Regional Approach to the Integration of Logistics Services in the EAC

Article I wrote for EABC in 2013 republished here.

The five East African Community (EAC) countries vary in their degree of integration into world markets, global supply chains and application of global best practices in trade logistics. The 2012 publication Trade in the Global Economy, compares the Logistics PerformanceIndex (LPI) of 155 countries and is measurement of the logistics efficiency of an economy. The performance of the EAC Partner States is poor overall, and not surprisingly it varies widely between the landlocked and transit countries. Tanzania for instance scores the highest LPI in the EAC region with a rank of 88 out of 155 countries, followed by Kenya at 122, Rwanda at 139 and Burundi at 155. Landlocked economies are geographically disadvantaged and restricted with regard to transit and logistical transport conditions outside their borders and hence faced with longer transit times and higher transit and transport costs. Recent studies show that importing into a landlocked country typically takes a week longer than its coastal neighbors while freight costs alone can be up to 40 per cent of export values for landlocked developing countries. The higher costs are caused by inadequate transit transport inter-modal connections, poor regulation and service and to address these concerns, the EAC region could benefit from a regional approach to streamline the logistics services sector and consolidate the broad range of logistics institutions, private sector, and relevant stakeholders into a single cross-border transport, logistics system and platform.

African economies generally have the highest trade logistics costs in the world and the EAC is not an exception to this trend. In a recent study, a set of estimates for Kenya, Tanzania and Uganda places the average cost of trade logistics services at the equivalent of a tax of between 25 and 40 percent on value added, which is rather alarming. For this reason, overall performance of the logistics sector in the EAC can impact negatively on the regions trade competitiveness, trade expansion, export diversification, ability to attract foreign direct investments, and invigorate economic growth. While infrastructure is an important and costly constraint, institutions, the regulatory environment and regional cooperation are equally vital for efficient logistics services and the consolidation of the EAC customs union and common market. 

Logistics services encompass streamlined door-to-door multimodal transport services from a logistics chain perspective and they determine the cost of getting goods from point of supplier to point of buyer. These services include services auxiliary to all modes of transport such as maritime, road, air, rail and pipeline services, freight and include other relevant services such as courier, cargo and freight services, customs broker services, testing services, warehousing, distribution, information and communication management and some aspects of financial services. Logistics services have become an increasingly large obstacle to Africa’s trade performance because of a profound change in the nature of international trade that has taken place in the last quarter century: the explosion of “trade in tasks.” In some manufacturing activities, a production process can be decomposed into a series of steps or tasks and since transport and coordination costs have fallen in many parts of the world, it has become efficient to produce different steps in the process in different countries. Even though African enterprises could compete with Chinese and Indian firms in factory floor costs in some product lines such as garments and other simple manufactured goods, overall African producers might be unable to compete given that the cost and efficiency of logistics services in the continent is a major supply side constraint 

Reforms are underway in the EAC region, to consolidate the customs union through various separate interventions, including harmonization of policies and regulations, modernization of transport and border management institutions, the NTB monitoring mechanism, standards and testing and investment in infrastructure. The 2012 World Bank Doing Business Report indicates that all 5 EAC economies implemented 11 combined regulatory reforms in trade facilitation, in areas such as the electronic submission of documents, risk management systems for inspections and joint border cooperation. While this is commendable, rather than individually address interlinked trade logistics issues, the EAC Partner States could jointly consider a comprehensive program on trade logistics services to address the weakest links in the macro-supply chain and thereby stimulate cooperation between public and private players. A legal instrument similar to the Logistics Protocol found in the ASEAN region, could provide a cross-sectoral platform for regulatory cooperation and dialogue among government, business, and civil society. An EAC logistics sectoral protocol would also consolidate the cross-cutting objectives of the Common Market as enshrined in Part B of the Protocol on the Establishment of the Common Market Protocol. A useful place to start would be a road-map for the integration of the logistics services sector through a framework for private public consultative dialogue, progressive liberalization and trade facilitation, in order to support the enhancement of EAC competitiveness and creation of an integrated trade logistics environment. 

EAC Common Revenue Management Model

Traders have blamed payment of taxes at every border point for increased cost of doing business. Border delays and the absence of laws to settle disputes and promote integration have also been cited as hindrances to the opening up of trade in East Africa. 

Well thats about to change.

The East African Community (EAC) 5 Heads of State have endorsed a revenue management model where tax will only be collected at the point of entry and imported goods transported to the final destination without stopping at national border points for customs charges or inspection. 

This approach is similar to that used in the South African Customs Union.

The decision raises hope for a speedy formation of a regional customs authority that would handle the smooth flow of goods across borders — handing traders an opportunity to save up to 15 per cent in extra transit costs that come with delays.

“The Summit adopted in principle the destination model of clearance of goods where assessment and collection of revenue is at the first point of entry and revenues are remitted to the destination partner states subject to the fulfilment of key pre-conditions to be developed by the high level task force,” the heads of state said in a communiqué at the end of a recent regional summit in Arusha.

Though the EAC launched its customs union in January 2010, disagreement over collection and sharing of revenue has frustrated efforts to establish a regional customs authority, slowing down cross-border trade. “We hope the decision brings some change this time by ending the controversy that has been with us for three years now,” Peter Njenga, a logistics officer said.

Kenya has been particularly reluctant to adopt the model that would see the Kenya Revenue Authority (KRA) lose control of close to 35 per cent of its present annual collections. Some member states want the revenue be used to finance projects of common interest such as roads or power generation.

However, Kenya has further hardened its position as it would mean losing a large proportion of tax collection at a time when it faces huge budgetary challenges as it implements the new constitution.

In Nairobi, opposition to a regional customs authority has also come from the port of Mombasa, a key entry point, with Kenya Ports Authority maintaining that extending the facility’s function to include collecting customs revenues will further delay the discharge of cargo given the current levels of congestion.

The setting up of a common revenue authority for the EAC has also been delayed due to the fact that Burundi had not fully emerged from the ravages of a civil war and required time to set up sound national institutions to manage public finances.  For instance in 2008, just one year after it joined EAC, Burundi became the only country in the region to ever report loss of revenue from free movement of goods under the customs union protocol.

This position has since changed with the Burundian President Pierre Nkurunziza recently saying the country is ready for higher stages of integration after hiring the services of Trade Mark East Africa (TMEA) to set up new revenue administration institution—Office Burundais des Recettes.

Article From Business Daily 

Impact of Transport on Landlocked Countries

At present, about one out of five countries in the world are landlocked and only three high-income economies out of 35 are landlocked. Of the 31 Land Locked Developing Countries (LLDC) in the world, 15 are in Africa. Being land locked significantly affects the GDP per capita of these countries. For instance, over the period 2003-05, GDP per capita of LLDCs was approximately 50% of the GDP per capita of transit developing countries and only about one quarter of GDP per capita of developing countries in general.

The main problem with regard to being landlocked is the geographical remoteness from the sea and transit dependence complicates the export and import processes.  As a result LLDCs trade less, grow more slowly than neighbouring coastal countries and for example countries like Burundi, Central African Republic and Mali spend an average of 15% of export earnings on transport and for some the cost can be as high as 50%.

According to World Bank Study, Improving Trade and Transport for Landlocked Developing Countries the cost of transporting a container from an LLDC to a port in a developed country is 20% higher than transporting from a coastal country.  The main causes of the higher costs are inadequate transit transport inter-modal connections, regulation and poor service.

The cost of importing from a LLDC is also rising and the Study also suggests that improving road infrastructure alone is not sufficient to eradicate inefficiency and high transport costs.  As indicated in previous posts in this Blog, the other main problems are associated with port infrastructure and the quality of port services which affect the cost and process of dispatching goods in and out of transit countries.

In addition,  it is estimated that manufacturers shipping from SSA pay nearly three times more in container handling charges at African ports than manufacturers shipping from Europe.   As shown in the above chart, in some SSA countries the cost of importing a standard-sized container is reportedly more than twice the world average. Added to these charges are the indirect costs associated with time delays at the port of entry and costs of transporting  goods to inland destinations and  in particular onward delivery to landlocked countries.