Kenya Airways have increased their flight frequency to Burundi and Kenya Commercial Bank (KCB) is also planning to open up a representation in Burundi at the end of 2009.

Rachel Keeler investigates what could interest investors in EAC's fifth member as it slowly emerges from over a decade of conflict.

As part of its new frequency strategy to maintain business as Africa absorbs the fallout of the global crisis, Kenya Airways (KQ) have been launching new routes to seemingly exotic destinations and multiplying existing services. At a recent press conference (held for maximum hype in the first class cabin of a Boeing 767), KQ Chief Operating Officer Bram Steller explained that by offering more flights coupled with an aggressive pricing strategy, the airline hopes to boost demand in today's sadly sluggish travel market. Fortunately, KQ will not have to muster all of that demand from thin air. Nita Nagi, KQ's sales manager for East Africa, says frequent flights also cater to regional business travelers, who have been increasingly mobile as EAC integration progresses.

The airline now offers two to four flights a day to Rwanda, where Kenyan businesses like KCB and Nakumatt have established a foothold and Kenyan citizens need no permit to work. KQ already flies four times a day from its Nairobi hub to Uganda and Tanzania. And in May 2009, the announcement came that it would double its flights to Burundi from once to twice a day. After breaking into both Rwanda and South Sudan, KCB plans to set up in Burundi by the end of this year, which will make it one of the few local companies operating in all five EAC states.

Both KQ and KCB are often invoked as symbols for the grand East African future – five states, one big happy market. And while these companies certainly offer signs of progress on the integration quest, they also pose a question rarely raised: what exactly is going on in Burundi? East Africa is so often discussed in terms of its core three states plus one – Rwanda, largely because of President Kagame's rabid development promotion. It is easy to forget there is actually a fifth member, to which KQ planes fly and regional businesses expand.

Investor Friendly Regulations

A Burundi delegation headed by President Pierre Nkurunziza did make an appearance at the July 2009 EAC investment conference in Nairobi. The group was there to promote various investment opportunities as the country – one of the poorest in the world – emerges from over a decade of civil conflict and works with the World Bank and IMF to stabilise and privatise key economic sectors.

At first glance, it all looks investor friendly: A brand new one-stop-shop investment promotion agency is to be established any day now. New investment laws provide total freedom of settlement, transfer of assets, tax incentives, and private property protection for foreign investors. Commercial court proceedings and business registry have been improved. And a revenue authority has been created to manage public finances and harmonise tax policies with the EAC. Immediate focus is on privatising the coffee sector, but the government is also seeking private investors for energy, tourism, telecoms, sugar, banking and mining ventures.

As one Burundian businessman put it: Everything is broken, or more optimistically, everything needs to be fixed. And this is how many Burundians pose it – as the opportunity for investors to come in on the ground floor of an economic recovery story, and fix things in exchange for high long-run returns.

Part of the argument is that even though Burundi is starting from scratch, or slightly worse – from post-conflict scratch, as a member of the EAC its economic rise will be necessarily faster and its future brighter. This hope may prove true in some ways. But not surprisingly, Burundi still has huge hurdles to jump and boundaries to break before it can sit meaningfully at the table with its four new friends.

EAC Market

In the short run, EAC membership has and will continue to spur on economic and fiscal reforms. The pressure is on Burundi to comply with a multitude of regional policies and participate in the EAC customs union which it officially joined this year. Integration also provides opportunities for more cross-border business, private sector networking, spillover knowledge creation, and attraction of foreign investor attention to what is quickly becoming an EAC market brand. Burundi's economy lags so far behind all the other EAC states that it cannot help but grow as a member of the group.

But integration also poses challenges for Burundi: Investors looking at the EAC market as a whole will naturally want to invest where either the cost of doing business and risks are lowest, demand is highest or resources are available, or some combination of all three. Mining companies may consider tapping Burundi's mineral wealth, but the global crisis has made even this boldest of sectors more attuned to the costs arising from inadequate infrastructure and political risk. Telecoms companies and banks have already moved into Burundi to exploit nascent demand; but with just 9m people, the country's market is relatively tiny, and still lacks large-scale insurance provision and fiscal stability, all of which deters big investors. Perhaps most importantly when considering long-term economic growth, manufacturing companies will resist moving into Burundi.

Why set up a factory in the region's least developed (and landlocked) state when you can open one in Kenya or Uganda and export into Burundi's market for free? Ugandan manufacturers have already complained extensively about having to face competition from Kenya's more advanced manufacturers who, by 2010, can export to Uganda's market duty free under the customs union. What has largely saved Uganda's young industry is its proximity to the lesser developed markets in Rwanda and Burundi as well as to the border regions of DRC and South Sudan, both of whom have no manufacturing capacity, but strong demand.

Rwanda has been incredibly proactive about increasing its competitive appeal within the region, but the country has also had more than 10 years to do so following the 1994 genocide. For Burundi, it will be difficult to establish industry now starting almost from scratch under a fully liberalised regional market. The country is currently seen largely as a one-way market for EAC goods and services. For instance, the country's heavily indebted private sector complains that banks have been happy to move into Burundi but are not providing credit commensurate with their presence to support local business development.

Finance is a major challenge for the nascent business community, even as the nation itself recently qualified for HIPC debt relief. Much of that money will go into public health and education, and rural infrastructure development.

Investor Interests

Burundi does harbour a few comparative advantages: the country has a good amount of flat, fertile land for agricultural development, which has been earmarked by its donor partners for development support. Businessmen working in Burundi's small manufacturing community say competition from regional imports will be a big challenge, but they want to see the country carve a niche for itself in coffee products and other agribusiness. Burundi also has miles of white sand beaches along Lake Tanganyika, where its capital city Bujumbura sits. Burundians hope tourism will be one of the first sectors to attract significant outside investment.

Demand for travel accommodation is already high, largely from diplomatic and donor traffic, but also from those twice daily KQ flights carrying at least a few regional businesspeople. And Bujumbura does not yet have any large hotels. Finally, much like Uganda, Burundi's landlocked geography hikes production costs, but also places it on an important trade route into growing markets in the DRC.

Work has already begun on plans for a railway line that will link the Dar es Salaam port to Kigali and on into Burundi. Lake Tanganyika also provides a transit route into Zambia and Tanzania, which has been attracting the attention of regional traders.

Security Concerns

In the near term, security risks remain a major concern for Burundi. When prompted, most Burundians will tell you that they "cannot go back" on the recent peace process, meaning that peace is finally here to say. The nation had seen many peace deals signed and destroyed leading up to the most recent ceasefire agreement reached between the government and the last remaining rebel group in 2008.

The group, the Forces for National Liberation (FNL), began laying down its arms earlier this year. The World Bank will provide at least USD15m to support demobilisation. But IRIN News recently reported that few weapons have been submitted thus far and as many as 10,000 FNL associates may remain unrecognised and without any official demobilisation support. This may not translate into more civil war, but coupled with the lack of economic opportunity in the country, it means that the basic security situation remains volatile – a situation similar to Southern Sudan.

The International Crisis Group reported in July 2009 that violence persists in the country, with the FNL accusing the government of arbitrary persecution and arrest, and the government accusing the FNL of abusing the population by levying illegal taxes and wielding violence against local officials and civilians. There is a general fear that as the FNL has registered as a political party; both it and the ruling CNDD-FDD party may invoke violence and intimidation to win the upcoming 2010 election.

By Brookings Institution standards, in 2008 Burundi was the fifth weakest state in the world, behind both the DRC and Somalia. At the same time, the 2010 election provides an early benchmark for Burundi. If things go smoothly, it will be seen as an important step toward stability and development, and could boost investor confidence. Burundians say President Nkurunziza is young, energetic and generally well liked. And with EAC eyes watching, the country has fresh motivation to get it right. Beyond this election, Burundians like to remind investors worried about long-run political risk that they can purchase insurance against political risks from the World Bank’s Multilateral Investment Guarantee Agency (MIGA), as well as from the African Trade Insurance Agency (ATI), of which Burundi is a member.

Perspectives

Overall, both government and private sector capacity remain low. Many Burundians learn English along with French from grade school, and speak Swahili, but a language barrier persists and education requires major investment. When asked which sectors and reforms it will prioritise, the government usually says everything is a priority; everything needs to be fixed.

The public sector is overworked and under-qualified in almost every way. Inflation vacillates around the low double digits, and the national currency, the Burundi Franc, has been hard to stabilise with the country dependent solely on coffee and tea exports for foreign exchange. The global crisis has hit Burundi, with lower international coffee prices, fewer remittances, and possibly less aid money for its ambitious restructuring projects.

The Burundi government hopes to grow by at least 4.5% in 2009, the same rate it achieved in 2008. IMF estimates have more realistically revised GDP growth projections to around 3.2% for this year. However, the Fund emphasises that the country has made commendable progress on fiscal and structural economic reforms.

Finally, while the rest of the EAC talks about how to structure private public partnerships for infrastructure development under global crisis constraints, the World Bank has explicitly ruled this option out for electricity and water distribution in Burundi: "Today, the immediate participation of the private sector in the management of REGIDESO [the state owned utility provider] services, either as a service-provider and/or as a shareholder, appears unlikely, until the country risk further diminishes and regulatory framework is fully enacted with appropriate regulations."

Burundi currently faces an electricity shortage of 25 MW during peak hours, which will need to be addressed in order to enable development in other sectors. So far, both the World Bank and African Development Bank have committed funds to rehabilitating hydropower production and distribution in the country. The Burundian government also hopes to invest USD91m in the construction of two new hydropower plants. Reforms recommended for REGIDESO in 2003 were derailed by the conflict and are now, like everything else, starting largely from scratch.

This article was first published in Ratio Magazine www.ratio-magazine.com