EABC STUDY ON IMPACT OF THE EAC CUSTOMS UNION ON BUSINESSES. Intergrated Development Consultants. Client: EABC Final Report, August 2008 Submitted By

Transcription

1 EABC STUDY ON IMPACT OF THE EAC CUSTOMS UNION ON BUSINESSES

2 EABC STUDY ON IMPACT OF THE EAC CUSTOMS UNION ON BUSINESSES Client: EABC Final Report, August 2008 Submitted By Intergrated Development Consultants South Gate Center Building (Magan Suites) Mkoma Road, P.O Box Nairobi Tel: August 2008

3 Table of Content page 1 INTRODUCTION 4 2 Methodology and Analytical Framework Methodology Analytical framework 6 3 AN OVERVIEW OF THE IMPLEMENTATION OF THE CUSTOMS UNION Extent of Implementation of the Customs Union 10 4 DOMESTIC PRODUCTION AND TRADE FLOW Domestic production chain Clients base for domestic production chain External factors impeding businesses from taking full advantage of the 13 EAC Customs Union Capacity utilization Trade flow chains Intra-EAC Export chain Import chain Predominant target market for exports 18 5 IMPLEMENTATION OF THE EAC CUSTOMS UNION Awareness of EAC Customs Union Information on EAC Customs Union Availability and content of information on EAC Customs Union Source of business information on EAC Customs Union Views on whether EAC Customs Union has been successfully implemented Relevance of the EAC Customs Union tariff structure and principles on 25 businesses Common External Tariff structure (CET) Elimination of intra EAC tariffs EAC common clearance procedures EAC Customs Union features with the most significant impact on businesses Usefulness of the principle of asymmetry to the business Awareness of the existence of duty drawback schemes Impact of the EAC CU implementation on businesses Overall benefit derived by companies from EAC free movement of goods among EAC members Expansion of business Business turnover Investments (capital investments) The most attractive aspects of EAC customs preferences to the businesses The least attractive/most problematic aspects of EAC customs union

4 5.6 Recommended measures to address non implementation of the EAC 33 Customs Union Reforms governments should undertake to compensate for losses 33 resulting from non-implementation of EAC customs union Proposed measures to government to guarantee full implementation of the EAC Customs Union Proposed measure to EAC to mitigate losses resulting from non implementation of EAC customs union Empowerment of EAC secretariat to strengthen regional integration Measures by the business community and lobby groups to hold 36 governments accountable for non-implementation of EAC customs union How the business community and lobby groups can hold EAC secretariat accountable for non-implementation of EAC customs union Trade remedies and the establishment of EAC Committee on Trade Remedies Expected effects of EAC Customs Union on Businesses in Burundi and 38 Rwanda 5.8 Harmonization EAC, SADC and COMESA Trade Regimes 39 6 NON TARIFF BARRIERS (NTBS) FACED BY BUSINESSES WHILE TRADING IN EAC Lack of common transit regime NTBs Awareness and Effectiveness of the Monitoring Mechanism Type of NTBS that affect businesses within the EAC region Effects of the NTBs on business operations Suggested remedial measures to mitigate the NTBs effects Awareness on existence of NTB monitoring mechanism and its effectiveness Notification of NTB for removal Business Communities views on how reforms on customs clearance procedures, infrastructure improvement, reduced subsidies and improved credit facilities would help address the main traditional NTBs. 7 conclusions and Recommendations 7.1 Conclusions 7.2 Recommendations

5 1 Introduction The East African Community (EAC) is an intergovernmental regional body comprising of Kenya, Burundi, Rwanda, Tanzania and Uganda whose agenda is to attain economic, social and political integration of East Africa. The key building blocks towards economic, social and political integration of the East African Community are clearly articulated in the Article 5 (2) of the Treaty which states that the. the Partner States undertake to establish among themselves and in accordance with the provisions of this Treaty, a Customs Union, a Common Market, subsequently a Monetary Union and ultimately a Political Federation in order to strengthen and regulate the industrial, commercial, infrastructural, cultural, social, political and other relations of the Partner States to the end that there shall be accelerated, harmonious and balanced development and sustained expansion of economic activities, the benefit of which shall be equally shared. The Treaty under Article 2(2) sets the Customs Union as the first transitional stage (entry point) of the integration process and as an integral part of the Community. The Treaty further provides under Article 75 for a Protocol on the Establishment of the East African Community Customs Union which was negotiated in four years and concluded in March The EAC Customs Union was launched on 1 st January Rwanda and Burundi joined the union in July 2007 and are expected to start implementing the provisions of the Customs Union with effect from January The overall goal of the EAC Customs Union (EAC CU) is to deepen the integration process through liberalization and promotion of intra-regional trade. Other indirect, howbeit crucial expectations of the customs union is promotion of efficiency in production in response to intra-region competition among businesses enhancement of domestic, cross border and foreign investment and promotion of industrial diversification and economic development. As implementation of the Customs Union progresses into its fourth year it is opportune time for business community to take stock of the effects this far. The business community needs a clear understanding on the effects of the EAC Customs Union in order to engage on issues geared towards enhancing the effectiveness of the EAC trade regime. It is in this context that EABC commissioned this study, through the funding from RTFP, with an aim of capturing empirical information on the experiences of business

6 community on the implementation of the Customs Union. Specific objectives, stipulated in the terms of reference, follows:-. a) To understand the level of awareness about the opportunities of implementation of the EAC CU b) To understand the expectations of the business community about the EAC CU including expectations about how it will be implemented c) To understand the facilitation needs of the business community in relation to the EAC CU d) To understand the challenges facing EAC exporters, producers and importers. It is envisaged that the output of the survey will provide vital inputs from the private sector which will enhance implementation of EAC Customs Union through corrective measures to mitigate existing challenges while maximizing successes.

7 2 Methodology and Analytical Framework 2.1 Methodology Field survey Questionnaires were adopted as the basic tool for capturing and collecting data for this survey. This was predetermined at the design stage by EABC which developed two sets of questionnaires. The first set, with questions relating to the effects of the Customs Union on intra-regional trade, targeted businesses in Kenya, Tanzania and Uganda where implementation of the CU is already taking place. Questions on the second set were formulated to capture perceptions of the customs union from businesses in Burundi and Rwanda where implementation is yet to begin (see annex 1 and 2). The criteria and selection of the sample firms entailed a three stages approach: - In the first stage, we identified and listed all sectors where intra-regional export is taking place from each Partner state. On the basis of this population, selection of the sample sectors was done based on volume of exports to the EAC, with cut mark placed on sectors accounting for 80% of exports and over. In the second stage, all the exporting firms, within the identified sectors, were listed to form the universe from which the sample businesses were drawn. In the third and final selection stage, a sample of firms was drawn from the universe based on the volume of their exports to the EAC in 2007 in the case of Kenya, Tanzania and Burundi; and information from export promotion agencies in the case of Rwanda and Uganda. Through this process, a total of 84 companies, drawn from 14 sectors, were picked for the survey. The size of this sample was influenced by the practical considerations of undertaking the survey within the set period of 15 days. The sampled sectors are summarized in the table below. Full lists and details appear in Annex 3 of this report.

8 Table 1.1: Sector coverage Burundi Kenya Rwanda Tanzania Uganda Sector Sector covered No. of sample firms Sector covered No. of sample firms Sector covered No. of sample firms Sector covered No. of sample firms Sector covered No of sample firms Food and Beverage Leather and Footwear Sector Motor vehicles and accessories Paper, paperboard and Stationery Petroleum, coal, rubber and plastic Construction (Cement) Pharmaceuticals, chemical paints and soaps Metals and Articles thereof, Metal and Non- Metallic Mineral Products Mining Hides and skin 2 Textile and clothing 2 1 2

9 Burundi Kenya Rwanda Tanzania Uganda Sector Sector covered No. of sample firms Sector covered No. of sample firms Sector covered No. of sample firms Sector covered No. of sample firms Sector covered No of sample firms Leather and footwear Fish TOTAL Questionnaires were sent to respondent firms in advance and thereafter appointments firmed up for purposes of completing the questionnaires through interactive sessions with the contact persons National and regional validation workshops The draft report was subjected to national and regional validation workshop held in the region between 28 th July and 25 th August Proceedings from the National and Regional Workshops were considered in the process of finalization of the study report. The reports of these workshops are annexed to this final study report as annex 4 (a) to (g). 2.2 Analytical framework Analytical framework of this study is drawn from the survey questionnaire. It provides the fabric for understanding opportunities imbedded in the implementation of the EAC Customs Union and challenges faced by businesses while trading under the Customs Union trade regime. It covers the following broad issues: - Production Domestic production chain External factors impeding the businesses from taking full advantage of the EAC Customs Union Capacity utilization Investments (capital investments)

10 Trade flow chain Export chain Import chain Implementation of the EAC Customs Union Awareness of the EAC CU (include elements of the EAC CU considered as most beneficial to businesses) Information about EAC CU Relevance of CET to the business Relevance of elimination of intra-eac tariffs EAC Common clearance procedure Usefulness of the principle of asymmetry to the business Most attractive aspects of EAC CU Least attractive aspects of EAC CU Changes on CET Effects of non implementation of EAC CU Use of trade remedies Awareness of duty drawback schemes Harmonization of EAC with SADC and COMESA Non Tariff Barriers faced by businesses while trading EAC Transit (lack of common transit) Others as per the analytical report

11 3 An Overview of the Implementation of the Customs Union 3.1 Extent of Implementation of the Customs Union Implementation of the EAC Customs Union is on course. The focus has been on implementation of the EAC CET, Internal Tariff elimination in accordance to the agreed road map, enforcement of the EAC Customs Management Act, the Rules of Origin, among others, as detailed below. Implementation of the Common External Tariffs The EAC CET is set according to category of goods, with raw materials and capital goods attracting a 0% rating, intermediate goods 10 % and finished goods 25% respectively. Exceptional rates, above maximum rate of 25%, apply on selected items (sensitive list) to protect production of such goods in the region. The list includes such goods as maize, rice, cement, cotton fabrics, and sugar, milk and diary products. The rates are published in the EAC CET HS 2007 tariff book and relevant EAC Gazette Notices. Elimination of Internal Tariffs. One of the features of a Customs Union zero internal tariffs on intra-regional trade among member states. To achieve this feature, EAC Partner states have adopted an asymmetrical tariff reduction programme for a transitional period of five years. The first round of tariff reduction was effected on January Consequently, tariff rates on four hundred and thirteen (413) Kenyan products into Uganda reduced from 10% in 2005 to 8% in Similar rates reduction on goods into Tanzania are reported in Table 3.1 Table 3.1: Tariff Rates Reductions on Kenyan Goods into Tanzania No. of Tariff lines (products) % 20% 15% 10% 15 20% 15% 10% 5% 20 15% 12% 9% 6% % 8% 6% 4% 112 5% 4% 3% 2% 54 3% 2% 1% 0% Development of EAC Rules of Origin (RoO).

12 Instruments for EAC RoO have already been developed. These include the Certificate of Origin and the Simplified Certificate of Origin whose implementation is commenced on 1 st July Enactment of EAC Customs Management Act 2004 The above Act forms one of the Customs laws of the community. It provides the institutional, operational and enforcement framework of customs. Elimination of non tariff barriers and Trade Facilitation Partner States have undertaken to remove all forms of Non Tariff Barriers (NTBs) to trade. These range from system based to infrastructural barriers. To attain this objective, EAC has developed a mechanism for elimination of NTBs. National monitoring committees have been constituted in all EAC countries in readiness for implementation of the mechanism. Harmonization and development of EAC standards As of 2006, about 600 standards had been harmonized and gazetted for uniform application in EAC. In addition, the Bureaus of Standards in Partner States recognize national quality marks and do not subject goods to further analysis. Adoption of the Competition Policy and Law To guarantee fair competition, EAC adopted a competition policy which prohibits any practice that adversely affects free trade. Further in 2006, an EAC Competition Act was enacted. However, the national competition laws and institutions will remain in effect while the EAC Competition law takes care of the intra regional trade.

13 4 Domestic Production and Trade Flow Chains 4.1 Domestic production chain An assessment of the effects of EAC Customs Union on the production value chain was done encompassing sourcing of inputs, clientele base and extent of capacity utilization. The results reveals tendency for companies to source inputs from either the domestic market or from the rest of the world with inputs from the two sources accounting for an average of 45% and 35% respectively. Inputs from the EAC trading block accounts for just 12% of the total in the production chain. This reflects opportunity for improvement of intra regional trade among the member states, a position which is underscored by the fact that most of the intraregional trade is in food and beverage, where EAC countries have a comparative advantage. Table 4.1: Source of input for domestic production chain Source % of inputs sourced from Domestic Economy EAC Europe Rest of the World Burundi Kenya Rwanda Tanzania[1] Uganda Weighted Average Clients base for domestic production chain In Kenya, distributors are the most significant clients for the domestic production chain handling almost 23% of the total output. The others in the order of significance are the supermarkets taking an estimated total of 16% while traders, businessmen and wholesalers tag along taking about 10% each. Others though not too significant include

14 manufacturers, agents and individuals handling about 7% each while government, NGOs, transporters and farmers handle a total of 3% each. In Tanzania, traders and manufacturers combined handle more than 50% of the total output from the production chain estimated at 30% and 20% respectively. Other clientele include supermarkets, NGOs, individuals, institutions and private companies handling output estimated at 10% each. In Uganda, individuals are the most important clients handling almost 37% of the output from the production chain. Traders and institutions follow taking approximately 16% and 11% of the output respectively. Manufacturers, distributors, supermarkets, wholesalers, and private companies lag behind with each handling an estimated 5% of the output. In Burundi, business people are the most significant clients for outputs from the domestic production chain accounting for about 60%. Other clientele include manufacturers and NGOs which handles 20% each. In Rwanda, on the other hand, supermarkets, distributors and farmers are the most important clients each handling about 22% of the production output. Other clients are the business people, manufacturers and cooperatives accounting for 11% each. This assessment reveals existence of a well established network of clientele that can be used in enhancing an uptake of output from the domestic production chain to the regional market and beyond. There is room for exploitation of the strong distributor network, which seems to be underutilized, as evidenced by the responses from the survey External factors impeding businesses from taking full advantage of the EAC Customs Union External factors hindering businesses from taking full advantage of the EAC Customs Union varied across all the five EAC countries. Electricity, fuel and transport cost tops these factors accounting for about 70% of total external factors. Table 4.2: Factor External factors hindering businesses from exploiting Opportunities in the EAC Customs Union. % share in total factors perceived as impeding business from exploiting opportunities in the EAC Customs Union Burundi Kenya Rwanda Tanzania Uganda

15 Electricity 33% 37% 46% 39% 35% Fuel 22% 22% 0% 15% 21% Infrastructure (road and rail) 9% 9% 0% 12% 18% Cost of transport 7% 7% 25% 4% 12% Other 29% 25% 29% 30% 14% Total 100% 100% 100% 100% 100% Capacity utilization Excess capacity is a major hindrance to competitiveness of businesses in the EAC region, with the level of severity varying widely across the states. The threat is more acute in Burundi and Rwanda, where 40% to 50% of companies reported operating at between 10% and 30% capacity. The problem is less severe in the other EAC states where businesses operate between 81% and 100% in Kenya, Uganda and Tanzania in that order. Factors exacerbating the excess capacity scenario are similar to the external factors identified in section above. Table 4.3: Capacity utilization % total respondent companies Capacity Utilization Burundi Kenya Rwanda Tanzania Uganda 10% 30% 40% 0% 50% 0% 8% 31% - 50% 10% 6% 8% 15% 8% 51% - 80% 40% 50% 25% 46% 53% 81% - 100% 10% 44% 17% 39% 31% 4.2 Trade flow chains Intra-EAC Export chain Results of the intra-eac export chain are based on responses from the sample companies that participated in the survey. According to these results, Kenya s export to EAC region is evenly distributed in Uganda, Tanzania and Rwanda estimated at 26% of the total. Kenya is the significant destination of Tanzania s exports estimated at 44%. Her exports to Uganda are much lower estimated at 28% of exports. On her part, Uganda s main export destination is Rwanda importing almost 36%, followed by Tanzania at 25% and Burundi at 21%. Tanzania s export to Rwanda and Burundi are even at 14%.

16 Further, the survey results show that Burundi s exports within the EAC region is skewed towards Rwanda at 58%. Her export to Kenya, Uganda and Tanzania are evenly distributed at 14 %. For Rwanda her main export destination in the region is Kenya at 56% with the rest of the countries receiving 11% each. Table 4.4: Intra-EAC export chain Destination Source EAC country: Figures are % share intra-eac exports from EAC country Burundi Kenya Rwanda Tanzania Uganda Burundi 22% 11% 14% 21% Kenya 14% 67% 44% 18% Rwanda 58% 26% 14% 36% Tanzania 14% 26% 11% 25% Uganda 14% 26% 11% 28% The clientele base for intra-eac export chain across include: distributors, wholesales/businesses, manufacturers, farmers, transporters, Governments, NGOs, among others. This is tabulated in the table below, which highlights the significance of these clients across the EAC countries. Table 4.5: Clientele base for intra-eac export chain Source EAC country: Figures are % share intra-eac Client for intra-eac export chain exports from Burundi Kenya Rwanda Tanzania Uganda Distributors 30% 25% Wholesalers/Supermarkets 14% 50% 10% Manufacturers 25% 8% 13% 9% Farmers 3% Transporters 3% Government 18% Institutions/Cooperatives/Auctions 50% 13% 18% Traders/Individuals 50% 42% 23% 45% NGOs 25% 13% UN Agencies 13% Total 100% 100% 100% 100% 100% Import chain

17 Businesses within the EAC region predominantly import from the rest of the world according to this survey s findings. Share of imports from this category ranges between 43% in Burundi to 75% in Tanzania. Europe is a significant source of imports for EAC countries, with the share in total imports ranging between 7% and 14%. Businesses reported significant imports from the EAC region too. Companies in Burundi, Rwanda and Uganda use considerable imports from the EAC region estimated at 43%, 32% and 22% in that order. Imports from Kenyan and Tanzanian businesses were rather low estimated at 6% and 5% of total imports, respectively. Imports from the COMESA region (non EAC countries) were reported by companies in Kenya and Rwanda while the rest of the EAC countries reported nil. SADC region (Non COMESA/EAC countries) was reported as a source of imports by companies in all the five EAC countries, with most of imports coming mainly from South Africa. Key importers under this economic block are Kenyan and Tanzanian businesses who reported imports at 18% and 17% respectively. Table 4.6: Source country Import chain % share of imports from source country Burundi Kenya Rwanda Tanzania Uganda EAC 43% 6% 32% 4% 22% COMESA 0% 8% 3% 0% 0% SADC (Non COMESA/EAC countries 7% 18% 7% 17% 4% Europe 7% 14% 7% 14% 11% Rest of the World 43% 54% 51% 75% 63% If the EAC Customs Union were to reverse the above trend in favour of intra-regionally sourced imports, it is imperative to understand factors behind decisions by companies when sourcing products from their preferred sources. The survey endeavoured to address this paradigm by seeking to establish critical factors buyers/importers consider when sourcing products In response, businesses pinned down product quality as the most important factor in deciding where to source imports. Cost of product was the second consideration while the others are summarized in the table below. Table 4.6: Critical factors for buyer/importer to source the products Critical factors for buyer/importer in sourcing of product EAC country: Figures are % share of the specific factor in total determinant factors in decision on souring of product Kenya Tanzania Uganda

18 Critical factors for buyer/importer in sourcing of product EAC country: Figures are % share of the specific factor in total determinant factors in decision on souring of product Kenya Tanzania Uganda Product quality 28% 26% 13% Availability of product 17% 18% Pre-inspection 3% 6% Security during shipping/transportation Proximity to the market/transport logistics 3% 6% 25% 62% Local taxes 3% 6% SPS (Veterinary/Health clearance/authorization) Availability of local financing (trade finance) 9% 6% 3% Cost of product 22% 6% 13% Import duty 6% 13% 6% Total 100% 100% 100% The above Import chain analysis shows huge potential for intra-regional trade. Extra regional imports, which in this case is defined as imports from outside the three economic blocks (EAC/COMESA/SADC) provides a proxy for this potential, which on average works to about 57%. It is apparent that regional market building should be a key preoccupation of for EABC and EAC. There are merits in pursuing strategy through the on going EAC/COMESA/SADC harmonization because, as can be seen from this analysis, businesses in the EAC region are actually trading right across the three regional blocks. Harmonization of trade and regulatory policies is one most critical factor to ensure that businesses in the region capture the market. Such a move will certainly stimulate investments as businesses respond to trade opportunities created by the EAC Customs Union trade regime. To turn to the side of the clientele base, EAC import chain is dominated by traders/distributors, as manufacturers take the second position. Other clients for the import chain vary from country to country and include transporters, individuals, agents, NGOs and cooperatives. The foregoing is captured in the following table.

19 Table 4.7: Clientele base for EAC import chain EAC country: Figures are % share imports from the specific Client for EAC import chain client Burundi Kenya Rwanda Tanzania Uganda Framers 18% Manufacturers 25% 18% 20% 50% Traders/Distributors 50% 46% 40% 50% 60% Transporters 9% Individuals 9% 20% Agents 20% NGOs 25% Cooperatives 20% Total 100% 100% 100% 100% 100% Predominant target market for exports The predominant export market for businesses in the EAC is the respective domestic market accounting for an average of 57% and ranging from 23% in Rwanda to 85% in Tanzania. Table 4.8: Business activities among respondent companies EAC country: Figures are % share of business activity in Business Activity total respondent companies business activities Burundi Kenya Rwanda Tanzania Uganda Domestic production chain 50% 74% 23% 54% 85% Intra-EAC export chain 10% 17% 77% 1 15% 7% Extra-EAC export chain 40% 9% 0% 31% 8% Total 100% 100% 100% 100% 100% This illustrates high tendency for companies in the region to focus production for domestic rather than export market. There is huge but latent export potential within the regional market which can be exploited by creating awareness among companies. 1 This figure includes extra-eac export chain.

20 5 IMPLEMENTATION OF THE EAC CUSTOMS UNION 5.1 Awareness of EAC Customs Union The level of awareness on the existence of the EAC customs union is quite high among the business community in the region. The level was reported at 100% in Uganda, 92% and 88% in Tanzania and Kenya in that order. However, level of awareness in Burundi and Rwanda is much lower estimated at 50% and 40% respectively. This underscores immediate need for an EAC Customs Union publicity and awareness program targeting businesses in the two countries. 5.2 Information on EAC Customs Union Availability and content of information on EAC Customs Union Responses on availability and content of information available to businesses on the Custom Union vary across the EAC partner States as table 5.1 depicts. Table 5.1: Availability and content of information on EAC Customs Union EAC country: Figures are % of respondent companies Form/type of information received indicating receipt of the specified information or having not received any information Burundi Kenya Rwanda Tanzania Uganda EAC Customs Management Regulation 25% 27% 25% Rules of Origin/Certification of Origin 11% 9% 19% CET 31% 9% 19% General Information on EAC Customs Union Implementation News Bulletin 6% Information on NTBs 3% 26% 6% 33% 19% Harmonization of seed treaty 27% How to join EAC 38%

21 Have not received any information 38% 67% 13% This analysis demonstrates that availability of information on EAC Customs Union instruments among businesses is rather low and at worst unavailable as brought out by some companies in Burundi, Rwanda and Uganda. This outcome heightens the need for EABC to come up with a strategy for outreach to the business community in the region. This awareness will stimulate the business community to take advantage of the regional integration Source of business information on EAC Customs Union The business community in the EAC region gets information on the Customs Union through different, howbeit varied sources as shown on the table below. Table 5.1: Source of information about EAC Customs Union Source of information on EAC Customs Union EAC country: Figures are % of respondent companies accessing the information on EAC CU from the identified source. Burundi Kenya Rwanda Tanzania Uganda Association of Manufacturers 2 45% 23% 50% EAC website/eac Secretariat 21% 25% 19% Business workshops/meetings on EAC 50% 7% 17% 13% Agents/Research interviews 7% 3% Media (Newspapers and Television) 50% 7% 33% 13% 8% Revenue Authorities 7% 32% 25% Distributors 3% Government 3% 25% EABC 14% Total 100% 100% 100% 100% 100% 2 (KAM in Kenya, UMA and PSFU in Uganda and CTI and TAM in Tanzania)

22 A further exploration on the ranking of the different sources of information in terms of importance to the business community yielded the following results shown on the following table. Table 5.2: Main sources of information on EAC Customs Union Source of information on EAC Burundi Kenya Rwanda Tanzania Uganda customs union Association of manufacturers 16% 25% 15% 0% 21% Internet 5% 12% 6% 23% 8% Newspapers 0% 11% 0% 12% 10% EAC secretariat 0% 9% 0% 4% 4% Revenue authorities 0% 9% 4% 4% 17% Radio 0% 2% 0% 8% 2% Television 0% 2% 0% 8% 2% Media 16% 0% 15% 0% 0% Customers 6% 3% 0% 8% 0% Workshops 11% 2% 0% 0% 0% Chamber of commerce 16% 5% 9% 0% 0% Ministry of trade 11% 0% 9% 0% 0% Ministry of regional development 11% 0% 0% 0% 0% Ministry of agriculture 0% 0% 11% 0% 0% Private sector Foundation 0% 0% 17% 0% 10% EABC 0% 2% 0% 4% 12% others 8% 18% 14% 29% 14% Total 100% 100% 100% 100% 100% In Kenya, the five most important sources of information in descending order are: Kenya Association of Manufacturers (KAM), internet, newspapers, EAC secretariat and Revenue Authority. In Burundi, Chamber of Commerce, Burundi Manufacturer Association, the media, Ministry of Trade, Ministry of Regional Development and workshops are the five most important sources in that order. In Uganda, Uganda Association of Manufacturers, Revenue Authority, East Africa Business Council and Private Sector Foundation were the five most important sources. Internet, newspapers, radio, television and customers were the important sources of information in Tanzania

23 while in Rwanda, private sector, media, association of manufacturers, ministry of trade and the chamber of commerce emerged as the most important source of information. Further investigation into the issues of preference on the source of information established the following result which could give guidance when developing a strategy for dissemination of information on the Customs Union. Table 5.3: Preferred way of obtaining information on EAC Customs Union Preferred way of obtaining information on EAC Customs Union EAC country: Figures are % of respondent which indicated the preferred way of obtaining information on EAC CU Burundi Kenya Rwanda Tanzania Uganda Association of Manufacturers 20% 21% 50% 10% 20% EAC website/ 13% 75% 15% 41% 46% Media (Newspapers and Television) 27% 13% 10% 8% 14% Business workshops/meetings on EAC 26% 8% 7% Revenue Authorities 8% EAC Secretariat 7% 4% 15% 8% Periodicals/handouts 33% 13% Government 7% 10% Total 100% 100% 100% 100% 100% To conclude the foregoing, it is noted that business associations have played a vital role in disseminating information on the Customs Union particularly in Kenya and Uganda, and to a lesser extent Tanzania. To this extent, strategies for enhancing information dissemination can build upon the success stories in Kenya and Uganda and should aim at strengthening dissemination capacities of the business associations there. Further, EAC should explore how to popularize its website as a source of information, especially because it transcends beyond organizations that are served by private sector associations. Dissemination of information could also be speeded up if respective governments played a more active role than is the case at the moment.

24 5.3 Views on whether EAC Customs Union has been successfully implemented One of the questions posed by the survey to respondent companies was: Whether the EAC Customs Union had been successfully implemented? The response was overwhelmingly in the affirmative rated at 79% for Kenya, 84% and 93% for Tanzania and Uganda, respectively. Table 5.4: Responses on whether EAC Customs Union has been successfully implemented. Response on the question whether the EAC Customs Union has been successfully implemented Figures are % of companies responding to the question on implementation of the Customs Union Kenya Tanzania Uganda Strongly Agree 54% 8% 13% Agree 25% 76% 80% Disagree 13% 8% 7% Strongly disagree 8% 8% 0% Total 100% 100% 100% The survey sought to obtain content to the above question by establishing awareness on the difference between intra-eac tariffs and CET for intra-regionally sourced products and extra-regionally sourced products. In Kenya 75% are aware while 25% are not. In Tanzania, 82% are aware while 18% are not aware. In Uganda the scenario is almost similar to that in Tanzania where 93% are aware and only 7% are not 5.4Relevance of the EAC Customs Union tariff structure and principles on businesses

25 5.4.1 Common External Tariff structure (CET) The question on relevance of EAC custom union s tariff structure and principles was posed to respondent and the following responses emerged. The CET structure is the most relevant Customs Union feature to businesses in the region, a position supported by 71% of respondents in Kenya, 55% and 77% in Tanzania and Uganda respectively. Attractive CET aspects to companies are: - zero tariff rating (raw material and capital goods), free movement of goods, enhanced market access and lower rates on raw material sourced locally. Table 5.5: Responses The relevance of CET to the businesses Responses on positive aspects of CET Responses in % Kenya Tanzania Uganda Zero tariff & free movement Improved market share Source material at a lower rate Protects markets Sub-total Responses on negative aspects of CET Not relevance Discourage business activities 6 Don t know 6 Negligible Other 9 8 Sub-total Total There is, therefore, overwhelming support for the EAC CET structure from the business community. The business community is not supportive of exceptions to full implementation of the CET, as illustrated by views expressed on the question:

26 Do you think that the changes in the CET allowing individual member countries to stay the implementation of the CET (i.e., to occasionally suspend implementation of CET for certain products) are useful or counterproductive? In Kenya, 50% of businesses think changes in CET are counterproductive, while 38% think it is useful. In Tanzania 21% think that this is useful while 57% thought this is counterproductive. In Uganda, 20 % think it is useful while 67% thought it is counterproductive. Reasons given in support of the argument that the changes to CET may be counter productive include: - Erosion of goodwill of the EAC Customs Union among businesses Creation uncertainty Undermine planning for production, which is currently premised on the existing CET Harm exports, if CET review raises duties of raw material/intermediate goods It is imperative that future CET reviews, provided for in the EAC customs Union Protocol, be carefully managed to take care of sensitivities raised by the business community. Such reviews should safeguard against uncertainties which if unchecked may lead to undermining of EAC Customs Union s goodwill. One way to achieve this is to allow for transitional periods after reviews to give companies time for production planning Elimination of intra EAC tariffs Elimination of intra-eac tariffs is very relevant to the regional business community, a position supported by 79% respondents in Kenya, 87% and 81% in Tanzania and Uganda following that order. Popular attributes includes increased trade and enhancement of market access within the EAC region. Table 5.6: Responses Business views on the relevance of the elimination of intra-eac tariffs Responses in % Kenya Tanzania Uganda Responses on positive aspects of CET increase in trade 50% 50% 55% market access rated 29% 37% 26% Sub-total 79% 87% 81% Responses on negative aspects of CET Punitive/not relevant 21% 13% 9% Total 100% 100% 100%

27 5.4.3 EAC common clearance procedures Companies responded overwhelmingly in support of EAC common clearance procedures with 82% in Kenya, 80% in Tanzania and 75% Uganda answering in the affirmative. Beneficial features include; speed and efficiency, enhancement of trade; and reduction of cost of doing business EAC Customs Union features with the most significant impact on Businesses Responses on the significance of EAC Customs union features (CET, elimination of internal tariffs and introduction of EAC Common Clearance Procedures) varied across the three EAC Countries. In Kenya, the most significant impact arises from internal tariff elimination, particularly the zero rating, followed by CET and EAC common customs clearance procedures. In Uganda, CET and EAC common clearance procedure were rated evenly at 36%, followed by internal tariff elimination. In Tanzania, CET was cited as having the highest impact at 50%, followed by the internal tariff elimination and EAC common clearance procedures at 29% and 21% respectively. Table 5.7: Responses Areas with the most significant impact on the businesses Responses in % Kenya Tanzania Uganda CET 32% 36% 50% Internal tariff elimination 42% 28% 29% EAC Common clearance procedure 26% 36% 21% Total 100% 100% 100% Despite slight differences in terms of significant of each feature among the states, impact on businesses was quite similar, highlighted as:- Enhanced market access and increased competitiveness Faster border clearance, which is expected to contribute to increased market share Increased economic activities Usefulness of the principle of asymmetry to the business

28 There is an overwhelming support for the principle of asymmetry among the business community in the region. In Kenya, 73% of businesses agree with the principle, while 27% do not. In Tanzania 67% support the principle while 33% are against it. Similar figures for Uganda are 75% for and 25% against. There is, however room for improving awareness of this principle as views from about 31% of Kenyan companies termed it as unfair, while 40% in Tanzania and 14% in Uganda felt that the principle had not being implemented Awareness of the existence of duty drawback schemes Awareness of the existence of duty drawback scheme is quite high in Tanzania and Uganda, where level of awareness was at 75% and 86% respectively. In Kenya, level of awareness was surprisingly very low at 32%. About 63%, 40% and 18% of the respondent companies in Kenya, Tanzania and Uganda, respectively reported having got refunds under the scheme. In view of the results in Uganda and Kenya, there is need for an awareness/education program on the duty drawback scheme encompassing all its features. It is also necessary to address the concern on the low level of refund, in keeping with the objective of the scheme, to enhance competitiveness of beneficiary companies. 5.5 Impact of the EAC CU implementation on businesses Overall benefit derived by companies from EAC free movement of goods among EAC members Free movement of goods within the EAC has been a major boost to businesses, a position supported by 77%, 73% and 46% of companies in Uganda, Kenya and Tanzania respectively. Businesses cited the following benefits derived from the free movement of goods: Goods move faster and more efficiently Reduced clearance requirements

29 Benefiting under the zero tariff regime Shorter lead times in supplying customers in the EAC Increased competition Expansion of business Companies reported expansion of businesses since the launch of EAC Customs Union in Business entities in Kenya reported about 86% business expansion since 2005, while in Tanzania and Uganda the same was reported at 78% and 60% respectively Business turnover Uganda has benefited most in terms of increase in export to the EAC region, a position supported by 48% of the surveyed companies. Kenya and Tanzania reported much lower figures estimated at 28% and 25% respectively. Intra-EAC trade activities, however, account for an insignificant proportion of companies annual turnover. In Kenya, Tanzania and Uganda, 74%, 71% and 83% of respondent companies reported intra-eac trade activities as accounting for 0% to 25% of their total annual turnover. Despite this position, 93%, 64% and 80% of companies in Kenya, Tanzania and Uganda, indicated EAC Customs Union as an important factor in the coming years in sustenance of their business operations. Annual turnover of respondent companies seems to be largely driven by domestic trade activities. In Kenya, Tanzania and Uganda, 91%, 65% and 86% of companies reported domestic trade activities as accounting for 51% to 100% of their total annual turnover. On the other hand, extra-eac trade activities were reported as having minimal effects on annual turnover of the respondent companies, as shown in the table below. Table 5.8: Annual business turnover dependent on intra-eac, extra-eac and domestic trade activities Per cent of business annual turnover which depends on Intra-EAC trade activities Responses in % Kenya Tanzania Uganda 0% to 25% 74% 71% 83% 26% to 50% 17% 22% 17% 51% to 100% 9% 7% 0%

30 Total 100% 100% 100% Per cent of business annual turnover which depends on Extra-EAC trade activities 0% to 25% 89% 56% 75% 26% to 50% 6% 0% 100% 51% to 100% 5% 44% 0% Total 100% 100% 100% Per cent of business annual turnover which depends on domestic trade activities 0% to 25% 9% 29% 14% 26% to 50% 0% 7% 0% 51% to 100% 91% 65% 86% Total 100% 100% 100% Given the liberal trade regime which EAC Customs Union has introduced in the region, a higher impact on business turnover would have been expected, especially in Kenya and Tanzania. In view of this theoretical expectation, this finding illustrates existence of unexploited intra-eac export potential at firm level. To unlock this potential, it is necessary for an analysis at product level to be commissioned to show the EAC market potential and to determine impediments and; devise strategies for businesses to apply in order to capture the market potential Investments The domestic market is the primary source of investment capital for all the EAC states with the exception of Uganda with 80%, 71%, 75% and 77% of total investment capital in Burundi, Kenya, Rwanda and Tanzania respectively, sourced locally. Table 5.8: Source of investment capital % total respondent companies Source Burundi Kenya Rwanda Tanzania Uganda Domestic versus external sourcing of investment capital Domestic 80% 71% 75% 36% 77%

31 External 20% 29% 25% 64% 23% EAC versus extra EAC sourcing of investment capital EAC 50% 96% 75% 93% 80% Extra EAC 50% 14% 25% 7% 20% Analysis of EAC versus Extra-EAC sourcing of investment capital, shows EAC region as the predominant source accounting for 50%, 96%, 75%, 93% and 80% of externally sourced investment capital in Burundi, Kenya, Rwanda, Tanzania and Uganda respectively. EAC Customs union has not had a major impact on intra-regional investments. Only companies operating in Kenya (33%) reported having been able to attract some capital from the region while those operating in Tanzania and Uganda had not. This position is further corroborated by the insignificant share of EAC as a source investment capital of the respondent companies. The financial markets in the EAC regional should therefore take this gap as an opportunity to stimulate production and trade development in the region The most attractive aspects of EAC customs preferences to the businesses The most attractive aspects of the EAC customs preferences are; elimination of intra-eac tariffs and CET, which combined accounted for 78% in Kenya, 82% and 90% in Tanzania and Uganda respectively. Table 5.10: Most attractive aspect of EAC customs preferences Aspect of the EAC Customs Union attractive to businesses Responses in % Kenya Tanzania Uganda Elimination of intra-eac tariffs 43% 36% 40% CET 35% 46% 50% EAC common customs clearance procedures 11% 18% 10% Removal of NTBs 11% Total 100% 100% 100%

32 5.5.6 The least attractive/most problematic aspects of EAC customs union Responses on aspects of the EAC Customs Union which businesses considered least attractive or problematic varied across the EAC partner States implementing the Customs Union. There was unanimity that NTBs were making the EAC Customs Union unattractive, a position cited by 25% of companies in Kenya and Tanzania and; 23% in Uganda. Table 5.11: The least attractive problematic aspect of EAC Customs Union The least attractive/most problematic aspects of EAC customs union Responses in % Kenya Tanzania Uganda Principal of asymmetry 10% 15% Non tariff barriers 25% 25% 23% Lack of common standards for the region 15% VAT & different tax regime in operation 5% 33% Long sensitive list 25% 8% CET/Import Duty 5% 17% 15% Application of rules & origin 15% 25% 8% EAC common custom clearance procedures 8% Others (Intra extra export chain, Lack of information) Total 100% 100% 100% 23% These findings are a pointer to the need for EAC to address concerns which the business entities have in regard to: EAC sensitive list Application of the EAC rules of origin, and The CET structure EABC may wish to explore this further in preparation for the review of the EAC trade regime as envisaged in the EAC Customs Union protocol, by year Recommended measures to address non implementation of the EAC Customs Union

33 5.6.1 Reforms governments should undertake to compensate for losses resulting from non-implementation of EAC customs union The business community proposed wide ranging measures to address losses resulting from non-implementation of the EAC Customs union. Specifically the following were proposed: - export compensation, review of tariffs, and provision of rebate/insurance among others as highlighted by the table. Table5.12: Proposed reforms to governments to address losses resulting from nonimplementation of the EAC Customs union Reforms to address losses resulting from non implementation of the EAC Customs Union Responses in % Kenya Tanzania Uganda Export compensation 42% 30% 14% Improvement in infrastructure 19% Review of EAC tariffs of concerns to businesses in the EAC region 8% 30% 14% Provision of rebate and insurance cover 23% 30% 43% Payment of interest/penalties 8% 15% Government enforcement of the agreed Customs Union measures 10% 14% Total 100% 100% 100% Proposed measures to government to guarantee full implementation of the EAC Customs Union The business community proposed the following measures to governments to guarantee full implementation of the Customs Union: implementation of the EAC Customs Union Protocol, Implementation of the NTB monitoring mechanism, elimination of the NTBs and harmonization of customs operations. Table 5.13: Proposed measures to governments to ensure full implementation of the EAC CU

34 Measures proposed by the respondent businesses on what the Government should do to ensure full implementation of the EAC CU Implementation of the Treaty (Customs Union Protocol) Removal of all tariff barriers elimination of intra-eac tariffs/liberalize intra-regional trade Implementation of NTB mechanism as a means of elimination of NTBs Harmonize Customs operations and strengthen Revenue Authorities Periodic reports on the performance of EAC Trade and Customs Union implementation Responses in % Kenya Tanzania Uganda 41% 18% 30% 18% 27% 27% 18% 10% 9% 37% 30% Sensitization of the stakeholders on EAC CU 30% Total 100% 100% 100% 5% Proposed measure to EAC to mitigate losses resulting from nonimplementation of EAC customs union The following measures were proposed to EAC Secretariat to mitigate losses arising from non implementation of the Customs Union:- Enforcement of the Customs Union Protocol, proposed by 24% and 14% businesses in Kenya and Tanzania respectively. Tracking and monitoring effectiveness of implementation of specific Customs Union requirement in collaboration with private sector. This measure was proposed by 35% and 14% businesses in Kenya and Tanzania respectively. Secure reforms in trade facilitation system to accommodate the changes foreseen in the EAC Customs Management Act, proposed by 18% and 29% businesses in Kenya and Tanzania respectively. Capacity building and empowerment of the public and private sector on matters of the EAC Customs Union implementation, proposed by 6%, 29% and 25% businesses in Kenya, Tanzania and Uganda respectively. Table 5.14: Proposed measures to EAC secretariat to mitigate losses arising from nonimplementation of EAC customs union Initiatives or interventions which the EAC secretariat should Responses in % undertake Kenya Tanzania Uganda Enforcement of Customs Union Law 24% 14% Track effectiveness of implementation of each Customs Union requirement working with the private sector to determine 35% 14%

35 Initiatives or interventions which the EAC secretariat should Responses in % undertake Kenya Tanzania Uganda losses/implied losses and use the finding to facilitate lobby for implementation of the specific requirement. Secure reforms in trade facilitation system to accommodate the changes foreseen in the EAC Customs Management Act 18% 29% Capacity building and empowerment of the public and private sector on matters of the EAC Customs Union implementation 6% 29% 25% Introduce penalties and sanctions 6% 75% Upgrade Secretariat to a Commission 6% Other 5% 14% Total 100% 100% 100% Empowerment of EAC secretariat to strengthen regional integration Businesses in the region perceive empowerment of EAC Secretariat as one of the strategies towards enforcement of EAC regional integration. Proposed empowerment measures included: - Power shift of some of the powers from governments to the secretariat, proposed by 44%, 70% 38% businesses in Kenya, Tanzania and Uganda, respectively Make the secretariat a commission with full funding and linked to private sector. This was a proposal from 17%, 13% businesses in Kenya and Uganda respectively Enhanced commitment from Partner States, which was proposed by 17% and 38% of respondent businesses in Kenya and Uganda, respectively Measures by the business community and lobby groups to hold governments accountable for non-implementation of EAC customs union. The following measures were proposed to hold governments accountable for non implementation of the EAC Customs Union: - Adoption of EAC harmonized standards, proposed by 13% and 10% of respondent companies in Kenya and Uganda, respectively Introduction of a legislation to deter non implementation of the Customs Union, proposed by 13% and 7% businesses in Kenya and Tanzania respectively. Demonstrate to governments strong correlation between private sector gains from implementation of Customs Union and economic development, proposed by 27%, 13% and 20% businesses in Kenya, Tanzania and Uganda respectively.