The ongoing knock-down of administrative barriers along the national borders of East African Community member states has sparked a fresh rally of trade in illegal goods that is costing manufacturers billions of shillings in marketshare and heavy revenue losses to governments.
The East African Business Council (EABC), a regional traders’ lobby, says the sale of illegal goods, mainly involving the shipment of contraband and counterfeit goods, has risen significantly since last year’s phase-out of cross border tariffs under the EAC customs union.
The council’s claims are backed by preliminary findings of a study by the Kenya Institute of Public Policy Research and Analysis (KIPPRA), which estimates the annual cost of trade in counterfeits and contraband goods in the region at Sh180 billion ($2 billion).
This means that trade in illegal goods has risen by 350 per cent from the Sh40 billion ($500 million) estimate the Organisation for Economic Cooperation and Development (OECD) gave in 2008.
Counterfeit goods are imitations of products offered for sale as if they were authentic, disregarding trademarks.
Contraband goods, on the other hand, may be authentic but have not fully complied with the import and export regulations such as payment of taxes.
Kenya loses about Sh50 billion a year through the sale of counterfeits, according to the Kenya Association of Manufacturers (KAM).
That is enough money to finance the free primary and secondary education subsidy for two years.
Besides causing massive revenue leakages for national governments in the region, the booming trade in illegal goods is also raising concern that its proceeds may be used to finance international crimes such as terrorism.
The sharp rise in illicit trade is partly attributed to the easing of administrative restrictions on circulation of goods and services with last year’s final phase out of cross-border tariffs on Kenyan goods entering other EAC states.
EABC says growth in illegal commerce is being driven by foreign and local entrepreneurs who are using the relaxed trade regime to replicate well known brand names and designs for sale at cheaper prices.
Dry cell batteries, alcoholic beverages, fruit juices, shoe polish, toothpastes, soaps and detergents, ball point pens, books, electrical and electronic items are some of the most counterfeited products.
Others are perfumes, clothing, footwear, cosmetics, pharmaceuticals, automotive spare parts, computer software and hardware, audio and video tapes and CDs.
Cigarettes top the list of counterfeit products sold in the Kenyan market threatening the marketshare of established players such as British American Tobacco (BAT).
BAT estimates that cigarette counterfeiters pocket close to Sh100 billion annually from sales in East Africa.
Economists say counterfeiting is mainly the result of the heavy taxation of cigarettes in Kenya, making contrabands more affordable and attractive to consumers.
Uganda and Kenya have recently enacted anti counterfeits legislation offering industrialists hope of a reversal in trends, decongestion of markets and laying the foundation for long term growth.
Kenya has since followed up with the launch of anti-counterfeit agency whose jurisdiction is, however, limited to its national borders.
“We have felt some positive impact in the market following the launch of the anti counterfeiting agency but I believe a lot still needs to be done to claw back the 20 per cent of the market that is still in the grips of counterfeit goods,” said Mr Sunil Morjaria, the director of office supplies distributor Despec East Africa.
The Kenya Revenue Authority (KRA) has also stepped up its fight against illegal trade with last year’s introduction of an electronic tracking system, known as Hi-G-Data Seal, which is based on radio frequency platform.
KRA has recently announced plans to expand coverage of the electronic cargo tracking system (ECTS) to monitor not only goods on transit but also exports and other goods under customs control.
The taxman said the move would also protect local manufacturers against unfair competition whenever goods meant for export markets and those that enjoy preferential tax terms, are sold locally.
Though manufacturers have backed the move, transporters say it has significantly increased their operation costs and erected new barriers to cross-border trade with neighbouring Uganda, Tanzania, Rwanda, Burundi, East Congo, Southern Sudan and Ethiopia who are not using a similar system.
Last month, Tanzania also stepped up its war against counterfeits with the announcement of a partnership with the International Criminal Police Organisation (INTERPOL) to fight the crime.
Business people however see these efforts as too disjointed to make an impact, saying only coordination among the agencies would produce tangible results.
“These efforts can only curb illicit cross-border trade in counterfeits if the agencies worked together and shared information,” said Steve Smith, the CEO of Eveready East Africa.
Tanzania’s Food and Drugs Authority and Kenya’s Pharmacy and Poisons Board have recently revealed that East Africa has become a huge market for counterfeited drugs, raising health concerns.
Mr James Muriithi, the operations manager at the Nakuru based Mutsimoto Motor Company – a manufacturer of motor vehicle filters – says in-house campaigns against counterfeits have proved expensive and futile for many companies.
Mutsimoto says it has lost 40 per cent of the market share it had three years ago to fake and sub-standard imports.
“Counterfeiters have changed tack and are no longer handling cheap and poor quality products that easily attract suspicion but well made and competitively priced items that are difficult to detect,” said Mr Muriithi.
He said the fight against sub-standard products and counterfeits has failed because most importers prefer to declare standard specifications for imports.
Investors in the region have organised a ministerial forum to be held in Nairobi between October 6 and 7 in the hope of ring fencing the 126 million people EAC common market from merchants of fake items.
The conference which seeks to come up with a regional approach to fighting counterfeits will focus on the rigid processes that courts apply to let off offenders with light sentences, half-hearted enforcement of the existing laws and failure by investors to protect their brands through registration.