RWANDAN PRIVATE SECTOR OVERVIEW

UNCLAS KIGALI 000477 SIPDIS DEPT FOR EB/IFD/OMA AND EB/IFD/ODF DEPT FOR AF/C AND AF/EPS DEPT PASS TO USAID FOR AFR/EA, PPC, AND AFR/SD COMMERCE FOR ITA - RTELCHIN SIPDIS E.O. 12958: N/A TAGS: ETRD USTR BTIO ECON RW SUBJECT: RWANDAN PRIVATE SECTOR OVERVIEW SUMMARY -------------- ¶1. Reports on Rwanda's development identify the private sector as a necessary engine for economic growth. This cable, the first in a series, provides an analysis of the Rwandan private sector and the overall business environment. It provides a brief overview of the private sector, describes the Rwandan Private Sector Federation and the Rwanda Investment and Export Promotion Agency, and identifies the key business issues in Rwanda. ¶2. The government of Rwanda (GOR) has adopted several initiatives to boost domestic exports and to welcome foreign investment. It has also developed an inclusive approach to the private sector by engaging it in the development of business regulations. Many challenges lie ahead for the Rwandan private sector, including a landlocked geography, limited access to long-term financing, foreign investor concern over domestic and regional political stability, and a small domestic market with limited purchasing power. However, the GOR's responsiveness to the demands and concerns of the private sector contributes to an improving business environment, such as lowering corporate tax rates and removing value added taxes on imported services. END SUMMARY. OVERVIEW OF PRIVATE SECTOR -------------- - ¶3. Rwanda's private sector is comprised mostly of micro and small-scale enterprises (MSSEs). There are nearly 70,000 formal and informal MSSEs, employing less than 30 people each; 100 to 200 small and medium-sized enterprises (SMEs), employing more than 30 individuals each; and about 60 large- scale enterprises employing more than 100 individuals each. The private sector is broken down into services (35 percent),agriculture (47 percent),and industries (18 percent). ¶4. In a 2005 study, the World Bank ranked Rwanda 58th out of 155 countries in terms of "ease of starting a business" and 139th for "ease of doing business." The report based the rankings, in part, on Rwanda's landlocked geography, low income per capita, and large informal economy. Its low rankings were also attributed to the fact that entrepreneurs must go through nine steps to launch a business and that the process takes longer than 21 days on average. ¶5. Most private businesses cite the following constraints that hinder the development of their enterprises: limited access to funds, especially long-term financing; small market with weak purchasing power; high transportation costs for imports and exports; lack of technical and management capacity; inadequate infrastructure; and limited access to reliable electricity. RWANDAN PRIVATE SECTOR FEDERATION -------------- -------------- - ¶6. Private sector representation started in Rwanda prior to 1994, in the form of the Rwanda Chamber of Commerce. A government-driven institution, the Chamber of Commerce suffered from three significant limitations: lack of autonomy, weak representation, and lack of relevant services. As a result, various industry sectors and constituencies created stand-alone associations to better serve their needs. The Rwandan Private Sector Federation (RPSF) was founded in December 1999 to consolidate these associations and to provide a more unified representation of Rwanda's business interests. The Federation has grown to twenty-three associations with the recent addition of six provincial associations. ¶7. The RPSF exists within a framework called the Public- Private Partnership (PPP),which was created in 2002 and is overseen by the Prime Minister. The Prime Minister convenes meetings four times a year, and the RPSF meets with the President once a year. The goal of the PPP is for the GOR to gain greater appreciation for issues concerning the business community, and for the two to work together in creating an environment conducive to doing business. The President and the Executive Secretary have strong links to the government, as does most of the Board of Governors. The RPSF has identified six constituency-based priorities: (1) strengthen Rwanda's private sector companies; (2) build human capacity for Rwanda's private sector; (3) facilitate sustainable funding sources for the private sector; (4) develop vibrant private sector member associations; (5) provide dispute arbitration and business assistance; and (6) advocate on behalf of the private sector within the PPP. RWANDA INVESTMENT AND EXPORT PROMOTION AGENCY -------------- -------------- -------------- ¶8. The Rwanda Investment and Export Promotion Agency (RIEPA) is a public body charged with promoting and facilitating trade and investment in Rwanda. RIEPA's mission is to assist investors with required permits and documentation, to liaise with authorities to secure land and implement projects, and to help promote Rwandan exports. RIEPA has 40 employees and is led by a Director General, two deputies, and an export promotion coordinator who are nominated and approved by the cabinet to indefinite terms. ¶9. Since its inception in 1998, RIEPA has registered more than 250 investors, but only a modest number of foreign investors. It has also hosted annual trade fairs and international investment conferences in attempts to spur investment in Rwanda and promote the private sector. RIEPA is additionally leading an effort to create the Rwandan Free Export Economic Processing Zone to offer tax incentives to businesses that produce export-oriented products. SUCCESS STORIES -------------- ¶10. The RPSF provides the business community with a forum through which to lobby the government on important issues and to discuss private sector proposals. It has extended development services to the business community in four provinces and hosted an Investment Dialogue Conference supported by the Ministry of Commerce and RIEPA. While some members complain that the RPSF has yet to deliver on its promises, it has achieved important and tangible results. Since its inception, the RPSF has repeatedly pressed the government to reduce the corporate tax rate from 35 percent; this year it will be reduced to 30 percent. ¶11. Another RPSF success story was the removal of a value- added tax (VAT) on imported goods and services. This charge was, in essence, double taxation, as companies were being charged a VAT for importing equipment and consulting services, while their end customers were also being charged a VAT for the same goods and services. The RPSF identified this VAT as an impediment to a favorable business climate and worked with the Ministries of Commerce and Finance to have it removed, demonstrating the GOR's willingness to listen to the concerns of the business community and to improve Rwanda's overall investment environment. ¶12. The RPSF and RIEPA are also consulted on the drafting of Rwanda's commercial laws, and spearhead other policy issues aimed at improving the overall business climate. For example, the RPSF is currently drafting a position paper for Parliament to eliminate the registration charge (1.2 percent of declared capital) applied to all companies. While an important source of income for the government, this charge has the negative impact of increasing the cost of doing business in Rwanda. CHALLENGES -------------- ¶13. The RPSF recognizes that it faces serious challenges. Resources are limited, both in terms of staff and budget. The RPSF staff (35 permanent employees) spends most of its time meeting with the government and donors, representing the interests and concerns of the private sector. Due to its limited resources, two important parts of its mandate-capacity of member associations and enterprise competitiveness-receive little attention. ¶14. In meetings with the various member associations of the RPSF, EconOff noted that of the 23 associations, only 8 appear to be fully functioning while the other 15 are either struggling or defunct. Not only are there too many member associations, but not all of them are effective. Association leaders told EconOff that their organizations faced three main challenges: they need help in better defining their role within the RPSF; support in organizing themselves and setting up relevant programs; and training for their members. ¶15. RIEPA has the challenging task of attracting investment in a country with high transportation and production costs and a small market with low purchasing power. Nonetheless, it can only gain the confidence of the private sector by continuing to introduce foreign investors to Rwandan businesses through investment conferences and trade shows. Because of these challenges, aside from hosting foreign investors and international conferences, RIEPA has not had quantifiable successes in promoting trade. COMMENT -------------- ¶16. Rwanda's private sector is particularly weak because of the country's history, its predominantly agrarian economy, and the dominance of micro and small-scale enterprises (MSSEs). Yet, this group of firms is the foremost source of tax revenues. The success of Rwanda's private sector will ultimately determine the level of prosperity for the average citizen. The very existence of the RPSF and RIEPA is evidence of the GOR's commitment to creating an attractive business environment. While some critics may complain that the RPSF leadership is comprised of former ministers, its close ties to the GOR have provided the RPSF with access to the appropriate decision-makers. It provides a good lobbying tool for business leaders to press their concerns, promoting transparency and debate in policy formulation, but has not yet been able to produce tangible benefits for individual businesses. To succeed in the long-term, the RPSF will need to streamline its bureaucracy, address its resource constraints, and translate its priorities into specific action to benefit its member associations. ARIETTI