Sunday, 24 June 2012

Doing Business in Tanzania

By Alykhan

Any discussion about reviving an economy in the end always comes down to boosting local businesses and job creation. This is the surest way of achieving robust economical growth that is distributed evenly among all  classes of society. Other sources of income such as exploitation of natural resources comes with its own drawbacks most notably the natural resource curse. Tanzania is a land of opportunity, characterized recently by robust economic growth and, thankfully, peace and stability in a region that is notorious for political unrest and civil war. This makes it an ideal place for attracting foreign investment but more importantly it should, at least in theory, be fertile ground for fostering local entrepreneurs that cater for Tanzanian consumers and hopefully even export their goods and services to other countries. In this article we want to examine some of the barriers to starting a business in Tanzania and how the government can rectify this situation to ensure our entrepreneurial culture is a thriving one.

So how easy is it to start a business in Tanzania? This is a difficult question to answer. A seasoned Tanzanian would answer "It depends on who you know". Therefore, the odds are already stacked up against someone who has a brilliant idea but lacks the contacts to get their business of the ground. But lets put this hard-to-objectively measure problem aside for now and focus on the legitimate way to start a business in Tanzania. How does it compare to other countries in Sub-Saharan Africa and indeed globally. Fortunately, there is a report published by a World bank funded project aptly named the Ease of Doing Business Report. This report covers all aspects of conducting a business, from starting one to buying/selling properties as well as dealing with bankruptcies. It contains a detailed analysis of 183 countries ranked on 11 criteria, all which are objectively measured and standardized to make it comparable. The report (which can be found online here) goes further to list important information which the authors have used to conclude their ranking (such as number of procedures and hours required to file a typical tax return)

Source: Doing Business: Doing Business in a more Transparent World Report 2012

According to the report, Tanzania is not faring so well when it comes to Ease of Doing business and is firmly in the bottom half of global rankings. In the East African region, Tanzania is ranked 4th out of the 5 countries, beating only Burundi but lagging far behind Rwanda, who have reformed their business sector considerably in recent years. (Report focus on Tanzania here)

Summary of procedural problems in conducting business in Tanzania and proposed reforms:

In order to improve efficency of the business environment in Tanzania, we need to focus on the main areas where Tanzania is lagging considerably. Here is our analysis (in decreasing order of severity):

1. Getting Construction Permits (Rank: 176 out of 183)
This is by far Tanzania's worse ranking and possibly a major stumbling block for those business requiring construction (factories, warehouses, office buildings). 

Officially, it requires a total of 19 procedures which takes on average 303 days to complete and the fees cost a whooping 1190% of an average Tanzanian's annual earnings. Compare this to Kenya where it takes 8 procedures, 125 days and 160% of annual income per capita and you can see Tanzania needs a major overhaul of construction permits. 

This long waiting time may also be a breeding ground for corruption as officials will seek bribes to speed up the process.

2. Registering Property (Rank: 158 out of 183)
Property acquisition and selling are common practices either as a business by itself (real estate) or for expanding an existing business.

 In Tanzania, property transfers require 9 procedures, take on average 76 days to complete and cost 4.4% of the property value. In Sub-Saharan Africa, Botswana has the highest rank (50) when it comes to Registering property. It requires 5 procedures, takes 16 days and costs 5% of the property value. This is about 5 times as fast as in Tanzania and requires half the number of procedures to complete.

3. Paying Taxes (Rank 129 out of 183):
Businesses pay taxes to the government for the privilege of benefiting from the resources of Tanzania. Countries are ranked on the number of tax payments made per year and the relative time required to fill out all the necessary documents. 

For Tanzania, an average company is required to make 48 payments to the government per year which requires 172 man hours to complete. Rwanda emerges the leader in Sub-Saharan Africa for ease of paying taxes. It requires 18 payments and 148 hours to complete on average. 

Also another factor to consider is the percentage of net profits that a business typically pays to the government as taxes. In Tanzania this amounts to 45% (Rwanda-31.3%) which places a huge strain particularly on small and medium sized businesses (SME), the majority of whom dont qualify for tax exemptions from the government where as the large corporations get away with paying much less in taxes (for a good example consider the mobile phone operators who despite making huge profits dont appear in the list of top tax payers). Changing the tax code to favor SME or atleast ensure all businesses pay their fair share of taxes will stimulate grassroot level entrepreneurship and create stable well paying jobs for the country.

4. Starting a business (Rank 123 out of 183):
Here the report evaluates the effort required to legally start a new business, by determining the number of procedures, time taken and the costs associated with formally registering the new business entity. 

In Tanzania, starting a new business requires 12 procedures, takes 29 days and costs 29% of the annual per capita income. It is important to minimize the effort and cost of this crucial first step which may discourage many potential entrepreneurs from starting a business. Again compare this to Rwanda (Rank 8) who are really committed to reducing barriers for new businesses. It requires 2 procedures, takes 3 days and costs 4% of annual income to start a business. Amazing!

Therefore we can clearly see that Tanzania has a lot of unnecessary bureaucratic blocks when it comes to conducting business in the country. We desperately  need to change this and we have many examples both globally and regionally like Rwanda of how this can be done to ensure Tanzania is not left behind in the global revolution to foster local businesses and attract more foreign investment.

No comments:

Post a Comment