Reform and Regional Integration of Professional Services in East Africa

Transcription

1 Report No 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 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized

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3 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 The Market for Professionals in East Africa The Market for Professional Services in East Africa Policy Challenges: Education, Domestic Regulation, Explicit Trade Barriers and Labor Mobility Restrictions CHAPTER 3. MARKETS FOR PROFESSIONALS IN EAST AFRICA Availability of Professionals in East Africa Are there Incentives to Acquire Professional Degrees and Skills in East Africa? Are Students Able to Acquire the Desired Professional Degrees and Skills in East Africa? Are there Incentives to Work as Professionals in East Africa? CHAPTER 4. MARKETS FOR PROFESSIONAL SERVICES IN EAST AFRICA Demand for Professional Services in East Africa Supply of Professional Services in East Africa CHAPTER 5. POLICY AFFECTING PROFESSIONAL SERVICES IN EAST AFRICA: EDUCATION, REGULATION, TRADE, AND LABOR MOBILITY Regulatory Measures, Explicit Trade Barriers and Education Requirements Affecting Professional Services in East Africa Labor Mobility in East Africa Indicators of Regulatory Conditions and Services Restrictiveness Indices in Professional Services in East Africa: A Comparative Analysis How much do Education Requirements, Domestic Regulations, Trade Barriers, and Immigration Restrictions Impede Professionals and Firms from Entering Markets in East Africa? How much do Conduct Regulations Limit the Ability of Professionals and Firms to Operate in Professional Services Markets in East Africa? CHAPTER 6. RECOMMENDATIONS FOR POLICY ACTION Policy Actions at the National Level Policy Actions at the International Level

4 ANNEXES Annex 1. Measuring the Interdependence and Interconnectedness of Business Services with Other Sectors of the Economy Annex 2: Note on the Quantitative Assessment of Regional and Wider Liberalization of Professional Services in Kenya and Tanzania Annex 3: Business Surveys of Services Users and Providers Annex 4: Users Evaluations of the Usefulness of Professional Services Annex 5: Regulatory and Market Structure Surveys Annex 6: Survey on Costs and Procedures to Become a Professional Annex 7: Sectoral Profile of Clients of Accounting Services Providers in East Africa Annex 8: Indicators of Regulatory Conditions in Professional Services Annex 9: Services Trade Policy Restrictiveness Indices REFERENCES LIST OF BOXES Box 2.1: Regulatory Heterogeneity and Regional Integration Box 6.1: Student Loan Programs Box 6.2: Tuning Educational Structures Box 6.3: Subject Specific Competences in Civil Engineering Tuning Latin America Box 6.4: Paralegals in Malawi Box 6.5: The Structured Engineers Apprenticeship Program in Tanzania Box 6.6: Negotiating Mutual Recognition Frameworks: 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 Figure 2.1: Explaining Skill Shortages and Skill Mismatches in Professional Services Figure 2.2: Explaining Underdevelopment of Professional Services in Africa Figure 3.1 Number of Accountants per 100,000 Inhabitants Figure 3.2: Number of Lawyers for 100,000 Inhabitants Figure 3.3: Availability of Scientists and Engineers Figure 3.4: Engineering Professionals in Tanzania... 27

5 Figure 3.5: Distribution of Accounting Professionals in Tanzania, Figure 3.6: Senior Staff by Gender Figure 3.7: Kenyan Professions and Median Annual Salaries (US$) Figure 3.8: Monthly Wages of Accounting and Engineering Professionals Figure 3.9: Monthly Wages of Lawyers and Legal Professionals Figure 3.10: Number of Professionals and Professional Density (per 100,000 Inhabitants) Figure 3.11: Panel A, B & C: Median Monthly Wages in US$, Accountants Figure 3.12: Quality of Math and Science Education Figure 4.1: External Usage of Professional Services in East Africa Figure 4.2: Size and Ownership Profile of Clients of Small Providers of Accounting Figure 4.3: Sources of Revenue by Type of Service for Providers of Accounting Figure 4.4: Usage of Accounting and Auditing Services by East African Firms Figure 4.5: Size and Ownership Profile of Clients of Small Providers of Legal Figure 4.6: Sources of Revenue by Type of Service for Providers of Legal Figure 4.7: Usage of Legal Services by East African Firms Figure 4.8: Size and Ownership Profile of Clients of Small Providers of Engineering Figure 4.9: Sources of Revenue for Providers of Engineering Services in East Africa by Type of Service Figure 4.10: Usage of Engineering Services by East African Firms Figure 4.11: Usage of Professional Services in East Africa: Cross-Country Comparisons Figure 4.12: Number of Professional Firms per 100,000 Inhabitants Figure 5.1: Regulation in Professional Services, Overall Indicator Figure 5.2: Entry Regulations in Professional Services Figure 5.3: Conduct Regulation in Professional Services Figure 5.4: Overall STRI in Professional Services Figure 5.5: STRI in Professional Services by Mode of Supply Figure 5.5: STRI in Professional Services by Mode of Supply (cont d) Figure 5.6: Education Requirements in Professional Services Figure 5.7: Restrictiveness of Regulation in East Africa: Top Constraints by Sector 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 Table 3.2: Kenyan Accounting Professionals in Kenya and Abroad, Table 3.3: Median Annual Wages for Secondary and University/Post-Graduate Table 3.4: Tertiary Education Systems in East Africa Table 3.5: Comparative Statistics of Students Enrolled in Legal and Engineering Table 3.6: Comparative Growth Rate of Professionals in Tanzania Table 3.7: Cost of Obtaining Professional Degrees and Internal Rates of Return on Professional Education in East Africa... 41

6 Table 3.8: Emigration Rates of African Individuals by Skill Level Table 4.1: Percentage of Professionals Employed by Top 10 Firms in the Accounting and Table 4.2: Civil Work Contracts by Major Sector and Supplier region in East Africa, Table 4.3: Percentage of Firms that Export Professional Services Table 5.1: Entry Regulation, Domestic Providers: Academic and Professional Qualifications for Accountants and Certified Accountants Table 5.2: Entry Regulation, Domestic Providers: Academic and Professional Qualifications for Accounting Technicians Table 5.3: Entry Regulation, Domestic Providers: Standards in Accounting Services Table 5.4: Entry Regulation, Foreign Providers of Accounting Services Table 5.5: Conduct Regulation and Discriminatory Measures in Accounting Services Table 5.6: Entry Regulation, Domestic Providers: Academic and Professional Qualifications for Lawyers Table 5.7: Entry Regulation, Domestic Providers: Academic and Professional Qualifications for Paralegals Table 5.8: Entry Regulation, Domestic Providers: Standards in Legal Services Table 5.9: Entry Regulation, Foreign Providers of Legal Services Table 5.10: Conduct Regulation and Discriminatory Measures in Legal Services Table 5.11: Entry Regulation, Domestic Providers: Academic and Professional Qualifications for Engineers Table 5.12: Entry Regulation, Domestic Providers: Academic and Professional Qualifications for Engineering Technicians Table 5.13: Entry Regulation, Domestic Providers: Standards in Engineering Services Table 5.14: Entry Regulation, Foreign Providers of Engineering Services Table 5.15: Conduct Regulation and Discriminatory Measures in Engineering Service Table 5.16: Labor Migration Policies in East Africa Table 5.17: Work Permits for Skilled Foreigners in East Africa Table 5.18: Categories of Work Permits in Uganda Table 5.19: Categories of Work Permits in Rwanda... 89

7 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

8 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 , 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

9 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 Zambia Uganda Malawi Tanzania 8 Kenya 14 South Africa 48 Mauritius Panel B: Number of Lawyers per 100,000 inhabitants Malawi Tanzania Mozambique Uganda Rwanda Zambia Botswana 12 Kenya 19 South Africa 39 Mauritius Source: World Bank Survey of Providers of Professional Services in East Africa, 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

10 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 socalled 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 (1 19 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, % Accounting Legal Engineering External Usage Internal Usage Source: World Bank Survey of Users of Professional Services in East Africa, 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

11 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

12 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 6 Panel A: Accounting Conduct regulation Panel B: Legal Conduct regulation vi

13 Panel C: Engineering - Conduct regulation Source: OECD Regulatory Database on Professional Services and World Bank Regulatory Surveys, 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

14 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, 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 Source: Gootiz and Mattoo (2009). viii

15 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. Foreignlicensed 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

16 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

17 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

18 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

19 - 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

20 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

21 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 secondbest 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 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

22 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 middlelevel. 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

23 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

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25 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

26 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 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 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 business services in GDP 2007 Share of renting and business services in GDP 2007 Average annual growth rate of business services outputs Kenya Rwanda Tanzania 9.5 n.a Uganda * Notes: * indicates that the statistics were calculated for the period 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 input output 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

27 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 Forward linkages Backward linkages Source: Authors calculations based on GTAP 7 data Figure 1.2: Forward and backward linkages in Uganda 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 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

28 Figure 1.3: Forward and Backward Concentration in Tanzania Forward Concentration Backward Concentration Source: Authors calculations based on GTAP 7 data Figure 1.4: Forward and Backward Concentration in Uganda Forward Concentration Backward Concentration Source: Authors calculations using GTAP 7 data 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 models 3 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

29 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 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) Domestic & Discriminatory Services Domestic Services Unilateral Discrimin atory Services EU Discrimi natory Services Africa Discrimi natory Services Africa EU Discrimi natory Services Rest of Work Discrimi natory Services Scenario definition 50% reduction of discriminatory barriers on EU services firms Yes No Yes Yes No Yes No 50% reduction of discriminatory barriers on Yes No Yes African services firms No Yes Yes No 50% reduction of discriminatory barriers on Yes No Yes ROW services firms No No No Yes 50% reduction of discriminatory barriers for Yes all services firms Yes No No No No No Aggregate real income changes for Kenya as a percentage of consumption as a percentage of GDP Aggregate real income changes for Tanzania as a percentage of consumption as a percentage of GDP 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

30 in the table), the gains would increase by seven times for Kenya and twelve times for Tanzania 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 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 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 productivity 6 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 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Africa Source: World Bank Survey of Users of Professional Services in East Africa, 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

31 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 (0.742) Acct. Services Usage * Large Dummy (0.362) Legal Services Usage * Small Dummy 0.786*** (0.290) Legal Services Usage * Medium Dummy (0.588) Legal Services Usage * Large Dummy (0.697) Eng. Services Usage * Small Dummy (0.282) Eng. Services Usage * Medium Dummy 1.182** (0.530) Eng. Services Usage * Large Dummy (0.666) Size Dummies Yes Yes Yes Yes Yes Yes Observations 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, As for legal services, advice on taxation and assistance in solving disputes with clients allows firms to better exploit business opportunities 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 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) 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

32 examined countries remain underdeveloped, with performance indicators below the averages of countries at a similar level of development 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 Strength of auditing & reporting system S. Africa 6 Mauritius Malawi 5 Kenya Botswana Tanzania 4 Uganda Mozambique Madagascar GDP per capita in 2008 (1,000 of US$) linear fitted value 95% confidence interval Source: Global Competitiveness Report , World Economic Forum. 7 Note that the Global Competitiveness Report does not collect data on Rwanda; hence that country is excluded from Figures

33 Figure 1.7: Availability of Scientists and Engineers 7 Availability of scientist & engineers Kenya Madagascar Uganda Malawi Tanzania Mozambique S. Africa Mauritius Botswana GDP per capita in 2008 (1,000 of US$) linear fitted value 95% confidence interval Source: Global Competitiveness Report , World Economic Forum. Figure 1.8: Property Rights Property rights S. Africa Mauritius Botswana Malawi Tanzania Uganda Madagascar Kenya Mozambique GDP per capita in 2008 (1,000 of US$) linear fitted value 95% confidence interval Source: Global Competitiveness Report , World Economic Forum. 9

34 Figure 1.9: Efficiency of Legal Framework for Disputes 9 Efficiency of legal framework for disputes Malawi Tanzania Uganda Madagascar Mozambique S. Africa Mauritius Botswana Kenya GDP per capita in 2008 (1,000 of US$) linear fitted value 95% confidence interval Source: Global Competitiveness Report , World Economic Forum 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 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

35 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 services 9 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

36 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 nonexistent 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 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 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

37 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 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 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

38 Figure 2.1: Explaining Skill Shortages and Skill Mismatches in Professional Services 1. Are prices for professional services high (large wage premia)? no yes 2. Is there an incentive to acquire professional degrees/ skills? Policy challenges: Education policies Immigration policies no yes Skills are public good Labor market regulations (ceiling on wages) Immigration of professionals covering gaps Monopsony power of employers Lower premia than in oth. sectors requiring tertiary education Insufficient information on benefit of skill acquisition Liquidity constraints 3. Are students able to acquire desired professional degree/ skills? no Liquidity constraints Poor secondary educ. No educ institution to offer degree (for ex.middle level yes 4. Is there an incentive to work as a professional? no yes Higher returns abroad Higher returns in other activities Higher returns in informal sector High risks /liabilities Absence of market relevant skills as inadequate domestic educational institutions and practical training, no access to foreign educ. Outcome 1 Outcome 2 Outcome 3 Outcome 4 Outcome 5 Skill shortages Shortage as students get different degrees Economy wide skill mismatches Skill shortages as professionals go abroad, go/return to civil service/other formal sectors/rent seeking activ. Sector specific, task level skill mismatches 14

39 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 provision of professional services? (Is there a pool of potential entrants?) Domestic regulation Trade policies 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 regulation Public good under consumption no yes Pref for alternative dispute resolution, no property rights, no contract enforcement Legal Limited/no monitoring of compliance with financial reporting standards Skill shortages Skill mismatches Sunk costs due to Educ, qualific standards Licensing 5. Are incumbents able to remain in operation? 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) no yes Outcome 1 Outcome 2 Outcome 3 Outcome 4 Outcome 5 Outcome 6 No demand (for certain segments) or slowly emerging demand Unsatisfied demand as no suppliers Unsatisfied demand as no suppliers Unsatisfied demand as prices too high Low quality services and/or high prices for all/ certain segments Demand but low quality of service and prices remain too high for SMEs (skill shortage/mismatch) (no entry of firms/professionals) (concentration/ fragmentation) (exit of firms) (incumbents cater to certain consumers) (export more profitable) 15

40 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 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 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 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 While public interest theories claim that many of these regulatory measures are justified to address market failures such as information asymmetries, externalities, lack 16

41 of economies of scale, and equity concerns private interest theories have been critical of many aspects of professional regulation and, especially, of self-regulation 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 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 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 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 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 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 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

42 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 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 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 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 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 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 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

43 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 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

44 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 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) 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 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

45 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 Zambia Uganda Malawi Tanzania Spain Kenya Germany France Botswana Austria Netherlands Sweden South Africa Finland Ireland Luxemburg UK Mauritius Denmark Italy 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

46 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 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 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 The main objective was to review existing statistics to establish the demand and supply of accounting personnel in both private and public sectors. 22

47 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) Accounting professionals are scarce in Rwanda, and the country did not have a professional accountancy body until August The total number of qualified accountants in Rwanda has grown from 14 in 2004 to about 89 at the end of 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 countries 15 to practice privately, but they do not have to be registered to practice in public office 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

48 Figure 3.2: Number of Lawyers for 100,000 Inhabitants Malawi Tanzania Mozambique Uganda Rwanda Zambia Azerbaijan Botswana Kenya Armenia Moldova Bosnia and Herzegovina Finland Ireland Latvia South Africa Russian Federation Lithuania Estonia Mauritius Sweden Slovenia Georgia UK Poland Croatia France Montenegro Turkey Slovakia Czech Republic Macedonia Austria Denmark Serbia Netherlands Romania Hungary Switzerland Norway Belgium Bulgaria Iceland Germany Malta Cyprus Portugal Spain Luxembourg Italy Greece Source: World Bank Regulatory Surveys in Eastern and Southern Africa, and CEPEJ (2008) The Kenyan legal profession consisted of about 7,100 qualified lawyers in 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 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 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

49 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 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 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 A total of 1,131 fully paid practicing members were registered with the Uganda Law Society (ULS) at the end of ULS s membership has steadily increased over the last few years, starting from 614 in 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 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 There remains a huge gap to be filled, especially in the area of criminal law 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

50 registered professionals represents only a small fraction of those providing engineering services 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 Source: Global Competitiveness Report , World Economic Forum. 26

51 3.22 The Engineers Registration Board (ERB) of Kenya reported 1,176 registered engineers at the end of 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 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 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 The Engineering Registration Board (ERB) in Tanzania reported a total of 8,408 registered engineers at the beginning of 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. Sectoral distribution of engineering professionals Figure 3.4: Engineering Professionals in Tanzania Civil 45% Electrical 18% Mechanical 17% Textile 0.1% Agricultural & irrigation 2% IT 1% Aeronautical 0.1% Marine 0.4% Mining and mineral processing 3% Chemical engineers 5% Environmental 4% Electronics and telecommunica tion 5% Source: Engineering Registration Board Tanzania,

52 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 According to the Uganda Institute of Professional Engineers (UIPE), as of 2008 the total number of engineers 16 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 However, it is estimated that a significant number of engineers are not registered with either of these two bodies 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 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 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 Source: NBAA (2009) Skills mismatches Certified public accountants in public practice 10% Temporary (foreign) certified public accountants 5% Certified public accountants 21% Approved accountants 18% Graduate accountants 40% Accounting technicians 6% 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

53 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 (%) Most senior Second most senior Most senior Second most senior Most senior Second most senior Most senior Second most senior Kenya Rwanda Tanzania Uganda Male Female Panel B: Legal (%) Most senior Second most senior Most senior Second most senior Most senior Second most senior Most senior Second most senior Kenya Rwanda Tanzania Uganda Male Female 29

54 Panel C: Engineering (%) Most senior Second most senior Most senior Second most senior Most senior Second most senior Most senior Second most senior Kenya Rwanda Tanzania Uganda Male Female Source: World Bank Surveys of Providers of Professional Services in East Africa, 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 Total Number of Professionals Accounting Share of Foreign Professionals Total Number of Professionals Engineering Share of Foreign Professionals Kenya % n.a. n.a. Rwanda % n.a. n.a. Tanzania % % Uganda % n.a. n.a. Source: NBAA, ICPAK, ICPAU, ERB, 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

55 Table 3.2: Kenyan Accounting Professionals in Kenya and Abroad, 2007 EMPLOYMENT KENYA UGANDA TANZANIA OVERSEAS TOTAL SECTOR Agriculture Aviation Banking & Finance Commerce, Retail and Wholesale Consultancy Education & Training Hotel Information Technology Insurance Manufacturing Medical Services Non Profit Sector Other Service Practice Public Sector Self Employed Not specified TOTAL 4, ,147 Source: ICPAK, 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 Degree University/Postgraduate Entry-level Professional Senior Professional Uganda 1,035 2,035 3,549 5,126 Tanzania 1, ,304 6,796 Kenya 1,837 7,185 6,206 10,602 Rwanda 466 1, 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,

56 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 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 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 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, 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 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

57 Figure 3.7: Kenyan Professions and Median Annual Salaries (US$) 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 - Source: PricewaterhouseCoopers, Wages of professionals in East Africa: International comparisons 3.42 Using data from the World Bank Surveys of Professional Services Providers in East Africa and information from the International Average Salary Income Database provided by World Salaries, 17 we can compare the wages of accountants and engineers in East Africa 18 with the wages of professionals in 28 developing and developed countries (figures 3.8 panels A, B, C and D) As expected, wages of East African accounting and engineering professionals are below those earned by similar professionals in developed countries. However, they are comparable to wages earned by their counterparts in many other developing or transition economies (figures 3.8 Panels A and B). After adjusting the East African wages for differences in the cost of living, 19 earnings of East African accountants and engineers exceed those of similar professionals in many developed and developing countries, suggesting that the returns to the corresponding professional degrees in East Africa are substantial (figures 3.8 panels C and D) This reflects the scarcity of accounting and engineering professionals in the examined African countries. The more severe scarcity of engineers, as compared to that of accountants in all three examined countries, is reflected by the earnings differential between the different types of professionals (compare panel A with panel D of figure 3.8 and panel B with panel C of figure 3.8). 17 The data is available at and is collected directly from government agencies across 28 different developing and developed countries. The average salary data is converted into constant 2005 US$ 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

58 Figure 3.8: Monthly Wages of Accounting and Engineering Professionals Panel A: Monthly Wages - Accountants Panel C: Monthly Wages - Engineers Panel B: Monthly Wages PPP - Accountants

59 Figure3.8: Monthly Wages of Accounting and Engineering Professionals (contd.) Panel D: Monthly Wages PPP - Engineers Source: World Salaries and World Bank Survey of Providers of Professional Services in East Africa, 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 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 Africa 20 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

60 Figure 3.9: Monthly Wages of Lawyers and Legal Professionals Source: European Commission for the Efficiency of Justice, 2008, and World Bank Survey of Providers of Professional Services in East Africa, 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 Rwanda Uganda Tanzania Legal Kenya Tanzania Uganda Rwanda Accountancy Source: World Bank Regulatory Surveys in East Africa, 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

61 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 Panel A Accountant Entry-level Accountant Senior Accountant Partner 0 Uganda Tanzania Kenya Panel B Lawyer Entry-level Lawyer Senior Lawyer Partner 0 Uganda Tanzania Kenya Panel C Engineer Entry-level Engineer Senior Engineer Partner 0 Uganda Tanzania Kenya Source: World Bank Surveys of Providers of Professional Services in East Africa,

62 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 inhabitants Tertiary gross enrollment ratio 2.6% 2.0% 0.9% 2.6% Public universities Number Enrollments 90,000 9,491 26,374 55,763 Private universities Number Enrollments 9,000 13,538 5,275 22,344 Public polytechnics and professional institutes Number Private polytechnics and professional institutes Enrollments 22,018 5,000 14,415 n.a. Number Enrollments n.a. 0 n.a. Source: Differentiation and Articulation in Tertiary Education Systems, World Bank (2008) and MEAC Rwanda (2010) 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 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 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

63 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 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 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 growth rate Students enrolled in legal studies % Students enrolled in engineering 4,529 6, % studies ((polytechnics) 2 Students enrolled in engineering studies (universities) 3 2,682 5, % 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 Table 3.7 reveals the growth rates of various professionals in Tanzania between 2004 and 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 Average growth rate Accountants 1,135 3,121 29% Engineers 5,780 8,408 10% Lawyers % Source: NBAA (2009), ERB (2009), Tanganyika Law Society (2009) 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

64 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 Madagascar Malawi Mozambique Kenya Uganda Tanzania Mauritius Botswana S. Africa GDP per capita in 2008 (1,000 of US$) linear fitted value 95% confidence interval Source: Global Competitiveness Report , World Economic Forum 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 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

65 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 Profession Average Costs per Years of Total Costs Net Present Value Internal Rate Year of Educ. Education (USD) of Earnings (USD) of Return (%) (USD) Kenya Lawyer (low) % Lawyer (high) % Accountant (low) % Accountant (high) % Engineer (low) % Engineer (high) % Rwanda Lawyer Accountant Engineer (low) Engineer (high) Uganda Lawyer (low) % Lawyer (high) % Accountant (low) % Accountant (high) % Engineer (low) % Engineer (high) % Tanzania Lawyer % Accountant (low) % Accountant (high) % Engineer % Source: World Bank Surveys on Costs of Obtaining Professional Degrees and Qualifications in East Africa, 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 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

66 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 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 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 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, 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) 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 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) 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,

67 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 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 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 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 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

68 modeling, the results given below should be taken in relative terms, as indications of orders of magnitude, rather than concrete and absolute values 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 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 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 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) 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

69 Table 3.8: Emigration Rates of African Individuals by Skill Level Emigration Rates in OECD countries in 2000 Tert. Second. Primary Educat Educat. Educat Number of Emigrants in OECD Countries in 2000 Tert. Second. Primary Educat Educat. Educat Number of Emigrants in South Africa in 2001 Tert. Second. Primary 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, Tanzania 12.1% 1.3% 0.1% 33,125 15,912 15, Uganda 36.0% 3.1% 0.3% 35,921 23,164 19, Ethiopia 9.8% 1.0% 0.1% 52,538 25,883 27, 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, , 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, ,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, ,034 Namibia 3.4% 0.1% 0.1% ,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 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 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

70 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 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 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 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

71 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) 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 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

72 Figure 4.1: External Usage of Professional Services in East Africa Panel A: Accounting Service External Usage Percentage of firms using the service Kenya Rwanda Tanzania Uganda 1-19 Employees Employees Above 99 Employees Percentage of firms using the service Panel B: Legal services External usage Kenya Rwanda Tanzania Uganda 1-19 Employees Employees Above 99 Employees Panel C: Engineering services External usage Percentage of firms using the service Kenya Rwanda Tanzania Uganda 1-19 Employees Employees Above 99 Employees Source: World Bank Surveys of Users of Professional Services in East Africa, 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

73 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 percent of the industry s client base, up from 40 percent in And these global affiliations are also forcing multinational client firms to switch from the Big Four to midsized companies that offer quality services at lower prices 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 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 middlesized 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 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 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) The list of potential clients that the surveyed accounting and auditing providers had to consider was nonfinancial sector, public sector, and banking and financial institutions. 49

74 Figure 4.2: Size and Ownership Profile of Clients of Small Providers of Accounting Services in East Africa Kenya Accounting Providers (5-19 employees) Tanzania Accounting Providers (5-19 empoloyees) Total answers (40) 100% Total answers (30) 100% Clients (users) Clients type Multinationals Large domestic private companies Medium domestic private companies Small domestic private companies Micro firms & individuals Government or government Domestic state owned 8% 20% 23% 18% 23% 5% 5% Multinationals Large domestic private companies Medium domestic private companies Small domestic private companies Micro firms & individuals Government or government Domestic state owned Others 10% 23% 13% 10% 33% 10% Uganda Accounting Providers (5-19 empoloyees) Rwanda Accounting Providers (5-19 empoloyees) Total answers (30) 100% Total answers (30) 100% Clients type Clients (users) Multinationals Large domestic private companies Medium domestic private companies Small domestic private companies Micro firms & individuals Government or government Domestic state owned Others 13% 27% 20% 7% 13% 3% 10% 7% Multinationals Large domestic private companies Medium domestic private companies Small domestic private companies Micro firms & individuals Government or government Domestic state owned 10% 10% 13% 27% 23% 13% Source: World Bank Surveys of Providers of Professional Services in East Africa, 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 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) 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

75 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 Accounting Accounting 0 30 Financial auditing Financial auditing 0 30 Tax advice Tax advice Management consulting Management consulting 0 20 Others Others >30 percent percent percent 1-10 percent >30 percent percent percent 1-10 percent Tanzania - Accounting Services providers Uganda - Accouting Services Providers Accounting Accounting 32 Financial auditing Financial auditing 11 Tax advice Tax advice 47 Management consulting Management consulting Others Others >30 percent percent percent 1-10 percent >30 percent percent percent 1-10 percent Source: World Bank Surveys of Providers of Professional Services in East Africa, 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

76 Figure 4.4: Usage of Accounting and Auditing Services by East African Firms Employees Employees Above 99 Employees 1-19 Employees Employees Above 99 Employees 1-19 Employees Employees Above 99 Employees 1-19 Employees Employees Above 99 Employees Kenya Rwanda Tanzania Uganda External Usage Internal Usage Source: World Bank Surveys of Users of Professional Services in East Africa, 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 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 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

77 and professional associations suggested that the market share of the largest ten firms is small 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 5 19 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 (52) 100% Total answers (42) 100% Clients (usage) Clients (usage) Multinationals Large domestic private companies Medium domestic private companies Small domestic private companies Micro firms & individuals Government or government Domestic state owned 15% 21% 15% 13% 17% 10% 8% Multinationals Large domestic private companies Medium domestic private companies Small domestic private companies Micro firms & individuals Government or government Domestic state owned Others 17% 10 10% 12% 26% 17% 10% Uganda Legal Poviders (5-19 employees) Rwanda -Legal Providers (5-19 employees) Total answers (18) 100% Total answers (4) 100% Clients Multinationals (users) Large domestic private companies Medium domestic private companies Small domestic private companies Micro firms & individuals Government or government Domestic state owned Others 17% 11% 11% 17% 28% 17% Clients Multinationals (users) Large domestic private companies Medium domestic private companies Small domestic private companies Micro firms & individuals Government or government Domestic state owned 25% 75% Source: World Bank Surveys of Providers of Professional Services in East Africa, 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

78 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) 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 Court rep. Advice on dom. law Title transfer Business advisory Tax advice Rep. before admin. agencies Adive on foreign law Advice on int. law Insolvency practice Patent law Court rep. Advice on dom. law Title transfer Business advisory Tax advice Rep. before admin. agencies Adive on foreign law Advice on int. law Insolvency practice Patent law >30 percent percent percent 1-10 percent >30 percent percent percent 1-10 percent Tanzania - Legal Services Providers Uganda - Legal Services Providers Court rep. Advice on dom. law Title transfer Business advisory Tax advice Rep. before admin. agencies Adive on foreign law Advice on int. law Insolvency practice Patent law Court rep. Advice on dom. law Title transfer Business advisory Tax advice Rep. before admin. agencies Adive on foreign law Advice on int. law Insolvency practice Patent law >30 percent percent percent 1-10 percent >30 percent percent percent 1-10 percent Source: World Bank Surveys of Providers of Professional Services in East Africa, 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