Report No. 57672-AFR Reform and Regional Integration of Professional Services in East Africa Time for Action October, 2010 Poverty Reduction and Economic Management Unit 2 Africa Region Document of the World Bank TABLE OF CONTENTS ACKNOWLEDGEMENTS ........................................................................................................................... i EXECUTIVE SUMMARY .......................................................................................................................... ii CHAPTER 1. THE ROLE OF PROFESSIONAL SERVICES IN EAST AFRICA .................................... 1 CHAPTER 2. CONCEPTUAL FRAMEWORK FOR THE ANALYSIS OF PROFESSIONAL SERVICES IN EAST AFRICA ......................................................................................... 11 2.1 The Market for Professionals in East Africa .............................................................. 11 2.2 The Market for Professional Services in East Africa ................................................. 12 2.3 Policy Challenges: Education, Domestic Regulation, Explicit Trade Barriers and Labor Mobility Restrictions ....................................................................................... 16 CHAPTER 3. MARKETS FOR PROFESSIONALS IN EAST AFRICA ................................................. 21 3.1 Availability of Professionals in East Africa ............................................................... 21 3.2 Are there Incentives to Acquire Professional Degrees and Skills in East Africa? ..... 31 3.3 Are Students Able to Acquire the Desired Professional Degrees and Skills in East Africa? ........................................................................................................................ 38 3.4 Are there Incentives to Work as Professionals in East Africa? .................................. 44 CHAPTER 4. MARKETS FOR PROFESSIONAL SERVICES IN EAST AFRICA ................................ 47 4.1 Demand for Professional Services in East Africa ...................................................... 47 4.2 Supply of Professional Services in East Africa .......................................................... 62 CHAPTER 5. POLICY AFFECTING PROFESSIONAL SERVICES IN EAST AFRICA: EDUCATION, REGULATION, TRADE, AND LABOR MOBILITY ..................................................... 67 5.1 Regulatory Measures, Explicit Trade Barriers and Education Requirements Affecting Professional Services in East Africa .......................................................................... 68 5.2 Labor Mobility in East Africa .................................................................................... 84 5.3 Indicators of Regulatory Conditions and Services Restrictiveness Indices in Professional Services in East Africa: A Comparative Analysis ................................. 89 5.4 How much do Education Requirements, Domestic Regulations, Trade Barriers, and Immigration Restrictions Impede Professionals and Firms from Entering Markets in East Africa? ................................................................................................................ 96 5.5 How much do Conduct Regulations Limit the Ability of Professionals and Firms to Operate in Professional Services Markets in East Africa? ......................................... 99 CHAPTER 6. RECOMMENDATIONS FOR POLICY ACTION........................................................... 103 6.1 Policy Actions at the National Level ......................................................................... 103 6.2 Policy Actions at the International Level ................................................................... 112 ANNEXES ................................................................................................................................................ 120 Annex 1. Measuring the Interdependence and Interconnectedness of Business Services with Other Sectors of the Economy .......................................................................................................... 120 Annex 2: Note on the Quantitative Assessment of Regional and Wider Liberalization of Professional Services in Kenya and Tanzania ............................................................................................. 122 Annex 3: Business Surveys of Services Users and Providers................................................................. 127 Annex 4: Users' Evaluations of the Usefulness of Professional Services............................................... 132 Annex 5: Regulatory and Market Structure Surveys .............................................................................. 135 Annex 6: Survey on Costs and Procedures to Become a Professional ................................................... 138 Annex 7: Sectoral Profile of Clients of Accounting Services Providers in East Africa ......................... 142 Annex 8: Indicators of Regulatory Conditions in Professional Services ................................................ 143 Annex 9: Services Trade Policy Restrictiveness Indices ........................................................................ 144 REFERENCES ......................................................................................................................................... 149 LIST OF BOXES Box 2.1: Regulatory Heterogeneity and Regional Integration .................................................................. 19 Box 6.1: Student Loan Programs ............................................................................................................ 105 Box 6.2: Tuning Educational Structures ................................................................................................. 107 Box 6.3: Subject Specific Competences in Civil Engineering --Tuning Latin America ........................ 108 Box 6.4: Paralegals in Malawi ................................................................................................................ 109 Box 6.5: The Structured Engineers Apprenticeship Program in Tanzania .............................................. 110 Box 6.6: Negotiating Mutual Recognition Frameworks: ........................................................................ 115 LIST OF FIGURES Figure 1.1: Forward and Backward Linkages in Tanzania......................................................................... 3 Figure 1.2: Forward and backward linkages in Uganda ............................................................................. 3 Figure 1.3: Forward and Backward Concentration in Tanzania................................................................. 4 Figure 1.4: Forward and Backward Concentration in Uganda ................................................................... 4 Figure 1.5: Productivity of Users vs. Non-Users of Professional Services in East Africa ......................... 6 Figure 1.6: Strength of Auditing and Reporting Systems .......................................................................... 8 Figure 1.7: Availability of Scientists and Engineers .................................................................................. 9 Figure 1.8: Property Rights ........................................................................................................................ 9 Figure 1.9: Efficiency of Legal Framework for Disputes ........................................................................ 10 Figure 2.1: Explaining Skill Shortages and Skill Mismatches in Professional Services .......................... 14 Figure 2.2: Explaining Underdevelopment of Professional Services in Africa ....................................... 15 Figure 3.1 Number of Accountants per 100,000 Inhabitants .................................................................. 21 Figure 3.2: Number of Lawyers for 100,000 Inhabitants ......................................................................... 24 Figure 3.3: Availability of Scientists and Engineers ................................................................................ 26 Figure 3.4: Engineering Professionals in Tanzania .................................................................................. 27 Figure 3.5: Distribution of Accounting Professionals in Tanzania, 2008 ................................................ 28 Figure 3.6: Senior Staff by Gender .......................................................................................................... 29 Figure 3.7: Kenyan Professions and Median Annual Salaries (US$) ...................................................... 33 Figure 3.8: Monthly Wages of Accounting and Engineering Professionals ............................................ 34 Figure 3.9: Monthly Wages of Lawyers and Legal Professionals............................................................ 36 Figure 3.10: Number of Professionals and Professional Density (per 100,000 Inhabitants) ..................... 36 Figure 3.11: Panel A, B & C: Median Monthly Wages in US$, Accountants ........................................... 37 Figure 3.12: Quality of Math and Science Education ................................................................................ 40 Figure 4.1: External Usage of Professional Services in East Africa ........................................................ 48 Figure 4.2: Size and Ownership Profile of Clients of Small Providers of Accounting ............................ 50 Figure 4.3: Sources of Revenue by Type of Service for Providers of Accounting .................................. 51 Figure 4.4: Usage of Accounting and Auditing Services by East African Firms ..................................... 52 Figure 4.5: Size and Ownership Profile of Clients of Small Providers of Legal ..................................... 53 Figure 4.6: Sources of Revenue by Type of Service for Providers of Legal............................................ 54 Figure 4.7: Usage of Legal Services by East African Firms .................................................................... 55 Figure 4.8: Size and Ownership Profile of Clients of Small Providers of Engineering ........................... 57 Figure 4.9: Sources of Revenue for Providers of Engineering Services in East Africa by Type of Service ................................................................................................................................... 58 Figure 4.10: Usage of Engineering Services by East African Firms .......................................................... 59 Figure 4.11: Usage of Professional Services in East Africa: Cross-Country Comparisons ....................... 61 Figure 4.12: Number of Professional Firms per 100,000 Inhabitants ........................................................ 62 Figure 5.1: Regulation in Professional Services, Overall Indicator ......................................................... 90 Figure 5.2: Entry Regulations in Professional Services ........................................................................... 91 Figure 5.3: Conduct Regulation in Professional Services ........................................................................ 92 Figure 5.4: Overall STRI in Professional Services .................................................................................. 93 Figure 5.5: STRI in Professional Services by Mode of Supply ............................................................... 94 Figure 5.5: STRI in Professional Services by Mode of Supply (cont'd).................................................. 95 Figure 5.6: Education Requirements in Professional Services ................................................................. 96 Figure 5.7: Restrictiveness of Regulation in East Africa: Top Constraints by Sector ........................... 101 LIST OF TABLES Table 1.1: Share of Business Services in GDP and Average Growth Rates of .......................................... 2 Table 1.2: Estimated Real Income Impacts from Trade Policy Options in Professional Services for Kenya and Tanzania (Results are Percentage Change from Initial Equilibrium) ...................... 5 Table 1.3: Regressions on Labor Productivity and Usage of Professional Services .................................. 7 Table 3.1: Foreign Professionals in East Africa ....................................................................................... 30 Table 3.2: Kenyan Accounting Professionals in Kenya and Abroad, 2007 ............................................. 31 Table 3.3: Median Annual Wages for Secondary and University/Post-Graduate .................................... 31 Table 3.4: Tertiary Education Systems in East Africa ............................................................................. 38 Table 3.5: Comparative Statistics of Students Enrolled in Legal and Engineering .................................. 39 Table 3.6: Comparative Growth Rate of Professionals in Tanzania......................................................... 39 Table 3.7: Cost of Obtaining Professional Degrees and Internal Rates of Return on Professional Education in East Africa.......................................................................................................... 41 Table 3.8: Emigration Rates of African Individuals by Skill Level ......................................................... 45 Table 4.1: Percentage of Professionals Employed by Top 10 Firms in the Accounting and ................... 63 Table 4.2: Civil Work Contracts by Major Sector and Supplier region in East Africa, ........................... 64 Table 4.3: Percentage of Firms that Export Professional Services ........................................................... 65 Table 5.1: Entry Regulation, Domestic Providers: Academic and Professional Qualifications for Accountants and Certified Accountants .................................................................................. 70 Table 5.2: Entry Regulation, Domestic Providers: Academic and Professional Qualifications for Accounting Technicians .......................................................................................................... 70 Table 5.3: Entry Regulation, Domestic Providers: Standards in Accounting Services ............................ 71 Table 5.4: Entry Regulation, Foreign Providers of Accounting Services ................................................ 74 Table 5.5: Conduct Regulation and Discriminatory Measures in Accounting Services........................... 75 Table 5.6: Entry Regulation, Domestic Providers: Academic and Professional Qualifications for Lawyers ................................................................................................................................... 76 Table 5.7: Entry Regulation, Domestic Providers: Academic and Professional Qualifications for Paralegals ................................................................................................................................ 76 Table 5.8: Entry Regulation, Domestic Providers: Standards in Legal Services...................................... 77 Table 5.9: Entry Regulation, Foreign Providers of Legal Services .......................................................... 78 Table 5.10: Conduct Regulation and Discriminatory Measures in Legal Services .................................... 80 Table 5.11: Entry Regulation, Domestic Providers: Academic and Professional Qualifications for Engineers ................................................................................................................................. 81 Table 5.12: Entry Regulation, Domestic Providers: Academic and Professional Qualifications for Engineering Technicians ......................................................................................................... 82 Table 5.13: Entry Regulation, Domestic Providers: Standards in Engineering Services ........................... 82 Table 5.14: Entry Regulation, Foreign Providers of Engineering Services................................................ 83 Table 5.15: Conduct Regulation and Discriminatory Measures in Engineering Service ........................... 84 Table 5.16: Labor Migration Policies in East Africa .................................................................................. 87 Table 5.17: Work Permits for Skilled Foreigners in East Africa................................................................ 88 Table 5.18: Categories of Work Permits in Uganda ................................................................................... 88 Table 5.19: Categories of Work Permits in Rwanda .................................................................................. 89 ACKNOWLEDGEMENTS The work in this report was made possible by grants from the Multi-donor Trust Fund for Trade and funding from the Bank Netherlands Partnership Program (BNPP). The report was drafted by a team composed of Nora Dihel, Ana Margarida Fernandes, Aaditya Mattoo, and Nicholas Strychacz. Toru Nishiuchi provided statistical assistance and developed the Regulatory Database on Professional Services in East Africa. Ephraim Kebede provided statistical assistance. Contributions from Bathsur Gootiiz and David Tarr are gratefully acknowledged. We would like to acknowledge valuable contributions from the following local consultants: Austen Baraza, Richard Gicho, John Irungu, John Kashangaki, Jacinta Mueni Kinyili, John Kibira Mathenge, and Peter Riechi Okara in Kenya; Kanobayita Alphonse, John Bosco Kanyangoga and Sebastien Manzi in Rwanda; George Gandye in Tanzania; and Patrick Barugahare and Lisa Cummins in Uganda. The business surveys were undertaken by TNS Opinion under Marco Pelucchi's helpful guidance. The work was undertaken with the overall guidance of Kathie Krumm (Sector Manager, AFTP2). The team wishes to acknowledge feedback and guidance received from Paul Brenton, Josaphat Kweka, Tracy Lane, Rachel Sebudde, Kene Ezemenary and Zubaidur Rahman. The team also wishes to thank the Bank's Kenya, Rwanda, Tanzania and Uganda country teams for their many useful insights and advice. The peer reviewers for the report included Bernard Hoekman (Director, PRMTR) and Vincent Palmade (Lead Economist, AFTFP). We would like to thank them for their valuable comments and suggestions. We would also like to thank Yutaka Yoshino, Jos Verbeek, Ian John Douglas Gillson, John Panzer, Juan Sebastian Saez, Zeinab Partow, Ingo Borchert, Louise M. Fox, Anton Dobrogonov, and Wolfgang Fengler for their valuable comments. The team also thanks the staff of the World Bank offices in Kenya, Rwanda, Tanzania and Uganda for logistical support: Mwanaisha Kassanga, Gladys Akurut Alupo, Rosemary Ngesa Otieno, Peter Isabyrie, Rosemary Mugasha, Agnes Mganga, Mary-Anne Mwakangale, Anne Odera, and Bathilde Jyulijyesage Special thanks are also owed to Dora Harris, Michelle Chester, Alice Aloua Tanon-Aguehounde, Arlette Sourou, Senait Kassa Yifru, Martin Buchara and Tanisha McGill for support provided from Washington. Lawrence Mastri was the editor of the document. i REFORM AND REGIONAL INTEGRATION OF PROFESSIONAL SERVICES IN EAST AFRICA: TIME FOR ACTION EXECUTIVE SUMMARY Policy makers across East Africa realize that weak professional services are impeding growth in their countries. Recent studies have revealed a strong relationship between African firms' access to services and their productivity. The East African governments have now committed themselves to reforming their professional services along with other backbone services like telecommunications, banking and transport. This will include creating a more integrated regional market -- and, to initiate this push, in 2009 the five East African heads of state - Burundi, Kenya, Rwanda, Tanzania, and Uganda - adopted the Common Market Protocol to begin the integration process in professional and other services. The East African governments have asked the World Bank for assistance in fixing the large gaps in information on policies and market conditions in professional services, especially accounting, engineering, and legal services. This report is a first step towards that aim. It will serve as a background document for meetings and workshops at the country and regional level, where regulators, professional associations, business representatives, negotiators and other stakeholders will confirm and deepen the information, then plan concrete steps for reform and regional integration. I. Professional Services Matter Even though the share of business services in the GDP of East African countries is small, ranging from 1.5 percent in Uganda to 3 percent in Kenya in 2007, the sector is among the most dynamic. Over the period 2001­2007, business services have grown at 8 percent per annum in Kenya, 14 percent per annum in Tanzania, and nearly 18 percent per annum in Uganda. In Rwanda, the sector has been stagnant. Business services are key inputs for other sectors. Input-output tables suggest that they are among the top fifth of economic sectors in direct and indirect usage. There are significant downstream linkages in minerals, manufacturing (garments, leather, paper, metal products, and chemicals), and services (business, education, distribution, and public administration). A wider use of professional services also means higher labor productivity. The average labor productivity of East African firms that use accounting, legal, and engineering professional services is 10 to 45 percent higher than that of firms that do not. Small firms, especially, show a strong connection between professional services and productivity. ii II. There are Striking Differences in the Level of Development of Professional Services across Countries in East Africa Availability varies across countries and professions. East African countries show significant variation in the availability of professionals, with relative abundance in Kenya and relative scarcity in Rwanda. But per capita availability in each of these countries is only a fraction of that in the more advanced African economies of Mauritius and South Africa (figure 1). Figure 1: Professional Density in Africa Panel A: Number of Accountants per 100,000 inhabitants Rwanda 0.9 Zambia 1 Uganda 2 Malawi 3 Tanzania 8 Kenya 14 South Africa 48 Mauritius 91 0 20 40 60 80 100 Panel B: Number of Lawyers per 100,000 inhabitants Malawi 2 Tanzania 2 Mozambique 2 Uganda 4 Rwanda 5 Zambia 6 Botswana 12 Kenya 19 South Africa 39 Mauritius 46 0 20 40 60 80 100 Source: World Bank Survey of Providers of Professional Services in East Africa, 2009. ...As do the wages of professionals. Although professionals in East Africa receive low nominal wages compared to their counterparts in other countries, once their wages are adjusted for purchasing power, professionals in Kenya and Uganda are well paid -- perhaps an indication of their scarcity relative to the demand for their services. A wage premium for professionals over the earnings of other workers with a university degree is evident in all EAC countries. Across professions, experienced engineers are among the best paid in each of the countries. iii The limited availability of middle-level professionals hurts access to services. Data suggests that -- with the exception of accounting technicians in Kenya -- East Africa has a middle-level skills vacuum. And middle-level professionals often play a crucial role in providing services to certain clients -- for example, accounting technicians provide basic accounting services needed by SMEs. Market structures show elements of both oligopoly and competition. Accounting and auditing services are dominated in each country by affiliates of multinationals -- the so- called Big Four (although in Kenya, local mid-level accounting firms are gaining market share at the expense of the Big Four after initially working as sub-contractors for them). The legal and engineering sectors are dominated by domestic providers -- often small firms and microenterprises -- although a small foreign presence exists in engineering. In legal services the worldwide consolidation trend that has created a growing number of large multinational law firms with vast international networks has missed East Africa. A large number of formal sector firms use professional services. Uganda is indicative of the pattern of service use by different-sized firms. There is a surprisingly high use of all three services by even the smallest firms (1­19 employees), which may be because this survey covers mostly urban formal sector firms (figure 2). A large proportion of the demand for accounting and auditing services seems to come from mandatory legal requirements for financial reporting and taxation. Figure 2: Usage of Professional Services in Uganda, % Usage of Professional Services in Uganda, % 100 0 0 10 90 5 21 13 26 80 70 5 11 60 50 95 100 85 90 40 77 74 68 30 64 61 20 10 0 Accounting Legal Engineering External Usage Internal Usage Source: World Bank Survey of Users of Professional Services in East Africa, 2009. In many cases, there is an inverted U-shape relationship between external use of professional services and firm size -- that is, external usage increases with firm size until a certain point, after which it declines. This pattern suggests that large firms may use a more selective outsourcing strategy of professional tasks. Whereas small and middle sized firms rely primarily on external iv service providers, more than a fifth of the largest firms (above 99 employees) rely exclusively on in-house engineers and lawyers. The in-house provision of professional services seems to increase with the degree of firm-specific knowledge or skills involved in the professional tasks. For example, the in-house provision of accounting services is much smaller than that of legal services, which in turn is well below the internal provision of engineering services. Gender imbalances are acute in all professional services, particularly at the senior level. Most senior staff are male, although women are slightly better represented in Tanzania. III. Explaining Skills Shortages and Skills Mismatches in East African Professional Services Covering the cost of professional education is a challenge. Professional education is expensive in all East African countries. While skill premia are evident, and the internal rate of return to education is also high in the region, the median cost to become professional ranges from US$ 14,000 to US$ 26,000, making professional qualification unaffordable for most of the populations, especially because the market for educational loans remains undeveloped. Weaknesses in education impede the acquisition of professional skills, particularly in engineering. The general erosion of mathematical skills in all countries explains the declining number of applicants in science, engineering, and technology courses and hence the shortages in the engineering sector. Limitations in the capacity and quality of professional education institutions. The absence of institutions that offer specialized (post-graduate) courses -- e.g., in legal and engineering services -- has been noted by stakeholders in several East African countries, as has the absence of institutions that offer academic and professional training courses for middle-level professionals (e.g., paralegals). There are no links between education systems, professional associations, employers, and users of professional services. This has the effect of producing qualified but unemployable professionals. IV. Explaining the Underdevelopment of Professional Services in East Africa Domestic regulation on the entry and on the operations of professional service firms, presumably designed to meet social goals, undermines competition. In East Africa, all three sectors impose domestic entry regulations. Kenya, Tanzania and Uganda impose severe entry restrictions in engineering and legal services. Rwanda remains on the light side in all three sectors. Each country grants exclusive rights to certain professions over certain activities. For example, only accounting professionals can perform statutory and public sector audits; only legal professionals can represent clients before courts; only qualified engineers can conduct feasibility studies. On the one hand, maintaining exclusive rights can lead to increased specialization of professionals and guarantee a higher quality of service. On the other hand exclusive rights can create v monopolies that have adverse price and allocation effects, especially if rights are granted for services that could be provided at lower cost by less-regulated middle-level professionals. Regulations affecting operations of legal and engineering providers (conduct regulation) in East Africa are heavier than in most comparators in the sample (figure 3). These outcomes are explained by price regulations, advertising prohibitions, and restrictions on the business structure of firms and on multidisciplinary activities. Figure 3: Conduct Regulation in Professional Services Panel A: Accounting Conduct regulation 6 5 4 3 2 1 0 Panel B: Legal Conduct regulation 6 5 4 3 2 1 0 vi Panel C: Engineering - Conduct regulation 6 5 4 3 2 1 0 Source: OECD Regulatory Database on Professional Services and World Bank Regulatory Surveys, 2009. Fixed prices. In Kenya, Tanzania, and Uganda legal services are subject to price regulation-- binding minimum prices in Kenya and Uganda, and minimum and maximum prices in Tanzania. Engineering services are subject to price regulations in Tanzania in the form of binding minimum prices. Advertising restrictions. Advertising by lawyers is prohibited in all countries, by accountants and auditors in Kenya, Tanzania and Uganda, and by engineers in Tanzania. Regulations governing business structure and multidisciplinary practices. Restrictions on the business structure appear in all professional services sectors in most countries. These regulations can restrict the ownership structure of professional services companies, the possibility for collaboration within the profession and with other professions, and in some cases the opening of branches, franchises, or chains. Demanding service standards can be burdensome for users. Multiple certification requirements have a disproportionate impact on competition. Kenya's banking and insurance laws require that all companies use auditors approved by the banks or insurance institutions -- generally auditors affiliated with one of the Big Four or other large companies -- to prepare the financial statements needed to obtain credit, for outside investors, or other external parties. These requirements may restrict access to the market for smaller suppliers. Restrictions on operations are hindering professional services firms. Private providers of services in East Africa say that restrictions on multidisciplinary activities are the most vii restrictive measures in accounting services, while regulations on fees and prices represent the most important constraints in legal and engineering services. Other constraints include non-transparent procurement procedures in accounting and engineering services, and inappropriate standards in accounting services (figure 4). Figure 4: Restrictiveness of Regulation in East Africa: Top Constraints by Sector Source: World Bank Survey of Providers of Professional Services in East Africa, 2009. Trade barriers limit competition and the efficiency of professional service providers. Countries in the region differ on openness to trade. Kenya and Tanzania exhibit the most restrictive policies on trade in professional services while Uganda is relatively open, and Rwanda much more so. Legal services are usually the most protected sector. This report will detail the maze of regulatory measures; but figure 5 and the following discussion are illustrative. Figure 5: Overall Restrictiveness indices in Accounting and Legal Services Overall Restrictiveness Index Accounting Overall Restrictiveness Legal 100 100 90 90 80 80 70 70 60 60 50 50 40 40 30 30 20 20 10 10 0 0 Source: Gootiz and Mattoo (2009). viii Cross-border trade (mode 1) All East African countries restrict cross-border trade in certain professional services, such as advice on domestic law, statutory and public sector audits, as well as tax representation and tax advice. Movement of natural persons (mode 4) In East Africa, explicit trade barriers, regulatory requirements, and immigration policy impede the supply of services by foreign professionals. In Kenya and Tanzania, de jure or de facto nationality requirements to practice domestic law exclude foreign professionals. Kenya does, however, make an exception for citizens of Tanzania and Uganda. Foreign-licensed lawyers can advise on foreign law in both Kenya and Tanzania, but in Kenya they can only act as consultants or as employees of a local law firm. Both countries, along with Uganda, impose discretionary limits (e.g., through labor market tests) on the presence of foreign professionals. Rwanda imposes no restrictions on the practice of foreign law and only limited restrictions on the practice of domestic law. The entry of foreign accountants in Kenya and Tanzania is less restricted. Foreign- licensed accountants can practice in Kenya if they belong to certain professional accountancy organizations (e.g., Scotland, England and Wales, Ireland, India, the US, Canada, and Tanzania) and if they pass an examination on Kenya's company law and taxation. In Tanzania, foreign-licensed accountants can practice if they meet a residency requirement and if they come from an International Federation of Accountants (IFAC) member country, in which case their qualifications are automatically recognized. Non- IFAC professionals must undergo a three-year training period. Both countries, along with Uganda, impose discretionary limits -- e.g., through labor market tests -- on the presence of foreign professionals. Rwanda imposes only minor restrictions on the length of stay. In contrast, entry conditions are much more liberal for foreign engineers, with no nationality or residence requirements. Rwanda and Uganda automatically recognize academic and professional qualifications as well as licenses obtained in other jurisdictions. In Tanzania, recognition is on a case-by-case basis, whereas in Kenya only the academic and professional qualifications are automatically recognized. Commercial presence (mode 3) Entry of foreign law firms is not permitted in Kenya and Tanzania but is allowed in Uganda. Local members of international networks face restrictions in each of those three countries on using the network's brand name. In accounting and auditing, all countries permit the establishment of foreign commercial presence, although Kenya imposes restrictions. In Kenya, Uganda and even the more ix liberal Rwanda, branches of foreign firms are prohibited. Kenya and Tanzania prohibit ownership or control by non-locally licensed professionals. In Tanzania, ownership by foreign nationals is limited to 50 percent, and a firm in Tanzania can use a foreign firm's name only if the relationship is a complete partnership, not affiliation. Foreign firms face fewer restrictions in engineering services. Still, Tanzania does not allow majority foreign ownership. Public procurement across modes Except in Rwanda, the procurement market for accounting services is partially closed to foreign firms or professionals without a presence in the host country. Foreign law firms and professionals with or without a presence in Kenya and Uganda are generally prohibited from selling legal services to government bodies or international organizations. For foreign law firms and professionals with a presence, the procurement market for legal services in Rwanda and Tanzania is generally open -- with the exception of advice on matters regulated by domestic law, courts representation, and tax advice. In Tanzania the procurement market for legal services is totally closed for foreign law firms and professionals without a presence. In engineering services in Tanzania and Uganda, foreign firms or individuals without a commercial presence are not allowed to engage in any procurement activities. V. Policies Affecting Trade Have Segmented Regional Markets for Professional Services Data on the presence of foreign professionals in East Africa is scarce. In Kenya, Tanzania and Uganda, the number of foreign accounting professionals is less than 10 percent of the total; but in Rwanda the share is as high as 60 percent. This is because, at the time of the survey, the country had only 36 domestic accountants and had opened up to foreign presence. Less than 300, or about 7 percent of Kenyan accountants, work abroad, of whom about half are in Uganda, and one-tenth in Tanzania. In legal services, there are virtually no foreign professionals in any of the countries. In engineering services, Tanzania alone provides data, which reveals that foreign engineers are 6 percent of the total. Regarding commercial presence, the affiliates of the Big 4 firms dominate accounting and auditing services in each country. Foreign firms are scarce in engineering and completely absent in legal services. A significant proportion of firms claim to export services, except in Rwanda. Proportions range from about 10 percent of legal firms in Uganda to 55 percent of engineering firms in Kenya. Evidence from World Bank-supported civil works procurement contracts between 1994 and 2009 shows the lack of integration of the East African market for engineering x services. Domestic companies generally win most of the contracts, except in energy and mining and transportation, where non-African companies have the lion's share. Surprisingly, there is virtually no intra-East African foreign firm participation in these contracts, with the limited exception of Kenyan firms in some Tanzanian and Ugandan projects and Ugandan firms in some Rwandan projects. VI. Specific Reforms at the National and International Levels Can Yield Significant Benefits National markets for professionals and professional services in East Africa remain underdeveloped: performance indicators fall below the averages of countries at a similar level of development. Regional markets for professional services and professional education are fragmented by restrictive policies, such as nationality requirements and regulatory heterogeneity, relating to licensing, qualification, and educational requirements. These outcomes are the result of constraints that call for policy action in four areas: education, regulation of professional services, trade policy, and labor mobility. Regional integration and trade liberalization are only one part of the broader reform agenda in professional services. Other vital areas include professional reform and upstream education and domestic regulation at the national level. 1. Reforms at the National Level Reforms should focus on addressing the skills shortages and mismatches, and on helping professional services to grow. Education Financial constraints prevent individuals from acquiring professional education, so developing ways to finance higher education should be a priority. Weaknesses in upstream school education mean that students are ill-equipped to acquire professional skills; thus, enhancing the quality and capacity of schools, especially in mathematics and sciences, must be a priority. All East African countries should commit to improving the quality of technical studies. The state of current professional education and its institutions will have to be improved, and new institutions will have to emerge. The latter may be best addressed by the private sector provided there is a good regulatory environment for higher education. Because of inadequate professional training programs, young graduates cannot find employment, which explains the attrition of skills in several professions. Stakeholders from the private sector have noted the coordination problems between employers, professional associations, and education institutions in terms of the content of educational programs for engineers and accountants. xi Policy actions that encourage collaboration between universities, professional associations, and the private sectors through internships could help students acquire skills and practical training. The Structured Engineers Apprenticeship Program (SEAP) for Graduate Engineers, developed by the Engineers Registration Board in Tanzania, is one program that could be replicated by other professions and other countries. Domestic Regulation East African countries might consider some of the following actions to improve domestic regulations: Relax cumulative disproportionate entry qualitative requirements -- for example, by narrowing the range of exclusive tasks in certain professions. While exclusive rights can bring increased specialization of professionals and guarantee a higher quality of service, they can also create monopolies that adversely affect price and allocation, especially if quality services can be provided at a lower cost by less-regulated middle-level professionals. Eliminate disproportionate restrictions on competition. - Fixed prices. Price regulations are supported by national professional associations, who claim that regulations prevent adverse selection problems. But most of the economic literature states that regulatory instruments can stifle competition and hurt consumers. Less restrictive mechanisms, such as better access to information on services and services providers, can accomplish the same goals at lower economic cost. - Restrictions on business organization. These can hamper the ownership structure of professional services companies, the scope for collaboration within the profession and with other professions and, in some cases, the opening of branches, franchises, or chains. - To justify these restrictions, professional associations argue that professionals are more likely to give independent advice if certain intra-professional partnerships are prohibited, while restrictions on multidisciplinary activities stop potential conflicts of interests that are detrimental to consumer welfare. But private interest theories stress that these regulations are clearly anticompetitive and may harm consumers by preventing providers from developing new services or cost-efficient business models. - As an example, these regulations might prevent lawyers and accountants from providing integrated legal and accountancy advice for tax issues. In general, restrictions on collaboration between members of the same profession seem to be less justifiable than restrictions on collaboration between members of different professions where the independence and liability of professionals must be protected. xii - Advertising prohibitions. According to public interest theories, advertising restrictions protect consumers. But private interest theories maintain that, as long as advertising is relevant and truthful, there is no justification for prohibiting it. If there are safeguards to prevent misleading advertisements, advertising can encourage competition by informing consumers about different products, allowing them to make better buying decisions. Comparative advertising can also boost new firms entering a market. Engaging with professional associations to design regulatory reform and trade liberalization strategy. 2. Reforms at the International Level Restrictive policies and varied regulations not only fragment regional markets for professional services and professional education, but prevent East African countries from exploiting gains from trade, based on comparative advantage, and improving competition by exploiting economies of scale. The differences in national endowments of professionals and the capacity for professional training, reflected in differences in the earnings of professionals and the costs of training across countries, suggest that large trade gains are possible by eliminating impediments to trade. More regional integration would also enhance competition between service providers, allow providers to exploit economies of scale, especially in professional education, and produce a wider variety of services. The prospects for attracting investment, both domestic and foreign, are greater in an integrated regional market. Regionalization may make it possible to reap scale economies in regulation and supervision, particularly where national regulatory agencies face skill constraints; it could also reduce the scope for the capture of national regulation by private sector interests. Policy action is required to (a) reduce explicit trade barriers that affect professional services, including reform of immigration laws, and (b) coordinate regulatory cooperation with trade liberalization. Trade barriers liberalized on a most favored nation (MFN) or non-preferential basis would generate the largest welfare gains. But liberalization may not always be technically feasible or politically acceptable, especially when differences in regulatory requirements cause impediments. Deeper regional integration through regulatory cooperation with neighboring partners with similar regulatory preferences can complement non-preferential liberalization. For example, common regional standards on accountancy and audit reporting would reduce the costs to market participants of operating across national borders. A computable general equilibrium model estimates positive impacts on real incomes of Kenyans and Tanzanians from reform in xiii professional services, amounting to as much as one-half percent of GDP -- significant for a sector that accounts for less than 3 percent of GDP. Explicit Trade Barriers East African countries may, individually or collectively, consider some of the following actions to improve their commitments to professional markets liberalization: Define the economic and social motivation for nationality and residency requirements. The objectives of those requirements may be achieved by less discriminatory measures such as (a) requiring Foreign Service providers to undergo professional assessment when nationality requirement is used as a tool to ensure professional competence and (b) appointing a representative agent or liability insurance in lieu of physical presence or residency requirement. Develop transparent criteria and procedures for applying economic needs testing and other equivalent policies. Set a timeline for easing and ultimately abolishing the policy. Minimize restrictions on forms of establishment. Where prohibition on incorporation is absolute such that only sole proprietorship and partnership are allowed, consider introducing "safeguards" on corporate forms that ensure that professionals are held accountable for their service. For example, require professionals to secure liability insurance, or stipulate that the majority of directors be qualified professionals. Where investments by non-professionals are prohibited, consider substituting the prohibition with less restrictive policies, such as requiring professionals to control operations. Relax absolute prohibition on foreigners from forming partnership with local professionals by requiring instead that foreign and local partners are jointly liable, and that their liability for the partnership's debts be unlimited. Develop a transparent and consistent framework for accepting professionals with foreign qualifications. Consider adjustments in policies where the social and economic motivations are ambiguous, such as requiring membership in local professional associations or mandatory partnership with or hiring of locals of the same profession within the same area of competence. Where foreign professionals are barred from practicing, recognize professional qualifications from other member countries with standards similar to those applied in the East African countries. How far and how quickly each East African country can proceed with reforms will depend on the political power of the users and providers of professional services - an issue that merits deeper investigation than has so far been possible. Political economy factors will also influence liberalization, which would ideally be non-preferential so that domestic users of professional xiv services have access, and domestic professionals can benefit from exposure to the best service providers in the world. If, however, reciprocal liberalization at the regional level is politically more feasible, then countries may want to weigh the benefits of opening markets, even in the narrow regional context, against the possible costs of giving a first-mover advantage to what may be a second- best regional service provider. Regulatory Cooperation at the Regional Level Developing meaningful competition and professional services markets will require not just that explicit trade barriers be eliminated but also that regulatory heterogeneity within the EAC be addressed. The regional forum may offer countries an opportunity to coalesce around more appropriate standards. Regulatory cooperation would be especially useful in the following areas: A. Mutual Recognition of Professional Qualifications and Professional Licensing Compliance with regulations governing professional services, such as licensing requirements, means that providers have to incur fixed costs in order to enter a market. Since each East African country has its own qualification criteria, the compliance costs are country-specific and cannot be spread out across professional services in other East African countries. Such country-specific costs can deter small and middle-sized firms from entering markets. East Africa could gain significant efficiency by adopting a common criterion for qualifications and by accepting qualifications and licenses obtained in their neighboring countries. As an example, Kox et al. (2004) estimate that the stock of FDI in the EU could increase by 20­ 35 percent if regulatory heterogeneity was reduced through a common services regulation directive. The five East African countries have taken the first steps towards mutual recognition in professional services through the East African Community Common Market negotiations. The Common Market Protocol, adopted by the Multi Sector Council in 2009, includes an annex on a framework agreement on mutual recognition agreements (MRAs) of academic and professional qualifications. A full-fledged MRA would need to cover areas such as education (accreditation of schools or academic programs); examinations (qualifying examinations for licensing, including alternative methods of assessment such as oral examinations and interviews); experience (length and nature of experience required for licensing); conduct and ethics (standards of professional conduct and the nature of disciplinary action for non-conformity with those standards); professional development and re-certification (continuing education and ongoing requirements to maintain professional certification); practice (extent of or limitations on permissible activities); and local knowledge (requirements for knowledge of such matters as local laws, regulations, language, geography or climate). xv B. Developing Appropriate Standards Inappropriate standards often stifle demand for services in accounting and engineering. While uniformity of standards may improve the quality, completeness, and comparability of the reported information, and international standards remain appropriate in specific cases, applying common standards to large firms and SMEs can prevent some smaller firms from using auditing and accounting services. A single standard may be appropriate if there is little demand for service variety, network effects are unbounded, and there is no anticompetitive risk from having a single standard. However, if the market requires variety to satisfy different kinds of users, then a single standard may not be appropriate. For example, complying with International Financial Reporting Standards (IFRS) for corporate accounting may be too expensive for certain kinds of firms, even if small firms are allowed to use a simplified standard. Several small and middle-sized firms in Tanzania and Uganda have noted the excessive costs of complying with international standards. Dual standards tailored to the specific needs of firms by size may be needed. Differentiated services provided to different types of firms -- say, large versus SMEs -- may be better delivered by different classes of accounting professionals -- that is, highly skilled versus middle- level. Developing an appropriate standard may be more desirable at a regional rather than national level. The reasons for this are to exploit economies in regulatory expertise, prevent fragmentation of the market by differences in standards, and to limit the scope for regulatory capture. A regional accounting standard offers East African countries an opportunity to create balances between stringency and access, between integration and local appropriateness, and between rules and discretion. A framework for regional cooperation on standards already exists in the Eastern Central and Southern African Federation of Accountants (ECSAFA). Kenya, Tanzania, and Uganda are full members; Rwanda is a temporary member. All countries could benefit from the ECSAFA Guide on Accounting for SMEs, developed in 2005 to provide common training standards for accounting technicians. Another potential model is the accounting technician scheme recently introduced by the Association of Accountancy Bodies in West Africa (ABWA). C. Regional Cooperation on the Removal of Restrictions on the Free Movement of Labor, Including Visa and Immigration Laws, and Regulations and Labor Policies. The free mobility of business people is critical for open trade. Through the Common Market Protocol, the EAC economies have committed to enhancing business mobility by exchanging information on regulatory regimes and streamlining immigration processes for business travelers and workers, and temporary residence of business people. The experience of regional groups like the EU or the APEC Business Mobility Group, which have made considerable progress in this area, could provide practical guidance for the implementation of free movement of labor and harmonization of immigration policies. xvi D. Regional Cooperation in Developing Means of Financing Higher Education as well as in Encouraging the Improvement of Existing Institutions of Professional Education and the Emergence of New Ones. Student loan schemes throughout East Africa could be bolstered through regional cooperation that shares information to raise the recovery rate of loans while increasing students' access to higher education within and outside the region. The recent partnership between the Kenya Higher Education Loan Board, the Tanzania Higher Education Students Loans Board, and the Students Finance Agency for Rwanda under the aegis of the African Higher Education Financing Agencies (AAHEFA) to tackle student loan schemes regionally is a good step in this direction. Several East African countries have drawn attention to the absence of institutions that offer specialized (post-graduate) courses (e.g., in legal and engineering services) as well as to the absence of institutions that offer academic and professional training courses for middle-level professionals. Where the market of a given country, such as Rwanda, is too small to justify creating certain institutions or courses, policies are needed to help professionals gain access to foreign training, including portability of course credits and scholarships. Specialized courses in high demand -- such as legal courses in e-commerce, technology transfer, multilateral investment, financial services, medical law and ethics, arbitration, international litigation -- could be designed and implemented at the regional level. In general, fragmentation of the regional market for education by regulation differences can prevent the emergence of regional hubs for higher education -- which can offer greater variety at lower costs by exploiting economies of scale. The Inter-University Council for East Africa (IUCEA), a regional inter-governmental organization established in 1980 with the aim of facilitating contact between the universities of East Africa, already provides a forum for discussion on a wide range of academic and other matters relating to higher education. Conclusion While the economic benefits of regional integration are clear, the pace of integration depends on the political motivation and the conviction that liberalization benefits members' domestic constituencies. As noted, the five East African countries have already made progress through the East African Community Common Market negotiations. Kenya, Rwanda, Tanzania, and Uganda have scheduled commitments in accounting and engineering services, and have adopted the annexes on removing restrictions on the free movement of workers and the right of establishment, as well as the annex on mutual recognition agreements (MRAs) of academic and professional qualifications. The EAC countries have, at least on paper, committed themselves to liberalizing services and deepening regional integration in a number of services sectors. But this commitment is not universal or absolute among those countries -- fears about integration remain. It would therefore be useful to explore ways to ease specific concerns. This report intends to provide information that will help countries begin making informed choices towards reform and international integration. xvii CHAPTER 1. THE ROLE OF PROFESSIONAL SERVICES IN EAST AFRICA 1.1 Professional services not only play a critical role in the functioning of modern economies, but they also make up one of the fastest growing services sectors in many developed and developing economies. Accountancy, for example, is a critical component in the infrastructure of a market economy, and no sound economic activity would be possible without it. In addition to its role in generating and processing information on the financial position and profitability of operations -- essential for good financial management and for accountability -- accountancy is the foundation of a country's fiscal system, and plays a key role in corporate governance (Trolliet and Hegarty, 2003). Effective law and justice systems, meanwhile, are key structural pillars of sustainable development and poverty reduction (Cattaneo and Walkenhorst, 2010). And the knowledge-intensive engineering sector is essential to the productivity and sustainability of other economic activities (Cattaneo et al 2010). For example, engineering plays a vital role in the development and maintenance of a country's physical infrastructure. 1.2 Some have suggested that the informal nature of business regulation in Africa curbs the demand for professional services. For example, the prevalence of informal arrangements, such as handshakes and oral agreements, as well as other customs and practice, means that in case of disputes recourse to the law, even if available, is usually the last step. And, in the absence of property rights protection, individuals and groups will revert to private protection before using legal services. In addition, poor monitoring of financial reporting or safety standards can limit the demand for accounting and engineering services. 1.3 Despite this lack of demand, stakeholders and the available literature suggest that accounting, engineering, and legal needs in developing countries are at least as pressing as they are in developed economies. Business skills and services play a critical role in reducing transaction costs considered by Collier and Gunning (1999) to be the most significant impediment to economic growth in Africa. 1.4 Demand for professional services is expected to increase with the growth of African economies. However, even at the current stage, demand remains unsatisfied given the skills shortages and mismatches or the inadequate quantitative or qualitative regulations applied to both domestic and foreign professionals and firms. 1.5 Recent studies such as Arnold et al. (2006) have revealed a strong relationship between the productivity of African firms and their access to services; and policy makers in East African countries -- Burundi, Kenya, Rwanda, Tanzania and Uganda -- realize that weaknesses in their services sectors are impeding growth. 1.6 Governments are now making reform of their professional services national and regional priorities right along with reform of other backbone services like telecommunications, banking, and transport. And the adoption by the five East African 1 Heads of State of the Common Market Protocol in 2009 has initiated the integration process in professional and other services. 1.7 While evidence on the state and role of professional services in Africa is scarce and unsystematic, available statistics at a more aggregated level show that "business services,"1 of which professional services constitute an important part, accounted for between 5 to over 9 percent of GDP in the examined East African countries in 2007. These figures compare favorably with the shares of business services in the GDP of more advanced countries. For example, Lesher and Nordas (2006) show that the shares of business services in GDP in OECD countries ranged from 3 percent in Greece to almost 13 percent in France. If the contribution of real estate services is subtracted, the share of business services in GDP ranged from 1.5 percent in Uganda to 3 percent in Kenya in 2007. With the exception of Rwanda, where business services have been stagnant during the last five years, the sector has registered dynamic growth rates in Kenya, Tanzania, and Uganda (table 1.1). Employment in business services ranges from about 5 percent of total employment in Rwanda to more than 30 percent of total employment in Tanzania. Table 1.1: Share of Business Services in GDP and Average Growth Rates of Business Services Outputs Share of real estate, renting and Share of renting and Average annual growth rate business services in business services in of business GDP GDP services outputs 2007 2007 2001-2007 Kenya 5.2 3 7.8 Rwanda 9.6 2.7 0.3 Tanzania 9.5 n.a. 14.3 Uganda 8.6 1.5 17.6* * Notes: indicates that the statistics were calculated for the period 2004­2007. Source: Kenya National Statistics Bureau, National Accounts, National Institute for Statistics Rwanda, Tanzania National Institute of Statistics, Uganda Bureau of Statistics. 1.8 Business services are key inputs to other sectors in Tanzania and Uganda. Using the GTAP version 7 input­output tables (base year 2004), we measure the interdependence and interconnectedness of business services with other sectors in these two countries.2 The interdependence is measured by (a) forward linkages that represent the extent to which business services sectors supply inputs to other sectors and (b) backward linkages that represent the impact on supplier sectors of a unit increase in the final demand for the output of business services sectors (see annex 1). Figures 1.1 and 1.2 show that in both countries the business services sector shows high (above 1) and stronger forward linkages than the average forward linkages in the manufacturing sector. The degree of interconnectedness of business service sectors is captured by indexes of backward and 1 Business services cover the following services categories: professional services, computer services, research and development, real estate, rental and leasing, other business services such as advertising, management consulting, services incidental to agriculture, mining, manufacturing, and energy distribution, technical consulting, maintenance and repair of equipment, building cleaning, packaging, and publishing. 2 The GTAP database has been used for many cross-country input-output analyses, covering both developed and developing countries. See, for example, Francois and Woerz (2006) and OECD (2006). 2 forward concentration that relate to the number of direct and indirect industry sales or purchases (see annex 1). Figure 1.1: Forward and Backward Linkages in Tanzania 3 2.5 2 1.5 1 0.5 0 Forward linkages Backward linkages Source: Authors' calculations based on GTAP 7 data. Figure 1.2: Forward and backward linkages in Uganda 3 2.5 2 1.5 1 0.5 0 Forward linkages Backward linkages Source: Authors' calculations based on GTAP 7 data. 1.9 Figures 1.3 and 1.4 show that in Tanzania and Uganda the linkages of business services sectors are dispersed among a broad range of downstream industries. Thus, the business services sector has a wide impact on the overall performance of the EAC economies. 1.10 Significant downstream linkages are seen in a broad range of manufacturing (including garments, leather, paper, metal products and chemicals), services (within business services, education services, distribution and public administration services), and minerals. Thus, business services have a wide impact on the overall performance of the EAC economies. 3 Figure 1.3: Forward and Backward Concentration in Tanzania 7 6 5 4 3 2 1 0 Forward Concentration Backward Concentration Source: Authors' calculations based on GTAP 7 data. Figure 1.4: Forward and Backward Concentration in Uganda 7 6 5 4 3 2 1 0 Forward Concentration Backward Concentration Source: Authors' calculations using GTAP 7 data. 1.11 The positive contribution of professional services to the competitiveness and development of several African countries is reinforced by quantitative assessments of wider, regional liberalization of professional services. Using a 52 sector computable general equilibrium model of Tanzania and a 53 sector model of Kenya, the World Bank has estimated the impacts on real incomes of Tanzanians and Kenyans of their own liberalization of barriers in professional services. The models3 contain professional services along with several other services sectors, including telecommunications, banking, insurance, and multiple transportation sectors. The authors allow foreign direct investment in these service sectors and, crucially, also allow productivity gains for sectors that use services from a net increase in the number of service providers. 3 An earlier version of these models is described in Jensen et al. (2008) and Balistreri et al. (2009). More details related to the model and additional results from a wider liberalization that covers all services sectors are presented in annex 2. 4 1.12 The analysis uses estimates of the ad valorem equivalents of the regulatory barriers in business services in both Kenya and Tanzania, including professional services.4 For professional services, the estimates of ad valorem equivalents are calculated on the basis of information collected through the World Bank Regulatory Surveys in East Africa.5 Some barriers are discriminatory against foreign investors and some are non-discriminatory in the sense that they impose higher costs on both domestic and foreign providers of professional or other business services. 1.13 In addition, the analysis required collecting data on the market shares of the professional services and other business services markets in Kenya and Tanzania captured by firms from the different regions of the world. The authors estimate the impacts of reducing both discriminatory barriers against Foreign Service providers (either regionally or multilaterally) as well as non-discriminatory cost-increasing barriers that apply to both domestic and Foreign Service providers. The estimated impacts on real incomes of Tanzanians and Kenyans from their own liberalization of barriers in professional services are summarized in table 1.2. Table 1.2: Estimated Real Income Impacts from Trade Policy Options in Professional Services for Kenya and Tanzania (Results are Percentage Change from Initial Equilibrium) Africa ­ Rest of Unilateral EU Africa Domestic & EU Work Domestic Discrimin Discrimi Discrimi Discriminatory Discrimi Discrimi Services atory natory natory Services natory natory Services Services Services Scenario definition Services Services 50% reduction of discriminatory barriers on Yes No Yes Yes No Yes No EU services firms 50% reduction of discriminatory barriers on Yes No Yes No Yes Yes No African services firms 50% reduction of discriminatory barriers on Yes No Yes No No No Yes ROW services firms 50% reduction of discriminatory barriers for Yes Yes No No No No No all services firms Aggregate real income changes for Kenya as a percentage of consumption 0.67 0.51 0.14 0.06 0.02 0.07 0.07 as a percentage of GDP 0.56 0.43 0.12 0.05 0.01 0.06 0.06 Aggregate real income changes for Tanzania as a percentage of consumption 0.23 0.12 0.10 0.04 0.01 0.04 0.06 as a percentage of GDP 0.20 0.11 0.09 0.03 0.01 0.04 0.05 Source: World Bank staff estimates. Note: The change in real income is Hicksian equivalent variation 1.14 The table shows that preferential liberalization of professional services with their African regional partners would benefit both Kenya and Tanzania. But if preferential liberalization with the Africa region is extended to an agreement with the EU, the gains would triple for Kenya and increase six times for Tanzania. If the liberalization of professional services commitments is extended to all foreign partners (called "Unilateral" 4 The estimates are computed on the basis of the methodology described in Nguyen-Hong, Duc (2000). Estimates for restrictions in engineering services are considered indicative of the magnitude of barriers in professional services. 5 Annex 3 provides details on the World Bank Surveys of Users of Professional Services in East Africa. 5 in the table), the gains would increase by seven times for Kenya and twelve times for Tanzania. 1.15 These results suggest that preferential liberalization in the region is a valuable first step, but wider liberalization, either multilaterally or with larger partners, will yield much larger gains. 1.16 Finally, the table shows that a serious effort to reduce non-discriminatory regulatory barriers (that is, barriers that raise the costs of Kenyan as well as foreign professional services providers in Kenya, and similarly in Tanzania) would double the benefits of multilateral liberalization in Tanzania and quadruple the gains in Kenya. The results also highlight the importance of professional services for these economies. 1.17 At a more disaggregated level, data from the World Bank Survey of Users of Professional Services in East Africa that covered representative samples of firms across all of Kenya, Rwanda, Tanzania, and Uganda further illustrate the role and value of using professional services. Firms that use professional services in the areas of accounting, legal, and engineering -- whether externally outsourced or provided in-house -- have higher average labor productivity in all four countries than firms without professional services linkages. The average labor productivity6 of East African users of professional services is 10 to 45 percent higher than that of non-users of professional services (figure 1.5). Figure 1.5: Productivity of Users vs. Non-Users of Professional Services in East Africa Africa 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Source: World Bank Survey of Users of Professional Services in East Africa, 2009. 1.18 The estimates from regressions based on the same data suggest that the productivity advantage of users of accounting and legal services is statistically significant, even after accounting for firm size. The effect of professional services use on productivity is stronger for small and medium firms (table 1.3). 6 Labor productivity is computed as the revenue of a firm divided by the number of its employees. 6 1.19 Respondents to the surveys listed a number of channels through which professional services affect their productivity and performance. First, basic accounting services are important for most firms, including (formal) SMEs and microenterprises. While many respondents said that they use accounting services because of statutory requirements, they also name accounting services as useful for maintaining and improving existing activities within enterprises and as helpful in accessing loans. Table 1.3: Regressions on Labor Productivity and Usage of Professional Services Dependent Variable is Log of Labor Productivity (1) (2) (3) (4) (5) (6) Acct. Services Usage Dummy 0.560** (0.262) Legal Services Usage Dummy 0.478* (0.252) Eng. Services Usage Dummy 0.34 (0.238) Acct. Services Usage * Small Dummy 0.734** (0.284) Acct. Services Usage * Medium Dummy -0.006 (0.742) Acct. Services Usage * Large Dummy 0.074 (0.362) Legal Services Usage * Small Dummy 0.786*** (0.290) Legal Services Usage * Medium Dummy -0.398 (0.588) Legal Services Usage * Large Dummy 0.626 (0.697) Eng. Services Usage * Small Dummy 0.293 (0.282) Eng. Services Usage * Medium Dummy 1.182** (0.530) Eng. Services Usage * Large Dummy -0.403 (0.666) Size Dummies Yes Yes Yes Yes Yes Yes Observations 253 255 255 253 255 255 Note: Standard errors robust to heteroskedasticity in parentheses. ***, **, and * indicate significance at a 1%, 5%, and 10% confidence levels, respectively. The regressions are estimated by OLS. Source: World Bank Survey of Users of Professional Services in East Africa, 2009. 1.20 As for legal services, advice on taxation and assistance in solving disputes with clients allows firms to better exploit business opportunities. 1.21 Meanwhile, many East Africa users consider engineering services an important platform for improving the quality of products and services, and for upgrading software and equipment. 1.22 User evaluations of professional services show that small firms value highly basic services such as bookkeeping, while larger firms find more sophisticated services such as auditing, management consulting, or advice on matters regulated by foreign law more valuable (annex 4). 1.23 Still, professional services remain less efficient, more costly, and less widely available in the East African economies than in many other comparable countries. Despite dynamic growth rates and positive developments, professional services in several 7 examined countries remain underdeveloped, with performance indicators below the averages of countries at a similar level of development. 1.24 For example, the quality of auditing and reporting systems remains problematic in Uganda (figure 1.6); the scarcity of scientists and engineers is a limiting factor in Tanzania (figure 1.7); while the enforcement of property rights seems an issue in Uganda (figure 1.8). Although comparable with the performance of countries at similar levels of development, the efficiency of the legal framework in settling disputes receives low rankings in Kenya, Tanzania and Uganda (figure 1.9).7 Figure 1.6: Strength of Auditing and Reporting Systems 9 Strength of auditing & reporting system 8 7 S. Africa 6 Mauritius Malawi Botswana 5 Tanzania Kenya 4 Uganda Mozambique Madagascar 3 2 1 0 0.05 0.5 5 50 GDP per capita in 2008 (1,000 of US$) linear fitted value 95% confidence interval Source: Global Competitiveness Report 2008­2009, World Economic Forum. 7 Note that the Global Competitiveness Report does not collect data on Rwanda; hence that country is excluded from Figures 1.6-1.9. 8 Figure 1.7: Availability of Scientists and Engineers 7 6 Availability of scientist & engineers 5 Kenya Madagascar 4 Uganda Malawi Tanzania S. Africa Botswana 3 Mauritius Mozambique 2 1 0 0.05 0.5 5 50 GDP per capita in 2008 (1,000 of US$) linear fitted value 95% confidence interval Source: Global Competitiveness Report 2008­2009, World Economic Forum. Figure 1.8: Property Rights 10 9 8 7 Property rights S. Africa 6 Mauritius 5 Botswana Malawi Tanzania 4 Uganda Kenya Madagascar 3 Mozambique 2 1 0 0.05 0.5 5 50 GDP per capita in 2008 (1,000 of US$) linear fitted value 95% confidence interval Source: Global Competitiveness Report 2008­2009, World Economic Forum. 9 Figure 1.9: Efficiency of Legal Framework for Disputes Efficiency of legal framework for disputes 9 8 7 6 S. Africa 5 Mauritius Botswana 4 Malawi Tanzania Uganda 3 Madagascar Mozambique Kenya 2 1 0 0.05 0.5 5 50 GDP per capita in 2008 (1,000 of US$) linear fitted value 95% confidence interval Source: Global Competitiveness Report 2008­2009, World Economic Forum. 1.25 Various reports and stakeholders suggest that the weak development of professional services might be the result of an underdeveloped skill base, weak legal and regulatory frameworks, the lack of participation in international networks, low levels of FDI, limited access to finance, and infrastructure problems. The prevailing business environment in many African countries, with chronic contract enforcement problems,8 further inhibits the development of professional services. 1.26 Analysis is hampered by a lack of information on demand and supply of professional services, including data on market conditions and policies in professional services. To address this gap, this report undertook a comprehensive data collection exercise that included policy assessments and enterprise surveys in Kenya, Rwanda, Tanzania and Uganda. The following chapters present diagnostics regarding the demand and supply of both professional services and professional skills, including an examination of market conditions and regulatory measures to identify factors that inhibit the development of professional services in the four East African countries. Before proceeding to those diagnostics, chapter 2 presents the conceptual framework for the analysis. 8 See for example, Deininger et al. (2006) and World Bank (2009). 10 CHAPTER 2. CONCEPTUAL FRAMEWORK FOR THE ANALYSIS OF PROFESSIONAL SERVICES IN EAST AFRICA 2.1 The analysis of the professional services sectors and of trade in professional services9 in East Africa differentiates between markets for professionals and markets for professional services. 2.1 The Market for Professionals in East Africa 2.2 We try to answer the following questions: How many qualified professionals work in each country? Are there skill shortages in any of the three professional services sectors? Is there statistical evidence of scarcity of skills? 2.3 Since scarcity may manifest itself by large labor market premia paid to certain professional skills, the study documents labor market premia for professional skills based on estimates of returns to tertiary education overall (in Rwanda) and on returns to specific professional degrees (in Kenya, Tanzania and Uganda). 2.4 Subsequently, the study will gather information on (a) current or projected skill gaps or shortages in the selected countries; (b) the extent to which immigration and foreign professionals are filling the national skills gap; (c) the capacity of higher education institutions for training of professionals and the cost of obtaining qualifications; and (d) the extent of skilled emigration from countries in the region. 2.5 From this information, the study will try to determine whether there are incentives to acquire professional skills, whether students are able to acquire the desired degrees/skills, and whether there are incentives for graduates to work as professionals. Figure 2.1 details the analysis steps, including the underlying explanatory factors for the potential outcomes. 2.6 One possible outcome is the absence of wage premia despite clear professional skill shortages in the country (outcome 1). In such cases, it is necessary to identify why the market is not creating institutions for skills acquisition. Possible explanations include (a) foreign professionals are, to some extent, covering the skills gap; (b) labor market regulations or the monopsony power of employers maintain wages at low levels; or (c) skills are perceived as an under-supplied public good. 9 The four modes of service supply are: Mode 1-- Cross-border supply: services supplied from the territory of one country into the territory of another country; Mode 2 -- Consumption abroad: services supplied in the territory of one country to the consumers of another country; Mode 3 -- Commercial presence: services supplied through any type of business or professional establishment of one country in the territory of another (i.e., FDI); Mode 4 -- Temporary presence of natural persons: services supplied by nationals of one country in the territory of another. This mode includes both independent service suppliers and employees of the services supplier of another country. 11 2.7 Second, shortages of professionals can occur because of a lack of incentives to acquire skills (outcome 2). Such an outcome could be explained by (a) lower wage premia in professional services than in other sectors that require tertiary education; (b) insufficient information about the benefits of professional skills acquisition (induced by weak or non- existent links between the labor markets and professional associations): or (c) liquidity constraints. 2.8 Third, skill shortages and mismatches can persist despite incentives to acquire professional degrees (outcome 3) because many potential students are not able to acquire the desired skills. This could be the result of (a) liquidity constraints and limited access to financing; (b) poor quality of secondary education that prevents students from being admitted to educational institutions; or (c) no educational institutions or insufficient capacity of the existing educational institutions. Other explanations for these outcomes include inappropriate or absent regulations and standards that prevent the emergence of certain professionals (such as middle-level professionals). 2.9 Fourth, despite incentives and ability to acquire skills, professionals may find that there are limited incentives to practice domestically or over a longer period of time (outcome 4). For example, higher returns abroad could motivate professionals to emigrate. Higher returns in other activities (e.g., management tasks for professional accountants) may generate shortages of senior level professionals. 2.10 Finally, sector-specific skill mismatches (outcome 5) could arise because of a lack of domestic specialization courses or practical training, or the inability of professionals to access these courses abroad (possibly because of credit constraints). 2.2 The Market for Professional Services in East Africa 2.11 Here we attempt to answer the following questions: Who are the main providers of business services and what is their market share? What are the degree of concentration and the level of fragmentation in the sectors? What is the ownership structure of the main providers? How much FDI is there in the examined professional services sectors and what is the potential for more FDI? How transparent are the fees and tariff structures of professional service firms? How important are imports of professional services? Which tasks within accounting, legal, and engineering services are currently traded cross-border within and outside the region? 2.12 Subsequently, information on the usage of professional services by size, and sectors is used to determine the extent of, demand for, accessibility, and quality of professional services in the examined countries. Figure 2.1 details the steps of the analysis, including the underlying explanatory factors for the potential outcomes. 2.13 Many observers suggest that the informality and the status of business regulation in Africa restrict demand for professional services in the examined countries (outcome 1). For example, the prevalence of informal arrangements such as handshakes and oral agreements, as well as other customs and practices, may suggest that in case of disputes 12 recourse to the law, even if available, is usually a last step. In addition, lacking protection of property rights, individuals and groups will revert to private protection and avoid using legal services. And limited monitoring of compliance with financial reporting or safety standards may curb demand for accounting and engineering services. 2.14 Other observers claim that accounting, engineering, and legal needs in developing countries are as at least as pressing as in developed economies. But demand remains unsatisfied (outcomes 2 to 4) given skills shortages or skills mismatches (as described in the previous section), or inadequate quantitative or qualitative regulations applied to both domestic or foreign professionals and firms. Examples of regulations that limit the incentives or possibilities of potential providers to enter the markets are (a) quantitative entry regulation, such as limits on the number of professionals in relation to population; (b) qualitative entry regulations, such as professional examinations; (c) minimum periods of professional experience; (d) compulsory membership in a professional body; (d) reserved tasks; (e) exclusive or shared exclusive rights to provide certain service:, and (f) specific entry restrictions on foreign providers. 2.15 Finally, professional services remain unaffordable or are of inadequate quality (outcome 5 and 6) because of inappropriate conduct regulation, such as regulations governing prices, business structure and multidisciplinary practices, and advertising restrictions applied to domestic and foreign users (discriminatory measures). 13 Figure 2.1: Explaining Skill Shortages and Skill Mismatches in Professional Services 1. Are prices for professional services high (large wage premia)? Policy challenges: no yes Education policies 2. Is there an incentive to acquire professional degrees/ skills? Immigration policies no yes Skills are public good 3. Are students able to acquire desired professional Labor market degree/ skills? regulations (ceiling on wages) Lower premia than in Immigration of oth. sectors requiring no yes professionals covering tertiary education gaps Insufficient Monopsony power of information on benefit Liquidity constraints 4. Is there an incentive to work as a professional? employers of skill acquisition Poor secondary educ. Liquidity constraints No educ institution to offer degree (for ex.middle level no yes Higher returns abroad Absence of marketrelevant skills as Higher returns in other activities inadequate domestic educational Higher returns in informal sector institutions and practical training , no High risks /liabilities access to foreign educ. Outcome 1 Outcome 2 Outcome 3 Outcome 4 Outcome 5 Shortage as students Economywide skill Skill shortages as Sectorspecific, tasklevel skill Skill shortages get different degrees mismatches professionals go abroad, mismatches go/return to civil service/other formal sectors/rent seeking activ. 14 Figure 2.2: Explaining Underdevelopment of Professional Services in Africa 1. Is there demand for professional services no yes Policy challenges: 2. Resource availability: Are there (sufficient) professionals who could potentially engage in the Domestic regulation provision of professional services? (Is there a pool of Trade policies potential entrants?) Immigration policies no yes 3. Market entry decision: Is there an incentive to enter the market of professional services? no yes 4. Are professionals/firms able to enter the market for professional services? Informality and status of business no yes regulation Public good under consumption 5. Are incumbents able to remain in operation? Pref for alternative dispute resolution, no property rights, no contract Sunk costs due to enforcement Legal Skill shortages Educ, qualific standards Limited/no monitoring of compliance Skill mismatches Licensing no yes with financial reporting standards Accounting Depends on level of: Entry restrictions and reserved rights applied to domestic suppliers & Depends on level of: Conduct regulation (advertising rules, fee Limited/no monitoring of compliance foreign suppliers (Trade barriers Market Access) and immigration restrictions regul., multidiscipl. practices, business struct.) applied to domestic with safety standards Engineering &foreign suppliers (Trade barriers National Treatment) Outcome 1 Outcome 2 Outcome 3 Outcome 4 Outcome 5 Outcome 6 No demand (for certain Low quality services and/or high Demand but low quality of Unsatisfied demand as no Unsatisfied demand as no Unsatisfied demand as segments) or slowly prices for all/ certain segments service and prices remain too suppliers suppliers prices too high emerging demand high for SMEs (skill shortage/mismatch) (no entry of firms/professionals) (concentration/ (exit of firms) (incumbents cater to fragmentation) certain consumers) (export more profitable) 15 2.3 Policy Challenges: Education, Domestic Regulation, Explicit Trade Barriers and Labor Mobility (Immigration) Restrictions 2.16 While this report focuses on trade policies and domestic regulation, limiting the analysis to those areas would only partially address the diagnosed problems. It is also important to analyze the education challenges in order to remedy the origin of the skills shortages and skills mismatches. 2.17 Similarly, the general immigration restrictions (in addition to the barriers affecting mode 4) have to be analyzed to address the free movement of professionals in the region. Policy measures in all four areas have to be coordinated. While many policy measures can be implemented at the national level or by unilateral domestic liberalization, regional and international engagement can help countries mobilize resources for and lend credibility to domestic reform. Education policies 2.18 Because professional services require a skilled workforce, the quality of education matters. In East Africa, financial constraints may prevent individuals from acquiring professional education, while limitations in the capacity and quality of professional institutions may prevent students from acquiring market-relevant skills. 2.19 Another challenge facing African secondary and higher education systems is balancing the competing demands of enrolling a greater number of students and of achieving a higher quality education experience that relates to economic needs. 2.20 The diagnostics on skills shortages and skills mismatches in professional services intend to provide accurate information about the supply, demand, and value of skills and qualifications. This, in turn, will help frame recommendations for more targeted skills formation and the reform of selected curricula. Domestic regulation 2.21 Professional services have traditionally been subject to a high degree of regulation. These regulatory measures are a result of direct governmental regulation and rules adopted by self- regulatory bodies. These regulatory measures take different forms, ranging from qualitative and quantitative entry regulation to conduct regulation. Entry regulation includes educational and professional qualification requirements, exclusive or shared exclusive rights to provide services, ownership restrictions, and restrictions on the numbers of providers. Conduct regulation, meanwhile, considers regulations governing business structure and multidisciplinary practices, pricing and advertising. These are applied to both domestic and foreign providers. 2.22 While public interest theories claim that many of these regulatory measures are justified to address market failures -- such as information asymmetries, externalities, lack 16 of economies of scale, and equity concerns -- private interest theories have been critical of many aspects of professional regulation and, especially, of self-regulation.10 2.23 The typical market failure in professional markets is that of information asymmetry. Professional services require that practitioners have a high level of technical knowledge, and many knowledge-intensive professional services can be considered credence goods -- that is, the clients may not have the knowledge to judge the quality of the services they purchase. 2.24 A possible market-based correction mechanism for this problem is the reputation premium. However, in many professional services reputation is not enough to provide information about quality to consumers. This can result in overall quality deterioration because providers of the highest quality, who charge higher prices, are driven out of the market.11 2.25 Similarly, regulatory intervention is needed to address the principal-agent problem that can generate supplier-induced demand: the agent (services provider) has an incentive to over-supply quality in order to charge higher prices even if the principal (consumer of services) would be better off with a lower quality service at a more reasonable price. 2.26 Information asymmetries like these are especially relevant in Africa, where professional services markets are underdeveloped and where many consumers, especially small enterprises, use these services less frequently, and so may need targeted protection. Consumer protection generally takes the form of professional and professional services regulation, while adverse selection issues are often addressed by (minimum) standards. 2.27 The second justification for regulatory intervention in professional markets is the concept of externalities. The use of professional services may bring benefits to users but also to third parties. For example, an accurate audit can help companies obtain credit while also helping creditors and investors make informed lending and investment decisions. 2.28 However, providers and potential users in Africa, particularly small enterprises, may be unaware of the private and social benefits that the use of professional services offers; therefore, intervention in many professional service markets tries to ensure that positive social externalities occur and negative externalities are avoided. Negative externalities can be addressed through liability regulations -- but this approach operates ex-post and has limited success. Ex-ante quality requirements, such as standards related to education and training, seem preferable to address externality issues. 2.29 Positive externalities include public goods. Many professional services exhibit public good characteristics and create positive externalities for parties not involved in the transaction. For example, engineering services may help safeguard the liability of technical systems and guarantee public safety by preventing the construction of poor quality 10 The classic references are Stigler (1971) and Posner (1974). 11 This process of `adverse selection' results in overall quality deterioration, which is described as a `market for lemons' in Akerlof (1970). 17 buildings and bridges. Legal professionals may generate important positive externalities that benefit society in general by defining and enforcing property rights -- a critical issue in many African countries. In a free market public goods tend to be under-produced, since the producer cannot exclude non-paying beneficiaries. To guarantee that public goods are provided, states may decide to enact regulations on the provision of public goods. 2.30 Market power can be an additional reason for regulatory intervention. In certain professional services, such as accounting, leading firms (often foreign-owned) have a significant share of the market and a large gap exists between the average leading firm and the average other firm. 2.31 For example, chapter 4 will show that accounting and auditing in Kenya, Tanzania, and Uganda are dominated by establishments of the "Big Four"12 -- multinationals who control a significant share of the market (approximately 80­85 percent of the market). In addition, accounting and auditing markets, as well as engineering markets, are heavily fragmented at the bottom in terms of organization, size, business culture, and management. These market structures may be a result of regulatory failure, such as uniform standards or licensing controls at multiple levels. In such cases, interventions may be needed that address inadequate direct or indirect regulation. 2.32 Regulating markets for professional services may also help public interest goals towards equity. Markets sometimes exclude certain actors from access to education or services. Therefore, governments or professional associations justify regulatory measures, such as price regulation, to ensure access to services for low-income consumers. 2.33 Finally, the lack of economies of scale for practitioners and professional services markets is relevant for Africa. The small size of the domestic market in some of the Eastern African countries may prevent the development of large professional service sectors, including the skills base. For example, local business service providers often don't have the expertise to support manufacturing exporters. 2.34 Business service sectors in the region also lack investment from foreign firms. In such cases, it is essential to (a) identify unnecessary measures and trade barriers that prevent African companies from exploiting economies of scale, and (b) examine how regional and/or multilateral liberalization (along with mutual recognition agreements) can help compensate for underdeveloped local services markets. 12 The "Big Four" are Deloitte, Ernst and Young, KPMG, and PricewaterhouseCoopers. 18 Box 2.1: Regulatory Heterogeneity and Regional Integration Regulatory heterogeneity prevents services providers from realizing economies of scale from a larger regional market. Given that most of the regulatory measures affecting professional services such as qualification requirements or licensing procedures generate fixed costs, they are incurred by firms before entering the market. In addition, given that each country in East Africa has its own qualification criteria, the compliance costs are country-specific and cannot be spread out through provision of professional services in other East African countries. Such fixed and country-specific regulation costs can have a serious impact on entry decisions by small and middle-sized firms -- especially if firms do not expect large sales in the foreign market. If the East African countries adopted a common criterion for qualifications or recognized the qualifications and licenses obtained in another East African country, significant efficiency would be gained as shown in the figure below. For example, Kox et al. (2004) estimate the increase in trade and investment flows in the EU determined by a reduction of regulatory heterogeneity. They show that the stock of FDI in the EU could increase by 20­35 percent if bilateral variation was reduced as a result of a common services regulation directive. Nordas and Kox (2007) also look at the impact of regulatory heterogeneity (and regulatory intensity) on services trade flows, and find large negative effects on market entry, trade flows, and the export performance of firms. Source: Kox et al. (2004) and Nordas and Kox (2007). Explicit trade barriers 2.35 The major share of the international trade in professional services takes place through commercial presence and through the temporary presence of natural persons. Thus, most restrictions faced by professional services exporters will relate to mode 3 and mode 4 in GATS terminology. Typical restrictions affecting commercial presence in professional services include the following: An economic needs test for the approval of foreign investment Numerical quotas on the number of operating licenses available to providers of professional services A joint venture requirement for the supply of professional services Regulation of contracts by value and number through an annual licensing system 19 Nationality or residency requirements for foreign establishment for companies providing professional services A requirement that foreign businesses hire specific ratios of domestic staff to foreign staff A reservation of some service sectors or activities for nationals or residents. 2.36 The supply of professional services through mode 3 will often be accompanied by mode 4 supply to provide skilled and professional services directly to projects and to maintain local offices. Professional service firms use a variety of professionals, such as high-skilled auditors, lawyers, engineers, and specialized technicians. Restrictions on mode 4 may also arise from a country's overall immigration policy or specific labor market conditions. The following are common examples of conditions for approving the entry of service suppliers: Labor market testing Residency requirements for intra-corporate transferees and a requirement that the foreign company employ specific numbers of local staff Authorization subject to the non-availability of locals Authorization subject to performance requirements (employment creation, the transfer of technology, the level of investment). 2.37 The deployment of professionals for temporary assignments in export markets separately or as a complement to foreign direct investment is common in these sectors. The movement of natural persons is a sensitive issue in many countries because of illegal immigration and security concerns. 2.38 Finally, trade in selected professional services, such as engineering consultancy services, can be provided via mode 1 by using mass communications systems (post, fax, telephone, Internet). The principal restrictions on the cross-border supply of professional services are that (a) the services be certified by locally registered service providers and (b) cross-border service providers already have a commercial presence in the importing country. Immigration policies 2.39 The trade-migration linkage is an important part of the debate on migration reform. Trade policy officials should not neglect the immigration and labor market perspectives when considering temporary entry or mode 4 issues. Policies related to visas, work permits, and treatment of foreign workers must be considered. 20 CHAPTER 3. MARKETS FOR PROFESSIONALS IN EAST AFRICA 3.1 This chapter provides information on the availability of professionals in Kenya, Rwanda, Tanzania and Uganda, and tries to explain the skills shortages and the skills mismatches in East Africa. The analysis follows the conceptual framework described in chapter 2, and seeks to answer the following questions: Are there enough professionals to provide professional services? Are there incentives to acquire professional degrees and skills? Are students able to acquire the desired professional degrees and skills? Are there incentives to work as professionals in East Africa? 3.1 Availability of Professionals in East Africa 3.2 The diagnostics reveal a heterogeneous picture across the markets for accounting, engineering, and legal professionals in East Africa. While scarcity premia for all examined professionals are evident in all four countries, there is a wide spectrum of perceptions about skills shortages, their nature, and the underlying reasons for the shortage, with different policy implications for each country's reform agenda. Accounting services 3.3 With a professional density of 14 accountants per 100,000 inhabitants, Kenya has more accounting professionals per capita than developed countries like Spain. Compared to most African countries, Kenya has a relatively well developed market for accounting professionals. By contrast, Rwanda and Uganda have a limited availability of accountants, even by African standards (figure 3.1).13 Figure 3.1 Number of Accountants per 100,000 Inhabitants Rwanda 0.9 Zambia 1.2 Uganda 2.3 Malawi 3.4 Tanzania 7.7 Spain 13.1 Kenya 14.0 Germany 17.1 France 25.0 Botswana 37.4 Austria 37.9 Netherlands 40.3 Sweden 46.3 South Africa 48.0 Finland 60.5 Ireland 72.2 Luxemburg 79.4 UK 86.7 Mauritius 90.5 Denmark 95.3 Italy 153.3 0 20 40 60 80 100 120 140 160 Source: World Bank Regulatory Surveys in Eastern and Southern Africa, 2009, and Paterson et al. (2003). 13 Note that figure 3.1 does not cover accounting technicians. We discuss their availability below for the East African countries only. 21 3.4 There are approximately 5,200 qualified professionals registered with the Institute of Certified Public Accountants of Kenya (ICPAK), providing accounting, auditing, and book-keeping services in the country. More than 40 percent of ICPAK's members are in public practice, while 50 percent practice in commerce and industry. The remaining 10 percent are employed in other sectors, including academia and the public sector. 3.5 About 20,000 qualified accounting technicians practice bookkeeping activities in Kenya. The holders of this designation need to pass the Kenya Accounting Technicians Certificate Examination (KATC), but they are not members of ICPAK. There are recent proposals to allow ICPAK to broaden its membership to include and regulate accounting technicians and other emerging professional groups within a system based on tiers of membership. 3.6 Although statistics on the demand for qualified accountants are not available, ICPAK estimates that the country would need between 7,000 and 10,000 qualified accountants to satisfy current demand ("World Bank Report on the Observance of Standards and Codes (ROSC) in Kenya"). Indeed, discussions with private stakeholders confirm that the demand for qualified accountants is growing. Several firms revealed that accountants with experience of three years and above are becoming increasingly expensive for local firms because these accountants are receiving overseas job offers that pay two or three times more than their Kenya salaries. Firms are forced to recruit new students every year, and there are recurring problems of continuity and high replacement costs. 3.7 Despite performing relatively well compared to other countries in Eastern and Southern Africa, Tanzania seems to have a limited availability of qualified accounting professionals. At the end of 2008, the membership of the National Board of Accountants and Auditors (NBAA) stood at 3,121 members of which 12 percent were in public practice. 3.8 According to the "World Bank Report on the Observance of Standards and Codes (ROSC)," Tanzania had a below average number of professional accountants relative to its GDP in 1999.14 However, accounting professionals registered a dynamic growth during the last years -- between 2004 and 2009 the average annual growth rates in the number of accounting professionals in Tanzania reached almost 30 percent. According to the World Bank ROSC, this development has been helped by the Auditors and Accountants Act, which has created an enabling environment for strong accounting practices. 3.9 The accountancy profession in Uganda is young but growing rapidly. According to the World Bank Report on the Observance of Standards and Codes (ROSC), the country's past turbulent history of civil wars has constrained the profession's development; but it grew rapidly during the last two decades: from less than 20 qualified accountants in 1990 14 The argument is based on an ACCA report, "The Status of Accounting and Auditing Functions in Tanzania and Harmonization with International and Regional Standards," commissioned by the NBAA in 1999. The main objective was to review existing statistics to establish the demand and supply of accounting personnel in both private and public sectors. 22 to approximately 700 (registered) qualified accountants at present. The Institute of Certified Public Accountants of Uganda (ICPAU) reported a membership of 699 in 2008, but industry reports suggest that there are more than the 2,000 active accounting professionals in the country. In 2005 nearly all members of the ICPAU held recognized foreign accountancy qualifications, of which about 80 percent were qualified under the Association of Chartered Certified Accountants (ACCA). (World Bank ROSC in Uganda). 3.10 Accounting professionals are scarce in Rwanda, and the country did not have a professional accountancy body until August 2008. The total number of qualified accountants in Rwanda has grown from 14 in 2004 to about 89 at the end of 2009. These professionals are now being registered with the newly created Institute of Chartered Professional Accountants of Rwanda (ICPAR). A small group of accountants (clustered in the General Auditors Office) has acted as a promoter of the national accountancy profession. While present demand for accounting and auditing services remains low in Rwanda, the expected high growth rates for Rwanda suggest that demand for accounting services will pick up fast in the near future. Legal services 3.11 The legal profession in all examined East African countries operates independently from the government and the state administration. Lawyers have to be registered with the local bar in all East African countries15 to practice privately, but they do not have to be registered to practice in public office. 3.12 Figure 3.2 presents the density of lawyers per 100,000 inhabitants for a large sample of developing and developed countries. The figure reveals a large difference in the availability of lawyers between most African countries and the rest of the economies shown. And, while the majority of African countries display a density of less than 20 lawyers per 100,000 inhabitants, the ratio seems particularly low in Tanzania, Uganda and Rwanda, even by the standards of developing countries. 15 There are two types of legal professionals in Kenya and Tanzania: advocates and notaries. In Kenya, both types of professionals have to be members of the Law Society of Kenya. The Tanganyika Law Society is the Bar Association of Tanzania Mainland, founded in 1954 by an Act of Parliament -- the Tanganyika Law Society Ordinance, chapter 344 of the Laws. Legal professionals in Zanzibar need to be registered with the Zanzibar Law Society. In Uganda, there are several types of legal professionals: (a) advocates, (b) attorneys, (c) public notaries, and (d) commissioners for oaths. All have to be members of the Uganda Law Society. In Rwanda, attorneys, advocates, and notaries have to be members of the Kigali Bar Association. 23 Figure 3.2: Number of Lawyers for 100,000 Inhabitants Malawi 2.04740469 Tanzania 2.102286736 Mozambique 2.189760282 Uganda 3.65829139 Rwanda 4.622239278 Zambia 5.721539142 Azerbaijan 6 Botswana 11.74637487 Kenya 18.91783282 Armenia 24 Moldova 29 Bosnia and Herzegovina 32 Finland 34 Ireland 36 Latvia 37 South Africa 39.1909286 Russian Federation 44 Lithuania 46 Estonia 46 Mauritius 46.17010045 Sweden 49 Slovenia 57 Georgia 58 UK 63 Poland 68 Croatia 74 France 76 Montenegro 77 Turkey 78 Slovakia 79 Czech Republic 82 Macedonia 83 Austria 84 Denmark 90 Serbia 91 Netherlands 92 Romania 95 Hungary 98 Switzerland 101 Norway 115 Belgium 145 Bulgaria 147 Iceland 159 Germany 168 Malta 192 Cyprus 227 Portugal 244 Spain 266 Luxembourg 288 Italy 290 Greece 342 0 50 100 150 200 250 300 350 Source: World Bank Regulatory Surveys in Eastern and Southern Africa, and CEPEJ (2008). 3.13 The Kenyan legal profession consisted of about 7,100 qualified lawyers in 2008. The Law Society of Kenya recorded large increases in lawyer registration over the last few years: the number of registered lawyers grew by 65 percent between 2000 and 2008. Following recent legal amendments regarding the licensing of foreigner legal professionals from Uganda and Tanzania, one foreigner was licensed to practice law in Kenya in 2008. 3.14 Consultations with local legal practitioners have revealed that Kenya faces skills gaps in many fields for specialized lawyers, including in e-commerce, technology transfer 24 and multilateral investment, financial services law, medical law and ethics, arbitration, international litigation, mediation, negotiation, dispute settlement, and alternative dispute resolution. Given the absence of domestic courses or training programs in these fields, lawyers need to pursue courses abroad to specialize in these areas. 3.15 The emigration of legal professionals also contributes to skills shortages in this profession in Kenya. Academics (law professors) are especially affected. Several Southern African countries -- Lesotho, Swaziland and Botswana -- are the most favored destinations for Kenyan lawyers. 3.16 Tanzania had approximately 850 practicing lawyers at the end of 2008, with membership more than doubling during the last decade. This shows good progress, especially if compared to Tanzania's situation forty years ago around its independence date, when there were only two lawyers in the country. In addition to the practicing lawyers, 52 judges and just over 400 magistrates serve the country. 3.17 A total of 1,131 fully paid practicing members were registered with the Uganda Law Society (ULS) at the end of 2008. ULS's membership has steadily increased over the last few years, starting from 614 in 2003. In addition, the ULS estimates that approximately 1,500 to 2,000 individuals are now providing legal services without subscribing to the Uganda Law Society. This category of practitioners includes individuals with legal training active in the government, corporate or institutional lawyers, and academics. The increase in ULS's membership is attributed to the liberalization of admissions into universities. Several universities have been accredited to teach law, with the number of students enrolled in legal training increasing significantly since 2005. 3.18 Rwanda suffers an acute shortage of lawyers, as well as many other professionals. There are around 450 lawyers in the country, with 80 lawyers admitted to the Kigali Bar Association in 2009. There remains a huge gap to be filled, especially in the area of criminal law. 3.19 In response, Rwanda's transitional national assembly created a lower-ranking category of independent legal professionals, known as judicial defenders. While paralegals have demonstrated their role as an important link between the needs of ordinary people and the more formal levels of the legal system in many countries and contexts, Rwanda went a step further, by allowing the judicial defenders to represent all persons before first instance courts after completing a six-month legal education. Although not directly related to corporate law, which is the object of the analysis in this report, this approach offers guidance for the development of middle-level skills to address skills shortages in East Africa. Engineering services 3.20 It is hard to tell how many engineering services professionals are practicing in each of the East African countries. Rwanda does not have a professional engineering association. Kenya, Tanzania, and Uganda do have professional engineering bodies, but while professional registration with them is in theory mandatory, in practice the number of 25 registered professionals represents only a small fraction of those providing engineering services. 3.21 To shed some light on the availability of engineers in East Africa, we have to rely on responses to the survey conducted by the World Economic Forum for the yearly Global Competitiveness Report. Respondents were asked to assess the availability of scientists and engineers in their countries on the basis of the following ranking: from 1 = nonexistent or rare, to 7 = widely available. The results for a large sample of both developing and developed countries are illustrated in figure 3.3, which shows that the availability of engineers is more problematic in Tanzania and Uganda. Figure 3.3: Availability of Scientists and Engineers Burundi Namibia Mozambique Ethiopia Mauritius Burkina Faso Latvia Botswana South Africa Moldova Tanzania Peru Malawi Bosnia and Herzegovina Ghana Lesotho Bulgaria Slovenia Georgia Luxembourg Uganda Benin Estonia Malta Mali Montenegro Macedonia, FYR Zambia Lithuania Romania Turkey Croatia China Hungary Portugal Italy Kenya Spain Russian Federation United Kingdom Slovak Republic Azerbaijan Germany Netherlands Cyprus Austria Belgium Norway Greece Switzerland Ireland Denmark Czech Republic United States France Sweden Finland 0 1 2 3 4 5 6 Source: Global Competitiveness Report 2008­2009, World Economic Forum. 26 3.22 The Engineers Registration Board (ERB) of Kenya reported 1,176 registered engineers at the end of 2008. The number of registered engineers more than doubled between 2000 and 2008 (from 548 to 1176 engineers); however, the ERB estimates that there are more than 6,000 active engineers in Kenya. 3.23 Regarding skills shortages, the ERB states that there are enough engineers to meet national demand in several areas of specialization. By contrast, the Association of Consulting Engineers of Kenya and the Council of the Institution of Engineers of Kenya claim that the country is facing a shortage of qualified professionals with experience (especially engineers with an experience of 10 to 15 years) as well as engineers specialized in the design of roads, railways, and airports, mechanical and electrical engineering, telecommunication and electronics. The shortage is attributed to the slowdown of construction activities in the 1990s that turned many engineers to other activities. To fill these gaps, Kenya imports engineers from South Africa, Ethiopia, India, China, and several European countries. 3.24 Kenya loses a number of senior engineers -- mainly civil engineers and structural engineers employed in infrastructure development -- to Southern African countries. Government agencies, which cannot retain staff because of low salaries, are most affected. 3.25 The Engineering Registration Board (ERB) in Tanzania reported a total of 8,408 registered engineers at the beginning of 2009. This translates into approximately 21 engineers per 100,000 inhabitants -- a relatively low number compared to the 262 engineers per 100,000 inhabitants in South Africa. According to the ERB, Tanzania needs to train about 20,000 engineers annually to catch up with developed countries. Figure 3.4: Engineering Professionals in Tanzania Sectoral distribution of engineering professionals Civil Electrical 45% 18% Mechanical 17% Textile 0.1% Agricultural & irrigation Electronics and 2% IT Mining and telecommunica Chemical 1% mineral tion Aeronautical engineers processing 5% 0.1% 5% Marine 3% Environmental 0.4% 4% Source: Engineering Registration Board Tanzania, 2009. 27 3.26 Almost 50 percent of Tanzania's engineers are in the civil engineering sector, reflecting the growing demand from the construction industry (figure 3.4). A small fraction of engineers are specialized in IT engineering. 3.27 According to the Uganda Institute of Professional Engineers (UIPE), as of 2008 the total number of engineers16 registered with the UIPE stood at 620. Additionally, the total number of engineers registered with the Engineers Registration Board (ERB) in Uganda was 378 in 2008. However, it is estimated that a significant number of engineers are not registered with either of these two bodies. 3.28 The availability of middle-level professionals is another issue. Statistics on accounting technicians, paralegals, and engineering technicians are limited; however, current data suggests that, with the exception of accounting technicians in Kenya, East Africa is facing a middle-level skills vacuum. 3.29 Tanzania offers an example: middle level professionals account for barely 6 percent in accounting (figure 3.5). This figure seems particularly low -- especially if compared with Kenya, where accounting technicians exceed the number of qualified accountants by a factor of 4. 3.30 Middle-level professionals play a crucial role in providing services to certain clients -- for example, accounting technicians can provide basic services needed by SMEs. And the absence of middle-level professionals in East African countries needs to be addressed. Figure 3.5: Distribution of Accounting Professionals in Tanzania, 2008 Accounting Certified public technicians accountants in 6% public practice 10% Graduate Temporary (foreign) certified accountants public accountants 40% 5% Certified public accountants Approved 21% accountants 18% Source: NBAA (2009) Skills mismatches 3.31 Most East African countries show serious skills mismatches. Accounting associations in Tanzania and Kenya report that there are jobless accountants despite high demand for qualified accounting professionals. Potential explanations include the absence 28 of links between the education system and the labor market and professional associations. The regulatory analysis (presented in chapter 5) consistently points to a low level of integration between education and labor market policies, and inadequate attention to professional market concerns prevents students from acquiring market-relevant skills. Gender imbalances 3.32 All the examined countries show evidence of gender imbalances at the managerial level of professional firms (figure 3.6 panels A, B and C). Female engineering professionals in senior positions seem totally absent in Kenya, Rwanda, and Uganda. Tanzania performs best among all East African countries -- which probably results from its 1999 National Higher Education Policy that, among other issues, addresses gender imbalances in higher education admissions. Tanzania is a unique case in East Africa for having such a national education policy, and could be a model for its neighbors in addressing disparities. Figure 3.6: Senior Staff by Gender Panel A: Accounting (%) 5.3 5.3 10 0 0 19 21 38 94.7 94.7 90 100 100 81 79 62 Most senior Second most Most senior Second most Most senior Second most Most senior Second most senior senior senior senior Kenya Rwanda Tanzania Uganda Male Female Panel B: Legal (%) 10 9.5 19 15.8 90 100 100 100 90.5 81 100 84.2 Most senior Second most Most senior Second most Most senior Second most Most senior Second most senior senior senior senior Kenya Rwanda Tanzania Uganda Male Female 29 Panel C: Engineering (%) 0 0 0 0 15 25 0 0 100 100 100 100 85 75 100 100 Most senior Second most Most senior Second most Most senior Second most Most senior Second most senior senior senior senior Kenya Rwanda Tanzania Uganda Male Female Source: World Bank Surveys of Providers of Professional Services in East Africa, 2009. Is the immigration of foreign professionals covering the skills gaps? The movement of East African professionals to provide services abroad 3.33 Table 3.1 shows that in Kenya, Tanzania, and Uganda foreign accounting professionals represent between 5 and 10 percent of total accounting professionals. In Rwanda's case 60 percent of all accounting professionals are foreigners -- a sign of the severe domestic shortages faced by this country and their consequent degree of openness to foreign professionals. In legal services, there are virtually no foreign professionals in any of the countries. Table 3.1: Foreign Professionals in East Africa Accounting Engineering Total Number of Share of Foreign Total Number of Share of Foreign Professionals Professionals Professionals Professionals Kenya 5266 6.1% n.a. n.a. Rwanda 89 59.6% n.a. n.a. Tanzania 3121 5.3% 8408 6.3% Uganda 699 8.6% n.a. n.a. Source: NBAA, ICPAK, ICPAU, ERB, 2009. 3.34 Table 3.2 furnishes additional evidence on the cross-border movement of accounting professionals for Kenya. While most Kenyan accountants who provide services abroad prefer overseas destinations, about 40 percent of total accountants abroad provide accounting services in Uganda and Tanzania. Also, there is evidence of cross-border movements of engineering professionals -- as shown in table 3.1 and confirmed by anecdotal evidence in all countries. By contrast, the cross-border movements of legal professionals in East Africa are extremely limited (almost non-existent). 30 Table 3.2: Kenyan Accounting Professionals in Kenya and Abroad, 2007 EMPLOYMENT KENYA UGANDA TANZANIA OVERSEAS TOTAL SECTOR Agriculture 72 0 2 1 75 Aviation 24 1 2 1 28 Banking & Finance 395 24 0 21 440 Commerce, Retail and 74 0 0 4 78 Wholesale Consultancy 1 0 0 2 3 Education & Training 169 3 0 7 179 Hotel 66 0 1 4 71 Information 32 1 0 0 33 Technology Insurance 127 1 1 3 132 Manufacturing 369 12 4 15 400 Medical Services 1 0 0 0 1 Non Profit Sector 224 7 0 22 253 Other Service 526 21 3 77 627 Practice 941 31 11 94 1077 Public Sector 677 45 1 4 720 Self Employed 21 1 0 3 25 Not specified 402 16 0 22 5 TOTAL 4,121 155 25 281 4,147 Source: ICPAK, 2007. 3.2 Are there Incentives to Acquire Professional Degrees and Skills in East Africa? Professional wages: Comparisons across Eastern African countries 3.35 In the countries examined, professionals have high earnings compared to other workers with university degrees, suggesting a scarcity or lack of supply of these professional workers. By comparing professional wages with the wages of skilled workers with a similar level of education, an "education premium" for professional workers -- that is, the added value of entering a profession -- can be estimated. The table below shows the median annual wages for workers with a secondary degree, for workers with a university or post-graduate degree, and the wages that an average entry-level and senior professional in East Africa could expect to earn. Table 3.3: Median Annual Wages for Secondary and University/Post-Graduate Levels of Education and Entry-Level Professionals (US$) Secondary University/Post- Entry-level Senior Degree graduate Professional Professional Uganda 1,035 2,035 3,549 5,126 Tanzania 1,220 -- 4,304 6,796 Kenya 1,837 7,185 6,206 10,602 Rwanda 466 1,600 -- -- Source: Data on wages of entry-level and senior professionals is from the World Bank Survey of Providers of Professional Services in East Africa. Wage data is from the following sources: Tanzania Labor Market Analysis, Internal Paper August 2008; Uganda National Household Survey, 2006; Kenya Poverty and Inequality Assessment, 2008. 31 3.36 This table shows a wage premium in Uganda and Tanzania for professional workers over the earnings of other workers with a university or post-graduate degree. In Kenya the wage premium is less apparent at the entry-level; the wage premium, however, becomes apparent at later levels in a professional's career. 3.37 Although these numbers should not be taken as exact figures, the existence of wage premia, both within professions and in relation to other East African countries, is useful in demonstrating the relative scarcity of professional workers in East Africa. 3.38 Another way to get a sense of how the wages for professional workers compare with workers with similar educations is to examine wage differences among employment groups within countries. This comparison can be analyzed in more detail with the case of Kenya, for which there are fewer data limitations. 3.39 The highest paid professional services worker in 2007 earned US$ 149,000 as a Kenyan firm's CEO, and the lowest paid professional services worker in 2007 earned US$ 1,600 as an assistant accountant. The median wage for a legal advisor is US$ 34,620, the median wage for an accountant is 19,063, and the median wage for a factory engineer is US$ 24,836. 3.40 Although these wages are substantially larger than the entry-level wage for a person, they include senior professionals as well as those working for foreign firms. So, although the median wage for a professional worker lags behind the average worker with a university/post-graduate degree, Kenyan professionals can expect to progress quickly in regard to compensation. Indeed, from 2007 to 2008 wages for professional workers in Kenya grew by an average of 8.4 percent to 9.2 percent. 3.41 The wages for professional workers in Kenya compare favorably with workers with a similar level of education. Besides workers in the accounting, engineering and legal professions, other high earners include IT consultants, sales managers, and food and beverage managers. The graph below shows selected professions and median annual salaries in US$. 32 Figure 3.7: Kenyan Professions and Median Annual Salaries (US$) 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 - Source: PricewaterhouseCoopers, 2007. Wages of professionals in East Africa: International comparisons 3.42 Using data from the World Bank Surveys of Professional Services Providers in East Africa and information from the "International Average Salary Income Database" provided by World Salaries,17 we can compare the wages of accountants and engineers in East Africa18 with the wages of professionals in 28 developing and developed countries (figures 3.8 panels A, B, C and D). 3.43 As expected, wages of East African accounting and engineering professionals are below those earned by similar professionals in developed countries. However, they are comparable to wages earned by their counterparts in many other developing or transition economies (figures 3.8 Panels A and B). After adjusting the East African wages for differences in the cost of living,19 earnings of East African accountants and engineers exceed those of similar professionals in many developed and developing countries, suggesting that the returns to the corresponding professional degrees in East Africa are substantial (figures 3.8 panels C and D). 3.44 This reflects the scarcity of accounting and engineering professionals in the examined African countries. The more severe scarcity of engineers, as compared to that of accountants in all three examined countries, is reflected by the earnings differential between the different types of professionals (compare panel A with panel D of figure 3.8 and panel B with panel C of figure 3.8). 17 The data is available at www.worldsalaries.org and is collected directly from government agencies across 28 different developing and developed countries. The average salary data is converted into constant 2005 US$ and to international dollars (purchasing power parity or PPP$). 18 For the East Africa countries, the wages are the average median wages across all categories of professionals (entry level professional, senior professional, and manager/partner). 19 The adjustment for East Africa is made using the 2005 PPP$ conversion rates published by IMF to ensure comparability of data. 33 Figure 3.8: Monthly Wages of Accounting and Engineering Professionals Panel A: Monthly Wages - Accountants 5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0 Panel C: Monthly Wages - Engineers 5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0 Panel B: Monthly Wages PPP - Accountants 5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0 34 Figure3.8: Monthly Wages of Accounting and Engineering Professionals (contd.) Panel D: Monthly Wages PPP - Engineers 5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0 Source: World Salaries and World Bank Survey of Providers of Professional Services in East Africa, 2009. Note: The average monthly wages are in 2005 US$ in Panels A and C and in international US$ (purchasing power parity or PPP US$) in panels B and D. 3.45 Wage data for lawyers is not available for a comparable sample of countries. However, we can shed some light on the earnings of legal professionals in East Africa20 by using information from the European Commission for the Efficiency of Justice (CEPEJ) for a large sample of European transition and developed countries. From here we can compare the gross salary of a first instance judge at the beginning of his/her career, the gross salary of a judge of the Supreme Court or of the highest appellate court, the gross salary of the prosecutor at the beginning of his/her career, and the gross annual salary of a public prosecutor of the Supreme Court or of the highest appellate court. While the samples should be interpreted with care -- given the different categories of professionals examined in East Africa and in the other countries -- we can still conclude that the wages of East African lawyers are significantly lower than those of legal professionals in many transition countries (figure 3.8). 20 Note that the salaries of legal professionals working in public office may constitute an underestimate of the salaries of lawyers in private practice. 35 Figure 3.9: Monthly Wages of Lawyers and Legal Professionals 14000 12000 10000 8000 6000 4000 2000 0 Source: European Commission for the Efficiency of Justice, 2008, and World Bank Survey of Providers of Professional Services in East Africa, 2009. Note: The average monthly wages are in 2006 US$. Professionals and wage: Similarities and differences in East Africa 3.46 A cross-country comparison of the availability of professionals in East Africa and their wages complements the previous international comparisons. Figure 3.9 suggests that, with the exception of Tanzania, shortages are more severe in accounting than in legal services in all countries examined. And the absence of accounting skills seems to be a constraint for the development of professional services in Rwanda. Figure 3.10: Number of Professionals and Professional Density (per 100,000 Inhabitants) Kenya 7100 Rwanda 450 Uganda 1131 Tanzania 850 Legal Kenya 5266 Tanzania 3121 Accountancy Uganda 699 Rwanda 89 0 2 4 6 8 10 12 14 16 18 20 Source: World Bank Regulatory Surveys in East Africa, 2009. Note: The bars show the professional density per 100,000 inhabitants while the numbers on the bars are absolute numbers of professionals in the depicted countries. While statistics on the availability of engineers do not exist in most countries, by corroborating anecdotal evidence with wage data (figures 3.10 panels A, B, and C) some insight into the severity of engineering shortages can be obtained. At the entry level, engineers' salaries are comparable to those of accounting and legal professionals; but the wages of senior engineers almost always exceed those of senior accountants and lawyers -- in some cases by a factor of 2. This suggests that engineers are especially scarce in East Africa. 36 3.47 In addition, the heterogeneity of professional endowments and the sectoral earnings differentials across countries (figures 3.9 and 3.10) suggest that there is substantial room for trade, with potentially important gains to be derived from creating an integrated East Africa regional market in professional services. Figure 3.11: Panel A, B & C: Median Monthly Wages in US$, Accountants 2500 Panel A 2000 1500 Accountant Entry-level 1000 Accountant Senior Accountant Partner 500 0 Uganda Tanzania Kenya 2500 Panel B 2000 1500 Lawyer Entry-level 1000 Lawyer Senior Lawyer Partner 500 0 Uganda Tanzania Kenya 2500 Panel C 2000 1500 Engineer Entry-level 1000 Engineer Senior Engineer Partner 500 0 Uganda Tanzania Kenya Source: World Bank Surveys of Providers of Professional Services in East Africa, 2009. 37 3.3 Are Students Able to Acquire the Desired Professional Degrees and Skills in East Africa? Capacity of higher education institutions to train professionals 3.48 Tertiary education and professional training are central means by which professionals gain their skills. The size and structure of the tertiary education system can indicate whether the skills and abilities obtained by tertiary graduates respond to the demands of professional markets. Table 3.5 summarizes the main characteristics of the tertiary education systems in the four examined countries. Table 3.4: Tertiary Education Systems in East Africa Kenya Rwanda Tanzania Uganda Tertiary graduates per 100,000 354 279 112 307 inhabitants Tertiary gross enrollment ratio 2.6% 2.0% 0.9% 2.6% Public universities Number 7 1 8 5 Enrollments 90,000 9,491 26,374 55,763 Private universities Number 14 4 17 16 Enrollments 9,000 13,538 5,275 22,344 Public polytechnics and Number 5 17 21 1 professional institutes Enrollments 22,018 5,000 14,415 n.a. Private polytechnics and Number 0 6 0 0 professional institutes Enrollments n.a. 0 n.a. Source: Differentiation and Articulation in Tertiary Education Systems, World Bank (2008) and MEAC Rwanda (2010). 3.49 An important question is whether the education system generates enough graduates to meet the demand for professionals and their services. The tertiary gross enrollment ratio provides a first indication on the general availability of graduates in each country. The data in table 3.5 shows that such enrollment ratio in Tanzania is significantly smaller than in less advanced neighboring countries like Rwanda and Uganda. The low enrollment rations suggest that Tanzania faces a fundamental challenge to expand its higher education sector. 3.50 Another issue is how each kind of institution affects the labor market outcomes of graduates. The differences between university enrollment and enrollment in middle-level institutions, such as polytechnics and professional institutes in all countries (documented in table 3.5) can explain the middle-level skill vacuum. To the extent that these differences reflect the differences in how the labor market rewards different types of professionals, this may suggest that, in the context of observed shortages in East Africa, inappropriate (too strict) regulation is curbing the demand for such middle-level skills. 3.51 Professional training programs for middle-level professionals are largely absent in legal services. Despite the fact that paralegals are currently not recognized as legal 38 professionals in Kenya, the Kenya School of Law is planning to start a two-year program for training paralegals as a response to private sector demands. 3.52 Skills shortages and mismatches can also be explained by the field of study chosen by students. In all the countries examined, private stakeholders and professional associations have raised concerns that students are not making the right study choices. This is especially true for engineering, where the numbers of students enrolled in engineering studies is not enough to meet the demand. The examples for Kenya and Tanzania illustrate this issue. 3.53 Table 3.6 shows that even in Kenya -- where engineering shortages are not as severe as in other East African countries -- the average growth rate of the number of engineering graduates (from both polytechnics and universities) is well below that of the number of law students. Table 3.5: Comparative Statistics of Students Enrolled in Legal and Engineering Studies in Kenya Average 2001 2008 growth rate 2001-2008 Students enrolled in legal studies1 627 2099 22.31% Students enrolled in engineering 4,529 6,749 6.87% studies ((polytechnics)2 Students enrolled in engineering 2,682 5,411 12.41% studies (universities)3 Source: Kenya National Statistics Bureau (2008). Notes: 1 based on statistics for the University of Nairobi and Moi University; 2 based on statistics for Kenya Polytechnic, Mombasa Polytechnic and Eldoret Polytechnic, University of Nairobi with the highest intake; 3 based on statistics for the Jomo Kenyatta University of Agriculture and Technology (JKUAT), Moi University, and Egerton University. 3.54 Table 3.7 reveals the growth rates of various professionals in Tanzania between 2004 and 2008. Again, the least dynamic growth is registered in the engineering profession. The professional association indicated that a high number of graduates do not enter the profession after completing training. Table 3.6: Comparative Growth Rate of Professionals in Tanzania 2004 2008 Average growth rate 2004­2008 Accountants 1,135 3,121 29% Engineers 5,780 8,408 10% Lawyers 487 850 15% Source: NBAA (2009), ERB (2009), Tanganyika Law Society (2009). 3.55 The declining number of applicants for science, engineering, and technology courses can be explained by the general erosion of mathematical skills (as depicted in 39 figure 3.11), so that candidates with a science background increasingly opt to study and practice commerce, law, or other non-science disciplines. Figure 3.12: Quality of Math and Science Education 8 Quality of math & science education 7 6 5 Kenya Mauritius Madagascar 4 Botswana Malawi Uganda 3 Mozambique Tanzania S. Africa 2 1 0 0.05 0.50 5.00 50.00 GDP per capita in 2008 (1,000 of US$) linear fitted value 95% confidence interval Source: Global Competitiveness Report 2008-2009, World Economic Forum. 3.56 Stakeholders in several East African countries had already mentioned the problem of the higher education institutions' capacity to produce the required graduates in legal services. All countries require law graduates to complete a structured training program at the post-graduate level in the national law school before taking the bar exam, which enables them to practice as legal professionals. Quantitative limits on the number of students admitted to these post-graduate programs (in several cases supported by the professional associations) contributed to shortages of legal professionals in East Africa. Thus, as a result of the liberalization of legal education in Uganda, the number of lawyers almost doubled during a five- year period. 3.57 In Kenya the absence of specialized courses in local higher education institutions, such as courses in arbitration, international litigation, dispute settlement mechanisms in legal services, or courses in aeronautical engineering, construction of airports, or railway engineering, have also been mentioned as a possible cause for the skills mismatches. Cost of obtaining professional degrees 3.58 The cost of obtaining professional degrees in East Africa gives some insights into the affordability of professional education and can perhaps hint at another rationale for the 40 skills shortages and mismatches. Table 3.8 presents the total costs for obtaining the necessary academic degrees and professional qualifications in all examined countries.21 Table 3.7: Cost of Obtaining Professional Degrees and Internal Rates of Return on Professional Education in East Africa Average Costs per Years of Total Costs Net Present Value Internal Rate Profession Year of Educ. Education (USD) of Earnings (USD) of Return (%) (USD) Kenya Lawyer (low) 6 8546 1424 36880 48% Lawyer (high) 6 19645 3274 25781 25% Accountant (low) 5 6538 1308 38572 69% Accountant (high) 5 17298 3460 27811 29% Engineer (low) 4 6086 1521 72508 81% Engineer (high) 4 17501 4375 61093 35% Rwanda Lawyer 10 27992 2799 .. .. Accountant 8 12786 1598 .. .. Engineer (low) 6 16840 2807 .. .. Engineer (high) 6 18188 3031 .. .. Uganda Lawyer (low) 5 15278 3056 41726 21% Lawyer (high) 5 17731 3546 39274 18% Accountant (low) 6 17253 2875 61083 22% Accountant (high) 8 23759 2970 54281 17% Engineer (low) 4 12385 3096 75620 33% Engineer (high) 4 17025 4256 70979 26% Tanzania Lawyer 6 13438 2240 29450 22% Accountant (low) 6 10760 1793 49372 35% Accountant (high) 6 13401 2234 46730 30% Engineer 10 10779 1078 54732 35% Source: World Bank Surveys on Costs of Obtaining Professional Degrees and Qualifications in East Africa, 2009. Notes: Years: Years of education; Total Costs: the present value (PV) of educational costs; Average costs: the PV of educational costs per year; NPV of earnings: the PV of lifetime earnings less the PV of educational costs; IRR (annual costs): the internal rate of return of educational costs and lifetime earnings less annual costs of practicing the profession, in local currency; IRR (US$): The internal rate of return of the PV of educational costs and lifetime earnings, in US$. Total costs and average costs are in current USD or present value (PV). The net present value of earnings is PV of lifetime earnings minus the PV of educational costs. 3.59 Table 3.8 shows that: The most expensive profession for which to study in the region is law, followed by accounting, then engineering. The most expensive country in which to study (assuming no government subsidization) is Uganda, followed by Kenya, Rwanda, and Tanzania. 21 The tables in annex 6 present country-specific details. 41 Country cost findings 3.60 In Kenya, the most expensive profession to enter is law (high cost of $19,645), followed by engineering ($17,501), and then accounting ($17,298). For students supported by the government, the costs are much lower, with the most expensive training in law ($8,546) followed by accounting ($6,538), and then engineering ($6,086). These students receive not only reduced tuition but also subsidized living expenses. 3.61 Most of a student's educational costs in Kenya are academic. For law, unsubsidized students must pay $17,025 for university and $2,620 for professional training and licensing. For accounting, unsubsidized students must pay $16,726 for university and $572 for professional training and licensing (most of this is for the CPA exam). For engineering, costs for unsubsidized students are almost all for university tuition -- graduates must pay around $100 in licensing fees when they enter the profession. 3.62 In Rwanda, the most expensive profession to enter is law ($32,646) followed by engineering ($18,899) and then accounting ($14,684). Students in Rwanda can also specialize in subsets of engineering and accounting: it costs $14,674 to become an engineer and $1,822 to become a technical accountant. 3.63 Students hoping to enter the law profession in Rwanda must pay a variety of costs. The cost of a university education is $11,155, the cost for a law degree is $10,335, and the cost of advanced training in law is $6,502. 3.64 For accounting, the cost of a university education is $2,682, and the cost for advanced training and professional qualifications is $10,104. For engineering, the cost of a university education is $11,263, and the cost of professional qualifications is $5,578 (low) and $6,926 (high). 3.65 In Uganda, the most expensive profession to enter is accounting (at least $20,845), followed by law ($19,271), and then engineering ($17,838). The cost of becoming an engineer is $6,409, and the cost of becoming a technical accountant is $5,686. The high cost of becoming an accountant is because of the expensive secondary degree, which can take a minimum of three years and a maximum of ten years to complete. Most students generally finish the course of study on the early end of the spectrum, if only because of the high cost of the program. 3.66 The cost of a university education for law in Uganda is $12,301 ($14,753 for private schools). The cost of an advanced degree in law is $2,811, and fees to enter the profession are $563. For accounting, the total cost of education is $16,576 ($23,759 for private schools), and fees are $677. For engineering, there are only educational costs of $12,385 ($17,025 for private schools). 3.67 In Tanzania, the most expensive profession to enter is law ($18,080) followed by engineering ($16,122), and then accounting ($14,178). Training for engineers is also expensive, at $16,067, whereas training for technical accountants is relatively low, at $4,831. Students in Tanzania can also train as Paralegals, which has a cost of $8,289. 42 3.68 The cost of a university degree for law In Tanzania is $9,171. The cost of an advanced degree in law is $6,103, and fees are $55. For accounting, the cost of a university education is $7,672 ($10,313 for private schools), the cost of an advanced degree in accounting is $2,985, and the cost of licensing and qualifications is $1,419. For engineering, the cost of a university education is $6,141, the cost of a three-year advanced engineering degree is $3,081, and the cost of the required three-year internship is $4,753. Rates of return on education 3.69 The rates of return discussed in this section are internal rates of return for lifetime earnings. In technical terms, this number represents the discount rate at which future cash flows of earnings would equal zero; therefore, all things being equal, a higher internal rate of return indicates a better investment. 3.70 These numbers are also useful in a broader analysis of the affordability of educational programs, given that a student who borrowed the entire cost of education at the internal rate of return would have net earnings of zero. This is especially important for African financial systems, in which many students would have to borrow educational costs, and interest rates are very high (in Uganda the borrowing rate is close to 20 percent). In comparison, the internal rate of return for U.S. university students is 11.7 percent.22 3.71 The present values of lifetime earnings based on education and the internal rates of return on educational investment shown in the table below were derived from calculations in a financial model. Net present value analyses are useful in a situation where there are up-front costs and a stream of future cash flows, and internal rates of return represent the rate of return on the educational investment. This type of analysis has been applied to examining returns to educational investment in other studies, including a study done by OECD that uses a similar financial model to show the economic premium attached to various levels of education.23 3.72 The model used here is a discounted cash flow analysis to derive present values and internal rates of return for lawyers, accountants, and engineers. For each profession, the present value of educational costs is inputted as a negative, and the median annual wages (or monthly wages multiplied by 12) are derived for each year. These are then discounted using the appropriate discount factor for that period, which is assumed here to be the real interest rate. 3.73 This is the approach taken by Hill et al. (2005). OECD takes a simpler approach, using a fixed interest rate of 5 percent, as this is the rate "one can expect, under normal circumstances, by investing in long-term government bonds in most countries."24 However, because of data constraints and the highly assumption-driven nature of financial 22 Hill and. Rex (2005). 23 For more details, please see Hill and. Rex ( 2005) and OECD (2009). 24 OECD Technical Annex, 2009, p. 54. 43 modeling, the results given below should be taken in relative terms, as indications of orders of magnitude, rather than concrete and absolute values. 3.74 Law. Kenya offers the highest rate of return in the study of law, with a rate of return for students attending private schools of 24.4 percent. For students subsidized by the government, the rate of return is even higher, at 46.2 percent. Tanzania is second, with a rate of return of 21.6 percent, followed by Uganda, with rates of return of 18.8 percent and 16.7 percent for low and high cost institutions, respectively. 3.75 Accounting. Kenya also offers the highest rate of return in the study of accounting. For students subsidized by the government, the rate of return is a very high 65.8 percent; for those attending private schools, the rate of return is 27.8 percent. Tanzania is second, with a low cost rate of return of 31.1 percent and a high cost rate of return of 26.9 percent. Uganda is third, with a low cost rate of return of 20.5 percent and a high cost rate of return of 15.7 percent. 3.76 Engineering. Kenya again offers the highest rate of return in the study of engineering. For students subsidized by the government, the rate of return is 80.6 percent; for those attending private schools, the rate of return is 35.3 percent. Tanzania is second with a rate of return of 35.4 percent. Uganda is third, with a low cost rate of return of 31.5 percent and a high cost rate of return of 24.3 percent. 3.4 Are there Incentives to Work as Professionals in East Africa? 3.77 The high level of emigration of tertiary graduates (presented in table 3.9) may also explain the skills shortages and mismatches identified in East Africa. Tertiary graduates include but are not restricted to professionals in accounting, engineering, and law. As of 2000, 80,287 university-educated Kenyans and 23,164 university-educated Ugandans were living in OECD countries, corresponding to 38.5 and 36 percent of all university-educated citizens living in Kenya and in Uganda, respectively. 3.78 These skilled professional emigration rates are high even by African standards. The emigration rates of skilled Rwandans are also high but may reflect the civil war and the consequences of genocide (given that they refer to 2000). 3.79 Interestingly, Tanzanian skilled emigration rates are much lower than those of its East African neighbors. Note that the emigration rates for secondary-educated and primary-educated citizens of Kenya, Rwanda, and Uganda are much more in line with those of other African countries. Hence, emigration from those East African countries is skewed towards university-educated individuals (including our professionals of interest), and is suggests that the domestic returns to tertiary education are substantially lower than those abroad. 44 Table 3.8: Emigration Rates of African Individuals by Skill Level Emigration Rates in Number of Emigrants in Number of Emigrants in OECD countries in 2000 OECD Countries in 2000 South Africa in 2001 Tert. Second. Primary Tert. Second. Primary Tert. Second. Primary Educat Educat. Educat Educat Educat. Educat Educat Educat. Educat Kenya 38.5% 3.9% 0.4% 80,287 60,659 38,372 2,671 2,219 1,204 Rwanda 31.7% 3.8% 0.1% 5,576 2,828 3,056 270 163 131 Tanzania 12.1% 1.3% 0.1% 33,125 15,912 15,295 819 801 906 Uganda 36.0% 3.1% 0.3% 35,921 23,164 19,083 994 385 235 Ethiopia 9.8% 1.0% 0.1% 52,538 25,883 27,844 314 646 219 South Africa 7.4% 0.6% 0.3% 173,411 61,216 30,981 Mauritius 56.0% 8.4% 8.0% 23,185 20,410 36,809 889 1,422 760 Angola 3.7% 0.8% 0.9% 7,872 11,866 27,184 1,099 1,830 4,102 Botswana 5.1% 0.5% 0.1% 1,423 676 589 966 1,295 9,480 Malawi 20.9% 2.8% 0.1% 5,459 4,397 3,444 1,699 3,494 14,914 Mozambique 22.6% 1.8% 0.1% 3,588 3,492 5,241 2,788 10,167 176,034 Namibia 3.4% 0.1% 0.1% 988 479 423 10,799 11,567 10,544 Zambia 16.4% 1.0% 0.2% 14,019 8,731 6,276 7,852 7,668 4,305 Zimbabwe 13.1% 1.8% 0.2% 34,017 21,659 4,962 25,041 29,579 45,394 Source: Docquier and Marfouk (2004). Conclusion 3.80 East Africa continues to experience professional skills shortages and mismatches despite incentives to acquire the needed professional degrees and skills. However, we see a wide spectrum of skills shortages with potentially different policy implications for each country's reform agenda. 3.81 In terms of country-specific differences, the more acute skills shortages are in Rwanda. Here, the absence of general professional skills constrains the development of professional services as both middle-level (technicians) and higher-level (certified accountants/engineers) professionals are in very short supply. Ideally, policy measures to address professional skills shortages in Rwanda should be linked to broader issues of skills development and private sector development. 3.82 In Kenya, Tanzania, and Uganda, absolute scarcity is more evident for experienced professionals or professionals with particular specializations.25 For example, in Kenya there is a growing demand for qualified accountants -- but accountants with three years and more of experience are becoming more expensive for Kenyan firms because those accountants are receiving job offers from overseas that pay two or three times their Kenya salaries. Firms therefore must recruit new students every year, and there are recurring problems of continuity and high replacement costs. This suggests that countries have different priorities in terms of the formation of specialized professionals. 25 Aeronautical engineers, engineers specialized in construction of airports and railways, lawyers specialized in e-commerce, technology transfer, financial services law, medical law and ethics, arbitration, international litigation, mediation, alternative dispute resolution were some of the specializations identified in shortage in East Africa. 45 3.83 By contrast, skills mismatches at both technician and skilled professional levels appear in all examined countries. For example, there are jobless accountants in Kenya and Tanzania despite high demand for qualified accountants. The limited availability of middle-level professionals is a serious constraint in all countries. Middle-level professionals play a crucial role in providing services to certain clients -- for example in accounting, accounting technicians can provide basic accounting services needed by SMEs. The formation of middle-level skills should be a priority in all the countries. 3.84 In terms of sector-specific differences, shortages seem more severe in the engineering sector in all East African countries. Therefore, policy measures to address the formation of engineering skills should be a priority in all examined countries. In addition, there are two points of concern about the attrition of engineering skills: (a) the declining number of applicants for science, engineering, and technology courses, and (b) the relatively high number of engineering graduates who do not enter the profession after completion of training. These trends are explained by the general erosion of mathematical skills in all countries such that more candidates with science background opt to study and practice commerce, law, or other non-science disciplines. In addition, the inability of students to acquire certain degrees because of poor secondary education needs to be addressed in all countries. 3.85 Access to higher education is an issue in all countries. While skill premia are evident and the internal rate of return to education is high in all countries, the median cost range to receive a professional education -- ranging from US$ 14,000 to US$ 26,000 makes professional qualification unaffordable for most of the population. All four countries must make affordability and financing of higher education a priority. The development and management of students' loan programs could be useful instruments, and offering incentives to the private sector to make significant contributions to financing higher education could prevent some of the problems in previous programs. Also, more emphasis needs to be placed on the production of middle-level professionals. 3.86 Finally, the heterogeneity of professional endowments and the sectoral earnings differentials across countries suggest that there is a great potential for trade (cross-border movements of professionals to provide services abroad), and important gains to be derived from creating an integrated regional market for professional services in East Africa. 46 CHAPTER 4. MARKETS FOR PROFESSIONAL SERVICES IN EAST AFRICA 4.1 The diagnostics reveals a mixed picture across the markets for accounting, engineering, and legal services in East Africa. While supply of and demand for professional services are stronger in Kenya, Tanzania and Uganda, the market for professional services -- especially for small and medium enterprises -- is still nascent in Rwanda. 4.2 This chapter's analysis follows the conceptual framework described in chapter 2, and tries to answer the following questions: Is there a demand for professional services in East Africa? Are there enough professional firms to provide professional services? 4.1 Demand for Professional Services in East Africa 4.3 On the demand side, the business surveys conducted in East Africa reveal that large companies (regardless of their sector of activity) show the highest usage of accounting, engineering, and legal services in all countries, confirming that the demand for professional services is dominated by large firms (figure 4.1).26 4.4 But usage of professional services by small companies is not negligible. Except for Rwanda, more than 50 percent of the interviewed formal small and micro firms in East Africa said that they use professional services at least once a year.27 While a large proportion of the demand for accounting and auditing services seems based on mandatory legal requirements, such as financial reporting and taxation, usage of legal and engineering services is considered necessary and often useful to remedy relations with clients and improve the quality of the firm's output. 4.5 The market structure and clientele of the accounting, legal, and engineering sectors in the four East African countries are outlined below. Accounting services 4.6 In Kenya, Tanzania and Uganda, the market for accounting and auditing services is dominated by the Big Four (see chapter 3). In Rwanda, only Deloitte and Ernst and Young are present. In all countries, the multinationals control approximately 80­85 percent of the market. In Kenya, for example, the Big Four account for 85 percent of the market and employ about 600 professional staff and 42 partners (which corresponds to about 15 percent of the country's registered accounting professionals). 26 Note the information displayed in figure 4.2 will be displayed in future figures in the chapter in more detail but is included here to set the stage for the analysis. 27 Given that most interviewed companies are located in the capital cities, usage of professional services may be overestimated to some extent. 47 Figure 4.1: External Usage of Professional Services in East Africa Percentage of firms using the Panel A: Accounting Service External Usage 120 100 80 service 60 40 20 0 Kenya Rwanda Tanzania Uganda 1-19 Employees 20-99 Employees Above 99 Employees Panel B: Legal services -- External usage 100 Percentage of firms using the 80 60 service 40 20 0 Kenya Rwanda Tanzania Uganda 1-19 Employees 20-99 Employees Above 99 Employees Panel C: Engineering services -- External usage 100 Percentage of firms using the 80 60 service 40 20 0 Kenya Rwanda Tanzania Uganda 1-19 Employees 20-99 Employees Above 99 Employees Source: World Bank Surveys of Users of Professional Services in East Africa, 2009. 4.7 The Kenya Export Promotion Council estimated that in 2007 the accounting sector's total revenue base stood at Ksh. 4 billion. The joint revenue base of the Big Four was approximately Ksh. 3.1 billion with PricewaterhouseCoopers (PWC) recording an average of Ksh. 1 billion in annual revenues. PWC leads the group with a market share of about 28 percent, followed by Deloitte with a share of 26 percent, KPMG with 17 percent, and Ernst and Young with 14 percent. The remaining, mostly local accounting and auditing firms, share only 15 percent of the market.28 This implies that the combined revenues of all other accounting and auditing firms did not exceed Ksh. 900 million during the same year. 28 Among these accounting and auditing firms that share 15 percent of the market are other smaller multinationals such as BDO and Grant Thornton that also have a presence in Kenya. 48 4.8 At first sight, it seems that the Big Four are the only firms competing for large and listed companies as clients, whereas the remaining firms target small and medium enterprises. But while the Big Four do indeed dominate the sector, an interesting shift in market structure is unfolding in some East African countries -- namely, several domestic mid-level accounting firms, which have entered into partnerships with global networks, continue to win contracts from the leading firms. 4.9 For example, in Kenya, 7 of the largest 15 firms, excluding the Big Four, have formed partnerships with domestic accounting firms. These mid-tier firms with international affiliations have been increasing their client base at a faster rate than the multinationals. Estimates from ICPAK show that the mid-tier firms now control between 60­70 percent of the industry's client base, up from 40 percent in 2000. And these global affiliations are also forcing multinational client firms to switch from the Big Four to mid- sized companies that offer quality services at lower prices. 4.10 This trend is well documented in Kenya but not yet in other East African countries. However, evidence from the World Bank Surveys of Providers in East Africa suggests that a shift is beginning to emerge in Tanzania and Uganda. 4.11 Figure 4.2 reveals that in Kenya, Tanzania and Uganda large domestic companies and multinationals are at least as equally important as the main clients of small and middle- sized providers of accounting services (accounting firms with 5 to19 employees) as are micro and small companies. In Rwanda, the market remains vertically fragmented with micro and small firms being the major clients of half of the small and middle-sized accounting providers. Also, in all countries, the accounting markets remain heavily fragmented at the bottom. Hence, the market structure in accounting and auditing services in East Africa resembles an oligopoly with a (variable) competitive fringe. 4.12 Interviews with industry specialists in Kenya and Tanzania revealed additional differences between larger and smaller accounting and auditing providers: whereas the Big Four compete on the basis of brand name, the remaining firms compete largely through price. And while the large firms compete to increase their revenue base, the rest of the firms compete to increase the number of clients, with expectations that this will eventually increase their future revenues. 4.13 Sectoral distribution of clients. In all countries, with the exception of Kenya, accounting and auditing firms earn the largest share of their revenue by providing services to banking and financial institutions, the dominant clients for providers of all sizes. Kenya's accounting firms earn a larger share of their income from providing services to the public sector (annex 7).29 29 The list of potential clients that the surveyed accounting and auditing providers had to consider was non- financial sector, public sector, and banking and financial institutions. 49 Figure 4.2: Size and Ownership Profile of Clients of Small Providers of Accounting Services in East Africa Kenya Accounting Providers Tanzania Accounting Providers (5-19 employees) (5-19 empoloyees) Total answers (40) 100% Total answers (30) 100% Clients (users) Clients type Multinationals 8% Multinationals 10% Large domestic Large domestic 23% 20% private companies private companies Medium domestic Medium domestic 13% 23% private companies private companies Small domestic 10% Small domestic private companies 18% private companies Micro firms & 33% Micro firms & individuals 23% individuals Government or government... Government or 5% Domestic state government... owned Domestic state 5% Others 10% owned Uganda Accounting Providers Rwanda Accounting Providers (5-19 empoloyees) (5-19 empoloyees) Total answers (30) 100% Total answers (30) 100% Clients type Clients (users) Multinationals 13% Multinationals 10% Large domestic 27% Large domestic private companies 10% Medium domestic private companies 20% Medium domestic private companies 13% Small domestic private companies 7% private companies Small domestic Micro firms & 27% private companies 13% individuals Micro firms & Government or 3% 23% individuals government... Government or Domestic state 13% 10% government... owned Domestic state Others 7% owned Source: World Bank Surveys of Providers of Professional Services in East Africa, 2009. Note: The graphs are based on answers to the question about major clients to providers of accounting services. Percentages are taken across the total answers provided by the interviewed providers. Multiple answers were possible. 4.14 Variety of accounting and auditing services. There is a demand for all types of services -- from accounting and auditing, to tax advice and management consulting. Financial auditing is the main source of revenue for accounting and auditing firms in all countries, followed closely by tax advice and accounting services (figure 4.3). 4.15 While not as dynamic as accounting and auditing services, management consulting services are emerging in Kenya and in Uganda as another source of revenue. In Kenya, multinationals such as PWC, Deloitte, and Hawkins and Associates account for a large proportion of the management consulting market. Domestic accounting and auditing firms, which account for a small share of the management consulting market, can't attract qualified staff, lack experience, and have poor managerial skills. 50 Figure 4.3: Sources of Revenue by Type of Service for Providers of Accounting Services in East Africa Kenya - Accounting Services Users Rwanda - Accounting Services Users 21 Accounting 11 Accounting 21 30 26 0 58 Financial auditing 21 Financial auditing 5 30 0 0 11 Tax advice 5 Tax advice 26 20 32 10 5 Management consulting 5 Management consulting 16 0 42 20 5 Others 0 Others 11 20 11 30 >30 percent 21-30 percent 11-20 percent 1-10 percent >30 percent 21-30 percent 11-20 percent 1-10 percent Tanzania - Accounting Services providers Uganda - Accouting Services Providers 33 Accounting 29 Accounting 19 0 32 67 Financial auditing 33 Financial auditing 0 0 11 0 Tax advice 24 Tax advice 38 24 47 0 11 Management consulting 5 Management consulting 26 33 26 5 37 0 53 Others 0 Others 26 14 5 19 26 >30 percent 21-30 percent 11-20 percent 1-10 percent >30 percent 21-30 percent 11-20 percent 1-10 percent Source: World Bank Surveys of Providers of Professional Services in East Africa, 2009. 4.16 The World Bank Surveys of Users of Professional Services point to a high usage rate of accounting and auditing services by East African firms, even among small and medium-size enterprises in all countries except Rwanda (figure 4.4). Only a small fraction of firms use accounting and auditing services provided in-house; the majority of firms of all sizes purchase the services from outside providers. We discuss the size-service usage link in more detail at the end of the chapter. 51 Figure 4.4: Usage of Accounting and Auditing Services by East African Firms 100 0 0 0 90 2 3 0 80 4 70 0 5 60 5 50 0 100 92 92 100 95 100 40 76 75 30 56 64 20 3 50 10 23 0 1-19 Employees 20-99 Employees 1-19 Employees 20-99 Employees 1-19 Employees 20-99 Employees 1-19 Employees 20-99 Employees Above 99 Employees Above 99 Employees Above 99 Employees Above 99 Employees Kenya Rwanda Tanzania Uganda External Usage Internal Usage Source: World Bank Surveys of Users of Professional Services in East Africa, 2009. Note: The numbers on the bars show the % of firms in each size category that use external services (in blue) and that use in-house services (in red). Note that in the survey external usage of services and in-house provision of services were mutually exclusively, although in reality simultaneous consumption of outsourced and in-house professional services could occur. Legal services 4.17 The legal sector is dominated by domestic providers -- often small firms and microenterprises. This situation is similar to that in most developing and developed countries: legal services are provided by individual professionals or small firms, with a relatively small number of large firms, mainly from a few developed, common law countries such as the United States and United Kingdom. 4.18 However, the worldwide consolidation trend experienced by a number of developed and middle income economies -- which has helped create a growing number of large multinational law firms with vast international networks -- is not seen in East Africa. This could be the result of restrictive entry and conduct regulations imposed by East African countries on foreign providers of legal services and on foreign legal professionals. Indeed, a common characteristic of the examined legal markets is the absence of foreign firms and foreign professionals providing legal services. 4.19 The concentration in legal services markets is less pronounced than in accounting and auditing markets (table 4.1). In all countries, only a small percentage of lawyers are employed by the largest ten firms in the sector. Discussions with industry representatives in Kenya revealed that legal firms with more than ten advocates in the country are few: Kaplan & Stratton with twenty advocates; Dally & Figs and Hamilton Harris & Mathews with fifteen advocates; and Anjarwalla & Khann with ten advocates. These advocates working in these firms are Kenyans, and most of these firms were established during the colonial era. Similarly, in Uganda, Tanzania, and Rwanda, consultations with professionals 52 and professional associations suggested that the market share of the largest ten firms is small. 4.20 While information on the exact market structure of the legal services sector is unavailable, the World Bank Surveys of Providers of Professional Services in East Africa offers some insights into the characteristics of those markets. Figure 4.6 shows that the legal markets in East Africa display a level of vertical segmentation comparable to the level seen in accounting and auditing markets. Even so, multinationals and large companies represent the major client for more than a quarter of small legal providers (with 5­19 employees) in Kenya, Tanzania, and Uganda. Figure 4.5: Size and Ownership Profile of Clients of Small Providers of Legal Services in East Africa Kenya Legal Providers (5-19 employees) Tanzania Legal Providers (5-19 empoloyees) Total answers Total answers (52) 100% 100% (42) Clients (usage) Clients (usage) Multinationals Multinationals 17% 15% Large domestic Large domestic 10 21% private companies private companies Medium domestic Medium domestic 10% 15% private companies private companies Small domestic 12% Small domestic private companies 13% Micro firms & private companies 26% Micro firms & individuals 17% Government or individuals government... Government or 10% Domestic state government... 17% owned Domestic state 8% Others 10% owned Uganda Legal Poviders (5-19 employees) Rwanda -Legal Providers (5-19 employees) Total answers (18) 100% Total answers (4) 100% Clients (users) Multinationals 17% Clients (users) Multinationals Large domestic 11% Large domestic private companies private companies Medium domestic 11% Medium domestic private companies Small domestic private companies 17% private companies Small domestic 25% Micro firms & private companies 28% individuals Micro firms & 75% Government or individuals government... Government or Domestic state government... 17% owned Domestic state Others owned Source: World Bank Surveys of Providers of Professional Services in East Africa, 2009. Note: The graphs are based on answers to the question about major clients addressed to providers of legal services. Percentages are taken across the total answers provided by the interviewed providers. Multiple answers were possible. 53 4.21 Sectoral distribution of clients. The banking sector seems to be the most important revenue provider for Ugandan legal firms, while non-financial institutions seem to be the most important clients for Kenyan and Tanzanian providers of legal services (annex 7).30 4.22 Variety of legal services. There is generally demand for the whole spectrum -- from advice on domestic and international law, title transferring, and court representation to representation before administrative agencies, tax advice, insolvency practice, business advisory services, and advice on patent law. In Rwanda, because of the newness of the economy and the catch-up still to be done, patent law, insolvency practice, and advice on international law are not demanded. Court representation, advice on domestic law, and title transferring generate most of the revenue in all examined countries (figure 4.6). Figure 4.6: Sources of Revenue by Type of Service for Providers of Legal Services in East Africa Kenya - Legal Services Providers Rwanda - Legal Services Providers 20 50 90 Court rep. Court rep. 15 10 Advice on dom. law 15 20 20 Advice on dom. law 10 30 30 50 5 25 Title transfer Title transfer 40 35 20 Business advisory Business advisory 15 20 10 10 Tax advice 5 Tax advice 15 20 5 Rep. before admin. agencies Rep. before admin. agencies 20 20 10 Adive on foreign law Adive on foreign law 10 10 20 Advice on int. law 5 Advice on int. law 10 Insolvency practice Insolvency practice 20 Patent law Patent law 15 >30 percent 21-30 percent 11-20 percent 1-10 percent >30 percent 21-30 percent 11-20 percent 1-10 percent Tanzania - Legal Services Providers Uganda - Legal Services Providers 19 43 21 26 Court rep. 14 19 Court rep. 21 26 4.8 19 37 Advice on dom. law 29 33 Advice on dom. law 16 32 5 4.8 5 5 Title transfer 38 Title transfer 26 19 47 Business advisory 14 Business advisory 5 16 33 58 Tax advice 24 29 Tax advice 11 11 42 Rep. before admin. agencies 10 Rep. before admin. agencies 11 11 24 26 Adive on foreign law 10 Adive on foreign law 38 26 Advice on int. law 19 Advice on int. law 5 11 29 26 Insolvency practice Insolvency practice 43 Patent law 4.8 10 Patent law 11 43 37 >30 percent 21-30 percent 11-20 percent 1-10 percent >30 percent 21-30 percent 11-20 percent 1-10 percent Source: World Bank Surveys of Providers of Professional Services in East Africa, 2009. 30 The list of potential clients that the surveyed legal providers had to consider was non-financial sector, telecom/electricity/water sector, banking sector, and manufacturing sector. 54 4.23 The World Bank Surveys of Providers in East Africa point to a high rate of usage of legal services, including among small and medium size enterprises, in all countries. However, while total usage of legal services is lower than total usage of accounting services, a much higher proportion of firms use legal services provided in-house (figure 4.7). Figure 4.7: Usage of Legal Services by East African Firms 100 90 13 5 80 9 9 16 21 70 50 0 11 60 50 9 7 40 76 80 85 75 75 73 74 30 26 61 47 50 43 20 10 19 0 Above 99 Employees Above 99 Employees Above 99 Employees Above 99 Employees 1-19 Employees 20-99 Employees 1-19 Employees 20-99 Employees 1-19 Employees 20-99 Employees 1-19 Employees 20-99 Employees Kenya Rwanda Tanzania Uganda External Usage Internal Usage Source: World Bank Surveys of Users of Professional Services in East Africa, 2009. Note: The numbers on the bars show the percentage of firms in each size category that uses external services (in blue) and that uses in-house services (in red). Note that in the survey external usage of services and in- house provision of services were mutually exclusively, although in reality simultaneous consumption of outsourced and in-house professional services could occur. Engineering services 4.24 In all surveyed East African countries, local providers dominate the market for engineering services, which is highly fragmented in organization, size, business culture, and management. The engineering services are mostly provided by small firms, although these activities are often combined with construction services into a single company. The combined capacity of these firms, though large, is too scattered to meet demand for large projects. The market for consulting and construction engineers mainly revolves around public sector projects, where consultancies are based in the construction of roads, airports, housing, water and sewerage works and other large projects. 4.25 According to professional associations in Kenya and Tanzania, most work for consulting engineers comes from international donor-funded physical infrastructure projects. The experience and skill required to participate in these projects often favor large foreign companies since only these firms can meet the requisite high standards. Several stakeholders questioned the appropriateness and relevance of the imposed standards as well as the coherence of these projects with their stated development objectives. 55 4.26 The dominance of small firms in the global engineering services sector is evident in Kenya, where small firms and sole practitioners are the majority. Many small engineering firms belong to the informal sector. Among the largest engineering consulting firms in Kenya are Howard Humphreys E.A Ltd, established in 1899 and incorporated in Kenya in 2000, employing 120 professionals; Otieno Odongo and Partners, established in 1977, employing 50 professionals; CAS consultants, established in 1985, employing 13 professionals; Uniconsult Kenya Ltd, established in 1983, employing 12 professionals; and Sapamo Consultants, established in 1982, employing 12 professionals. Most of these firms are located in Nairobi. Only two firms operate in Mombasa, and engineering firms seem to be entirely absent from other urban areas. 4.27 Uganda's demand for engineering services comes mainly from the booming construction sector. The industry remains generally fragmented -- which stakeholders blame on the lack of government policy and the absence of a strong institutional framework. This has encouraged an "informal sector" mentality approach to business in the sector, which is evident in the poor quality of many buildings. 4.28 Small operators dominate Tanzania's engineering sector. For example, in construction engineering, of the approximately 3,700 registered building contractors, 80 percent are classified as small operators. There are a little over 100 larger operators offering both civil and construction services capable of undertaking larger contracts. 4.29 Because of this, foreign contractors and consultants account for 80 percent of the monetary value of new works in Tanzania. And given the serious capacity constraints, most firms handle small and minor work projects, which are gained by stiff competition and paid with low profitability. Only a small number of larger firms have been able to compete with foreign firms for medium-size projects. Local stakeholders say that a lack of investment capital and inappropriate standards prevent engineering firms from competing for larger projects. However, a number of micro- and small engineering firms in Tanzania said that they work with large companies that subcontract to smaller stakeholders. 4.30 The segmentation of the market, especially in Tanzania, is confirmed by the World Bank Surveys of Professional Services in East Africa. Small engineering service providers in Tanzania and Rwanda count mostly smaller firms as major clients. But a considerable number of engineering providers in Kenya and Rwanda name large companies and multinationals as their major clients. This is especially true in Uganda (figure 4.8). 56 Figure 4.8: Size and Ownership Profile of Clients of Small Providers of Engineering Services in East Africa Kenya Engineering Providers (519 employees) Tanzania Engineering Providers (519 empoloyees) Total answers (23) 1 Total answers (15) 100% Clients (users) Clients (users) Multinationals Multinationals Large domestic private Large domestic private 0.22 companies companies Medium domestic private Medium domestic private 0.17 13% companies companies Small domestic private Small domestic private 0.17 13% companies companies Micro firms & individuals 0.22 Micro firms & individuals 67% Government or government 0.13 Government or government 7% agencies agencies Domestic state owned Domestic state owned Others 0.09 Others Uganda Engineering Providers (519 employees) Rwanda Engineering Providers (519 employees) Total answers (14) 100% Total answers (13) 100% Clients (users) Clients (users) Multinationals 36% Multinationals 8% Large domestic private Large domestic private 35% 23% companies companies Medium domestic private Medium domestic private 14% 31% companies companies Small domestic private Small domestic private 38% companies companies Micro firms & individuals 7% Micro firms & individuals Government or government 7% Government or government agencies agencies Domestic state owned Domestic state owned Others Others Source: World Bank Surveys of Providers of Professional Services in East Africa, 2009. Note: The graphs are based on answers to the question about major clients addressed to providers of engineering services. Percentages are taken across the total answers provided by the interviewed providers. Multiple answers were possible. 4.31 Sectoral distribution of clients. Engineering firms in all examined countries earn on average the largest fraction of their revenues from providing services to construction companies and to a lesser extent to IT firms (annex 7). 31 4.32 Variety of engineering services. Engineering consulting services are the most important in Tanzania, Kenya and Uganda, while design and planning and project management are more important in Rwanda (figure 4.9). 31 The list of potential clients that the surveyed engineering providers had to consider was: IT companies, water companies, transport companies, and construction companies. 57 Figure 4.9: Sources of Revenue for Providers of Engineering Services in East Africa by Type of Service Tanzania - Engineering Services Providers Uganda - Engineering Services Providers 30 30 24 35 Engineering consulting 15 Engineering consulting 18 5 29 5 15 18 Design and planning 15 Design and planning 12 25 41 Project management 15 15 Project management 12 12 15 41 Planning 10 15 Planning 6 35 24 5 15 12 12 Construction cost management 25 Construction cost management 18 15 18 5 20 6 Tender and contract admin. 30 Tender and contract admin. 29 5 29 Environment assesment 15 Environment assesment 24 20 24 Testing 5 Testing 12 15 18 Feasibility study 5 Feasibility study 6 10 35 20 Others Others 6 25 >30 percent 21-30 percent 11-20 percent 1-10 percent >30 percent 21-30 percent 11-20 percent 1-10 percent Kenya - Engineering Services Providers Uganda - Engineering Services Providers 5 30 24 35 Engineering consulting 25 Engineering consulting 18 20 29 10 10 18 Design and planning 5 Design and planning 12 20 41 5 10 12 Project management 5 Project management 12 20 41 Planning Planning 6 25 24 5 12 12 Construction cost management Construction cost management 18 25 18 5 25 6 Tender and contract admin. 10 Tender and contract admin. 29 20 29 5 Environment assesment Environment assesment 24 15 24 Testing 5 Testing 12 25 18 Feasibility study 5 Feasibility study 6 15 35 Others Others 6 10 >30 percent 21-30 percent 11-20 percent 1-10 percent >30 percent 21-30 percent 11-20 percent 1-10 percent Source: World Bank Surveys of Providers of Professional Services in East Africa, 2009. 4.33 The World Bank Surveys of Users of Professional Services point to a high rate of usage of engineering services by East African firms, including by small and medium size enterprises, in all countries except Rwanda. Surprisingly, the percentage of firms using in- house engineering services is substantially higher than that of accounting and legal services, which are mostly outsourced (figure 4.10). One likely explanation for such high usage is that engineering services include IT services, which are becoming important for a growing share of firms across all sectors in East Africa. 58 Figure 4.10: Usage of Engineering Services by East African Firms 100 5 0 10 90 24 80 13 13 26 38 70 9 60 25 50 67 92 93 90 40 76 75 77 65 68 30 56 29 50 20 10 17 10 0 Kenya Rwanda Tanzania Uganda External Usage Internal Usage Source: World Bank Surveys of Users of Professional Services in East Africa, 2009. Note: The numbers on the bars show the percentage of firms in each size category that uses external services (in blue) and that uses in-house services (in red). Note that in the survey external usage of services and in- house provision of services were mutually exclusively, although in reality simultaneous consumption of outsourced and in-house professional services could occur. Users of professional services in East Africa 4.34 The high rate of usage of accounting, legal, and engineering services across firms of all sizes in Kenya, Tanzania, Uganda and even Rwanda (although to a lesser degree) identified in figures 4.5, 4.8, and 4.11 may be surprising given the relatively unsophisticated level of those countries' economies. Despite our careful consideration of representative samples of firms for our surveys across sectors in each of the countries, most of the interviewed firms were located in the capital or second major city of each country, and all belong to the formal sector. Hence it is possible that the usage of services is overestimated to some degree. 4.35 However, for accounting and auditing services another piece of evidence corroborates our findings. The 2007 World Bank Investment Climate Survey shows that a larger fraction of firms in Kenya, Tanzania, and Uganda have their accounts audited than do firms in other countries at the same income level. 4.36 Sourcing strategy of Eastern African firms. There is no clear dichotomy in terms of the size or the sectoral distribution of demand for professional services, but figures 4.1 and 4.11 identify two clear trends across sectors and countries.32 32 Note that the information displayed in figure 4.12 has been displayed in earlier figures in the chapter but is combined here for a clearer understanding of the cross-country trends. 59 4.37 First, with the exception of Rwanda, we see a negative curvilinear (inverted U- shape) relationship between the degree of external usage of professional services and firm size in most countries. The external usage of professional services increases with size until a certain point, after which the firms choose a more selective outsourcing strategy of professional tasks (as documented by the decrease in external usage of professional services for large companies as compared to the usage for medium firms). This is combined with an increased in-house provision of professional tasks (as supported by the higher number of professionals working in their respective profession employed by large companies as compared to medium and small firms). 4.38 Outsourcing, as opposed to in-house business services, can benefit smaller firms by allowing them to use more efficient and skilled service providers at lower cost because of their own economies of scale and their specialization. This is especially likely for services with high fixed costs such as IT services (Ono and Stango, 2005). Hence, one could expect relatively smaller firms to outsource business services more than larger firms. This can explain the "second half" of the inverted U-shape relationship between the degree of usage of professional services and firm size -- that is, larger firms use less outsourced services and more in-house-provided services than medium firms. 4.39 It is also possible that relatively larger firms have more bargaining power with service providers, which would make them more likely to enter into relationships with providers. This could help explain the "first half" of the inverted U-shape relationship -- that is, medium firms outsource professional services more than small firms in East Africa. 4.40 Second, the in-house provision of professional services increases with the degree of firm-specific technical competences involved in the professional tasks. In-house provision of accounting services is much smaller than that of legal services, which in turn is well below the internal provision of engineering services. The World Bank Surveys on Users of Professional Services in East Africa show that generally less than 10 percent of the interviewed firms that do not purchase external accounting services use accounting services provided in-house; in legal services between 33 and 65 percent of non-users of external legal services report in-house provision of such services; and, except for Rwanda, more than 60 percent of East African non-users of external engineering services report in- house provision of engineering services. 4.41 The transactions costs theories of Coase (1952) and Williamson (1975) can help to rationalize this trend. A firm will outsource business services to external providers if the corresponding costs are lower than those of in-house provision.33 A large component of outsourcing costs are transaction costs related to the effort, time, and costs incurred in searching, negotiating, monitoring, and enforcing contracts with service suppliers (Grossman and Helpman, 2005; Abramovsky and Griffith, 2006). The complexity of a particular business service increases the transaction costs associated with its outsourcing -- for example by requiring larger relationship-specific sunk investments, thus 33 It is possible and even likely that for a given business service firms may outsource certain sub-categories while providing other sub-categories in-house. 60 exacerbating the hold-up problem, and by making it more difficult and costly to write a contract on that outsourcing transaction.34 4.42 Accounting and auditing services are likely to be more standardized across firms, simpler, and thus require less relationship-specific sunk investments between client and provider than legal or engineering services. A user firm's needs for an engineering service may be much more easily met if the firm has one or more dedicated engineers on their payroll, which the firm can control to deliver a perfectly customized service. This reasoning would explain the larger share of in-house provision of legal and engineering services for accounting services (for firms that do not outsource such services). Figure 4.11: Usage of Professional Services in East Africa: Cross-Country Comparisons 2 9 15 3 22 3 12 8 3 12 11 13 93 27 83 77 74 78 67 2 68 69 63 65 34 58 59 34 29 15 Accounting Legal Engineering External Internal Cross-Sectoral Comparisons 2 9 15 22 3 3 12 8 3 12 13 11 93 27 83 2 77 78 74 67 63 65 34 68 69 58 59 34 29 15 Kenya Rwanda Tanzania Uganda East Africa External Internal Source: World Bank Surveys of Users of Professional Services in East Africa, 2009. 34 A hold-up problem occurs when one or both parties in a transaction engage in opportunistic behavior once relationship-specific sunk costs have been incurred -- e.g., if one party asks more of the transaction than was initially agreed upon. 61 4.2 Supply of Professional Services in East Africa 4.43 With less than one professional firm per 100,000 inhabitants in most examined sectors, the four Eastern African countries show significantly lower densities of service providers than the more advanced comparators depicted in figure 4.12. These results are in line with expectations and, to a certain extent, reflect the limited availability of professionals identified in the previous chapter. 4.44 However, in several cases, the density differential is more pronounced for professional service firms than for professionals -- for example, in accounting and legal services in Kenya. This may suggest a higher degree of concentration in the East African professional markets than in the corresponding European markets or/and that large companies are outsized. Figure 4.12: Number of Professional Firms per 100,000 Inhabitants Panel A: Number of accounting firms per Panel B: Number of law firms 100,000 inhabitants per 100,000 inhabitants Tanzania 0.4 Kenya 0.6 Rwanda 0.5 Malawi 0.8 Uganda 0.5 Zambia 1.0 Malawi 0.5 Rwanda 1.3 Zambia 0.9 Uganda 1.4 Kenya 1.0 Mozambique 1.5 Mozambique 1.1 Tanzania 1.6 Mauritius 19.7 Netherlands 17.0 France 26.7 Mauritius 24.6 Ireland 37.9 Finland 30.1 Germany 42.7 Denmark 31.1 Austria 43.6 Austria 34.5 Germany 38.0 UK 45.9 Ireland 40.8 Denmark 77.0 UK 41.0 Finland 82.0 Sweden 49.0 Netherlands 86.8 France 51.2 Spain 94.1 Luxemburg 113.3 Sweden 149.1 Italy 151.9 Italy 156.4 Spain 202.0 Luxemburg 178.9 Belgium 265.6 0 50 100 150 200 250 300 0 50 100 150 200 250 300 Panel C: Number of Engineering firms per 100,000 inhabitants Tanzania Uganda Malawi Kenya Rwanda Mozambique Zambia Mauritius 0 5 10 15 20 25 Source: World Bank Regulatory Surveys in Eastern and Southern Africa, 2009, and Paterson et al (2003) 4.45 The high concentration hypothesis, especially in accounting services, seems reinforced by the very high percentage of professionals employed by the largest 10 firms35 in the sector (table 4.1). 35 The largest 10 firms were identified on the basis of their number of employees. 62 Table 4.1: Percentage of Professionals Employed by Top 10 Firms in the Accounting and the Legal Sectors in East Africa Accounting Legal Kenya1 15% 1% Rwanda 65% 4% Tanzania na 11% Uganda 21% 9% 1 Source: Regulatory Surveys in East Africa, 2009. Note: Top 4 firms in accounting in Kenya. Are foreign firms satisfying the unmet demand for professional services in East Africa? Exports and imports of professional services in East Africa 4.46 There is limited evidence on the magnitude of trade and investment flows in professional services in East Africa. 4.47 Statistics from professional associations reveal that in accounting and engineering services there is some foreign participation in the form of foreign-owned or partially foreign-owned establishments. In accounting services, firms with foreign affiliations (firms with foreign equity or firms with foreign partners) dominate the markets. In engineering, 8 out of the 10 top engineering firms have foreign equity. In Tanzania, 35 percent of all registered engineering firms have foreign participation. By contrast, foreign legal firms are non-existent in East Africa. 4.48 Data on procurement contracts extracted from the Business Warehouse Database36 provides additional insights into the participation of foreign companies in procurement activities in the four East African countries. Table 4.2 presents data on civil work procurement contracts financed to some degree by the World Bank and implemented between 1994 and 2009 in each of the four East African countries by sector and by partner country/region. This data is used as a proxy for procurement activities in engineering services, which makes sense given that so many of the large civil works in these countries have World Bank financing. The table shows that, except for energy and mining and transportation, most civil work procurement activities are executed by domestic firms. The participation of African suppliers in the civil work procurement activities of the examined countries is highest in health and social services and in transportation. 4.49 Some intra-EAC procurement related flows are observable in health and social services, information and communication, transportation, industry and trade, public administration, and education. For example, between 1994 and 2009, 17 percent of civil work activities procured in the health and social services sector by the Rwandan government were undertaken by Ugandan firms. During the same period, 23 percent of civil work activities procured in the health and social services sector by the Ugandan government were carried out by Kenyan firms. 36 The World Bank Business Warehouse is a database that contains current and historical data on lending, supervision, evaluation, non-lending/AAA, procurement, and resource management. 63 Table 4.2: Civil Work Contracts by Major Sector and Supplier region in East Africa, 1994-2009 % Foreign Foreign Domestic Grand Company Non- Company Total from African East Kenya Rwanda Tanzania Uganda Africa Africa Agriculture Kenya 85% 0% 0% 0% 0% 0% 0% 14% 100% Rwanda 81% 0% 0% 0% 0% 0% 0% 19% 100% Tanzania 86% 0% 0% 0% 0% 0% 0% 14% 100% Uganda 97% 0% 0% 0% 0% 0% 0% 3% 100% Education Kenya 100% 0% 0% 0% 0% 0% 0% 0% 100% Rwanda 99% 0% 0% 0% 1% 1% 1% 0% 100% Tanzania 33% 0% 0% 0% 0% 0% 0% 67% 100% Uganda 66% 10% 0% 0% 0% 10% 10% 24% 100% Energy & mining Kenya 1% 0% 0% 0% 0% 0% 0% 99% 100% Rwanda 3% 0% 0% 0% 0% 0% 0% 97% 100% Tanzania 7% 0% 0% 0% 0% 0% 0% 93% 100% Uganda 2% 0% 0% 0% 0% 0% 0% 98% 100% Health & social serv Kenya 46% 0% 0% 0% 0% 0% 0% 53% 100% Rwanda 83% 0% 0% 0% 17% 17% 17% 0% 100% Tanzania 52% 0% 0% 0% 0% 0% 0% 48% 100% Uganda 67% 23% 0% 1% 0% 23% 23% 9% 100% Industry and trade Rwanda 32% 0% 0% 0% 0% 0% 0% 68% 100% Tanzania 100% 0% 0% 0% 0% 0% 0% 0% 100% Uganda 85% 0% 0% 1% 0% 1% 1% 14% 100% Info & communication Kenya 0% 0% 0% 0% 0% 0% 0% 100% 100% Rwanda 100% 0% 0% 0% 0% 0% 0% 0% 100% Uganda 43% 0% 0% 3% 0% 3% 3% 53% 100% Public admin, Law Kenya 75% 0% 0% 0% 0% 0% 0% 25% 100% Rwanda 57% 0% 0% 0% 6% 6% 6% 37% 100% Tanzania 59% 1% 0% 0% 2% 2% 2% 39% 100% Uganda 57% 4% 0% 1% 0% 7% 4% 36% 100% Transportation Kenya 13% 0% 0% 0% 0% 0% 0% 87% 100% Rwanda 28% 0% 0% 0% 0% 0% 0% 72% 100% Tanzania 20% 6% 0% 0% 1% 7% 7% 73% 100% Uganda 5% 0% 0% 0% 0% 9% 0% 87% 100% Water/sanit/fld prot Kenya 35% 0% 0% 0% 0% 0% 0% 65% 100% Rwanda 90% 0% 0% 0% 0% 0% 0% 10% 100% Tanzania 51% 3% 0% 0% 3% 6% 6% 43% 100% Uganda 37% 14% 0% 0% 0% 14% 14% 49% 100% Source: Business Warehouse Database, 2009. 64 4.50 Finally, the business surveys undertaken in East Africa provide guidance on trade linkages in professional services. The surveys show that only a small proportion of firms import accounting and engineering services in Kenya; imports of legal and engineering services are absent in Rwanda. By contrast, more than 50 percent of the interviewed firms in Kenya said that they import legal services, around 17 percent of respondents in Tanzania and Uganda report imports of accounting and legal services, and over 25 percent of respondents in both countries import engineering services. 4.51 Except for Rwanda, a relatively high proportion of firms in all other countries reported exports of professional services (table 4.3). The main export markets are East Africa, DR Congo, South Africa, Mauritius, EU, China, and India. For example, Kenyan engineering firms have projects in South Sudan, Rwanda, and Uganda, and engineers travel regularly to work on the sites (Kenya Export Promotion Council, 2009). Table 4.3: Percentage of Firms that Export Professional Services Accounting Legal Engineering Tanzania 25% 35% 20% Uganda 20% 10% 15% Kenya 20% 25% 55% Rwanda 0 0 0 Source: Surveys of Users of Professional Services in East Africa, 2009. Conclusion 4.52 On the demand side, demand for accounting and auditing services is dominated by listed companies or large corporate entities, which at this stage represent the largest source of demand growth for these services. 4.53 But usage of professional services by small companies is not negligible: except for Rwanda, more than 50 percent of the interviewed formal small and micro firms in East Africa said that they use professional services at least once a year. A large proportion of the demand for accounting and auditing services is derived from mandatory legal requirements, such as financial reporting and taxation. 4.54 The market for engineering services revolves around public sector projects, where consultancy is based in the construction of roads, airports, housing, water and sewerage works, and other large construction. The bulk of the work available to consulting engineers comes from international donor-funded physical infrastructure projects. 4.55 All three markets show vertical fragmentation. While the market for accounting and auditing services resembles an oligopoly with a (variable) competitive fringe, the market structure of legal and engineering services is less clear, although small providers play a major role. 4.56 Regarding the sourcing strategy, there is no clear dichotomy in the size or the sectoral distribution of demand for professional services. But two trends emerge clearly across sectors and countries. 65 4.57 First, with the exception of Rwanda, we see an inverted U-shape relationship between the degree of external usage of professional services and firm size in most countries. The external usage of professional services increases with size until a certain point, after which the firms choose a more selective outsourcing strategy of professional tasks (as documented by the decrease in external usage of professional services for large companies as compared to the usage for medium firms). This is combined with an increased in-house provision of professional tasks (as supported by the higher number of professionals working in their respective profession employed by large companies as compared to medium and small firms). 4.58 Second, the in-house provision of professional services increases with the degree of firm-specific technical competences involved in the professional tasks: in-house provision of accounting services is much smaller than that of legal services, which in turn is well below the internal provision of engineering services. 4.59 On the supply side, accounting and auditing services are dominated by multinationals. Despite the domination of the Big Four, several local mid-level accounting firms, which have entered into partnerships with global networks, continue to win contracts from the Big Four. However, these markets remain heavily fragmented at the bottom. 4.60 The legal sector is dominated by domestic providers -- often small firms and microenterprises. This is similar to the situation in most middle income and developed countries: legal services are traditionally provided by individual professionals or small firms, with a small number of large firms, mainly from a few developed, common law countries. 4.61 However, East Africa is not experiencing the same worldwide consolidation trend as are a number of developed and middle income economies, with a growing number of large multinational law firms with vast international networks. 4.62 Engineering is dominated by local practices, highly fragmented in terms of organization, size, business culture, and management. The combined capacity of these firms, though large, is too scattered to meet the demand for large projects. 4.63 Finally, the available data shows some foreign participation in accounting and engineering services -- both in cross-border trade and commercial presence. Foreign providers could to meet some of the unsatisfied demand in these sectors. The market for legal services is closed. 66 CHAPTER 5. POLICY AFFECTING PROFESSIONAL SERVICES IN EAST AFRICA: EDUCATION, REGULATION, TRADE, AND LABOR MOBILITY 5.1 This chapter addresses the skills shortages and skills mismatches as well as the underdevelopment of professional services in East Africa based on the policy measures that affect professional services sectors. 5.2 The chapter first describes the regulatory frameworks in professional services in the four East African countries, including the reasons for regulation. The analysis considers education policies, domestic regulations, trade policies, and labor mobility policies affecting professional services. 5.3 The qualitative analysis is complemented with quantitative indicators of professional qualifications and regulations, both being based on the information collected by the regulatory surveys of professional services described in annex 2. Some of the indicators we examine are computed following a method developed by OECD for estimating indicators of product market regulation.37 These indicators, which measure the qualification and regulatory conditions in accounting, engineering and legal services, and cover entry and conduct regulations, have been used extensively in setting policy priorities in OECD and non-OECD countries, and in various empirical studies linking regulation to economic performance. The extension of the OECD methodology to the four East African countries enables first-time comparisons of the regulatory frameworks in East Africa with regulatory conditions in a broad sample of developed and emerging economies. 5.4 We also examine the services trade policy restrictiveness indices compiled by Borchert, Gootiz, and Mattoo (2010), which measure the degree of restrictiveness imposed by explicit barriers to trade in professional services. 5.5 Second, based on these qualitative and quantitative analyses, the chapter tries to answer the following questions: How do education and professional qualification requirements, domestic regulations, trade policies, and labor mobility policies create barriers for professionals and firms to enter the markets for professional services in East Africa? Are incumbents able to remain in operation? 5.6 The policy measures are examined from two different perspectives -- public interest and private interest theories -- in an attempt to determine the possibilities for relaxing restrictive rules. The goal is to offer advice about creating and implementing the right policy recommendations in the four areas (education, domestic regulation, trade 37 See Conway and Nicoletti (2006) and HTTP://WWW.OECD.ORG/DOCUMENT/1/0,3343,EN_2649_34323_2367297_1_1_1_1,00.HTML for details related to the OECD Indicators of Product Market Regulation that we use as the basis for our professional services regulation indicators. 67 policy and immigration), separating what needs to be done at the national level versus what requires joint action and cooperation at the regional level. 5.1 Regulatory Measures, Explicit Trade Barriers and Education Requirements Affecting Professional Services in East Africa 5.7 Professional services have traditionally been subject to a high degree of regulation. These regulatory measures are a result of direct governmental regulation and rules adopted by self regulatory bodies (professional associations). The regulatory measures take different forms: (a) Qualitative and quantitative entry regulations include educational and professional qualifications, exclusive or shared exclusive rights to provide services, ownership restrictions, restrictions on numbers of providers. (b) Conduct regulations include regulations governing business structure and multidisciplinary practices, pricing, and advertising rules and regulations applied to both domestic and foreign providers. 5.8 As described in chapter 2, while public interest theories claim that many of these regulatory measures are justified to address market failures -- such as information asymmetries, externalities, lack of economies of scale, and equity concerns -- private interest theories have been critical of many aspects of professional regulation and self- regulation, in particular the protectionist outcomes they often produce. 5.9 This section describes the regulatory frameworks in place in Kenya, Rwanda, Tanzania, and Uganda, looking in detail at the following pillars: education, domestic regulation (covering domestic entry restrictions and conduct regulation), explicit barriers to trade (covering foreign entry restrictions and discriminatory conduct restrictions), and broader labor mobility barriers. The following classification is used as an organizing framework for the discussion: Education and qualification requirements - Qualitative entry regulation: required academic education, professional examinations, minimum periods of professional experience; Domestic entry regulation - Quantitative entry regulation: limits the number of professionals in relation to population; - Qualitative entry regulation: compulsory membership in a professional body, reserved tasks, exclusive or shared exclusive rights that professionals have to provide certain services; Foreign entry restrictions: - Restrictions on the movement of natural persons: nationality and residency requirement, quotas, economic needs test, limits on the length of stay, recognition of academic and professional qualifications; 68 - Restrictions on the establishment of commercial presence: restrictions on foreign ownership, limits on the type of legal entry, limits on the scope of business; - Restrictions on cross border trade: entry restrictions and limits on the scope of business; Conduct regulation: regulations governing prices, business structure and multidisciplinary practices, and advertising restrictions applied to domestic and foreign users (discriminatory measures). Labor mobility restrictions: as procedures for hiring a foreign worker. 5.1.1. Accounting and Auditing Services Entry requirements Domestic entry 5.10 Academic and professional qualifications: The pre-qualification requirements for accountants and auditors consist of university degrees in Rwanda and Tanzania, while secondary school certificates are considered sufficient in Kenya and Uganda. The required academic qualifications must be supplemented by practical training (two years in Kenya, Rwanda and Uganda, and three years in Tanzania) to complete the professional examination. 5.11 Practical training must be conducted under the supervision of a fully qualified accountant in Kenya and Tanzania. But this requirement is a two-edged sword: on the one hand, young graduates must gain experience through these training programs; on the other, the limited availability of experienced professionals to supervise trainees, coupled with their lack of interest in such activities, makes it more difficult to form accountants in a short period of time. 5.12 All countries have national qualification examinations for accountants. The only exception to examination requirements is granted to associate accountants in Rwanda. The associate accountants are not required to pass professional exams, but they need to have an accounting bachelor degree or must demonstrate an experience of at least four years prior to entry into force of the Accounting Law (2007) (table 5.1). 5.13 Upon successful completion of national examinations, candidates obtain the public accountant certificate (CPA) and become eligible for registration with their national professional associations. Membership in the professional organization is compulsory for accountants and auditors in all the countries analyzed. In addition, access to the profession is regulated in all East African countries through compulsory licenses issued by the professional associations. Continuing education is an obligation for the members of the profession in Kenya, Tanzania, and Uganda (table 5.1). 69 Table 5.1: Entry Regulation, Domestic Providers: Academic and Professional Qualifications for Accountants and Certified Accountants Entry Regulation ­ Domestic Providers Kenya Rwanda Tanzania Uganda Academic Qualifications ­ Accountants and Certified Accountants University degree required No Yes Yes No Link between education system and professional Yes Yes Yes Yes associations Link between education system and labor market No No No No Professional Qualifications ­ Accountants and Certified Accountants Requirement to pass professional exam Yes Yes Yes Yes Requirement of relevant compulsory practice Yes No Yes Yes Compulsory membership in professional Yes Yes Yes Yes association Licensing requirements Yes Yes Yes Yes Continuing education requirement Yes No No Yes Source: World Bank Regulatory Surveys in East Africa, 2009. 5.14 The education pre-qualification requirements to legally practice as accounting technicians (middle-level professionals) consist of high school certificates in all analyzed countries. Additional professional examinations are required in all countries. Only Tanzania requires training (one year) to be able to legally practice as an accounting technician. Membership in the professional organization and licenses to practice as accounting technicians are compulsory in Rwanda, Tanzania, and Uganda (table 5.2). Table 5.2: Entry Regulation, Domestic Providers: Academic and Professional Qualifications for Accounting Technicians Entry Regulation ­ Domestic Providers Kenya Rwanda Tanzania Uganda Academic Qualifications ­ Accounting Technicians Degree required Yes- Yes- Yes - Yes- secondary secondary secondary secondary school school school school Link between education system and professional Yes Yes Yes Yes association Link between education system and labor No No No No market Professional Qualifications ­ Accounting Technicians Requirement to pass professional exam Yes Yes Yes Yes Requirement of relevant compulsory training No No Yes Yes Compulsory membership in professional No Yes Yes Yes association Licensing requirements No Yes Yes Yes Continuing education requirement No No No No Source: World Bank Regulatory Surveys in East Africa, 2009. 5.15 In all countries professional associations are involved in the training of both middle-level and highly skilled accounting professionals by helping to design curricula, or by providing training or continuous education. By contrast, in none of the countries is there 70 an institutional mechanism to ensure the participation of employers in the formation of accounting professionals. 5.16 Standards. Standards related to education, qualification, and licensing of professionals are mandatory in all East African countries. This is also true for technical standards, including financial and reporting standards, procedures, and methods governing audits. In all countries, the standards are established on the basis of norms developed by the East African Community, norms inherited from the English Common Law and/or norms developed by national bodies (table 5.3). 5.17 The scope of exclusive activities38 is similar among the Eastern African countries analyzed. In all East African countries auditors enjoy exclusive rights to conduct statutory audits and public sector audits (table 5.3). 5.18 Quantitative restrictions. None of the countries imposes restrictions on the number of domestic accounting and/or auditing firms (table 5.3). Table 5.3: Entry Regulation, Domestic Providers: Standards in Accounting Services Entry Regulation ­ Domestic Providers Kenya Rwanda Tanzania Uganda Standards Mandatory standards related to education and Yes ­ I Yes ­ I Yes ­ I&N Yes ­ I&R qualification Mandatory standards related to licensing Yes ­ N Yes ­ I Yes ­ I&N Yes ­ I&R Mandatory standards related to technical issues Yes ­ I Yes ­ I Yes ­ I&N Yes ­ I&R Exclusive Rights 2 out of 13 No 2 out of 13 2 out of 13 Restrictions on Number of Providers No No No No (Individuals or Firms) Source: World Bank Regulatory Surveys in East Africa, 2009. Note: N stands for National Standard, R stands for Regional Standard and I stands for International Standards. Foreign entry39 Movement of natural persons 5.19 Restrictions on form of entry. The four East African countries do not impose any nationality or residency requirements on foreign professionals wishing to provide accounting and auditing services in their territories. Kenya, Tanzania, and Uganda impose quantitative restrictions on foreign professionals in the form of labor market tests or economic needs tests. There are limits on the initial length of stay in these three countries, but extension of stay or renewal of visa is permitted (in general on a case-by-case basis). None of the countries have restrictions on the type of entry (intra-corporate transferee, 38 Accounting and auditing activities include statutory audit, non-statutory audit, audit of mergers and contribution in kind, public sector audit, accounting, insolvency and restructuring practice, tax advice, tax representation, management consultancy, investment advice, legal advice and representation, expert witness in accounting, and forensic auditing. 39 See also annex 5. 71 services-supplying employee, independent professional as employee of a local firm, independent professional as contractual service provider) (table 5.4). 5.20 Recognition of academic and professional qualifications. All East African professional associations recognize academic and professional qualifications obtained in other EAC countries and in most IFAC member countries. Specifically, all four countries recognize degrees and qualifications obtained in other EAC and several OECD countries. In addition, Rwanda recognizes degrees and qualifications obtained in all IFAC member countries, while Tanzania and Uganda recognize degrees and qualification obtained in SADC and COMESA, respectively. Kenya and Uganda do not automatically recognize licenses obtained in any other jurisdiction; but Rwanda recognizes licenses obtained in any IFAC country, Tanzania recognizes licenses obtained in EAC countries and in a selected set of IFAC countries. 5.21 Kenya and Uganda require practical experience in the host country, as well as passing an exam on local company or tax laws, before a license to practice as an accountant can be issued (table 5.4). 5.22 At the EAC High Level Task Force meeting in September 2009, the Multi Sector Council adopted the Common Market Protocol, which included the schedules of commitments on free movement of services, adopted annexes on removing restrictions on the free movement of workers and on the right of establishment, and adopted an annex on mutual recognition agreements (MRAs) of academic and professional qualifications. 5.23 In addition, Kenya has indicated it would engage in MRAs in accountancy with South Africa, UK, Canada, USA, and Australia (on qualification of professionals), while Uganda has similar plans with ECSAFA and IFAC members (on qualification and licensing of professionals). 5.24 Rwanda has expressed interest in engaging in MRAs covering qualification requirements, licensing, and technical standards with all interested countries. Tanzania has no plans to engage in MRAs outside of the EAC area. Establishment of commercial presence 5.25 Restrictions on the form of entry of accounting services providers are present in Kenya, Rwanda, and Uganda. In all three countries establishment of a branch of the foreign firm is prohibited (table 5.4). 5.26 Foreign ownership restrictions. Tanzania imposes limits on ownership or control by foreign nationals (50 percent of ownership must be held by Tanzanian nationals). Kenya and Tanzania prohibit ownership or control by non-locally licensed professionals, restricting foreign entry. In addition, Tanzania requires separate licensing of accounting firms (table 5.4). 72 5.27 Activities that can be provided by foreign suppliers. In Tanzania and Uganda, restrictions on activities and tasks40 that can be provided by foreign accounting suppliers are holding back the entry of foreign providers via commercial presence. Statutory audit, public sector audit, and tax representation cannot be performed by foreign accounting providers with commercial presence in Tanzania, while non-statutory audit, accounting of mergers and of contribution on kind, and legal advice and representation cannot be performed by foreign accounting providers with commercial presence in Uganda (table 5.4). Cross-border service 5.28 None of the countries prohibits cross-border provision of accounting services. Residents in all four countries are allowed to obtain accounting services directly from foreign providers located abroad. But the foreign firm's ability to provide cross-border accounting services depends on whether the firm employs licensed accounting professionals. 5.29 In Kenya, Tanzania, and Uganda foreign providers cannot perform certain accounting tasks and activities without a commercial presence. These break down as follows: (a) Kenya: statutory audit, public sector audit, accounting, tax advice, legal advice and expert witness in accounting; (b) Tanzania: statutory audit, public sector audit and tax representation; (c) Uganda: statutory audit, non-statutory audit, audit of mergers and of contribution in kind, public sector audit, accounting, insolvency and restructuring practice, tax representation, legal advice and representation, expert witness in accounting, and forensic auditing. Procurement of accountancy services by government and international organizations 5.30 Foreign accounting firms and foreign accounting professionals with a presence in the host countries can sell all kinds of accounting services to government bodies or international organizations in Kenya, Rwanda, and Uganda. Similar conditions apply to foreign accounting firms with a commercial presence in Tanzania; but foreign professionals (even with presence in Tanzania) cannot participate in any procurement activities. Except for Rwanda, the procurement market is partially closed to foreign firms or professionals without a presence in the host country. 40 Accounting and auditing activities include statutory audit, non-statutory audit, audit of mergers & contribution in kind, public sector audit, accounting, insolvency and restructuring practice, tax advice, tax representation, management consultancy, investment advice, legal advice and representation, expert witness in accounting, forensic auditing. 73 Table 5.4: Entry Regulation, Foreign Providers of Accounting Services Entry Regulation - Foreign Providers Accountancy Services Kenya Rwanda Tanzania Uganda Restrictions on the Movement of Natural Persons Nationality requirement No No No No Residency requirement No No No No Quota, labor market test or economic needs test Yes No Yes Yes Yes - EAC, Yes - EAC, Recognition of degrees and qualifications obtained abroad Yes - IFAC Yes - IFAC SADC, COMESA select IFAC Yes - EAC, Recognition of licence obtained abroad No Yes - IFAC No select IFAC Yes - EAC, Yes - EAC, Compliance with foreign technical standards recognized Yes - IAS Yes - All SADC, COMESA select IFAC Government Procurement - prohibited activities None None All 1 out of 13 Intl. Organization Procurement - prohibited activities None None .. None Restrictions on Establishment of Commercial Presence Establishment prohibited No No No No Restriction on form of entry Yes Yes No Yes Ownership limits No No Yes No Limits on control by foreign professionals not licensed to practice in Yes No Yes No host country Licence for firm required No No No Yes Prohibited activities None None 5 out of 13 2 out of 13 Government Procurement - prohibited activities None None None 1 out of 13 Intl. Organization Procurement - prohibited activities None None .. None Restrictions on Cross Border Trade No - but No - but No - but Prohibited Yes conditional conditional conditional admission admission admission Procurement- prohibited activities Government, firm w/o commercial presence - prohibited activities 12 out of 13 None 9 out of 13 5 out of 13 Government, individual w/o presence - prohibited activities 12 out of 13 None All 5 out of 13 Intl. org., firm w/o commercial presence - prohibited activities None None .. 5 out of 11 Intl. org., individual w/o presence - prohibited activities None None .. 5 out of 11 Source: World Bank Regulatory Surveys in East Africa, 2009. Conduct regulation Domestic providers (professionals and firms) 5.31 Competition law is applicable to accountancy services in Kenya, Rwanda, and Tanzania. A competition law does not exist in Uganda. 5.32 Accountancy and auditing services are not subject to price regulation in the examined countries, but advertising by the accounting and auditing profession is prohibited in Kenya, Tanzania, and Uganda (table 5.5). 5.33 Regarding the business structure and inter-professional cooperation, there are restrictions on the types of legal entities through which accounting and auditing professionals can exercise their profession in Kenya, Tanzania, and Uganda. In Tanzania and Uganda there are restrictions on the type of cooperation (e.g., partnerships, 74 associations, joint ventures) allowed between accounting and auditing professionals and other professionals (e.g., lawyers). 5.34 But accounting professionals are allowed to perform a large set of activities usually carried out by other professionals (multidisciplinary activities), such as insolvency and restructuring practice, tax advice, tax representation, management consultancy, investment advice, legal advice and representation, and expert witness in accounting (table 5.5). Foreign providers (professionals and firms) 5.35 The advertising and business structure restrictions described above are applied in a non-discriminatory way to foreign providers. Table 5.5: Conduct Regulation and Discriminatory Measures in Accounting Services Conduct Regulation and Discriminatory Measures Kenya Rwanda Tanzania Uganda Competition rules applicable to accounting profession Yes Yes Yes No Fees and prices regulated Domestic providers No No No No Foreign providers No No No No Advertising prohibited Domestic providers Yes No Yes Yes Foreign providers Yes No Yes Yes Business structure ­ permitted types of legal entity Domestic providers 4 out of 6 All 4 out of 6 2 out of 6 Foreign providers 4 out of 6 All 4 out of 6 2 out of 6 Multidisciplinary practices ­ permitted activities Domestic providers All All All 6 out of 8 Foreign providers All All All 8 out of 8 Location and diversification regulation Domestic providers No No No No Foreign providers No No No No Quality control instruments Domestic providers Yes No Na Yes Foreign providers Yes No Na Yes Source: World Bank Regulatory Surveys in East Africa, 2009. 5.1.2. Legal Services Entry requirements Domestic entry 5.36 Academic and professional qualifications. The pre-qualification requirements for lawyers consist of university degrees in all four East African countries. To be able to sit the bar examination, candidates need to supplement these academic qualification with post- graduate specialized law courses (which last 18 months in Kenya and 12 months in Tanzania and Uganda) and practical training (which lasts one year in all countries). In Kenya and Rwanda, practical training needs to be conducted under the supervision of a senior lawyer. 75 5.37 In order to practice law as advocates, candidates must pass the national bar examination and become members of their national bar association in all four countries. Membership in the professional bar is compulsory in all countries. In addition, all four East African countries regulate access to the profession through compulsory licenses issued by the bar associations. In Kenya and Uganda, continuing education is obligatory for members of the profession (table 5.6). Table 5.6: Entry Regulation, Domestic Providers: Academic and Professional Qualifications for Lawyers Entry Regulation - Domestic Providers Kenya Rwanda Tanzania Uganda Academic Qualifications - Lawyers University degree required Yes Yes Yes Yes Yes post Yes post Yes post graduate No graduate graduate diploma diploma diploma Additional educational requirement (specialized course) Yes Yes Yes Link between education system and professional association Yes curricula & continuou continuou training continuou s educ s educ s educ Link between education system and labor market No No Yes No Professional Qualifications - Lawyers Requirement to pass professional exam Yes Yes Yes Yes Requirement of relevant compulsory practice Yes Yes Yes Yes Compulsory membership in professional association Yes Yes Yes Yes Licensing requirements Yes Yes Yes Yes Continuing education requirement Yes Yes Yes Yes Source: World Bank Regulatory Surveys in East Africa, 2009. 5.38 The education pre-qualifications for paralegals (middle-level professionals) consist of secondary/high-school degrees in all four countries. None of the analyzed countries imposes requirements for membership in a professional organization or licensing requirements to legally practice as paralegals (table 5.7). Table 5.7: Entry Regulation, Domestic Providers: Academic and Professional Qualifications for Paralegals Entry Regulation - Domestic Providers Kenya Rwanda Tanzania Uganda Academic Qualifications - Paralegals University degree required No Yes? No No Yes - Link between education system and professional association No training No No Link between education system and labor market No No No No Professional Qualifications - Paralegals Requirement to pass professional exam No No No No Requirement of relevant compulsory practice No No No No Compulsory membership in professional association No No No No Licensing requirements No No No No Continuing education requirement No No No No Source: World Bank Regulatory Surveys in East Africa, 2009. 76 5.39 Standards. Kenya and Tanzania have mandatory standards for education, qualification, and licensing of professionals, as well as technical standards that include ethical rules and rules of professional conduct. There are no such requirements in Rwanda or Uganda. 5.40 In Tanzania the standards are based on norms developed by the East African Community, norms inherited from the English Common Law, and norms developed by national bodies. In Kenya the standards are based on norms developed by the East African Community and norms developed by national bodies (table 5.8). 5.41 The range of exclusive activities41 varies among the Eastern African countries, but generally advice on matters regulated by domestic, foreign or international law, and representation of clients before courts is reserved by law to legal professionals; tax advice and management consulting are non-exclusive tasks (table 5.8). 5.42 Quantitative restrictions. None of the examined countries imposes restrictions on the number of domestic legal professionals or legal firms (table 5.8). Table 5.8: Entry Regulation, Domestic Providers: Standards in Legal Services Entry Regulation - Domestic Providers Kenya Rwanda Tanzania Uganda Standards Yes - I, R, Yes - N No No Mandatory standards related to education and qualification C, N Yes - I, R, Yes - N No No Mandatory standards related to licensing C, N Yes - I, R, Yes - N No No Mandatory standards related to technical issues C, N Exclusive Rights 5 out of 10 None 3 out of 10 9 out of 10 Restrictions on Number of Providers (Individuals or Firms) No No No No Source: World Bank Regulatory Surveys in East Africa, 2009. Note: N stands for National Standard, R stands for Regional Standard and I stand for International Standards. Foreign entry42 Movement of natural persons 5.43 Restrictions on the form of entry. In Kenya and Tanzania, de jure or de facto nationality requirements to practice domestic law exclude participation by foreign professionals. Kenya does, however, make an exception for citizens of Tanzania and Uganda. Foreign-licensed lawyers can advise on foreign law in both Kenya and Tanzania; but in Kenya they can only act as consultants or as employees of a local law firm. Both 41 Legal activities include advice on matters predominantly regulated by domestic law, advice on matters predominantly regulated by international law, advice on matters predominantly regulated by foreign law, transferring of title to real estate, wills and regulation of family matters (conveyance), representation of clients before courts, representation before administrative agencies (including tax matters), and advice and representation on patent law. 42 See also annex 5. 77 countries, along with Uganda, impose discretionary limits (e.g., through labor market tests) on the presence of foreign professionals. Rwanda imposes no restrictions on the practice of foreign law and only limited restrictions on the practice of domestic law (table 5.9). 5.44 Recognition of academic and professional qualifications. All four countries recognize academic and professional qualifications in law obtained in other EAC countries and the UK, and Rwanda recognizes all degrees and qualifications. Licenses obtained in other jurisdictions are not automatically recognized in any of the examined countries. 5.45 Kenya plans mutual recognition agreements (MRAs) in legal services with Tanzania and Uganda. Uganda also has MRA plans with all interested countries (table 5.9). Establishment of commercial presence 5.46 Restrictions on the form of entry. Entry of foreign law firms is not permitted in Kenya and Tanzania but is allowed in Rwanda and Uganda. The establishment of a branch of the foreign firm is prohibited in Rwanda and Uganda (table 5.9). In each of those three countries local members of international networks face restrictions on using the network's brand name. Cross-border service 5.47 Residents (firms or individuals) in all four countries are allowed to obtain legal services directly from foreign providers located abroad. But the market for foreign providers without a commercial presence in the East Africa countries (especially advice on matters regulated mostly by domestic law) remains largely closed (table 5.9). Table 5.9: Entry Regulation, Foreign Providers of Legal Services Entry Regulation - Foreign Providers of Legal Services Kenya Rwanda Tanzania Uganda Restrictions on the Movement of Natural Persons Nationality requirement Yes* No Yes Yes Quota, labor market test or economic needs test Yes No Yes Yes Recognition of degrees and qualifications obtained abroad EAC All EAC EAC Recognition of licence obtained abroad No if MRA No No Government Procurement - prohibited activities All 4 out of 10 None All Intl. Organization Procurement - prohibited activities All None None All Restrictions on Establishment of Commercial Presence Establishment prohibited Yes No Yes Yes Restriction on form of entry Yes Yes Yes Yes Ownership limits Yes No Yes Yes Licence required Yes Yes Yes Yes Prohibited activities All None 7 out of 10 8 out of 10 Government Procurement - prohibited activities All 4 out of 10 None All Intl. Organization Procurement - prohibited activities All None None All Restrictions on Cross Border Trade Prohibited na No No No Procurement- prohibited activities Government, firm w/o commercial presence - prohibited activities All 7 out of 10 .. 7 out of 10 Government, individual w/o presence - prohibited activities All 5 out of 10 .. 7 out of 10 Intl. org., firm w/o commercial presence - prohibited activities 8 out of 10 None .. 7 out of 10 Intl. org., individual w/o presence - prohibited activities 8 out of 10 None .. 7 out of 10 Source: World Bank Regulatory Surveys in East Africa, 2009. Note: * exception for citizens of Tanzania and Uganda. 78 Procurement of legal services by government and international organizations 5.48 Foreign law firms and professionals with or without a presence in Kenya and Uganda are generally prohibited from selling legal services to government bodies or international organizations. For those with a presence, the procurement market for legal services in Rwanda and Tanzania is generally open (with the exception of advice on matters regulated mostly by domestic law, representation before courts, and tax advice) (table 5.9). However, in Tanzania the procurement market for legal services is totally closed for foreign law firms and professionals without a presence. Conduct regulation Domestic providers (professionals and firms) 5.49 Competition rules do not apply to the legal profession in Tanzania and Uganda. Legal services are subject to price regulation in Kenya, Tanzania, and Uganda -- binding minimum prices in Kenya and Uganda, and minimum and maximum prices in Tanzania. 5.50 Advertising by the legal profession is prohibited in all countries. Kenya and Uganda have restrictions on the types of legal entities through which legal professionals can exercise their profession. Specifically, while limited liability partnerships, individual enterprise, limited liability companies, and public limited companies are prohibited in Uganda, limited liability partnerships and public limited companies are prohibited in Kenya. All East African countries have restrictions on cooperation between legal professionals and other professions -- for example, inter-professional cooperation in the form of incorporation is forbidden in Kenya and Uganda. Foreign providers (professionals and firms) 5.51 Generally, the price, advertising, business structure, and inter-professional cooperation regulations are applied in a non-discriminatory way to foreign suppliers of legal services. Exceptions are found (a) in Uganda, for fees regulation that are not applicable to foreign providers; (b) in Kenya and Uganda, in business structure regulation (whereby fewer types of legal entities through which law practitioners are allowed to exercise their profession are available to foreigners); and (c) in Kenya and Uganda, in multidisciplinary practices, whereby foreign providers are allowed to perform a smaller number of multidisciplinary activities (table 5.10). 79 Table 5.10: Conduct Regulation and Discriminatory Measures in Legal Services Conduct Regulation and Discriminatory Measures Kenya Rwanda Tanzania Uganda Competition rules applicable to legal profession Yes Yes No No Fees and prices regulated Domestic providers Yes No Yes Yes Foreign providers Yes No Yes No Advertising prohibited Domestic providers Yes Yes Yes Yes Foreign providers Yes Yes Yes Yes Business structure -permitted types of legal entities Domestic providers 4 out of 6 All 6 out of 6 2 out of 6 Foreign providers 4 out of 6 na 6 out of 6 2 out of 6 Multidisciplinary practices - permitted activities Domestic providers All All All 5 out of 6 Foreign providers None All All None Location and diversification regulation Domestic providers No No na No Foreign providers No No na No Quality control instruments Domestic providers No No na No Foreign providers No No na No Source: World Bank Regulatory Surveys in East Africa, 2009. Note: na = answer not available. 5.1.3. Engineering Services Entry requirements Domestic entry 5.52 In all four countries the pre-qualification requirements for graduate or conception engineers consist of university degrees. Before being eligible to complete a professional examination, these academic requirements need to be supplemented by practical training (lasting three years in Kenya and Tanzania and four years in Uganda). Practical training needs to be conducted under the supervision of a senior engineer in Kenya, Tanzania, and Uganda. Kenya and Tanzania have national qualification examinations for engineers. 5.53 While there is no explicit examination in Uganda, there is an assessment mechanism to test the professional competence of an engineering professional before being admitted as a member to the Uganda Institution of Professional Engineers (UIPE). The candidate must submit a career report and a technical report, which are reviewed by the assessors appointed by UIPE. The assessors then make recommendation to the UIPE Council for approval of the applicant's application for membership (table 5.11). 5.54 Once national examinations are successfully completed, candidates can legally practice as engineers in their home countries. Membership in the relevant professional organization is not compulsory for engineers in East Africa, but in several cases an engineer is not legally allowed to sign any contract document unless registered with the Engineering Registration Board (Kenya). The Uganda Engineers Registration Act requires 80 a person to be a member of the professional association in order to be able to practice as an engineering professional, but in practice this requirement is often not implemented. 5.55 Kenya, Tanzania, and Uganda regulate access to the engineering profession through compulsory licenses issued by the professional associations. However, while registration with the professional bodies is in theory mandatory for engineering professionals, the number of registered professionals represents only a small fraction of those providing engineering services in these countries because the requirement is not enforced. 5.56 Continuing education is not obligatory to members of the profession in these three countries. The engineering profession remains largely unregulated in Rwanda, and a professional association is yet to be established Table 5.11: Entry Regulation, Domestic Providers: Academic and Professional Qualifications for Engineers Entry Regulation - Domestic Providers Kenya Rwanda Tanzania Uganda Academic Qualifications - Engineers University degree required Yes Yes Yes Yes Additional educational requirement No No No No Yes Yes Yes Link between education system and professional association curricula continuous No contiuous & educ educ training Link between education system and labor market Yes No Yes No Professional Qualifications - Engineers No but Requirement to pass professional exam assessm. Yes No Yes mech. Requirement of relevant compulsory practice Yes na Yes Yes No but No but necessary Compulsory membership in professional association No No assessm. to sign mech. contract Licensing requirements Yes No Yes Yes Continuing education requirement No No No No Source: World Bank Regulatory Surveys in East Africa, 2009. 5.57 The education pre-requirements to legally practice as engineering technicians (middle-level professionals) consist of high school certificates in Kenya and Tanzania, and an ordinary diploma in engineering in Uganda. Additional professional examinations are required in Kenya and Tanzania. An assessment of professional qualifications similar to the assessment applied to graduate engineers is undertaken in Uganda in order to become a member of the UIPE. 5.58 All three countries require additional practical training (lasting three years) to legally practice as engineering technicians. Membership in a professional organization and licenses to legally practice as engineering technicians are not compulsory in any of the examined countries. The engineering profession remains largely unregulated in Rwanda, and a professional association is yet to be established (table 5.12). 81 Table 5.12: Entry Regulation, Domestic Providers: Academic and Professional Qualifications for Engineering Technicians Entry Regulation ­ Domestic Providers Kenya Rwanda Tanzania Uganda Academic Qualifications ­ Engineering Technicians University degree required No No Yes Yes Link between education system and professional Yes-curricula No Yes- na association & training curricula & training Link between education system and labor market No No Yes na Professional Qualifications ­ Engineering Technicians Requirement to pass professional exam Yes No Yes No ­ but assess. mech. Requirement of relevant compulsory practice Yes No Yes No Compulsory membership in professional No No Yes No association Licensing requirements No No Yes No Continuing education requirement No No No No Source: World Bank Regulatory Surveys in East Africa, 2009. 5.59 Standards. Standards related to education, qualification, and licensing of professionals, as well as technical standards -- including quality control, maintenance, and research -- are mandatory in Kenya and Rwanda. In Kenya, the standards are established on the basis of norms developed by national bodies, while the British building code serves as a model in Rwanda (table 5.13). 5.60 The scope of exclusive activities43 varies among the analyzed Eastern African countries. Except for environmental assessments, the profession seems to have an exclusive right to provide all other engineering-related activities in Kenya and Tanzania. In Uganda, exclusive rights are restricted to feasibility studies, design and planning, planning and managing maintenance, testing and certification, and expert witness activities (table 5.13). 5.61 Quantitative restrictions. None of the countries imposes restrictions on the number of domestic engineering firms (table 5.13). Table 5.13: Entry Regulation, Domestic Providers: Standards in Engineering Services Entry Regulation - Domestic Providers Kenya Rwanda Tanzania Uganda Standards Mandatory standards related to education and qualification Yes Yes No No Mandatory standards related to licensing Yes Yes No No Mandatory standards related to technical issues Yes Yes No No Exclusive Rights 9 out of 10 na All 5 out of 10 Restrictions on Number of Providers (Individuals or Firms) No No No No Source: World Bank Regulatory Surveys in East Africa, 2009. 43 Typical engineering activities encompass the following: feasibility studies, environmental assessments, design and planning, representation for obtaining permits (signature of designs), tender and contract administration, project management, including monitoring of execution, construction cost management, planning and managing maintenance, survey sites, testing and certification, expert witness activities. 82 Foreign entry Movement of natural persons 5.62 Recognition of academic and professional qualifications. All the East African professional associations recognize academic and professional engineering qualifications obtained abroad. Licenses obtained in other jurisdictions are not automatically recognized in Kenya but are recognized in the other three countries. 5.63 Kenya has plans to take part in mutual recognition agreements (MRAs) in engineering with the East African Community countries; Tanzania has similar plans with a broader group of countries from Europe, Asia, and Africa (table 5.14). Establishment of commercial presence 5.64 Activities that can be provided by foreign suppliers. In Tanzania entry of foreign providers via commercial presence is limited by restrictions on the activities and tasks that can be provided by foreign engineering suppliers. Tanzania prohibits environmental assessments, design and planning, construction cost management, and tender and contract administration representation for obtaining permits by foreign providers (table 5.14). In Kenya, Rwanda and Uganda, foreign engineering firms can engage in all activities and tasks. Procurement of engineering services by government and international organizations 5.65 Foreign engineering firms and foreign engineering professionals with a presence in the host countries can sell several types of engineering services to government bodies or international organizations in East Africa. Foreign firms or individuals without a commercial presence are not allowed to engage in procurement activities in Tanzania and Uganda (table 5.14). Table 5.14: Entry Regulation, Foreign Providers of Engineering Services Entry Regulation - Foreign Providers of Engineering Services Kenya Rwanda Tanzania Uganda Restrictions on the Movement of Natural Persons Recognition of degrees and qualifications obtained abroad Yes Yes -All Yes- All Yes - All Recognition of licence obtained abroad No Yes -All Yes- All Yes - All Compliance with foreign technical standards recognized No Yes -All Yes- All Yes - All Government Procurement - prohibited activities 2 out of 10 None All None Intl. Organization Procurement - prohibited activities All None .. None Restrictions on Establishment of Commercial Presence Prohibited activities None None 5 out of 10 None Government Procurement - prohibited activities 2 out of 10 None All None Intl. Organization Procurement - prohibited activities None None .. None Restrictions on Cross Border Trade Procurement- prohibited activities Government, firm w/o commercial presence - prohibited activities 2 out of 10 None All All Government, individual w/o presence - prohibited activities 2 out of 10 None All All Intl. org., firm w/o commercial presence - prohibited activities All None .. All Intl. org., individual w/o presence - prohibited activities All None .. All Source: World Bank Regulatory Surveys in East Africa, 2009. 83 Conduct regulation Domestic providers (professionals and firms) 5.66 Competition law applies to engineering services in Kenya and Rwanda. Competition rules are not applicable to the engineering profession in Tanzania. Uganda does not have a competition law. 5.67 Engineering services are subject to price regulation in Tanzania in terms of binding minimum prices (table 5.15). Foreign providers (professionals and firms) 5.68 The advertising and business structure restrictions described above are applied in a non-discriminatory way to foreign providers (table 5.15). Table 5.15: Conduct Regulation and Discriminatory Measures in Engineering Service Conduct Regulation and Discriminatory Measures Kenya Rwanda Tanzania Uganda Competition rules applicable to accounting profession Yes Yes No No Fees and prices regulated Domestic providers No No Yes No Foreign providers No No na No Advertising prohibited Domestic providers Yes na No No Foreign providers Yes na No No Business structure ­ permitted types of legal entity Domestic providers All All All All Foreign providers All All All All Multidisciplinary practices ­ permitted activities Domestic providers All na 1 out of 3 All Foreign providers None na 1 out of 3 1 out of 3 Location and diversification regulation Domestic providers No na No No Foreign providers No na No No Quality control instruments Domestic providers Yes na Yes No Foreign providers Yes na Yes No Source: World Bank Regulatory Surveys in East Africa, 2009 5.2 Labor Mobility in East Africa 5.69 Labor flows in East Africa are tightly regulated, and although there are no overtly discriminatory regulations, policies are aimed more at restricting rather than facilitating the free movement of labor. With the exception of highly trained foreign workers, or those working on high value foreign investment projects, policies do not protect the welfare of foreign workers. Hence, while current laws and regulations do not directly discourage the migration of labor, they do not encourage it. 5.70 Most skilled workers in East Africa emigrate to North America or Europe, although some also emigrate to Botswana, South Africa, or Swaziland. Most unskilled workers emigrate to South Africa, and similarly, most unskilled workers coming to East Africa 84 (mainly to Tanzania) originate in South Africa. Table 5.16 summarizes the labor migration policies in the four East African countries. 5.71 In Kenya, the issue of labor mobility is included in the Kenyan Constitution, and is overseen by a variety of government bureaucracies. In theory, the Constitution outlines a variety of principles that guarantee a migrant's personal liberty, freedom of movement, and protection from discrimination. In practice, however, Kenya has one of the stricter regimes in East Africa for granting permits to foreign workers. 5.72 Overall, Kenya's system of handling work permit applications is considered "outdated."44 Many foreign investors have reported difficulties in obtaining work permits, especially for employment and projects in the services sector. This difficulty occurs despite the existence of a special class (Class F to J) of permits, considered investors' permits, which are designed to facilitate foreign investment. The main hurdle is to prove that a foreigner's employment will be of benefit to Kenya. And it is often difficult to determine if a worker meets this threshold, especially since "benefit to Kenya" is not defined, and there are no guidelines on how to interpret this stipulation. 5.73 In addition, the applicant "must justify the steps that have been attempted to fill the position with a Kenyan citizen and why this has not been possible."45 In practical terms, these stringent requirements mean that many foreign investors and potential employees of professional services firms just don't know whether they will be allowed to work in Kenya, which in turn constrains new business and economic growth. 5.74 Work permits are issued for up to a two-year period, and can be extended for up to a maximum period of five years. According to some investors, work permits are more quickly granted when a foreigner is working on a large capital project, or when a project will produce large export earnings. Foreigners working on projects in export processing zones are also more likely to have their work permit expedited. 5.75 But foreign workers trying to enter a services sector are more likely to face difficulties. Statistics show that approximately 6,500 work permits and 2,500 investor permits are given each year, and this number has stayed constant over the past several years. 5.76 Kenya does not have emigration restrictions. Over the past several decades Kenya has seen an outflow of highly skilled workers, such as doctors, engineers, lawyers, and university professors, because of political instability and economic troubles. In 2004, an estimated 96,354 Kenyans were working abroad in Europe, North America, Australia, and the Middle East46 (table 5.16). 5.77 In Rwanda, Ministerial Orders and related legislation oversee the issue of labor mobility. The new Ministerial order No 01119.19, 25/0212009 stipulates that there are no 44 Musonda, 2006, p. 15. 45 Ibid., p. 16. 46 Shitundu, 2006, p. 7. 85 work permit fee requirements for the citizens of East Africa. However, the citizens of East Africa are required to register with the immigration authorities for management purposes. 5.78 There are no special work permit requirements for foreign workers in Rwanda because every foreigner who has secured an employment in Rwanda is eligible for a work permit. The work permit is renewed depending on employment contract; therefore there is no time limitation. 5.79 The university degree requirement, stipulated in the previous immigration law, was waived by the new migration policy. A foreign worker needs to show that he/she is qualified in a certain field and not necessarily possessing a university education. However, a foreigner has to possess a proof of his/her professional expertise (which is not necessarily a university degree). Moreover, under the new immigration rules, a foreigner can acquire an entry visa online. After entering into Rwanda, a foreigner can apply for the work permit if he/she has secured a job. 5.80 One provision unique to Rwanda was the "counterpart training" article. This provision mandated that every foreign worker from developed countries must have a Rwandan counterpart, hired by the employer and trained by the foreign worker. This requirement is no longer mandatory under the new immigration rules. 5.81 In Tanzania, the issue of labor mobility is governed by the Immigration Acts of 1995 and 1997. These Acts provide the legal basis for overseeing the movement and documentation of all foreigners entering Tanzania. 5.82 Employment of foreigners is prohibited without a work permit. Foreigners lacking a work permit are also prohibited from engaging in any trade, occupation, or business profession. Work permits are issued to foreigners for certain types of jobs, and in certain locations; they are also often issued to foreigners who wish to establish businesses and activities that will benefit the wider economy. 5.83 Permits have a limit of three years, and can be renewed for up to two years, for a maximum stay of up to five years. This means that immigrants are never allowed to settle permanently in Tanzania. For this reason, the number of skilled foreigners working in Tanzania is very low: during 2000­2002 an estimated 13,869 foreigners were working in Tanzania out of a national labor force of nearly 18 million people.47 5.84 Tanzania does not have emigration restrictions. Recently, Tanzania has seen an increase in labor workers because of an increase in foreign direct investment, with a large number of these workers coming from South Africa. In addition, as Tanzania's economy has become more capital intensive, demand for skilled foreign workers has increased. Among those most in demand are engineering, technical, and management skills. In the past, Tanzania has drawn most of its foreign workers from other African countries; however, as demand has increased, Tanzania is even attracting skilled foreign workers from countries outside of Africa (table 5.16). 47 Shitundu, 2006, p. 9. 86 5.85 In Uganda, the issue of labor mobility is overseen by the Immigration Board and the Immigration Department. These agencies register and issue national identity cards to nationals and foreigners, and administer the movement of workers into and out of Uganda. 5.86 There are seven different classes of entry permits, which are issued depending on the function of the visitor and the purpose of the visit. Permits are only granted when it has been established that the person's entry will be beneficial to Uganda. Entry permits are valid for five years, and can be renewed for up to three years. Foreigners who meet any of the criteria for being a prohibited immigrant will not be allowed to enter the country and may be fined and/or jailed if they enter illegally. 5.87 Uganda has a draft National Employment Policy that outlines policies regarding all aspects of employment, including emigration. One of the goals of this policy is to place Uganda citizens into "jobs of high performance and earnings outside the country"48 in an effort to derive some economic benefit from highly skilled nationals who leave Uganda for higher paying jobs abroad. 5.88 Uganda does not have emigration laws. Over the past several decades, Uganda has seen an outflow of skilled workers because of political unrest, economic decline, and high unemployment. Although Uganda has taken steps to spur economic growth, many highly skilled Ugandan professionals are leaving the country while these policies are being enacted (table 5.16). Table 5.16: Labor Migration Policies in East Africa Overseeing Entry Entry Entry Permit Inflow/Outflow organization/Legislation Permit Permit Extension of Skilled Needed? Length Length Labour Kenya Kenyan Constitution; Yes 2 years 5 years Outflow government bureaucracies Rwanda Ministerial Orders; Yes 1 year 1 year, up to --- government three renewal bureaucracies Tanzania Immigration Acts of Yes 3 years 2 years, Inflow 1995 and 1997; maximum stay government of 5 years bureaucracies Uganda Immigration Board and Yes 5 years 3 years Outflow Immigration Department Source: Musonda (2006) and Shitundu (2006). Note: The last column indicates the dominant type of flow in each country. 48 Musonda, 2006, p. 11. 87 Work permits 5.89 Each country in East Africa has different types of work permits and different criteria for issuing them, as shown in table 5.17 and in the more detailed description below. Table 5.17: Work Permits for Skilled Foreigners in East Africa Issued According to: Permit for skilled workers Kenya Type of employment Class A and D For workers with a specific employer in Kenya Class F and J "Investor's permits," not sector-or employer- specific Rwanda Type of employment Class C For workers with NGOs or non-profit organizations and nationality Class D For workers with high education levels and valuable skill sets Tanzania Type of activity General Class For trade, business, professional services, agriculture, etc. Investor Class Allows up to 5 foreign experts to work on investment projects Mining Class Allows an unlimited number of foreign mining professionals Uganda Type of profession Class D For workers engaging in business and trade and sector Class F For workers engaging in professional services Source: Musonda (2006) and Shitundu (2006). 5.90 In Kenya, work permits are issued based on employer. A worker with a specific job with a specific employer receives a Class A or D permit; someone working on an investment project, regardless of the sector, can receive a Class F or J "investor's permit." 5.91 In Tanzania, there are three main classes of work permits. The General Class of permits is governed by the Immigration Act, and is given to foreign workers engaged in trade, business, professional services, agriculture, manufacturing, or prospecting for minerals. The Investor Class of permits is governed by the Tanzania Investment Centre Act, and allows up to five foreign experts to work on specific investment projects. The Mining Class of permits is governed by the Mining Act No.5 of 1998, and allows an unlimited number of foreign mining professionals to work on specific mining projects. 5.92 In Uganda, permits are divided by the sector in which a foreign worker will be employed. Table 5.18: Categories of Work Permits in Uganda Class A ­ Government and diplomats Class B- Agriculture Class C ­ Miners Class D ­ Business and trade Class E- Manufacturers Class F ­ Professional Class G - Employees Source: Musonda (2006). 5.93 In Rwanda, work permits are issued based on a worker's function and the person's nationality and relationship to Rwanda. 88 Table 5.19: Categories of Work Permits in Rwanda Class A ­ The worker whose country of origin has signed a freedom of movement agreement, or who is a refugee worker; Class B ­ The worker who was born in Rwanda, or whose parents or spouse has Rwandan nationality; Class C ­ The volunteer of a non-governmental organization (NGO) or a non-profit making organization; Class D ­ The worker who was recruited for his/her high professional qualifications and whose country of origin has not signed a freedom of movement agreement Source: Ministerial Order N° 13/19 of 14/03/2003 on procedure to recruit foreign workers ( J.O. nº 11 du 01/06/ 2003), Rwanda 5.3 Indicators of Regulatory Conditions and Services Restrictiveness Indices in Professional Services in East Africa: A Comparative Analysis 5.94 The qualitative information on regulatory conditions in East Africa was converted into quantitative indicators for each sector -- accounting, engineering, and legal -- on the basis of the OECD method described in annex 8. The indicators cover a mix of domestic regulations and explicit trade barriers classified as (a) entry regulation and (b) conduct regulation. Entry regulations include barriers to becoming a member of each of the professions. These may take the form of licensing and educational requirements, quantitative constraints on the number of suppliers of professional services, or exclusive rights granted to suppliers in certain activities. Conduct regulations include restrictions on prices and fees, advertising, form of business, and inter-professional cooperation. 5.95 Figure 5.149 shows that on average across the whole sample legal services are more heavily regulated than accounting or engineering services. The four East African countries follow this general pattern. Moreover, Kenya, Tanzania, and Uganda show more severe regulation of legal services than most countries in the sample. 5.96 Among the non-African countries in the sample, accounting is the second most regulated professional service, followed by engineering. This pattern is reversed in the case of the East African countries: engineering services are more heavily regulated than accounting services. Moreover, engineering services in Tanzania and Kenya appear to be more heavily regulated than in the majority of the countries included in the sample. 5.97 Rwanda has one of the lightest regulations for accounting and legal services (as compared to the whole sample). 49 Note that a larger value indicates a more restrictive regulation. 89 Figure 5.1: Regulation in Professional Services, Overall Indicator Panel A: Accounting - Overall 6 5 4 3 2 1 0 Panel B: Legal - Overall 6 5 4 3 2 1 0 Panel C: Engineering - Overall 6 5 4 3 2 1 0 Source: OECD Regulatory Database on Professional Services and World Bank Regulatory Surveys, 2009. 5.98 Entry restrictions in accounting and legal services are common across countries, while large cross-country differences in entry rules are evident in engineering services. In East Africa, entry regulation is common in all three sectors (figure 5.2). Compared with the 90 other countries in the sample, Kenya, Tanzania, and Uganda face severe entry restrictions in engineering and legal services. Rwanda remains on the light side in all three sectors. Figure 5.2: Entry Regulations in Professional Services Panel : Accounting Entry regulations 6 5 4 3 2 1 0 Panel B: Legal Entry regulations 6 5 4 3 2 1 0 Panel C: Engineering Entry regulations 6 5 4 3 2 1 0 Source: OECD Regulatory Database on Professional Services and World Bank Regulatory Surveys, 2009. 5.99 As opposed to entry regulation, differences across countries in conduct regulation are concentrated in accounting and legal services across the whole sample. These differences are less pronounced in East Africa (figure 5.3). 91 5.100 The conduct regulation of engineering and legal services is heavier than in most comparators included in the sample. Rwanda's conduct regulations are more restrictive in accounting services (figure 5.3). Figure 5.3: Conduct Regulation in Professional Services Panel A: Accounting: Conduct Regulation 6 5 4 3 2 1 0 Panel B: Legal: Conduct Regulation 6 5 4 3 2 1 0 Panel C: Engineering: Conduct Regulation 6 5 4 3 2 1 0 Source: OECD Regulatory Database on Professional Services and World Bank Regulatory Surveys, 2009. 92 5.101 To illustrate the restrictiveness of explicit trade barriers in professional services in East Africa relative to a set of developed and developing economies, we use the services trade policy restrictiveness indices (STRI) compiled by Gootiiz and Mattoo (2009). These are based on the data from the services policy surveys (that we also use in our analysis) described in annexes 5 and 9.50 5.102 The STRI cover foreign entry restrictions on the movement of natural persons (mode 4) or on the establishment of commercial presence (mode 3). Restrictions on mode 4 include nationality and residency requirements, quotas and economic needs tests, and limits on the type of legal entry or on the scope of business. Restrictions on mode 3 include restrictions on foreign ownership, limits on the type of legal entry, or on the scope of business. 5.103 Figure 5.451 shows that, across the whole sample, trade in legal services is more heavily regulated and restricted than trade in accounting/auditing services. All four East African countries follow this pattern. And Kenya and Tanzania show more severe restrictions on trade in both accounting/auditing as well as legal services than most countries in the sample -- especially stronger than their counterparts in Southern Africa. Rwanda has one of the least restrictive trade policies in professional services of the entire sample. In fact, in accounting/auditing Rwanda shows the lowest STRI of all countries in the sample. Figure 5.4: Overall STRI in Professional Services Accounting and Auditing Overall Trade Restrictiveness Index 80 70 60 50 40 30 20 10 0 Legal Overall Trade Restrictiveness Index 90 80 70 60 50 40 30 20 10 0 Source: Borchert, Gootiiz, and Mattoo (2010). 50 While Gootiiz, and Mattoo (2009) compute STRI for four sub-categories of professional services -- accounting, auditing, domestic law, and international law -- we combine those of accounting and auditing and those of the two types of law. Engineering services are not covered by the STRI. 51 A larger value indicates a more restrictive trade policy. 93 5.104 Considering the restrictiveness of trade separately across mode 3 and mode 4 of supply of professional services, some interesting differences occur (figure 5.5). The establishment of foreign law firms (mode 3) is substantially more difficult than that of foreign accounting/auditing firms, particularly in Kenya and Tanzania, but also in most other countries in the sample. The degree of protection for mode 3 is, however, not higher in Eastern Africa than in the rest of the sample for accounting/auditing services. In fact the restrictions imposed on foreign accounting/auditing firms that want to establish a commercial presence in Rwanda and Uganda are lower than those in many OECD countries. Kenya exhibits the most closed domestic market to the establishment of foreign law firms among all countries in the sample, whereas Rwanda and Uganda exhibit the most open markets to the commercial presence of foreign law firms. 5.105 The movement of natural persons (mode 4) is substantially more restricted for legal professionals than for accounting/auditing professionals in all East African countries. Kenya and Tanzania impose some of the most restrictive barriers to the practice of foreign lawyers in their jurisdictions, only equaled by the barriers imposed by China and South Africa. For both foreign accountants/auditors as well as lawyers, Rwanda exhibits the most liberal trade policy. Figure 5.5: STRI in Professional Services by Mode of Supply Accounting and Auditing Restrictiveness Index Mode 3 80 70 60 50 40 30 20 10 0 Legal Trade Restrictiveness Index Mode 3 100 90 80 70 60 50 40 30 20 10 0 94 Figure 5.6: STRI in Professional Services by Mode of Supply (cont'd) Accounting and Auditing Restrictiveness Index Mode 4 100 90 80 70 60 50 40 30 20 10 0 Legal Trade Restrictiveness Index Mode 4 100 90 80 70 60 50 40 30 20 10 0 Source: Gootiiz and Mattoo (2010). 5.106 Contrasting the severity of trade barriers to the entry and conduct regulations in professional services in East Africa a few points emerge: Legal services are more heavily regulated than the other professional services, and their explicit trade barriers are also the most restrictive both in terms of mode 3 or mode 4 of supply. This pattern is true in Eastern Africa and in the rest of the world. Compared to others in the sample, Kenya and Tanzania impose significant entry and conduct restrictions in legal services; the same is true for explicit trade barriers. While Uganda shows substantial entry and conduct regulations in legal services, the explicit trade barriers it imposes to the sector, especially through mode 3, are relatively low from a cross-country perspective. Rwanda has one of the lightest regulations in accounting and legal services and also in its explicit trade barriers. For accounting, Rwanda exhibits the most liberal trade regime of all countries. 95 5.4 How much do Education Requirements, Domestic Regulations, Trade Barriers, and Immigration Restrictions Impede Professionals and Firms from Entering Markets in East Africa? Education and qualification requirements 5.107 With the exception of paralegals, the examined professions face qualitative entry requirements in most countries. These qualitative requirements for highly skilled professionals generally do not vary significantly across countries. The academic pre- qualification requirements for all highly skilled professionals consist of university degrees (except for accountants in Kenya and Uganda, where a high school degree is sufficient). Additional post-graduate specialized courses are required in legal services in all countries except Rwanda. 5.108 The academic pre-qualification needs to be supplemented with practical training of varying duration in almost all professions in order to complete the professional examination. An exception to this is training in engineering in Rwanda and Uganda. 5.109 Education requirements are measured as a combination of (a) the duration of education to obtain the required degree, (b) the duration of compulsory practice, and (c) requirements to pass a professional exam to become a full member of the profession. A comparative assessment of the education requirements in a number of developed and developing countries provides additional hints on the restrictiveness of these regulatory measures in East Africa (figure 5.4). 5.110 The figure reveals that education requirements in several East African countries are above the sample's average. More severe requirements as compared to the other countries in the sample are seen in engineering services. This suggests that education and qualification requirements may generate disincentives to become a professional in several East African countries. Figure 5.7: Education Requirements in Professional Services Panel A: Accounting Education Requirements Panel B: Legal Education Requirements 6 6 5 5 4 4 Sample average 3.4 Sample average 3.3 3 3 2 2 1 1 0 0 96 Panel C: Engineering Education requirements 6 5 4 3 Sample average 2.4 2 1 0 Source: OECD Regulatory Database on Professional Services and World Bank Regulatory Surveys, 2009. 5.111 Qualitative entry restrictions can therefore limit the number of professionals and services. This may be especially true when the entry restrictions are combined with exclusive tasks for the regulated profession.52 Other qualitative entry requirements 5.112 Membership in the relevant professional association is mandatory in accounting and legal services, and compulsory licensing is a must in all professions. Engineering in Rwanda is an exception, where a professional association has yet to be established. 5.113 Continuing education is an obligation for members of the accounting and legal profession in most examined countries, Rwanda being the exception. Rwanda will have to introduce such programs in the near future. 5.114 More variation is evident in the regulation of middle-level professionals. For example, in engineering, the regulatory spectrum for engineering technicians ranges from total absence of entry requirements in Rwanda to requirements to pass a professional exam, undertake compulsory training, and obtain a license in Tanzania. 5.115 Public interest theories argue that qualitative regulatory measures are necessary to guarantee high-quality services and avoid adverse selection. Qualitative entry restrictions may thus be necessary. 5.116 But private interest theories warn that qualitative regulations may be disproportionate as a result of excessive entry requirements set by rent-seeking professionals and professional associations. In addition, if the profession gains a monopoly over the organization of the required training, the education of necessary professionals may be limited. 52 See also OECD (2007). 97 5.117 It is difficult to determine whether the qualitative requirements in the examined countries are disproportionate. Several examples of restrictive qualitative requirements have been obtained while conducting these regulatory surveys. For example, restrictions on access to the profession, mainly due to the monopoly of professional associations over training institutions, have been identified in legal services in several East African countries. The higher education institutions that provide the required law degrees are under the control of the professional associations, which restrict the number of students. 5.118 For example, the Kenya School of Law, through which all legal professionals must pass, has a limited capacity of 600 students per year. Similar constraints related to the capacity of accredited institutions that provide legal training were reported in Uganda. And the widening of admissions into universities offering law courses has almost doubled the number of registered lawyers between 2003 and 2008. 5.119 Other qualitative restrictions affecting competition are multiple certification requirements. This issue has been raised in Kenya, where the country's banking and insurance laws require that all companies use auditors approved by the banks or insurance institutions (generally auditors affiliated with one of the "Big Four" or other large companies) to prepare the financial statements for outside investors or other external parties to obtain a credit. These requirements may limit the access of smaller suppliers to the market. Exclusive tasks 5.120 Highly skilled professionals in all sectors have exclusive rights to perform certain activities (e.g., auditing, representation of clients before courts, advice on legal matters, feasibility studies, design and planning). The range of these exclusive activities seems wider in legal and engineering services. In accounting, most East African countries enjoy exclusive rights to conduct statutory audits and public sector audits -- that is, 2 out of 13 possible activities. The range of exclusive activities reserved to accounting professionals in East Africa is narrower than that in most developed and developing countries. By contrast, the number of activities reserved to legal professionals ranges from 3 to 9 out of a total of 10 activities. This is in line with the general trend across countries in the sample. 5.121 The number of activities reserved to engineers ranges from 5 to 10 out of a total of 10 activities. The scope of exclusive activities in engineering services in East Africa is comparable to that seen in many developing and emerging economies, but wider than the scope of exclusive engineering activities in developed countries. 5.122 The argument in favor of exclusive rights is that they can lead to increased specialization of professionals and guarantee a higher quality of service. But the negative price and allocation effects of exclusive rights, which act as monopolies, can be substantial, especially if they are granted for standardized services that can be provided at a lower cost by less-regulated or non-regulated providers. 98 Restrictions on foreign entry 5.123 In all examined countries, the entry restrictions imposed on domestic suppliers are supplemented by explicit trade barriers on foreign suppliers. Nationality requirements, which typically ban foreign entry, are imposed in several countries on providers of legal services. Several countries apply economic needs tests or labor market tests in accounting and legal services. Restrictions on the entry of foreign accounting and law firms exist in all countries in various forms (foreign ownership limits or restrictions on the form of entry). The scope of business activities and procurement participation allowed for foreign providers of professional services is narrower than for domestic providers in almost all surveyed countries. 5.124 All these measures further reduce the number of service providers and thus availability of services provided and consumer choice. 5.125 Figure 5.2 suggests that entry restrictions in engineering and legal services in East Africa are more severe than in most countries included in the sample. 5.126 Finally, we must note the inefficiencies in the duplication of education and training determined by the non-recognition of professional qualification and licenses -- especially in accounting and legal services. 5.127 In Rwanda or Uganda there are no requirements to use standards for education, qualification, and licensing of legal professionals, nor technical standards, including ethical rules and rules of professional conduct. 5.128 Similarly, Tanzania and Uganda have no requirements on standards for education, qualification, and licensing of professionals, as well as technical standards, including quality control, maintenance, and research in engineering. 5.129 However, this total absence of standards may reflect the low level of sophistication of the market and can have large negative effects; for example, no standards in engineering services can pose dangers for public safety. 5.5 How much do Conduct Regulations Limit the Ability of Professionals and Firms to Operate in Professional Services Markets in East Africa? Fixed prices 5.130 In accounting and engineering services, fees for professional services are negotiated freely between practitioners and clients in almost all surveyed countries. Fees and prices of legal services are regulated in Kenya, Tanzania, and Uganda. Also, Tanzania recently introduced fee regulations for engineering services. Apart from the examined East African countries, few non-African countries regulate prices in engineering services. In a small number of countries, price regulation often takes the form of non-binding recommendations. Also, few developed countries regulate fees for lawyers. 99 5.131 These price regulations are introduced and supported by national professional associations, who claim they help prevent the adverse selection problem. But most of the economic literature states that these regulatory instruments can seriously harm competition by eliminating or reducing the benefits that competitive markets deliver for consumers. Most agree that less restrictive mechanisms, such as better information on the services provided, could be established. Advertising restrictions 5.132 Several professions in Africa are subject to sector-specific advertising restrictions: accounting in Kenya, Tanzania, and Uganda, legal services in all examined countries, and engineering services in Tanzania. In general, East African countries have more severe regulations on advertising and marketing than most developed and developing economies. 5.133 Public interest theories justify advertising restrictions by the need to protect consumers. But private interest theories maintain that there is no justification for prohibiting advertising that is relevant, truthful, and not misleading.53 Instead, advertising fosters competition by informing consumers about different products and allowing them to make better-informed buying decisions. It is also stressed that advertising, especially comparative advertising, can be a crucial competitive tool for new firms entering a market. Regulations governing business structure and multidisciplinary practices 5.134 There are restrictions on business structure in all professional services sectors in most examined countries. These regulations can restrict the ownership structure of professional services companies, the room for collaboration within the profession and with other professions, and in some cases the opening of branches, franchises, or chains. 5.135 To justify these regulations, professional associations argue that professionals are more likely to give independent advice if certain forms of intra-professional partnerships are prohibited, while restrictions on multidisciplinary activities prevent potential conflicts of interests that are detrimental to consumers. 5.136 But private interest theories stress that these regulations are clearly anti-competitive and may harm consumers by preventing providers from developing new services or cost- efficient business models. For example, these regulations might prevent lawyers and accountants from providing integrated legal and accountancy advice for tax issues. 5.137 In general, restrictions on collaboration between members of the same profession seem to be less justifiable than restrictions on collaboration between members of different professions where there is a strong need to protect the independence and liability of professionals. 53 Stigler (1961) has argued that advertising by the providers of services can substitute for a large amount of searching efforts by a large group of consumers. 100 5.138 Further guidance on whether the regulatory measures are disproportionate can be obtained from business surveys. Stakeholders from the professional service sectors in East Africa were asked to rank regulatory measures according to their perceived restrictiveness.54 Figure 5.5 reveals that regulations on multidisciplinary activities are the most restrictive measures in accounting services, while regulations on fees and prices represent the most important constraints in legal and engineering services. Other constraints include non-transparent procurement procedures in accounting and engineering services and inappropriate standards in accounting services. Figure 5.8: Restrictiveness of Regulation in East Africa: Top Constraints by Sector Source: World Bank Survey of Providers of Professional Services in East Africa, 2009 Conclusion Several points for action emerge from the analysis. Measures that restrict the entry of professionals and professional firms 5.139 Explicit trade barriers. The most restrictive measures for all modes of services supply are applied in legal services, and the legal sector remains largely closed to foreign participation. Nationality requirements, which typically ban foreign entry, are imposed in several countries on providers of legal services. Economic needs tests or labor market tests are applied by several countries in accounting and legal services. Restrictions on the entry of foreign accounting and law firms exist in all countries in various forms (foreign ownership limits or restrictions on the form of entry). The range of business activities and procurement participation allowed for foreign providers of professional services is narrower than for domestic providers in almost all surveyed countries. All these measures reduce the number of service providers and thus the availability of services provided and consumer choice. 54 See annex 3 for details. 101 5.140 Cumulative and disproportionate qualitative entry restrictions. The most frequent measures are (a) monopoly of the professional association over the higher education institution that provides the degree, combined with exclusive rights (in legal services); ((b) multiple licensing requirements (in auditing services). 5.141 Immigration policies. The East African countries rigidly control the movement of skilled workers into and out of their borders, in many cases applying stringent regulations on workers from developed countries as well as on those from within East Africa. These regulations range from strict entry requirements and limits on the time that a foreign worker can stay, to mandating a "counterpart" who will be trained to take the place of the foreign worker. There is also little harmonization of migration policies and the issuing of work permits across the East Africa region. Measures that restrict the operation of professionals and professional firms Inappropriate conduct regulation. Several measures are worth noting: Fixed prices/fees (in legal and engineering services) Advertising restrictions (mainly in legal and accountancy services) Restrictions on forms of practice and multidisciplinary activities (in all examined services). Other restrictive regulatory measures include: Unavailability or limited applicability of competition law to professional services Inadequate standards that prevent the emergence of middle-level professionals (for example, paralegals) Uniform standards applicable to SMEs and large companies (for example, compliance difficulties in accounting and auditing) Inefficiencies related to duplication of education and training determined by non- recognition or partial recognition of professional credentials and licenses. 5.142 Strict national policies, combined with the lack of regional coordination among East African countries, discourage foreign investment and so hinder economic growth and development. Trade liberalization and regional integration can help reduce the opportunity for private interest regulation, enhance competition, and deal with labor mobility issues that are crucial in professional services. A case in point is the recognition of professional qualifications and licenses at the Eastern African Community level. 102 CHAPTER 6. RECOMMENDATIONS FOR POLICY ACTION 6.1 The previous chapters have detailed how national markets for professionals and professional services in East Africa remain underdeveloped, with performance indicators below the averages of countries at a similar level of development. 6.2 In addition, regional markets for professional services and professional education in East Africa are fragmented by restrictive policies, such as nationality requirements, and regulatory heterogeneity, relating to licensing, qualification, and educational requirements. 6.3 These outcomes call for policy action in the following areas: education, regulation of professional services, trade policy, and labor mobility. While policy action at the national level will differ from country to country, given diverse conditions in the four examined countries (as described in chapter 2), international and regional cooperation should complement domestic policy measures. 6.4 These recommendations are intended to provide guidance to the East African governments on how to develop a strategy for coordinated domestic reform and liberalization of professional services, taking into account the cross-country findings. What needs to be done at the national level versus what requires joint action and cooperation at the international level? 6.1 Policy Actions at the National Level Main challenges Covering the cost of professional education. Professional education is expensive in all countries. While skill premia are evident and the internal rate of return to education is also high in all countries, the median cost for becoming a professional range from US$ 14,000 to US$ 26,000, making professional qualification unaffordable for most of the population in these countries since the market for educational loans is not well developed. Weaknesses in school education impede the acquisition of professional skills. Weaknesses in upstream secondary school education limit the ability of students to gain professional skills -- especially in engineering services. The general erosion of mathematical skills in all countries explains the declining number of applicants in science, engineering, and technology courses; hence, the shortages in the engineering sector Limitations in the capacity and quality of professional education institutions. The absence of institutions that offer specialized (post-graduate) courses (e.g., in legal 103 and engineering services) have been noted in several East African countries, as has the absence of institutions that offer academic and professional training courses for middle-level professionals (e.g., training programs for paralegals). The absence of links between educational systems, employers, and users of services leads to unmet needs and unemployed professionals, and explains the attrition of skills in several professions. The absence of links between the educational systems on the one hand, and employing firms and business users of services on the other, creates qualified but unemployable professionals. Several stakeholders from the private sector have pointed to the coordination problems between employers, professional associations, and education institutions in educational programs for engineers and accountants. Domestic regulation on the entry and on the operations of firms, presumably designed to meet social goals, undermines competition. - In East Africa, domestic entry regulation is common in all three sectors. Kenya, Tanzania and Uganda face severe entry restrictions in engineering and legal services. Rwanda remains on the light sight in all three sectors. - Regulation affecting operations of legal and engineering providers (conduct regulation) in East Africa is heavier than in most comparators included in the sample. These outcomes are explained by price regulations, advertising prohibition, and restrictions on the business structure of firms and on multidisciplinary activities. Recommended policy actions 6.5 The main focus at the national level should be on the development of frameworks that address the skills shortages and the skills mismatches and facilitate the growth of professional services. Education Since financial constraints prevent individuals from acquiring professional education, developing means of financing higher education should be a priority. 6.6 Because professional services require a skilled workforce, the quality of education matters for competitiveness. The diagnostics in chapter 3 show that financial constraints prevent individuals from acquiring professional education. To address the affordability of higher education, the development and management of student loan schemes could be useful. 6.7 Access to professional education could be increased by making financing more available for students. It is unrealistic to expect the government to provide all the necessary funding, and so it makes sense to diversify funding sources for both students and universities. Successful education systems around the world generally receive funding from students, government, on-campus services, matching grants, donations and gifts, and 104 revenue from research and development.55 In addition, a mix of public, private non-profit, and private for-profit universities and advanced training institutes can cater to the different needs of students. 6.8 One of the central problems with financing higher education in Africa is that the total number of students attending university in Africa has far outpaced the available support. Some countries have handled this challenge better than others; for example, Botswana's funding resources have kept pace with the increase in students, whereas Kenya has lagged in student growth by a factor of three.56 6.9 However, African countries know that student funding assistance is needed; and that student loan programs could diversify the sources of funding for higher education while also making it affordable for individuals. Student loan programs now operate in more than 60 countries across all continents and are becoming an increasingly important financing mechanism for higher education (see box 6.1). Kenya has had a student loan program since 1974, and twelve other African countries now provide government loans for students. Uganda and Burundi, among others, are now considering implementing student loan programs.57 Box 6.1: Student Loan Programs Until the mid-1990s, there were only a limited number of cost-sharing arrangements between governments and students for financing higher education in developing countries; governments were reluctant to charge tuition fees or transform their scholarship programs into student loan programs. However, under pressure from increasing enrollments and in with increasing per-student costs, an increasing number of governments in Sub-Saharan Africa are embracing cost-sharing arrangements (Johnstone, 2001). In Mozambique and South Africa, cost-sharing has taken the form of the introduction of upfront tuition fees at all public institutions. To be equitable, cost-sharing arrangements need to be implemented in parallel with adequate support mechanisms for qualified but needy students through scholarship schemes and student loan programs (Salmi, 2003). Student loan programs are often underwritten by the national government. Since the late 1990s, the number of World Bank higher education student loan projects and related activities has soared. Support has been sought to establish student loan schemes from scratch (Bulgaria, Ethiopia, Hungary, Mexico, and Namibia), improve the performance of existing programs (Brazil, China, Jamaica, Venezuela), or expand coverage (Mexico). But establishing student loan programs that promote accessibility but result in real cost recovery is a challenge. The cross-country evidence shows failures of student loan schemes in, for example, Ghana, Kenya, Nigeria, and Lesotho (recovery rate lower than 10 percent). Some reasons for the limited success of those programs in Africa are excessive built-in interest rate subsidization, long grace periods, poor execution, and a governance system that allows many students to treat their loans like grants. This undermines governments' ability to generate cash from loans that can then be loaned to other students.58 55 "Vietnam: Higher Education and Skills for Growth," World Bank Report No. 44428-VN, June 2008. 56 World Bank, "Financing Higher Education in Africa," World Bank Report, 2010. 57 World Bank, 2010, p. 77. 58 World Bank, 2010, p. 90-91. 105 Due to the built-in subsidies, recovery ratios for loans in default are relatively low, as illustrated in the table below. Recovery ratios are calculated as the present value of repayments divided by the present value of the disbursed loan. Recovery ratios in Africa are low in comparison to developed countries because of a combination of two factors. First is the relatively weak legal environment in many African countries, which hinders the collection of loans. Second is the structural problem that many students see educational loans as grants. Country Recovery Ratio Ethiopia 35.24 Ghana 39.13 Kenya 27.93 Mauritius 59.36 South Africa 50.47 Nigeria 10.88 Comparators High Income 74.3 Upper Middle Income 50.04 Lower Middle Income 56.09 Loan recovery ratios Low Income 37.19 Source: Hua and Ziderman, 2008. Still, there are examples of successful student loan programs and there is some evidence that student loan programs can have positive impacts. A successful example is the South African National Student Financial Aid Scheme, which has expanded access while generating cost recovery (Johnstone, 2001). This program was given the authority to compel employers to withhold student loan repayments owed by employees with payments in serious arrears, thus facilitating the collection of loan repayments. Overall, there is little hard evidence, and the jury is still out on whether student loan programs can generate sufficiently high loan repayment rates. A study for Costa Rica and Mexico (Salmi, 2003) shows that student loan programs can have a positive impact on the quality of higher education through the eligibility criteria imposed on beneficiaries and beneficiary institutions. Moreover, beneficiaries from Mexico's student loan program SOFES have achieved better academic performance than their peers, possibly due to their awareness of the price and value of their education (Canton and Blom, 2004). Student loan programs should be reformed and expanded rather than abandoned. Educational loans are beneficial for both students and governments. Students gain access to funding that they might otherwise not find, and governments are able to train a skilled workforce through a cost sharing mechanism that eases pressure on national accounts. At the same time, raising recovery ratios would enable governments to assist more students. Many pre- conditions are necessary for designing and administering efficient and financially viable student loan programs: transparent eligibility criteria to ensure that any subsidy element be targeted to the most academically and socially deserving students, a close supervision of the academic performance of the student loan beneficiaries, a carefully designed interest rate and subsidy policy to protect the long term financial viability of the program, and efficient collection mechanisms to minimize default (Salmi, 2003). These pre-conditions mean that the implementation of student loan programs requires institutional capacity, which today can only be found only in middle-income countries. The implementation of such programs in the near future in low-income countries faces formidable challenges as it requires also a strengthening of the capacity and efficiency of legal systems. Weaknesses in upstream school education make students ill-equipped to acquire professional skills; therefore the quality and capacity of schools, especially in mathematics and sciences, must be reinforced. All the examined countries should be focusing on enhancing the national education capacity and quality of technical studies. 106 6.10 The value of high-quality education for successful and sustainable economic development is well known. Skills and education are necessary for long-term growth based on innovation and competitiveness in the global economy, and increasing a population's skill level can increase technology and export intensity, leading to higher growth. However, many of the skills that add the most value to an economy -- such as mathematics and science -- are under-provided in many, if not most, East African countries. 6.11 The weaknesses in upstream secondary school education and in academic education limit the ability of potential students to acquiring market-relevant skills in all examined professions. Particularly affected are engineering services. The general erosion of mathematical skills in all countries explains the declining number of applicants to science, engineering, and technology courses and the subsequent shortages in the engineering sector. 6.12 International and national experiences related to quality assurance of secondary and higher education could serve as a model for East African countries. For example, in Europe a major step for improving the quality of higher education programs has been the adoption of a common set of Standards and Guidelines for Quality Assurance in the European Higher Education Area. The Tuning Educational Structures in Europe is another useful example. Box 6.2: Tuning Educational Structures The Tuning Educational Structures in Europe initiative was launched in 2001 by a large group of universities from several European countries. Tuning has not only developed a methodology to (re-)design, develop, implement, and evaluate study program, it has also served as a platform for developing reference points at the subject level. In 2007 the work of Tuning was validated by some twenty independent international peer review committees for as many subject areas and was highly praised. Over the years the Tuning method has developed into a process of approach relevant for all parts in the world. Its usefulness has already been discussed in 19 Latin American countries. According to the Tuning approach, reference points are expressed in terms of learning outcomes and competences. Learning outcomes are statements of what a learner is expected to know, understand, and be able to demonstrate after completion of a learning experience. According to Tuning, learning outcomes are expressed as the level of competence to be obtained by the learner. Competences represent a dynamic combination of cognitive and meta-cognitive skills, knowledge and understanding, interpersonal, intellectual and practical skills, and ethical values. Competences are developed in all course units and assessed at different stages of a program. Some competences are subject-area related (specific to a field of study); others are generic (common to any degree course). Normally, competence development proceeds in an integrated and cyclical manner throughout a program. To make levels of learning comparable, the Tuning subject area groups have not only developed reference points but also cycle (level) descriptors for their academic field, which are also expressed as competences/learning outcomes. In 2002 Tuning organized a Europe-wide consultation process that included employers, graduates and academic staff / faculty for, at that time, seven subject areas. Such a consultation process was in later years repeated in other regions and countries and extended to students as an important group of stakeholders (19 Latin America countries, Russia, Georgia). Source: OECD (2008). 107 6.13 The Tuning initiative in engineering distinguishes three different educational tracks or profiles within the field: engineers, engineering technologists, and engineering technicians. These categories may have different titles or designations and different legal empowerment or restrictions within individual (national) jurisdictions. There seems to be a broad consensus regarding the graduate attributes and professional competencies in the field. Box 6.3 provides an example of competencies for civil engineers developed in the context of the Tuning initiative in Latin America. Box 6.3: Subject Specific Competences in Civil Engineering --Tuning Latin America 1. Ability to apply knowledge of the basic sciences and sciences of civil engineering 2. Ability to identify, evaluate, and implement the most appropriate technologies for the context in hand 3. Capacity to create, innovate, and undertake to contribute to technological development 4. Capacity to conceive, analyze, calculate, and design civil engineering works 5. Skill in planning and programming civil engineering works and services 6. Capacity to build, supervise, inspect, and evaluate civil engineering works 7. Capacity to operate, maintain, and rehabilitate civil engineering works 8. Skill in evaluating the environmental and social impact of civil works 9. Capacity to model and simulate civil engineering systems and processes 10. Capacity to direct and lead human resources 11. Skill in administering material resources, teams, and equipment 12. Capacity to understand and associate legal, economic, and financial concepts in decision-making, project management, and civil engineering works 13. Capacity for spatial abstraction and graphic representation 14. Capacity to propose solutions that will contribute to sustainable development 15. Skill in preventing and evaluating accidents and risks in civil engineering works 16. Skill in handling and interpreting field information 17. Skill in using information technologies, software, and tools for civil engineering 18. Capacity to interact with multidisciplinary groups and come up with integral civil engineering solutions 19. Skill in employing quality control techniques in managing civil engineering materials and services Source: "Tuning Latin America." 6.14 The manual on Graduate Attributes and Professional Competencies59 offers additional guidance. This manual was developed as part of the design and implementation of three international agreements on mutual recognition of accredited programs: the Washington Accord for Engineers, the Sydney Accord for Engineering Technologists, and the Dublin Accord for Engineering Technicians. 6.15 The accords are based on substantial equivalence of content and outcomes, and do not distinguish different specializations within each track. The different graduate attributes of the three educational tracks are expressed in learning outcomes statements compared with each other. For engineers, the focus is on conceptualization of engineering models; for engineering technologists on defining and applying engineering procedures, processes, systems or methodologies; and for engineering technicians on practical procedures and practices. Given the limitations in the capacity and quality of professional education institutions, existing institutions may have to be improved while new ones may have to be created. 59 http://www.washingtonaccord.org/IEA-Grad-Attr-Prof-Competencies-v2.pdf 108 6.16 East African countries lack institutions that offer specialized (post-graduate) courses (e.g. in legal and engineering services) as well as institutions that provide academic and professional training course for middle-level professionals. However, Malawi offers a model for developing middle-level legal professionals for East African countries to follow (box 6.4). 6.17 There has to be both horizontal differentiation (for example, the emergence of new educational providers in the same category operated by for-profit, non-profit, international, or local government entities to respond to the increased demand for access to higher education) and vertical differentiation (for example, the emergence of new types of institutions such as polytechnics, professional institutes, junior colleges for middle-level professionals) to respond to labor market needs for a greater diversity of graduate skills and levels of training. Box 6.4: Paralegals in Malawi A sometimes unappreciated level of professional workers is middle-level professionals, an important subsection of skilled workers that can produce large economic gains and provide services in under-supplied areas. Especially in the field of law, paralegals -- non-lawyers that nonetheless engage with clients on a variety of complex law-related tasks -- participate in a range of activities in which unskilled workers would be unable to succeed. Some of these tasks include working with lawyers on cases of criminal justice, advising clients on law-related issues, and playing a role in mediating commercial disputes between two parties. Indeed, there is a growing role for paralegals in the criminal justice area in Africa. The typical needs of African countries for criminal justice resources are roughly 5 percent for legal representation, 25 percent for alternative dispute settlement, and 70 percent for legal empowerment. Of these, paralegals can provide services in alternative dispute settlements and legal empowerment. Similarly, paralegals can play a role in commercial dispute settlement and mediation, where the services of lawyers are not always needed. As these numbers suggest, paralegals can provide a range of services throughout the legal system that may otherwise be unaddressed by lawyers due to a lack of capacity. In Malawi, several successful initiatives have been created to encourage the education, training, and development of new paralegals. For example, the Paralegal Advisory Service is an innovative initiative that offers paralegal aid in criminal cases, and so far 38 trained paralegals have taken part in the project. The project is set up so that candidates receive training from NGOs working in partnership with key stakeholders, including Malawi prisons, police services, and the court system. In return, the paralegals are able to work with these same institutions, making the arrangement a positive one for both sides. The program has been such a success that the organization is being transformed into the Paralegal Advisory Services Institute, and is introducing similar programs throughout the region and even further abroad, to Bangladesh. Although Malawi has been a leader in innovative initiatives for paralegals, countries can put in place similar programs for other middle-level professionals. Training accountants in this way, for example, could lead to greater business acumen and efficiency in African businesses. Furthermore, such services are tradable across borders, and there may be demand even within Eastern Africa. Developing similar programs could generate additional trade in educational services via modes 2 (consumption abroad) and 4 (movement of natural persons), further helping economic growth and development across the region. Source: PASI Malawi, 2007. The absence of links between educational systems, employers, and users of services prevents young graduates from finding employment and further explains the attrition of skills in several professions. 109 6.18 Several stakeholders from the private sector have emphasized the coordination problems between employers, professional associations, and education institutions in the content of educational programs for engineers and accountants. Policy actions to encourage collaboration between universities, professional associations, and the private sectors through internships could help students acquire skills and practical training. 6.19 The Structured Engineers Apprenticeship program (SEAP) for Graduate Engineers developed by the Engineers Registration Board in Tanzania provides an example that could be followed by the other East African countries. Box 6.5: The Structured Engineers Apprenticeship Program in Tanzania Young engineers graduating from higher learning institutions lack several technical and managerial skills not acquired during the academic training programs. Experience has shown that a number of young graduate engineers do not gain employment because of a lack of professional exposure, experience, and competence. This vicious cycle of no-experience, no-employment, no-experience has forced a number of graduate engineers to quit the profession. The cost of training an engineer for four years is one of the highest compared to other professionals. If graduate engineers do not receive help immediately after graduation to acquire experience and employment, they will shift to other jobs instead of practicing engineering. This represents a waste of scarce resources and human capital. The Engineers Registration Board of Tanzania introduced the Structured Engineers Apprenticeship Program (SEAP) in 2003 to help graduate engineers acquire the professional experience necessary for registration as a professional engineer. The SEAP training is open to all graduate engineers. Between 2003 and 2009 a total of 1,050 engineers have benefited from SEAP training. Eight hundred and forty-five trainees were sponsored by the government,60 while the rest were financed by employers or self- sponsored. The majority of engineers are able to find employment after completion of the SEAP program. The professional training of fresh graduate engineers is complemented with another structured training program, namely the continuing professional development (CPD) program for engineers. Given this necessity and the high potential demand for SEAP and CPD by practicing engineers in Tanzania the establishment of the two structured programs by the Engineers Registration Board (ERB) is fully justified and deserves support from the various stakeholders of these programs, including the individual engineers, employers, training institutions, regulatory boards, and professional institutions. Each of these stakeholders has a unique role to play in promoting the two programs, and the role of ERB here is crucial. ERB has several responsibilities, including the setting of standards of attainment, prescribing and enforcing the necessary required standards, coordinating the efforts of various stakeholders, and setting policies and procedures to facilitate implementation of the program. Source: ERB . 6.20 Domestic regulation of professionals on the entry and on the operations of professional service firms, presumably designed to meet social goals, undermines competition. East African countries may, individually or collectively, examine the following ways to seek incremental, qualitative improvements in domestic regulation: 60 The selection criteria for trainees sponsored by the Government of Tanzania are the following: academic qualification (the score is proportional with the grades), number of years since graduation and prior experience (the score is inversely proportional with the number of years since graduation /number of years of experience -- fresh graduates receive the highest score), and registration with the ERB. 110 Relax disproportionate cumulative entry qualitative requirements -- for example, by narrowing the scope of exclusive tasks in certain professions. The argument in favor of exclusive rights is that they can lead to increased specialization of professionals and guarantee a higher quality of service. But exclusive rights that create monopolies can have adverse price and allocation effects, especially if they are granted for services that can be obtained at a lower cost by less-regulated middle-level professionals. Eliminate disproportionate conduct regulation that restricts competition - Fixed prices. Price regulations are supported and introduced by national professional associations who claim that they help prevent adverse selection problems. But most of the economic literature agrees that such regulatory instruments can stifle competition and hurt consumers. Less restrictive mechanisms, such as better access to information on services and service providers can accomplish the same goals at lower cost. - Restrictions on business organization. These regulations can restrict the ownership structure of professional services companies, the room for collaboration within the profession and with other professions and, in some cases, the opening of branches, franchises, or chains. To justify these regulations, professional associations argue that professionals are more likely to give independent advice if certain forms of intra-professional partnerships are prohibited, while restrictions on multidisciplinary activities prevent potential conflicts of interests that are detrimental to consumer welfare. - But private interest theories stress that these regulations are clearly anticompetitive and may harm consumers by preventing providers from developing new services or cost-efficient business models. For example, these regulations might prevent lawyers and accountants from providing integrated legal and accountancy advice for tax issues. Generally, restrictions on collaboration between members of the same profession seem to be less justifiable than restrictions on collaboration between members of different professions, where the independence and liability of professionals has to be protected. - Advertising prohibitions. Public interest theories justify advertising restrictions by the need to protect consumers. But private interest theories maintain that there is no justification for prohibiting advertising that is relevant, truthful, and not misleading. In general, provided there are adequate safeguards to prevent misleading advertisements, advertising can encourage competition by informing consumers about different products and allowing them to make better-informed bugin decisions. Moreover, comparative advertising can be a crucial competitive tool for new firms entering a market. 111 Engage with professional associations to design regulatory reform and trade liberalization strategy 6.2 Policy Actions at the International Level Main challenges 6.21 The fragmentation of regional markets for professional services and professional education in East Africa by restrictive policies and regulatory heterogeneity prevents countries from exploiting gains from trade based on comparative advantage, as well as gains from enhanced competition and exploiting economies of scale. The differences in national endowments of professionals and the capacity for professional training -- reflected in differences in earnings of professionals and the costs of training across countries -- suggest a substantial potential for trade and for large gains from eliminating impediments to trade. Deeper regional integration would enhance competition between service providers, allow providers to exploit economies of scale, especially in professional education, and produce a wider variety of services. The prospects for attracting investment, both domestic and foreign, are greater in an integrated regional market. Regionalization may also make it possible to reap scale economies in regulation and supervision, particularly where national regulatory agencies face skill constraints; it could also reduce the possibility that private sector interests capture national regulation. 6.22 Trade barriers would ideally be liberalized on a most favored nation (MFN) or non- preferential basis since that would generate the largest welfare gains. But liberalization may not always be technically feasible or politically acceptable, especially when impediments arise from differences in regulatory requirements. 6.23 Deeper regional integration through regulatory cooperation with neighboring partners that have similar regulatory preferences can complement non-preferential liberalization. Common regional standards on accountancy and auditing reporting, for example, would reduce the costs to market participants of operating across national borders. A computable general equilibrium model estimates positive impacts on real incomes of Kenyans and Tanzanians from reform in professional services, amounting to as much as one-half percent of GDP -- which is significant for a sector that accounts for less than 3 percent of GDP. 6.24 Drawing an example from the EU, Kox et al. (2004) estimate that the stock of FDI in the EU could increase by 20­35 percent if regulatory heterogeneity was reduced as a result of a common services regulation directive. 112 6.25 However, regional integration is only one part of the broader reform agenda in professional services. Other vital areas include reform of professional and upstream education, which we only briefly address in this report. Recommended Policy Action 6.26 Policy action should (a) reduce explicit trade barriers affecting professional services, including through reform of immigration laws, and (b) coordinate liberalization with regulatory reform. The five East African countries have taken the first steps towards liberalization of professional services through the East African Community Common Market negotiations. The Common Market Protocol, adopted by the Multi Sector Council in 2009, contains schedules of services commitments that will address several of the explicit trade barriers on a preferential basis. However, it is important to deepen such efforts and pursue liberalization on a non-preferential basis. Relax explicit trade barriers 6.27 East African countries must start to relax the explicit trade barriers applied to the presence of natural persons, commercial presence, and cross-border supply of professional services, as well as through discriminatory procurement. 6.28 In terms of explicit barriers, the most restrictive measures for all modes of services supply are applied in legal services. The legal sector remains largely closed to foreign participation. Nationality requirements which typically ban foreign entry are imposed in several countries on providers of legal services. Economic needs tests or labor market tests are applied by several countries in accounting and legal services. Restrictions on the entry of foreign accounting and law firms exist in all countries in various forms (foreign ownership limits or restrictions on the form of entry). The scope of business activities and procurement participation allowed for foreign providers of professional services is narrower than for domestic providers in almost all surveyed countries. All of these measures reduce the number of service providers and thus the availability of services provided and consumer choice. 6.29 East African countries may consider the following actions to improve professional markets: Articulate the economic and social motivation for nationality and residency requirements. The objectives of nationality and residency requirements may be achieved by less discriminatory measures such as (a) require foreign service providers to undergo professional assessment when nationality requirement is used to ensure professional competence; and (b) appoint a representative agent, or liability insurance, in lieu of physical presence or residency requirement. Minimize restrictions on forms of establishment. Where prohibition on incorporation is absolute so that only sole proprietorship and partnership are allowed, introduce "safeguards" on corporate forms that ensure professionals are 113 made accountable for their service -- such as, require professionals to secure liability insurance, or stipulate that the majority of directors be professionals. Develop transparent criteria and procedures for applying economic needs testing and other policies; set a timeline for easing and ultimately abolishing the policy. Where investments by nonprofessionals are not allowed, relax the prohibition and substitute it with less restrictive policies, such as requiring professionals to have control of operations. Relax absolute prohibition on foreigners from forming partnership with local professionals by requiring instead that foreign and local partners be jointly liable, and that their liability for the partnership's debts be unlimited. Develop a transparent and consistent framework for accepting professionals with foreign qualifications. Consider adjustments in policies where the social and economic motivations are ambiguous, such as mandatory membership in local professional associations and mandatory partnerships with or hiring of locals of the same profession within the same area of competence. Where foreign professionals are completely barred from practicing, recognize professional qualifications from other member countries that have similar standards to those applied in the East African countries. 6.30 How far and how quickly each country proceeds will depend on the political power of users and incumbent providers of specific professional services (an issue that merits deeper investigation than has so far been possible). 6.31 Political economy factors will also influence the form of liberalization. Ideally, liberalization would be non-preferential so that domestic users of professional services have access, and domestic professionals can benefit from exposure to the best service providers in the world. 6.32 If, however, reciprocal liberalization at the regional level is politically more feasible, then countries ought to weigh the unquestionable benefits of market opening, even in the narrow regional context, against the possible costs of giving a first-mover advantage to what may be a second-best regional service provider. 6.33 Meaningful competition requires eliminating explicit barriers and addressing regulatory heterogeneity. The regional forum may also offer countries an opportunity to coalesce around more appropriate standards. 114 Regulatory cooperation would be useful in the following areas: A. Mutual recognition of professional qualifications and professional licensing 6.34 The five East African countries have taken the first steps towards mutual recognition in professional services through the East African Community Common Market negotiations. The Common Market Protocol, adopted by the Multi Sector Council in 2009, includes an annex on a framework agreement on mutual recognition agreements (MRAs) of academic and professional qualifications. The implementation of a full-fledged MRA would have to cover education, examinations, experience, conduct and ethics, professional development and re-certification, range of practice, and local knowledge. Box 6.6: Negotiating Mutual Recognition Frameworks: What can we Learn from other Regions? Countries negotiating an MRA in professional services can learn valuable lessons from other regions, in particular the European Union and NAFTA, which have struggled -- not always successfully -- to develop mutual recognition frameworks. These efforts have involved first identifying a core set of requirements that can be harmonized across countries and that provide a basis for eventual MRAs. Here we consider MRAs in accounting in NAFTA.* The process of creating a mutual recognition framework can be split into primary and secondary issues. The primary items are concerned with accreditation and training standards, and apply to all professions; the secondary items are concerned with sector-specific provisions and issues. The primary items to consider are: Education. Establish regionally accepted academic programs required for practicing professionals, and guidelines for the accreditation of schools teaching such programs. Experience. Establish the type and length of required experience or training necessary, if any, before a student can take the examination or receive a license. Examinations. Establish examinations that students need to pass before they receive a professional license. In the NAFTA countries, there are separate exams in Mexico from the United States and Canada (due to language differences), but the content of the exams is harmonized across countries. Examinations are in some ways the most important primary item because they gauge a candidate's knowledge and readiness to practice the profession. Still, to the extent that examinations cannot fully assess how well educated and experienced an individual is, it may be necessary to consider the latter two attributes independently. These primary factors are often the most difficult on which to reach agreement and implement. All relevant governmental and professional organizations should take part in defining requirements. Because of the number of organizations involved -- five principle groups and numerous subgroups negotiated the primary NAFTA standards -- NAFTA's negotiation and implementation process for primary factors took over 10 years to complete, in addition to the time spent negotiating organizing principles in the NAFTA treaty text itself. The secondary items to consider are: Professional conduct and ethics. This is critical in professions like accounting and law. Standardizing expectations for professional conduct helps avoid conflicting cultural mores across the region. Professional development. Different countries have different expectations on professional development and recertification, so standardizing these expectations is also important. 115 Local knowledge. Some knowledge of the country in which a professional practices can be beneficial. This can be tested in the examination, or by requiring relevant academic coursework or some work experience in the foreign country. In general, the first step is to establish the least rigorous standards that can be accepted by countries in each category. Some countries may need to raise their standards beyond their current level, and others to lower them; however, in many countries minimum standards are already close (for example, each NAFTA country required a specialized designation in order to practice as a professional accountant). Once this base line negotiation is complete, more specific standards of interest to countries in the region can be added in each category. However, in many cases a common set of standards is not necessary for mutual recognition; a country must merely accept the validity of the other countries' standards. Once a common set of standards has been negotiated and accepted, the new standards must be implemented. This can take as long to accomplish as the negotiation process, depending on the influence and status of various stakeholders in each country. Countries could establish specific targets and dates for which certain standards are implemented. In addition, countries can negotiate interim agreements allowing a certain restricted degree of regional professional practice to take place until the full set of standards is implemented. Successful MRAs--The Example of the EU As opposed to NAFTA's experience in designing and implementing an MRA, the European Union (EU) has had considerably more success. In part this is due to the more centralized structure and institutional capacity of decision making in the EU, which has a particular strength in forming regulation such as an MRA. The European Commission and European Parliament are both bodies that are comprised of national representatives, so decisions passed down by these bodies have already been negotiated in a multilateral forum. This lends MRA directives legitimacy and obviates the need for protracted and complicated negotiations. EU institutions have been instrumental in putting forth directives on how the EU MRA should be designed, emphasizing the importance of the regional institutional setting when designing MRA provisions. Still, although the European Commission and European Parliament have set out a broad framework for how the EU MRA will appear, it is up to individual member states to implement the MRA in that country based on the minimum requirements. This gives member states more leeway in how to approach the issue of mutual recognition. For example, member states are able to decide whether an examination or a more lengthy "adaptation period" are required. In some cases, though, EU requirements may be quite strict--countries may require professionals to be fully proficient in the local language in order to practice their profession in that country, and may carry out background checks on the professional's qualifications. In addition, the EU still requires a minimum standards qualification that must be demonstrated by proof of education, licensing, and professional experience. A comparison of NAFTA's and the EU's experiences in designing and implementing MRAs shows that more progress has been achieved in the EU, likely due to the EU's existing institutional capacity and its centralized decision making apparatus. Even so, despite the EU's relative success in designing and implementing an MRA, the EU MRA is not complete and work continues to be done on it. Reviews and revisions of the existing MRA provisions are taking place. This underlines the difficulty and lengthy time frame it takes to implement a successful MRA in a region, even given a strong institutional capacity and political will. *We use the NAFTA example to illustrate the MRA approach. Useful examples of mutual recognition in engineering services are the Washington Accord for Engineers, the Sydney Accord for Engineering Technologists and the Dublin Accord for Engineering Technicians. Other regional agreements that have recently attempted MRAs in professional services are ASEAN, Mercosul, and APEC, It should be noted however that progress with MRAs in these regions is rather limited. More progress has been achieved in the EU. 116 B. Developing appropriate standards 6.35 Inappropriate standards often stifle demand for services in accounting and engineering. While uniformity of standards may improve the quality, completeness, and comparability of the reported information, and international standards remain appropriate in specific cases, it seems that applying common standards to large firms and SMEs can prevent some smaller firms from using auditing and accounting services. Indeed, a single standard may be appropriate if there is little demand for service variety, network effects are unbounded, and there is no anticompetitive risk from having a single standard. However, if the market requires variety to satisfy different types of users, then a single standard may not be appropriate. 6.36 For example, complying with International Financial Reporting Standards (IFRS) for corporate accounting may be too costly for certain types of firms, even taking into account the provision for small firms to use a simplified standard. Several small and middle-sized firms -- particularly in Tanzania and Uganda -- noted the excessive costs of complying with international standards. 6.37 Dual standards tailored to the specific needs of firms by size may be worth considering in East Africa. Differentiated services provided to different types of firms -- say, large versus SMEs -- may be best delivered by different classes of accounting professionals. 6.38 A framework for regional cooperation on standards already exists in the form of the Eastern Central and Southern African Federation of Accountants (ECSAFA): Kenya, Tanzania, and Uganda are full members, while Rwanda is a temporary member. All countries could benefit from the development of the ECSAFA Guide on Accounting for SMEs, a common training standards guide for accounting technicians, developed in 2005. 6.39 The development of an appropriate standard may be desirable at a regional rather than national level in order to exploit economies in regulatory expertise, prevent fragmentation of the market by differences in standards, and limit the scope for regulatory capture. A regional accounting standard allows East African countries to balance stringency with access, integration with local appropriateness, and rules with discretion. C. Regional cooperation to remove restrictions on the free movement of labor, including visa and immigration laws and regulations and labor policies 6.40 The mobility of business people is vital to the promotion of free and open trade. Through the Common Market Protocol, the EAC economies have committed themselves to enhancing business mobility by exchanging information on regulatory regimes, and by streamlining immigration processes for business travelers and workers and the temporary residence of business people. The experience of regional groupings such as the EU or the APEC Business Mobility Group, which have made considerable progress in this area, could provide practical guidance on implementing the commitments to the free movement of labor and the harmonizing of immigration policies. 117 D. Regional cooperation means financing higher education, improving existing institutions of professional education, and encouraging new ones to emerge. 6.41 Developing and managing student loan programs at the national level is a worthwhile option. And regional cooperation in sharing information to increase the recovery rate of loans, while increasing students' access to higher education within and outside the region, would improve the impact of loan schemes in East Africa. 6.42 A good first step to coordinate student loans regionally is the recent partnership between the Kenya Higher Education Loan Board, the Tanzania Higher Education Students Loans Board, and the Students Finance Agency for Rwanda under the aegis of the African Higher Education Financing Agencies (AAHEFA). 6.43 Several East African countries lack the institutions that offer specialized (post- graduate) courses (e.g., in legal and engineering services) as well as institutions that offer academic and professional training courses for middle-level professionals. 6.44 Where the market of a given country, such as Rwanda, is too small to justify the creation of missing institutions or courses, policies to gain access to foreign training are needed, including portability of course credits and scholarships. Missing specialized courses (legal courses focusing on e-commerce, technology transfer and multilateral investment, financial services law, medical law and ethics, arbitration, international litigation) could be designed and implemented at the regional level. 6.45 Regulation differences fragment the regional market for education and prevent the emergence of regional hubs for higher education -- which can offer greater variety at lower costs by exploiting economies of scale. The Inter-University Council for East Africa (IUCEA), a regional inter-governmental organization established in 1980 to foster contact between the universities of East Africa already provides a forum for discussion on a wide range of academic and other matters relating to higher education. 6.46 In sum, East African governments should consider engaging in close regulatory cooperation at the regional level and using trade liberalization and regional integration to reduce private interest regulation in order to enhance competition and the growth of professional services. The governments could also work with donors to secure technical and financial assistance to strengthen the capacity of regulatory associations, and to develop sound regulations (for example, in the context of the EPA negotiations). How feasible is regional integration? Is there any interest in international cooperation? 6.47 While the economic benefits from regional integration are evident, the pace of integration depends upon members' conviction that liberalization benefits their domestic constituencies. As noted, the five East African countries have made progress in the area of 118 services through the East African Community Common Market negotiations. Kenya, Rwanda, Tanzania, and Uganda have scheduled commitments in accounting and engineering services, and have adopted the annexes on removing restrictions on the free movement of workers and on the right of establishment, as well as the annex on mutual recognition agreements (MRAs) of academic and professional qualifications. 6.48 The EAC countries have, at least on paper, committed themselves to liberalizing services and to regional integration in a number of services sectors. Still, the degree of commitment varies among the East African countries. For example, some countries still have fears about integration, and it would be useful to look for ways to alleviate concerns. This report intends to provide the information needed for informed choices as East African countries contemplate reform and international integration. 119 Annexes Annex 1. Measuring the Interdependence and Interconnectedness of Business Services with Other Sectors of the Economy61 The interdependence of business services with other sectors of the economy in Tanzania and Uganda is measured by forward and backward linkages that assess the magnitude of transactions between industries (figures 1.1 and 1.2). The linkages are unweighted averages of the GTAP manufacturing and services sectors. The general assumption is that sectors with a forward or a backward linkage greater than 1 are considered key sectors. The basic relationship between gross output, intermediate demand, and final demand is given in equation (1): D I A Y , or alternatively: Y I A D 1 (1) Y is the vector of industry gross output, D the vector of final demand, and A the matrix of technical coefficients -- i.e., the share of inputs from industry i in total production of the input using industry j. I A1 is known as the Inverse Leontief Matrix of the input- output-coefficients that describes how many units of one good or service have to be produced at any stage of the value added chain in order to produce one unit of the final demand for goods or services. The elements of I A1 are denoted bij. Forward linkages measure the extent to which sectors supply inputs to other sectors. They are calculated by dividing the effect resulting from a one unit rise in final demand on sector i's output by the effect of a one unit increase in final demand for the output of all sectors in the entire economy and can be represented mathematically as an index: N (1 / N )b.i b.i (2) U .i N N , where b.i bij (1 / N 2 ) b.i (1 / N ) b.i j 1 i 1 i 1 A high forward linkage indicates that the sector is a key sector in terms of supplying inputs to other sectors. Backward linkages measure the impact on supplier industries of a unit increase in the final demand for a particular sector's output. They are calculated by dividing the effect of a one unit rise in final demand for sector j's output on other industries by the effect of a one unit increase in final demand for the output of all sectors in the entire economy and can be represented mathematically as an index: 61 Claus (2003) and Pillat and Wölfl (2005). 120 (1 / N )b. j b. j N (3) U. j N N , where b. j bij (1 / N 2 ) b. j (1 / N ) b. j i 1 j 1 j 1 A high backward linkage indicates that an increase in the final demand of one sector's output will have a large impact on sectors that supply inputs into this sector's production. Backward and forward linkages assess the magnitude of transactions between industries. They can be complemented with measures of industry interconnectedness, which focus on the number of direct and indirect industry sales or purchases, and are related to coefficients of variation. To determine the degree of industry interconnectedness, measures of backward and forward concentration, represented mathematically as follows, can be employed: 1/ 2 N bij bij (4) G. j (bij ) N (1 C j ,ij ) 2 ) , where for all i and j: C j ,ij N b i 1 b. j ij i 1 1/ 2 N bij bij (5) G.i (bij ) N (1 Ci ,ij ) 2 ) , where for all i and j: Ci ,ij N b j 1 b.i ij j 1 Sectors with relatively more linkages across sectors can be considered key sectors from a policy perspective because they have a stronger transmission effect through the economy (figures 1.3 and 1.4). 121 Annex 2: Note on the Quantitative Assessment of Regional and Wider Liberalization of Professional Services in Kenya and Tanzania Key message Preferential liberalization of professional services with African partners by Kenya or Tanzania is a valuable first step that will produce gains. But wider liberalization of professional services, including with the EU or on a non- discriminatory basis, will yield much larger gains. Liberal rules of origin would be a useful step toward non-discriminatory liberalization. Reducing barriers that raise the cost of domestic as well as foreign service providers would also significantly increase the estimated gains. Finally, if these liberalization efforts were extended to other business services, such as telecommunications, financial and transportation services, Kenya and Tanzania would likely reap substantial real income gains, equal to more than 10 percent of consumption in the Kenyan case and more than 5 percent of consumption for Tanzania. Both economic theory and empirical literature have shown that the wide availability of business services brings productivity gains to the manufacturing sector and contributes to its international competitiveness.62 The wide availability of professional services is especially important for the efficient operation of small and medium enterprises. These enterprises have occasional needs for professional services, such as lawyers, accountants, auditors and engineers, but their scale of operation does not allow them to economically employ multiple service sector specialists full time. However, the regulatory regimes in professional services in Kenya and Tanzania impose significant burdens on the cost of providing professional business services, both by local business service providers and by multinationals. Reform and liberalization of the regulatory regimes in Tanzanian business services sectors could result in an increase in the number of providers and the quality of professional business service provision in Tanzania, which in turn would increase productivity and competitiveness of Tanzanian industry, agriculture, and other services sectors as well. At this time Tanzania and Kenya are engaged in regional negotiations in the East African Customs Union on professional services commitments and are negotiating the European Partnership Agreements. Tanzania has a regional arrangement with SADC, and Kenya with COMESA. Both countries are involved in multilateral negotiations that involve potential commitments in professional services. Potential participation in these multiple agreements raises several questions: How can the agreements be structured or combined to yield better results for growth and poverty 62 The term professional services refers to service professions like lawyers, accountants, engineers, and programmers. It is modeled as business services other than telecommunications, banking, insurance, and various transportation services. The term business services is used more broadly than it is used in the GATS. In this note, business services refers to all services sectors where the quality and technological sophistication of the service has important productivity impacts on sectors that use the service. 122 reduction? What would be the consequences for the national incomes of Tanzania and Kenya as well as on industry, agriculture, wages, returns to capital, exports and imports, and the professional services sectors themselves of responding to the requests of its trading partners by agreeing to further commitments? Is it more valuable to have agreements with large technologically advanced countries, especially with services in the agreements? And how does the participation in multiple agreements affect the value of preceding or prospective agreements? In order to answer these questions, a World Bank team has developed a 52-sector computable general equilibrium model of Tanzania and a 53-sector model of Kenya.63 The models contain professional services along with several other business services sectors, including telecommunications, banking, insurance, and multiple transportation sectors. The authors allow foreign direct investment in these business services sectors and, crucially, productivity gains for sectors that use business services from a net increase in business service providers. The analysis begins with estimates of the ad valorem equivalents of the regulatory barriers in business services in both Kenya and Tanzania, including professional services.64 Some barriers are discriminatory against foreign investors and some are non-discriminatory in the sense that they impose higher costs on both domestic and foreign providers of professional or other business services. In addition, the analysis required collection of data on the market shares of the professional services and other business services markets in Kenya and Tanzania captured by firms from the different regions of the world. The authors estimate the impacts of reducing both discriminatory barriers against foreign service providers (either regionally or multilaterally) as well as non-discriminatory cost increasing barriers that apply to both domestic and foreign service providers. The estimated impacts on real incomes of Tanzanians and on Kenyans from their own liberalization of barriers in professional services are summarized in table 1. We find that preferential liberalization of professional services with respect to its African regional partners would be beneficial for both Kenya and Tanzania in our central elasticity case. But if preferential liberalization with the Africa region is extended to an agreement with the EU, the gains would triple for Kenya and increase six times for Tanzania. If the liberalization of professional services commitments is extended to all foreign partners (called "Unilateral" in the tables), the gains would increase by seven times in the case of Kenya and twelve times in the case of Tanzania. Thus, these results suggest that 63 An earlier version of these models appeared as Jensen, Jesper, Thomas F. Rutherford, and David G. Tarr (2008), "Modeling Services Liberalization: The Case of Tanzania," World Bank Policy and Research Working Paper Number 4801; and Balistreri, Edward J., Thomas F. Rutherford, and David G. Tarr (2009), "Modeling Services Liberalization: The Case of Kenya,"Economic Modeling, Vol. 26 (3), May, 668-679. 64 The analysis follows the methodology of Nguyen-Hong, Duc (2000), "Restrictions on Trade in Professional Services," Australian Productivity Commission Staff Paper, August. Available at: HTTP://WWW.PC.GOV.AU/RESEARCH/STAFFRESEARCH/ROTIPS/ROTIPS.PDF 123 preferential liberalization in the region is a valuable first step, but wider liberalization, with larger partners or multilaterally will yield much larger gains. Finally, we estimate that a serious effort to reduce non-discriminatory regulatory barriers (that is, barriers that raise the costs of Kenyan as well as foreign professional services providers in Kenya, and similarly in Tanzania) would double the benefits of multilateral liberalization in Tanzania and quadruple the gains in Kenya. These results for professional services are indicative of the significantly larger gains to Kenya and Tanzania from wider liberalization of services across all business sectors. In table 2, we summarize results of policy scenarios for all business services (including telecommunications, banking, insurance and several transportation sectors, along with professional services) executed in the models of Kenya and of Tanzania. While preferential liberalization with regional partners in Africa yields some gains,65 an agreement with the EU yields gains many multiples of the gains from an agreement with the African partner. Multilateral liberalization yields gains about four times greater than the gains from an agreement with the EU. But the biggest gains come from reducing the non-discriminatory barriers that negatively impact both domestic and foreignservice providers; if this reform is combined with reducing discriminatory barriers against all foreigners, the estimated gains exceed 10 percent of consumption in the case of Kenya and are 5.4 percent of consumption for Tanzania One way the regional arrangements can be used as a step for broader non-discriminatory liberalization would be liberal rules of origin. In particular, it would be beneficial to allow firms established in any partner country to be granted rights equivalent to national firms or individuals of the partner country itself, as is the practice in NAFTA. Conclusions The results of this modeling work suggest that preferential liberalization with African partners of professional services by Kenya or Tanzania is a valuable first step, but wider liberalization, including with the EU or on a non-discriminatory basis, will yield much larger gains. Liberal rules of origin would be a useful step toward non-discriminatory liberalization. Reducing barriers that raise the cost of domestic as well as foreign service providers would also significantly increase the estimated gains. Finally, if these liberalization efforts were extended to telecommunications, financial, and transportation services, Kenya and Tanzania would likely reap substantial gains. 65 The estimates are for the "central" elasticity case and the case of no initial rent capture by domestic agents. In the case of initial rent capture by domestic agents, regional liberalization leads to losses in many of our elasticity choices. See the annex for an explanation of the importance of who captures the rents and supply elasticities of partners in explaining the real income impacts. 124 Table 1: Estimated Real Income Impacts from Trade Policy Options in Professional Services for Kenya and Tanzania (results are percentage change from initial equilibrium) Rest of EU Africa Africa-EU World Domestic & Unilateral Discrimina Discrimina Discrimina Discrimina Discriminatory Domestic Discriminatory tory tory tory tory Scenario definition Services Services Services Services Services Services Services 50% reduction of discriminatory barriers on EU services firms Yes No Yes Yes No Yes No 50% reduction of discriminatory barriers on African services firms Yes No Yes No Yes Yes No 50% reduction of discriminatory barriers on ROW services firms Yes No Yes No No No Yes 50% reduction of regulatory barriers for all services firms Yes Yes No No No No No Aggregate real income changes for Kenya as a percentage of consumption 0.67 0.51 0.14 0.06 0.02 0.07 0.07 as a percentage of GDP 0.56 0.43 0.12 0.05 0.01 0.06 0.06 Aggregate real income changes for Tanzania as a percentage of consumption 0.23 0.12 0.10 0.04 0.01 0.04 0.06 as a percentage of GDP 0.20 0.11 0.09 0.03 0.01 0.04 0.05 Source: World Bank staff estimates. Note: The change in real income is Hicksian equivalent variation. 125 Table 2: Estimated Real Income Impacts of Trade Policy Options in all Business Services for Kenya and Tanzania results are percentage change from initial equilibrium EU Unilateral Discrimina Discrimina Unilateral tory EU Africa EU-Africa tory Unilateral & Scenario definition EU FTA Services Tariffs FTA FTA Unilateral Services Tariffs Domestic 50% reduction of discriminatory barriers on EU services firms Yes Yes No No Yes Yes Yes No Yes 50% reduction of discriminatory barriers on African services firm No No No Yes Yes Yes Yes No Yes 50% reduction of discriminatory barriers on ROW services firms No No No No No Yes Yes No Yes 50% reduction of regulatory barriers for all services firms No No No No No No No No Yes Removal of tariffs on EU sourced goods Yes No Yes No Yes Yes No Yes Yes Removal of tariffs on ROW sourced goods No No No No No Yes No Yes Yes Aggregate Real Income Changes for Kenya as a precentage of consumption 0.9 0.6 0.2 0.2 1.1 3.8 1.6 2.1 10.3 as a percentage of GDP 0.7 0.5 0.2 0.2 0.9 3.1 1.3 1.7 8.6 Aggregate Real Income Changes for Tanzania as a precentage of consumption 0.4 0.2 0.1 0.0 0.4 1.7 0.5 1.1 5.4 as a percentage of GDP 0.4 0.2 0.1 0.0 0.4 1.5 0.5 1.0 4.9 Source: World Bank staff estimates. Note: Results are for the case of no initial domestic rent capture of the services barriers. Real income changes are smaller (and negative in some cases) with initial rent capture. 126 Annex 3: Business Surveys of Services Users and Providers In 2009 the World Bank conducted two types of firm surveys covering services users and services providers in Kenya, Rwanda, Tanzania, and Uganda. The survey instruments were developed by the World Bank and the surveys were implemented by TNS opinion in all countries. Services users survey The sample design was developed to be representative of the economy of each of the countries in terms of sectors of activity and size categories (measured in number of employees). The frames (universes) used to draw the samples were the most recent available lists of firms from official sources, such as local statistical institutes or business registers. In the case of Rwanda, where those were not available, the sample frame was taken from a secondary source, a private federation of firms. The distribution of firms across sectors and size categories in the sample was chosen to be proportionate to the universe distribution within the constraints of a fixed number of firms to be covered per country. Within each sector-size category cell the firms to be part of the final sample were chosen randomly from the universe of firms in that cell. Because of budget constraints within each country, only firms in the main capital city (and vicinity areas) were covered. The surveys covered a total of 100 firms in Kenya, 41 firms in Rwanda, 112 firms in Tanzania, and 103 firms in Uganda. The distribution of firms across sectors and size categories in the final sample is shown in the table below. 127 Table A3.: Service users in Kenya, Rwanda, Tanzania, and Uganda Kenya Users Survey - Sample Distribution more than 1-4 5-19 20-99 100 Total employees employees employees employees Mining 1 1 3 1 6 Agribusiness 1 3 2 2 8 Manufacturing 3 7 7 12 29 Construction 1 3 3 5 12 Services 9 14 10 12 45 Total 15 28 25 32 100 Rwanda Users Survey - Sample Distribution more than 1-4 5-19 20-99 100 Total employees employees employees employees Mining 0 3 0 1 4 Agribusiness 1 3 1 0 5 Manufacturing 0 11 3 1 15 Construction 2 3 0 1 6 Services 1 7 2 1 11 Total 4 27 6 4 41 Tanzania Users Survey - Sample Distribution more than 1-4 5-19 20-99 100 Total employees employees employees employees Mining 1 2 3 4 10 Agribusiness 5 2 6 2 15 Manufacturing 6 3 21 6 36 Construction 3 2 4 0 9 Services 31 5 3 3 42 Total 46 14 37 15 112 Uganda Users Survey - Sample Distribution more than 1-4 5-19 20-99 100 Total employees employees employees employees Mining 0 2 0 2 4 Agribusiness 1 3 2 2 8 Manufacturing 3 9 8 8 28 Construction 1 5 6 5 17 Services 16 24 4 2 46 Total 21 43 20 19 103 Source: Random samples drawn by the polling company TNS based on the universes taken from Statistical Abstract 2008 (Kenya National Bureau of Statistics), Records from the Private Sector Federation of Rwanda 2007/2008 Tanzania Mainland and Tanzania Der-Ess-Salam Business Register Surveys 2006/2007 (National Bureau of Statistics), and Uganda Business Register 2006/2007 (Uganda Bureau of Statistics). 128 The survey intended to examine the sources of demand for accounting, legal, and engineering services. The survey included questions on how much firms spent on external accounting, legal, or engineering services, whether any of those services were imported, and what specific sub-categories of those services were purchased. For firms that did not purchase any type of professional services, the survey asked the reasons for that choice. The survey also asked about the frequency with which professional services were acquired and asked the firms to judge the value of acquiring each type of professional services for their management and performance. For accounting services in particular, the survey asked whether different sub-categories of services were obtained as a result of statutory obligations and for which entities the documents were prepared. In addition, the survey asked about each firm's labor force composition, particularly the numbers and types of professionals (accountants, lawyers, and engineers) employed. Finally, the survey obtained information on each firm's total employment, type of ownership, export status (and, for exporters, which were the destination countries), and total revenues. All these questions were asked for a single point in time for each firm. Services providers survey The sample design was developed to cover accounting, legal, and engineering services sectors and all size categories (measured in terms of number of employees) within those sectors. The frames (universes) used to draw the samples were the most recent available lists of firms from official sources, such as local statistical institutes or business registers. In the case of Rwanda where those were not available the sample frame was taken from a secondary source, a private federation of firms. In each of the professional services sector, the distribution of firms across size categories in the sample was chosen to be proportionate to the universe distribution within the constraints of a fixed number of firms to be covered per sector and country. Within each professional services sector-size category cell the firms to be part of the final sample were chosen randomly from the universe of firms in that cell. Because of budget constraints within each country, firms mainly in the capital city (and vicinity areas) were covered. The surveys covered a total of 60 firms in Kenya, Tanzania, and Uganda, and 27 firms in Rwanda. The detailed distribution of firms across professional services sectors and size categories is shown in the table below. 129 Table A3.2: Service users in Kenya, Rwanda, Tanzania and Uganda Kenya Providers Survey - Sample Distribution more than 1-4 5-19 20-99 100 Total employees employees employees employees Accounting 1 15 2 1 19 Engineering 2 18 0 0 20 Legal 1 9 7 3 20 Rwanda Providers Survey - Sample Distribution more than 1-4 5-19 20-99 100 Total employees employees employees employees Accounting 2 8 0 0 10 Engineering 7 3 0 0 10 Legal 1 5 1 0 7 Tanzania Providers Survey - Sample Distribution more than 1-4 5-19 20-99 100 Total employees employees employees employees Accounting 1 13 6 0 20 Engineering 3 17 1 0 21 Legal 0 2 14 4 20 Uganda Providers Survey - Sample Distribution more than 1-4 5-19 20-99 100 Total employees employees employees employees Accounting 0 11 5 3 19 Engineering 1 8 7 3 19 Legal 2 5 7 4 18 Source: Random samples drawn by the polling company TNS based on the universes taken from Statistical Abstract 2008 (Kenya National Bureau of Statistics), Records from the Private Sector Federation of Rwanda 2007/2008 Tanzania Mainland and Tanzania Der-Ess-Salam Business Register Surveys 2006/2007 (National Bureau of Statistics), and Uganda Business Register 2006/2007 (Uganda Bureau of Statistics). The goal of this survey was to examine the business environment conditions in which providers of accounting, legal, and engineering services operate and how those affect their performance. The survey included questions on the distribution of firm revenues across sub-categories of services, on the types of clients, whether any of the services were exported and, for exporters, which were the destination countries, and what mode of delivery was used. 130 The survey also asked the firms to judge the degree of obstacle that domestic regulations related to competition, related to qualification requirements and licensing procedures, related to public procurement, and related to registration procedures/permits/other administrative steps necessary to start a business represent for its operations and growth. In addition, the survey also asked the firms to judge the degree of obstacle of regulations related to ownership/establishment of affiliates, related to competition, related to qualification requirements and licensing procedures represent to owning a firm in a foreign country or entering as a supplier into a foreign market. The survey asked questions related to the degree of competition faced by the firm in the domestic market. The survey also asked about the labor force composition of the firm, the numbers and average salaries of different types of employees (e.g., partners, managers, senior professionals, junior professionals) and the professional experience and qualifications of the most senior partners of the firm. Finally, the survey obtained information on each firm's total employment, type of ownership, total revenues and total costs. All these questions were asked for a single point in time for each firm. 131 Annex 4: Users' Evaluations of the Usefulness of Professional Services A. Users' evaluations of the Usefulness of Accounting Services a) Basic accounting/bookkeeping b) Preparation/review of financial statements 14 14 519 519 Firm size Firm size 2099 2099 100 100 Total Total 0 20 40 60 80 0 20 40 60 80 Percent Percent A lot of Moderate Minor No value A lot of Moderate Minor No value value value value at all value value value at all c) External audit d) Tax advice 14 14 519 519 Firm size Firm size 2099 2099 100 100 Total Total 0 20 40 60 80 0 20 40 60 80 Percent Percent A lot of Moderate Minor No value A lot of Moderate Minor No value value value value at all value value value at all e) Management consulting 14 519 Firm size 2099 100 Total 0 20 40 60 80 Percent A lot of Moderate Minor No value value value value at all Source: World Bank Survey of Users of Professional Services in East Africa, 2009. 132 B. Users' Evaluations of the Usefulness of Legal Services a) Advice on matters regulated by domestic law b) Advice on matters regulated by foreign law 14 14 519 519 Firm size Firm size 2099 2099 100 100 Total Total 0 10 20 30 40 50 60 0 20 40 60 80 Percent Percent A lot of Moderate Minor No value A lot of Moderate Minor No value value value value at all value value value at all c) Representation before admi. agencies and courts d) Notary services 14 14 519 519 Firm size Firm size 2099 2099 100 100 Total Total 0 20 40 60 80 0 20 40 60 80 Percent Percent A lot of Moderate Minor No value A lot of Moderate Minor No value value value value at all value value value at all Source: World Bank Survey of Users of Professional Services in East Africa, 2009. 133 C. Users' Evaluations of the Usefulness of Engineering Services a) Maintenance and repair b) IT engineering 14 14 519 519 Firm size Firm size 2099 2099 100 100 Total Total 0 20 40 60 80 0 20 40 60 80 Percent Percent A lot of Moderate Minor No value A lot of Moderate Minor No value value value value at all value value value at all c) Research, design and planning d) Testing & quality control 14 14 519 519 Firm size Firm size 2099 2099 100 100 Total Total 0 20 40 60 80 0 20 40 60 80 Percent Percent A lot of Moderate Minor No value A lot of Moderate Minor No value value value value at all value value value at all Source: World Bank Survey of Users of Professional Services in East Africa, 2009. 134 Annex 5: Regulatory and Market Structure Surveys In 2009 the World Bank conducted regulatory and market structure surveys in accounting, legal, and engineering services in Kenya, Rwanda, Tanzania, and Uganda. The survey instruments were developed by the World Bank, and in each of the countries the data was collected by local consultants from professional associations and was subsequently confirmed by private sector providers and other relevant stakeholders, and then reviewed against the relevant laws and regulations where possible. The goal of the regulatory survey was to collect information on the regulatory frameworks in place in the selected professional services sectors. The survey included questions on the entry restrictions applying to domestic providers for academic qualifications, professional qualifications, standards, exclusive and shared exclusive rights, and restrictions on the number of providers (individuals and firms) allowed. The questions on academic and professional qualifications covered both middle-level and highly skilled professionals. The survey also included questions on conduct regulation related to fees and prices, advertising possibilities, types of ownership allowed for service firms, multidisciplinary practices, location and diversification possibilities, and the use of quality control instruments. The survey also asked whether any of these conduct regulations were discriminatory towards foreign providers. The information collected through this survey is presented in a separate Regulatory Database. The analysis of regulations also made use of the services policy surveys conducted by the World Bank and described in Gootiz and Mattoo (2009). The policy summaries for accounting and legal services collected through the services policy surveys are summarized in the tables below. While the original data collection effort covered only accounting and legal services, a similar policy survey was applied to engineering in Kenya, Rwanda, Tanzania, and Uganda. These surveys tried to uncover the explicit trade policy barriers to professional services. They collected information on entry restrictions applying to foreign providers related to (a) restrictions on the movement of professionals, such as nationality or residency requirements, quota/labor market tests/economic needs tests, recognition (or lack thereof) of degrees and qualifications and of licenses obtained abroad; and (b) restrictions on foreign ownership and market entry conditions for service firms, such as limited forms of entry, ownership limits, limits on the control by foreign professionals not licensed to practice in the host country, license requirements, prohibited activities in general and in procurement in particular; and (c) restrictions on cross-border trade in professional services. 135 Table A5.1: Policy summaries in Kenya, Rwanda, Tanzania and Uganda: Accounting Services Foreign Providers of Accounting and Kenya Rwanda Tanzania Uganda Auditing Services Foreignlicensed professionals Foreignlicensed professionals eligible to practice subject to eligible to practice subject to Automatic recognition of foreign conditions. Residency conditions if members of certain license granted for members of requirement. Education professional accountancy approved accountancy bodies requirement foreign degree organizations (national (from the US, the UK, Canada, may be recognized if from an IFAC organizations in Scotland, England Kenya, India, Tanzania, and member country. Must either and Wales, Ireland, India, the US, Automatic recognition of foreign international associations). Must Movement of have at least 3 years of work Canada, Tanzania and license granted. Minimum still register with the Institute of Natural Persons experience, which can be from an international organizations). Must wage/wage parity requirement. Certified Public Accountants of IFAC member country, or go pass an exam on company law Uganda. Labor Market Test & through a 3year training in and taxation of Kenya. Labor Economic Needs Tests. Duration Tanzania. Must also pass an exam. Market Test & Economic Needs of stay initially allowed differs Labor Market Test & Economic Tests. Duration of stay initially case by case (5 years maximum). Needs Tests. Duration of stay allowed differs case by case. Extension possible. initially allowed is 2 years. Extension possible. Extension possible. Branch not allowed. No limit on ownership by foreign nationals, Ownership by foreign nationals but in practice, if all partners are limited to 50%. Ownership by non foreign, at least one should be locallylicensed professionals not resident in Uganda. No limit on permitted. License required. Establishment Branch not allowed. Ownership ownership by nonlocally License required. Branch not Difference in licensing criteria for of Commercial by nonlocallylicensed licensed professionals, but all allowed. foreign and domestic applicants. Presence professionals not permitted. partners must be members of A firm in Tanzania can use a approved accountancy bodies. A foreign firm's name only if the local member of an international relationship is a complete network of professional services partnership, not affiliation. firms cannot use the network's brand name. Source: Gootiz and Mattoo (2009). 136 Table A5.2: Policy summaries in Kenya, Rwanda, Tanzania and Uganda: Legal Advice on Domestic Law and Legal Representation in Court Foreign Providers of Kenya Rwanda Tanzania Uganda Legal Services For legal advice on domestic law, automatic recognition of foreign license granted. For legal representation in court, Foreignlicensed professionals nationality requirement. Exception applies to residents in are eligible to practice subject to Uganda, in which case either the requisite Nationality requirement for certain conditions, as long as education/qualification or practical experience is required. 1) becoming licensed exception there is a reciprocity or mutual Education requirement: a law degree from Universities of CLOSED. While the Advocates Act only for citizens of Tanzania and recognition agreement between Nairobi (Kenya), DaresSalaam (Tanzania) or Zambia, or a legal does not explicitly put forth a Uganda. For legal representation Rwanda and home country. 1) qualification that entitles a person to practice law in England nationality requirement, in Movement of in court, a narrow exception is Education requirement: foreign and Wales, Scotland, Northern Ireland or the Republic of practice, the application form Natural Persons possible for foreign advocates degree may be recognized if it Ireland. Must also complete a postgraduate bar course at the requires one to be a Tanzanian Legal Advice licensed in a Commonwealth originates from certain countries. Law Development Centre in Uganda. 2) Work experience national. For legal representation on Domestic country they may appear in a 2) Training/Internship requirement: in case the applicant is without a law degree or a in court, however, a lawyer Law and Legal specified suit or matter without a requirement: foreign experience legal qualification 5 years as a legal practitioner from Kenya, licensed in a Commonwealth Representation Kenyan license if accompanied by may be recognized if it took place Tanzania, Zambia and countries with reciprocal arrangements in country or a country designated in Court a Kenyan advocate (but they may in certain countries. 3) Passing an force in favor of Uganda and must work under surveillance of an by the Minister may be admitted be required to demonstrate a lack exam is required. Also, legal advocate licensed in Uganda or with the Government in Uganda temporarily to argue a particular of domestic availability for the practitioners from partner states for at least 6 months. Regardless of the above, a legal case. particular services they are may have their foreign licenses practitioner in Kenya, Tanzania, Zambia or a country with a providing). automatically recognized and reciprocal arrangement in force in favor of Uganda may be practice in Rwanda. Minimum admitted temporarily to appear in a particular case if he/she wage/wage parity requirement. works with a locallylicensed lawyer. Labor Market Test & Economic Needs Tests. Duration of stay initially allowed differs case by case (5 years maximum). Extension possible. Ownership by nonlocally Establishment licensed professionals not of Commercial CLOSED. A local member of an Branch not allowed. A local member of an international permitted. License required. Presence international network cannot network of professional services firms cannot use the Difference in licensing criteria for Legal Advice on practice under any name other network's brand name. For legal representation in court license Branch not allowed. foreign and domestic applicants. Domestic Law than his own or the name of a required the Law Council inspects chambers and issues A firm in Tanzania can use a and Legal past or present member or certificates of approval. The Law Council also has to approve foreign firm's name only if the Representation members of the firm. the firm's name. relationship is a complete in Court partnership, not affiliation. Source: Gootiz and Mattoo (2009). Table A5.3: Policy summaries in Kenya, Rwanda, Tanzania and Uganda: Legal Advice on Foreign Law Foreign Providers of Kenya Rwanda Tanzania Uganda Legal Services Automatic recognition of foreign license granted. While the Advocates Act requires being licensed in Tanzania to practice Movement of Nationality requirement for Automatic recognition of foreign law locally, the government de Automatic recognition of foreign license granted. Labor Market Natural Persons advocates. Foreign lawyers can license granted. Minimum facto condones practice of foreign Test & Economic Needs Tests. Duration of stay initially allowed Legal Advice act as consultants and work for a wage/wage parity requirement. law by foreignlicensed lawyers. differs case by case (5 years maximum). Extension possible. on Foreign Law local law firm as employees. Labor Market Test & Economic Needs Tests. Duration of stay initially allowed (2 years). Extension possible. Ownership by nonlocally licensed professionals not CLOSED. A local member of an Establishment permitted. License required. international network cannot of Commercial Difference in licensing criteria for Branch not allowed. A local member of an international practice under any name other No restrictions, except branches Presence foreign and domestic applicants. network of professional services firms cannot use the than his own or the name of a are not permitted. Legal Advice on A firm in Tanzania can use a network's brand name. past or present member or Foreign Law foreign firm's name only if the members of the firm. relationship is a complete partnership, not affiliation. Source: Gootiz and Mattoo (2009). 137 Annex 6: Survey on Costs and Procedures to Become a Professional In 2009 the World Bank conducted surveys on the costs and procedures to become an accounting, engineering, or legal professional in Kenya, Rwanda, Tanzania, and Uganda. The survey instruments were developed by the World Bank, and in each of the countries the data was collected by local consultants from a set of domestic students in the three professional fields and from a set of domestic professionals. The data collected was subsequently confirmed against published information by professional associations or higher education institutions where possible, and by relevant stakeholders. The objective of this survey was to allow an in-depth assessment of the costs and procedures necessary to become a full member of the accounting, engineering, and legal professions in each of the countries. The survey asked about: The costs of and the time necessary for obtaining a qualifying degree to legally practice as an accountant, engineer, or accountant, including the detailed decomposition of costs into the cost of the degree, tuition fees, and living expenses; The cost of and time necessary for evaluating the (domestically obtained) education credentials in order to be able to enter into the profession; The costs of and the time necessary for obtaining any required specialized degree in addition to the qualifying degree in order to enter into the profession, including the detailed decomposition of costs into the cost of the specialized course, tuition fees, and living expenses; The costs and duration of undertaking the practical training/internship necessary to become a full member of the profession; The costs of taking the professional examinations necessary to become a full member of the profession; The costs of and the time necessary for obtaining the licenses to legally practice as a professional; The costs of obtaining membership in the professional association in order to legally practice, which covers the initial registration and the annual subscription; The costs of obtaining continuing education and the number of required courses per year. The detailed costs necessary for the various steps to becoming a professional are shown below for each of the countries and each of the professions. 138 Table A6.1: Costs to become a Professional in Kenya C o s t o f P ro f e s s io n a l Q u a li f ica tio n ( in K ES ) La w A cco u n ti n g En g i n e e ri n g # y e a rs 4 La w y e r ( l o w ) La w y e r ( h i g h ) A cco u n ta n t ( l o w ) A cco u n ta n t ( h i g h ) En g i n e e r ( l o w ) T u i ti o n p e r y e a r 25,100 171,460 25,100 162,625 25,100 H o u sin g 7,000 60,000 7,000 60,000 7,000 F o o d & M i s c. 90,000 180,000 90,000 180,000 90,000 T o ta l p e r y e a r 122,100 411,460 122,100 402,625 122,100 T o ta l C o s t o f d e g re e 488,400 1,645,840 488,400 1,610,500 488,400 C o s t o f P ro f e s s io n a l Q u a li f ica tio n s 356,000 356,000 24,800 24,800 5,000 p e r y e a r 178,000 w h i ch i n cl u d e s C o s t o f C P A e x a m th e i n te rs h i p C o s t o f P ro f e s s io n a l Lice n s in g Fe es 17,500 17,500 30,000 30,000 6,200 A n n u a l C o s t 9,660 9,660 20,000 20,000 3,200 C o n ti n u i n g e d u ca ti o n 7,500 7,500 0 0 0 T o ta l C o s t ( K E S ) 861,900 2,019,340 543,200 1,665,300 499,600 A n n u a l co s ts o n ce p ra cti ci n g ( K E S ) 17,160 17,160 20,000 20,000 3,200 T o ta l C o s t ( U S D ) 11,341 26,570 7,147 21,912 6,574 A n n u a l co s ts o n ce p racticin g ( U S D ) 226 226 263 263 42 N o te : Th e s e co n v e rs i o n s u s e a n e x ch a n g e ra te o f : K ES/USD = 76 Source: World Bank Surveys on Costs of Obtaining Professional Degrees and Qualifications in East Africa, 2009. Table A6.2: Costs to become a Professional in Rwanda Categories Law Accounting Engineering # years 4 4 6 4 Tuition per year 965 211 965 Housing/Food 1193 1193 Misc. 619 63 619 Total per year 2777 274 2777 Total Cost of degree 11108 1644 11108 Cost of Professional Qualifications Lawyer Technician Accountant Certified Acc. Technical Graduate Eng. Conception Eng. # years (where applicable) 4 0 0 2 1 2 2 Tuition 526 0 0 3071 1754 2660 1552 Housing/Food 2015 0 0 1436 0 0 1060 Misc. Costs 585 0 0 1439 825 225 790 Total per year 3126 0 0 5946 2579 2885 3402 Onetime fees 0 0 0 845 809 180 809 Total Cost of Advanced Degree 12504 0 0 12737 3388 5950 7613 Cost of Additional Degree (for lawyers) # years 2 Tuition 2200 Housing/Food 1060 Misc. Costs 790 Internship Cost 263 Total per year 4313 Total Cost of Additional Degree 8626 Cost of Professional Licensing Fees 408 178 198 303 178 178 178 Annual Cost 526 0 88 351 0 0 0 Continuing education 0 0 0 0 0 0 0 Total Cost 32,646 1,822 1,842 14,684 14,674 17,236 18,899 Annual costs once practicing 526 0 88 351 0 0 0 Source: World Bank Surveys on Costs of Obtaining Professional Degrees and Qualifications in East Africa, 2009. 139 Table A6.3: Costs to become a Professional in Tanzania Cost of Professional Qualifications (in TZS) Castegories Law Accounting Engineering Lawyer Paralegal Accountant (lowAccountant (hig Acct. Technicia Engineer Technician # years (where applicable) 4 4 4 4 2 4 4 Tuition 1,500,000 1,200,000 900,000 1,950,000 570,000 1,124,500 1,124,500 Housing/Food 1,200,000 800,000 1,200,000 1,560,000 780,000 885,000 885,000 Misc. Costs 940,000 700,000 940,000 420,000 314,000 420,000 420,000 Total per year 3,640,000 2,700,000 3,040,000 3,930,000 1,664,000 2,429,500 2,429,500 Onetime fees 20,000 70,000 580,000 Total Cost of Advanced Degree 14,580,000 10,870,000 12,160,000 16,300,000 3,328,000 9,718,000 9,718,000 Cost of Additional Degree # years 2 2 2 1 3 3 Tuition 1,570,000 220,000 220,000 1,350,000 900,000 800,000 Housing/Food 2,800,000 1,200,000 1,200,000 780,000 1,180,000 1,180,000 Misc. Costs 500,000 940,000 940,000 314,000 370,000 420,000 Clerkship expenses Less wages Total per year 4,870,000 2,360,000 2,360,000 2,444,000 2,450,000 2,400,000 Onetime fees 76,000 2,160,000 2160000 650,000 Total Cost of Additional Degree 9,816,000 0 6,880,000 6,880,000 3,094,000 7,350,000 7,200,000 Internship for Engineers #years 3 3 Cost per year 1,560,000 1,560,000 Onetime fees 5,000 81,000 Total Cost 4,685,000 4,761,000 Cost of Professional Licensing Fees 12,000 320,000 100,000 100,000 100,000 12,000 12,000 Annual Cost 20,000 200,000 50,000 50,000 40,000 20,000 20,000 Continuing education 0 0 1,000,000 1,000,000 0 0 0 Total Cost 24,408,000 11,190,000 19,140,000 23,280,000 6,522,000 21,765,000 21,691,000 Annual costs once practicing 20,000 200,000 1,050,000 1,050,000 40,000 20,000 20,000 Total Cost (USD) 18,080 8,289 14,178 17,244 4,831 16,122 16,067 Annual costs once practicing (USD) 15 148 778 778 30 15 15 Note: These conversions use an exchange rate of: TZS/USD= 1350 Source: World Bank Surveys on Costs of Obtaining Professional Degrees and Qualifications in East Africa, 2009. 140 Table A6.4: Costs to become a Professional in Uganda Cost of Professional Qualifications (in UGS) Categories Law Accounting Engineering Lawyer (low) Lawyer (high) Accountant (low) Accountant (high) Acc. Technician Technical (low) Technical (high) Graduate Eng. (low) Graduate Eng. (high) # years 4 4 3 3 2 2 2 4 4 Tuition 3,133,500 3,846,000 2,610,500 3,350,000 950,000 2,100,000 2,100,000 2,923,500 4,786,000 Housing/Food 440,000 1,100,000 1,880,000 1,880,000 1,880,000 440,000 1,100,000 440,000 1,100,000 Misc. Costs 2,600,000 2,600,000 1,948,000 1,948,000 1,948,000 2,600,000 2,600,000 2,600,000 2,600,000 Total per year 6,173,500 7,546,000 6,438,500 7,178,000 4,778,000 5,140,000 5,800,000 5,963,500 8,486,000 Onetime fees 136,000 0 51,000 0 51,000 930,000 930,000 930,000 930,000 Total Cost of Advanced Degree 24,830,000 30,184,000 19,366,500 21,534,000 9,607,000 11,210,000 12,530,000 24,784,000 34,874,000 Cost of Additional Degree # years 1 1 3 10 Tuition 2,550,000 2,550,000 3,562,792 3,562,792 Housing/Food 1,130,000 1,130,000 1,880,000 1,880,000 Misc. Costs 2,250,000 2,250,000 1,948,000 1,948,000 Clerkship expenses 312,000 312,000 0 0 Less wages 1,000,000 1,000,000 Total per year 6,242,000 6,242,000 6,390,792 6,390,792 Total Cost of Additional Degree 6,242,000 6,242,000 19,172,376 63,907,920 Cost of Professional Licensing Fees 1,249,250 1,249,250 1,510,000 1,510,000 1,510,000 0 0 0 0 Annual Cost 499,750 499,750 250,000 250,000 250,000 571,000 571,000 571,000 571,000 Continuing education 250,000 250,000 300,000 300,000 300,000 0 0 Total Cost 32,321,250 37,675,250 40,048,876 86,951,920 11,117,000 11,210,000 12,530,000 24,784,000 34,874,000 Annual costs once practicing 749,750 749,750 550,000 550,000 550,000 571,000 571,000 571,000 571,000 Total Cost (USD) 16,533 19,271 20,485 44,477 5,686 5,734 6,409 12,677 17,838 Annual costs once practicing (USD) 384 384 281 281 281 292 292 292 292 Note: These conversions use an exchange rate of: UGS/USD= 1955 Studying for the various professional diplomas can take Crosscurrency calculation between 3 and 10 years. This calculations assumes that Tuition (GBP) 1139 the accountant is earning entry level wages of USG 1,000,000 USD/GBP= 1.6 while studying. Since most accountants do not take 10 years Tution (USD) 1822.4 to complete the program, the actual cost is likely to be on UGS/USD= 1955 the lower end of the spectrum. Tuition (UGS) 3562792 Source: World Bank Surveys on Costs of Obtaining Professional Degrees and Qualifications in East Africa, 2009. 141 Annex 7: Sectoral Profile of Clients of Accounting Services Providers in East Africa Percentage of revenue earned in the domestic market by accounting, engineering, and legal services providers from selling their services to clients in different sectors. (a) Accounting Services Kenya Rwanda Country Tanzania Uganda 0 10 20 30 40 50 60 70 80 Percent Public sector Banking and Financial ins. Nonfinancial sector (b) Legal Services Kenya Rwanda Country Tanzania Uganda 0 10 20 30 40 50 60 Percent Manufacturing Banking Telecom, Electricity, Water Nonfinancial (c) Engineering Services Kenya Rwanda Country Tanzania Uganda 0 20 40 60 80 100 Percent Construction Companies Transport companies Water companies IT companies Source: World Bank Surveys of Providers of Professional Services in East Africa, 2009. 142 Annex 8: Indicators of Regulatory Conditions in Professional Services The indicators of professional services are calculated according to the tables presented below. Qualitative information is coded by assigning a numerical value to each of the possible responses to a given question (see the coding of data portion of the tables below), while quantitative information is subdivided into classes using a system of thresholds (see the weights by questions and the weights by theme). The indicator for each profession is calculated as the simple average of the indicators of entry and conduct regulation. The overall indicator of professional services is the simple average of the indicators for accounting, engineering, and legal services. Panel A: Entry regulation Weights Question by theme weights (ck) (bj ) Coding of data Licensing: 2/5 0 1 2 3 >3 How many services does the profession have an exclusive or shared exclusive 0 1.5 3 4.5 6 right to provide? 1 Education requirements (only applies if Licensing not 0): 2/5 What is the duration of special education/university/or other higher 0.33 equals number of years of education (max of 6) degree? What is the duration of compulsory practise necessary to become a full 0.44 equals number of years of compulsory practise (max of 6) member of the profession? Are there professional exams that must 0.22 no yes be passed to become a full member of the profession? 0 6 Quotas and economic needs tests 1/5 no yes Is the number of foreign professionals/firms permitted to practice 1 0 6 restricted by quotas or economic needs tests? Country scores (0-6) jbj k c k answerjk Panel B: Conduct regulation Weights Question by theme weights (ck) (bj )1 Coding of data Regulations on prices and fees 0.38 non-binding non-binding maximum minimum minimum recommended recommended prices on maximum prices on prices on Are the fees or prices that a profession prices on prices on all some prices on all some all charges regulated in any way (by no regulation some services services services services services services government or self-regulated)? 1 0 1 2 3 4 5 6 Regulations on advertising 0.23 no specific regulations advertising is regulated rtising is prohibited Is advertising and marketing by the 1 0 3 6 profession regulated in any way? Regulation on form of business 0.19 partnership and some incorporation Is the legal form of business restricted to no restrictions allowed incorporation forbidden sole practitioner only a particular type? 1 0 2 5 6 Inter-professional cooperation 0.19 generally only allowed with all forms allowed generally forbidden Is cooperation between professionals allowed comparable professions restricted? 1 0 3 4.5 6 Country scores (0-6) jbj k c k answerjk Source: HTTP://WWW.OECD.ORG/DATAOECD/25/19/42220487.XLS 143 Annex 9: Services Trade Policy Restrictiveness Indices The indicators of the restrictiveness of explicit trade barriers in professional services (henceforth STRI) are computed making use of the services policy surveys conducted by the World Bank described in Gootiiz, and Mattoo (2010) as presented below. The indicators are computed for four subsectors: accounting, auditing, domestic law, and international law. The STRI was created using an expert judgment approach. This method applies a score to a summary or bundle of measures, which we call "policy summary." The policy summaries reflect the perceived overall restrictiveness in a given subsector and a given mode of supply (1, 3, or 4). The policy summaries cover a defined set of potential restrictions, of which only restrictive measures are listed and scored. The table below shows the measures covered and the rules applied to the policy summary. A benefit of the policy summary is that it can account for idiosyncratic and qualitative information provided by the survey that affects the degree of openness. The qualitative policy information would surely escape any fixed algorithm that attempts to turn policy information into binary scores. The expert judgment approach has both strengths and weaknesses. The main strength is that it can better capture aspects of policy that are rich but difficult to quantify. The main weakness, as the name suggests, is that it is subjective and based on expert judgment. Subjectivity arises because the score per policy summary can change depending on the experts' perspectives. Another of its strengths, however, is that it largely avoids potential double counting and the use of fixed weights per individual measure. These weaknesses are commonly pointed to in earlier approaches known as bottom-up scoring, pursued by the Australian Productivity Commission and more recently by the OECD. The bottom-up scoring approach would assign a score of restrictiveness to each individual measure and would then aggregate using weights per measure and/or per category of measures. In order to do so, all measures have to be binary or have to be converted into a binary measure, potentially causing a loss of qualitative information. The weights per measure are determined either subjectively or by statistical methods but would at any rate be fixed, regardless of the inherent relationship among the measures considered. One worrisome problem of the bottom-up approach is that it treats all restrictions (entry, operational, regulatory) as additive. However, not all measures can reasonably be added up. For instance, if foreign suppliers are not allowed to enter in a market, then the restrictions on operations and regulatory environment should not matter. In other words, the weight of subsequent categories should be different depending on the policy regime. For example, the restriction on operations should take a weight of zero if initial entry is not allowed and higher weight if entry is allowed. Therefore, considering a fixed weight per measure is not ideal. Also, the conventional bottom-up approach may double count the restrictiveness by adding up different but redundant measures. For example, suppose that a foreign equity limit is 49 144 percent. Then it is safe to assume that foreign investors are not allowed to exercise corporate control via majority ownership. However, if there is also a requirement that the majority of the board of directors must be nationals, then the bottom-up approach would add this as another restriction, thereby essentially double counting the restrictiveness even though the equity restriction preempts the board restriction. In contrast, by assigning a score to a policy summary, rather than scoring individual measures, largely avoid the risk of mechanically double counting measures or adding non- binding restrictions. Also, we do not lose the rich information and extensive comments provided by government officials and survey respondents. As a result, the STRI broadly captures the restrictiveness of policies in terms of explicit measures, such as quota, as well as de facto restrictions, such as approval of the president for licensing. Upon having a policy summary per subsector-mode, the assigned score maps the perceived restrictiveness of each summary onto a 5-point scale ranging from 0 to 1, with three intermediate levels of restrictiveness (0.25, 0.50, and 0.75). The scores are defined as follows: - 0.00: open without restrictions - 0.25: virtually open (only notifications required, minimal discretion) - 0.50: some significant restrictions (e.g., only minority foreign equity participation allowed) - 0.75: virtually closed (e.g., providing loans from abroad requires proof of domestic unavailability of like service) - 1.00: completely closed. When there is only one restrictive measure, the scoring rule in the table applies, but when two or more measures are in place, the scores reflect the restrictiveness of the key measures. Specifically, since the restrictiveness index is assigned to a policy summary for a subsector-mode combination, if one policy variable within the summary changes, the index may or may not change. Not all changes in policy information will trigger a change in the STRI. The change in STRI will depend on the type of variable and the number of variables that are restrictive. In addition, the measures covered can be divided into two tiers in terms of impact on market entry by foreign supplier. The first tier measures include those that affect market entry decisions most significantly, such as the limit on foreign ownership and the number of licenses allowed. The second tier measures are those that affect operations of service providers, such as the board of directors and repatriation of earnings. If the first tier measures are not restrictive and the only restrictions are in the second tier measures, then the final score will reflect the restrictiveness of the second tier measures. If multiple measures of the first and second tiers are restrictive, then the index will reflect the most restrictive measure (0 to 1) of all. 145 Note that for the overall STRI computed across all modes of supply of accounting and legal services across borders each subsector (accounting, auditing, domestic law, and international law) receive an equal weight, whereas different modes receive different weights: mode 1 receives a 0.2 weight whereas mode 3 and mode 4 receive each a 0.4 weight. Scoring rules for the Policy Summary Note for interpreting the table: Only measures included in the policy summary are scored. The scores reflect the overall restrictiveness of key policy measures applied to a subsector-mode (and not to individual measures). When there is only one measure that is restrictive, the following scoring rule applies, but when two or more measures are in place, the score reflects a judgment of the aggregate effect of the measures. Assumptions: A. Foreign law or accounting firms intend to provide legal or accounting services via telephone, email, mail, or fax. B. Foreign firms already possess qualified professionals who are certified and qualified to provide the type of services in accounting, auditing, or foreign legal law. MODE 1: C. The clients in the home country are domestic or foreign firms (non-legal and non- Accountancy accounting firms). If there is a restriction on clients -- such as, non-professional firms cannot and Legal obtain these services from abroad -- trade through mode 1 would be considered restrictive. Note: The mode 1 measures in the survey do not cover the regulatory requirements on licensing, qualification, and other regulatory conditions that may prevent the foreign firms from providing services. 1 Cross border trade not allowed Staffed with professionals licensed to provide the service Demonstration of domestic unavailability of service required 0.75 Assumptions: A. Foreign accounting or legal firm that has commercial presence in the home country wishes to provide services through commercial presence in host country B. Foreign professionals, who wish to establish commercial presence as a partner, joint-owner, or shareholder, are assumed to possess necessary skills, qualifications, and experience to provide services in their MODE 3: home jurisdiction. Accountancy Notes: and Legal A. If local qualification is necessary for partners to set up a partnership and the conditions for meeting local qualification are burdensome (as this can be revealed from the mode 4 regime), it is considered restrictive. B. Separate legal entity is defined as "having a separate office from the parent company," but it is considered not a locally incorporated entity. Establishing commercial presence -- not allowed 1 Greenfield branch -- not allowed 0.25 Separate legal entity-- not allowed 0.25 Ownership by foreign nationals or by non-locally licensed professionals not permitted, or foreign ownership of less than 50 percent allowed (assuming entry 0.5 through other forms allowed, such as association with local partners) 146 0.5 Association with locally-licensed professionals as partners or shareholders not permitted 0.5 Significant discrimination in licensing criteria for foreign and domestic applicants Explicit limit on number of licenses 0.5 0.25 or 0.5 Difference in licensing criteria Hiring of locally-licensed professionals as employees not permitted 0.25 Restrictions on name or brand international name 0.25 Assumptions: For professionals who wish to supply services through mode 4, the following assumptions have been made: (a) The foreign professionals are natural persons who intend to provide services temporarily in a host country as defined in the GATS Annex on Movement of Natural MODE 4: Persons. The professional is not seeking citizenship, residence, or employment on a permanent Accountancy basis. (b) Foreign professionals are already qualified and licensed to provide services in their and Legal home jurisdiction. Notes: In mode 4 qualification section, we are seeking to identify the additional licensing requirements that the foreign professionals have to fulfill to provide services in a foreign jurisdiction, where they did not obtain the qualifications. Also, if mutual recognition agreements are required, it is not treated as restrictions. Market closed -- Nationality of host country required 1 Must be resident to be licensed or to work as a professional 0.25 Automatic recognition of foreign license granted Foreign-licensed professionals eligible to practice subject to conditions depends Quota for foreigners -- ICT, SSE, and IP 0.5 Labor Market Test -- ICT, SSE, and IP 0.5 Economic needs test -- ICT, SSE, and IP 0.5 Education -- Foreign degree not recognized 0.5 Work experience or training -- Foreign training not recognized 0.5 Passing a professional exam required depends If entry not allowed through SSE or IP (Entry allowed only through ICT) 0.5 If entry not allowed through SSE or ICT (Entry allowed only through IP) 0.25 Minimum wage/salary or wage parity requirement -- ICT, SSE, and IP Duration of stay initially allowed - ICT, SSE, and IP Possibility of extension of stay - ICT, SSE, and IP Note: In the table above the following acronyms for the definitions of mode 4 entry apply. 1) ICT or intra-corporate transferee: An employee of a foreign service provider with a commercial presence in the host country who is transferred to the foreign service provider's office in the host country to work there temporarily for a finite length of time. 147 Example: A multinational accounting firm transfers an accountant from its New York office to its Paris office for two years. 2) SSE or service-supplying employee: An employee of a service provider located abroad who is sent by the same service provider to temporarily carry out a specific assignment/contract for a client of the service provider in the host country. Example: An accounting firm in the US sends its accountants to China to do an audit for a client of the firm in China. 3) IP or independent professional: A professional who comes into the host country in order to work for an individual or a firm in the host country, either as a regular employee or on a temporary contract. (Note: The professional would already have a contract or offer from the employer in the host country when entering the country.) 148 REFERENCES Abramovsky, L. and R. Griffith. (2006). "Outsourcing and Offshoring of Business Services: How Important is ICT?" Journal of the European Economic Association, Vol. 4, No. 2-3. Akerlof, G. (1970). "The Market for `Lemons': Quality Uncertainty and the Market Mechanism." Quarterly Journal of Economics, Vol. 84. Arnold, J., A. Mattoo, and N. Gaia. (2006). "Services Inputs and Firm Productivity in Sub-Saharan Africa: Evidence From Firm-Level Data," Journal of African Economies, Vol. 17. Balistreri, E., T. Rutherford, and D. Tarr. (2009). "Modeling Services Liberalization: The Case of Kenya," Economic Modeling, Vol. 26. Borchert, I., B. Gootiiz, and A. Mattoo. (2010). "Global Patterns of Services Trade Barriers - New Empirical Evidence ," World Bank mimeo. Canton, E. and A. Blom. (2004). "Can Student Loans Improve Accessibility to Higher Education and Student Performance? An impact study of the case of SOFES, Mexico." Policy Research Working Paper Series 3425. Washington, DC: The World Bank. Cattaneo, O., L. Schmidt, and P. Walkenhorst. (2010). "Trade in Engineering Services." Chapter in the forthcoming publication Services Trade for Development, Washington, DC: The World Bank Cattaneo, O. and P. Walkenhorst. (2010). "Law and Justice for Development: Trade Aspects." Chapter in the forthcoming publication Services Trade for Development. Washington, DC: The World Bank. Centre for the Advancement of Trade Integration and Facilitation, Centre for Strategic and International Studies, Institute for International Trade, Thailand Development Research Institute (2007). "Expanding Trade in Business Services in ASEAN." REPSF Project 05/006. Claus, I. (2003). "Changes in New Zealand's Production Structure: An Input Output Analysis." New Zealand Treasury Working Paper 03/01. Conway, P. and G. Nicoletti. (2006). "Product Market Regulation in the Non- Manufacturing Sectors of OECD Countries: Measurement and Highlights." OECD Economics Department Working Papers No. 530. Deininger, K., D. Ayalew, and T. Yamano. (2006). "Legal Knowledge and Economic Development: The Case of Land Rights in Uganda." Policy Research Working Paper Series No 3248, World Bank. 149 Docquier, F. and A. Marfouk. (2004). "Measuring the international mobility of skilled workers (1990­2000)." Policy Research Working Paper Series No 3381, World Bank. European Commission for the Efficiency of Justice (2008). "European judicial systems." Council of Europe, September 2008. Féderation des Experts Comptables Européens: Qualification and Market Access Working Party (2008). "Practical Experience in Education of Professional Accountants." Foundation for Economic Education. Fernandes, A. and A. Mattoo. (2008). "Professional Services and Development: A Study of Mozambique." Policy Research Working Paper Series 4870, World Bank ,Washington, DC. Francois, J. and J. Woerz. (2006). "Producer Services, Manufacturing Linkages, and Trade" Tinbergen Institute Discussion Paper No. 045/2-TI 2007. Global Competitiveness Report 2009-2010. Geneva: World Economic Forum. Gootiiz, B. and A. Mattoo. (2009). "Services in Doha: What's on the Table?" Journal of World Trade Vol. 43, 1013­1030. Grossman, G. and E. Helpman. (2005). "Outsourcing in a Global Economy." Review of Economic Studies. Guggiola, G. (2010). "IFRS Adoption in the EU, Accounting Harmonization and Market Efficiency: A Review." Economics and Quantitative Methods, Department of Economics, University of Insubria. Hill, K., D. Hoffman, and T. Rex. (2005). "The Value of Higher Education: Individual and Societal Benefits." University of Arizona, W.P. Carey School of Business. Jensen, J., T. Rutherford, and D. Tarr. (2008). "Modeling Services Liberalization: The Case of Tanzania." Policy and Research Working Paper Number 4801, World Bank. Lesher, Molly and H. Nordas. (2006). "Business Services, Trade and Costs." OECD Trade Policy Working Papers 46. OECD Trade Directorate. Kox, H., A. Lejour, and R. Montizaan. (2004). "The Free Movement of Services within the EU." CPB Documents 69, CPB Netherlands Bureau for Economic Policy Analysis. Kox, H. and H. Nordas. (2009). "Quantifying Regulatory Barriers to Services Trade." OECD Trade Policy Working Paper No. 85. Organization for Economic Co- operation and Development. 150 Musonda, F. (2006). "Migration Legislation in East Africa." Geneva: International Migration Papers, #82. Nguyen-Hong, D. (2000). "Restrictions on Trade in Professional Services." Productivity Commission Discussion Paper No. 1638, Productivity Commission of the Government of Australia. OECD (2007). "Competitive Restrictions in the legal Profession." DAF/COMP (2007)39. OECD( 2009). "Education at a Glance: OECD Indicators" and "OECD Technical Annex." Ono, Y. and V. Stango. (2005). "Outsourcing, Firm Size, and Product Complexity: Evidence from Credit Unions." Economic Perspective. Federal Reserve Bank of Chicago. PASI The Paralegal Advisory Service Institute (2007). "Changing the Landscape." Evaluation Report March 2007, Lilongwe, Malawi. Paterson, I, M. Fink, and A. Ogus. (2003). Economic Impact of Regulation in the Field of Liberal Professions in Different EU Member States. Vienna, Institute of Advanced Studies. Peek, L., E. McGraw, Y. Robichaud, J. Castillo Villarreal, M. Roxas, and G. Peek. (2007). "NAFTA Professional Mutual Recognition Agreements: Comparative Analysis of Accountancy Certification and Licensure." Global Perspectives on Accounting Education, Vol. 4. Posner, R. (1974)." Theories of Economic Regulation." Bell Journal of Economics and Management Science, Vol. 5. Pilat, D and A. Wölfl (2005). "Measuring the interaction between manufacturing and services." OECD STI Working Paper 5, May. Salmi, J. (2003). "Student Loans in an International Perspective: The World Bank Experience." LCSHD paper series, no. 44, World Bank. Shitundu, J. (2006). "A Study on labor migration data and statistics in East Africa." Geneva: International Migration Papers, #81. Stigler, G. (1971)." The Theory of Economic Regulation." Bell Journal of Economics and Management Science, Vol. 2. Trolliet, C. and J. Hegarty. (2003). "Regulatory Reform and Trade Liberalization in Accountancy Services." Domestic Regulation& Services Trade Liberalization, edited by Mattoo, A. and P. Sauve, World Bank and Oxford University Press, 2003. World Bank (2001). "Report on the Observance of Standards and Codes: Kenya." Washington DC: The World Bank. 151 World Bank (2005a). "Report on the Observance of Standards and Codes: Tanzania." Washington DC: The World Bank. World Bank (2005b). "Report on the Observance of Standards and Codes: Republic of Uganda." Washington DC: The World Bank. World Bank (2008a). "Differentiation and Articulation in Tertiary Education Systems: A Study of Twelve African Countries." Washington, DC: The World Bank. World Bank (2008b). "Report on the Observance of Standards and Codes: Republic of Rwanda." Washington DC: The World Bank. 152