The manufacturing sector is relatively small and is concentrated on industries associated with the production of equipment used in the extraction and processing of natural resources such as aluminium, machinery and transport equipment, followed by chemicals.  However 80% of Norway's imports are manufactured goods.

The Norwegian economy is generally characterized as a mixed economy - a capitalist market economy with a clear component of state influence.  For example, revenues from Norwegian oil and gas activity are invested in the Government Pension Fund, ensuring that the country’s petroleum wealth will benefit future generations. The fund serves as a resource as it makes long-term investments in solid companies throughout the world, with ethical considerations as cornerstones in the fund’s investment strategy. The “oil fund”, as it is known to the general public, is often cited by the IMF as an exemplary sovereign wealth fund which has an average ownership stake of one per cent in the global stock markets, thus securing its right to a considerable share of future profits in listed companies throughout the world. 

What seems to make the difference is the participation of the Norwegian State and her effective management of natural resources in the economy. For instance it is estimated that in 2008, the State owned around one-third of the Oslo Stock Exchange capitalisation and is a major shareholder in several of the larger commercial listed companies.  The State’s ownership contributes to safeguarding the public interest in Norway’s natural resources and the revenues flowing there from.  For instance, the Petroleum Act establishes that the property rights over Norway's petroleum and gas resources are vested in the State. In the same vein, revenue management and taxation in this sector are directly linked to the States responsibility to its citizens which historically is proven to be an important driving force to strengthen accountability- because of the social fiscal contract created between citizens and the government.

Along these lines, we should recall a previous post which highlighted the importance of local content as a basis for sustainable development in Africa. This is relevant since natural resource exports as a share of Africa’s total merchandise exports, are second highest globally at 73%, after the Middle East which holds the highest concentration at 74%. This is according to the WTO Report on Trade in Natural Resources, which also reveals that export taxes on natural resources appear twice as often as export taxes in other sectors. Hence it appears that there is a global fiscal practice where the State intervenes to provide for effective natural resource management, sustainable development and the advancement of comparative advantage in an economy. Despite this, WTO and EPA negotiations continue to push for the elimination of export taxes in Africa’s resource based sectors.  Export taxes could be used to fund research, technology and innovation in resource sectors just like Norway does in the fish and seafood sector. Exporters of fish and fish products have been subject to a levy that varies between 0.2% and 1.05% of the export value depending on the species and the stage of processing.  The levy is used to finance the activities of the Norwegian Seafood Export Council (NSEC) and the Fishery and Aquaculture Industry Research Fund.  The elimination of export restrictions for the sole benefit of importers can also be detrimental to the environment and the development of African resource economies.

EU Raw Material Shortages and Elimination of Export Restrictions

According to a European Commission Report, the EU faces shortages of 14 key raw materials used in making cell phones, solar power cells, batteries, and other electronics. The materials that are critical for the EU include: Antimony, Beryllium, Cobalt, Fluorspar, Gallium, Germanium, Graphite, Indium, Magnesium, Niobium, PGMs (Platinum Group Metals), Rare earths, Tantalum and Tungsten.  According to the Report, demand for these metals and minerals could triple over the next 20 years. 

The low global supply of these raw materials is mainly due to the fact that a high share of  worldwide production mainly comes from a handful of countries: China (antimony, fluorspar, gallium, germanium, graphite, indium, magnesium, rare earths, tungsten), Russia (PGM), the Democratic Republic of Congo (cobalt, tantalum) and Brazil (niobium and tantalum). This production concentration is compounded by low substitutability and low recycling rates. Nonetheless, this puts pressure on European nations to maintain strong trade relations with the primary exporters of those materials namely; China, Russia,the Democratic Republic of Congo, and Brazil.

Source: Europe Press Release Rapid

However, as shown above, China is the major source of most of these raw materials.  However she has been accused of restricting the export of certain deposits thereby affecting global supply and prices. A notable illustration of the growing importance of export restrictions, was the establishment of a panel by the WTO Dispute Settlement Body (DSB) in December 2009 to examine complaints brought by the United States, the European Union, and Mexico concerning China’s export restrictions on selected raw materials. Meanwhile Argentina; Brazil; Canada; Chile; Colombia; Ecuador; India; Japan; Korea (Republic of); Mexico; Norway; Chinese Taipei; Turkey and Saudi Arabia have also joined this dispute as third parties. 

According to the USTR, China is the top or near top producer of these materials and these measures skew the playing field against the US and other countries, by creating substantial competitive benefits for downstream Chinese producers, that use the inputs in the production and export of numerous processed steel, aluminum and chemical products and a wide range of further processed products. 

Meanwhile, there has been considerable debate in the WTO, as to whether export taxes actually violate any WTO disciplines, with some arguing that is an area of policy space that was intended to be outside of the multilateral disciplines and hence within Members jurisdiction- especially in low income developing and LDCs.  

However, in the EPA context, the EU has insisted on the elimination of export taxes, even though EPAs are supposed to meet the development needs of the world's poorest countries. Export taxes are used in Africa for industrial or export diversification, revenue, efficient management of resources, environment, job creation, value addition and macro-economic stability. In fact some have advocated that a policy focus on local content, such as available raw materials, is the most sustainable way of ensuring attainment of broader development goals. (see previous post on local content here).

The irony of the matter is that Europe's critical needs are met largely by China- and not Africa. Can the use of such policy measures by African countries be seen to distort world trade or be expected to help Africa move out of poverty and lessen her reliance on donor aid?