ENHANCING KENYA'S TRADE IN SERVICES The Way Forward

Transcription

1 PB01/2017 Key Recommendations 1. Draft amendment to specific sector laws to align them to the EAC Common Market Protocol (CMP) obligations. 2. Streamline all horizontal legislations that affect the free movement of services. These include in the investment Law, Immigration Law and the Public Procurement Law. 3. Complete preparing Kenya's schedule of 78 service sub-sectors. Key target should be to have a c o m m o n s e t o f c o m m e rc i a l meaningful service sectors to be liberalized across the EAC. 4. Internal discussions and negotiations of the 5 sub-sectors not negotiated under the CMP should commence forthwith. 5. Data on key service sectors should be enhanced to make the business case for or against service sector liberalization and regulation. 6. Regionally, the de-linking of movement of service providers under Mode 4 to the schedule of workers should be concluded and effected as soon as possible. 7. Develop a mechanism to regularly monitor restrictions in services sectors and agree on a timeframe or their removal should be developed. ENHANCING KENYA'S TRADE IN SERVICES The Way Forward Introduction Given their transformational effect, liberalization of services has the potential to generate important benefits for the people of Kenya and East Africa. The openness of services sectors has a positive impact on investments, as services constitute the majority of inward foreign direct investment (FDI) stocks. Opening up to service imports and FDI can be an effective mechanism to increase competition, enhance efficiency and bring international best practices and better skills and technologies to the domestic market. Recent research (Hoekman and Shepherd, 2015, 2016) analyzing performance of services and productivity of manufacturing found that at the average rate of services input intensity, a 10% improvement in services productivity is associated with a 0.3% increase in manufacturing productivity and a resulting increase in exports of 0.2%. In addition, the research found that services trade restrictiveness is negatively associated with manufactured goods exports. Similarly, Arnold et al. (2008), found a significant and positive relationship between productivity of manufacturing firms and service performance in telecommunications, electricity and financial services. Under the CMP, EAC Partner States committed to liberalize seven services sectors namely, business services, communication, distribution, education, financial, tourism & travel and transport sectors during the first phase of liberalization. Of the possible 136 sub-sectors in the seven sectors, EAC Partner States made commitments as follows: Burundi (74), Kenya (63), Rwanda (101), Tanzania (59) and Uganda (98). An analysis of the levels of commitment shows that Partner States made varying commitments in these 7 sub- sectors, with only 57% of the potential commitments being made; of which only 16-subsectors have been committed by all the Partner States. This low level of commitment, coupled with limited implementation of commitments at the national level, essentially means that the potential benefits of a common market for trade in services are significantly eroded.

2 THE IMPORTANCE OF THE SERVICES SECTOR IN KENYA The services sector has and continues to play a crucial role in Kenya's economic development. Combined, services constitute the largest and most dynamic part of the Kenyan economy, accounting for almost half of the country's GDP and significantly outperforming agriculture and industry in terms of contribution to GDP. Figure 1 below shows the contribution of services over the last 3 years. Service exports are however dominated by transport and travel, which together accounted for 60.8 per cent of total service exports. Figure 3 below illustrates this: Source: Source: World Development Indicators (World Bank) Data on other commercial services (OCS) exports is neither readily available, nor captured regularly. WTO Kenya country profile provides the following as the other key export sectors after transport and travels for 2014 : The growth and expansion in modern services has lowered transaction costs and created spillovers of knowledge to other sectors, while stimulating demand for traditional services such as electronic trade and distribution. Service exports have grown three-fold over the last 10 years, outperforming service imports, as illustrated in Figure 2 below: Source: Source: Updated data on services contribution to employment is also not readily available. Available data suggests that in terms of formal employment, services account for a significant share, at around 34.5 per cent in Kenya (ILO 2013). In addition, significant services employment occurs in the informal sector in the region, through sectors such as informal retail distribution, restaurants and personal services. 2

3 KENYA'S SERVICES LIBERALIZATION COMMITMENTS Kenya's commitments under the CMP are as follows: business services (15), communications services (17), distribution services (3), education services (4), financial services (12), tourism and travel (3) and transport services (9). While the number of commitments is the second lowest among the EAC Partner States, they are an improvement on Kenya's commitments under the World Trade Organisation's (WTO) General Agreement on Trade in Services (GATS), as illustrated in the table below: Sectors GATS Kenya CMP 1. BUSINESS SERVICES nc improved A. Professional services nc improved B. Computer and related nc improved C. Research and nc improved D. Real estate nc nc E. Rental/Leasing services nc improved F. Other nc nc 2. COMMUNICATION partial improved SERVICES A. Postal nc nc B. Courier nc improved C. Telecommunication partial similar* D. Audiovisual partial improved E. Other nc nc 3. DISTRIBUTION SERVICES nc improved 4. EDUCATION SERVICES nc improved 5. FINANCIAL SERVICES partial improved A. All insurance and partial improved B. Banking and other partial improved 6. TOURISM AND TRAVEL RELATED SERVICES partial same A. Hotels and restaurants full same B. Travel a gencies and full same C. Tourist guides full same D. Other nc nc 7. TRANSPORT SERVICES partial improved A. Maritime nc improved B. Internal waterways nc nc C. Air partial improved D. Space nc nc E. Rail nc nc F. Road partial improved G. Pipeline nc nc H. Services auxiliary to all nc nc I. Other partial improved The comparison between GATS and the CMP only concerns Modes 1 to 3, market access, national treatment, and additional commitments - it does not include mode 4 commitments. The latter have been subject to on-going negotiations since April 2011, following acknowledgement at the EAC regional level to de-link Mode 4 (movement of service providers) from the Annex II, Schedule of Workers in the CMP. While Kenya has submitted its schedule of mode 4 commitments to the EAC Secretariat, not all other Partner States have done so, which would allow the amendment of the CMP Schedule of Services to be formally undertaken. Following agreement at the regional level, EAC Partner States have committed to deepen their commitments up to 78 sub-sectors, based on PS schedule of commitments in the EAC CMP. This is an opportunity especially for Kenya which made significantly lower commitments than other EAC Partner States like Rwanda, Uganda and Burundi. It is also an opportunity to increase the number of sectors where all Partner States have made common commitments. The guiding principle should be to achieve a common set of commercial meaningful service sectors to be liberalized across the EAC in order to truly create a common market for trade in services. These sectors should be those that are important for exports (including manufactured goods exports); those are important for value addition and those that are important for regional development plans. Government should work with private sector to agree on these priority sectors. Lastly, in line with the commitment made in the CMP, EAC Partner States are to negotiate and make commitments in the remaining 5 sub-sectors i.e. construction services, environmental services, health related and social services, and recreational, cultural and sporting services and other services not included elsewhere. It is important that government begins engaging private sector in these areas to establish the key areas of interest. Source:WTO Secretariat and Annex V of the EAC CMP'nc' = no commitments. 3

4 IMPLEMENTATION OF KENYA'S EAC SERVICES OBLIGATIONS According to the EAC Common Market Scorecard (2016), which assessed compliance by December 2015 in four key service sectors (professional services - legal, accounting, architecture and engineering; road and air transport; distribution services - retail and wholesale; and telecommunication services), Kenya, like all other EAC Partner States, is yet to fully implement its services obligations. Overall, EAC Partner States were noted to have 57 restrictions or non-conforming measures (NCMs) in the above 4 sectors (excluding air transport which was not scored), as illustrated in the table below: Distribution of NCMs across the EAC Partner States Country Number of NCMs 2016 Source: EAC Common Market Scorecard 2016 Share of NCMs 2016 Tanzania 16 27% Kenya 14 24% Uganda 10 17% Rwanda 10 17% Burundi 9 15% Total % In terms of distribution of these NCMs, Kenya's 14 NCMs are mostly found in the professional services which accounts for 57% of all the total NCMs; followed by transport services with 36% and telecommunication with 7% of the total. Additionally, most identified NCMs (79 percent) are violations of the national treatment principle. Examples of sector specific restrictions: Through the Scorecard (2016) process and other ongoing research, the following are some of the restrictions currently found in various domestic service sector laws: 1. Legal services - Advocates Act Cap 16, S. 11, restricts advocates from other EAC states from Kenyan courts; from signing or filing any pleadings in court. 2. Engineering Services - Engineering Technologists and Technicians Act 2016, S. 18(1) (b), requires Kenyan residency and working permit for registration and that firms are locally incorporated, with at least 51 per cent of shares held by Kenyan citizens. 3. Road transport services - Public Tolls Act, Second Schedule - Transit toll charges target only foreign-registered vehicles. 4. Air Transport Services - Civil Aviation (Air Licensing) Regulations, 2009, Regulation 5 (b) - Air service and aircraft licenses are only for Kenyan citizens, and majority (51%) voting rights in firms must be held by the State or citizens. 5. Communication services - Kenya Information a n d C o m m u n i c a t i o n s ( B r o a d c a s t i n g ) Regulations, 2009, Regulation 14 (5) - A subscription management services licensee required to have minimum local equity participation of 20% 6. Tourism and Travel related Services - Tourism Act, Authority Regulations, 2014, Regulation 24 - Only Kenyan citizens employed in regulated tourism activities or services unless no Kenyan is available. Authority has to approve employment after verification. 4

5 Examples of cross cutting restrictions: Restrictions are also found in laws that are cross cutting in nature, as illustrated below: 7. Public Procurement and Asset Disposal Act 2015 Defines a citizen contractor to mean a firm wholly owned or controlled by persons who are citizens of Kenya. IT also reserves 21% of total score in procurement evaluation for citizen contractors. 8. Investment Promotion Act, S.4 considers citizens of other EAC Partner States as foreigners for purposes of the Investment Certificate; and requires a higher limit of investment amount from them (USD 100,000 instead of KES 1 Million for a resident). Restrictions facing Kenyan services sector suppliers in the EAC region As is the case in Kenya, other EAC Partner States have also maintained NCMs in their domestic laws, at sector levels and in cross cutting legislations. As seen in the Table 2, over 44 restrictions were found in the in the 4 sectors that were assessed and scored under the EAC Common Market Scorecard. Across the region, professional services account for over two thirds of the identified NCMs at 71%, distributed as follow: engineering (38%), accounting (29%) and legal services (19%) and architecture services (14%). The road transport had 25%; telecommunications 2% and distribution sector 2%. Important to note though is that since Partner States made commitments in different sectors, a lower number of NCMs does not necessarily denote a more open market. Mutual Recognition Agreements (MRAs): To facilitate movement of professionals across the region, Kenya has signed MRAs with Rwanda, Tanzania and Uganda in the engineering services; architectural services; and accounting, auditing, and bookkeeping Services. An MRA facilitates trade in services by enabling the qualifications of services suppliers, recognized by the authorities in their home country, to be mutually recognized by other Partner States who are signatories to the MRAs. MRAs however cannot override local laws they are applicable only in accordance with prevailing laws and regulations of the host country. This means that Kenya and other EAC Partner States that are party to MRAS must align their laws to the provisions of the MRAs and the CMP in order to give force to them. 5

6 CONCLUSION Given the size of the Kenyan economy and indeed those of other EAC Partner States, economic integration is fundamental to achieving the socio-economic developmental objectives of the region. The importance of the service sector to these objectives cannot be overstated. Services are not only a final product, contributing significantly to the GDP of the region, but they are also intermediary products supporting the competitiveness and growth of all other sectors. One only need reflect on the importance of transport, energy and communication to the cost of production in manufacturing industry; or the importance of professional services such as accounting to modern businesses; or the crucial role played by ICT and financial services in all areas of the economy to see how closely the service sector is linked to Kenya's economic growth, industrial transformation and poverty reduction. Kenya and all EAC Partner States must therefore remove existing restrictions and other impedes in order to create an environment that enables businesses to harness the full potential of the service sector, enabling it to play a key role in facilitating economic growth and transformation of Kenya and the EAC region. Key Policy Recommendations: 1) Kenya should, as a matter of priority, review and amend specific sector laws it committed in the CMP. These laws have already been mapped through various processes, including by the National Implementation Committee on the Common Market Protocol and the EAC Common Market Scorecards. Aligning its laws to its CMP obligations gives Kenya the moral authority to put pressure on other EAC Partner States to implement their commitments. 2) To support sector specific reforms, effort should also be put towards streamlining all horizontal legislations that affect the free movement of services. These include in the Investment Law, Immigration Law and the Public Procurement Law. 3) Working with the private sector, the government should deepen Kenya' service sector liberalization by completing preparation of her schedule of 78 service sub-sectors as agreed by the Sectoral Council for Trade, Industry and Investment (SCTIFI).Key target should be to achieve, at the regional level, a common set of commercial meaningful service sectors to be liberalized across the EAC in order to truly create a common market for trade in services. These sectors should be those that are important for exports (including manufactured goods exports); those are important for value addition and those that are important for regional development plans. Government should work with private sector to agree on these priority sectors. 6

7 4) Working with the private sector, the government should commence internal negotiations of the 5 sub-sectors not negotiated under the CMP. This will enable the country to establish its offensive and defensive positions interest before negotiations commence at the regional level. 5) Working with relevant service sector professional bodies, bureau of statics and other key bodies, enhance data on key service sectors to make the business case for or against service sector liberalization and regulation. 6) Regionally, to enhance the free movement of service providers, the de-linking of Mode 4 from the schedule of workers should be concluded and effected as a matter of priority. This will enable easier movement of service suppliers across the region. 7) Regionally, a mechanism to regularly monitor restrictions in services sectors and agree on a timeframe or their removal should be developed. This Policy Brief was adapted from the Research Paper Status and Impact of Domestication of The EAC Common Market Protocol in Kenya developed as part of a KEPSA Project entitled, 'Improving Business Environment to Deepen Trade and Investment for the Kenyan Private Sector in the EAC Region'. The project received funding support from the United States Agency for International Development (USAID) through the East Africa Trade & Investment Hub. KEPSA This Policy Brief is published by KEPSA 5thFlr, Shelter Afrique Building, Mamlaka Rd, P.O. Box Nairobi, Kenya. Ph: /2/ Fax: info@kepsa.or.ke Website: The Voice of the Private Sector in Kenya. KEPSA's Policy Briefs are mainly meant to inform, educate and provoke debate on specific private sector development and public policy issues. Readers are encouraged to quote or reproduce material from this paper for their own use, but KEPSA requests due acknowledgement. (I) Hoekman, B and Shepherd, B, Services Productivity, Trade Policy, and Manufacturing Exports. RSCAS 2015/07. (ii) Arnold, J. M., Javorcik, B., Lipscomb, M. and Mattoo, A. (2016), Services Reform and Manufacturing Performance: Evidence from India. The Economic Journal, 126: (iii) International Labour Office 2013, Global Employment Trends. ILO: Geneva. (iv) WTO Secretariat, based on GATS Schedules of Specific Commitments for Kenya (GATS/SC/47, GATS/SC/47/Suppl.1 and GAT/SC/47/Suppl.2) and Annex V of the East African Community Common Market (Schedule of Commitments on the Progressive Liberalization of Services). 7

8