FOREIGN PRIVATE CAPITAL IN RWANDA Year 2015 1 CHAPTER ONE INTRODUCTION 1.0 Introduction F oreign Private Capital (FPC) refers to inward investments in terms of equity or/and non-equity (debts) from nonresidents into Rwanda and outward investments of Rwandan residents to the rest of the world. It is composed of foreign direct investment which is the most important component, portfolio investment and other investments. This chapter presents an overview of the global performance of the Foreign Direct Investments (FDI) flows in 2015 with a focus on Africa. FDI attracts more attention, as compared to other foreign investments namely portifolio and other investments, FDI are less volatile with long term investment horizon attracted by high economic growth rates and strong macroeconomic fundamentals while Portfolio investment tend to be attracted by relatively high short term returns and stock exchange market developments. In 2015, Africa FDI declined by 7 percent from US$ 58 billion in 2014 to US$ 54 billion in 2015 as a result in the slowdown in the global economy. FDI inflows to Africa could return to a positive growth trajectory in 2016 with expected average increase of 6 percent to the range of $55–60 billion. The biggest rise in prospective investments are in North African economies such as Egypt and Morocco, but a more optimistic scenario also prevails more widely, for example in Mozambique, Ethiopia, Rwanda and the United Republic of Tanzania (WIR, 2016). 1.1 Global Foreign Direct Investment trends Foreign Direct Investment is at the center of foreign private investment analysis as one of the major components in foreign investments and its benefits to economies. In his publication, Charles W. L. Hill (2015), asserts that foreign direct investment can make a positive contribution to a host economy by supplying capital, technology, and management resources that would otherwise not be available and thus boost that country’s economic growth. Other components of private foreign investments are considered short term and volitile and therefore less analysed on global level. The According to WIR (2016), globally, FDI flows in 2015 rose by 38 percent to US$ 1.76 trillion from US$ 1.28 million in 2014, their highest level since the global economic and financial crisis of 2008-2009. A surge in cross-border mergers and acquisitions to US$ 721 billion, from US$ 432 billion in 2014, was the principal factor behind the global rebound.
FOREIGN PRIVATE CAPITAL IN RWANDA Year 2015 2 The growth in FDI flows was attributed to inward FDI flows to developed economies which almost doubled to US$ 962 billion from US$ 523 in 2014 and the developing economies saw their FDI inflows reach a new high of US$ 765 billion, 9 percent higher than in 2014. The global FDI flows forecasts are expected to decline by 10-15 percent in 2016, reflecting the fragility of the global economy, persistent weakness of aggregate demand, sluggish growth in some commodity exporting countries, effective policy measures to curb tax evasion and slump in MNE profits. Figure 1: Global Foreign Direct Investments trends in 2015 Source: World Investment Report, 2016 1.2 Regional investment trends In Africa and on the global level, FDI is the main component of Foreign Private Investment and is the most reported and analyzed component of FPC. In this section, we discuss the FDI trend in Africa according to the UNCTAD World Investment (2016) and regional private sector investment reports. The FDI flows to Africa fell to US$54 billion in 2015 from US$ 58 billion in 2014, a decrease of 7 percent, East Africa received $7.8 billion in FDI in 2015, a 2 percent decrease compared to 2014 due to the slowdown in the global economy, but the outlook for growth is positive as some Asian countries are finding interest in Africa, for instance the textile and garments firms from Bangladesh, China and
FOREIGN PRIVATE CAPITAL IN RWANDA Year 2015 3 Turkey are establishing in Africa seeking alternative production bases for export to the European Union (EU) and North America invested $2.2 billion in Ethiopia last year, especially because of its privileged exports under the African Growth and Opportunity Act (AGOA) and economic partnership agreements (EPAs). Shaoxing Mina Textile (China), for example, announced the establishment of a textile and garment factory there to supply African and international markets. In the Eastern Africa, Kenya is becoming a favored business hub, not only for oil and gas exploration but also for manufacturing exports, as well as consumer goods and services. FDI flows to Kenya reached a record level of $1.4 billion in 2015, resulting from renewed investor interest and confidence in the country’s business climate and booming domestic consumer market. In contrast to Kenya, in other Eastern Africa countries, the decrease in FDI flows was observed. In Uganda, FDI inflow declined by 17.0 percent to US$ 1.0 Billion in 2015 from US$ 1.2 Billion in 2014. The bulk of FDI inflows into Uganda in the recent years have been oil related. According to WIR (2016), FDI flows to the United Republic of Tanzania also decreased by 25 percent to $1.5 billion from US$ 1.88 billion in 2014. In an effort to attract more foreign investors, both the United Republic of Tanzania and Kenya now allow 100 percent foreign ownership of companies listed on their stock exchanges. (WIR, 2016). Figure 2: Foreign Private Direct Investment, by region, 2013-2015 (Billions of US$) Source: World Investment Report, 2016 1.3 Monitoring foreign investment in Rwanda Globally, countries around the world have committed to collect information on foreign private flows following international standards on data collection methodology and share their information with World Bank and UNCTAD for comparability and communication. Rwanda has also committed to annually
FOREIGN PRIVATE CAPITAL IN RWANDA Year 2015 4 conduct this exercise and share the results. With the objective of complementing internal resources, Rwanda has actively attracted FDI by creating and sustaining a sound and conducive investment climate through important reforms which has made easier for businesses to get started, get loans, pay taxes, etc. A whole package for investment promotion in general can be found within Rwanda Development Board. The package for investment promotion includes among others: regulatory framework, registration facilities and requirements, change of registered businesses, closing of businesses, disclosure requirements, and other facilities such as working permit, government’s protection of investments, settlement of disputes, transfer of funds, special economic zone facilitations, public private partnership (PPP) where RDB is chief negotiator between public and private sector. Rwanda enacted a new investment code which includes additional tax incentives, principles of national treatment, free transfer of funds and protection in case of expropriation. According to the World Investment Report in 2016, Rwanda improved its world ranking to 56th position in the world in doing business, up from 62th last year. In Africa, Rwanda ranks 2nd from 3rd last year and remains number one in the East African Community. 1.4 Doing Business in Rwanda Moving up six places from 62nd to 56th position means that Rwanda has become even more competitive and that the business and investment environment of the country is improving. Rwanda, which ranks second in Africa in Doing Business 2017, is an example of an economy that used Doing Business as a guide to improve its business environment. From Doing Business 2005 to Doing Business 2017 Rwanda implemented a total of 47 reforms across all indicators. Rwanda is one of only 10 economies that have implemented reforms in all of the Doing Business indicators and every year since Doing Business 2006. These reforms are in line with Rwanda’s Vision 2020 development strategy, which aims to transform Rwanda from a low-income economy to a lower-middle-income economy by raising income per capita from $290 to $1,240 by 2020. Rwanda now has a fully functioning electronic portal that combines company registration, information on tax obligations and duties and value added tax registration, saving entrepreneurs an average of two days and eliminating too much interactions with government officials. Of the 190 economies included in Doing Business, Rwanda made the largest improvement on the registering property indicators in 2015/16. The Rwanda Natural Resources Authority introduced a fast track procedure for commercial property transfers, and improved the transparency of the land registry by
FOREIGN PRIVATE CAPITAL IN RWANDA Year 2015 5 establishing a land administration services complaints mechanism and by publishing statistics on property transfers. Figure 3: Rwanda and comparator economies rank on the ease of doing business Source: World Bank doing business report 2017 1.5 Summary of some recent reforms done in Rwanda A number of reforms are being done in a bid to improve the doing business in Rwanda. The following are the recent reforms registered in Rwanda which continue to place the country on a competitive edge. Reform Description Starting a business Rwanda made starting a business easier by improving the online registration one-stop center and streamlining post-registration procedures.
FOREIGN PRIVATE CAPITAL IN RWANDA Year 2015 6 Dealing with construction permits Rwanda made dealing with construction permits more cumbersome and expensive by introducing new requirements to obtain a building permit. At the same time, Rwanda also strengthened quality control by establishing required qualifications for architects and engineers. Registering property Rwanda made it easier to register property by introducing effective time limits and increasing the transparency of the land administration system. Paying taxes Rwanda streamlined paying taxes by introducing a requirement that companies file and pay social security contributions monthly instead of quarterly. Trading across borders Rwanda made trading across borders easier by removing the mandatory pre-shipment inspection for imported products. Enforcing contracts Rwanda made enforcing contracts easier by introducing an electronic case management system for judges and lawyers. Source: Rwanda Development Board, 2016
FOREIGN PRIVATE CAPITAL IN RWANDA Year 2015 7 CHAPTER TWO METHODOLOGY AND GENERAL FINDINGS 2.0 Introduction This chapter discusses the methodology that was used in conducting the Foreign Private Capital census 2016 which collected information for the year 2015. It covers the activities undertaken during the census as well as the organization of the census, data processing, data quality and adherence to the international standards. 2.1 Organization of the Census 2.1.1 Institutional Framework In conducting foreign private capital censuses, four institutions are involved namely; the National Bank of Rwanda, National Institute of Statistics of Rwanda, Rwanda Development Board and the Private Sector Federation. 2.1.2 Scope The census involved collection of data for the year 2015 from companies with foreign investments in Rwanda covering industrial activities as defined by the UN International Standard for Industrial Classification (ISIC 4). It covered companies located in both Kigali and out of Kigali. 2.1.3 Compilation of Investors’ Register Prior to the fieldwork, the investors’ register was updated to cover all the foreign private investments. The register provides a comprehensive list of companies with foreign private investments. It contains company investments pledges, main activities, value and status of investment. Information about companies that were either rehabilitated, expanded, relocated, merged or had their business names changed was updated. The census frame of 232 companies was established with the objective of covering all enterprises in Rwanda with foreign direct investment, portfolio investments and foreign borrowing in 2015. During the field work, 209 companies were interviewed. 23 companies could not be located as they had relocated, closed, put under receivership, changed their names or have not started operation by the census period. After compilation of enterprise register, all the companies in the register were considered in the census.
FOREIGN PRIVATE CAPITAL IN RWANDA Year 2015 8 2.1.4 Questionnaire The questionnaire for the FPC census 2016 was designed in conformity with International Monetary Fund’s (IMF) sixth edition of balance of payments and international investment position manual. It was designed to capture information on company particulars, industrial classification, equity, non-equity and income on investments. 2.2. Field work and Data quality 2.2.1 Training of technical team In partnership with Macro-economic and Financial Management Institute of Eastern and Southern Africa, a training was conducted prior to the commencement of the survey with the aim of reviewing the questionnaire; researcher’s manual and survey logistics. 2.2.2 Fieldwork In order to have a smooth monitoring and evaluation of census activities, the fieldwork was implemented in two phases. The first phase involved distribution and collection of questionnaires in Kigali city where most of the companies have their headquarters while phase two covered the distribution and collection of questionnaires in other provinces. In Kigali city, questionnaires were distributed to companies and given two weeks to complete them. After that period, the technical team staff assisted most of the companies in filling the questionnaires. Before the questionnaire collection, the technical staff would discuss with each respondent to clarify on any issue not clear to the respondents and thereafter collect the completed form. The collected information was verified against financial statements to ensure that the collected data are reliable before data entry and processing. 2.2.3 Response Rate A total of 209 questionnaires were administered to enterprises during the field activities and 191 companies responded, equivalent to 91.4 percent response rate. The distribution and response rate by sector of investments are shown in Table 2.1.