Fresh quest for investors in top-priority sectors

Investors are keenly awaiting a new national investment code after government tabled before parliament a draft law that would eventually replace the existing legislation which critics say does not adequately cater for the specific realities in the country's strategic sectors.
An official at RDB guides a client on how to register a business online. (John Mbanda)
An official at RDB guides a client on how to register a business online. (John Mbanda)

Investors are keenly awaiting a new national investment code after government tabled before parliament a draft law that would eventually replace the existing legislation which critics say does not adequately cater for the specific realities in the country’s strategic sectors. Notably, the Bill, once enacted into law, is expected to extend generous incentives only to investors in priority sectors as opposed to the current blanket regime.

For the last two weeks, Members of the Chamber of Deputies’ Standing Committee on Economy and Trade have been debating the draft Investment Code, which officials say seeks to further facilitate investors in the country.

Once enacted into law, the new legislation will replace the existing code which critics say does not adequately respond to the particular needs and realities of the economy as it gives a blanket consideration for all sectors.

The draft law, officials say, was conceived in a bid to avail investment incentives to help shore up investments in priority sectors, including energy, ICT, transport and logistics, improved agriculture, tourism, manufacturing, business process outsourcing, and hospitality.

The legislation will particularly provide for a 50 per cent reduction in preferential corporate tax for investments in the priority sector – up from the current 30 per cent.

The new law will also provide clearly defined tax holidays of up to seven years depending on which sector one has invested in and how much is involved.

Speaking to The New Times on Tuesday, Louise Kanyonga, the Head of Investment Promotion at Rwanda Development Board (RDB), said the government was not out to extend incentives to just anyone but was rather focusing on the sectors that are highly critical to making Rwanda a private sector-led economy by 2020.

“We are not taking a blanket approach; we are promoting strategic sectors that will get us where we aspire to be. We hope that promoting private sector investment will cut across other sectors, hence conclusive economic development,” said Kanyonga.

Article 15 of the draft code mandates RDB to facilitate the provision of fiscal and non-fiscal incentives to investors and aftercare services to investors from the time of registration to operational stage, among others.

Kanyonga says one of the biggest issues Rwanda’s private sector faces is balance of trade. “We are importing far much more than we are exporting and that is simply not a sustainable situation. So, one of the incentives is towards export promotion,” she said.

According to figures, in 2013, Rwanda registered a total of 153 new investment projects generating an estimated US$1.3 billion, while 90 local investors were registered, twice more than the number of foreign investors.

The proposed investment code also seeks to encourage incentives toward investment projects that will improve the quality and quantity of exports from Rwanda, according to Kanyonga, also the Registrar General at RDB.

The new code will also particularly see government slash corporate income tax for those investing in the energy sector from 30 per cent to 15 per cent.

Rwanda is regarded as one of the most generous countries for investors with figures indicating that the government was probably losing billions in tax holidays.

A report released in 2011 by the Institute of Policy Analysis and Research (Ipar) and ActionAid International indicated that in 2008 and 2009, the country lost over $234 million in tax incentives.

The report concluded that government was “too generous”. “Rwanda was generous at giving investment incentives without having targeted the right groups that would bring rightful investment returns,” the report said in part.

Dr Dickson Malunda, a development economist and a senior researcher at Ipar, welcomed the ongoing amendments to the current law, saying that the draft code provides for incentives that are targeted unlike the current legislation that had no “significant returns” to the economy.

“It was as if anyone who had a business idea that’s registered at RDB would simply get incentives. This had negative implications to the economy. For investment to pay returns, they should be targeting specific priority sectors,” he said.

Malunda, one of the authors of the Ipar report, added: “To attain self-reliance, as national vision, no money should be foregone. Not all incentives are bad, we simply need to prioritise and make sure we have enough revenue that would accelerate national development.”

Antoine Manzi, the director of advocacy at the Private Sector Federation, says that the current law was unsuitable because it gives equal incentives to all sectors which could have frustrated investors in such priority sectors as mining and construction.

“Some key sectors like mining and construction incurred huge losses due to policies that are not favourable enough such as long term financing and taxation, yet they are considered big GDP contributors in the country,” he said.

Manzi added: “Incentives in the current investment law weren’t streamlined and fair. We hope that the new law will adequately address these issues.”

Kanyonga agrees with this assessment and is optimistic that the draft investment code will make a difference. She said that the main problem with the current law is that it provides for too many “general incentives”.

“We are trying to put more focus on what we consider as strategic investments that are linked to our targets that will help us fast track our development,” she said.

Kanyonga said that for Rwanda to become a middle income, knowledge-based economy, as envisioned in the Vision 2020 blueprint, there should be a structural shift in the economy. “That means moving from agriculture-based economy to a service-based economy, by increasing contribution of service industry to the GDP to above 55 per cent.”

“That’s why there are lots of new financial concepts that are being introduced like private equity, venture capital, mutual funds, among others, to try and incentivise movements into the financial services sectors,” she added.

The RDB official said that energy sector was the biggest beneficiary under the proposed code, owing to its ability to power the economy. “The industries we need to see coming up cannot survive without energy. Energy will continue to be a top priority.”

Defending the bill before the parliamentary committee, Francis Gatare, the CEO of RDB, said the proposed incentives will, among others, help government to achieve its energy target of at least 563MW on the national grid by 2017.

The country currently produces 155MW, with several major projects, including for energy imports, in the pipeline.

The law will also provide for tax holidays of up to seven years of huge investments, ranging from $50 million initial investment, in defined priority sectors.

Energy projects that will generate at least 25MW will have seven years of taxi holiday, among other incentives while micro finance institutions are also expected to benefit from a five-year tax holiday, according to the draft law.

“We are hopeful that Parliament will approve these new amendments as soon as possible. All stakeholders, including the private sector, have been extensively consulted to ensure that this law responds to the reality on the ground,” said Kanyonga.

Connie Bwiza, the chairperson of the Committee on Economy and Trade, said an investment-friendly law is vital for the attainment of the national development goals. Her comments were echoed by MP Emmanuel Mudidi. “All we are looking at is having a law that is comprehensive enough and investment-friendly.”

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