PROGRAMME CONCEPT NOTE. Regional Economic Integration Support Programme in East Africa Phase two (REISP II)

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1 Ministry of Foreign Affairs PROGRAMME CONCEPT NOTE Regional Economic Integration Support Programme in East Africa Phase two (REISP II) Ref.no. 104.Østafrika Table of Contents Introduction... 1 Strategic questions... 1 Summary of conclusions... 1 Conclusions from Preparatory Analyses... 2 Key experiences and results of previous support... 2 Preliminary Overview of Envisaged Programme Support... 3 Justification for the support... 3 Brief outline of the support strategy and a description of design... 3 Envisaged support modalities... 7 Preliminary budget... 8 Envisaged management structure of the programme... 8 Relation to other donors... 8 Risks... 8 Annex 1 Annex 2 Annex 3 Annex 4 Annex 5 Annex 6 Annex 7 Updated Process Action Plan Results Framework Risk Management Matrix Assessment according to the budget support principles Environmental and Climate Screening Note HRBA/Gender Screening Note Overview of Existing Danida PSD support in Kenya, Tanzania and Uganda

2 Introduction Strategic questions Question 1: Support to the East African Community (EAC) under the Regional Economic Integration Support Programme phase one (REISP I) was provided through a joint donor Partnership Fund. Under REISP II there is an option to provide (part of) the funding as core funding disbursed as performance tranches to the EAC Secretariat. Does the Programme Committee agree that the core funding option is considered as design moves forward? Question 2: Danida has provided support for infrastructure development under REISP I as part of its funding for Trade Mark East Africa (TMEA). Under REISP II it is proposed to strengthen focus on infrastructure by including, in addition to TMEA support, a particular funding window to finance preparatory work and facilitate financing for regional infrastructure projects. Does the Programme Committee agree with the strengthened prioritisation of infrastructure? Question 3: For regional integration to contribute to inclusive growth and job creation, the trade activities of private business must be boosted. REISP II suggests support at the micro level to demonstrate how the private sector can benefit from regional economic integration. Support will be provided to help develop and strengthen regional value chains and encourage small and mediumsized enterprises to enter new EAC markets. Does the Programme Committee agree with inclusion of support in this area? Can the Committee offer views/advice on criteria that should govern support? Summary of conclusions REISP I has supported EAC economic integration since 2011, and encouraging results have been achieved. REISP II will build on the positive experiences from REISP I and continue the support to the EAC integration process which will enhance trade and competitiveness. Improved opportunities for the private sector will contribute to inclusive growth, job creation and poverty reduction. Firstly, one of the prerequisites is that EAC reforms deliver harmonised rules and regulations which are implemented and enforced. REISP II will support the capacity of EAC and Partner State institutions. Secondly, there is a continued need to reduce transport costs and the barriers involved with trading within the EAC. REISP II will continue to provide trade facilitation support which will address 1) the reduction of non-tariff barriers and simplified processes and regulatory systems connected with trading across-borders, e.g. customs procedures and one-stop border posts, 2) additional support to realise a series of regional economic infrastructure projects. Thirdly, REISP II will support regional value-chain projects to promote trade across-borders. Through catalytic initiatives with strong demonstration effects, REISP II will encourage the private sector to enter new markets and take advantage of opportunities created by regional integration. REISP II will continue the partnerships developed in REISP I. If it is relevant to strengthen East African ownership, additional partner organisations could be included in the design phase. REISP II will complement support delivered through national programmes in Kenya, Tanzania and Uganda (see Annex 7) and will explore synergies with Danida Business Instruments. 1

3 Conclusions from Preparatory Analyses Key experiences and results of previous support Danish support for EAC integration ( ) is currently being delivered through the EAC Partnership Fund and TMEA. Although it is too early to assess the outcomes of REISP I, emerging results are encouraging. Trade indicators suggest that EAC trade is increasing. REISP I aimed for a 10% annual increase in the total value of exports from the EAC region this target was reached in 2010, 2011 and At the country level, the best performers were Rwanda, Burundi and Tanzania, where average annual exports ( ) increased by 23%, 18.6% and 16.4%. REISP I targeted a 25% increase in the share of intra-regional trade in total trade. This is also increasing. Intra-regional exports as a share of total exports amounted to 20.92% in 2012, and total intra-eac trade grew by 21.9% in Based on the World Bank s Doing Business Reports (2009 to 2013), there have been improvements in the time required to export and import. Burundi, Rwanda, Tanzania and Uganda have achieved reductions in the time it takes to export. The overall reduction for the EAC is 20% in The EAC Partnership Fund has contributed to positive progress on establishing functional EAC organs and institutions, and there has been tangible progress on implementation of the Customs Union and Common Market Protocols. A new protocol to establish the East African Monetary Union was signed in November 2013, which signals a major milestone for continued integration. Selected key achievements comprising: Four policies related to the Customs Union have been harmonised, 56 non-tariff barriers have been resolved; a draft EAC non-tariff barriers bill was adopted by the Council in November 2013, 79 new EAC standards have been harmonised and declared, 67 obsolete EAC standards have been withdrawn and three new key regulations on product certification, testing laboratories and enforcement of technical standards have been developed. TMEA has mobilised funding of USD 590 million and is currently implementing around 170 projects. TMEA support has contributed to increasing trade and lowering trade costs through investments in ports, transport observatories, one-stop border posts, improvedcustoms management, and a reduction in non-tariff barriers and improvements in standards. A few selected key achievements include: TMEA has set a target of a 15% reduction in average time to import or export a container from Mombasa to Burundi or Rwanda. While data is pending, results include commencement of programmes to enhance the capacity of the two main ports at Mombasa and Dar es Salaam; simplification of the East African customs bond system and the completion of several visibility studies on enhancing trade facilitation and corridor performance. TMEA has set a target of a 30% decrease in the average time a truck takes to cross selected borders. There is notable progress in the construction of one-stop border posts; the construction of six of them has already commenced and one has been completed. Further, integrated border management activities are proceeding in tandem with one-stop border post construction and will further be enhanced by the One-stop Border Post Bill, formulated with support from TMEA, 2

4 which was passed by the East Africa Legislative Assembly in 2013, setting out the operations of the one-stop border posts regionally. Furthermore there has been enhanced efficiency through the establishment of electronic Single Window Information for Trade (SWIFT). In Uganda, initial results from Entebbe and Jinja show that 40%-60% of all goods on average are now cleared on the same day. Finally, REISP I contains a pilot initiative which aims to stimulate trade across borders by supporting regional value chains. The initiative will not be continued in its present form, but positive and negative lessons will feed into the formulation of outcome 3 in REISP II. Preliminary Overview of Envisaged Programme Support Justification for the support REISP II will contribute to the implementation of Denmark s 2012 development cooperation strategy, The Right to a Better Life, Denmark s Strategic Framework for Priority Area: Growth and Employment, launched in 2011 and the new trade policy adopted in May The strategy will help improve access to global and regional markets and enhance integration of EAC countries into the global economy. Proposed support builds on Denmark s strong track record of providing flexible responsive support to the EAC. It will complement and add value to national programmes in Kenya, Tanzania and Uganda and strengthen linkages to Danida Business Instruments in particular Danida Business Finance. The justification for REISP II is its potential economic and development impact on regional integration, alignment with Denmark s strategic priorities and lessons from REISP I. The long-term development of each EAC economy hinges on the success of the regional integration agenda. Individual EAC economies are too small to compete effectively in international markets. Their domestic markets are small. To sustain higher growth they need to expand, specialise and integrate to achieve economies of scale. The integration process supports deregulation, harmonisation of rules and regulations and reduction of non-tariff barriers. This reduces trade costs which will benefit EAC businesses as well as Danish businesses with an interest in the region. The preparatory analysis demonstrates that the needs and financing gaps associated with regional integration are substantial. There are still restrictions on the free movement of goods, persons, labour, capital and services and there is a need for stronger coordination and cooperation on economic, trade and industrial policies to promote harmonious balanced development. The EAC is under-funded, constrained in terms of staff resources and struggles to deliver on even its existing mandate. EAC institutions are becoming stronger, but need to be developed to sustain and drive integration. Implementation of the Customs Union and Common Market Protocols need to be completed for integration to deliver the benefits it promises. Additional support is required to address bottlenecks to trade, including high transport costs and informal barriers to trade. A massive need for infrastructure investments remains. Brief outline of the support strategy and a description of design The overarching objective of REISP II is to contribute to inclusive growth, job creation and poverty reduction. The immediate objective is to support a sustainable EAC integration process which enhances trade and competitiveness. 3

5 The theory of change is that facilitating, removing barriers to and reducing costs of trade, expanding and integrating markets and market access will improve competitiveness and increase trade spurring economic opportunities, which in turn is expected to increase inclusive growth and poverty reduction through employment and income generation. Development Objective level Immediate Objective level Poverty reduction Job creation/income Inclusive growth Increased trade Improved competitiveness Box 1 illustrates the expected linkages from enhanced EAC integration to poverty reduction. It is well-documented that Box 1 Fewer barriers to trade and lower cost Enhanced EAC integration regional integration and trade lead to economic growth. However, it is also increasingly clear that trade does not automatically lead to inclusive economic growth and poverty reduction (OECD, World Bank, ODI, etc.). A number of factors, such as productive capacities, access to market and distributional impact, determine the benefit of trade for the poorest segments of the population. These linkages will be considered carefully in the design phase and will be reflected in the logframe. REISP II will follow good practice on aid effectiveness. It will promote ownership and sustainability by aligning with partner s priorities, results frameworks and building the core competence of partner institutions. REISP II will help the EAC and Partner States address the identified challenges and facilitate change by providing support to the EAC and a range of partner organisations focused on: Building effective institutions to support coordination and delivery of the integration agenda Consolidating implementation of the Customs Union and Common Market Protocols Supporting evidence-based policy making and policy advocacy with a focus on making policy relevant to the needs of the private sector, responsive to the negative impact of regional integration and making trade-induced growth inclusive and pro-poor. Making it easier and cheaper to trade across-borders with a focus on trade facilitation, elimination of non-tariff barriers and investment in economic infrastructure Developing viable regional value chains which demonstrate how regional integration can benefit EAC small businesses and promote inclusive growth. Outcome 1: Building effective institutions, policy and regulations to drive sustainable EAC regional integration Support aims to consolidate implementation of the customs union and facilitate full implementation of the Common Market Protocol. Denmark s assistance will help implement the findings of the recently finalised EAC institutional review. Action and follow-up will be approved by the EAC Council in Q Expected results include implementation of measures to enhance the autonomy and effectiveness of the EAC secretariat, establishment of new organisations critical to implementing the core protocols union (e.g. Customs Authority, Competition Authority, Statistics Bureau), improved accountability by enhancing the performance of organisations such as the East Africa Legislative Assembly (EALA) and the East African Court of Justice (EACJ), progress on enhancing Partner State budgetary provisions and growth in the number of established competent EAC staff. 4

6 During the design phase, Danida will review with the EAC Secretariat the target areas for support from Denmark. Support to consolidate implementation of the Customs Union will include technical and capacity building support to implement the EAC Non-Tariff Barriers Bill and to support harmonisation and implementation of laws and regulations focused on standards. Understanding the impact of regional integration: The preparatory analysis highlighted the need to improve the understanding of the impact of regional integration. Improved regional integration and increased economic activity will change the status quo, and there will be winners and losers. From a human rights-based approach perspective it is imperative to understand the impacts of regional integration better, to promote broad-based benefits from regional integration and to do more to mitigate the negative impact of reforms. Civil and private sectors voices need to be heard more clearly to make EAC reform priorities more inclusive and to respond more effectively to the needs of the private sector and the poor. Under REISP II a dedicated effort will aim to strengthen the knowledge base and stimulate advocacy with a view to providing the platform for targeted initiatives. The multi-donor EAC Partnership Fund supporting the EAC Secretariat will be the lead funding channel under Outcome 1. As a point of departure it is expected to earmark funding to strengthen the research capacity of the EAC Secretariat. If it is relevant to strengthen the knowledge base, grants or technical support could also be provided to complementary partners. These are to be identified during the design phase. Outcome 2: Improving the environment for trade and reducing the cost of trading across-borders. This outcome addresses the need to reduce transport costs and the barriers and costs which erode competitiveness and reduce trade. Support will continue to build on the successful partnership established with TradeMark East Africa. Expected results by 2016 include: 10% increase in the total value of exports from the EAC 25% increase in the share of intra-regional trade in total trade 15% reduction in the average time to import/export a container from Mombasa to Rwanda 30% decrease in the average time a truck takes to cross selected borders. REISP II will continue to provide support to address the high cost of trading across-borders. Support will introduce new procedures and processes to make EAC borders thinner. REISP II will consolidate work to improve the performance of the two main ports in Mombasa and Dar es Salaam. It will replicate good practice, including consolidation of transport observatories across the EAC to record data on constraints to corridor performance. It will continue to support innovation that uses new technology, techniques or incentive systems to improve effectiveness, accountability and compliance. This will include technical and capacity building support to consolidate and expand construction of one-stop border posts, broadening the use of single electronic windows to speed up goods clearance and extending the use of on-line customs services. In addition support will improve the capacity of the EAC and Partner States to implement the 2013 Bali Trade Facilitation Agreement. TMEA support will include monitoring and technical support to eliminate non-tariff barriers (NTBs). Technical support will be provided at the EAC and national level to help to professionalise 5

7 logistics and transport services which currently inhibit and increase the cost of trade. It will embed effective dispute resolution processes at the regional level and focus in particular on reducing NTBs facing small businesses and informal enterprises. Technical and capacity building support will help implement standards at the national level. National monitoring systems will be consolidated so progress on implementation of protocols can be tracked more transparently. This will complement the higher level policy work and regulatory reform process supported through Outcome 1. Enhanced infrastructure investment to reduce trade costs and improve competitiveness: A particular effort is foreseen to catalyse new investments in regional economic infrastructure, which is currently a major cause of weak competitiveness in the EAC. Preparatory analysis indicates that there will be a massive demand for infrastructure investments to keep up with population growth and the growth in the economies in East Africa. Currently a variety of funding sources are available. What is lacking is the capacity to develop strong, bankable investment projects. It is proposed to explore the opportunities for setting up a project preparation facility which can finance feasibility studies and project preparation activities to develop bankable regional economic infrastructure projects. These will have a regional dimension, but could cover sustainable energy, roads, rail etc. The project preparation facility would actively facilitate the development of financing packages which involves different financiers offering a mix of grants, loans, public funding and private (commercial) funding for the respective projects. It is expected that Danida Business Finance will be a potential source of financing. The East African Development Bank (EADB) has been identified as a potential partner. EADB has been given the mandate to realise regional infrastructure investments by setting up an infrastructure development fund, but currently lacks the capacity to live up to its new mandate. The World Bank is supporting EADB capacity development and moreover suggests that the main financing products to be delivered by EADB should be project preparation and viability gab funding, which respectively could be supported through REISP II and DBF. A preliminary institutional assessment of EADB is positive and further assessment will draw on existing analysis carried out by the EU and other partners during the design phase. Outcome 3: Development of viable regional value chains involving SMES Support under this outcome aims to demonstrate how regional integration can generate tangible benefits for business and support inclusive growth. It will facilitate development and expansion of cross-border value chains which contribute to growth in employment, investment and cross-border trade. There will be a strong focus on supporting SMEs and the agricultural sector, both of which are key to enhancing livelihoods and reducing poverty in the EAC. Support is expected to address niche areas (regional trade/value chains) not supported through Danish country programmes or, alternatively, areas which hold a particular potential for complementing Danish country programmes. The Danish funding would finance cross-border agri-business ventures with the potential to stimulate production and trade across the EAC. Results would include higher levels of intra-regional trade, increased investment, employment and turnover within target markets and value chains. It would stimulate small business development and leverage new private sector finance. It would grow sustainable agri-based value chains and establish new EAC trading routes and markets. Support would develop markets and value chains that are not targeted at the national level. When designing 6

8 the activities under this outcome, one focus will be to initiate activities that stimulate broad-based benefits of increased trade. Potential partners identified to date include AgDevCo and Kilimo Trust two organisations which work with value chains in East Africa. Denmark s green growth priorities will be mainstreamed across the programme components. The EAC has a protocol on environment and natural resources, a climate change master plan, climate changes policy and EAC disaster risk reduction and management strategy. They have been adopted by the Council and are currently being implemented. The EAC has expressed some interest in Denmark supporting work on renewable energy. Support to partners or specific project grants will include appraisal of environmental impact and sustainability. The programme will incorporate a human rights-based approach. The EAC has established an EAC Forum of National Human Rights Commissions and the EAC Bill of Rights is being passed by the East African Legislative Assembly (EALA). As indicated above it is foreseen to initiate work to understand better the impact of regional economic integration and initiate measures to mitigate negative consequences for particular groups. To achieve development impact, regional integration must facilitate inclusive growth. Key to this is the impact of reforms on the private sector and the stimulus that regional integration brings to sectors such as agriculture which involves close to 80% of the EAC s population. The support to develop regional value chains contributes to ensuring that the population employed in agriculture also benefit from increased trade opportunities. REISP I supported the mainstreaming of gender into EAC projects and includes a gender mainstreaming strategy, action plan and guidelines. The fourth EAC Development Strategy included gender-sensitive outcome indicators. TMEA has adopted a gender policy, gender action plans for all programmes/departments and a gender unit is being established. Support to new and existing partners will include strategies to ensure women benefit from support delivered through partners. Envisaged support modalities During REISP I funding was provided through two relatively well-functioning multi-donor vehicles. While REISP II foresees to continue the funding of these vehicles, there is a desire to strengthen more directly the EAC organisations which will have to drive the EAC integration agenda in the future. As during REISP I, the support to the EAC secretariat is expected to be delivered through the multidonor Partnership Fund which has developed into a robust funding mechanism. As a supplement, it is proposed to explore the feasibility of providing core funding to the EAC Secretariat. During the formulation of REISP I, a number of critical fiduciary risks were identified and as a consequence, it was decided not to provide core funding to EAC institutions. Since then, the EAC secretariat has carried out a number of reforms to strengthen financial management and control functions. The secretariat is expected to undergo a fiduciary risk assessment in the last half of This assessment will provide an important input to a Danish decision to provide core funding to the EAC. Currently no other donor is providing direct funding. Further information is provided in Annex 4. The support to TMEA would be in accordance with the procedures established during phase one. Denmark would be part of TMEA s governance structure. It is foreseen to continue providing unearmarked funds to TMEA. If EADB is feasible as a partner, support would most likely be in the form of ear-marked funding to the realisation of the Infrastructure Development Fund and 7

9 accompanied by a solid Technical Assistance input. Options for delivering support under Outcome 3 will be considered further during the design phase. Preliminary budget Mio DKK Total Outcome Outcome Outcome Technical Assistance/reviews Total Envisaged management structure of the programme REISP II will build on the experiences from REISP I which has functioned relatively well. The embassy in Dar es Salaam, as the EAC-accredited embassy, will take overall responsibility for implementation of the programme. The embassy will lead on policy dialogue with the EAC and will coordinate dialogue with other partner institutions. This may involve delegation of some responsibilities to other embassies. The embassy in Nairobi will represent Denmark in the TMEA management structure. The Department for Africa (AFR) will lead on programme formulation and its approval. AFR will continue to steer overall policy and strategic direction on regional integration and act as a link with other headquarter departments as required. AFR will engage embassies continuously during the project formulation stage. Under REISP I, a regional advisor was placed in Arusha. The advisor has helped improve coordination and has raised Danida s profile and influence on regional integration issues. Based on the good experience from REISP I, as well as the increased ambitions of REISP II, day-to-day programme management, advisory and coordination support will also be sub-contracted to a consultancy company under REISP II. Similar technical assistance related to outcome 3 is foreseen. Relation to other donors REISP II aims to complement country support provided to TMEA in Kenya and Uganda. A wide range of other donors also support TMEA and the EAC. There is scope to enhance coordination and sharing of information between REISP II and related donor programmes. The most relevant and important donor programmes will be identified and, when appropriate, coordination will be built into project design. High-level coordination already takes place through Danida s membership of committees in the EAC and TMEA. Risks Annex 3 summarises critical risks. Overall, REISP II is a continuation of REISP I and the risks are well known. Contextual risks include a deterioration in political commitment to regional integration, a deterioration in the security situation, external economic shocks which distract leaders from regional integration and slow growth. Programmatic risks include EAC lack of mandate, capacity and finance to effectively coordinate and drive regional integration, competing priorities and weak capacity in Partner States, weak private sector response to opportunities created by regional integration and lack of inclusive growth resulting from regional integration. Institutional risks relate to financial mismanagement of funds by partner organisations, and the risks that TMEA spread its activities too thinly. The risks will be monitored at the embassy level, and the REISP II Technical Assistance will provide input to this process. The Tanzanian Embassy will oversee policy dialogue on 8

10 political issues and actively monitor risks in consultation with other embassies in the region. REISP II will support analysis to better understand and manage the impact, costs and benefits of regional integration. 9

11 Annex 1 Process Action Plan ACTIVITY TIMELINE Retreat with EAC Ambassadors, REISP Adviser, AFR and Saana March 2014 Completed Consulting Consultation with EAC Secretary General Tanzanian Early May Completed Ambassador Institutional reviews of EAC, TMEA and EADB May/June 2014 Completed Theory of Change discussions on outcomes and outputs Draft Concept Note and Annexes including initial technical June Completed consultation with Tanzania, Kenya, Uganda Consultation with EAC embassies Concept Note Finalised June/July - Completed July Completed Policy Advocacy and Research needs assessment: Review of ToR July existing research on regional integration, review of institutions active in this area including potential partners. Review of policy advocacy Aug-Nov support. Identification of gaps, opportunities and mechanisms for linking research to policy advocacy mechanisms and policy Report: Dec development within the EAC. Concept Note and Annexes submitted to Programme Committee, August 2014 Public Consultation Programme Committee Meeting 4 September Formal feedback to embassies September 2014 ToR for programme design based on issues highlighted in concept September note, feedback from Programme Committee and public consultation. Tender Design Activities October Nov 2014-Jan 2015 Consultation/workshop with HQ/embassies to review strategic November 2014 focus and options for Outcome 3 (development of regional value chains and advisory support) Draft programme document finalised Feb 2015 Prepare ToR for appraisal Jan/Feb 2015 Consultation on the Programme Document March-April 2015 Appraisal (Technical Advisory Service) May 2015 Post Appraisal Video Conference June 2015 External Grant Committee September Programme Start November

12 Annex 2 - Results Framework Thematic Programme Thematic Programme Objective Impact Indicator Regional Economic Integration Support Programme in East Africa II (REISP II) Development Objective: Increase in EAC trade which contributes to inclusive growth and poverty reduction. Immediate objective: Improved EAC integration which enhances trade and competitiveness. Development Objective Indicators: 1) Real average GDP growth per annum in the EAC region reaches at least 7-8% 2) GDP per capita increases in line with EAC targets (EAC Industrialisation Strategy) 3) Reduction in EAC poverty ratio (share of population living below USD 1.25 per day - to be aligned with targets of the EAC secretariat). Engagement Title Immediate Objective Indicators: 1) Consolidation of the Customs Union and full implementation of the Common Market Protocol (EAC Partnership Fund) 2) 5% increase in the total value of exports from the EAC region (TMEA) 3) 25% increase in the share of intra-regional exports compared with total exports in the region (TMEA) 4) Growth in selected sectors/value chains benefitting from regional integration (e.g. value of trade, employment and income). Effective Institutions, Policy and Regulations to drive sustainable EAC regional integration Outcome indicator Consolidation of the Customs Union and full implementation of the Common Market Protocol Baseline Year 2014 Baseline established from the EAC Common Market Scorecard and the EAC Common Market Framework. Target Year 2018 Improved implementation and compliance based on the EAC Common Market Scorecard. Specific target to be agreed with the EAC Secretariat. Output indicator Enhanced EAC capacity to implement the 5 th Development Strategy Baseline Year 2014 Baseline set for budget, staffing levels, institutional capability based on institutional review Target Year 2018 Positive progress on EAC institutional reforms including enhanced budget provision, growth in established competent EAC staff and other key actions agreed by the Council in 2014 Output indicator Harmonisation and implementation of new policies, regulations, market instruments and standards Baseline Year 2014 Baseline established using EAC Common Market Scorecard, the EAC common market framework and tracked through the East African Monitoring System (EAMS) Target Year 2018 Target number of regulations for both Customs Union and Common Market Protocol will be agreed during design phase with 11

13 a strong focus on reform in the service sector Output indicator Improved systems for mainstreaming impact analysis into EAC policy making Baseline Year 2014 Agree with EAC how impact analysis can be mainstreamed more effectively. This will set the baseline and target areas for action. Light touch institutional reviews of potential partners (most likely the EAC Secretariat) will recommend whether or how to improve research capacity and development of evidence to support impact analysis. Target Year 2018 Impact analysis effectively mainstreamed into development and delivery of the 5 th EAC Development Strategy Institutional capability of key partners enhanced based on institutional reviews (before and after). Enhanced body of research and data available to policy makers Output indicator Research on regional economic integration effectively influences the EACs approach to policy and shapes EAC priorities Baseline Year 2014 Establish baseline on % of Research capacities of relevance for impacting policy and decision making. Target Year 2018 Increase in the proportion of research that influence EAC policy and practice Engagement Title Improved environment for trade and reduced cost of trade Outcome indicator WB Doing Business indicators for EAC countries on trading across-borders 25% increase in the share of intra-regional exports compared with total exports in the region (TMEA) Baseline Year 2014 Establish baselines from WB Doing Business and TMEA Target Year 2018 All EAC countries have an improved on trading across-borders Output indicator Reduction in non-tariff barriers Baseline Year 14 Set baseline for resolution of non-tariff barriers with EAC/TMEA during design Target Year 18 Effective implementation of the NTB Bill resulting in elimination of Non-Tariff Barriers Output indicator Time savings resulting from better processes, systems at borders, lower regulatory costs and improvements in infrastructure Baseline Year 14 Agree baseline to be used during design phase with EAC/TMEA Target Year 18 30% decrease in the average time a truck takes to cross selected borders 15% reduction in average time to import or export a container from Mombasa or Dar es Salaam to Burundi or Rwanda Output indicator Regional infrastructure projects agreed and financing in place Baseline Year 2014 Target Year 2018 Regional infrastructure projects worth USD 2.5 billion have been developed and financed as a result of Denmark s technical support Engagement Title Development of viable regional value chains involving SMES Outcome indicator Value of goods/services exported/imported regionally within target markets Baseline Year 2014 To be agreed with selected partner organisations Target Year 2018 Output indicator Increased investment, employment and turnover within the target markets 12

14 Number of small holders engaged in value chains Finance leveraged into companies/value chains Baseline Year 2014 To be agreed with selected partners Target Year

15 Annex 3- Risk Management Matrix Risk summary for grant proposal Programmatic and Institutional Risks Risk factor Likelihood Impact Risk response Combined residual risk Programmatic Risks EAC lacks mandate, capacity and finance to effectively coordinate and drive regional integration Competing priorities and weak capacity in Partner States means that reforms are not implemented effectively at the national level Private sector response to opportunities created by regional integration is weak. The impact of reforms on growth and trade is muted Institutional Risks Financial mismanagement of funds by partner organisations Likely Significant Provide sufficient financial support to build and strengthen capacity. Track and monitor progress on institutional reform and modify action accordingly. Maintain good contact with the Secretary General EAC. Likely Significant RESIP II will help build capacity of key national institutions and strengthen monitoring systems (through TMEA). REISP II will identify synergies with country programmes on capacity development. Design will explore if more needs to be done in this area. Unlikely Major REISP II will provide support to enhance understanding of impact and to help stimulate a private sector response. RESIP II will explore synergies with country programmes to enhance competitiveness and help promote private sector development. Likely Major Only provide budget support to the EAC if a robust fiduciary analysis is carried out to guide support to improve public financial management support. Fiduciary capacity development as part of institutional support. Significant Significant Significant Significant 14

16 Contextual Risks Context: File No: REISP II Risk factor Likelihood Background to assessment Impact Background to assessment Risk response if applicable / potential effect on development cooperation in context 1 Political commitment to regional integration diminishes. This slows reform and the integration process. Unlikely Although there are differences in view on the pace of regional integration there is a general political consensus that integration is the right way for the EAC to evolve economically. There is less consensus on political union Significant If political commitment is not sustained it will be very difficult to make progress as Partner States will not be willing to implement the necessary reforms. It would be very difficult to achieve impact under this scenario. If political commitment were to deteriorate then a point may be reached where support should be scaled back. The Tanzanian Ambassador will maintain regular policy dialogue with the Secretary General in the EAC and regional Ambassadors will coordinate and share information across Partner States. The REISP II Technical Assistance will provide regular political updates with a focus on the implications for integration. This acts as an early warning system.

17 2 Security situation deteriorates substantially due to elections or conflict linked to having difficult neighbours (DRC, South Sudan etc). This impacts on investor confidence and disrupts trade. Unlikely There is a risk that elections will bring unrest as this has happened in Kenya and Tanzania in the past and to a lesser extent Uganda. There is a risk that spillover from conflict in neighbouring countries impacts on the EAC. This could affect trade and development particularly in border regions. Minor This needs to be watched but pockets of security problems are unlikely to undermine the integration process. If there were major disruption due to an election in one country then this could have a more significant impact. To date, political stability has been regarded as an attractive feature of the EAC. As above there is a need to monitor political developments in each EAC country and to track how regional conflict is impacting on trade. Good political analysis delivered through the REISP II Technical Assistance and regular communication with Embassies should be sufficient to track this risk. 3 External economic shocks (global economic environment, commodity shocks etc) damage growth and distract policy makers from the regional integration agenda Likely The global crisis in 2008 followed by commodity shocks impacted negatively on EAC economies. However, all economies sustained growth but at lower rates. There is a risk this will happen again given these economies are still not resilient, however, growth is now increasing and the global economy is recovering. Minor The main impact of shocks is that it distracts decision makers from the process of integration. In many ways the recent crisis strengthened the focus on regional integration as a way of building resilience in the face of shocks. REISP II supports measures to support economic development. It addresses factors which will improve competitiveness (transport costs) and make EAC economies more resilient. REISP II will also explore how it can contribute to enhancing regional trade in agriculture as this would enhance food security and improve flexibility in the face of commodity price shocks. Economic developments will be tracked through the REISP II Technical Assistance and within Embassies. This will also feature in coordination meetings and reports to Ambassadors so issues can be reviewed and discussed at an early stage. 1

18 4 Economic Development triggered by Regional Integration does not result in inclusive growth Unlikely It is possible that regional integration will generate growth that does not reach the poorest. A great deal depends on Partner States own economic development strategies as well as the approach in the EAC to mitigating the negative impacts of integration Significant If this materialises then it will impact on higher level goals relating to inclusive growth and poverty reduction. It will limit the short to medium term development impact of REISP II support. There are difficult tradeoffs between opening markets, enhancing trade and managing the downside risks associated with growing inequality. REISP II will support more robust impact analysis and will work with the EAC and other partners to mainstream this into policy and strategy. Action is also required at the country level to enhance competitiveness and address inequality. REISP II promotes synergy with country programmes and will encourage dialogue on how regional and country level support can improve the business environment and encourage broad based growth. Agricultural reforms are key. REISP II will explore providing support to enhance regional trade in agriculture - this will aim to complement programmes at the national level. 2

19 Programmatic and Institutional Risks Title: File No: Programmatic Risks REISP II Risk factor Likelihood Background to assessment of likelihood Impact Background to assessment to potential impact Risk response Combined residual risk P1 EAC lacks mandate, capacity and finance to effectively coordinate and drive regional integration Likely This is a significant risk given the EAC mandate is still evolving, it is underfunded and has limited capacity. However, the situation is improving and an institutional review has proposed measures to address these problems. Significant Significant if no action is taken as this will undermine the EAC's ability to drive and enforce the regional integration process. However, whilst there is short term risk there are encouraging signs that the situation will improve over the medium term. Provide sufficient financial support to build and strengthen capacity. Track and monitor progress on institutional reform and modify action accordingly. Maintain good contact with the Secretary General EAC. Significant P2 Competing priorities and weak capacity in Partner States means that reforms are not implemented effectively at the national level Likely Implementation at the national level is a real risk as domestic reform agendas are crowded and key institutions are often weak. Significant The impact is significant as it slows implementation of EAC reforms at the national level which limits impact RESIP II will help build capacity of key national institutions and strengthen monitoring systems (through TMEA). REISP II will identify synergies with country programmes on capacity development. Design will explore if more needs to be done in this area. ] Significant 3

20 P3 P4 Private sector response to opportunities created by regional integration is weak. The impact of reforms on growth and trade is muted s Weak coordination across regional integration programmes limits impact and undermines value for money Unlikely Unlikely There is clear evidence that intra-regional trade is increasing and that the private sector is looking to access new markets. However, this is a slow process and many businesses, particularly SME's remain unaware of the potential benefits of regional integration. There is a risk of donors duplicating support and overloading partner organisations. This will undermine the impact of support. Major Minor If there is no private sector and trade response then support to regional integration will not generate the expected returns in terms of growth and poverty reduction Regional integration is not a crowded field. There is scope for donors to provide more and not undermine one another. Many donors deliver support through joint mechanisms. REISP II will provide support to enhance understanding of impact and to help stimulate a private sector response. RESIP II will explore synergies with country programmes to enhance competitiveness and help promote private sector development. REISP II will provide most of its support through basket funds or established institutions which are specialist in their field and deliver support provided by a range of different donors. This means that Danida is not adding to transaction costs and is supporting broad based reform agendas which are more likely to have impact and achieve results. Significant Insignificant 4

21 P5 Financial mismanagement of funds by partner organisations / beneficiaries Likely All partners identified for support will need to demonstrate that they have sound financial systems. There is a heightened risk if budget support is provided to the EAC where there are concerns about fiduciary risk. These are presented more fully in the budget support assessment annex. Major The direct impact on the programme of some element of financial mismanagement is likely to be small. However, if this resulted in termination of support then the impact could be significant if problems in one area resulted in termination of all elements of support. There is a risk of financial mismanagement if budget support is provided to the EAC. Although there has been significant investments in improving systems there has not been a formal fiduciary assessment for some time. To mitigate the risk more substantially this would need to be carried out in the course of 2014/15 and capacity development support enhanced to address remaining risks. All other partners will need to be similarly assessed during the design phase but initial assessments suggest all other proposed partners have sound financial systems in place. The level of risk should be reevaluated following the design phase. Significant 5

22 Annex 4 - Assessment According to the Budget Support Principles Criterion 1. Fundamental values Fundamental values, encompassing a minimum respect for human rights, pluralistic democracy and rule of law, including independence of the judiciary. Comments The Community s constitutive document the 1999 Treaty for the Establishment of the East African Community (EAC Treaty) details the objectives of the Community as including attainment of sustainable growth and equitable economic development of the EAC Partner States. Article 3 of the Treaty provides that membership in the Community requires adherence to universally acceptable principles of good governance, democracy, the rule of law, observance of human rights and social justice. Article 6 (d) of the Treaty obligates Partner States to achieve, good governance including adherence to the principles of democracy, the rule of law, accountability, transparency, social justice, equal opportunities, gender equality as well as the recognition, promotion, and production of human and people s rights in accordance with the provisions of the African Charter on Human and People s Rights. Furthermore, the Partner States have undertaken to cooperate in social welfare matters, including in the development and adoption of a common approach towards the disadvantaged and marginalised groups, including children, the youth, the elderly and persons with disabilities through rehabilitation and provision of, among others, foster homes, health care education and training (Art.120). To operationalise these provisions, the Community has developed various legal instruments and initiatives which seek to deepen application of governance and human rights principles within the region. These include: EAC Human Rights Bill (2012), which was passed by the East African Legislative Assembly (EALA) in April It awaits assent by the EAC Heads of State. The Bill, which went through several public hearing before it was passed, seeks to give effect to the provisions of the Treaty and consolidates the various principles on human and people s rights found in the Charter on Human Rights and various conventions and agreements including the African Charter on Human and Peoples Right as well as the UN Charter on Human and Peoples Rights (Banjul Charter). The Bill further provides an institutional framework for research in the area of human rights and will lead to harmonization of applicable principles and rules across the EAC Partner States. The Bill further enables the formation of an East African Community Human Rights Commission (EACHRC), whose mandate is to ensure the protection of human and peoples rights in the EAC. The EAC Bill is said to complement gaps in the rights enshrined in Partner States national constitutions, which are said not to have incorporated all fundamental rights and freedoms. Further, the Bill is said to go beyond the Banjul Charter by inserting other new rights and freedoms relating to youth, minority, privacy, housing, food, water and fair administrative action.