Developing Professional Services in Sub- Saharan Africa through Regional Integration: Time for Action

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1 Developing Professional Services in Sub- Saharan Africa through Regional Integration: Time for Action PREM Week Trade in Services Washington DC, 25 April 2011

2 Outline Professional services matter for development but Sub- Saharan Africa experiences skills shortages and skills mismatches and the markets for professional services remain underdeveloped One reason is the fragmentation of regional markets by restrictive trade and migration policies and by regulatory heterogeneity Policy action is required in four areas education, regulation, trade policy and labor mobility at the national and the international levels Regional agreements and MRAs attempt to eliminate barriers to trade and address regulatory differences How can the World Bank provide support Regional regulatory knowledge platform

3 Professional services matter for growth The sector is very dynamic in most countries: for example, business services grew at 21% per year in Zambia and 18% per year in Uganda in Important inputs for other sectors that are key for regional integration in Eastern and Southern Africa Focus on accounting, engineering and legal services Accounting and legal services can help reduce transaction costs Engineering services contribute to the development of infrastructure and are essential to the productivity of economic activities Professional services can become an important source for export diversification in Sub-Saharan Africa

4 Professional services matter Higher labor productivity (sales/employees) is associated with greater usage of professional services in all East African countries, especially for small firms 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Africa Productivity of Users and of Non-Users of Professional Services Average across firms in East Africa

5 Skills shortages, skills mismatches and underdevelopment of professional services in East Africa Skills shortages Most severe shortages of engineering and accounting professionals Shortages of middle-level professionals (such as technicians or paralegals) and shortages of experienced professionals Skills mismatches Jobless professionals despite scarcity Underdevelopment of professional services markets Professional services are less efficient, more costly and less widely available than in many other comparable countries (for example, poor quality of auditing and reporting systems, poor enforcement of property rights)

6 Potential for regional services trade is significant Availability of professionals varies across countries and sectors Panel A: Number of Accountants per 100,000 inhabitants Panel B: Number of Lawyers per 100,000 inhabitants Rwanda 0.9 Malawi 2 Zambia Uganda 1 2 Tanzania Mozambique Uganda Malawi 3 Rwanda 5 Tanzania 8 Zambia 6 Kenya South Africa Botswana Kenya South Africa Mauritius 91 Mauritius

7 but fragmented regional markets for professional services in East Africa Foreign accountants are less than 3% of total in Malawi and Zambia and less than 10% of total in Kenya, Tanzania and Uganda but 60% in Rwanda Foreign engineers are less than 5% of total in Malawi and Mozambique and 6% of total in Tanzania Virtually no foreign professionals in legal services in any of the Eastern and Southern African countries Affiliates of Big Four dominate accounting and auditing services Limited presence of foreign firms in engineering services Complete absence of foreign firms in legal services World Bank-supported civil works procurement contracts show lack of integration of EAC market for engineering services Virtually no intra-east African foreign firm participation in these contracts Exceptions: Kenyan firms participate in some Tanzanian and Ugandan projects and Ugandan firms in some Rwandan projects

8 Regional integration could help Gains from trade based on differences in endowments Larger regional market is able to attract greater domestic and foreign investment Allows providers to exploit economies of scale and produce a wider variety of services - in professional services and education and enhance competition between services providers Allows scale economies in regulation, particularly where national agencies face technical skills or capacity constraints. Reciprocal liberalization at regional level may be technically more feasible and politically more acceptable when impediments arise from differences in regulatory requirements

9 Liberalizing services trade would facilitate access Typical explicit barriers to trade in professional services Mode 1 (cross-border delivery) Not permitted since commercial presence required to perform most accounting and auditing activities Mode 3 (commercial presence) Mode 4 (presence of natural persons) Foreign ownership restrictions: ownership by non-locally licensed professionals not allowed Restrictions on activities that can be performed by foreign accounting professionals Discretionary limits (labor market tests & econ. needs tests) for foreign-licensed accountants

10 but must be complemented by reform to improve the efficiency of domestic regulation to enhance competition Domestic regulations on entry and operation of professional firms are heavy and can undermine competition despite social goals Entry Regulation Conduct Regulation University degree + 12 months postgraduate course + practical training Bar exam + Continuing education n obligation Price regulation : Binding minimum and maximum prices Advertising is prohibited Compulsory membership in the professional bar Scope of exclusive rights: 9 out of 10 Restrictions on type of corporation Absence of quality control instruments

11 Restrictions on operations hurt professional services providers the example of East Africa

12 and by reform to reduce costs of access to & improve quality of education Covering cost of professional education in Africa is a challenge Median costs are unaffordable for most due to liquidity constraints/ absence of loans even if internal rates of return and skill premia are high Uganda Tanzania Rwanda Kenya Profession Years Total Costs (USD) Lawyer (low/high avg.) 5 16,505 Accountant (low/high avg.) 6 20,506 Engineer (low/high avg.) 4 14,705 Lawyer 6 13,438 Accountant (low/high avg.) 6 24,161 Engineer 10 10,779 Lawyer 10 27,992 Accountant 8 12,786 Engineer (low/high avg.) 6 17,514 Lawyer (low/high avg.) 6 14,096 Accountant (low/high avg.) 5 11,918 Engineer (low/high avg.) 4 11,793

13 National reform could address challenges in the markets for professional services in Africa Relaxing disproportionate entry requirements,e.g. by narrowing the scope of exclusive tasks Eliminating restrictions on competition, e.g. price regulation; advertising prohibitions, restrictions on business organization Reducing costs of access to & improve quality of education, e.g. by developing student loan programs, improving the quality and the capacity of secondary schools especially in maths and science, encouraging vertical and horizontal differentiation of educational institutions as well as collaboration between universities, professional associations, and private sector through internships

14 and regional cooperation could better integrate the market for professional services Removing trade barriers Allowing commercial presence, movement of natural persons ideally on an MFN basis Addressing immigration policies Removing restrictions on free movement of labor, including visa and immigration laws and regulations, and labor policies to allow mobility of business people Increased regional regulatory cooperation Implementing full fledged Mutual Recognition Agreements around appropriate (regional) standards Eliminating fragmentation of regional market for education Regional cooperation to increase recovery of student loan schemes Creation of regional education and training hubs

15 Mutual Recognition Agreements: strong conceptual and empirical support MRA of education, professional qualifications and licensing would eliminate heterogeneity in education and qualification requirements and licensing procedures that is costly and hurts entry of small providers Kox et al. (2004) estimate that EU stock of FDI could increase by 20-35% if regulatory Heterogeneity was reduced as a result of a common services regulation directive

16 Working towards MRAs for qualifications in professional services in Africa Ambitious step in regional liberalization and regulatory cooperation in context of EAC Common Market Protocol: annex on MRAs Accountancy professional bodies of Kenya (ICPAK), Rwanda (ICPAR), and Tanzania (NBAA) signed in 2010 an MRA for academic and professional qualifications Workshops in Nairobi in September 2010 with World Bank support brought together professional associations, regulators, trade negotiators, and business representatives and created a platform for dialogue to move the accountancy MRA forward: Uganda not part of initial signatories also participated in the workshop Joint COMESA-World Bank workshop on MRAs for qualifications in professional services on 3 May 2011 in Swaziland to inform the subsequent COMESA Committee on Trade in Services and advance the MRA agenda

17 Moving forward to integrate African services markets: A platform on regulation and services reform Challenge: integrating markets (expanding trade) while achieving regulatory objectives efficiently Knowledge on regulation is sector-specific focus of regulators often is not on international trade/investment or on competition A knowledge platform/forum can help identify key bottlenecks and alternation policy options Fill information gaps on trade in services, current regulations and regulatory barriers identify priority sectors A focal point for impact analysis A consultative mechanism to collect, analyze, and diffuse knowledge on services regulation and reform A mechanism to identify alternative options based on experiences of other countries (neighbors; BRICS, high-income countries/oecd, etc.) A vehicle to support development of national and regional services trade strategies and to monitor implementation Pilot Professional Services Knowledge Platform

18 Thank you! Report and policy notes