policy Brief
The KENYA INSTITUTE for PUBLIC
Negotiating Trade in Services Under an *c°nO™,C
Partnership Agreement: A Proposal for Kenya
_ uu r, Parifir (ACP) countries have enjoyed non-reciprocal
enya and other African, Caribbean a l Inion (EU) since the 1970s under the
Kpreferential trade arrangement with the European Union (EU) ance th
Economic Partnership Agreements (EPAs) between the EU and individual or groupings o
countries that are compatible with the WorldTrade Organization (WTO).
The Cotonou Partnership Agreement (CPA), exclude sensitive services from the
which provides for negotiation of these EPAs, negotiations. In addition, liberalization of trade
was signed in the year 2000 and ratified in 2003 in services should be guided by the principles
by most of the ACP countries. Article 41 of the of asymmetry and positive regional
Cotonou Partnership Agreement provides for discrimination; that is, the ACP member
the application of special and differential countries should not be required to fully
treatment (S&D) in services negotiations. The reciprocate the openness granted by the EU.
S&D treatment is in recognition of the wide This is the spirit of the General Agreement of
disparity in capacity and competitiveness Trade in Services (GATS) of the WTO.
between the EU and ACP countries. It is
therefore aimed at providing the ACP countries
with some sort of affirmative action, through Kenya and other countries in the region have
increased openness of EU markets to exports of established a grouping of 16 countries, the
services from ACP countries, and by Eastern and Southern Africa (ESA)' , for the
strengthening the domestic capacity of ACP purpose of negotiating an Economic
countries to supply services.
Although there is no firm obligation under the This policy brief is based on a chapter "The
Cotonou Partnership Agreement for trade in effects of the EU-ESA Economic PartnershipAgreement (EPA) on Kenya's Services Sector" of a
services to be liberalized in the context of the study on Assessment of the Potential Impact of
Economic Partnership Agreements, the the EU-ESA Economic Partnership Agreement on
partnership agreement provides that if the two Kenya's Economy. The study was conducted in
partners agree to include services in 2005/6 by KIPPRA for the Ministry of Trade and
negotiations, then the liberalization of such Industry under the KEPLOTRADE Programe,
services should be progressive and adopted to which is a trade negotiations support
the level of development of the countries programme. Some data has, however, been
involved and to their specific constraints In updated.
other words, the countries have flexibility to
Partnership Agreement with the European The EU is an important trading partner for Kenya
Union. ESA countries have agreed to negotiate and other ESA countries in services. However,
with the EU on the basis of six clusters, one of there are considerable barriers in the EU market
them being services. However, the level of for Kenya (and other ESA countries) services
preparedness in services negotiations lags exports. Trade barriers apart, however, lack of ;
behind that of otherclusters. adequate supply capacity has prevented Kenya
and other ESA countries from exploiting the EU
market.
Services are important in Kenya and their
importance has increased over time, and
currently contribute about two-thirds of the market could have significant implications for
country's gross domestic product (GDP). Kenya in terms of increased competition.
Equally significant is the fact that the value of
exports in services exceeds that of imports, It is therefore evident that Kenya needs to
unlike the case of trade in goods. In 2005, for weigh its options in deciding the approach and
example, services accounted for about 49 content of its negotiations for trade in services
percent of foreign exchange inflows and 20 within the ESA-EU economic partnership
percent of the outflows compared with goods, agreement. This brief presents a proposal
which accounted for about 52 percent of the Kenya could consider in developing her
inflows and 80 percent of the outflows. position and articulating it at ESA forums. The
country could lose the opportunity to expand
The EU is an important trading partner for the existing and potential market for its
Kenya and other ESA countries in services services exports in the ESA region and the EU if
(although we do not have data on this). it is not pro-active and strategic in the
However, there are considerable barriers in the negotiations.
EU market for Kenya (and other ESA countries)
services exports. Trade barriers apart, however, Importance of Services in Kenya
lack of adequate supply capacity has prevented
Kenya and other ESA countries from exploiting Since 1960 the contribution of the services
the EU market. The ESA region is also an sector to Kenya's GDP and wage employment
important market for Kenya's services exports. has been much higher than that of either
Therefore, greater participation of the EU in this agriculture or manufacturing, with the most 
Source: Data obtained from United Nations Commission for Trade and Development (UNCTAD:
Handbook of Statistics (www.unctad.org)
2 KIPPRA Policy Brief No. 1/2006
important services being transport, travel and these countries jointly accounted for close to 90
tourism, and communications. In 1960, for percent of ESA region's total services exports
instance, the share of services in contribution to (excluding those of Comoros, Djibouti, Eritrea,
GDP was 44 percent compared with 38 percent Zambia and Zimbabwe' whose data was not
for agriculture and 18 percent for available)
manufacturing.This share rose to 52 percent by
1990 and to 66 percent by 2004. The sector's Mauritius and Kenya alone accounted for close
share of wage employment in Kenya is even to 30 percent of the region's services exports
higher. that year. Moreover, as Figure 2 demonstrates,
the share of services exports in total exports has
With regard to exports, the services sector has increased over time for most of the ESA
accounted for over 50 percent of foreign countries. While one or two services dominate
exchange inflows and about 33 percent of the the services exports of most of the ESA
outflows per year for most of the period since countries, a few countries export more services.
the 1970s. In 2004, the respective contributions Mauritius mainly exports travel and tourism,
were 44 percent and 18 percent, while in 2005 transport, insurance, financial and other
they were 49 percent and 20 percent. Apart business services while Kenya exports travel
from government services, the leading and tourism, transport, and communication
commercial services exports are transport, and services.
travel and tourism. In 2003, for example, these
two accounted for almost 69 percent of all While Kenya is among the leading exporters of
services exports (Figure 1). Even more services among the ESA countries, her ranking
important is the fact that efficient and has been declining over time and has been
competitive services can spur the growth of overtaken by Mauritius as the leading exporter
other sectors of the economy. of services. However, imports of different
services into the ESA region (excluding Kenya)
Trade in Services in Kenya and have grown considerably since the 1990s,
other ESA Countries indicating the potential of Kenya to develop
into a regional services hub owing to its
The leading exporters of services in the ESA relatively better endowment in skills and
region are Mauritius, Kenya, Ethiopia, human resources.
Madagascar, Seychelles, and Uganda. In 2002, 
■e 2: Share of services exports in total exports from ESA countries, 1980-2i
Source: Data obtained from United Nations Commission for Trade and Development (UNCTAD): Handbook of Statistics (www.uncatd.org).
KIPPRA Policy Brief No. 1 /2006 3
While Kenya is among the leading exporters travel advisories issued by EU governments to
of services among the ESA countries, her their citizens. These travel advisories had
ranking has been declining over time and has unprecedented adverse effects on Kenya's
been overtaken by Mauritius as the leading tourism between 2002 and 2004.
exporter of services.
Second, are the anti-competitive practices of
Some of the most important services in the large suppliers who have superior capacity and
region, in terms of actual or potential trade, are tend to dominate the market by supplying
briefly described below. different services within the travel and tourism
supply chain. Such suppliers are found in all
segments of tourism and include suppliers of
Travel and tourism transport, computer reservation and global
Travel and tourism is a very important export distribution systems, tour organizers, travel
sector for ESA countries, accounting for more agency and accommodation.
than 10 percent of all the countries' (except
Djibouti) total services exports in 2003. For a Third, and related to the preceding one, regards
quarter of the ESA countries, in fact, travel and the unfair restrictions is access to distribution
tourism accounts for more than 50 percent of services like computer reservation systems, the
their total exports in services. Many ESA high costs of these systems due to
countries have competitive tourism sectors as monopolistic tendencies, and tendency of the
reflected in indices developed by the World major airlines that own these services to enjoy
Travel and Tourism Council (WTTC). The privileged access.
competitiveness of Kenya's tourism industry,
for example, is largely attributable to the
country's environmental and human resource Fourth, are barriers over air accessibility, which
quality, and to some extent technology. includes lack of bilateral air service agreementswith all EU countries and limitations with
respect to the number of passengers that can
The EU is a critical market for Kenya's travel and be airlifted per week in some EU countries.
tourism exports, accounting for about 60
percent of the tourists visiting the country in
any one year.This could be largely true for other Finally, the entry of professionals into the EU is
ESA countries given the relative proximity of still problematic and yet this is the mode of
Europe to the region and Europe's demand for supply that ESA countries have the capacity toexploit. For example, while it requires
tourism services. considerable capital to establish a tour
operating business in the EU, it requires much
Although data on the EU's exports of travel and less capital to offer consultancy services.
tourism services to the ESA region is not
immediately available, there is likelihood that While the importance of these barriers cannot
these exports are not significant, given the high be underestimated, the most significant barrier
levels of poverty in the region. It is known, is lack of adequate supply capacity. Kenyan
nevertheless, that senior government officials firms are unable to compete effectively with
and various professionals from the ESA region their EU counterparts due to capital
regularly attend conferences in EU countries. constraints, difficulty of penetration into the
tight networks that exist in the EU markets by
There are considerable barriers to tourism foreign firms, and insufficient information on
exports by Kenya and indeed other ESA the EU markets.
countries. First are the occasional negative 
4 KIPPRA Policy Brief No. 1 /2006
Transport only important and strategic in these countries'economies but also have a high export
Transport services are another important potential especially in the regional context. As
export for ESA countries. In 2003, transport an example of this potential, some ESA
services exports from ESA accounted for about countries have a surplus supply of professional
30 percent of the region's total service exports services while others have large deficits. There
for that year. All ESA countries exported some is therefore increasing evidence of growing
regional and overseas movement of
professionals from Kenya and other ESA
Kenyan firms are unable to compete effectively
with their EU counterparts due to capital countries that have a surplus. The main
constraints, difficulty of penetration into the destinations of Kenyan professional service
tight networks that exist in the EU markets by exports in the last decade have been Southern
foreign firms, and insufficient information on the and Eastern Africa regions, although many
EU markets. others have sought opportunities in the UKand
other European countries.
transport services that year, with Kenya alone The regional market is expected to continue to
accounting for about 40 percent of the total.
x- be an important export destination for Kenya's
professional services in the coming decades.
With respect to transport, the EU and ESA However, as discussed under tourism,
countries trade mainly in air transport and movement of professionals is highly restricted
maritime transport services. This is largely in the EU due to many licensing and visa
because most ESA countries lack capacity in requirements. Relaxation of such restrictions
shipping and air transport services. There is would therefore have an enormous positive
strong presence of European carriers such as impact on the economies of ESA countries,
KLM and British Airways in the region. more so if the relatively lower skilled staff were
However, the value of the intra-regional trade in allowed to accompany professionals.
road, rail, maritime (especially auxiliary and
port services), and airtransport services is also With improving telecommunication services,
considerable. Many ESA countries are land­ moreover, Kenya has potential to become a
locked and carry out a considerable amount of global outsourcing centre for Information
their international trade through the port of Communication Technology (ICT) and
Mombasa. In addition, Kenya Airways has a manufactured products.The potential is based
considerable network of air transport services
in the region. on the country's relative advantages withrespect to human resource, time differences
with the USA, geographical proximity to
Like in tourism and travel services, therefore, Europe, and the widespread use of English
the most important barrier to ESA countries' language in the country.
ability to export transport services to the EU is
lack of capacity, and is therefore not market-
related. Although accurate data is not available, other
services are known to be important, or have
potential tradables, for some ESA countries.
Other services Kenya, for example, imports a large amount of
Other important services in the ESA region, education services from the USA, EU, South
although they are not featuring among the Africa and even from the neighbouring
leading exports, include professional services countries. KIPPRA estimates that the country
and telecommunication services.These are not pays about Ksh 25 billion annually for these
KIPPRA Policy Brief No. 1 /2006 5
services. However, the country also exports interior design; Securicor in other business
education services in the region and has services; foreign independent power
potential to become a regional hub for these producers (IPPs) in energy; Vodafone and Celtel
services.This is also true for health services, and in mobile phone sector, and many others in
medical institutions in Nairobi are handling education, tourism and other sectors. Many of
increased numbers of patients from the region these and other service providers use Kenya as
Overall, therefore, services are an increasingly their regional hub.
important export sector not only in Kenya but
also in other ESA countries. The EU and ESA Second, barriers to EU firms in the Kenyan and
regions are important trading partners in ESA market in general are not significant. Even
services. However, there are considerable though many countries in the region have not
barriers in the EU market for exports of services made deep commitments within the
by ESA countries. Reduction or removal of WTO/GATS framework, they have considerably
these barriers would considerably benefit the liberalized their services through structural
region.The greatest barrier in most cases is not adjustment programmes (SAPs) and other
market access but lack of supply capacity. initiatives.
Implications of an ESA-EU Third, major barriers exist in the EU for ESA
Economic Partnership services exports, especially in professional
Agreement (EPA) to Kenya services.
From the foregoing, and from available Fourth, the domestic supply capacity of
literature, several features that indicate the services in many ESA countries is weak.
likely implications of an economic partnership
agreement between ESA countries and the EU
emerge. In view of these features and the nature of past
and current trade in services between the EU
and ESA, the economic partnership agreement
The economic partnership agreement may may not necessarily lead to an immediate
not necessarily lead to an immediate explosion of EU export of services into the ESA
explosion ofEU export of services into the ESA region. Yet, depending on how the
region. Yet, depending on how the negotiations are done, the EPA could provide
negotiations are done, the EPA could provide considerable resources for addressing
considerable resources for addressing domestic supply bottlenecks and attract
domestic supply bottlenecks and attract investment by EU firms. This should inform
investment by EU firms. Kenya's approach to and content of the ESA-EU
economic partnership negotiations with
respect to services.
First, there is considerable presence of EU firms
in Kenya's services industry largely due to many A Proposal for the EPA
years of friendly policies. These firms include Negotiations
Barclays, Citibank and Standard Chartered in
banking; Deloitte Touche, Tohmatsu and KPMG This brief makes a proposal on how Kenya could
in accounting, auditing and consulting; Ayton approach the negotiations for ESA-EU
Young & Rubicam in advertising and marketing; economic partnership agreement for services.
Maersk, Express Kenya, Interfreight, andTibbett The proposal consists of what Kenya (and other
& Britten in transport and logistics; Old Mutual ESA countries) could request from the EU; what
in insurance; Symbion in architecture and they could offer to the EU;and how Kenya could
6 KIPPRA Policy Brief No. 1/2006
exploit the regional potential to build The EU is an important trading partner for
international competitiveness. Kenya and other ESA countries in services.
However, there are considerable barriers in
What Kenya and other ESA countries the EU market for Kenya (and other ESAcountries) services exports. Trade barriers
could request apart, however, lack of adequate supply
The EU has already committed itself to special capacity has prevented Kenya and other ESA
and differential treatment for the ESAand other countries from exploiting the EU market.
ACP countries in the negotiations, and to
support the development of their services
sectors. Kenya and other ESA countries should Full credit for autonomous liberalization,
therefore negotiate for, among others: that is, for the liberalization of services
• Adequate and flexible resources, both in trade that ESA countries have already
the form of financial support and undertaken either through structural
technical assistance, to develop the adjustment programmes or their own
capacity for supply of domestic services. initiatives.
Such capacity is required across the range
of services in the form of infrastructure Adoption by the EU of measures or
development and other requirements for incentives to stimulate the right kind of
improving the business environment. foreign direct investment and therefore
This should include support for the increased technology transfer from the
relatively small-scale businesses to EU to ESA countries.
establish commercial presence in the EU,
as a way of coping with pressure from the Emergency safeguards in case of balance
large integrated suppliers. of payments problems or other
unanticipated outcomes arising from the
• Substantial improvement of EU's economic partnership agreements.
openness to services exports from Kenya
and other ESA countries, especially with Kenya should take a pro-active approach and
respect to temporary entry of leadership role to ensure that these elements
professionals from the region. This could areincluded in the negotiations.
be achieved through introduction of a
business travel card to ease the visa
process; inclusion of less-skilled workers What Kenya and other ESA Countries
in the list of support staff allowed to could offer
accompany professionals entering the EU Kenya should offer, or promise to offer after a
to supply services; recognition of specified period, further liberalization of
professional qualifications of service services that it lacks capacity to supply
suppliers from the ESA region through immediately or within a short period. A
special pass or similar arrangements; growing body of research suggests that these
increased supply of information may include basic telecommunications and
regarding the EU market in terms of the shipping services. However, conditions should
demand for services and the trade be attached to such offers. Such conditions
barriers in existence; adoption of include transfer of technology and managerial
measures by the EU to discourage unfair know-how, public service obligations,
and anti-competitive practices such as maximum prices that can be charged for
domination by large integrated suppliers; essential services such as water and sanitation,
and removal of the restrictions that limit and the proportion of profits that must be
the ability of ESA service suppliers to reinvested in the infrastructure.
establish businesses in the EU.
KIPPRA Policy Brief No. 1/2006 7
attraction of qualified Kenyans in the diaspora
Exploiting regional potential to join in through investment. Efforts in this
Kenya should adopt measures to take direction should also include relaxation of the
advantage of its regional competitive minimum capital requirement of $500,000 in
advantage in skills and human resources to the Investments Act 2004 for services, which
strengthen its standing as a regional services require relatively little capital. The efforts
hub and to develop into a global outsourcing should also include tax incentives such as
centre. This requires attracting investment in reduced corporate and withholding tax rates,
critical areas such as rebuilding of relief from double taxation of income, and
infrastructure (including roads, energy and extension of the 'investment deduction'
telecommunications) and creation of a incentive available to manufacturing and
competitive environment for the private sector­ tourism to other services. These interventions
improvement of security, law and order; and have also been recently recommended by
further supply of the required skills, including
through improvement in education, UNCTAD.-
partnership with the private sector, and 
Notes
'ESA countries are Burundi, Comoros, DR Congo, Djibouti, Eritrea, Ethiopia, Kenya, Madagascar, Malawi, Mauritius,
Rwanda, Seychelles, Sudan, Uganda, Zambia, and Zimbabwe.
’However, Zimbabwe was among the leading exporters in 2000 fortransport, travel and
’UNCTAD (2005). Kenya Investment Policy Review, UNCTAD, Geneva. tourism and business services.
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