The World Bank Group* with support from the UK’s Department for International Development (DFID) has undertaken an in-depth study of investment perceptions and specific investment constraints faced by exporting firms and potential future investors in eight priority economic sectors – tea, horticulture, agro-processing, minerals, manufacturing, tourism, ICT/BPO and healthcare.

The objective of the survey is to research the perspectives of existing and potential investors in the priority sectors. With the study and approach differentiated for the internal “exsiting” Rwanda companies and external international “potential” investors.

For the international survey, a database of over 600 international companies in the target sectors based on a range of sources was built to allow for identification and profiling of the most relevant international potential investors. Companies were then qualified by phone and those qualifying were mailed the agreed questionnaire. A follow-up phone interview was then organised and the questionnaire completed. The survey received 59 responses, or approximately 10% of those contacted.

For the Rwanda survey, face to face interviews were conducted among existing investors across all sectors. This resulted in the production of quantitative and qualitative data. A total of 66 responses were generated by the fieldwork team representing a mixed group of Rwandan and international shareholding structures.

* In collaboration with the Rwanda Development Board (RDB), the lead agency of the Government of Rwanda (GoR) for private sector development.

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Context: the Rwandan Economy and Private Sector

Development Performance

Rwanda is gradually transforming its economy from a low-income to a middle-income country. Since the turn of the century, Rwanda has seen its economy grow by 7.9% per year, such that it is currently more than 3.5 times larger than it was in 2000. Meanwhile, there is an on-going structural shift in the economy from subsistence agriculture towards commercial sectors: Industry has grown by 9.8% per year on average, Services by 9.4%, and Agriculture, Livestock, Forestry, and Fishery by 5.3%.

In the same period, GDP per capita has increased from $242 to $729 and poverty has reduced from 60.3% of the population to 39.1%. Life expectancy at birth has increased from 48.2 years in 2000 to 64.5 years in 2015, while the child mortality rate dropped from 183/1000 to 42/1000. The youth literacy rate increased from 7% in 2010 to 85% in 2015. Financial inclusion increased from 48% in 2008 to 89% by 2016, while mobile phone owners increased from 6% to 65% between 2006 and 2014.

Several factors point toward expanded business opportunities in the future. Rwanda is located in one of the fastest growing regions in the world, and the growing domestic and regional markets present new market opportunities for both new and existing investors. A domestic and regional middle class is emerging, creating a market for an expanding array of goods and services.

Opportunities also exist for growing the export base, specifically for high value agricultural products such as horticulture and agro-processing and for light-manufacturing, tourism, minerals, and traditional export crops.

Furthermore, about half of Rwanda’s population is younger than 19 years old, which opens the possibility for a demographic dividend from a growing working-age population and a lower dependency ratio. Rwanda’s young population is likely to generate new businesses and take advantage of new technologies. The use of ICT can facilitate the entry of youth in SMEs and stimulate entrepreneurship and skills development.

The External Balance: Trade and FDI

The country is becoming increasingly “land-linked” rather than landlocked, thus increasing the likelihood of attracting investment, stimulating competitiveness and supporting Rwanda’s transition from a subsistence-economy to a commercial-based, export-oriented economy. While maritime trade through the transport corridors have become cheaper and faster, new flight connections to high-end consumer markets have been established. For example, agricultural products are likely to fetch higher prices in resource-rich West-African countries or in European and Asian markets, to which more flight routes are currently being established.

Furthermore, Rwanda has expanded its foreign market access by negotiating trade agreements such as EPA, AGOA and the Tripartite Agreement. As a result, imports and exports have increased their combined share of the economy from 36% in 2005 to 48% by 2016. Since 2011, imports grew on average by 4.8% per annum and exports by 8.4%.

However, Rwanda has a significant trade deficit which affects the current account; the current trade deficit stands at 18% of GDP for 2016. This is a common feature for high-growth developing economies as there are high investments and little production and savings to supply inputs and finance. Net foreign transfers (ODA, remittances, grants, interest payment, etc.) mitigate this deficit with 4% of GDP such that the current account deficit is 14% of GDP, i.e. Rwandan households, firms, and institutions borrowed 14% of the national GDP in 2016.

The trend in the trade balance has been downward trending since 2013, which puts downward pressure on the current account. Equally significant, net foreign transfers have declined as share of GDP, hence narrowing the gap between the trade deficit and the current account. While these deficits are not necessarily problematic if countered by future growth, short and medium term macro-economic stability may be at risk if the imbalances grow large. Consequently, there is a need to increase foreign investment and exports.

Identified general challenges to private sector companies

Rwanda is characterised by an active ongoing dialogue between the private sector and the government, with investors having direct and frequent access to high-level government officials. The private sector is growing, but it remains possible for government officials to have an overview of what problems companies in key sectors are facing. Consequently, the GoR’s perception of private sector problems may be relevant. The Private Sector Development Strategy, which is currently being drafted, aims to summarise the current knowledge of relevant private sector problems. The list below summarises key GoR perceptions of the problems faced by the private sector in Rwanda:

1. Access to finance: The prime interest rate is at 16-18%, making securing finance for all but the most lucrative ventures untenable. The savings rate is at 7.1%;

2. Access to skills: Wages in non-primary sectors appear competitive at face value around $40/month (31,300 RWF). However, almost 20% of firms report access to skills being a constraint to their business;

3. Enforcing small business contracts: A September 2016 MINICOM consultation found that a major constraint to especially small businesses is the inability to enforce business contracts.

4. High cost of trade: At an average $3,633 per container from Mombasa to Kigali, Rwanda remains one of the most expensive places for a container to reach. This is despite the figure having declined from around $5000 per container in 2015;

5. Regulatory compliance: At an estimated 3.1% of GDP, the cost of complying with regulatory requirements also remains high;

6. Insufficient access to and quality of infrastructure: Rwanda faces an infrastructure gap, hindering its economic transformation. Access to serviced land is a major constraint, often raised as the biggest challenge by foreign investors looking to set up operations in Rwanda;

7. Internal market inefficiencies, both for raw materials and for final products: Inefficient value chains and consumer markets lead to sub-optimal outcome for farmers, processors, traders, and consumers;

8. Access to and cost of standards and technology: While relatively little data is available about the average productivity of Rwandan firms, 32% of firms report that access to tools and machinery is a challenge (IBES, 2015). Furthermore, accessing export markets is challenging for smaller firms who lack the necessary standards.

Comparison of findings from the two surveys

Future FDI Plans for Africa

International Potential Investors: A very high percentage of companies (over 70%) are considering FDI in Africa over the next 12-24 months. In terms of the types of FDI being considered, companies are considering all modes of market entry for Africa. Over half of companies are considering Greenfield FDI, while over 40% are considering Strategic Partnerships with local firms; over one-third of companies are considering JVs with a local firm; and nearly one-third of companies are considering M&As.

Companies are planning to invest in Africa for export-oriented FDI to serve the African and US/European markets. In fact, nearly 60% of companies are planning export-oriented FDI. Companies are primarily driven by market access and market size as location determinants for FDI. They are also attracted to countries that have economic stability, low political risk and a pro-business regulatory environment. Low costs and incentives are also important location drivers cited by companies.

Existing Domestic Investors: No less than 92.4% of existing investors have plans for further investment in Rwanda. The total amount mentioned among the 66 respondents is $320 million, with the largest amounts in the agro-processing, mining, tea, and manufacturing sectors. This indicates the importance of existing investors for increasing investment overall. Apart from being more inclined to invest, existing investors may be faster and more efficient in the implementation of an investment project given their prior knowledge of the country.

On the other hand, finance may be a limiting factor, which raises the possibility of FDI into the company. Among the respondents, 66% percent were interested in additional foreign investment – mainly through JVs and Strategic Partnerships. This opens the opportunity to match domestic investors with foreign investors, letting each party use their comparative advantage in the investment process.

Location Determinants

Potential international investors primarily look for markets and stability when choosing a location in Sub-Saharan Africa, followed by regulatory environment and low operating costs. Investors that have invested in Rwanda have a similar profile with the exception that they put less emphasis on the size of the market and relatively more on stability and security.

Rwanda’s Strengths

Potential and existing investors agree that stability is Rwanda’s key strength. Existing investors are relatively more in agreement: 81% of domestic respondents cite stability among the top three strengths, whereas the figure among potential investors is 38%.

The second most cited strength among domestic investors is the market opportunity. In these cases, reference was made to Rwanda being a landlocked, the proximity to regional markets as well as investors seeing Rwanda’s limited market size as a good testing ground/foothold for entering regional markets. In contrast, international potential investors do not cite the market opportunity among the top strengths, but they do refer to stable economic growth, which generates a growing market. About a quarter of respondents in both surveys also cite the ease of doing business and infrastructure.

On the other hand, existing investors do not see the quality of labour among Rwanda’s strengths, whereas 21% of international investors perceive it as such. The two surveys also contrast on the perception of government incentives: 37% of domestic investors see it as a strength, while international investors do not.

Rwanda’s Weaknesses

Both surveys agree that the main weakness is the limited size of the market. While some investors are attracted to the relatively small size, which offers a good testing ground for expanding in the region, the majority of investors are deterred by the limited size of the national market. Economies of scale are limited and other countries in the region offer a larger consumer base.

The two surveys also agree that the geography and landlocked position are major constraints. Whilst the cost of transporting a container to and from the regional ports have come down in recent years, it remains higher than Rwanda’s regional peers.

Furthermore, the domestic investors cite the cost of production as a weakness. This is, among other factors, a result of the landlocked location. International investors cite lack of skilled labour.