The arrival of East Africa’s common
market next year will be the first step to much more open trading in
the larger Comesa region; winners and victims are already getting ready
Integration of the East African Community (EAC) faces its greatest test next January, when the customs union comes into full force and the common market is set to launch. It should rally regional trade and investment, and improve productive efficiency by introducing competition and economies of scale. This would give a much-needed boost to industry in a region still dominated by agriculture.
However, fears abound that Kenya, the community’s economic hub, will reap most of the benefits. In industry, this anxiety is particularly keen for Ugandan producers, who have struggled to overcome the logistical bad luck of being landlocked to increase their market share in recent years. When the customs union was initiated in 2005, Uganda was granted five years to reduce tariffs on EAC goods, which went down from 10% to 2% now and will be eliminated next year. Gradual integration was meant to provide businesses with time to grow before facing Kenyan producers on a level playing field.
Seeking hiccup remedies?
“But as it is today, there are several hiccups that we have incurred,” says Gideon Badagawa, director of the Uganda Manufacturers Association (UMA), “including issues of transport to the sea, which have constrained a lot of businesses here because they are importing from Mombasa. The roads are still not as it was expected they would be at the end of five years.”
Improvements remain a long way off: energy costs will not come down until at least 2011, when the Bujagali dam will add 250 MW. Railways into northern Uganda, where an important trade route enters southern Sudan, are a decade away.
The common external tariff that arrives with the customs union presents another problem: Ugandan manufacturers currently import inputs at lower duties than other EAC countries. When those duties are harmonised, Ugandan businesses will lose that competitive edge. “Manufacturers who depend on local raw materials will survive, but those who depend on imports and have Kenyan competitors will have to close in the near future,” predicts K.R. Sridharan, general sales and marketing manager for Britania Allied Industries, one of Uganda’s largest manufacturers.
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It is no secret that Kenyan manufacturers stand to gain from the establishment of the common market. Kenya retained the industrial base from the first failed attempt at East African integration in the 1970s. Since then, Kenyan companies have had regional expansion on their minds. “I look at the common market as an advantage. It means anything I make will have duty-free access to other markets in the community,” says Steve Smith, managing director of Eveready East Africa, which exports batteries throughout the region from its Kenyan base.
Pradeep Paunrana, managing director of Kenya’s Athi River Mining, also anticipates benefits: “We welcome the East African customs union – it will create a bigger market and allow all manufacturers to achieve economies of scale and improve business performance… We are looking at East Africa as one market, and the business strategy going forward becomes region-centric. In the medium term, the company is planning to put a 1.5m-tonne cement plant in Tanzania and a fertiliser plant in Rwanda.”
?Friends and neighbours
Running subsidiaries will be easier under the common market, although this is not yet finalised (a protocol is to be signed by November). Free movement of workers and universal establishment rights are anticipated.
Kenya’s Bamburi Cement acquired Hima Cement in Uganda in 1999 and now runs its operations in both countries as one. According to Vipul Agrawal, Bamburi’s sales director, the company spends an enormous amount of time and money on duplicate registrations and expatriate contracts. This is an area where the common market could make a big difference, Agrawal says. “My concern,” says Eveready’s Smith, “is that there are a lot of good laws – but will they be implemented?” Even when internal tariffs strike zero on 31 December, a host of non-tariff barriers will persist, entrenched by vested interests.
Much of the trouble is coming from Tanzania, where the authorities do not recognise harmonised regulatory standards already written into law. On the whole, Tanzania has been far more resistant to integration than any other EAC member. A socialist past and lack of English-language training has kept Tanzanian businesses from becoming as competitive as those next door; fear of being overrun runs deep. It is questionable whether Tanzania will go forward with the EAC – it has until the end of 2009 to opt out.
There is also a question as to how committed Kenya and Uganda are to fast-tracking integration. Both have refused to relinquish power to the EAC secretariat, which has no authority to initiate policy or make decisions. That has made integration sluggish and left industry leaders sceptical of how soon they will see promised benefits. Mahendra Shah is opening East Africa’s largest ceramic tile manufacturing plant in Kenya this year. He plans to export by road to all five EAC states, and to Sudan, Somalia and the Democratic Republic of Congo (DRC). Cross-border transport costs will be huge, and he is not convinced the common market will help: “A lot of these things are done on paper, but when it comes down to reality, you have problems from one country to the next.” ?
Ugandan companies are doing what they can to make it. Proximity to markets in Rwanda, Burundi, the DRC and southern Sudan has proved advantageous. Manufacturing exports into the Sudan and the DRC grew to over $20m per month in 2006, according to the IMF.
No business is an island ?
Kenyan companies are capitalising on Uganda’s geography, too. Bidco Oil Refineries opened a refinery in Jinja in 2005 and has been cultivating palm oil nearby. Bamburi is building a $100m cement plant in Uganda to double its capacity there. As is Eveready: most of its DRC business goes through Rwanda, which will be easier under the common market. “Once duties, codes and standards are harmonised, the use of bonded warehouses should be synchronised, and that makes the transfer of goods easier,” Smith said.
This is, after all, the goal of integration. Manufacturers with big plans benefit most when they can transfer goods across a region with ease and can locate production wherever costs are low and demand is high. Still, many of East Africa’s largest manufacturers continue to lobby for protection from Asian imports. Even Kenyan companies will have difficulty competing with Egypt and South Africa, which are members of overlapping free-trade pacts with the EAC.
But Bidco CEO Vimal Shah is an advocate of the big picture. He sees the EAC as a prelude to the goals of the 19-member Common Market for Eastern and Southern Africa (COMESA). “In COMESA there will be some winners and some losers. But if you’re not competitive, and you think you’re not going to be competitive for a long time, shift your base,” Shah says. “Reduce your costs of production or your capital inputs and get competitive – otherwise government protection and being an island for a long time isn’t going to help you.”
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