69680 Botswana Institute for Development Policy Analysis Gaborone Botswana The World Bank Poverty Reduction and Economic Management 1 Southern Africa Africa Region ISBN: 99912-911-7-2 Prospects for Export Diversification in Botswana Botswana Institute for Development Policy Analysis Gaborone, Botswana The World Bank Poverty Reduction and Economic Management 1 Southern Africa Africa Region ii PROSPECTS FOR EXPORT DIVERSIFICATION IN BOTSWANA © BIDPA and The World Bank 2006 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the written permission of the copyright owners. Design and layout: Impression House, Gaborone, Botswana Printed by: Impression House, Gaborone, Botswana, 2006 ISBN: 99912-911-7-2 The views expressed in this book do not necessarily represent the opinion of BIDPA or The World Bank but that of the authors. Contact details: Botswana Institute for Development Policy Analysis Private Bag BR-29 GABORONE, Botswana Tel: +267 397 1750 Fax: +267 397 1748 Homepage: http://www.bidpa.bw iii CURRENCY EQUIVALENTS Currency Unit = Pula (P.) US$1 = P4.54 (Effective April 27, 2005) FISCAL YEAR July 1 - June 30 Acronyms and abbreviations ACBF African Capacity Building Foundation ACP African, Caribbean and Pacific AGOA African Growth and Opportunities Act ARCS Administrative and Regulatory Cost Survey ASYCUDA Automated System of Customs Data Management ATC Agreement on Textiles and Clothing BDC Botswana Development Corporation BDVC Botswana Diamond Valuing Company BECI Botswana Export Credit Insurance and Guarantee Company Limited BEDIA Botswana Export Development and Investment Authority BIDPA Botswana Institute for Development Policy Analysis BLNS Botswana, Lesotho, Namibia and Swaziland BMC Botswana Meat Commission BNCS Botswana National Conservation Strategy BoB Bank of Botswana BoBCs Bank of Botswana Certificates BOBS Botswana Bureau of Standards BOC Botswana Ostrich Company BOCCIM Botswana Confederation of Commerce, Industry and Manpower BOTA Botswana Training Authority BOTASH Botswana Ash BPC Botswana Power Corporation BPO Business Process Outsourcing BSE Bovine Spongiform Encephalopathy BTA Botswana Telecommunications Authority BTC Botswana Telecommunications Corporation BURS Botswana Unified Revenue Service BWP Botswana Pula CAP Common Agricultural Policy CET Common External Tariff CEDA Citizen Entrepreneurial Development Agency CET Common External Tariff CIF Cost Insurance and Freight CITES Convention on International Trade in Endangered Species iv COMESA Common Market of Eastern and Southern Africa COR Certificate of Rights CSO Central Statistics Office CYTAX “current year tax� DAHP Department of Animal Health and Production DCC Duty Credit Certificate DFID Department for International Development DoT Department of Tourism DTI Direct Trade Input DWNP Department of Wildlife and National Parks EAOB Exporters Association of Botswana EPA Economic Partnership Agreements EPZ Export Processing Zones ERP Effective Rate of Protection ESAMLG Eastern and Southern Africa Anti-Money Laundering Group EU European Union FAP Financial Assistance Policy FDI Foreign Direct Investment FIAS Foreign Investment Advisory Service FMD Food and Mouth Disease FOB Free on Board FPSG Fixed Period State Grant FSC Financial Sector Commission FTA Free Trade Area GATS General Agreement of Trade in Services GATT General Agreement on Trade and Tariffs GCC Gaborone City Council GDFI General Directorate for Foreign Investment GDP Gross Domestic Product GNI Gross National Income GoB Government of Botswana GRCO Gaborone Regional Customs Office HATAB Hotel and Tourism Association of Botswana HHI Hirschmann-Herfindahl Index HIES Household Income and Expenditure Survey HLCC High Level Consultative Council IBCs International Business Corporations ICC International Chamber of Commerce ICD Inland Clearance Depot IDA Industrial Development Act IDZs Industrial Development Zones IFSC International Financial Services Centre IMF International Monetary Fund ISC International Services Centre JITAP Joint Integrated Technical Assistance Programme LDC Less Developed Countries LITS Livestock Identification and Trace Back System LLA Local Licensing Authority v MCI Monetary Conditions Index METRs Marginal Effective Tax Rates MFA Multi-Fibre Agreement MFDP Ministry of Finance and Development Planning MFN Most Favoured Nation MIDP Motor Industry Development Programme MLHA Ministry of Labour and Home Affairs MoA Ministry of Agriculture MoE Ministry of Education MoH Ministry of Health MTI Ministry of Trade and Industry MTR Mid Term Review NCSA National Conservation Strategy Agency NDP National Development Plan NEER Nominal Effective Exchange Rate NEMIC National Employment, Manpower and Incomes Council NILA National Industrial Licensing Authority NISB National Immigrants Selection Board NLA National Licensing Authority NTBs Non Tariff Barriers OECD Organization for Economic Co-operation and Development OIE Office International des Epizooties OMPP Ostrich Management Plan Policy PAYE Pay As You Earn PEEPA Public Enterprise Evaluation and Privatization Agency PPI Producer Price Index PPP Public Private Partnership PSM Per Square Meter RC Registrar of Companies RCA Revealed Comparative Advantage REER Real Effective Exchange Rate RIR Real Interest Rate RISB Regional Immigrants Selection Board RLA Regional Licensing Authority ROE Return on Equity ROW Rest of World RPMD Registrar of Patents, Marks and Designs SACU Southern African Customs Union SACUA Southern African Customs Union Agreement SAD Single Administrative Document SADC Southern African Development Community SARS South African Revenue Service SAT Self Assessment Tax SLAAC State Land Allocation Advisory Committee SMEs Small and Medium Enterprises SPS Sanitary and Phytosanitary Standards SPVs Special Purpose Vehicles TCDA Trade Cooperation and Development Agreement vi TCPB Town and Country Planning Board TEC Tertiary Education Council TILB Tourist Industry Licensing Board TIN Taxpayer Identification Number TRIPS Trade-Related Aspects of Intellectual Property Rights TPRM Trade Policy Review Mechanism TRQ Tariff Quota TSA Tourism Satellite Accounting TSG The Services Group UNCTAD United Nations Conference on Trade and Development UNICITRAL United Nations Commission for International Trade Law USA United States of America USAID United States Agency for International Development VAT Value Added Tax VET Vocational Education and Training VCF Venture Capital Fund VOIP Voice-Over Internet Protocol WIPO World Intellectual Property Organization WTO World Tourism Organization WTO World Trade Organization WUC Water Utilities Corporation vii TABLE OF CONTENTS EXECUTIVE SUMMARY AND ACTION MATRIX................................................................................... I 1. DIVERSIFICATION AND EXPORT GROWTH ................................................................................1 ECONOMIC AND EXPORT CONCENTRATION – SOME INDICATORS ........................................... 1 COSTS AND BENEFITS TO CONCENTRATION .......................................................................... 2 EXPORT PERFORMANCE OVERVIEW ..................................................................................... 6 2. THE ENABLING ENVIRONMENT I: THE NATIONAL POLICY FRAMEWORK ................................13 NATIONAL POLICY DEVELOPMENT – AN OVERVIEW ............................................................ 13 BUSINESS REGULATION AND FOREIGN DIRECT INVESTMENT POLICY .................................... 16 THE INCENTIVES REGIME .................................................................................................. 20 THE EXCHANGE RATE AND EXPORTS .................................................................................. 29 THE LABOR MARKET ......................................................................................................... 36 3. THE ENABLING ENVIRONMENT II: EXPORT AND SECTOR-SPECIFIC POLICIES.........................40 SECTOR POLICIES - CASE STUDIES...................................................................................... 40 IMPORT TARIFF AND EXEMPTION SCHEMES FOR EXPORTERS ............................................... 60 EXPORT PROMOTION AND PRIVATE SECTOR SUPPORT INSTITUTIONS .................................... 62 TRADE FINANCE AND EXPORT CREDIT INSURANCE ............................................................. 64 LICENSING RULES AND STANDARDS ................................................................................... 65 4. TRADE POLICY FOR EXPORT GROWTH...................................................................................69 MAIN TRADE AGREEMENTS ............................................................................................... 69 MARKET ACCESS ISSUES ................................................................................................... 73 DOMESTIC PROTECTION AND THE TERMS OF TRADE ............................................................ 82 5. TRADE FACILITATION AND INFRASTRUCTURE .......................................................................96 CUSTOMS PROCEDURES, MANAGEMENT AND VISA RULES ................................................... 96 SHIPPING AND PORTS ...................................................................................................... 102 LAND TRANSPORTATION ................................................................................................. 105 AIR TRANSPORT .............................................................................................................. 109 THE BUSINESS COSTS OF UTILITIES .................................................................................. 111 viii TABLES TABLE 1-1: ACTION PLAN...........................................................................................................................................................................i Table 1-1: Composition of Exports (US$'000) ...............................................................................................................................................7 Table 1-2: Direction of Exports (as a percentage of total exports) ................................................................................................................8 Table 1-3: Botswana’s Trade with the Region .............................................................................................................................................11 Table 1-4: Botswana’s Revealed Comparative Advantage ..........................................................................................................................11 Table 1-5: Share of Foreign Companies in Manufacturing – 2000..............................................................................................................12 Table 2-1: Summary of Major Incentive Programmes .................................................................................................................................22 Table 2-2: Type of investment incentives in selected countries...................................................................................................................27 Table 2-3: Regional Interest Rates (nominal) ...............................................................................................................................................30 Table 2-4: Unemployment rates by level of training attainment, 2001 .......................................................................................................36 Table 3-1: Tourism in Botswana and South Africa ......................................................................................................................................46 Table 3-2: Motor Vehicle Exports by Type of Vehicle (in pula) .................................................................................................................57 Table 3-3: Firm Survey: Characteristics........................................................................................................................................................58 Table 3-4: Phase down in the rate of customs duty on imported light motor vehicles ...............................................................................59 Table 3-5: Prohibitions/Restrictions on Exportable Products ......................................................................................................................65 Table 3-6: Botswana: Prohibitions/Restrictions on Imported Products.......................................................................................................67 Table 4-1: Principal Trade Agreements Affecting Apparel and Textiles ....................................................................................................73 Table 4-2: NTBs in the SADC Region..........................................................................................................................................................77 Table 4-3: Rules of Origin for Textiles and Apparel....................................................................................................................................78 Table 4-4: Structure of MFN tariffs of SACU, 1997-02 ..............................................................................................................................84 Table 4-5: SADC Non-Tariff Barriers...........................................................................................................................................................86 Table 4-6: Botswana Effective Rates of Protection (percent) ......................................................................................................................90 Table 5-1: Documentation Requirements......................................................................................................................................................98 Table 5-2: Land & Sea Transport Costs August, 2002...............................................................................................................................102 Table 5-3: Shipping Costs- Mauritius to Botswana March, 2002..............................................................................................................102 Table 5-4: Shipping services currently offered by Walvis Bay to Europe and the US .............................................................................104 Table 5-5: Transport cost to ports for landlocked SADC countries – US$ for a 20-foot container .........................................................106 Table 5-6: Botswana Road User Charges....................................................................................................................................................107 Table 5-7: Comparative Cost of Infrastructure Services (US Dollars) ......................................................................................................111 Table 5-8: Regional comparison of Fixed line call charges as on 2004 (US$/minute).............................................................................113 Table 5-9: Comparison of average tariffs (FY2002) ..................................................................................................................................114 Table 5-10: Internal Water Usage and Cost (Botswana Pula, Unit cost)...................................................................................................115 Table 5-11: Comparison of average tariffs (FY2002) ................................................................................................................................115 Table 5-12: Regional Water Cost Comparison ...........................................................................................................................................115 BOXES Box 1-1: Has Botswana caught ‘late-onset’ Dutch Disease? .........................................................................................................................5 Box 2-1: The Land Problem and Exports......................................................................................................................................................19 Box 2-2: Does Botswana’s reliance on diamonds suggest a more ‘activist’ role for government?............................................................21 Box 3-1: Infrastructure at Top Tourist Attractions .......................................................................................................................................49 Box 3-2: Does Botswana Benefit from Vehicles Protection and the MIDP? ..............................................................................................59 Box 3-3: Does Botswana need an Export Processing Zone (EPZ)?.............................................................................................................61 Box 4-1: SACU – Towards a Single Market?....................................................................................................................................71 Box 4-2: Should Government Remove the Export Monopoly of the BMC?...............................................................................................88 Box 4-3: Do Anti-Dumping Duties raise the price of inputs and raise the anti-export bias? .....................................................................88 Box 4-4: Evaluating trade diversion: the realities “on the ground� ..................................................................................................92 Box 5-1: FIAS (2004) Recommendations on Customs Changes .................................................................................................................99 Box 5-2: Textiles and Walvis Bay....................................................................................................................................................105 Box 5-3: Tourism and Air Transport ...........................................................................................................................................................110 FIGURES Figure 1-1: Measures of Export Diversification, 1990-2003..........................................................................................................................1 Figure 1-2: Annual Change in Government Mineral Revenues, 1993/4 to 2002/3.......................................................................................3 Figure 1-3: Selected Merchandise Trade Indices, 1993=100 .........................................................................................................................8 Figure 1-4: Real Non-Traditional Exports, 1990-2003...................................................................................................................................9 Figure 1-5: Services Exports, 1990/91 – 2002/3...........................................................................................................................................10 Figure 2-1: Monetary Conditions Index ........................................................................................................................................................30 Figure 2-2: Real Effective Exchange Rate Measures, 1990-2004 ...............................................................................................................33 Figure 2-3: Bilateral Real Exchange Rates of the Pula 1990-2004..............................................................................................................34 Figure 2-4: Private and Government Salaries by grade October 2003.........................................................................................................38 Figure 3-1: Botswana – Overseas Tourist Arrivals, 2000 - 2003.................................................................................................................47 Figure 3-2: Textiles Exports including 2004 Year to Date Data..................................................................................................................55 ix PREFACE Economic diversification is a major policy objective of the Government of Botswana and has been a key determinant of macro and microeconomic policy. The Ninth National Development Plan, covering the period April 2003 to March 2009, adopted the theme “internationally competitive sustainable economic diversification�. However, despite this policy focus, diamonds remain the dominant export and source of foreign exchange. Against this background the Government requested that the World Bank undertake a collaborative study with the Botswana Institute for Development Policy Analysis (BIDPA) on the constraints and opportunities for export diversification. This partnership has combined the World Bank’s cross- country knowledge with BIDPA’s deep understanding of Botswana’s institutions and political economy. The study represents the views of both organizations and, it is hoped, will be a major step in continued collaboration. The study was also conducted in partnership with COMMARK Trust, a DFID-funded grant making organization focused on making markets work for the poor, which co-financed and implemented the ostrich, and garments and textiles sub-sector studies. The study was undertaken between May 2004 and May 2005. Elwyn Grainger-Jones (consultant) was team leader and lead author of the report under the supervision of Happy Fidzani (Executive Director, BIDPA) and Fahrettin Yagci (Lead Economist, World Bank). Kennedy Mbekeani (Senior Research Fellow BIDPA) assisted in coordinating BIDPA’s trade inputs for the study, with Jay Salkin (Senior Macroeconomic Policy adviser, BIDPA) as overall BIDPA internal reviewer. Peer reviewers were Dr Joel Sentsho (University of Botswana), Philip English (Senior Economist, WBI Trade, World Bank), and Jeffrey Lewis (Manager, DEC, World Bank). A number of background studies were prepared as an input for the report, and are available as discussion drafts on BIDPA’s website (www.bidpa.bw). The case studies for this report were chosen to reflect a mix of traditional, non-traditional sectors, successful and challenged sectors. Sub-sector studies were undertaken on beef, ostrich, textiles, automobiles and parts, tourism and financial services exports. Background studies were also conducted on the impact of the exchange rate on exports and on the labour market’s impact on exports. This study has benefited from a recently-completed Investment Policy Review prepared by UNCTAD, a FIAS study on the regulatory and procedural framework for private investment, studies on diversification in manufacturing, services and agriculture produced by BIDPA for the World Bank, a WTO Trade Policy Review of the Southern African Customs Union (SACU), USAID-funded trade work undertaken for the SADC Mid-Term Review, and various other existing government and non-government reports. A well-attended consultation workshop was held in Gaborone on March 11, 2005. As can be seen from the Action Plan, this study requires follow-up and further research on a number of fronts. As such it should not be seen as the end-point for collaboration between the World Bank, BIDPA and the Government of Botswana on this important issue. Finally, the fact that this study contains many suggestions for policy change should not detract from Botswana’s reputation as one of the most successful economies in Africa. Other studies, such as World Bank (2003) “Botswana: A Case Study in Successful Growth�, focus more on what countries can learn from Botswana. This study focuses on how Botswana can sustain this strong record. x ACKNOWLEDGEMENTS The Study benefited from excellent assistance and collaboration with Government. The study team would like to thank in particular the staff of the Ministries of Finance and Development Planning, the Ministry of Trade and Industry, the Bank of Botswana, BEDIA, and the IFSC for valuable guidance and assistance. The study team found government officials to be universally open and helpful, with a common desire to share knowledge to contribute to development in Botswana. Funding was generously provided by the Dutch Government under the Bank Netherlands Partnership Program. Co-financing was generously provided by BIDPA and the COMMARK Trust. COMMARK Trust financed and managed background case studies on the textiles and garments industry and on the ostrich industry. Lolette Kritzinger-van Niekerk (World Bank Senior Economist, Botswana Country Economist) provided valuable advice and guidance. Risserné Carole Gabdibé (Team Assistant, World Bank) provided excellent administrative support. Excellent country support was provided to an intensive schedule of visiting missions by the team in BIDPA. BIDPA wishes to acknowledge the support it received from the African Capacity Building Foundation (ACBF) for both its participation in the research activities that led to the production of this book as well as part funding the publication costs of the book. We are also grateful to Dr Imogen Mogotsi for proof reading the manuscript. EXECUTIVE SUMMARY AND ACTION MATRIX Introduction Botswana stands out as a successful mineral exporting country in Sub-Saharan Africa 1 Real GDP per capita has increased ten-fold since Independence – the fastest growth rate in GDP per capita in the world. When Botswana achieved Independence in 1966 it had 12 kilometres of paved road, 22 Batswana who had graduated from University and 100 from secondary school. Botswana is now classified as an upper middle-income country, and has approximately 7000 kilometres of tarred roads, a GDP per capita in 2003 of approximately US$4000, almost universal free education, three doctors per thousand population, and infant mortality of approximately 58 per 1000 live births. The proportion of the population that has completed primary education has grown from 1.5 percent in 1964 to 33 percent. Botswana was awarded the highest sovereign credit rating in Africa by both Moody’s and Standard and Poor’s in 2002, 2003 and 2004. 2 Botswana has transformed itself from a largely agrarian and beef exporting country to an economy based on mining exports, the service sector and the government sector. This was achieved because a combination of effective institutions, political stability and sound economic policies allowed it to successfully harvest a natural resource abundance in diamonds – Botswana has become the second largest diamond producer by volume in the world after Australia, and the largest producer in terms of output value (EIU, 2004a). However, Botswana still faces a number of development challenges 3 First, Botswana has one of the highest HIV infection rates in the world, estimated in 2002 to be 25 percent for those aged 15-49 years. Second, although poverty has declined considerably, about one-third of the population still lives below the poverty datum line and inequality levels are comparable to Colombia and Brazil. Third, diversifying the economy beyond Botswana’s principal export – diamonds – is a major policy goal for Government, but is proving difficult to achieve. This is the focus of this study. This concentration of export activity in diamonds features in most indicators of economic diversity 4 Rough gem diamonds dominate exports, accounting for 83 percent of total merchandise goods exports in 2003. Since the mid-1980s to the late 1990s, the share of diamonds in total merchandise exports averaged 75 percent a year. In recent years, the share has increased to 84 percent as non-diamond exports failed to keep pace with diamond growth. Mineral taxes and royalties are projected to account for approximately 46 percent of total government revenues in budget year 2003/04 and 48 percent in the 2005/06 budget. Seventy-five percent of the stock of FDI in 1999 was concentrated in the mining sector (UNCTAD, 2003). Mining accounted for 35 percent of total GDP in 2002/03, although GDP figures may understate the contribution of mining to economic activity – mining revenues sustain government finances, and public sector consumption equals 37 percent of GDP. General government accounts for 16 percent of GDP, the second largest component of economic activity after mining. Similarly, although diamond-mining represents a relatively small share of employment (3.4 percent), high diamond revenues have allowed a rapid expansion in direct and indirect government employment since Independence. ii 5 One positive aspect of export diversification relates to trade in services. Services exports have been rising steadily, with an average annual growth rate of around 10 percent in real terms between 1990 and 2003 compared to 3 percent a year for goods exports. This was driven in part by a growth in tourism revenues and business services. Export diversification, therefore, appears to be taking place in the form of a growth in services exports rather than a shift from diamonds to manufactured exports. Diamond production has conferred enormous benefits to Botswana, although the old adage that “there is no rose without thorns� applies… 6 First and foremost, diamond production creates few direct jobs, skills or technology transfer, accounting for about 3 percent of formal employment in 2001. Unemployment remains high, estimated at around 20 percent of the labour force in the 2001 census and almost 24 percent in the 2002/03 HIES. Second, there are high price and demand uncertainties in the diamond market. Third, there are questions over whether Botswana’s diamond output growth can be sustained - open cast mining is projected to last about another 25 years at current extraction rates although new sources may well appear. Fourth, the government budget relies heavily on unstable diamond revenues denominated in US dollars, and has finally moved into a long- awaited (small) deficit. After facing large budget surpluses for most of the 1980s and 90s, Botswana has had budget deficits in three of the last five years. Mineral taxes and royalties (mainly diamonds) accounted for approximately 46 percent of total government revenues and grants in 2002/03. Key Findings What should be the policy response in the face of a hugely profitable dominant export sector and the above challenges? 7 This study does not treat export diversification as an enclave issue that is somehow disconnected from the rest of the economy. For example, reform of Government monopolies in telecommunications and air travel is not a new issue. However, we present new evidence on its impact on export diversification, particularly on tourism and financial services. Hence, instead of one ‘magic bullet’ or hidden growth sector, the study argues that there are a wide number of policy-related constraints to export growth. The removal of these will in aggregate have a significant impact on exports. 8 Key recommendations that require action at the national, regional and international level are as follows: At the national level there are many areas where government leadership is necessary to improve the competitiveness of Botswana’s exports and to help mobilize a supply response. This includes further improvements to the business environment through full implementation of the FIAS (2004) recommendations. In addition, Government should introduce better and more systematic monitoring of its various incentives programs. Government should adopt best-practice principles for citizen empowerment policies so that this policy thrust does not contradict export diversification objectives. The Government review of taxation policies planned for 2005 should include consideration of adopting a flat-rate company tax. There should be a comprehensive reform of Vocational and Educational Training, and urgent resolution of the work permits issue. Reform of utilities would reduce business costs and improve the competitiveness of iii goods and services exports. Government should revitalise its privatization and utilities reform program – particularly in the area of telecoms and air transport. Progress made with the phased agreement towards open skies should be closely monitored to ensure that it gets implemented within the agreed time frames, if not sooner. To reduce international telecommunications prices, Government should consider instructing Botswana Telecom Authority (BTA) to issue an unlimited number of licences for international voice services and lift the ban on providing voice over internet protocol. The monopoly of Botswana Telecommunications Corporation should not be allowed to continue indefinitely to allow BTC to restructure - Government should set a target date for the privatization of BTC. Some aspects of trade policy are also under the sole authority of national policymakers. The Botswana authorities should refrain from using import bans as a tool to sustain local enterprises against foreign competition. Further, they should undertake a detailed review of all import permits, with a view to removing this requirement for all but a limited number of commodities for security, public health and public morality reasons. In the face of market failures and policy distortions at the sector/industry level, greater Government leadership is also needed to ensure that the right incentives, market structure and capacity-development for growth are in place. In the beef sector, the upcoming Government livestock study should fully consider options for BMC privatisation, the removal of export monopoly (in particular to South Africa) and the potential for trade liberalisation to increase exports. The ostrich sector is still in a fledgling state, and Government should eliminate the current ostrich export levy. Greater government support to the tourism sector is needed, including better marketing, a move away from the current low volume/high cost approach, greater collaboration with private sector organisations including consideration of a formal partnership agreement between the public and private sector, and greater coordination between the Botswana Tourism Board and the Department of Wildlife and National Parks (DWNP). In the financial sector Government should consider broadening the incentives available to IFSC companies to all cross-border services, and making further efforts to streamline the incentives approval process. The textile sector requires an active role for BEDIA to encourage much-needed productivity improvements. At the regional level the report advocates further regional integration (see paragraph 40) and market opening. This includes Botswana using its potential new influence in the new SACU Secretariat to reenergize the liberalization efforts of SACU. This effort should comprise: a phased program of tariff reforms that would continue the progress made during the early liberalization period in the 1990s, continued reductions in the number of anti-dumping initiations, and developing a regional approach to easing visa restrictions over the longer run. In addition, Government should develop a ‘Standards Strategy’, to include an assessment of the scope for greater harmonisation of standards within SACU – in particular whether it would be feasible to introduce a single set of standards across the region, with inspections to be done by single authority with clear guidelines of why inspections are being done. Botswana should lobby for simplified and liberalised SADC rules of origin in the SADC MTR follow-up discussions. Many of the recommendations aimed at improved trade facilitation require a iv coordinated SACU solution (with some exceptions, such as opening the Tlokweng border gate on a 24 hour basis). Government should develop a program for VAT harmonisation by SACU members. Further, Government should explore the concept of a ‘one-stop border post’ with South Africa to reduce border crossing time, with a longer-run objective of establishing a regional SACU customs authority Customs and Excise. Government should explore the scope for the introduction of a single tourist visa for multi-country visits to the region, and undertake a review of restrictive cabotage laws that raise freight costs across the region. A new transport desk could be established in the SACU Secretariat that could, for example, tackle intra-SACU transport issues such as accusations of monopoly pricing by South African railways affecting Botswana’s exports. At the international level, continued progress in WTO negotiations and access to EU and US markets are essential. This includes improving EU preferences for beef products to allow customs duty, quota and special duty free export of a wider range of beef and meat products, without excessive administrative and sanitary restrictions. Further, making the AGOA LDC provision permanent would provide predictability for potential investors in a particularly unstable market. Botswana should lobby for improved rules of origin in all preferential trading agreements – in particular, for Economic Partnership Agreement with the EU to allow for single transformation of goods such as found in the AGOA agreement with the United States. Potential new WTO rules on the Doha Development Agenda could assist in reducing the number of anti-dumping actions launched by and against SACU, and an effective agreement on trade facilitation could help to reduce restrictions across the region. 9 Detailed recommendations are presented below. For ease of reference, these are summarized in the Action Matrix presented at the end of this Executive Summary. The National Policy Framework Despite a broadly private-sector friendly overall policy environment there are some remaining constraints to business and foreign investment… 10 FIAS (2003) identified delays and inefficiencies in the registration of companies. UNCTAD (2003) expressed concerns over a draft Investment Code which suggested a possible tightening up on conditions for FDI. UNCTAD (2003) and FIAS (2004) highlight the impact of restrictive work permits for expatriates, and also identified difficulties for foreign investors in acquiring commercial land in Gaborone. It is recommended that Government convene a seminar with key stakeholders to monitor implementation of the recommendations of FIAS 2004 report, finalise revisions to the Industrial Development Act with the intention of simplifying the industrial licensing system, expedite approval of a revised investment code that drops restrictions on smaller-scale FDI, and expedite reforms to the land allocation system. Adopting best-practice principles on Citizen Economic Empowerment could ensure its coherence with export diversification 11 ‘Citizen Empowerment’ is a term used to describe the valid objective of empowering citizens by enhancing their skills, resources and opportunities to participate in productive enterprises. The Government’s citizen economic empowerment strategy includes financial intervention to assist local business activities; enterprise development for citizens; job creation; and training v and education. However, there are also a number of concerns about current and potential restrictions arising under the remit of citizen empowerment. Citizen economic empowerment has driven a wide number of Government schemes, including the local procurement program and the reservation policy, concerns over which are discussed below. Further, there are risks to Citizen Economic Empowerment becoming a form of hidden protectionism in its influence on economic policy. Considerations over citizen empowerment may explain some of the delays in dealing with the most pressing economic reform issues identified in this and other recent reports on Botswana, such as land allocation, work permits and privatisation. For example, the initial acquisition of serviced industrial land on state land is restricted to citizens, resulting in major delays for overseas investors in obtaining land. It is important that government policies learn from international best-practice in empowering citizens – the approach taken to citizen empowerment in other countries such as South Africa may not be the most appropriate for Botswana because of the latter’s unique historical circumstances 12 This is clearly a sensitive issue that will have a major impact on export diversification. One possible first step towards resolving such conflicts would be for Government to adopt some best-practice principles for actions taken under the citizen empowerment remit – Chapter 2 suggests some possible principles, including principles such as “over-protection and excessive handholding do not lead to empowerment�, “citizenship does not convey the right to be shielded from the consequences of making economic decisions�, “creating new jobs leads to more citizen economic empowerment than providing preferential treatment for citizens in filling existing jobs�, and that “education is a fundamental empowerment tool�. Also at the national level, a unified flat-rate company tax could remove distortions against some export sectors and simplify the regulation of IFSC companies… 13 Botswana is a low-tax jurisdiction, with low general rates of tax and investment tax credits in various forms, including the ability to grant a tax holiday, favourable tax rates or exemption and special deductions for employment or training. Preferential tax rates apply to the manufacturing sector and to offshore financial services companies approved by the IFSC – the company income tax for manufacturing businesses and IFSC companies is reduced from the standard 25 percent to 15 percent. Government can provide company-specific tax concessions, but rarely makes use of this facility. It is recommended that Government considers adopting a uniform 15 percent tax rate for all business activities. This would remove the implicit discrimination against the tourism sector, and would eliminate the onshore and offshore distinction in financial services for tax purposes. This would of course require an assessment of fiscal impacts – non-mineral income tax, which includes personal income taxes as well, accounts for about fifteen percent of total government revenue. As an interim measure, consideration should be given to reducing the transaction cost of applying for the reduced manufacturing tax rate by awarding it automatically, subject to ex post oversight. Since tax rates should be assessed in the broad context of macroeconomic management and the overall taxation structure, this should be considered in the context of the overall assessment of taxation policy planned for 2005. There should be better monitoring of incentive programs, some of which may have an anti- export bias… 14 The Central Statistical Office or another suitable agency or think-tank should conduct a review of ongoing impact assessment and monitoring of existing government support programs, tax incentives and reservation policies, in particular those supporting non-tradeable activities. The reservation policy, through which certain economic activities are reserved vi exclusively for citizens and companies which are wholly owned by citizens, should be reviewed to assess whether it has had an impact on building human capital, and whether this offsets its negative impact on consumers by restricting trade and investment. Further, CEDA should prepare more thorough evaluations of project proposals with a view to their net benefit to Botswana, using shadow prices that place a premium on tradeable goods. Government should commission a cost-benefit review of the industrial rebate for raw materials imported for production for sales into domestic market. 15 Recent programs such as the local procurement program and the reservation policy, which typically include small-scale business activities and non-tradeable activities (e.g., housing and personal services), constitute an anti-export bias. The procurement program enables companies to seek protected government contracts instead of local entrepreneurship being directed towards export contracts. However, it is difficult to calculate the extent of the anti- export bias of these schemes. More broadly, it has not been possible to undertake even simple financial cost-benefit analyses of the impact of Government incentives, in part because there is little data collected with which to undertake such analyses. Import tariff exemption schemes for exporters are well-functioning although they are a second-best option and require some reforms... 16 Botswana exempts certain customs and excise duties and VAT on raw materials imported by registered manufacturers. Various exemption schemes function effectively with few unnecessary delays imposed on importers. They are covered by SACU rules, hence until recently they were determined by South Africa with little consultation or predictability with respect to rules changes. However, although most machinery inputs have zero tariffs and have VAT payments reimbursed, there are still a number of tariffs that fall outside of the definition of ‘raw materials’ or ‘machinery’ that raise the price of operating a goods or service exporting company. Vehicles are one important example. Hence even efficiently- managed exemption schemes are still a blunt instrument to redress the anti-export bias of tariffs. Critically, exporters are not exempted from anti-dumping tariffs on their inputs. Rebates and exemptions are only allowed on ‘schedule 1’ tariffs, whereas anti-dumping duties are ‘schedule 2’ tariffs (see paragraph 46 below). Botswana should propose within SACU that anti-dumping tariffs be eligible for duty exemptions and rebate schemes. With a view to assessing whether there is any practical value to establishing an EPZ, there should be a follow-up review on whether broadening the definition of inputs that are exempt from customs and VAT would make a significant cost difference to exporters. Export Promotion and Private Sector Support Institutions are well-resourced but are still developing 17 Botswana has a broad range of export promotion activities. BEDIA is refocusing its activities on export development in contrast to export promotion, based on a perception that weak internal capacity for product development is the major constraint to export. In this context, BEDIA is preparing an export development programme as part of the WTO- UNCTAD-ITC Joint Integrated Technical Assistance Programme (JITAP) II. BEDIA and the Botswana Development Corporation (BDC) are both involved in the provision of factory shells. Given the emergence of private sector providers, this should be reappraised. There have been a number of complaints about the effectiveness of the Ministry of Trade and Industry (MTI) in providing political risk insurance – Government should conduct a performance audit of the provision of political risk insurance, including an assessment of need. There are mixed views concerning whether there is sufficient provision of trade vii finance and export credit insurance. Smaller export enterprises have reported difficulties in accessing trade credit in a timely fashion. FIAS (2004) made suggestions on minor adjustments to the system that would facilitate a more rapid payment of exporters – these should be implemented. There are relatively few self-imposed licensing restrictions on exports from Botswana, although there is a need to develop a clearer standards strategy… 18 With the exception of diamonds and beef, Botswana allows exports to go largely unhindered. All commercial exports require an Export Declaration Form, although these are straightforward to obtain. There has been a rapid increase in the number of approved standards – from 30 to 167 between 1998-2002. The Botswana Bureau of Standards (BOBS) is facing a number of challenges. It has limited testing facilities, is not able to implement border controls to monitor the quality of trans-border goods because of the absence of a holding facility, and legislation of departments linked with BOBS is not yet harmonized in terms of the development of product specifications. Government should develop a ‘Standards Strategy’. This should include an assessment for the scope for greater harmonisation of standards within SACU – in particular, whether it would be feasible to introduce a single set of standards across the region, with inspections to be done by a single authority with clear guidelines of why inspections are being undertaken. Under Article 28 of the new SACU agreement Botswana and other members have agreed that “Member States shall strive to harmonize product standards and technical regulations within the Common Customs Area�. A priority for the new SACU Secretariat will be to give some clarity and a roadmap on how Members could achieve this goal. BOBS is already collaborating with SADC countries to develop a regional body for accreditation of conformity assessment facilities (SADCA), which would allow mutual recognition among all members. Such measures to avoid duplication should be encouraged. As Botswana’s major market for non- traditional exports and a major source for international exports, continued cooperation with the South African Bureau of Standards is essential. Human capital needs to be increased to boost productivity, in particular through a reform of the vocational and educational training system and a resolution of the work permits issue… 19 This study conducted a survey of 11 exporting firms to discuss a wide range of labour-related issues. Botswana now has a well-resourced education system, although there are two particular areas of concern. First, in the absence of any systematic human resource planning, Botswana’s vocational training system has been supply-driven with relatively limited involvement of employers in the development of course content and training standards. It focuses mainly on pre-employment, time-bound technician and craft-level skills training for predominantly male primary and secondary school leavers at government-funded vocational training centres. There is a skill mis-match between this training and the skill needs of manufacturing and other key sectors, which rely almost totally on on-the-job training for both production workers and other staff. Training policy and practice is still too compartmentalised between the Botswana Training Authority (BOTA), the Tertiary Education Council (TEC), and the Ministry of Education. It is recommended that Government develop a detailed and comprehensive national human resources development strategy, which focuses in particular on the occupational requirements of the key growth sectors in the economy. This should include a comprehensive reform of the vocational education and training (VET) sector. In particular, little use is made of the company tax viii rebate for training, with companies complaining that it is too bureaucratic. This requires reviewing and replacing it with a more effective incentive for human resource development. 20 Second, obtaining work and residence permits has been consistently identified as among the most difficult investment procedures in Botswana. The total backlog of work permit applications was 7474 in late 2004. Temporary work permit waivers enable most foreign investors to circumvent unwieldy and bureaucratic work permit procedures, although these have to be renewed every three months. A resolution of the work permits issue is required, possibly with permits based on a points system and/or a minimum number of permits awarded automatically for companies. Of particular concern is between 600-1000 percent increase in work permit fees over the last four years and the twenty-fold increase in visa application fees instituted in 2004. Government should review these cost increases. Producers have complained that this has unreasonably raised the costs of obtaining labour. Advanced economies such as the United States still require the importation of large numbers of expatriate experts – Botswana’s stage of development and limited labour pool suggests that it should be encouraging rather than discouraging the arrival of skilled immigrants. The Role of Government at the Sector and Industry Level – the Case Studies 21 Government leadership is needed at the sector level to ensure that the right incentives, market structure and capacity-development for growth are in place. The beef sector faces growing competition and a need for reform… 22 This study commissioned a background study on the beef sector. The Botswana beef export industry is in crisis. The recent financial difficulties of the Botswana Meat Commission (BMC) – the Government’s export monopoly for beef – have been exacerbated by temporary factors – notably the recent drought and the outbreak of foot and mouth disease (FMD). But while there may well be a cyclical upturn, these cycles are nevertheless occurring around a deteriorating trend. Further, in the past frequent exchange rate depreciations against European currencies in most years allowed BMC to post regular profits – this has recently been reversed as the exchange rate appreciates. 23 This trend will not be reversed without fundamental change that would increase the number of cattle sold to BMC for export. There appears to be a consensus that the fundamental problem facing the sector is that the cattle off-take rate is too low. This results in poor throughput (and low weights) for BMC, either because prices on the domestic market are pushed up, making it more attractive than exporting, or simply because there are too few cattle raised with the intention of bringing them to the market. Various studies suggest that there is significant scope for an increase in supply. However, over the period since 1992 prices paid to producers have generally gone up by less than the price paid by EU importers. This has occurred for a number of reasons – high costs arising from EU SPS measures and rising demand in the local market, resulting in fewer cattle being sold to BMC and hence higher unit processing costs. 24 The beef sector has long been a recipient of government support in the form of artificially high producer prices, heavy direct subsidies into the sector, a very lenient tax system, heavy provision of livestock-specific infrastructure and trade protection. Industry restructuring would allow time for either a substantial shake-up to the supply side or an orderly decline of the beef export sector. The study cautions against precipitate moves to privatise BMC – at least until the supply side has been improved. The supply baseline is a throughput sufficient ix for only one abattoir, and standards might be compromised. Another option that should be considered is continuing BMC’s monopoly in terms of exports to Europe and other distant markets, but its removal for sales to South Africa. At the present time it seems improbable that any organisation other than BMC would sustain substantial exports outside the region. If Government decides that maintaining the export market is preferable to a domestic-only beef market, there should be further consideration of the scope for liberalization of beef imports. This would reduce domestic prices, making selling to BMC for export more attractive for farmers. In the industrial sector and advanced countries it is commonplace to have intra- industry trade – there is no reason in principle why the same should not occur in Botswana, with the region importing larger quantities of forequarter meat partly in order to release hindquarter meat for export. The planned livestock study should provide a clear estimate of the number of cattle in the country. Better information is essential for policymakers – it would help to clarify issues such as off-take potential, linkages and the importance of cattle to the Botswana economy. The ostrich sector is still at a nascent stage, during which time the removal of the export levy should be considered… 25 The Botswana ostrich industry is at an infant stage. There are currently about 29 active farmers in the country, holding a total of about 500 breeding hens. About half of these ostriches are held by two large scale producers. In terms of production efficiency, the Botswana industry produces a heavier bird in a relatively shorter space of time than South Africa, although the overall quality of the skin is poor. There is only one abattoir, managed by the Botswana Ostrich Company (BOC). This received certification for exporting directly to the EU in August 2004. Since then, the BOC has been able to supply around 3 tons per month to the wholesale trade in Belgium. There is optimism that exports can be increased to the EU, the target market. There is no tannery for ostrich leather as yet. 26 The government has supported Botswana’s ostrich industry through the provision of a new state-funded ostrich abattoir and veterinary services, and through its willingness to extend BDC loan facilities despite a failure to repay the initial loan on schedule. The success of the ostrich industry depends upon the viability of the BOC as the sole marketing channel for ostrich products in Botswana. BOC is currently running at a loss, but is hopeful for a positive supply response from both existing and new producers following the approval to export to the EU market. The key issue for Government is for how long to subsidise this industry – there should not be an assumption that just because the country has the largest population of wild ostriches in the world it is automatically suitable for effective farming. There is significant growth potential, but there should be a clear end-point for the current public subsidy. However, it is premature for the imposition of the current export levy of P32 on average per bird, which reduces BOC’s earning by about ten percent per bird. Government should eliminate this levy until the industry reaches a critical mass to attain BOC profitability. According to industry participants, CEDA has so far not been sufficiently forthcoming in funding ostrich farming projects. Only 10 ostrich projects have so far been approved for funding, with none since the EU granted export approval. CEDA’s reticence may well be based on valid financial reasons, hence this issue should be addressed and negotiated at an industry level. x The tourism sector has major potential but requires greater investment and a clearer voice in policymaking… 27 Apart from its diamonds and beef, Botswana’s natural comparative advantage is in its diverse and abundant wildlife and natural resources, which are a major draw for tourism. Tourist numbers rose rapidly but peaked in 2000. The gradual decline seen in 2004 – set against a net increase in South African tourist numbers – is of serious concern. Nevertheless, the sector has significant growth potential. 28 Botswana’s Tourism Policy has generally been based on sound principles that have acknowledged the environmental value and vulnerability of the resource base. However, there is a need to give greater recognition to the sector in policymaking, and to align the sector support institutions more clearly around a demand-led approach. Further, despite the Government’s policy objective of “modified high volume/mixed price� tourism, Botswana is still largely a low volume/high cost destination. Botswana can sustain its national wilderness areas while increasing visitor numbers. Government should consider greater ‘zoning’ of wildlife areas to allow higher volumes in certain areas while maintaining greater restrictions in others. The independent, self drive component of the international tourism market is growing continuously – the sector should develop the required infrastructure and marketing packages to capitalize on this segment of the market. 29 While the various tourism policy frameworks provide some excellent proposals, these are not part of a clearly defined and prioritized implementation plan, with the result that it is difficult to gauge and monitor implementation. The Department of Tourism (DoT) suffers from a lack of adequate funding and a clear competitive marketing strategy, and has to play the role of “referee and player� by having to regulate the industry while promoting it. Government should allocate and manage the budget allocation and investment for the DoT and the Department of Wildlife and National Parks (DWNP) as a whole package within a commonly agreed tourism development strategy. Due to limited resources and capacity, the promotion of “Brand Botswana� as a global destination of choice has suffered during the past few years and marketing has been largely left to the private sector. The recent appointment of the first Botswana Tourism Board bodes well for destination marketing. There is need for a well- researched, clear marketing strategy that will direct the future marketing focus of the Board and will inform Botswana’s overall tourism policy and development thrust. 30 An adherence to low volume/high value tourism and limited budgetary allocations have led to under-investment in essential facilities and infrastructure development for tourism, and mounting pressure is being placed on the existing and limited infrastructure of wilderness parks (in particular Chobe). A formal partnership agreement between the government and the private sector should be considered, possibly based around a dedicated Tourism and Conservation Management Fund. The establishment of local tourism associations in the main tourism centres, affiliated to Hotel and Tourism Association of Botswana (HATAB), should also be considered. Such partnerships should aim to strengthen linkages to the local economy. Further research is needed on the costs and benefits of allowing a longer concession term for tourism leases in wildlife management areas. The International Financial Services Sector must be underpinned by sound regulation while incentives should be broadened to all services exports… 31 The Botswana International Financial Services Centre (IFSC) became operational in 2000. IFSC has managed to attract twenty-one companies in a relatively short time. IFSC xi companies are estimated to grow to 244 total employees, of whom 168 are local, in 2005. Unfortunately there are no available data to isolate the impact of the IFSC upon the services trade balance. 32 Botswana offers a generous incentives package in its endeavour to set up an international financial services centre, including a reduced corporation tax regime stabilized to 2020, exemption from VAT on services or imports, and a credit for withholding taxes levied in other jurisdictions. All services must be for clients based outside of Botswana and transacted in foreign currency. 33 There are two main sector-specific challenges. First, a necessary condition for an international financial centre is to have a modern and well respected regulatory framework. A background study on the financial sector prepared for this report concluded that the regulatory system has so far been in a rather reactionary posture to new developments and has tried to accommodate new needs within an existing structure. Government should make further efforts to streamline the process of obtaining IFSC tax and regulatory approval and reducing the number of bodies involved (currently the IFSC, the MFDP and the Bank of Botswana) through introducing a one-step approval process. A potential problem arises from having a dual tax regime, marketing an offshore jurisdiction based on a two-tiered tax regime (i.e., one for domestic economy and another for offshore) is becoming increasingly difficult. An overhaul of regulation of the non-bank financial system, including the offshore jurisdiction, is necessary. Further, a key enabling factor for financial services exports is the number of double-taxation agreements – Botswana has only ten such agreements, compared to 40 in Mauritius. Government should increase efforts to negotiate double taxation agreements. 34 Second, Government should reappraise the existing scope of companies eligible for IFSC incentives – its current focus is too narrow and excludes a number of potential cross-border service activities (e.g., regional transport companies). Government should consider broadening IFSC incentives by making all cross-border service exporters eligible for incentives and renaming the ‘IFSC’ (International Financial Services Centre) the ‘ISC’ (International Services Centre). The textile and apparel sector faces a challenging environment, and there is a clear role for BEDIA to initiate industry reform to improve productivity 35 Botswana’s textile and apparel industry faces a number of challenges – notably the phase-out of the multi-fibre agreement, the possible ending of special access to the US market, and the ending of the Financial Assistance Policy (FAP) subsidies. Despite this, its relatively diverse apparel exports have been growing rapidly to the United States (the ‘AGOA effect’), although exports to South Africa and Europe, while on a growth trend, both dipped in 2004 according to preliminary government trade statistics. 36 Government has made extensive use of subsidies and other tax incentives to develop the textiles and apparel industry. The main subsidy – the Financial Assistance Policy (the FAP) – has ceased and subsidy payments will end in 2005. While the industry may be able to survive without cash incentives, it will flourish only if sector efficiency is increased and only in an environment where the economy-wide barriers to conducting business discussed in this report are removed. The primary threat to the industry is its lack of competitiveness in terms of factory efficiency – productivity levels are very low, with the best examples estimated to xii be 50 percent of established international standards. This is because of inadequately trained operators and a lack of control by supervisory management. 37 There is a clear role for the Botswana Export Development and Investment Authority (BEDIA) in developing a comprehensive response to this lack of productivity. They should commission productivity audits and training needs analyses, identify suitable service providers to address the needs of the industry both nationally and regionally, identify means of financing productivity enhancement and training, and develop the market for training service providers to the industry. BEDIA should facilitate the establishment of an association of Botswana Textile and Apparel manufacturers as an independent and officially registered body. There is also a need to identify niche markets. BEDIA should focus its promotion effort on suppliers to specific market segments that can create competitive Botswana-based supply chains. The most likely market segments are Formal Modern Niche markets in Europe, the USA and South Africa, the replenishment segment of Traditional and Modern Mass markets in Europe, USA and South Africa, and South African based apparel manufacturers supplying the potential future Zimbabwe market. The Automotive products sector is fairly dependent on the continuation of the South African Motor Industry Development Programme (the MIDP) and tariff protection… 38 Exports surged between 1996 and 2000 because of the establishment of a large Hyundai assembly plant in Botswana. This plant closed in 2000 ostensibly because of market access barriers and poor management. Rules of origin played a role in its demise. After the plant started operations South Africa challenged that there was insufficient value-addition taking place and ruled that the products failed the rules of origin requirements as originating from Botswana. South Africa used SACU Article 11(5) to oblige Botswana to cooperate in the fulfilment of ‘economic objectives’ of its import control legislation for the auto sector. 39 A fledgling automotive products sector remains. This sector evolved through generous FAP incentives, the MIDP program and high tariff protection in the SACU market. Of the five firms surveyed for this report, two (the majority by output) benefit from MIDP, while the remaining firms sell to the tariff-protected SACU market (accounting for about one-quarter of employment of the firms surveyed). Further, three firms benefit from (soon to be phased out) FAP subsidies. Tariffs in SACU are currently 38 percent for cars, and are scheduled to fall to 28 percent by 2009. Automotive products companies, therefore, face a challenging future. The MIDP provides a large reduction in import duties on completely built up units for exporting companies, and has been a facilitating factor in choosing South Africa as an assembling centre by western and Japanese automobile giants. This scheme is potentially open to WTO challenge as an export subsidy. This would reduce the attractiveness as a location for assembling and manufacturing components for export in future. Beyond maintaining protection at the expense of consumers and business users of transport – which this study does not recommend – there were no export constraints specific to this sector identified in the background study. A Case for Greater Regional Integration A major cross-cutting theme of the report is the need for greater regional integration… 40 Government should develop a clear long-term vision based on a transformation of SACU from a customs union to a single market. The new SACU Agreement, renegotiated in 2002, falls well short of a bold new vision for further regional integration. It maintains the basic xiii customs union with very limited aspirations towards a single market. The Agreement excludes cooperation on investment protection and incentives, but does include an agreement “in principle to develop common policies and strategies�. Similarly there is no commitment to develop a common competition policy, although there is a commitment for Member States to cooperate on the enforcement of competition laws and regulations. There is no provision to allow for the freer movement of people. Services remain outside of the agreement. However, the report identified a wide number of issues that need to be resolved at the regional level (see paragraph 8). 41 A Customs Union, such as SACU, requires a common external tariff, a customs pool and a common trade policy. However, fiscal borders have remained in place and border controls are maintained for differences in standards (e.g., safety standards). In contrast, a single market means that goods circulate freely, with a common trade policy, the harmonisation of standards, common policies in competition, and harmonization of regulations where there is substantial intervention in the market. 42 South Africa is the regional superpower, accounting for 90 percent of SACU’s GDP. As the dominant regional economy it has a past record of setting trade and economic cooperation policy according to its own interests with little consultation with its smaller neighbours. This has led to fears over the pooling of sovereignty associated with closer economic integration. However, this report advocates deeper economic integration in SACU, based on the concept of “open regionalism� (GEP 2005) where barriers are also reduced between the region and the outside world. Recommendations for closer integration feature in most sections of this report, as summarized in paragraph 8. This is for the following reasons: First, Botswana cannot ‘go it alone’ given its small population. South Africa is likely to remain the major market for its non-diamond exports because of high transport costs and the trading benefits of proximity. Apart from Egypt, South Africa is the only major market in the region. The use of import substitution in the region to promote demand for more advanced products is not good, and small countries have had particular difficulties in using such techniques because of their small market size. A small domestic market size is also a major constraint to investment since it limits the scope for economies of scale and expansion. A survey of French companies found small market size to be the main factor limiting investment in Africa (Charalambides, 2004). Trade ties with South Africa have played a central role in the development of Botswana. South Africa is the primary market for Botswana’s non-traditional exports, constituting 75 percent of non-traditional exports. The case studies for this report suggest a mixed reliance on the South African market. Fifteen percent of beef exports are destined for South Africa, although this may represent a more important market as preferences to the EU are eroded. All ostrich exports are destined for the EU. Data is not available on financial services direction of exports. Over half of holiday visitors come from South Africa. South Africa has traditionally been the dominant market for textiles and apparel exports. Second, although Botswana has a higher GDP per capita than South Africa, it can still benefit from South Africa’s more developed private sector, market know-how, expertise and investment. South Africa is the source of almost half of the stock of FDI in Botswana. Investors from outside the African continent are so far mainly interested in minerals. Attracting high quality investors who actually understand the international market is a challenge given that the economy of the entire SACU region is still approximately the size of Belgium’s economy. Recent surveys of South xiv African investment in Africa indicate that familiarity and the need to use South Africa as the “anchor� economy are important determinants of investment (Charalambides, 2004). In some sectors, for example the textile or automotive products sectors, South Africa offers the potential to link into regional supply chains, although progress in developing such linkages has been limited to date. Third, the harmonization of regulations required to move towards a single market could act as a major spur to increased investment and trade within the SACU region and beyond. It would ultimately remove the need for the customs control of goods at the border, would encourage inwards investment to the region (since investors would have a common rules platform), and would encourage greater cross- border competition in services. As argued throughout the report, without such cooperation the impact of having a customs union with a common external tariff is limited. The European Union did not have free circulation of goods before the single market: “Despite the absence of customs duties in trade between Member States, in fact there was little difference in administrative burden or appearances between intra – Community trade and trade with non – member countries… Customs clearance at the Community’s internal frontiers was elaborate and time consuming� (European Commission, 1999). Of course, this is not a rapid process – it took the EU thirty years to harmonize its non-tariff barriers. Further, the liberalization of movement in people would also be beneficial to labour markets within the region, and could take place at a pace acceptable to SACU members, given concerns over its impacts. In the EU, regulations liberalizing the movement of people were introduced after the liberalization of goods. Fourth, there is not a choice between aligning Botswana with Europe, North America or South Africa. Closer integration with South Africa would not be at the expense of closer trade and investment ties with other regional partners and beyond. “Trade diversion� costs should not be exaggerated – tariffs can be a small part of the importing decision in relation to other costs (see Box 4-4). Nevertheless, closer regional integration should be accompanied by continued reductions in high external tariff walls (Hinkle, 2004). Trade Policy – Actions at the National and Regional Level Import tariffs are moderate, although there is still a need to reduce protection and simplify the tariff structure 43 A key feature of the SACU common external tariff (CET) is high tariff dispersion, from 0 to 325 percent with a simple average tariff of 8 percent and an import weighted average of 6 percent, a cascading tariff and a high tariff variance. This increases effective rates of protection and inefficiencies. A combination of high and low tariff rates reflects a South African policy of keeping input tariffs low and maintaining high tariffs on some final products. Botswana should initiate a renewed program of trade reforms through the new SACU Secretariat. This should include a phased program of tariff reforms that would continue the progress made during the early liberalization period in the 1990s, and would include SACU accelerating its tariff rationalization program to reduce the number of tariff categories from 41 to six, in line with WTO commitments. SACU tariffs largely protect South African industries at the expense of Batswana consumers and businesses (including exporters – see below). A reduction from over 100 to 41 ad-volorum tariff bands has so far xv taken place. Less complexity would increase transparency, reduce the scope for protectionist lobbying, and therefore facilitate trade. 44 SACU tariffs provide relatively high effective protection to some industries. Using standard tariff analysis, tariffs raised the incentives for Botswana companies to serve the domestic SACU market above the world market by raising the profitability of doing so by on average 88 percent for a sample of 33 firms surveyed in Botswana by The Services Group (TSG, 2003). The most protected sectors according to the TSG analysis are food processing, textiles, clothing, wood products and furniture production. 45 Botswana should use its influence in the new SACU Secretariat to reenergize the liberalization efforts of SACU. This effort should include tariff and non-tariff measures that feature throughout this study. On tariffs, this should include a phased program of tariff reforms that would continue the progress made during the early liberalization period in the 1990s. This would focus on reducing SACU’s average applied rates (which would be strongly in Botswana’s interest), urging SACU to accelerate its tariff rationalization program to reduce the number of tariff categories, lobbying within SACU for the number of anti- dumping initiations to be further reduced, and reviewing the impact of liberalizing beef imports with a view to discussing this with SACU neighbours. Anti-dumping is one of the main ‘trade-policy imposed’ non-tariff barriers. This could have a significant impact on input costs for some exporters and requires further investigation… 46 On a trade-weighted basis anti-dumping measures add little to overall protection, although they do make a significant difference at the individual product level. Critically for SACU exporters, most of the challenged products are intermediate products in the production process (Holden, 2002). Hence, while intermediate products typically face a lower MFN tariff level, antidumping duties increased this protection considerably in the 1990s. These duties ranged between 15 and 202 percent and averaged 52 percent. Chemicals form the largest single sector for initiated cases (37 percent), and make up approximately 10 percent of Botswana’s imports. Similarly, machinery, mechanical and electrical appliances make up a further 9 percent of anti-dumping cases and constitute 19 percent of Botswana’s imports. Critically, duty exemptions do not apply to anti-dumping duties. Government should commission a short follow-up research piece to isolate how anti-dumping duties have increased the anti-export bias by raising the input costs for producers. At the same time, Botswana should act within SACU to further reduce the number of anti-dumping initiations and to change SACU duty-exemption rules (see paragraph 16 above). Further, Government could advocate the development of tighter rules on anti-dumping for all WTO members through the WTO Doha Development Agenda. …while Botswana imposes very restrictive non-tariff barriers on some sensitive products it should refrain from using import bans as a tool to sustain local enterprises against foreign competition. 47 Import bans are an arbitrary measure that is borne by the consumer and contributes to the anti-export bias. Botswana makes use of import licensing and import bans on the imports of some agricultural products (bread, beef, fish produce, eggs, chicken and – when in season – oranges, cabbages, tomatoes, and milk). The limits amount to an import ban for beef, eggs, poultry and bread. Botswana imposed a ban on the importation of bread in October 2003 to support local bakeries. Consumers had hitherto chosen higher-quality imported long-life xvi bread, but were denied this choice by the ban. More critically for exporters, a further import limitation is being considered at the time of writing which would ban the importation of all second-hand vehicles that are more than five years old. This would be enacted ostensibly on safety grounds, but would more likely be initiated to protect largely South African producers from imports of reconditioned Japanese vehicles. 48 Government should undertake a detailed review of all import permits with a view to removing this requirement for all but a limited number of commodities for security, public health and public morality reasons. In particular, Botswana should avoid any new restrictions on the import of second-hand vehicles. More broadly, the Botswana authorities should ask the new SACU Secretariat to set up a monitoring program of NTBs in similar fashion to a COMESA exercise. So is there an ‘anti-export bias’? 49 Yes, but the economics of being in a customs union complicate the analysis. Import tariffs, and restrictions and regulations do impose a moderate anti-export bias on the economy. However, because high protection has supported industries largely in South Africa rather than Botswana, SACU tariff barriers have had a less distortionary impact on Botswana than might be expected. Botswana is therefore in an unusual position: because of the existence of the SACU customs union, a bias towards domestic production within SACU does not fully translate into a domestic investment bias towards import-competing production for Botswana. 50 Nevertheless, tariff and non-tariff barriers do have some impact on incentives to export from Botswana. First, they reduce consumer welfare and thus national income and investment, although the extent to which tariffs are the principal cause of trade diversion in the region can be disputed (Charalambides, 2004). Second, they have switched demand and therefore investment towards some protected industries in Botswana – textiles and clothing tariffs have raised the price of clothing on the domestic market throughout SACU, making it more profitable to sell into the domestic market and in South Africa. An import ban and a 40 percent external tariff may have had a similar impact in the beef sector, where supplies to BMC for export are too low (see paragraph 24). Flour milling, furniture production, egg production, and dairy production also depend on non-tariff protection. Third, SACU tariffs and national non-tariff barriers raise the cost of inputs used by export companies. The transport sector is a good example. Trucks are not considered as machinery, hence they face tariffs and VAT. Motor vehicles face particularly high tariffs (see Box 3-2). Tariffs on computer equipment were reduced to zero only in 2004 after successive requests by the Botswana authorities. Further, some industrial materials still face tariffs, such as steel which faces a tariff of 5 percent, furniture of approximately 20 percent, transport equipment (approximately 12 percent), and printing and publishing (approximately 7 percent). In addition, anti-dumping duties are passed on to exporters as described above. Protection of services from foreign and domestic competition also raises business input costs for exporters, and represents a potential negotiating chip… 51 The state retains a monopoly in key utilities and elements of the transport sector: fixed-line telecommunications, water supply and sewerage services, electric power supply, the airline and the railway. The airline and telecommunications represent a major potential improvement to exporter efficiency – tourism operators surveyed for this study consistently identified air transport costs as a major restriction (see recommendations on air transport xvii reform, paragraph 71). More generally, service companies identify international telecommunications costs as a particular constraint. To reduce international telecommunications prices, Government should consider instructing the Botswana Telecommunications Authority (BTA) to issue an unlimited number of licences for international voice services and to lift the ban on providing voice over internet protocol. The monopoly of BTC should not be allowed to continue indefinitely to allow BTC to restructure – Government should set a target date for the privatisation of BTC. 52 Such reforms could be used as a ‘negotiating chip’ in regional or WTO trade negotiations. Botswana has committed to under 5 percent of all possible WTO GATS services commitments, which is less than the average developing country index of 6.9 percent (WTO TPR, 2003). There are no GATS commitments on supply of services by temporary movement of people nor (generally) on cross-border trade. This means in some cases that service has to be supplied through commercial presence by a supplier who meets all the normal residency requirements. Because of various preferential agreements, the levels of external tariffs imposed by trading partners are not a major barrier to export growth. 53 Diamonds are allowed duty-free access to the EU market regardless of the trade regime in place. The vast majority of Botswana’s other main products take place under preferential trading arrangements or the SACU customs union, hence face few tariff restrictions. 54 Exports to South Africa and other SACU members enter duty and quota-free. Most exports to the US take place under AGOA. Exports to the EU take place under the Cotonou arrangements, where ACP countries are entitled to a 100 percent reduction in ad valorem customs duties. The export weighted MFN tariff facing Botswana’s food products to the EU is 55 percent, while the average applied tariff is only a 5 percent (CEPII, 2004). CEPII (2004) find that, given a high level of protection on beef carcasses, there is no evidence of tariff escalation for food products. There are currently no import tariffs or export duties on ostrich meat exports to the EU market. Botswana has preferential access to several important markets for garment and textile products. As an ACP country, it has duty and quota-free access for textiles and apparel to the EU. Under AGOA, Botswana qualifies as a ‘least- developed country’. This means that until September 2007 it can produce apparel from fabric purchased anywhere in the world and ship it to the United States duty-free. As a SADC country, its products are given preferential duty treatment when exported to SADC countries outside SACU. Zimbabwe and Botswana have a free trade agreement that dates back to 1956. The erosion of these trade preferences is a concern in a number of sectors 55 Botswana faces the inevitable erosion of its existing preferential market access through the reduction of tariffs and trade barriers under WTO, regional and bilateral trading agreements,. 56 The textile industry has faced the phase-out of multi-fibre agreement (MFA), and faces the potential removal of AGOA special preferences after September 2007. With MFA phase-out, major low-cost apparel producing countries, most notably China, are likely to take a greater share of the apparel export market, although it is too early to fully assess the impacts. There is no doubt that some buyers will switch from African suppliers to Asian ones, particularly those in price sensitive markets segments. On the other hand, price is not the only point of competition in apparel: African apparel meeting the rules-of-origin can still be imported xviii duty-free into the USA and Europe; many buyers do not want to source all their products from a single country or region; and China and other low-cost Asian producers do not have an infinite capacity to expand production. 57 AGOA has been the dominant driving force behind recent growth of the apparel sub-sector in a number of Sub-Saharan African countries, including Botswana. Botswana’s AGOA ‘LDC status’ means that manufacturers are able to source highly competitive Asian manufactured cloth as their raw material input. Currently, this special LDC advantage will expire midway through 2007 and it is unlikely to be extended. This would have the greatest impact on the woven apparel segment of the sub-sector, employing 25 percent of the workforce. The survival of these factories is at risk if they cannot source Sub-Saharan qualifying fabric. Botswana needs to start preparing now for this eventuality. Coping strategies could include shifting market focus away from the USA to other markets, shifting the sourcing of raw material to AGOA eligible countries, reducing manufacturing costs through improved labour and material efficiency and by investing in more automated equipment, and shifting production to apparel made from fabric and yarn that is considered in short-supply in the USA and, therefore, still duty-free to the USA under AGOA. 58 Botswana is protected from full-scale competition with the most efficient producers of beef in the world in a small number of markets only, of which the EU and South Africa (plus Norway) are probably the most important. ACP countries are covered by Protocol 4 on beef and veal of the ACP–EU Partnership Agreement of 2000 which gives beef a 92 percent reduction in customs duties. The prospect of price competition pushing EU prices below their current level would be increased greatly if Botswana were to face direct competition with Latin American or Australasian suppliers. At present, Botswana has a preferential tariff quota (TRQ) under Cotonou. Because both the Cotonou and WTO TRQs are small relative to the size of the European market, these imports do not significantly push down prices. The Doha Round or an EU–Mercosur Free Trade Agreement could result in a significant increase in the size of the TRQ for Botswana’s competitors, while a merging of EPA and WTO quotas could have the same impact. While the main policy response is an improvement in competitiveness in the beef sector, Botswana should nevertheless push for the EU to widen existing trade preferences for beef products by allowing customs duty, quota and special duty free export of a wider range of beef and meat products. Non-Tariff Barriers represent a more serious market entry restriction than tariffs, and rules of origin are particularly damaging... 59 For trade with regional neighbours, the more obvious non-tariff barriers (NTBs) – foreign currency controls, import licensing, price controls and state marketing – have been removed, but a number of more non-transparent and arbitrary NTBs remain. For exports outside of SACU, complex rules of origin act as a substantial barrier to exports. The power of rules of origin is apparent from their positive impact in AGOA, and in their negative impact in decreasing Botswana’s textiles export to Zimbabwe. Rules of origin have proven to be the most contentious part of implementing the SADC Trade Protocol. Current rules of origin will be very difficult to satisfy for regional producers and will therefore hinder regional vertical integration (Brenton, 2004). Special rules of origin have been applied to certain sectors (e.g., motor vehicles and sugar), and negotiations for other sectors are still ongoing—most notably textiles and apparel, and wheat and flour. For textiles and apparel, imported raw materials will have to undergo a minimum of two stages of production (“double transformation�) before they can be considered to have originated in a SADC country. SADC rules of origin on vehicles and components will also make it difficult for Botswana’s xix small auto sector to sell to non-SACU SADC countries. SADC Member States plan to discuss rules of origin as a follow-up discussion to the Trade Protocol Mid-Term Review. 60 Botswana should launch a concerted lobbying effort to improve rules of origin in all preferential trading agreements, starting with a Government-initiated ‘rules of origin’ strategy paper. In particular, this could advocate for the Economic Partnership Agreement with the EU to allow for single transformation of goods such as found in the AGOA agreement with the United States. In addition, Botswana should lobby for simplified and liberalised SADC rules of origin in the SADC MTR follow-up discussions (quota restrictions should be removed and the derogation should become the general rule for all SADC Member States). Botswana should press within SACU for a concerted and more liberal approach to rules of origin – SACU has been resistant to relaxing rules of origin within SADC, insisting on higher local content to qualify for preferential treatment than other SADC members would like to accept. Botswana should combine efforts with other textile and garment exporters in the region to lobby for the AGOA LDC provision to be made permanent. …and the EU’s stringent SPS regulations on beef and ostrich exports are becoming ever more troublesome and costly to implement. 61 Compliance with the EU’s SPS requirements is necessary not only to continue exporting to Europe, but also to many other high-priced markets for both beef and ostrich sales. Part of the reason for the Botswana Meat Commission’s (BMC’s) failure to operate at full capacity has been the closures required from time to time to deal with animal disease outbreaks. In the ostrich sector, the BOC also cannot currently isolate and quantify such costs. One of their concerns is that the multi-species abattoir is required by government to meet stringent EU standards for all its slaughter operations, including cattle service slaughters for domestic beef processors. This renders the abattoir less competitive in slaughter service provision relative to its domestic rivals. Detailed estimates of the costs of compliance in both sectors should be a priority for further research so that policymakers may fully assess the costs and benefits of the current emphasis on sales to the European Union. There are various other non-tariff barriers limiting regional and international exports from Botswana. 62 Import permits are required for agricultural products in most SADC countries. South Africa imposes specific levies on some imported and domestically produced agricultural products, although these are not high. Local content requirements are used in all SACU countries. Visa restrictions increase the cost of travel and business, and have a particular impact on the services sector. There is no provision in the new SACU agreement to allow for the freer movement of people. If SACU is to move towards a single market, this is an important step towards its achievement. Botswana should work with other SACU members to develop a regional approach to easing visa restrictions, starting with a SACU-wide visa, possibly including SADC members. Trade Facilitation – Actions at the National, Regional and International Level Botswana faces a number of ‘trade facilitation’ constraints 63 Key features of Botswana’s trade facilitation landscape include proximity to major South African markets, distance from major developed country markets, and – as a landlocked country - reliance on transit through its neighbours, primarily South Africa. Botswana is only four hours by road to the major South African conurbation of Johannesburg. Botswana’s xx exports to the US and EU largely pass through the Port of Durban, which is just 9 hours journey from Gaborone. The costs of transport links to other countries in the region are raised by poor and fragmented infrastructure in neighbouring countries. High transport costs were quoted as a major constraint for all of the background sector studies conducted for this report. Transportation costs for imports of intermediate and capital inputs and exports from Botswana to South Africa and beyond are high in comparison to international competitors such as Mauritius and South Africa, or Argentina or Brazil for beef. Shipping costs are expensive from Southern Africa – Government should use its own procurement program to increase competition 64 Naude (2001) estimates that shipping costs from South Africa are significantly above world prices – with the margins on imports almost 50 percent higher than the average for developing countries. Despite a general reduction in shipping costs worldwide over the last three decades, costs from South Africa have risen. Private freight companies suggest that Government, a major importer of goods, does not provide sufficient scrutiny to its transport cost on imports. Government should undertake a review of government-procured shipping costs to assess whether greater price pressures could be introduced into the transport market. This could review whether government should import FOB1 and open transit to tender from national and international importers. As part of this review, CSO should build an index of shipping costs on which to base analysis (‘FOB’ and ‘CIF’ costs). Walvis Bay and the Trans-Kalahari Corridor offer an alternative route out, but has not yet become popular. 65 By using Walvis Bay, Botswana manufacturers can reduce shipping time to Europe and the East Coast of the United States by a week or more compared to Durban, although the cost is similar. This is particularly important in the apparel sector where a short response time to orders is crucial. This route uses the Trans-Kalahari highway linking Pretoria to Walvis Bay via Botswana. An important component of maritime transport costs is seaport efficiency. South Africa's port turnaround times tend to be up to 5 times as long as that of competitors (Naude, 2001). Port clearance in South Africa on average takes two to three days, and there are many complaints about congestion, especially at the Port of Durban. Container handling at Walvis Bay is more efficient than the port of Durban; and, according to some officials, there is less pilferage of goods. Unfortunately, direct call to the USA has not yet been established, in part because Walvis Bay is not yet certified for export directly to the US. The Walvis Bay route has so far not proved attractive to exporters, partly because traders are accustomed to the Durban route. Hence, traffic to and from the port to Botswana is low, raising transport costs and limiting the frequency of sailings from Walvis Bay. Government should work with the Walvis Bay Corridor Group and other authorities to encourage greater use of Walvis Bay route. Botswana has a relatively well-developed and well-managed land transport infrastructure, although costs could be reduced through removing cabotage cartage laws and reviewing road charging 66 For exports requiring sea ports, Botswana faces high inland transportation costs to Durban and Walvis Bay. The average cost to send a 40 foot container to Durban from Gaborone is approximately Pula 12,000 (US$2460) to 14,000 (US$2870). This is less than the equivalent cost for Zambia, but equal to Zimbabwe and well above Swaziland (Tagg, 2002). Auto- 1 Bearing in mind that CIF costs often exclude hidden transport costs, such as demurrage charges. xxi component exporting firms interviewed for this study reported that the Durban to Gaborone and back route for raw and finished products constitute nearly 60 percent of total transport costs. There are four areas of concern on land transport. 67 First, reviews of the domestic road transport market suggest that there are no major policy restrictions to new entry among the commercially established operators, with the exception of passenger transport, which is restricted to citizens-owned enterprises. However, restrictive cabotage laws (common to all SADC countries) contribute to the high costs of transport in the region – cargo carriers are not allowed to pick up loads at the delivery destination except those destined for their originating country. Government should undertake a review of the impacts of restrictive cabotage laws with a view to initiating a coordinated effort to liberalise these restrictions. Regulatory reform has had a significant impact on prices in other countries – for example, liberalization of the transport market in France reduced transport costs by between 20-40 percent. 68 Second, road charging is a particularly contentious regional issue. Botswana recently revised its road user charges for foreign-owned freight vehicles, with an increase of 797 percent in fees for the Tlokweng-Gaborone Section. Typical of transport policy changes in the region, the increase was made without consultation with SACU partners. Government should review these new road charges with a view to revoking them, and should encourage greater consultation among SACU Transport Ministries, possibly by establishing a transport desk within SACU. 69 Third, soda-ash relies on the South African rail parastatal to transport its product within South Africa. The Botswana authorities should investigate the pricing of rail transport by Spoornet, possibly taking up any concerns about monopoly pricing with South African officials through SACU. 70 Fourth, access to many of the main tourism attractions is limited to gravel roads which are mostly only navigable by means of 4-wheel drive vehicles. The undeveloped road system has been applied as a control mechanism to limit tourism. Given the need to spread Botswana’s tourism appeal across a wider spectrum of market segments (in particular the self-drive market), the possibility of upgrading some of the gravel access roads to and within the parks should be investigated. High air transport costs are a major constraint to the development of services exports, re- enforcing the importance of air liberalisation 71 Passenger travel costs are high. Market access to the air transport sector is quite restrictive in comparison with road transport. Air Botswana is Botswana’s only designated scheduled airline, with the Botswana Government as sole shareholder. A new bilateral agreement with South Africa will phase-in an open-skies, multi-designated aviation regime over three years from 2004. This should have a major impact on prices. As part of an export diversification strategy, progress in phasing in the agreement should be closely monitored to ensure that it gets implemented within the agreed time frames, if not sooner. Government should also consider setting a new target date for the privatisation of Air Botswana. xxii Botswana Customs is efficient, although the difference between South Africa’s Value Added Tax (VAT) and Botswana’s VAT creates a second economic border which should be removed… 72 Customs clearance procedures were recently reviewed and simplified prior to implementation of an UNCTAD project to install the ASYCUDA++ computer system in all the main customs clearance points in the country. Imported inputs for export production get customs clearance largely without unnecessary restrictions. However, the difference between South Africa’s value added tax (VAT) and Botswana’s VAT creates a second economic border. Despite being major trading partners, Botswana’s VAT rate is 10 percent, while South Africa’s is 14 percent. To mitigate the risk of hijacking or pilferage of goods, South Africa recently made it a requirement that all Botswana freight companies forwarding goods to Durban for export must pay VAT collected before the goods are allowed through South Africa, then have it reimbursed. There have been a number of complaints about the reimbursement procedures and delays. 73 Government should propose a SACU-wide strategy for VAT harmonisation. This should include costings comparing the revenue gains/losses with estimates of the economic losses associated with the increased transaction costs of the VAT differentials. A further resulting restriction is the time allowed for the groupage of products within South Africa – exporters or freight forwarders must prove that goods leave South Africa within 30 days or face a penalty. This rule makes it difficult to containerise goods in South Africa. Botswana should lobby the South African authorities (possibly through SACU) to extend the time allowed for groupage (containerization) of products in South Africa before they are liable for South African VAT. …while customs-related constraints to regional trade require a push for greater cooperation. 74 Weak and inefficient customs in neighbouring non-SACU countries create significant barriers to regional integration. The textiles sector is a good example – border constraints in Zambia and Zimbabwe will limit the ability of Botswana apparel manufacturers to use cotton from these countries in their production chain – this could be particularly important if the AGOA LDC special exemption is ended in 2007 (see paragraph 57). Further, there are differing customs electronic platforms between South Africa and Botswana, which means that traders with South Africa still need to fill out forms manually to clear goods. In addition, although electronic documentation is now available in the larger customs offices, it must still be accompanied by a paper version as paper documentation is regarded as the only legal declaration. 75 Botswana should push for an effective agreement on trade facilitation in the WTO and should also continue to use existing regional fora, such as SADC, to tackle these obstacles. In the longer-term, Government should champion the creation of a regional SACU customs authority. This would ensure common procedures, reducing transaction costs for shippers. The Department of Customs and Excise is exploring the concept of a ‘one-stop border post’ with South Africa to reduce border crossing time. As an interim measure, this should be strongly encouraged. xxiii Border constraints are onerous for tourists entering by car, and there is a need to remove multiple tourism taxes and introduce a regional tourist visa. 76 Botswana’s central location in Southern Africa and the fact that it borders four countries places it at the centre of the Southern Africa tourism circuit. The absence of a coordinated and tourist-friendly immigration and customs system at the various entry points results in major frustrations and lengthy delays, and could impact negatively on the visitor experience. Botswana, Zimbabwe, South Africa and Zambia all have different immigration and customs requirements and tax regimes, with the result that visitors have to go through a variety of differing procedures in order to move between them. This makes a quick round trip a major exercise with the visitor having to pass through six border control points, often having to wait in long queues, paying a variety of steep entry taxes and wasting valuable time. Government should explore the scope for the introduction of a single, special tourist visa which includes entry tax costs. This could be approved and purchased in advance of the visit at a foreign office of any of the four tourism circuit countries. Data Limitations One final point – this study came across a range of data constraints. Resolving these – particularly the lack of recent trade data – will be necessary in developing an export strategy 77 First and foremost, there has been a two-year delay in accessing reliable trade data. Government should review procedures and capacity for collecting trade data at the CSO. The Ministry of Finance and Development Planning must find a way to integrate the software of its two departments that collect (Customs) and analyse (Trade Statistics in CSO). Data should be made available in a usable format on a quarterly basis. One solution could be to contract out this role. Second, there are major weaknesses in the quality of services export and import data (paragraph 1.22). There should be a concerted effort involving the CSO, Bank of Botswana and other relevant departments to reconcile and improve the quality of services exports information. Third, good quality data on productivity would help to identify possible sources of inflationary pressures and the underlying reasons for lack of competitiveness. Fourth, the calculation of a producer price index (PPI) for Botswana would facilitate the calculation of an REER index that is consistent with good international practice. Botswana’s REER calculations should, as far as possible, use PPIs for trading partner inflation rather than consumer prices indices. i TABLE 1-1: ACTION PLAN AREA RECOMMENDATION FOLLOW-UP, TIMEFRAME AND PRIORITY CHAPTER 2: THE ENABLING ENVIRONMENT I: THE NATIONAL POLICY FRAMEWORK National 1. Government to finalise development of competition law (paragraph 2.6). MFDP Policy 2005 Development – An HIGH Overview 2. Government to review procedures and capacity for collecting trade data at the CSO. The Ministry of MFDP Finance and Development Planning must find a way to integrate the software of its two departments 2005-6 that collect (Customs) and analyse (Trade Statistics in CSO). Data should be made available in a usable format on a quarterly basis. One solution could be contract out this role. There should be a concerted effort involving the CSO, Bank of Botswana and other relevant departments to reconcile and improve the quality of services exports information. Further, estimates for productivity and a producer price index would facilitate the calculation of valuable economic data (paragraph 2.10). VERY HIGH 3. Government to adopt best-practice principles for Citizen Empowerment Schemes as set out in MFDP paragraph 2.7 onwards. 2006 HIGH Business 4. Government to convene seminar with key stakeholders to monitor implementation of the Customs and Regulation recommendations of FIAS 2004 report (paragraph 2.14). Excise and Foreign 2005 Direct Investment HIGH ii Investment 5. Government to finalise revisions to the Industrial Development Act with the intention of simplifying MTI Policy the industrial licensing system (paragraph 2.14). 2005 HIGH 6. Government to expedite approval of a revised investment code that drops restrictions on smaller-scale MTI FDI (paragraph 2.14). 2005 HIGH 7. Government to expedite reforms to land allocation issue (paragraph 2.14). MFDP 2005 HIGH The 8. Government to consider adopting uniform 15 percent tax rate of all business activities. This would MFDP Incentives make for a much simpler, easier to administer regime which would still place Botswana in a highly Next 3 years Regime competitive position internationally. It would remove the implicit discrimination against the tourism sector, and would eliminate on shore and offshore distinction for tax purposes (see paragraph 3.51). This would of course require an estimation of the budget impacts and an assessment of how this would fit into overall tax policy. Non-mineral income tax, which includes personal income taxes as well, accounts for about fifteen percent of total government revenue, although it is becoming more important as mineral revenues stagnate and SACU revenues decline (paragraph 2.23). MODERATE 9. Consideration should be given to removing the need for a manufacturer to apply to the Ministry of MFDP Finance and Development Planning in order to be eligible for the reduced tax rate. The current 2006 system, whereby an application is lodged which is then carefully scrutinized, seems to add an unnecessary layer of bureaucracy. Companies could be permitted to take a position as to their eligibility (in line with self-assessment principles), with the Department of Taxes then able to review any claim (paragraph 2.26). MODERATE 10. The reservation policy should be reformed. As it stands, it is a restriction on trade in certain areas of MTI commercial activity (Table 2-1: Summary of Major Incentive Programmes and paragraph 2.12). Next 3 years MODERATE iii 11. Government, in cooperation with SACU and SADC, should establish a clearer role for cooperation to MFDP, BURS avoid tax competition in the region (paragraph 2.32). Longer-run MODERATE 12. Government to commission cost-benefit review of industrial rebate for raw materials imported for MFDP production for sales into the domestic market (paragraph 3.75). 2006 MODERATE 13. As part of a broad export diversification strategy, Botswana should reconsider and appraise any broad MFDP or specific subsidies (especially interest rate subsidies) for non-tradeable goods activities. For Next 3 years example, CEDA should evaluate project proposals with a view to their net benefit to Botswana, using shadow prices that place a premium on tradeable goods (paragraph 2.19). MODERATE 14. Central Statistical Office or another suitable agency or think-tank to conduct a review of ongoing MFDP, CSO impact monitoring of existing government support programs, tax incentives and reservation policies Next 2 years set out in Table 2-1: Summary of Major Incentive Programmes. HIGH The Labor 15. Government could develop a detailed and comprehensive national human resources development MLHA, MOE, Market strategy, which focuses in particular on the occupational requirements of the key growth sectors in the MFDP, BOTA, economy. The development of a labour market information system is essential. Most importantly, TEC this should include a comprehensive reform plan for the vocational education and training sector Next 2 years (paragraph 2.70). HIGH 16. The company tax incentive for training requires reviewing and replacing with a more effective MFDP incentive for human resource development (paragraph 2.28). 2006 MODERATE 17. A resolution of the work permits issue is also required, possibly with permits based on a points system DWP and/or a minimum number of permits awarded automatically for companies (paragraph 2.65). In 2005-6 particular, Government should reassess the cost of obtaining a work permit and visa. VERY HIGH iv CHAPTER 3: THE ENABLING ENVIRONMENT II: EXPORT AND SECTOR-SPECIFIC POLICIES Sector Beef Policies - Case Studies 18. Upcoming Government livestock study to fully consider options for BMC privatisation, the removal MoA of export monopoly (in particular to South Africa) and the potential for trade liberalisation to increase 2005-6 exports (paragraph 3.12). VERY HIGH Ostriches 19. Government to eliminate the current ostrich export levy (paragraph 3.24). MoA 2005-6 HIGH Tourism 20. The establishment of local tourism associations, which are affiliated to HATAB, in the main tourism HATAB centres is recommended. Local businesses of such associations could collaborate with the public Next 3 years sector on issues, such as the cleaning up and beautification of tourism towns, safety, infrastructural issues, community awareness and tourism information provision and reservations (paragraph 3.37). MODERATE 21. It is crucial that the DWNP be an active and key partner in the formulation and implementation of the MFDP, DWNP national tourism strategy, be closely aligned to the Botswana Tourism Board, and that the Government Next 2 years allocate and manage its budget allocation and investment in the DOT and the DWNP as a holistic package, within a commonly agreed tourism development strategy (paragraph 3.37). MODERATE 22. Since the tourism success of emerging destinations is reliant upon the active participation and joint DWNP, visioning of the government and the private sector, a formal partnership agreement should be HATAB considered, with both parties committing themselves to the implementation of a jointly agreed national Next 2 years tourism strategy that will guide tourism development over the next decade (paragraph 3.39). MODERATE 23. A formal partnership agreement between the government and the private sector should be considered. DWNP v This could include funding cooperation and in this regard the establishment of a dedicated Tourism Next 2 years and Conservation Management Fund, to be funded through realistic levies and charges at all tourism points such as parks, mobile tour operators, hospitality establishments, etc. (A tourism bed levy is currently being charged, but it is small and only applicable to accommodation enterprises) (paragraph MODERATE 3.39). DWNP 24. Further research is needed on the costs and benefits of allowing a longer concession term for tourism 2006 leases in wildlife management areas (paragraph 3.41). MODERATE Financial Services Exports 25. Government to consider broadening IFSC incentives by making all service exporters eligible for MFDP incentives and renaming the IFSC (International Financial Services Centre) the ISC (International 2005-6 Services Centre) (paragraph 3.48). HIGH 26. Government to increase efforts to negotiate double taxation agreements MFDP Ongoing 27. Government to expedite a complete overhaul of the regulation of the non-bank financial system, MFDP, BOB including offshore jurisdiction. In this regard, a unified non-bank financial system regulator approach, Next 2 years similar to Mauritius and South Africa, could be one possible course to follow (paragraph 3.53). HIGH 28. Government to make further efforts to streamline the process of obtaining IFSC tax and regulatory MFDP, BOB approval and reducing the number of bodies involved (currently the IFSC, the MFDP and the Bank of 2005-6 Botswana), possibly through introducing a one-step approval process (paragraph 3.46). HIGH The Apparel Sector 29. BEDIA could hold a consultation meeting with the manufacturers who are currently receiving BEDIA subsidies under FAP to find out what barriers to competitiveness each faces. BEDIA needs to make 2005 sure that these barriers, some of which are discussed in this report, are overcome as far as possible MODERATE (paragraph 3.62). 30. In-company interventions to be developed as part of the national HIV/AIDS strategy (paragraph 3.66). MoH, Ongoing 31. BEDIA could develop a comprehensive response to the low levels of productivity in the textile and vi apparel industry. It should commission productivity audits and training needs analysis, identify BEDIA suitable service providers to address the needs of the industry both nationally and regionally, identify 2006 means of financing productivity enhancement and training and develop the market for training service VERY HIGH providers to the industry (paragraph 3.65). BEDIA 32. Industrialists in this sector should be encouraged and assisted to form an industrial association to 2006 lobby and negotiate for their specific needs. BEDIA could use its offices to facilitate the establishment of an association of Botswana Textile and Apparel Manufacturers that is constituted as an independent, officially registered body1. This association would then become the key point of contact with the industry and would represent its interests in discussions with Government and Labour MODERATE Unions, and could participate in the preparations for trade negotiations (paragraph 3.67). Import Tariff 33. Botswana should propose, with SACU, a change in the trade regime to allow anti-dumping tariffs to MTI and be eligible for duty exemptions and rebate schemes (Box 4-3). 2006 Exemption MODERATE Schemes for 34. Government to take follow-up review on whether broadening the definition of inputs that are exempt MTI Exporters from customs and VAT would make a significant cost difference to exporters (Error! Reference 2005 source not found.). MODERATE Trade 35. Conduct a performance audit of the provision of political risk insurance by MTI, including an MFDP Finance and assessment of need (paragraph 3.85). 2006 Export Credit MODERATE Insurance Export 36. BEDIA and BDC to appraise whether they should continue in the provision of factory shells BEDIA-BDC Promotion (paragraph 3.82). 2005 and Private Sector MODERATE Support 37. BEDIA to coordinate JITAP implementation to build on work undertaken in this study (paragraph BEDIA Institutions 3.81). 2005 MODERATE vii Licensing 38. Undertake a detailed review of all import permits, with a view to removing this requirement for all but MTI Rules and a limited number of commodities for security, public health and public morality reasons. Government 2006 Standards could review the Control of Goods, Services and Other Charges Act, possibly applying a costs and benefits approach to assess whether a reduced scope for the Act is beneficial. This should include an assessment of the scope of allowing issuing of import permits outside of Gaborone (paragraph 3.94). HIGH 39. Government to develop a ‘Standards Strategy’, which could include an assessment of the scope for MTI- Botswana greater harmonisation of standards within SACU – in particular whether it would be feasible to Bureau of Standards introduce a single set of standards across the region, with inspections to be done by single authority with clear guidelines of why inspections are being done (paragraph 3.89). 2006 MODERATE 40. At the border, the Department of Customs and Excise conducts verification of import permits and Customs, physical examination of goods on behalf the Department of Crop Production and Forestry. These MFDP departments should be linked electronically to avoid delays for importers in clearing goods in the 2005 event of queries (paragraph 3.94). MODERATE CHAPTER 4 – TRADE POLICY FOR EXPORT GROWTH Market 42. Botswana should launch a concerted lobbying effort to improve rules of origin in all preferential MTI Access trading agreements, starting with a Government-initiated ‘rules of origin’ strategy paper. In particular, Next 2 years Issues this could advocate for the Economic Partnership Agreement with the EU to allow for single transformation of goods such as found in the AGOA agreement with the United States. In addition, Botswana should lobby for simplified and liberalised SADC rules of origin in the SADC MTR follow- up discussions (quota restrictions should be removed and the derogation should become the general rule for all SADC Member States). Botswana should press within SACU for a concerted and more liberal approach to rules of origin – SACU has been resistant to relaxing rules of origin within SADC, insisting on higher local content to qualify for preferential treatment than other SADC members would VERY HIGH like to accept (paragraph 4.30). 43. Lobby the EU to improve existing trade preferences for beef products to allow customs duty, quota MTI, MOA and special duty free export of a wider range of beef and meat products, without excessive Next 2 years administrative and sanitary restrictions (paragraph 4.17). HIGH viii 44. Prepare detailed estimates of the costs of compliance need to be prepared in order to fully assess the MoA costs and benefits of the current emphasis on sales to the European Union (paragraph 4.37). 2006 HIGH 45. Botswana should continue to lobby for the AGOA LDC provision to be made permanent in order to MTI provide predictability for potential investors in a particularly unstable market (paragraph 4.21). Next 2 years HIGH Domestic 46. The Botswana authorities should refrain from using import bans as a tool to sustain local enterprises MTI, MFDP Protection against foreign competition. This is an arbitrary measure that is borne by the consumer and Ongoing and the contributes to the anti-export bias. Government should reconsider the effective import ban on bread Terms of and not impose new restrictions on imports of second-hand vehicles (Paragraph 4.59). VERY HIGH Trade ix 47. Botswana should use its influence in the new SACU Secretariat to reenergize the liberalization efforts MTI of SACU. This effort should include: a phased program of tariff reforms that would continue the Next 5 years progress made during the early liberalization period in the 1990s. This should focus on: VERY HIGH reducing SACU’s average applied rates (which would be strongly in Botswana’s interest). urging SACU to accelerate its tariff rationalization program to reduce the number of tariff categories from 41 to six, in line with WTO commitments (paragraph 4.52). lobbying within SACU for the number of anti-dumping initiations to be further reduced (Box 4-3). Government should initiate a short follow-up review of the impact of anti- dumping duties on the cost of Botswana’s business inputs. Government to advocate the development of tighter rules on anti-dumping for all WTO members through the WTO Doha Development Agenda. urging SACU to set up monitoring program of NTBs in similar fashion to a COMESA exercise. reviewing the impact of liberalizing beef imports with a view to discussing this with SACU neighbours (paragraph 4.63). developing a regional approach to easing visa restrictions over the longer run, starting with a SACU visa, possibly including SADC members (paragraph 4.45). Proposing, within the SACU framework, a tightening of SACU members’ ability to make use of Article 17 (paragraph 4.46). proposing SACU-wide limitations on the use of local content requirements that restrict the ability of other SACU members to trade with their SACU neighbours (paragraph 4.47). x CHAPTER 5 – TRADE FACILITATION Customs 48. Develop a program for VAT harmonisation by SACU members, including an assessment of costings, MFDP Procedures, comparing the revenue gains/losses with estimates of the economic losses associated with the 2005-6 Management increased transaction costs of the VAT differentials (paragraph 5.7). Further, Government to propose and Visa development of a transit system that covers movement through all SACU Member States. HIGH Rules 49. Lobby South African authorities to extend time allowed for groupage (containerization) of products DoT, MTI in South Africa before they are liable for South African VAT (paragraph 5.7). 2006 MODERATE 50. Explore the concept of a ‘one-stop border post’ with South Africa to the reduce border crossing time Customs (paragraph 5.11). 2006 MODERATE 51. Explore desirability of moving towards a regional SACU customs authority (paragraph 5.11). MTI, MFDP 2005-6 MODERATE 52. Implementation of FIAS (2004) Customs Recommendations (Box 5-1). MTI, Customs MODERATE 53. Government could set up a ‘complaints/ suggestions’ post at the main border posts, following a Customs similar initiative by COMESA states (paragraph 5.13) 2006 MODERATE 54. Customs and Excise to open Tlokweng border gate on a 24 hour basis (at present it is 0600 to 2200) Customs to reduce congestion (paragraph 5.13). 2005 MODERATE xi 55. Government to explore the scope for the introduction of a single, special tourist visa that could be Immigration approved and purchased in advance of the visit at a foreign office of any of the four tourism circuit Next 2 years countries (Botswana, Namibia, Zambia and Zimbabwe), which will provide access to all four countries (paragraph 5.17). HIGH 56. Government to explore scope for reducing or combining multiple taxes that apply when combining MFDP, Zimbabwe and Botswana in a regional travel package (paragraph 5.18). Customs 2005-6 HIGH 57. Botswana should push for an effective agreement on trade facilitation in the WTO that reflects the MTI, Foreign varying implementation capacities of developing countries and reduces constraints to trade. It should Affairs also continue to use existing regional fora, such as SADC, to tackle these obstacles (paragraph 5.14). 2005-6 MODERATE 58. Government should propose SACU-wide limitations on the use of local content requirements that MTI restrict the ability of other SACU members to trade with their SACU neighbours (paragraph 4.47). 2006 MODERATE 59. Government to work with Walvis Bay Corridor Group and other authorities to encourage greater use MTI- of Walvis Bay route. This could be achieved by aggressive and continuous marketing needs to be Department of directed at both suppliers and shipping agents; comprehensive measurement of volume and type of Transport freight traffic in the context of a study to investigate the possibility of a coordinated effort by private 2005-6 sector groups to use Walvis Bay. Further, BEDIA could request the Southern African Global Competitiveness Hub to facilitate efficient transportation over the Zambia-Zimbabwe-Botswana transportation corridor in the same way that it has for the Trans-Kalahari and Dar-Lusaka corridors. MODERATE 60. Government to undertake a review of government-procured shipping costs to assess whether greater MFDP price pressures could be introduced into the market. This could review whether government should 2006 import FOB and open transit to tender from national and international importers (paragraph 5.25). MODERATE xii Land 61. Undertake a review of the impacts of restrictive cabotage laws (common to all SADC countries) with Department of Trans- a view to initiating a coordinated effort to liberalise these restrictions (paragraph 5.35). Transport portation 2005-6 HIGH 62. Government to review the road charges that started in March, 2004, with a view to revoking them, Department of and fully consulting with other Member States before invoking any such charges in the future Transport (paragraph 5.36). 2005 MODERATE 63. Government to encourage greater consultation among SACU Transport Ministries, possibly MTI, establishing a transport desk within SACU, and encourage intra-SACU dialogue between transport Department of authorities (paragraph 5.36). Transport Next 3 years MODERATE 64. Botswana to take up Spoor-net pricing issue within SACU, and to explore whether South African MTI, competition laws allow for consideration of rail pricing complaints by BOTASH (paragraph 5.38). Department of Transport 2006 MODERATE 65. Government to investigate the possibility of upgrading some of the gravel access roads to and within Department of the parks – for example, from Maun to Moremi, between Chobe and Moremi and within particular Transport, zones of the parks. Such upgrades should be accompanied by infrastructure improvements in the DWNP selected high density areas of the parks so as to accommodate increased visitor flows in a sustainable Next 3 years manner (paragraph 5.42). MODERATE Air Transport 66. Progress made with the phased agreement towards open skies should be closely monitored, so as to MFDP ensure that it gets implemented within the agreed time frames, if not sooner (paragraph 5.45). Next 3 years HIGH 67. Government to set a new target date for the privatisation of Air Botswana (paragraph 5.44). MFDP HIGH xiii The Business 68. Revitalise the privatization program – particularly in the area of telecoms and air transport (paragraph MFDP Costs of 5.50). 2005 Utilities HIGH 69. To reduce international telecommunications prices, Government should consider instructing BTA to BTA issue an unlimited number of licences for international voice services and lift the ban on providing Next 2 years voice over IP. The monopoly of BTC should not be allowed to continue indefinitely to allow BTC to restructure - Government should set a target date for the privatisation of BTC (paragraph 5.53). VERY HIGH 70. The Government should encourage the Water Utilities Corporation (WUC) to supply raw water to the MFDP industrial estates where textile and apparel manufacturers are located. This would be an enormous 2005-6 incentive to potential investors in weaving, knitting and dyeing plants (paragraph 5.60). MODERATE Bibliography Acemoglu, D., S. Johnson and J. Robinson (2002), An African Success Story: Botswana. 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