PROGRAMME CONCEPT NOTE. Regional Economic Integration Support Programme in East Africa Phase two (REISP II)

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Ministry of Foreign Affairs

PROGRAMME CONCEPT NOTE

Regional Economic Integration Support Programme in East Africa

− Phase two (REISP II) 2015-2019

Ref.no. 104.Østafrika.3

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Introduction

Strategic questions

Question 1:

Support to the East African Community (EAC) under the Regional Economic

Integration Support Programme phase one (REISP I) was provided through a joint donor

Partnership Fund. Under REISP II there is an option to provide (part of) the funding as core

funding disbursed as performance tranches to the EAC Secretariat.

Does the Programme Committee agree

that the core funding option is considered as design moves forward

?

Question 2:

Danida has provided support for infrastructure development under REISP I as part of

its funding for Trade Mark East Africa (TMEA). Under REISP II it is proposed to strengthen focus

on infrastructure by including, in addition to TMEA support, a particular funding window to finance

preparatory work and facilitate financing for regional infrastructure projects.

Does the Programme

Committee agree with the strengthened prioritisation of infrastructure

?

Question 3:

For regional integration to contribute to inclusive growth and job creation, the trade

activities of private business must be boosted. REISP II suggests support at the micro level to

demonstrate how the private sector can benefit from regional economic integration. Support will be

provided to help develop and strengthen regional value chains and encourage small and

medium-sized enterprises to enter new EAC markets.

Does the Programme Committee agree with inclusion of support

in this area? Can the Committee offer views/advice on criteria that should govern support

?

Summary of conclusions

REISP I has supported EAC economic integration since 2011, and encouraging results have been

achieved. REISP II will build on the positive experiences from REISP I and continue the support to

the EAC integration process which will enhance trade and competitiveness. Improved opportunities

for the private sector will contribute to inclusive growth, job creation and poverty reduction.

Firstly, one of the prerequisites is that EAC reforms deliver harmonised rules and regulations which

are implemented and enforced. REISP II will support the capacity of EAC and Partner State

institutions. Secondly, there is a continued need to reduce transport costs and the barriers involved

with trading within the EAC. REISP II will continue to provide trade facilitation support which will

address 1) the reduction of non-tariff barriers and simplified processes and regulatory systems

connected with trading across-borders, e.g. customs procedures and one-stop border posts, 2)

additional support to realise a series of regional economic infrastructure projects. Thirdly, REISP II

will support regional value-chain projects to promote trade across-borders. Through catalytic

initiatives with strong demonstration effects, REISP II will encourage the private sector to enter new

markets and take advantage of opportunities created by regional integration.

REISP II will continue the partnerships developed in REISP I. If it is relevant to strengthen East

African ownership, additional partner organisations could be included in the design phase. REISP II

will complement support delivered through national programmes in Kenya, Tanzania and Uganda

(see Annex 7) and will explore synergies with Danida Business Instruments.

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Conclusions from Preparatory Analyses

Key experiences and results of previous support

Danish support for EAC integration (2012-2015) is currently being delivered through the EAC

Partnership Fund and TMEA. Although it is too early to assess the outcomes of REISP I, emerging

results are encouraging. Trade indicators suggest that EAC trade is increasing.



REISP I aimed for a 10% annual increase in the total value of exports from the EAC region

− this target was reached in 2010, 2011 and 2012. At the country level, the best performers

were Rwanda, Burundi and Tanzania, where average annual exports (2008-12) increased by

23%, 18.6% and 16.4%.



REISP I targeted a 25% increase in the share of intra-regional trade in total trade. This is also

increasing. Intra-regional exports as a share of total exports amounted to 20.92% in 2012,

and total intra-EAC trade grew by 21.9% in 2011-12.



Based on the World Bank’s Doing Business Reports (2009 to 2013), there have been

improvements in the “time required to export and import”. Burundi, Rwanda, Tanzania and

Uganda have achieved reductions in the time it takes to export. The overall reduction for the

EAC is 20% in 2010-2013.

The

EAC Partnership Fund

has contributed to positive progress on establishing functional EAC

organs and institutions, and there has been tangible progress on implementation of the Customs

Union and Common Market Protocols. A new protocol to establish the East African Monetary

Union was signed in November 2013, which signals a major milestone for continued integration.

Selected key achievements comprising: Four policies related to the Customs Union have been

harmonised, 56 non-tariff barriers have been resolved; a draft EAC non-tariff barriers bill was

adopted by the Council in November 2013, 79 new EAC standards have been harmonised and

declared, 67 obsolete EAC standards have been withdrawn and three new key regulations on product

certification, testing laboratories and enforcement of technical standards have been developed.

TMEA

has mobilised funding of USD 590 million and is currently implementing around 170

projects. TMEA support has contributed to increasing trade and lowering trade costs through

investments in ports, transport observatories, one-stop border posts, improvedcustoms management,

and a reduction in non-tariff barriers and improvements in standards. A few selected key

achievements include:



TMEA has set a target of a 15% reduction in average time to import or export a container from

Mombasa to Burundi or Rwanda. While data is pending, results include commencement of

programmes to enhance the capacity of the two main ports at Mombasa and Dar es Salaam;

simplification of the East African customs bond system and the completion of several visibility

studies on enhancing trade facilitation and corridor performance.



TMEA has set a target of a 30% decrease in the average time a truck takes to cross selected

borders. There is notable progress in the construction of one-stop border posts; the construction

of six of them has already commenced and one has been completed. Further, integrated border

management activities are proceeding in tandem with one-stop border post construction and will

further be enhanced by the One-stop Border Post Bill, formulated with support from TMEA,

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which was passed by the East Africa Legislative Assembly in 2013, setting out the operations of

the one-stop border posts regionally. Furthermore there has been enhanced efficiency through

the establishment of electronic Single Window Information for Trade (SWIFT). In Uganda,

initial results from Entebbe and Jinja show that 40%-60% of all goods on average are now

cleared on the same day.

Finally, REISP I contains a pilot initiative which aims to stimulate trade across borders by supporting

regional value chains. The initiative will not be continued in its present form, but positive and

negative lessons will feed into the formulation of outcome 3 in REISP II.

Preliminary Overview of Envisaged Programme Support

Justification for the support

REISP II will contribute to the implementation of Denmark’s 2012 development cooperation

strategy, “The Right to a Better Life, Denmark’s Strategic Framework for Priority Area: Growth and

Employment”, launched in 2011 and the new trade policy adopted in May 2014. The strategy will

help improve access to global and regional markets and enhance integration of EAC countries into

the global economy. Proposed support builds on Denmark’s strong track record of providing flexible

responsive support to the EAC. It will complement and add value to national programmes in Kenya,

Tanzania and Uganda and strengthen linkages to Danida Business Instruments – in particular Danida

Business Finance.

The justification for REISP II is its potential economic and development impact on regional

integration, alignment with Denmark’s strategic priorities and lessons from REISP I. The long-term

development of each EAC economy hinges on the success of the regional integration agenda.

Individual EAC economies are too small to compete effectively in international markets. Their

domestic markets are small. To sustain higher growth they need to expand, specialise and integrate to

achieve economies of scale. The integration process supports deregulation, harmonisation of rules

and regulations and reduction of non-tariff barriers. This reduces trade costs which will benefit EAC

businesses as well as Danish businesses with an interest in the region.

The preparatory analysis demonstrates that the needs and financing gaps associated with regional

integration are substantial. There are still restrictions on the free movement of goods, persons,

labour, capital and services and there is a need for stronger coordination and cooperation on

economic, trade and industrial policies to promote “harmonious balanced” development. The EAC

is under-funded, constrained in terms of staff resources and struggles to deliver on even its existing

mandate. EAC institutions are becoming stronger, but need to be developed to sustain and drive

integration. Implementation of the Customs Union and Common Market Protocols need to be

completed for integration to deliver the benefits it promises. Additional support is required to

address bottlenecks to trade, including high transport costs and informal barriers to trade. A massive

need for infrastructure investments remains.

Brief outline of the support strategy and a description of design

The overarching objective of REISP II is to contribute to inclusive growth, job creation and poverty

reduction. The immediate objective is to support a sustainable EAC integration process which

enhances trade and competitiveness.

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The theory of change is that facilitating,

removing barriers to and reducing costs of

trade, expanding and integrating markets

and

market

access

will

improve

competitiveness and increase trade spurring

economic opportunities, which in turn is

expected to increase inclusive growth and

poverty reduction through employment and

income generation.

Box 1 illustrates the expected linkages from

enhanced EAC integration to poverty

reduction. It is well-documented that

regional integration and trade lead to economic growth. However, it is also increasingly clear that

trade does not automatically lead to

inclusive

economic growth and poverty reduction (OECD,

World Bank, ODI, etc.). A number of factors, such as productive capacities, access to market and

distributional impact, determine the benefit of trade for the poorest segments of the population.

These linkages will be considered carefully in the design phase and will be reflected in the logframe.

REISP II will follow good practice on aid effectiveness. It will promote ownership and sustainability

by aligning with partner’s priorities, results frameworks and building the core competence of partner

institutions. REISP II will help the EAC and Partner States address the identified challenges and

facilitate change by providing support to the EAC and a range of partner organisations focused on:



Building effective institutions to support coordination and delivery of the integration agenda



Consolidating implementation of the Customs Union and Common Market Protocols



Supporting evidence-based policy making and policy advocacy with a focus on making policy

relevant to the needs of the private sector, responsive to the negative impact of regional

integration and making trade-induced growth inclusive and pro-poor.



Making it easier and cheaper to trade across-borders with a focus on trade facilitation,

elimination of non-tariff barriers and investment in economic infrastructure



Developing viable regional value chains which demonstrate how regional integration can benefit

EAC small businesses and promote inclusive growth.

Outcome 1: Building effective institutions, policy and regulations to drive sustainable

EAC regional integration

Support aims to consolidate implementation of the customs union and facilitate full implementation

of the Common Market Protocol. Denmark’s assistance will help implement the findings of the

recently finalised EAC institutional review. Action and follow-up will be approved by the EAC

Council in Q3 2014. Expected results include implementation of measures to enhance the autonomy

and effectiveness of the EAC secretariat, establishment of new organisations critical to implementing

the core protocols union (e.g. Customs Authority, Competition Authority, Statistics Bureau),

improved accountability by enhancing the performance of organisations such as the East Africa

Legislative Assembly (EALA) and the East African Court of Justice (EACJ), progress on enhancing

Partner State budgetary provisions and growth in the number of established competent EAC staff.

Development

Objective

level

Poverty reduction

Job creation/income

Inclusive growth

Immediate

Objective

level

Box 1

Increased trade

Improved competitiveness

Fewer barriers to trade and lower cost

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During the design phase, Danida will review with the EAC Secretariat the target areas for support

from Denmark. Support to consolidate implementation of the Customs Union will include technical

and capacity building support to implement the EAC Non-Tariff Barriers Bill and to support

harmonisation and implementation of laws and regulations focused on standards.

Understanding the impact of regional integration:

The preparatory analysis highlighted the need

to improve the understanding of the impact of regional integration. Improved regional integration

and increased economic activity will change the status quo, and there will be winners and losers.

From a human rights-based approach perspective it is imperative to understand the impacts of

regional integration better, to promote broad-based benefits from regional integration and to do

more to mitigate the negative impact of reforms. Civil and private sectors’ voices need to be heard

more clearly to make EAC reform priorities more inclusive and to respond more effectively to the

needs of the private sector and the poor. Under REISP II a dedicated effort will aim to strengthen

the knowledge base and stimulate advocacy with a view to providing the platform for targeted

initiatives.

The multi-donor EAC Partnership Fund supporting the EAC Secretariat will be the lead funding

channel under Outcome 1. As a point of departure it is expected to earmark funding to strengthen

the research capacity of the EAC Secretariat. If it is relevant to strengthen the knowledge base, grants

or technical support could also be provided to complementary partners. These are to be identified

during the design phase.

Outcome 2: Improving the environment for trade and reducing the cost of trading

across-borders.

This outcome addresses the need to reduce transport costs and the barriers and costs which erode

competitiveness and reduce trade. Support will continue to build on the successful partnership

established with TradeMark East Africa. Expected results by 2016 include:



10% increase in the total value of exports from the EAC



25% increase in the share of intra-regional trade in total trade



15% reduction in the average time to import/export a container from Mombasa to Rwanda



30% decrease in the average time a truck takes to cross selected borders.

REISP II will continue to provide support to address the high cost of trading across-borders.

Support will introduce new procedures and processes to make EAC borders “thinner”. REISP II will

consolidate work to improve the performance of the two main ports in Mombasa and Dar es Salaam.

It will replicate good practice, including consolidation of transport observatories across the EAC to

record data on constraints to corridor performance. It will continue to support innovation that uses

new technology, techniques or incentive systems to improve effectiveness, accountability and

compliance. This will include technical and capacity building support to consolidate and expand

construction of one-stop border posts, broadening the use of single electronic windows to speed up

goods clearance and extending the use of on-line customs services. In addition support will improve

the capacity of the EAC and Partner States to implement the 2013 Bali Trade Facilitation Agreement.

TMEA support will include monitoring and technical support to eliminate non-tariff barriers

(NTBs). Technical support will be provided at the EAC and national level to help to professionalise

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logistics and transport services which currently inhibit and increase the cost of trade. It will embed

effective dispute resolution processes at the regional level and focus in particular on reducing NTBs

facing small businesses and informal enterprises. Technical and capacity building support will help

implement standards at the national level. National monitoring systems will be consolidated so

progress on implementation of protocols can be tracked more transparently. This will complement

the higher level policy work and regulatory reform process supported through Outcome 1.

Enhanced infrastructure investment to reduce trade costs and improve competitiveness:

A

particular effort is foreseen to catalyse new investments in regional economic infrastructure, which is

currently a major cause of weak competitiveness in the EAC. Preparatory analysis indicates that there

will be a massive demand for infrastructure investments to keep up with population growth and the

growth in the economies in East Africa. Currently a variety of funding sources are available. What is

lacking is the capacity to develop strong, bankable investment projects.

It is proposed to explore the opportunities for setting up a project preparation facility which can

finance feasibility studies and project preparation activities to develop bankable regional economic

infrastructure projects. These will have a regional dimension, but could cover sustainable energy,

roads, rail etc. The project preparation facility would actively facilitate the development of financing

packages which involves different financiers offering a mix of grants, loans, public funding and

private (commercial) funding for the respective projects. It is expected that Danida Business Finance

will be a potential source of financing.

The East African Development Bank (EADB) has been identified as a potential partner. EADB has

been given the mandate to realise regional infrastructure investments by setting up an infrastructure

development fund, but currently lacks the capacity to live up to its new mandate. The World Bank is

supporting EADB capacity development and moreover suggests that the main financing products to

be delivered by EADB should be project preparation and viability gab funding, which respectively

could be supported through REISP II and DBF. A preliminary institutional assessment of EADB is

positive and further assessment will draw on existing analysis carried out by the EU and other

partners during the design phase.

Outcome 3: Development of viable regional value chains involving SMES

Support under this outcome aims to demonstrate how regional integration can generate tangible

benefits for business and support inclusive growth. It will facilitate development and expansion of

cross-border value chains which contribute to growth in employment, investment and cross-border

trade. There will be a strong focus on supporting SMEs and the agricultural sector, both of which are

key to enhancing livelihoods and reducing poverty in the EAC. Support is expected to address

“niche areas” (regional trade/value chains) not supported through Danish country programmes or,

alternatively, areas which hold a particular potential for complementing Danish country programmes.

The Danish funding would finance cross-border agri-business ventures with the potential to

stimulate production and trade across the EAC. Results would include higher levels of intra-regional

trade, increased investment, employment and turnover within target markets and value chains. It

would stimulate small business development and leverage new private sector finance. It would grow

sustainable agri-based value chains and establish new EAC trading routes and markets. Support

would develop markets and value chains that are not targeted at the national level. When designing

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the activities under this outcome, one focus will be to initiate activities that stimulate broad-based

benefits of increased trade. Potential partners identified to date include AgDevCo and Kilimo Trust

– two organisations which work with value chains in East Africa.

Denmark’s green growth priorities will be mainstreamed across the programme

components.

The EAC has a protocol on environment and natural resources, a climate change

master plan, climate changes policy and EAC disaster risk reduction and management strategy. They

have been adopted by the Council and are currently being implemented. The EAC has expressed

some interest in Denmark supporting work on renewable energy. Support to partners or specific

project grants will include appraisal of environmental impact and sustainability.

The programme will incorporate a human rights-based approach.

The EAC has established an

EAC Forum of National Human Rights Commissions and the EAC Bill of Rights is being passed by

the East African Legislative Assembly (EALA). As indicated above it is foreseen to initiate work to

understand better the impact of regional economic integration and initiate measures to mitigate

negative consequences for particular groups. To achieve development impact, regional integration

must facilitate inclusive growth. Key to this is the impact of reforms on the private sector and the

stimulus that regional integration brings to sectors such as agriculture which involves close to 80% of

the EAC’s population. The support to develop regional value chains contributes to ensuring that the

population employed in agriculture also benefit from increased trade opportunities.

REISP I supported the mainstreaming of gender into EAC projects and includes a gender

mainstreaming strategy, action plan and guidelines. The fourth EAC Development Strategy included

gender-sensitive outcome indicators. TMEA has adopted a gender policy, gender action plans for all

programmes/departments and a gender unit is being established. Support to new and existing

partners will include strategies to ensure women benefit from support delivered through partners.

Envisaged support modalities

During REISP I funding was provided through two relatively well-functioning multi-donor vehicles.

While REISP II foresees to continue the funding of these vehicles, there is a desire to strengthen

more directly the EAC organisations which will have to drive the EAC integration agenda in the

future.

As during REISP I, the support to the EAC secretariat is expected to be delivered through the

multi-donor Partnership Fund which has developed into a robust funding mechanism. As a supplement, it

is proposed to explore the feasibility of providing core funding to the EAC Secretariat. During the

formulation of REISP I, a number of critical fiduciary risks were identified and as a consequence, it

was decided not to provide core funding to EAC institutions. Since then, the EAC secretariat has

carried out a number of reforms to strengthen financial management and control functions. The

secretariat is expected to undergo a fiduciary risk assessment in the last half of 2014. This assessment

will provide an important input to a Danish decision to provide core funding to the EAC. Currently

no other donor is providing direct funding. Further information is provided in Annex 4.

The support to TMEA would be in accordance with the procedures established during phase one.

Denmark would be part of TMEA’s governance structure. It is foreseen to continue providing

un-earmarked funds to TMEA. If EADB is feasible as a partner, support would most likely be in the

form of ear-marked funding to the realisation of the Infrastructure Development Fund and

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accompanied by a solid Technical Assistance input. Options for delivering support under Outcome 3

will be considered further during the design phase.

Preliminary budget

Mio DKK

2015

2016

2017

2018

2019

Total

Outcome 1

20

100 Outcome 2

40

200 Outcome 3

5

15

20

75 Technical Assistance/reviews

5

25 Total

68

83

400 Envisaged management structure of the programme

REISP II will build on the experiences from REISP I which has functioned relatively well. The

embassy in Dar es Salaam, as the EAC-accredited embassy, will take overall responsibility for

implementation of the programme. The embassy will lead on policy dialogue with the EAC and will

coordinate dialogue with other partner institutions. This may involve delegation of some

responsibilities to other embassies. The embassy in Nairobi will represent Denmark in the TMEA

management structure. The Department for Africa (AFR) will lead on programme formulation and

its approval. AFR will continue to steer overall policy and strategic direction on regional integration

and act as a link with other headquarter departments as required. AFR will engage embassies

continuously during the project formulation stage. Under REISP I, a regional advisor was placed in

Arusha. The advisor has helped improve coordination and has raised Danida’s profile and influence

on regional integration issues. Based on the good experience from REISP I, as well as the increased

ambitions of REISP II, day-to-day programme management, advisory and coordination support will

also be sub-contracted to a consultancy company under REISP II. Similar technical assistance related

to outcome 3 is foreseen.

Relation to other donors

REISP II aims to complement country support provided to TMEA in Kenya and Uganda. A wide

range of other donors also support TMEA and the EAC. There is scope to enhance coordination

and sharing of information between REISP II and related donor programmes. The most relevant and

important donor programmes will be identified and, when appropriate, coordination will be built into

project design. High-level coordination already takes place through Danida’s membership of

committees in the EAC and TMEA.

Risks

Annex 3 summarises critical risks. Overall, REISP II is a continuation of REISP I and the risks are

well known.

Contextual risks

include a deterioration in political commitment to regional

integration, a deterioration in the security situation, external economic shocks which distract leaders

from regional integration and slow growth.

Programmatic risks

include EAC lack of mandate,

capacity and finance to effectively coordinate and drive regional integration, competing priorities and

weak capacity in Partner States, weak private sector response to opportunities created by regional

integration and lack of inclusive growth resulting from regional integration.

Institutional risks

relate

to financial mismanagement of funds by partner organisations, and the risks that TMEA spread its

activities too thinly. The risks will be monitored at the embassy level, and the REISP II Technical

Assistance will provide input to this process. The Tanzanian Embassy will oversee policy dialogue on

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political issues and actively monitor risks in consultation with other embassies in the region. REISP

II will support analysis to better understand and manage the impact, costs and benefits of regional

integration.

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Annex 1 – Process Action Plan

ACTIVITY TIMELINE

Retreat with EAC Ambassadors, REISP Adviser, AFR and Saana Consulting

March 2014 – Completed Consultation with EAC Secretary General – Tanzanian

Ambassador

Early May – Completed Institutional reviews of EAC, TMEA and EADB

Theory of Change discussions on outcomes and outputs

May/June 2014 – Completed Draft Concept Note and Annexes including initial technical

consultation with Tanzania, Kenya, Uganda Consultation with EAC embassies

Concept Note Finalised

June 2014 - Completed June/July - Completed July 2014 - Completed Policy Advocacy and Research needs assessment: Review of

existing research on regional integration, review of institutions active in this area including potential partners. Review of policy advocacy support. Identification of gaps,opportunities and mechanisms for linking research to policy advocacy mechanisms and policy development within the EAC.

ToR – July Aug-Nov Report: Dec Concept Note and Annexes submitted to Programme Committee,

Public Consultation

August 2014

Programme Committee Meeting 4 September

Formal feedback to embassies September 2014 ToR for programme design based on issues highlighted in concept

note, feedback from Programme Committee and public consultation. Tender

Design Activities

September October

Nov 2014-Jan 2015 Consultation/workshop with HQ/embassies – to review strategic

focus and options for Outcome 3 (development of regional value chains and advisory support)

November 2014

Draft programme document finalised Feb 2015

Prepare ToR for appraisal Jan/Feb 2015

Consultation on the Programme Document March-April 2015 Appraisal (Technical Advisory Service) May 2015

Post Appraisal Video Conference June 2015

External Grant Committee September 2015.

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Annex 2 - Results Framework

Thematic

Programme

Regional Economic Integration Support Programme in East Africa II (REISP

II)

Thematic

Programme

Objective

Development Objective:

Increase in EAC trade which contributes to

inclusive growth and poverty reduction.

Immediate objective:

Improved EAC integration which enhances trade and

competitiveness.

Impact Indicator

Development Objective Indicators:

1)

Real average GDP growth per annum in the EAC region reaches at

least 7-8%

2)

GDP per capita increases in line with EAC targets (EAC

Industrialisation Strategy)

3)

Reduction in EAC poverty ratio (share of population living below

USD 1.25 per day - to be aligned with targets of the EAC secretariat).

Immediate Objective Indicators:

1)

Consolidation of the Customs Union and full implementation of the

Common Market Protocol (EAC Partnership Fund)

2)

5% increase in the total value of exports from the EAC region

(TMEA)

3)

25% increase in the share of intra-regional exports compared with total

exports in the region (TMEA)

4)

Growth in selected sectors/value chains benefitting from regional

integration (e.g. value of trade, employment and income).

Engagement Title

Effective Institutions, Policy and Regulations to drive sustainable EAC

regional integration

Outcome indicator

Consolidation of the Customs Union and full implementation of the Common

Market Protocol

Baseline

Year

2014

Baseline established from the EAC Common Market Scorecard and

the EAC Common Market Framework.

Target

Year

2018

Improved implementation and compliance based on the EAC

Common Market Scorecard. Specific target to be agreed with the

EAC Secretariat.

Output indicator

Enhanced EAC capacity to implement the 5

th

_{Development Strategy}

Baseline

Year

2014

Baseline set for budget, staffing levels, institutional capability based

on institutional review

Target

Year

2018

Positive progress on EAC institutional reforms including enhanced

budget provision, growth in established competent EAC staff and

other key actions agreed by the Council in 2014

Output indicator

Harmonisation and implementation of new policies, regulations, market

instruments and standards

Baseline

Year

2014

Baseline established using EAC Common Market Scorecard, the

EAC common market framework and tracked through the East

African Monitoring System (EAMS)

Target

Year

2018

Target number of regulations for both Customs Union and

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a strong focus on reform in the service sector

Output indicator

Improved systems for mainstreaming impact analysis into EAC policy making

Baseline

Year

2014

Agree with EAC how impact analysis can be mainstreamed more

effectively. This will set the baseline and target areas for action.

Light touch institutional reviews of potential partners (most likely

the EAC Secretariat) will recommend whether or how to improve

research capacity and development of evidence to support impact

analysis.

Target

Year

2018

Impact analysis effectively mainstreamed into development and

delivery of the 5

th

_{EAC Development Strategy}

Institutional capability of key partners enhanced based on

institutional reviews (before and after). Enhanced body of research

and data available to policy makers

Output indicator

Research on regional economic integration effectively influences the

EACs approach to policy and shapes EAC priorities

Baseline

Year

2014

Establish baseline on % of Research capacities of relevance for

impacting policy and decision making.

Target

Year

2018

Increase in the proportion of research that influence EAC policy

and practice

Engagement Title

Improved environment for trade and reduced cost of trade

Outcome indicator

WB Doing Business indicators for EAC countries on trading across-borders

25% increase in the share of intra-regional exports compared with total

exports in the region (TMEA)

Baseline

Year

2014

Establish baselines from WB Doing Business and TMEA

Target

Year

2018

All EAC countries have an improved on trading across-borders

Output indicator

Reduction in non-tariff barriers

Baseline

Year

14 Set baseline for resolution of non-tariff barriers with EAC/TMEA

during design

Target

Year

18 Effective implementation of the NTB Bill resulting in elimination

of Non-Tariff Barriers

Output indicator

Time savings resulting from better processes, systems at borders, lower

regulatory costs and improvements in infrastructure

Baseline

Year

14 Agree baseline to be used during design phase with EAC/TMEA

Target

Year

18 30% decrease in the average time a truck takes to cross selected

borders

15% reduction in average time to import or export a container from

Mombasa or Dar es Salaam to Burundi or Rwanda

Output indicator

Regional infrastructure projects agreed and financing in place

Baseline

Year

2014

Target

Year

2018

Regional infrastructure projects worth USD 2.5 billion have been

developed and financed as a result of Denmark’s technical support

Engagement Title

Development of viable regional value chains involving SMES

Outcome indicator

Value of goods/services exported/imported regionally within target markets

Baseline

Year

2014

To be agreed with selected partner organisations

Target

Year

2018

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Number of small holders engaged in value chains

Finance leveraged into companies/value chains

Baseline

Year

2014

To be agreed with selected partners

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Annex 3- Risk Management Matrix

Risk summary for grant proposal

Programmatic and Institutional Risks

Risk factor

Likelihood Impact

Risk response

Combined

residual risk

Programmatic

Risks

EAC lacks mandate,

capacity and

finance to

effectively

coordinate and

drive regional

integration

Likely

Significant

Provide sufficient financial support to

build and strengthen capacity. Track

and monitor progress on institutional

reform and modify action accordingly.

Maintain good contact with the

Secretary General EAC.

Significant

Competing

priorities and weak

capacity in Partner

States means that

reforms are not

implemented

effectively at the

national level

Likely

Significant

RESIP II will help build capacity of key

national institutions and strengthen

monitoring systems (through TMEA).

REISP II will identify synergies with

country programmes on capacity

development. Design will explore if

more needs to be done in this area.

Significant

Private sector

response to

opportunities

created by regional

integration is weak.

The impact of

reforms on growth

and trade is muted

Unlikely

Major

REISP II will provide support to

enhance understanding of impact and

to help stimulate a private sector

response. RESIP II will explore

synergies with country programmes to

enhance competitiveness and help

promote private sector development.

Significant

Institutional Risks

Financial

mismanagement of

funds by partner

organisations

Likely

Major

Only provide budget support to the

EAC if a robust fiduciary analysis is

carried out to guide support to

improve public financial management

support. Fiduciary capacity

development as part of institutional

support.

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Contextual

Risks

Context:

REISP II

File No:

Risk factor

Likelihood

Background to

assessment

Impact

Background to assessment

Risk response if applicable / potential

effect on development cooperation in

context

1 Political

commitment to

regional

integration

diminishes. This

slows reform

and the

integration

process.

Unlikely

Although there are

differences in view on

the pace of regional

integration there is a

general political

consensus that

integration is the right

way for the EAC to evolve

economically. There is

less consensus on

political union

Significant

If political commitment is

not sustained it will be

very difficult to make

progress as Partner States

will not be willing to

implement the necessary

reforms. It would be very

difficult to achieve impact

under this scenario.

If political commitment were to

deteriorate then a point may be

reached where support should be

scaled back. The Tanzanian Ambassador

will maintain regular policy dialogue

with the Secretary General in the EAC

and regional Ambassadors will

coordinate and share information

across Partner States. The REISP II

Technical Assistance will provide regular

political updates with a focus on the

implications for integration. This acts as

an early warning system.

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1

2 Security

situation

deteriorates

substantially

due to elections

or conflict

linked to having

difficult

neighbours

(DRC, South

Sudan etc). This

impacts on

investor

confidence and

disrupts trade.

Unlikely

There is a risk that

elections will bring unrest

as this has happened in

Kenya and Tanzania in

the past and to a lesser

extent Uganda. There is a

risk that spillover from

conflict in neighbouring

countries impacts on the

EAC. This could affect

trade and development

particularly in border

regions.

Minor

This needs to be watched

but pockets of security

problems are unlikely to

undermine the integration

process. If there were

major disruption due to an

election in one country

then this could have a

more significant impact. To

date, political stability has

been regarded as an

attractive feature of the

EAC.

As above there is a need to monitor

political developments in each EAC

country and to track how regional

conflict is impacting on trade. Good

political analysis delivered through the

REISP II Technical Assistance and regular

communication with Embassies should

be sufficient to track this risk.

3 External

economic

shocks (global

economic

environment,

commodity

shocks etc)

damage growth

and distract

policy makers

from the

regional

integration

agenda

Likely

The global crisis in 2008

followed by commodity

shocks impacted

negatively on EAC

economies. However, all

economies sustained

growth but at lower

rates. There is a risk this

will happen again given

these economies are still

not resilient, however,

growth is now increasing

and the global economy

is recovering.

Minor

The main impact of shocks

is that it distracts decision

makers from the process

of integration. In many

ways the recent crisis

strengthened the focus on

regional integration as a

way of building resilience

in the face of shocks.

REISP II supports measures to support

economic development. It addresses

factors which will improve

competitiveness (transport costs) and

make EAC economies more resilient.

REISP II will also explore how it can

contribute to enhancing regional trade

in agriculture as this would enhance

food security and improve flexibility in

the face of commodity price shocks.

Economic developments will be tracked

through the REISP II Technical

Assistance and within Embassies. This

will also feature in coordination

meetings and reports to Ambassadors

so issues can be reviewed and discussed

at an early stage.

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2

4 Economic

Development

triggered by

Regional

Integration does

not result in

inclusive growth

Unlikely

It is possible that regional

integration will generate

growth that does not

reach the poorest. A

great deal depends on

Partner States own

economic development

strategies as well as the

approach in the EAC to

mitigating the negative

impacts of integration

Significant

If this materialises then it

will impact on higher level

goals relating to inclusive

growth and poverty

reduction. It will limit the

short to medium term

development impact of

REISP II support. There are

difficult tradeoffs between

opening markets,

enhancing trade and

managing the downside

risks associated with

growing inequality.

REISP II will support more robust impact

analysis and will work with the EAC and

other partners to mainstream this into

policy and strategy. Action is also

required at the country level to enhance

competitiveness and address inequality.

REISP II promotes synergy with country

programmes and will encourage

dialogue on how regional and country

level support can improve the business

environment and encourage broad

based growth. Agricultural reforms are

key. REISP II will explore providing

support to enhance regional trade in

agriculture - this will aim to

complement programmes at the

national level.

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3

Programmatic and Institutional Risks

Title:

REISP II

File No:

Programmatic Risks

Risk factor

Likelihood

Background to assessment

of likelihood

Impact

Background to

assessment to potential

impact

Risk response

Combined

residual risk

P1 EAC lacks

mandate,

capacity and

finance to

effectively

coordinate and

drive regional

integration

Likely

This is a significant risk

given the EAC mandate is

still evolving, it is

underfunded and has

limited capacity. However,

the situation is improving

and an institutional review

has proposed measures to

address these problems.

Significant

Significant if no action

is taken as this will

undermine the EAC's

ability to drive and

enforce the regional

integration process.

However, whilst there

is short term risk there

are encouraging signs

that the situation will

improve over the

medium term.

Provide sufficient financial

support to build and

strengthen capacity. Track and

monitor progress on

institutional reform and

modify action accordingly.

Maintain good contact with

the Secretary General EAC.

Significant

P2 Competing

priorities and

weak capacity in

Partner States

means that

reforms are not

implemented

effectively at

the national

level

Likely

Implementation at the

national level is a real risk as

domestic reform agendas

are crowded and key

institutions are often weak.

Significant

The impact is significant

as it slows

implementation of EAC

reforms at the national

level which limits

impact

RESIP II will help build capacity

of key national institutions

and strengthen monitoring

systems (through TMEA).

REISP II will identify synergies

with country programmes on

capacity development. Design

will explore if more needs to

be done in this area.

Significant

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4

P3 Private sector

response to

opportunities

created by

regional

integration is

weak. The

impact of

reforms on

growth and

trade is muted

Unlikely

There is clear evidence that

intra-regional trade is

increasing and that the

private sector is looking to

access new markets.

However, this is a slow

process and many

businesses, particularly

SME's remain unaware of

the potential benefits of

regional integration.

Major

If there is no private

sector and trade

response then support

to regional integration

will not generate the

expected returns in

terms of growth and

poverty reduction

REISP II will provide support to

enhance understanding of

impact and to help stimulate a

private sector response. RESIP

II will explore synergies with

country programmes to

enhance competitiveness and

help promote private sector

development.

Significant

s

P4 Weak

coordination

across regional

integration

programmes

limits impact

and undermines

value for money

Unlikely

There is a risk of donors

duplicating support and

overloading partner

organisations. This will

undermine the impact of

support.

Minor

Regional integration is

not a crowded field.

There is scope for

donors to provide more

and not undermine one

another. Many donors

deliver support through

joint mechanisms.

REISP II will provide most of its

support through basket funds

or established institutions

which are specialist in their

field and deliver support

provided by a range of

different donors. This means

that Danida is not adding to

transaction costs and is

supporting broad based

reform agendas which are

more likely to have impact and

achieve results.

Insignificant

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5

P5 Financial

mismanagement

of funds by

partner

organisations /

beneficiaries

Likely

All partners identified for

support will need to

demonstrate that they have

sound financial systems.

There is a heightened risk if

budget support is provided

to the EAC where there are

concerns about fiduciary

risk. These are presented

more fully in the budget

support assessment annex.

Major

The direct impact on

the programme of

some element of

financial

mismanagement is

likely to be small.

However, if this

resulted in termination

of support then the

impact could be

significant if problems

in one area resulted in

termination of all

elements of support.

There is a risk of financial

mismanagement if budget

support is provided to the

EAC. Although there has been

significant investments in

improving systems there has

not been a formal fiduciary

assessment for some time. To

mitigate the risk more

substantially this would need

to be carried out in the course

of 2014/15 and capacity

development support

enhanced to address

remaining risks. All other

partners will need to be

similarly assessed during the

design phase but initial

assessments suggest all other

proposed partners have sound

financial systems in place. The

level of risk should be

re-evaluated following the design

phase.

Significant

(22)

Annex 4 - Assessment According to the Budget Support Principles

Criterion

Comments

1.

Fundamental values Fundamental values, encompassing a minimum respect for human rights, pluralistic democracy and rule of law, including independence of the judiciary.

The Community’s constitutive document – the 1999 Treaty for the Establishment of the East African Community (EAC Treaty) details the objectives of the Community as including attainment of sustainable growth and equitable economic development of the EAC Partner States.

Article 3 of the Treaty provides that membership in the Community requires adherence to universally acceptable principles of good governance, democracy, the rule of law, observance of human rights and social justice. Article 6 (d) of the Treaty obligates Partner States to achieve, ‘good governance including adherence to the principles of democracy, the rule of law, accountability, transparency, social justice, equal opportunities, gender equality as well as the recognition, promotion, and production of human and people’s rights in accordance with the provisions of the African Charter on Human and People’s Rights’.

Furthermore, the Partner States have undertaken to cooperate in social welfare matters, including in the development and adoption of a common approach towards the disadvantaged and marginalised groups, including children, the youth, the elderly and persons with disabilities through rehabilitation and provision of, among others, foster homes, health care education and training (Art.120).

To operationalise these provisions, the Community has developed various legal instruments and initiatives which seek to deepen application of governance and human rights principles within the region. These include:

 EAC Human Rights Bill (2012), which was passed by the East African Legislative Assembly (EALA) in April 2012. It awaits assent by the EAC Heads of State. The Bill, which went through several public hearing before it was passed, seeks to give effect to the provisions of the Treaty and consolidates the various principles on human and people’s rights found in the Charter on Human Rights and various conventions and agreements including the African Charter on Human and Peoples’ Right as well as the UN Charter on Human and Peoples Rights (Banjul Charter). The Bill further provides an institutional framework for research in the area of human rights and will lead to harmonization of applicable principles and rules across the EAC Partner States. The Bill further enables the formation of an East African Community Human Rights Commission (EACHRC), whose mandate is to ensure the protection of human and peoples’ rights in the EAC.

The EAC Bill is said to complement gaps in the rights enshrined in Partner States national constitutions, which are said not to have incorporated all fundamental rights and freedoms. Further, the Bill is said to go beyond the Banjul Charter by inserting other new rights and freedoms relating to youth, minority, privacy, housing, food, water and fair administrative action.

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1

 EAC Good Governance Protocol (2012)– currently in draft form, awaiting Council adoption, the Protocol has 7 key pillars namely Constitutionalism; Rule of Law and Access to Justice; Protection of Human Rights and Promotion of Equal Opportunities; Democracy and Democratization process; Combating Corruption and enhancing Ethics and Integrity; Separation of Powers; Economic Governance; and Private Sector Development and Corporate Governance. The Protocol once adopted will evolve a dispensation that cements the recognition of good governance as a prerequisite for successful regional integration, peace and stability.

In addition, the EAC has been hosting an annual regional Conference on Governance, now in its 5th year. The Conference deals with a range of issues, including corruption, fair and transparent elections human rights, among others.

 To enhance pluralistic democracy, the 4th EAC Development Strategy has identified harmonisation of democratic policies, processes and practices; election observation and evaluation; and support to National Electoral Commissions as key strategic interventions. Among others, the EAC has since 2010 fielded Electoral Observer Missions (EOM), aimed at strengthening political accountability and providing an opportunity for EAC Partner States to document best practices and learn from each other with the view of improving their conduct in their own elections. Thus far, the EAC has deployed EOMs to Burundi in 2010, Rwanda in 2010, Tanzania in 2010; referendum in Kenya in 2010; Uganda in 2011 and; Kenya in 2013 (which Denmark supported through the Kenya Country programme).

 In terms of independent judiciary, each of the Partner States has a judiciary that are relatively independent of the legislative and executive arms of the government. At the Community level, the EAC established the East African Court of Justice (EACJ) as one of the organs of the Community. Amongst its roles is to ensure adherence to law in the interpretation of the EAC Treaty; to preside over trade and investment issues disputes as well as matters associated with the monetary union.

2.

Solid Regional policies and plans for poverty reduction, good governance and sustainable

development; including assessment of relevance, progress and political will as well as public sector capacity to implement policy and reforms; policy framework for monitoring

The objectives of the Community is to widen and deepen cooperation among the EAC Partner States in political, economic, social, cultural fields, research and technology, defences, security and legal and judicial affairs in order to enhance accelerated harmonious, balanced development and sustained expansion of economic activities, in order to raise the standards of living and improve the quality of life of its population (Art. 5 (1-3)).

In pursuit of these objectives, the EAC aims to move towards political federation through a four-stage process, beginning with a Customs Union (focusing on movement of goods), progressing to a Common Market (extending to free movement of services, labour, capital, etc.) and then monetary union, with the ultimate goals of establishing a federated state in East Africa. Protocols have been signed to establish both the EAC Customs Union (2004) and EAC Common Market (2010) and EAC Monetary Union (2013).

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2

progress of public policies should also be assessed; the partnership between the development partners and the receiving country and experiences from cooperation up to date.

EAC Development Strategy (2001-2005) prioritised the establishment of the Customs Union while the third Strategy (2006-2010) focused on the introduction of the Common Market. The fourth focuses on implementation of the EAC Common Market and establishment of the EAC Monetary Union. However, a number of strategic interventions are also included to ensure the region benefits from the integration commitments made (namely, greater liberalisation) – for instance, developing regional infrastructure (road, rail, energy, ICT, air and maritime transport), developing and strengthening the productive sectors (agriculture, industry, tourism), and harmonising and strengthening education and social services sectors.

In addition to the development strategies, the EAC has both an EAC Industrialisation Policy and EAC Industrialisation Strategy (spanning 2012 to 2032). The main objective of both is “structural transformation of the manufacturing sector through value addition and product diversification based on comparative and competitive advantages of the region”. The policy identifies many of the challenges facing the region and aims to build a more diversified regional economic structure in order to reduce vulnerability to shocks and ensure more rapid development. The policy outlines 14 strategic measures that will achieve this including promoting regional strategic industries; strengthening the business and regulatory climate; enhancing access to finance; facilitating the development of micro, small and medium enterprises; developing support infrastructure along identified development corridors; promoting sustainable industrialisation; and increasing access to markets. The strategy goes on to elaborate key interventions necessary for effective implementation of the policy. It is underpinned by national industrialisation policies and strategies, and draws lessons from best practices. Six strategic sectors in which the region has potential comparative advantage are identified: iron-ore and other mineral processing; fertilisers and agrochemicals; pharmaceuticals; petro-chemicals and gas processing; agro-processing; and energy and bio-fuels. The strategy outlines several interventions through which the region will realise enhanced competitiveness, economic transformation and higher quality of life for East African citizens. Implementation of both the policy and strategy is guided by a set of principles relating to issues such as: equitable industrialisation; strengthening and exploiting policy synergies; promotion of targeted industry value chains; and pursuing industrialisation based on market principles and on comparative and competitive advantage.

To enhance sustainable development, the EAC Treaty (Art 112-4) obligates Partner States to cooperate on environment and natural resource management as prerequisites for sustainable development. The EAC has operationalised this through various policies and directives that are being implemented, including:

 EAC Protocol on Environment and Natural Resources Management (2006), which seeks to promote sustainable growth and development of the Partner States through sustainable use and management of the environment and natural resources; foster closer cooperation for sustainable and coordinated management, conservation, protection and utilization of the environment and natural resources; promote shared responsibility and cooperation and promote development and harmonization of policies, laws and strategies for environment; and natural resources management to support sustainable development.

PROGRAMME CONCEPT NOTE. Regional Economic Integration Support Programme in East Africa Phase two (REISP II)

Ministry of Foreign Affairs