Trade Negotiations Insights • Volume 8 • Number 2 • March 2009

Building bridges

Supporting services negotiations in the East African EPA

by Francis Mangeni

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In the East African Community (EAC) countries (Burundi, Kenya, Rwanda,Tanzania and Uganda), the services sector has become an increasingly important contribution to economic growth and, specifically, to poverty eradication programmes through employment generation, remittances from abroad, and internal linkages with other sectors. In Kenya, the tourist sector contributes more than 64% of the GDP, subject to occasional fluctuations caused by security alerts and the recent political instability.

In Uganda, the services sector makes up just over 42% of the GDP and has been growing at an estimated rate of 6.8% ahead of the agriculture sector, which still employs over 80% of the population. Tourism is not only a leading destination of foreign direct investment (FDI), but also as the largest sub-sector, it contributes over 60% annually to services. Estimates are that about 90% of jobs advertised are in the services sector. The major sub-sectors are tourism and related services, education, information and telecommunications, financial services, health, energy, and construction. (1)

The services sector has high potential for growth in the region. In the tourism subsector, there are key investment opportunities for accommodation and construction, conferences, catering and entertainment, tour operators, water sports, eco-tourism facilities, privatisation, and joint ventures. While the coastal regions provide warm sunny beaches for holiday, the hinterlands have national parks, unique people and culture, lakes and rivers, flora and fauna, bird life, and the Lake Victoria islands.
On the potential for growth, a supportive view was provided by the WTO Secretariat in its report for the Trade Policy Review of the EAC countries, which found that:

The potential of the services sector remains largely unexploited in the EAC. In tourism, for example, where the EAC’s attractions are among the best in Africa, inadequacies in infrastructure and marketing/promotion, financial constraints, security issues, and lack of skilled labour have limited its development. Further liberalisation and commitments under the [General Agreement on Trade in Services (GATS)] should contribute to attracting investment in services, in general, and should improve the efficiency of other economic activities and the competitiveness of EAC’s exports, especially by reducing costs related to, inter alia, telecommunications, transport, and energy. (2)

The EAC countries consider tourism to be important and their GATS schedules include liberalisation commitments in this sub-sector. However, the tourism sub-sector has attracted concern globally, particularly arising from package holidays given through operators based in origin countries, the result being that destination countries reap unsatisfactory gains from tourism. In the case of Uganda, for instance, notwithstanding the phenomenal increase in tourist arrivals in the countries assessed at about 123% since 1992, estimates are that expenditures to Ugandan tourism service providers have increased only by 16%. (3) There are other concerns as well, such as the effect on the environment and local communities.

The Cape Town Declaration on Responsible Tourism of August 2002 is an attempt to address some of these concerns and it provides a good indication of issues that could be addressed in EPA negotiations. In particular, it is encouraged that tourists should spend sufficiently in destination countries and there should be significant economic gains for local communities. In the context of the EPAs, a practical implementation of this would include commitments for destination tour operators to establish commercial presence in the EU, joint ventures, and guidelines on equitable sharing of incomes from tourism. EAC countries could adopt policies that closely involve local communities in tourist activities. In Uganda, for example, there is a deliberate policy to mainly employ wild life guides and workers in the hospitality industry from the local communities inhabiting the tourist areas. Physical needs in the sector include decent and affordable accommodation, particularly outside the urban areas. Another important need is frequent international air travel to the countries from major origin countries including the EU. Currently, Nairobi is the regional hub and fares between Nairobi and cities within the region are exorbitant on Kenya Airways, which is widely considered to monopolise many routes. Ugandan operators have therefore expressed concerns that this high fare discourages tourists in Kenya from proceeding to Uganda as well. Moreover, key upcountry airports are in a state of disrepair or are totally dysfunctional. Road, railway, and water transport needs improvement as well. The railway network in the EAC region is hardly modern, which is why most travel is via poorly maintained roads. Water transport, including on Lake Victoria, is, at best, considered scarce.

There are training needs as well. The quality of hospitality and professionalism varies among the countries. There are many accounts that claim Kenya and Tanzania have an edge over their neighbours. Yet, there seems to be a feeling in Tanzania that the comparably poor quality of English spoken in the hotel and catering industry puts Kenyans at an advantage, which results in Tanzanians preferring to employ Kenyans.

The liberalisation of the telecommunications sector has had considerable results. In Uganda for instance, according to the Uganda Communications Commission, mobile telephone lines increased from 3,000 in 1996 to 5,163,414 by December 2007; the number of fixed telephone lines rose from 45,145 in 1996 to 165,788 by December 2007.

Mobile phone operators have grown from just one in 1996 to four in 2007. There are over ten internet service providers, and 130 FM radio stations. Foreign exchange inflows from the Information and Communication Technology (ICT) sector as a whole have risen from practically no exports in 2001 to over USD 10 million annually. Moreover, a regulatory authority is in place with licensing and intervention powers demonstrating greater possibilities for electronic commerce and market information.

Challenges remain, however. Rural areas have not benefited as much from the telecommunications revolution in the region. Limited internet bandwidth results in inefficiency. The private sector seems to be leaps and bounds ahead of governmental measures to promote sharing of networks, interconnectivity, and a single market in telecommunications services, which, though admirable, could have adverse implications for consumer protection. While Kenya and Uganda have subscribed to the GATS reference paper on telecommunications, which deals with anti-competitive practices, other East African countries have not.

The liberalisation so far attained, particularly on an autonomous basis, should be safeguarded, together with flexibility and policy space. While EPA commitments would assist in ensuring the credibility and nonreversal of the progress made, this should not be at the expense of adjustment and corrective mechanisms for addressing adverse developments.

In the context of the economic integration processes, the liberalisation of services will be based on a negative-list approach in order to rapidly establish a single market in services. EPA negotiations should support this process through development co-operation and by assisting a harmonised approach for all EAC countries in their external trade relations on the basis of a shared platform provided by the common market.

In the context of public utilities and social infrastructure, a key defensive interest is to protect the public from inefficiency and market failure, anti-competitive practices, and abuse of a dominant position, as well as shortages and social dislocation from unscrupulous dealings and fraud. The privatisation experience has demonstrated the possibility of some serious adverse consequences for the public. Privatisation of electricity and water distribution in Uganda resulted in shortages and dramatic hikes of tariffs. Various banks collapsed with dire consequences for depositors, before new laws and tougher regulation were introduced. In Tanzania, unscrupulous dealings were discovered in the provision of electricity and water by foreign companies that were either “brief-case” companies or that had charged exorbitant and unjustified fees and fines from a developing country government.

Infrastructural services should benefit society as a whole and assist in social economic development to ensure social justice and sustainable development. Due to higher poverty levels in rural communities, some commercial key services are less available; poverty eradication initiatives must squarely target these areas. Information and telecommunications (to assist e-commerce for instance), financial services (to provide reasonably priced and adequate credit), transportation (to assist national and regional trade and interconnectivity), and energy (to assist efficiency and modernisation), must equally benefit rural areas as well.

In terms of regulation and sequencing, effective regulatory authorities should be in place before liberalisation of the sub-sectors. Various sub-sectors have regulatory authorities (education, communications, financial services, and most professional services for instance), but there are no authorities in a large number. In terms of pace, the liberalisation should be gradual and have appropriate safeguards so that adverse consequences can be addressed through adjustment and corrective measures.

Identification of offensive interests should be based on past experience with liberalisation, export performance and returns, credible positive impact and inflows, and the likelihood of promotion of regional development objectives.

The main trade objective of EAC countries has been to secure enhanced access to the EU market for natural persons (mode 4 in GATS), covering both professional and non-professional persons. In this regard, an appropriate relaxation of the extensive restrictions in the EU has been sought. Proposals have included the establishment of predictable and substantial quotas and a special user-friendly business visa system. Other modes of interest include the establishment of commercial presence (mode 3) particularly in the tourism sub-sector for operators and agents, as well as cross border supply (mode 1) in the information and telecommunications and business services sub-sectors. Priority sub-sectors for exportation to the EU include tourism, information and telecommunications, professional services, construction, and health-related and social services.

Overall, the main objective in importation of services from the EU is assistance in building physical and social infrastructure, increasing development financing, promoting health, eradicating poverty, and addressing key constraints to achievement of the Millennium Development Goals.

Author
Dr Francis Mangeni is a Legal Consultant with Lex Uganda Advocates and Solicitors.

Notes
1. Private Sector Foundation of Uganda, Sectoral and Analytical Studies to Guide Uganda in EPA Negotiations, Uganda Programme on Trade Opportunities.
2. WTO document WT/TPR/S/171 dated 20 September 2006, paragraph 24.
3. Private Sector Foundation of Uganda, op cit.