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September 28, 2018

China’s footprint in Uganda’s industrial sector

By Ugandan journalist Frederic Musisi, first published in Daily Monitor on 5 September. 

If you had been given a decade to ponder, you would never have imagined that Kapeeka in Nakaseke District, about 63km from the capital Kampala, would emerge from shadows of the guerrilla war that brought President Museveni to power in 1986.

Today, Kapeeka, which is part of the wider Luwero Triangle that was ravaged by the war against the Obote government, is teeming with economic activity – thanks partly to the mad rush for land in surrounding areas and development of Namunkekera Rural Industrial Centre or China-Uganda Agricultural Industrial Park in Namunkekera.

The park, developed as a joint venture, comprises several value chain industries ranging from fruit processing to ceramics manufacturing. Operation Wealth Creation, a government programme, supervises the park.

Officials say a car assembling plant, one of the 50 industries to be established in the park, is in the offing.

Namunkekera Rural Industrial Centre is among the 22 industrial parks so far established by the Uganda Investment Authority (UIA) as one of the interventions to drive industrialisation in the country.

So far, the Chinese investors have developed the park and are currently developing another one in Mbale District. Construction works estimated to cost $600m (about Shs2 trillion) for the Mbale park were flagged off in March. A consortium of eight Chinese enterprises last year signed agreements to develop the park, which is expected to house 55 factories and create some 15,000 jobs.

State minister for Investments and Privatisation Evelyn Anite, in a recent interview, said “they (Chinese) mean well, and come here ready to invest but it is us who frustrate them most times.”

“But this one (industrial parks) is a game changer whichever way you look at it, it is the key to Uganda’s industrialisation, and we are ready to work with them tirelessly,” Ms Anite told this newspaper.

Industrial parks or special economic zones is China’s industrialisation model that Beijing hopes to spread to other countries. They are developed with enabling infrastructure such as roads, electricity and water access, available for would-be manufacturers.

In 2007, President Museveni directed the Finance ministry to develop industrial parks across the country in Arua, Lira, Gulu, Soroti, Moroto, Mbale, Tororo, Iganga, Jinja, Masaka, Luwero-Nakaseke, Nakasongola, Mbarara, Bushenyi, Kabale, Kasese, Fort-Portal, Hoima, Rakai and Mubende districts to promote zonal industrialisation.

The President emphasized agro-processing factories for honey, tomatoes, fruits, coffee, milk, grain milling, and others such as cement manufacturing, and textiles, to be built in the parks as one of the ways of supporting small and medium enterprises.

Made in Uganda by China

Records from UIA, a government agency charged with investment promotions locally and internationally, indicate that currently, there are 21 Chinese companies operating in the parks in Namanve/Kampala Business park, and one in the Luzira business park. Most of the industries are agro-processing.

Asked whether this was in anyway a game changer, Ms Stella Kanyike, the UIA spokesperson, said “the answer is a resounding yes.”

“Chinese investment has contributed significantly to infrastructural development, particularly in the areas of transport, energy and ICT,” Ms Kanyike said.

“There has also been significant investment in Uganda’s priority investment sectors such as mineral beneficiation. China is among the top 3 FDI sources in Uganda,” she said.

Finance minister Matia Kasaija while reading this financial year’s Budget, said they expected economic output to grow by 5.8 per cent, higher than the 3.9 per cent recorded last year, and specifically “the industrial sector expanded by 6.2 per cent compared to 3.4 per cent last financial year due to good performance in construction and agro-processing, and recovery in the mining and quarrying sub-sectors.”

He said they would prioritise competitive industrial development of manufacturing firms to increase productivity through, among others, supporting entrepreneurs in making investments in the manufacture of industrial products, provision of serviced industrial parks, and continued infrastructure development to reduce costs of electricity, allow efficient market access through reliable road and rail infrastructure.

In the long-run, according to the commissioner for external trade in the Trade ministry, Mr Silver Ojakol, the growth in the number of Chinese manufacturers will culminate into “made in Uganda by China” industrialisation approach.

Ms Anite noted that “industrial parks is the only opportunity Uganda has” to breathe life in industrialisation, and particularly “as government works hard to bridge trade deficits” with all global markets.

Look at it this way, Ms Anite said: “If we cannot do it (manufacturing) ourselves why not invite the Chinese— who started a few years ago but look where they are—here to produce for our consumption and even export rather than us always importing.”

Indeed, barely a quarter of the year goes by without President Museveni or his designee touring, commissioning or breaking ground for construction of either an agro-processing, textiles or machinery assembly plant.

In the last three or four years, most of the industries flagged off have either been by Chinese or Indian investors.

Ms Anite admitted “it is true Ugandans have concerns about Chinese manufacturing here” but said “(Ugandans) are instead investing in arcades and malls, which is disturbing. I think we should give them chance.”

Uganda is considered a net-import country, meaning it imports more than it exports. President Museveni has on several occasions voiced concern about the country being able to export goods of only worth $5 billion (Shs18 trillion) and spend on $7 billion (Shs26 trillion) on imports.

The Chinese manufacturing locally for exportation or ‘made in Uganda by China’ is a strategy, Mr Ojakol said is one of the avenue of “bridging the trade imbalance” between Uganda and China.

“They know very well the standards for their home markets unlike Uganda manufacturers. If they started producing here and exporting, it is Uganda that stands to gain,” Mr Ojakol told local manufacturers recently at a meeting organised by the Chinese economic counselor to brief Ugandan business people on the China Import and Export fair slated for October.

China is Uganda’s second-largest trading partner but the latter’s exports stand at a meagre $57.7m (Shs214 billion) and imports at $886.2m Shs3.2trillion).

Overall, agriculture accounts for 80 per cent of Uganda’s exports. The industrial sector, especially manufacturing, plays a limited role in the economy.

Mr Ojakol said Ugandan manufacturers are mainly disadvantaged to access foreign “by standards.”

The remedy, he said, is to focus on import substitution and promote exports. More so, as government is increasingly promoting the ‘Buy Uganda Build Uganda (BUBU)’ policy going by the 35 per cent and 60 per cent import duty slapped on imported products that Uganda can otherwise produce.

The proposal for BUBU legislation would, if implemented, offer domestic producers preferential treatment on the domestic market over our EAC partners, for example, through preferential public procurements policies.

Domestic producers would include foreign investors manufacturing locally. The Namunkekera Rural Industrial Centre in Kapeka was commissioned early this year, and during a recent visit officials said it has created some 1,000 jobs across the value chain. So far Chinese investors have set up a fruit processing, food processing and ceramics industries in the park and they are already exporting. Managers at the park said more jobs will be created with time as the factories increase production capacity for both local consumption and export.

Just mid last month, the Uganda-China Guangdong free zone was commissioned in Tororo District near the Uganda-Kenya border. The free zone is home to $620m (Shs2.2 trillion) Osukuru carbonatite complex, which will house fertiliser and steel manufacturing plants to produce for local consumption and export.

To exhibit his commitment to the project, President Museveni, days after the commissioning, ordered for suspension of Uganda Revenue Authority (URA) officials for reportedly “frustrating” the Chinese officials developing the free zone by refusing to clear their machinery at customs.

Can the strategy energise Uganda’s quest to industrialise? 

This year’s national budget was specifically premised on “industrialisation and productivity enhancement.”

Since 2000, the government has been emphasising industrialisation to transform Uganda’s economy from peasantry to an industrial-based economy but little has been achieved.

In 2008, the National Industrial Policy was rolled out with objectives of creating a business friendly environment for private sector-led industrialisation, improving infrastructure development for effective and efficient industrialisation programme, and encouraging and fostering innovation, entrepreneurship, adjustment and adoption of best management practices in the quest for improved competitiveness.

However, policy analyst Ramathan Ggoobi in a 2017 study titled, “Economic Development and Industrial Policy in Uganda” argued that the industrial policy is widely (mis)understood to mean industrialisation.

“To be clear, Industrial policy is not about industry per se. Policies targeted at non-traditional agriculture or services qualify as much as incentives for manufacturing.”

Additionally, the policy, since being operationalised, has not been implemented well. Uganda’s industrial sector has been mainly beset by low investments, and poor infrastructure services resulting in high production costs.

GDP growth

A 2017 report titled “An abc of Industrialisation in Uganda: Achievements, Challenges and Bottlenecks” by the UN Economic Commission of Africa notes that between 2000 and 2014, the manufacturing’s sector contribution to GDP growth amounted to just 8 per cent, compared to 30 per cent related to other activities.

“Firstly, the sector is dominated by small and medium enterprises (SMEs), which make up some 93.5 per cent of firms operating in the sector. This in itself represents a serious challenge. Firms are usually not able to reap the benefits of economies of scale and, given the strong correlation between firm size and export capacity, consequently have difficulties competing internationally,” the report reads in part.

In terms of overall contribution of structural transformation, UNECA said in Uganda the absolute contribution was significantly lower at 1.4 per cent but nonetheless ranked Uganda in the top 5 in Africa.

Nevertheless, the executive director of Uganda Manufacturing Association (UMA), Mr Daniel Birungi, said they welcome government’s interventions, including attracting Chinese manufacturers to produce locally but what they detest is the absence of a level playing field.

“It is discouraging to see that many are given preferential treatment on tax incentives, land, etc, on arrival even where it is not necessary yet we are all affected by the same conditions,” Mr Birungi said.

Besides, he added, “when the going gets tough for a local investor they will persevere but foreign investors pack and leave to look for better environment. That is why you see that a lot has been done yet cannot be qualified quantitatively.”

Going forward, Mr Birungi said, with the Chinese investing heavily “it would be ideal if they procure everything locally from raw materials because it widens the value chain.” He also suggested government emphasising joint ventures to transfer capital, knowledge and skills transfer, if the ongoing efforts are to yield results.

What should Uganda produce? 
The African Development Bank in a 2011 study said “the desirable structure of African production is a matter of some controversy; but argued they should follow a land-abundant development path similar to that followed by the United States, rather than the model followed by the land-scarce Asian economies—particularly China.

Likewise, a 2014 study titled “China’s Industrialisation: Overview—Implications for Africa’s Industrialisation” by Prof Li Xiaoyun of China Agricultural University in Beijing, said China‘s industrialisation success carries many experiences, such as how to grasp the opportunities provided by globalisation, how to develop infrastructure to eliminate the bottleneck for industrialisation, how to develop industrial parks to absorb foreign capital and technology, etc.

“Certainly, Africa cannot follow China‘s industrialisation path, but there is a lot that Africa can learn from the Chinese experience. The essence of China‘s industrialisation success has been largely driven by the state-led industry policy, i.e. to use the role of the state to eliminate barriers at each stage of development so that the country‘s comparative advantage can be utilised.”


Q& A with Ms Zhao Xiufen, economic and commercial counselor at the Chinese Embassy in Uganda

How would you describe the China-Uganda economic relations?
Since establishment of diplomatic relations, the economic relations have been deeply enhanced. Now China has become the second largest trading partner, the biggest foreign direct investment source and the key infrastructure partner.

How have relations fared overtime in statistical terms and what, in your view, are the main hurdles?
The friendly exchanges between the two countries date back a long time. People from the two countries have supported each other in the pursuit of development and national renewal. Today, China-Uganda relation are on a fast track of all-round development.

Uganda’s ministry of Trade has always talked of a wide trade deficit; what is the current status in terms of statistics and in your view how can this be bridged?
We need to take a comprehensive view of the development of our economic ties. China was the second largest trading partner of Uganda. To deal with these problems, China will hold the first China international import expo in Shanghai on November. It is a good opportunity for Uganda to narrow the trade imbalance.

One of the ways suggested is getting Chinese manufacturers to produce here for export. How feasible is this idea?
It is a good idea. Chinese government also make a policy of cooperation on international production capacity. In fact, there are several industrial parks funded by Chinese investors in Uganda. Some factories has already started production, and some goods will export to China Market.

How many Chinese businesses do we have in Uganda?
Chinese businesses cover a lot of sectors in Uganda such as manufacturing, agriculture, construction, electricity, financial, mining, storage, and wholesale.

How many of these are in manufacturing?
About 60 per cent, according to UIA.

During the last FOCAC summit, a lot was premised on manufacturing but has anything tangible been achieved yet, especially on Uganda’s side?
We have the launch of Liaoshen Industrial Park and China-Uganda Mbale Industrial Parks. Chinese enterprises also constructed the Karuma Hydropower Station, Isimba Hydropower Station, Kampala-Entebbe Expressway and Entebbe Airport expansion project. Those projects will further improve the business environment in Uganda, and attract more investment on manufacture sector in the future.

Through what other initiatives does China plan to grow manufacturing in Africa, and in Uganda?
President Xi Jinping has put forward the initiative of the Silk Road Economic Belt, and the 21st Century Maritime Silk Road. The initiative aims to strengthen international cooperation and synergize national development strategies for greater complementarity and common development. It is an opportunity for China-Africa, and China-Uganda to enhance infrastructure and manufacture cooperation under this initiative.

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