Reform and Regional Integration of Professional Services in East Africa

Time for Action

Dissemination Workshop

October 7, 2010Brussels

Motivation

• Weaknesses in service sectors hinder economic growth and development in East Africa

• In parallel with reforms of backbone service sectors, governments are beginning to prioritize reform in professional service sectors

• Adoption of EAC Common Market Protocol in November 2009 initiated process of regional integration in professional services

Purpose of the study and the dissemination workshops

• Remedy large gaps in information on policies and regulatory regimes, and market conditions for provision of professional services (accounting, engineering and legal services) in East Africa

• Bring together regulators, professional associations, business representatives, negotiators, international organizations and other stakeholders to facilitate steps towards reform and regional integration in East Africa

• What role for Europe to support the reform process and regional integration in East Africa? – EPAs, regulatory cooperation, technical assistance, knowledge platforms

Professional services matter

• Professional services play a crucial role for functioning of modern economies• Accounting and legal services can help reduce transaction costs which are a

significant impediment to growth in Africa

• Share of business services in the GDP of East African countries is small (less than 3%) …

• … but sector is very dynamic: business services grew at 8% per year in Kenya, 14% per year in Tanzania and 18% per year in Uganda in 2001-2007

• Business services are key inputs in terms of direct and indirect usage for

other sectors (e.g., garments, leather, paper, metal products, chemicals, minerals, business services, education services, distribution and public administration)

Professional services matter

• Higher labor productivity (sales/employees) is associated with greater usage of professional services in all East African countries, especially for small firms

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

Figure 1.5 Productivity of Users vs. Productivity of Non-Users of professional services in East Africa

Heterogeneity in level of development of professional services within EAC

• Availability of professionals varies across countries and sectors

91

48

14

8

3

2

1

0.9

0 20 40 60 80 100

Mauritius

South Africa

Kenya

Tanzania

Malawi

Uganda

Zambia

Rwanda

Panel A: Number of Accountants per 100,000 inhabitants

46

39

19

12

6

5

4

2

2

2

0 20 40 60 80 100

Mauritius

South Africa

Kenya

Botswana

Zambia

Rwanda

Uganda

Mozambique

Tanzania

Malawi

Panel B: Number of Lawyers per 100,000 inhabitants

Market structure of professional services sectors

• Elements of both oligopoly and competition are present

• Accounting/auditing: Big Four (KPMG, Ernst & Young, PWC, Deloitte) dominate markets in EAC but in Kenya mid-sized local firms are gaining market share after being sub-contractors to Big Four

• Engineering: small domestic providers dominate and some limited foreign presence

• Legal: small domestic providers dominate and complete absence of foreign law firms

Skills shortages, skills mismatches and underdevelopment of professional services

• Skills shortages • Most severe shortages of engineering and accounting professionals• Shortages of middle-level professionals (such as technicians or

paralegals) and shortages of experienced professionals

• Skills mismatches• Jobless professionals despite scarcity

• Underdevelopment of professional services markets• Professional services are less efficient, more costly and less widely

available than in many other comparable countries (for example, poor quality of auditing and reporting systems, poor enforcement of property rights)

Diagnostics and Challenges

Diagnostics Challenges What explains

· skills shortages and skills mismatches · underdevelopment of professional

services that are observable in East Africa despite many positive developments in recent years?

· Education issues· Domestic regulation · Trade restrictions · Labor mobility barriers

Challenges in education: High costs of professional education

• Covering cost of professional education in East Africa is a challenge• Median costs are unaffordable for most due to liquidity constraints/ absence of loans even if internal rates of return and skill premia are

high Profession Years Total Costs (USD)Uganda

Lawyer (low/high avg.) 5 16,505Accountant (low/high avg.) 6 20,506Engineer (low/high avg.) 4 14,705

TanzaniaLawyer 6 13,438Accountant (low/high avg.) 6 24,161Engineer 10 10,779

RwandaLawyer 10 27,992Accountant 8 12,786Engineer (low/high avg.) 6 17,514

KenyaLawyer (low/high avg.) 6 14,096Accountant (low/high avg.) 5 11,918Engineer (low/high avg.) 4 11,793

Policy Action at National Level: Education-related reforms

• Develop and manage students’ loan programs to address financial constraints preventing individuals from acquiring professional education

• Improve the quality and the capacity of secondary schools especially in maths and science and improve the quality of technical studies

• Encourage improvements of existing institutions of professional education and emergence of new institutions: horizontal and vertical differentiation

• Encourage collaboration between universities, professional associations, and private sector through internships could help students acquire relevant skills and practical training

• Domestic regulations on entry and operations of professional services firms are heavy and can undermine competition despite social goals

Challenges of domestic regulation

Regulation of engineering services in Tanzania

Entry Regulation

University degree and 3 years

practical training

National qualification examination

Compulsory membership in the professional association not

enforced

Scope of exclusive rights: 9 out of 10

activities

Conduct Regulation

Price regulation: recommended

minimum prices

Advertising is prohibited

No restrictions on business structure

No location restrictions nor quality control

instruments

Restrictions on operations hurt professional services providers

Policy Action at National Level: Domestic regulation

• BETTER REGULATION NOT DEREGULATION• Relax cumulative entry qualitative requirements

• Narrow scope of exclusive tasks in certain professions e.g., by allowing services to be provided by less-regulated middle-level professionals

• Eliminate disproportionate restrictions on operations that affect competition• Abolish fixed prices but improve access to information on services and

providers• Reduce restrictions on business organization by allowing collaboration

among members of same profession• Eliminate advertising prohibition but ensure that advertizing is relevant

and not misleading

Challenges of trade restrictiveness and labor mobility

• Explicit trade barriers, regulatory requirements, and immigration policies restrict trade through movement of professionals (mode 4) while restrictions on establishment and operations of foreign firms impede trade through commercial presence (mode 3)

0102030405060708090

100

Overall Restrictiveness Index Accounting

0102030405060708090

100

Overall Restrictiveness Legal

Explicit barriers to trade in accountancy services in Kenya•Not

permitted since commercial presence required to perform most accounting and auditing activities

Mode 1

•Foreign ownership restrictions: ownership by non-locally licensed professionals not allowed

•Restrictions on activities that can be performed by foreign accounting professionals

Mode 3

•Discretionary limits (labor market tests & econ. needs tests) for foreign-licensed accountants

Mode 4

Policy Action at International Level: Trade restrictiveness

• Ideally trade liberalization should occur on a non-preferential or multilateral basis • Domestic users of professional services would have access

to the world’s best service providers • Domestic professionals would benefit from exposure to

those world’s best service providers• Minimize restrictions on forms of establishment for foreign

providers (mode 3)• Instead of prohibiting incorporation, introduce ‘safeguards’

on corporate forms to ensure that foreign professionals are made accountable for their service

Policy Action at International Level: Trade restrictiveness and labor mobility

• Reduce restrictions on movement of professionals (mode 4)• Replace nationality and residency requirements by less

discriminatory measures: e.g. requiring foreign service providers to undergo professional assessment to ensure professional competence or using liability insurance

• Develop transparent criteria/procedures for applying economic needs tests

• Eliminate visa restrictions and other immigration related barriers

Role of Regional Integration and Cooperation

Policy actions at international level – how should East Africancountries proceed at the regional level? • Regional markets for professional services and professional

education in East Africa are fragmented by restrictive trade policies and regulatory heterogeneity that prevents EAC countries from exploiting gains from trade based on comparative advantage and economies of scale, and gains from enhanced competition and from higher investment

• Reciprocal liberalization at regional level may be technically more feasible and politically more acceptable when impediments arise from differences in regulatory requirements

Policy Actions at Regional Level

• Eliminate trade barriers

• Address immigration policies

• Eliminate fragmentation of regional market for education

• Implement Mutual Recognition Agreements around appropriate standards

In conclusion

• Economic benefits from regional integration of professional services sectors are evident

• EAC countries have committed on paper to services liberalization and deeper regional integration in services sectors in context of EAC Common Market Negotiations

• Burundi, Kenya, Rwanda, Tanzania, and Uganda have scheduled commitments in accounting and engineering services, have adopted annexes on removing restrictions on free movement of workers and on right of establishment, and on MRA of academic and professional qualifications

• What role for Europe to support the reform process and regional integration in East Africa? – EPAs, regulatory cooperation, technical assistance, knowledge platforms

Thank you!Nora Dihel

Africa Region - Poverty Reduction and Economic Management Unitndihel@worldbank.org

Ana M. FernandesDevelopment Economics Group – Trade and International Integration Unit

afernandes@worldbank.orgAaditya Mattoo

Development Economics Group – Trade and International Integration Unit amattoo@worldbank.org