New optimism has emerged over the future of the Southern African Customs Union (Sacu) after the member States celebrated the centenary of this, the oldest functioning customs union, earlier in 2010.

More regular meetings have been taking place and leaders of the member States have committed strengthening the organisation. This is a significant change from where things stood in 2009, when the future of the customs union was in question, and there were comments that it may dissolve into a mere free trade area.

"I am more optimistic about Sacu than I was at the centenary celebrations, where I felt very despondent. The organisation is starting to focus on the right issues," says Trade Law Centre for Southern Africa (Tralac) executive director Trudi Hartzenberg.

However, while political will and certainty may have increased, a number of trade experts have emphasised that Sacu needs to build confidence among the private sector because it is felt that business is neither particularly concerned with, or well-informed about, the role of Sacu.

Businesses need to be assured that, if there is a problem with trade law, for example, this can be dealt with through Sacu.

In 2002, the Sacu secretariat said that it would establish a tribunal, which would adjudicate on violations of rules. The tribunal was, initially, expected to be operational by 2009, and would adjudicate on matters concerning the application or interpretation of the 2002 Sacu Agreement, as well as on disputes arising between member States.

Business is concerned about the slow pace of decision-making within Sacu and the amount of time taken to implement decisions, which is why many companies have lost faith in Sacu as an institution. It is felt that realistic timeframes should be established for such deliberation and action, and rules should be upheld.

Sacu secretariat executive secretary Tswelopele Moremi says that the organisation is aware that the slow implementation of the 2002 Agreement causes tension and frustration among member States, while another representative of the secretariat highlights that decisions can only be implemented at the pace of the slowest member State.

"The system is over-politicised and heated. It needs to be more independent, and have the predictability and certainty that any court should have," notes South African Agricultural Processors Association international trade advisor Lambert Botha.

"For the private sector to establish good businesses, and create jobs, Sacu must have a robust, rules-based regime that will provide reliability and transparency. Otherwise, the region will see opportunistic investments that will not contribute to development," adds Hartzenberg.

Proper research also needs to be done to establish the value of the Sacu market for business so that this information can be used in marketing exercises and, perhaps, attract investment.

South Africa's Department of Trade and Industry (DTI) director-general Tshediso Matona says that the South African government hopes to see Sacu develop into an institution that can deepen regional integration, implement regional trade and industrial policies, and stimulate cross-border infrastructure projects. These will address what he calls "destructive and prohibitive trade barriers".

He emphasises that regional production and value chains must be developed and that South Africa has already done some work on identifying what some of these could be. Agriculture and processing, livestock and food, clothing and textiles, tourism, crafts and renewable energy featured on this list of possible cross-border value chains that could be developed.

He also stresses the need for more shared research and analysis between the Sacu member States.

After a Sacu heads of State meeting, held in Johannesburg, in July, member States reiterated their commitment to enhancing the customs union. A new vision and strategy were outlined, and the council of Ministers was directed to focus on 12 challenges that require improvement for Sacu to evolve.

In August, another Sacu meeting was held, in Gabarone, where these key issues were whittled down to five priority focus areas that needed work.

These are to develop a regional industrial policy, facilitate cross-border trade among Sacu members, review the revenue-sharing formula, develop common institutions and promote unified engagement in negotiations with third parties.

The Revenue-Sharing Challenge

This is one of the most contentious issues among the member States of Sacu. The Sacu Council of Ministers has decided to review the existing arrangement, and has appointed a service provider to conduct the review and report to the commission by December 2010.

South African Treasury has put forward proposals that the customs revenue generated through the agreement should be used in a developmental fund. This fund could be used to build cross-border infrastructure and assist in breaking down some of the barriers to intra-Sacu trade, rather than contributing to the national budgets of some of the smaller countries within the union.

South African National Treasury African economic integration chief director Neil Cole explains that 70% of the budget of Swaziland is derived from the customs revenue sharing arrangement, while about 60% of Lesotho's budget comes from the arrangement.

He notes that it is dangerous for a country to be this dependent on customs revenue, particularly since revenues decreased by about 50% during the global financial crisis when trade was heavily impacted. This meant that the contributions to these countries shrank significantly.

Cole also says that, if funds that support budgets were to be redirected to a developmental fund, there would need to be discussion on aid, and also fiscal reform, so that these countries would not be negatively impacted.

It is hoped that the development fund could address trade barriers and stimulate trade and industrialisation in the region, and assist the smaller countries in becoming more financially secure. However, this process would take time.

The current revenue sharing formula was implemented for the first time in December 2004. In practice, member States' yearly revenue shares are determined and approved by the Council in December for implementation during the subsequent year.

The current formula has three components - the customs component, allocated on the basis of each country's share of intra-Sacu imports; the excise component, allocated on the basis of each country's share of Gross Domestic Product (GDP); and the development component, which is fixed at 15% of total excise revenue, and is distributed according to the inverse of each country's GDP per capita.

The structure of the revenue-sharing formula is such that Botswana, Lesotho, Namibia and Swaziland (BLNS), get a significant share of their revenue from the customs component, while South Africa gets more than 90% of its share from the excise component. The development component, while meant to compensate the least-developed economies, is distributed more or less in equal shares among all the member States.

The Sacu secretariat, located in Namibia, states that the implementation of the current revenue-sharing formula has a number of challenges with the data that inform the variables in the formula.

It also recognises that its common revenue provides a potential source of financing for its new vision and strategic objectives. Thus, the need for an independent evaluation of the operating of the current arrangement, and the development of options for a new revenue-sharing arrangement in line with the new Sacu vision and strategy.

"The output of the study will form a basis for negotiation of and agreement to a new revenue-sharing arrangement," says the Sacu secretariat.

Unified Engagement?

It was the Economic Partnership Agreement (EPA) discussions with the European Union (EU), in 2009, that threatened to destabilise the relationships among Sacu member States, as some countries signed an interim EPA, while others, namely South Africa and Namibia, refused to do so.

There were accusations of bullying on the part of the EU as well as by South Africa as the largest economy within Sacu.

Closer collaboration among Sacu States has since emerged and significant impetus, from both blocs, to conclude these negotiations by the end of the year has been evidenced.

The most favoured nation (MFN) proposal remains a core issue on which the parties are still "far apart", South African negotiators explain.

The South African government feels that it is logical that Sacu increase trade with other developing countries, such as China, India and Brazil, since changing patterns of trade show that these countries are garnering increasing percentages of global trade.

Other Sacu member States, like Botswana for example, still export goods, such as beef and diamonds, largely to European markets, and want to maintain these established markets.

There is also, currently, a lack of alignment, owing to South Africa's bilateral Trade Development and Cooperation agreement (TDCA) with the EU, while the remaining Sacu countries are allowed duty-free, quota-free access into the EU. The aim of the EPAs is to conclude one comprehensive deal to address the misalignment.

These, and other new-generation issues, such as intellectual property rights, government procurement, services and competition policy, are differences that will need to be ironed out if an agreement is to be inked before the end of the year.

Facilitating Trade & Industry

To improve trade between Sacu member States, better cross-border infrastructure will be needed, and spatial development initiatives will be important in this regard.

Value chain linkages should be identified to improve the productive capacity of the region.

Matona says that lack of cross border infrastructure is "probably the greatest obstacle to progressing faster with regional integration".

Thus, the proposal to create a development fund, rather than continue with the current customs and excise revenue-sharing agreement, which could be put towards cross-border infrastructure, was proposed as a way of dealing with this lack of infrastructure.

South African DTI African multilateral economic relations chief director Xolelwa Mlumbi-Peter says that a common industrial policy should target sectors where complementarities are possible, and would have to address issues of infrastructure, trade facilitation and standards.

Matona adds that common trade and industrial policies need to be developed to overcome the current policy deadlock. Implementation will rely on effective cross-border infrastructure, while the entire initiative hinges on competitiveness and the capacity to produce ‘tradeables' competitively.

"You can't develop a common industrial policy if you don't have a common understanding of industrial policy," cautions Hartzenberg, emphasising that member States first need to have a shared understanding of the basics.

Services, such as telecommunications, energy and transport, are also vital for industry and for enabling competitive manufacture. If the inadequacies of the services sectors are not dealt with, industrial policy will come to nothing, Hartzenberg adds.

South African Institute of International Affairs trade expert Peter Draper asserts that the BLNS States, through the common external tariff, have effectively adopted South Africa's industrial policy, and the real test for Sacu will come when its tribunal votes against South Africa's interest. For example, if the tribunal were to vote against South Africa's automotive policy, which does not allow for the import of second-hand cars, it would mean more affordable vehicles become available in BLNS States.

Draper also argues that industrial policy should be regional and national, and should not be sector based as this would be too divisive. He further asserts that unilateral trade liberalisation, rather than protection of selected sectors, would make the region more competitive.

Cole emphasises that trust among Sacu member States will be required if complementary industrial policies are to be established. Some countries may not realise benefits in the short term, and will only reap benefits over the longer term.

Common Institutions

"There is a shift taking place, and I'm optimistic that we will see institutional development in Sacu," says Hartzenberg.

Moremi notes that there has been some work on the Sacu tariff board, and capacity is being built within the secretariat, which now employs a legal officer.

SACU Institutions are contained in Article 7 of the 2002 Sacu Agreement and include establishment of the Sacu Council of Ministers, the secretariat, the commission, national bodies, a tariff board, technical liaison committees and a tribunal.

Progress on establishing some of these institutions has been slow.

Thus, while Sacu still faces many challenges, the conviction to face up to these challenges seems more apparent, at least from a political view.

"Agreeing on a new mission and vision are not sufficient alone to take Sacu forward. It needs committed leadership from politicians, officials and the private sector," says Moremi.

Matona says that significant achievements have taken place to enable Sacu to move forward on a different plane and trajectory to that of the past.

Balancing the interests of the member States will always be challenging, but perceptions are swaying towards more confidence in Sacu.