Ratio Magazine :: The Inside Track to East Africa’s Economies - EAC: Locally Manufactured Vehicles Stuck at Internal EAC Customs Borders

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EAC: Locally Manufactured Vehicles Stuck at Internal EAC Customs Borders

Monday, 25 August 2008

For the past three and a half years, General Motors East Africa have tried to enforce the EAC customs protocol that would enable them to export duty free to Uganda and Tanzania. Even though the regulations are very clear, GM continues to run up against customs officials charging them 25% import duty.

When the EAC customs protocol came into force in January 2005, it removed, with some exemptions, internal tariffs within the EAC and ring-fenced the integrated regional market with the Common External Tariff (CET) under which intermediate goods incur import duties of 15%, and finished goods 25%. No import duties are levied on raw materials. With the inception of the customs union, General Motors (GM) East Africa marketed their vehicles in the neighbouring countries, hoping to increase sales on the back of duty free trade within the EAC – but in August 2008, three and a half years, customs officials still impose a 25% duty when GM ship their vehicles across inner-EAC borders to Tanzania and Uganda.

For Bill Lay, Chief Executive Officer of GM, this is a source of intense frustration: GM vehicles would qualify both under the rules regarding value addition that specify that 35% value must be added within the EAC as well as under the rules of origin that requires substantial transformation. EAC customs regulations are seemingly clear and the authorities in the EAC do, in fact, concur with GM: The revenue authorities and ministries of trade of Tanzania, Uganda and Kenya have recently sent a joint team to GM and concluded that their process qualifies as substantial transformation.

If the customs protocol is clear on the issue, why is it seemingly impossible to enforce it? Tanzania, Lay argues, has traditionally been afraid of Kenya’s industrial power, but the real culprit is vested interests from importers who bring in ‘mitumba’ (second hand) vehicles. Officially, Kenya applies an eight-year age limit to such imports, but this is regularly, and extensively, violated. Port management and customs officials are institutions known for their corruption. Mitumba importers regularly fake documents to import over-aged vehicles and inspection agents are just as regularly paid off. While there is a wide range of mitumba importers, the largest players are, says Lay, powerful enough to lean on authorities and prevent the opening up of the EAC internal market to safeguard their interests.

Outlook
Ever since the inception of the EAC customs union, vested interests have held up the streamlining of the CET and removal of internal customs duties for many other products. The governments’ failure to enforce them has several implications:

Lay argues that the excessive corruption in this market undermines the level playing field, threatens local manufacturing – which not only affects GM East Africa, but also others like Toyota and allows unsafe vehicles onto East Africa’s roads. For GM as well as other manufacturers, the ongoing imposition of customs duties drives up costs in an environment where the industry’s competitiveness is affected by the high costs of doing business due to Kenya’s dilapidated infrastructure and institutional weaknesses. There are repercussions for employment, too: The company currently employs around 500 staff, half of which in their factory, but this overall figure has halved from previously 1,000.

On a regional level, the persisting influence of vested interests over mutually agreed regulations continues to impede regional integration, which affects both domestic companies and foreign investors who are attracted by the bigger regional market. For services companies, this is easier, but clearly remains a challenge for manufacturing companies that need to achieve economies of scale, i.e. cannot set up production operations in each country, and need to physically get their products across the border.

Importantly, it also indicates that the Government of Kenya faces very practical difficulties in realising its ostensible commitment to turning Kenya into a mid-income country by 2030 as outlined in the Vision 2030 national development master plan. While the official strategy emphasises a modernisation of the economy and local value addition, it is not the lack of grand concepts that will undermine such plans, but such concrete obstacles that are typically not discussed. In the case of GM, the government’s failure to support domestic manufacturers by enforcing existing regulations is particularly ironic as GM is actually part-owned by the Kenyan government.

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