Rwanda’s industrial policy seeks to diversify economy, increase exports and the sector contribution to total GDP, as well as spur manufacturing across the country under the Community Processing Centres (CPCs) initiative, among others. However, this push is being held back by numerous challenges, including lack of access to affordable and reliable electricity, taxes on some raw materials and lack of skilled personnel, according to a new study.

The study by Enabling Environments Development, a Mauritius-based consultancy firm, calls for increased access to affordable and reliable electricity by industrial players, review some of the tax laws and creation of a pool of skilled personnel to drive growth of the country’s manufacturing and export sectors.

The survey conducted between December 2016 and February 2017 cited high electricity tariffs and supply woes as one of the biggest bottlenecks affecting industrial sector players in the country. It also identified high cost of transport, as well as taxes on some raw materials as some of the major challenges faced by Rwandan manufacturers, which it said were making the sector less competitive compared to their counterparts in the East African Community (EAC) region.

According to the report, most of the respondents in the study (25 per cent) said high electricity tariffs were a big barrier to the sector’s growth, while 21 per cent said taxes on some products like sugar used as raw materials by manufacturers affect their competitiveness. Other challenges identified by respondents include high cost of transport (18 per cent), taxes (14 per cent) as well as unfavourable regulations (11 per cent), and shortage of skilled labour 7 per cent.

Local industrialists have in the past complained of irregular power supply and unscheduled load shedding, which they say damages their machinery and increases cost of operations. To address the problem, last year the Ministry of Infrastructure and electricity bodies, Energy Utility Corporation Limited (EUCL) and Rwanda Energy Group (REG), said they were going to reduce power tariffs by more than half "to make the sector more competitive”

The power charges were slashed by government from Rwf120 per KW/hour to Rwf90 KW per hour.

In addition manufacturers requested for nine of hours of uninterrupted electricity supply daily, up from the present six hours. The sector players are also always advised to operate at night when there is less demand on electricity to avoid some of these challenges.

Angelo Musinguzi, the KPMG tax manager and one of the experts that conducted the research, said the objective of the study was to ‘cost benchmark Rwanda manufacturers against other EAC sector’.

He added that, according to the findings of the survey, Rwandan manufacturers were spending most of their profits paying electricity bills compared to their counterparts in the EAC bloc.

"Most of the industrial players (25 per cent) identified electricity as the biggest barrier affecting the sector,” he said.

This is against the backdrop of numerous government interventions to bolster manufacturing despite challenges, including electricity fees and supply interruptions. Musinguzi said the challenges identified by the study have affected the profitability of industrial sector and, thus exports and the country’s economic growth.

Claudine Mukeshimana, the Rwanda Association of Manufacturers executive director, said they have been receiving complaints from members about high costs of electricity despite government efforts to reduce power tariffs. She added that many industrialists have informed the association that the revised tariff has not been implemented.

For instance, UTEXRWA, Rwanda’s sole textile maker, the situation (power challenges) is still bad. According to Celestine Sebuhinja, the firm’s operations manager, the firm’s electricity bills have doubled despite government’s move to reduce the cost of power for industrial users.

Rwanda currently has an installed power generation capacity of 208MW. The country hopes to increase this to 563MW by 2018 to improve access to electricity, especially in the rural areas.

Over the last seven years, more efforts in the energy sector have been directed towards diversified and balanced power production and supply to meet the national targets. As a result, electricity generation capacity has increased almost three-fold from 76MW in 2010 to 208MW in January 2017. This has enabled a rapid increase in electricity access whereby grid connections through the Electricity Access Rollout Programme (EARP) increased three times from 2010 to 2016.

Accordingly, the national electricity access rates rose from 10.8 per cent in 2010 to the current 28 per cent on grid and 3 per cent off-grid.

Meanwhile, Musunguzi called for a review of the EAC Common External Tariff regime to facilitate industrialisation and, "this can be done by considering duty remission on all products used as inputs by manufacturers”.

Margaret Chemengich, the lead research officer at consultancy firm, Enabling Environments Development of Mauritius, said despite initiatives to make the manufacturing sector more competitive, there were still other key challenges, like marketing and packaging that are making it difficult for sector players to expand their market share across the region.

"Rwanda has quality products, but still faces other issues, including low personnel capacity. Local manufacturers are, for example, also not conversant with the product cost structures of their regional competitors, making it difficult to market their goods,” she added.

She said there is need to conduct an analysis of cost differentials in the EAC to inform policy-makers on areas where Rwanda has a competitive advantage or disadvantage in order to assist in developing suitable policy interventions.

"Rwanda, being a landlocked country, it is important to have a cost advantage on other cost structures other than location in order to attract investment and have a fair share in the EAC market trade.”

Recommendations

Angela Katama, another expert involved with the survey, called for interventions to improve the supply chain, saying this could help the sector "bounce back and increase its contribution to the national GDP”. She added that sustained reviews on the country’s investment code to support young industries will help keep up the momentum in industrialising Rwanda. "Government must equally provide quality seeds to sustain quality inputs at competitive prices to the manufacturers in agro-processing,” she said.

Fiscal policy regulations

The research suggested a series of tax exemptions, including renegotiation of levy for goods within the three band tariff system, exemptions on import duty and VAT on packaging materials for industrial imports and the removal of withholding tax of 5 per cent on industrial inputs.

"Excise duty on locally-manufactured beverages is still high. So, the authorities should consider reducing excise duty rates on locally-made goods to a lower level, for instance, charging a flat rate of, say 10 per cent on lemonades and all juices,” Musinguzi said.

Quality and energy cost

Government should also exempt investors in electricity from corporate income taxes, regardless of the amount invested in the country for both solar and hydro power developers. Musinguzi said though the investment code provides incentives to energy investors, the thresholds are "set in terms of invested money that is still high, making the code redundant to a larger extent”. 

Made-in-Rwanda

Meanwhile, the experts said Made-in-Rwanda campaign is key to supporting manufacturers and industrial growth.

"Therefore, it should be strengthened to increase exports to the regional market, where they are still low.”