1 Private Sector Federation National Institute of of Rwanda National Bank of Rwanda Foreign Private Investment and Investor’s Perceptions Report-2010
i Foreword FOREWORD The Rwanda Working Group on foreign private capital flows (the National Bank of Rwanda, Rwanda Development Board and National Institute of Statistics) presents the report on first round FPC survey results for the calendar years 2008 and 2009. This is the first survey in Rwanda aimed at capturing information on Foreign Private Capital for the period of 2008-2009. All companies registered as foreign direct investments by Rwanda Development Board were included in the survey, and this was combined with a purposive sample of large, medium and small taxpayers captured in the RRA database. A total of 152 companies were given questionnaires. This report contains investor’s perceptions on investment climate, employment statistics and data on private sector foreign borrowings and equity. The information captured in the report was provided by senior management of companies surveyed, including Managing Directors, Chief Executive Officers and Finance Managers. In addition to completing the questionnaires, companies provided financial statements which assisted in data validation. The FPC survey shall be a continuous activity as it is important for the Government of Rwanda in its efforts to attract foreign investments in the country. Furthermore, the findings shall contribute to formulation of appropriate foreign private capital policies and will be used to improve Rwanda’s Balance of Payments and International Investment Position statistics. We take this opportunity to thank all partner institutions involved in conducting this survey and the FPC working group for their commitment to make this survey a success. We also extend our thanks to Macroeconomic and Financial Management Institute for Eastern and Southern Africa (MEFMI) for technical assistance through training on FPC concepts, analysis and the software for data processing. Amb. GATETE Claver Governor, National Bank of Rwanda
ii Foreign Private Investment and Investor’s Perceptions Report-2010 LIST OF ACRONYMS BNR:
National Bank of Rwanda BOP:
Balance of Payments BOU:
Bank of Uganda BV:
Book Value CSR:
Corporate Social Responsibility CSR:
Social Security Fund FAL:
Foreign Assets and Liabilities FALIPS: Foreign Assets and Liabilities & Investor
Perception FDEI:
Foreign Direct Equity Investment FDI:
Foreign Direct Investment FPC:
Foreign Private Capital FPEI:
Foreign Portfolio Equity Investment GDP:
Gross Domestic Product IIP:
International Investment Position IP:
Investor Perceptions ISIC:
International Standards of Industrial
Classification MEFMI: Macro Economic and Financial Management
Institute MOU:
Memorandum Of Understanding NISR:
National Institute of Statistics of Rwanda PCMS: Private Capital Monitoring System PSED:
Private Sector External Debt PSF:
Private Sector Federation PSI:
Private Sector Investment PSIS:
Private Sector Investment Survey RBS:
Rwanda Bureau of Standards RDB:
Rwanda Development Board RECO:
Rwanda Electricity Corporation REMA: Rwanda Environment and Management
Authority RIEPA: Rwanda Investment and Export
Promotion Agency RRA:
Rwanda Revenue Authority RURA: Rwanda Utilities Regulatory Agency RWASCO: Rwanda Water and Sanitation
Corporation RWF:
Rwandan Franc RWG:
Rwanda Working Group (on Private
Capital Monitoring)
iii TABLE OF CONTENTS FOREWORD
i LIST OF ACRONYMS
ii TABLE OF CONTENTS
iii LIST OF TABLES
v LIST OF FIGURES
vi ACKNOWLEDGEMENTS
vii EXECUTIVE SUMMARY
viii CHAPTER I. INTRODUCTION
1 1.1. Background of foreign private capital in
Rwanda
1 1.2. Ease of Doing Business in Rwanda 3 1.3. Objective of the survey
4 1.4. Scope of the survey
5 1.5. Global and Regional Perspective
5 1.6. Global Trends in Foreign Direct Investment
(FDI)
6 1.7. Macro-economic development of Rwanda 8 CHAPTER II. METHODOLOGY
13 2.1. Sensitization
13 2.2. Enterprise register
13 2.3. Survey
13 2.4. Tools
14 2.4.1. Questionnaires
14 2.5. Training and field work activities
14 2.5.1. Technical assistance
14 2.5.2. Questionnaire Administration
15 2.6. Data processing
15 2.7. Up-rating Methodology
15 2.8. Challenges
17 2.8.1 Responsiveness
17 CHAPTER III. QUANTITATIVE FINDINGS
17 3.1. Analysis of findings on private foreign
assets and liabilities
17 3.1.1. Foreign Direct Investment
18 3.1.2. Foreign Portfolio Investment
18 3.1.3. Other investments
18 3.1.4. Foreign liabilities by sectors
19 3.1.5. Foreign private investment stock by
regional grouping
22 3.1.6. Return on equity by sector 2008 and 2009 23 3.1.8. Private Sector External Debt (PSED) 24 3.2. Findings on private non-foreign assets
and liabilities
26 3.2.1. Entity turnover
26 3.2.2. Employment
26 3.2.3. Compensations of employees
27 3.2.4. Actual investment
28 3.2.5. Corporate social responsibility
29 Table of Contents
iv Foreign Private Investment and Investor’s Perceptions Report-2010 CHAPTER IV. FINDINGS ON INVESTORS’ PERCEPTIONS
30 4.1. Effect of Economic and Financial factors
to business
30 4.2. Efficiency of support services
31 4.3. Cost of support services
32 4.4. Effect of labor, environment and health
factors on business operations
32 4.5 Effects of financial crisis on business
operations
32 4.6 Efficiency of regulatory and other
government agencies on business entities 34 4.7 The future direction of investments 34 4.8 Useful Sources of information
35 CHAPTER V. CONCLUSION AND RECOMMENDATIONS 36 5.1. Conclusion
36 5.3. Government policy response
38
v LIST OF TABLES Table 1: Questionnaire Administration 12 Table 2: Sectoral Uprating Factors 13 Table 3: Inflows by origin in 2008 & 2009 in
RFW million
19 Table 4: Countries of origin by Stock in
2008 & 2009 in RWF million 20 Table 5: Top profitable sectors
22 Table 6: Private Sector External Debt flows
(Rwf million)
23 Table 7: Private Sector External Debt stocks
(RWF millions)
24 Table 8: Foreign Assets stock (RWF million) 25 Table 9: Distribution of employment in
2008 and 2009
26 Table 10: Total compensation of employees
for 2008-2009 in RWF million 28 Table 11: Type of investment in FAL private
enterprises 2008-2009 in
RWF million
29 Table 12: Private corporate social
responsibility for 2008-2009 in
RWF million
30 Table 13: Government policy response 41 List of Tables
vi Foreign Private Investment and Investor’s Perceptions Report-2010 LIST OF FIGURES Figure 1: Recent global trend in foreign
direct investment, 2001-2009 1 Figure 2: Top Ten Countries in Doing Business
in Sub-Saharan Africa
3 Figure 3: Rwanda’s Doing Business
Performance by Category
2010 and 2011
4 Figure 4: Selected macroeconomic
performance indicators
2005-2010
8 Figure 5: Total stocks end 2008 & 2009 15 Figure 6: Total flows during 2008 & 2009 16 Figure 7: Flows and stocks by sectors
in 2008 (RWF millions)
18 Figure 8: Flows and stocks by sectors
in 2009 (RWF million)
18 Figure 9: Foreign Private Investment Stock
by Regional Grouping,
2008 and 2009
21 Figure 10: Stocks of loans by sector in
2008 and 2009
24 Figure 11: Distribution of employment by
sector 2008-2009
27 Figure 12: Effect of Economic and Financial
factors to business
31 Figure 13: Efficiency of support services 32 Figure 14: Cost of support services
33 Figure 15: Effect of labor, environment and
health factors on business
operations
34 Figure 16: Effects of financial crisis
on business operations
35 Figure 17: Efficiency of regulatory and other
government agencies on business
entities
36 Figure 18: Future direction of investments 37 Figure 19: Useful Sources of information 38
vii Acknowledgements ACKNOWLEDGEMENTS On behalf of stakeholder institutions, BNR expresses deep appreciations to the dedicated staff of Rwanda FPC technical team for successfully carrying out the survey and producing this report. Their contribution was immeasurable and is duly recognized. BNR also wishes to record gratitude to the Government of Rwanda through the FPC leading institutions namely RDB, NISR, PSF and BNR for providing funds for the survey. Sincere appreciation goes to Macroeconomic and Financial Management Institute of Eastern and Southern Africa (MEFMI) for the technical assistance granted to Government of Rwanda from the launch of the of this project. Their assistance includes demand assessment on FPC monitoring, training of technical team and providing software for data entry and analysis. We extend great thanks to Mr. Keneth Egesa (BOU) for training of the technical team and useful insights on questionnaire design and Mr. Evarist Mgangaluma (MEFMI) as well as Mr. Wilson Phili Wilson (Bank of Zambia) for comments and editing the report. Particularly appreciation goes to Dr. Modestus Kipilimba and Mr. Dennis Mollel for IT technical support during the MEFMI missions on the data entry and analysis. Most importantly, special thanks are extended to the companies who participated by responding to the questionnaires and providing complementary information such financial statements. Without their input, the government would not have been able to make an assessment of the magnitude of FPC and their perceptions regarding the domestic investment climate. Our hope is that, on the basis of the same understanding, we will continue to cooperate in next surveys. We urge the companies which did not respond to our questionnaire to participate during the second round survey which is planned to take place during the second half of 2011.
viii Foreign Private Investment and Investor’s Perceptions Report-2010 EXECUTIVE SUMMARY This report presents the findings from FPC survey conducted during the second half of 2010 on 152 companies with foreign assets and liabilities. In addition, the report proposes policy recommendations to improve FPC performance.
The survey was jointly conducted by National Bank of Rwanda (BNR), National Institute of Statistics of Rwanda (NISR), Rwanda Development Board (RDB) and Private Sector Federation (PSF). The objectives of this survey include setting up the Private Capital Flows (PCF) database in conformity with international codes and standards, and determining the magnitude and trends of FPC for the period 2008-2009. Response Rates and Survey Findings: Questionnaires were distributed to 152 entities of which, 128 responded representing a response rate of 84.2 percent. The survey findings indicated that in 2009 Rwanda attracted total stock of foreign investment to the tune of RWF 223,240.1 million (USD 390.9 million) having increased from RWF165,023.1 million (USD 295.3 million) in 2008. Resilience in Foreign Private Capital Flows despite the Global Financial Crisis was partly attributed to diverse sources of investment. Apart from EU (the most affected region by the crisis), Rwanda received over 60.0 percent of FPC stock from COMESA (18.3 percent), SADC (16.4 percent), EAC (11.0 percent), Asia (13.4 percent) and other less affected non OECD countries (13.0 percent). On country basis, the largest stock of investment came from South Africa (16.1 percent), China (11.4 percent) and Libya (10.5 percent). In EAC region Kenya accounted for the largest share. As at end 2009, the largest proportion of foreign private liabilities/investment was in form of Foreign Direct Investment (FDI) accounting for 61.4 percent. The remaining components were in form of other investment and portfolio investment accounted for 36.2 percent and 2.3 percent, respectively. Sectors with the highest shares of foreign liabilities were Information and Communication (36.2 percent) and finance and insurance (35.0 percent). Whole sale and retail trade accounted for 6.5 percent while Agriculture accounted 4.0 percent of total liabilities The gross flows of foreign direct investment during 2009 stood at RWF 79,838.4 million (USD 140, 5 million) compared to RWF 79,828.7 million (USD 146.0 million), mainly driven by equity and non-equity liabilities. Sectors which attracted highest flows were information and communication, Agriculture, forestry and fishing and finance and insurance sectors. The difference between two ends period stocks which is not explained by the flows of the year is due to other changes mainly valuation of equity and non-equity stocks.
ix Acknowledgements
The stock of Private Sector External Debt (PSED) as at end 2009
stood at RWF 131,968.9 million (USD 231.0 million), having
increased from RWF 58,895.4 million (USD 105.4 million)
in 2008, mainly driven by long term concessional loans from
related companies.
Return on equity (ROE) for 2009 was 30.5 percent up from 28.0
percent in 2008. Information and communication, and financial
and insurance services sectors registered the highest return
on equity of 55.3 percent and 44.8 percent, respectively. The
survey further revealed that total dividends paid during 2009
amounted to RWF 13,247.0 million (USD 23.2 million) having
declined by 16.0 percent from RWF 15,691.0 million (USD 28.1
million) in 2008. Manufacturing, wholesale and retail trade and
agriculture accounted for 64.8 percent, 13.3 percent and 10.5
percent of total dividend, respectively.
Rwanda’s claims/assets on the rest of the world were low
compared to its liabilities, they increased from RWF 12,136.7
million (USD 21.7 million) in 2008, which increased to RWF
13,680.6 million (USD 24.0 million) at end 2009.
Results from investor perceptions revealed that domestic
and regional business environment were the key factors that
initially led majority of companies to invest in Rwanda and
particular, the stability of the domestic political and economic
environment as well as the anti-corruption measures. It was
further observed that business operations were negatively
affected by informal trade and import competition. Other
factors reported to have adverse impact include regulatory
framework, state intervention levels of inflation, interest
rates and exchange rate, corporate tax, customs and excise
duty, small size of the domestic market, inaccessibility to
international markets, efficiency and high costs of electricity.
Policy Implications and Recommendations:
Investment monitoring: The survey highlighted the need for continuous monitoring of foreign investments to update policy makers with information on foreign assets and liabilities. This calls for funding regular investment surveys that would help in strengthening data quality and policy formulation to attract and retaining investment. Debt sustainability: Government is advised to include private sector debt on its debt sustainability analysis as survey results indicated that loans from unrelated companies on average accounted for 75.0 percent of total outstanding private To convert the RWF Rwandan francs into USD we used the flowing rates: USD 1= RWF 546.8509 and 568.2810 (mean year exchange rate) for flows in 2008 and 2009, respectively. The stocks were converted at USD1= RWF 558.8975 and 571.2375 (31 December exchange rate) for 2008 and 2008, respectively. x Foreign Private Investment and Investor’s Perceptions Report-2010 sector debt. This among others will enable government to appropriately allocate its foreign reserves in line with the composition of the overall external debt. Domestic lending rates: the findings of the FPC 2010 revealed that the magnitude of external borrowing to finance investment increased substantially. This may partially be attributed to inadequate long-term financing and high interest rates on domestic credit facilities which are critical for private sector development. National banks in collaboration with financial institutions are advised to lower the cost of borrowing. In addition, private entities can expand the scope of financing by listing their companies to capital markets to raise equity and debt financing. The government is advised to encourage private sector (e.g. through tax incentives) to list their stocks into the Rwanda Capital Market in order to mobilize financing through issuance of equity shares and tradable debt securities.
Inflation was identified as a major constraint to the private sector growth and development. High inflation erodes the values of financial assets and creates uncertainty about future prices which discourages savings and investments. This inflation is mainly attributable to imports (fuel in particular), hence the government is advised to continue investing on alternative sources of energy. Infrastructure development: The private sector requested the government to do more on development of rural roads and energy infrastructures to lower the cost of doing business. In addition, it also suggested the need for ICT infrastructure to be enhanced in order to increase efficiency and reduce cost of communications. Access to international markets: this has been a concern to investors; the government is advised to ease the cost of air transport, development of cross border roads and railways to facilitate access to external markets. Sectoral diversification: results from the survey showed that investors are not planning to diversify in other sectors. It is therefore critical for government through Rwanda Development Board to market potentialities in other sectors. This needs to go in tandem with infrastructure development. Regional diversification: EU countries accounted for 31.0 percent of total investment, being the largest share when compared to other regions. The government needs to explore possibilities of increasing investments inflows from EAC, COMESA, SADC and Asian countries in order to balance the distribution of investment. 1 Introduction CHAPTER I. INTRODUCTION 1.1. Background of foreign private capital in Rwanda Foreign direct investments have been identified as an important source of financing for developing countries. The International Monetary Fund defines the FDI as investments brought in a country by non-resident unit being individuals or companies. Generally, foreign direct investment is a long- term undertaking. The investor resident in a country foresees a durable interest in investing in another country. The investor has therefore an opportunity to diversify the risks of his investments and generate more revenues from funds invested abroad. The country of destination of funds benefits a lot from direct investment in terms of reduction in unemployment, increase in financial, equipment and expertise resources. On international level, according to the World Investment Report 2010, global FDI inflows fell from a historic high of $1,979 billion in 2007 to $1,697 billion in 2008, a decline of 14% and fell a further 37 per cent to $1,114 billion in 2009 due to financial and economic crisis, (see figure 1). It began to bottom out in the latter half of 2009. The first half of 2008 developing countries weathered the global financial crisis better than developed countries, as their financial systems were less closely interlinked with the hard-hit banking systems of the United States and Europe. Their economic growth remained robust, supported by rising commodity prices. Their FDI inflows continued to grow, but at a much slower pace than in previous years, posting a 17% growth to $621 billion. By region, FDI inflows increased considerably in Africa (27%) and Figure 1: Recent global trend in foreign direct investment, 2001- 2009 Source: World Investment Report 2010 in Latin America and the Caribbean (13%) in 2008, continuing the upward trend of the preceding years for both regions. The slow pace of down trend in Africa was mainly due to policy measures adopted by a number of African countries to make the business environment in the region more conducive to FDI. In Rwanda, attraction of Foreign Direct Investment has been very active due to high conducive investment climate through radical reforms which make it easier for businesses to get started, get credit, pay taxes, etc. The Rwandan Government is