RWANDAN PRIVATE SECTOR OVERVIEW

UNCLAS KIGALI 000477

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E.O. 12958: N/A
TAGS: ETRD USTR BTIO ECON RW
SUBJECT: RWANDAN PRIVATE SECTOR OVERVIEW


SUMMARY
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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
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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
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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
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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
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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
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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
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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