SMEs: Challenges, way forward

Dar es Salaam. Formalisation of business enterprises is increasingly becoming a significant requirement in seeking to improve economies and livelihoods on a meaningful, all-inclusive and sustainable basis.

The process is also significant as Tanzania struggles to implement socio-economic development strategies intended to make the country a semi-industrialised, middle-income economy, in line with the National Development Vision-2025

Although business formalisation is a wise move, stakeholders complain that the extant policies and regulatory frameworks are major obstacles to effective formalisation – saying that these are overly bureaucratic.

They also blame the policies and regulatory frameworks for being business unfriendly in such areas as taxation, accessing credit financing and “social protection.”

Commenting on this, Dr Donath Olomi of the Institute of Management and Entrepreneurship Development (IMED) said “adequate policy and regulatory frameworks are important. Business operators should be able to acknowledge that business regulations work to their benefit and the laws are observed.”

Dr Olomi made this statement at a Breakfast Debate organised by Policy Forums last week under the theme ‘Transforming Trade and Industry in Tanzania: Facilitating the Formalisation of Micro-Enterprises.’

In a presentation titled ‘Participatory Business Formalisation: an Inclusive Approach to Managing and Transforming Informal Businesses’ Dr Olomi said regulatory simplification, costs reduction, one-stop centres and enforcement of compliance work to a great extent.

The 2014 Integrated Labour Force Survey Analytical Report conducted by Tanzania’s National Bureau of Statistics (NBS) shows that 75.9 per cent of salaried and self-employed workers in non-agriculture sectors are in the informal sector.

According to Dr Olomi, policy and regulatory frameworks are significant because they are supposed to work for all operators in the informal sector – and ensure that laws and procedures are followed and preserved.

“They should provide common understanding, language and definition for informal sector operators, vendors and petty traders famously known as ‘Machingas.’ Most importantly, they should provide a predictable business environment,” he said.

Good policy and regulatory frameworks will make the informal sector coherent and cost-effective, Dr Olomi says – adding that they’d provide guidance to urban planning on various issues, including zoning, infrastructure development, taxes, levies and fees.

A specialist in ‘Enabling Environment and Enterprise Formalisation’ at the International Labour Organization (ILO), Judith Van Doorn, outlines four aspects to be considered when transforming businesses from informal to formal. These are persistence, simplicity, giving voice to businesses, and selling benefits to entrepreneurs.

“Under ‘persistence,’” Ms Van Doorn explains, “policymakers should introduce initiatives, and continue to elaborate, improve and adapt them while making sure that policies ‘speak to each other.’

“Some countries have worked for over 20 years to find the right policies; this requires persistence, high political will and extensive coordination,” she states.

Regarding simplicity, she argues that, although business registration processes vary from one country to another, most governments have streamlined registration procedures, sometimes bringing them under one roof.

“This is a step forward. Yet, in many countries, a lot remains to be done to simplify registration and make it client-friendly,” she says.

Entrepreneurs should weigh the benefit(s) of formalising their businesses against the costs and/or risks of working in the informal sector. Simplifying registration procedures alone would not encourage entrepreneurs to formalise.

Ms Van Doorn also said more needs to be done, and that persistence and simplicity alone won’t encourage owners to formalise their businesses.

“Finally, it is important to listen to business owners and take their views on-board – especially during formulation of policies and regulations,” she says.

Speaking at the event, a private sector representative, Mr Gaston Kakuwi, called for a review of Tanzania’s business policy, noting that so-called “mandatory issues” – such as the need for entrepreneurs to have feasible business facilities – are outdated.

“There are experts who don’t need to have such factors. They include those who are competent in Information and Communications Technologies (ICTs),” he said.

Supporting the call for increased education on the formalisation processes, Mr Kakuwi said that, after understanding the benefits, risks and/or losses, less effort would be required in the formalisation exercise.

Major challenges confronting Tanzanian entrepreneurs include lack of incentives, and their non-involvement in the formulation of policies and regulations.

All business operators – especially those in the private sector – should be involved, because they are the ones who know the challenges in the sector, he stated, pontificating that “lack of participation results in ineffective policies and guidelines.”

Apart from providing special business IDs to ‘Machingas,’ involvement of the informal sector should be prioritized starting from the grassroots to higher levels, Mr Kakuwi said, explaining that this would prevent the mushrooming of white elephant projects like the Machinga Complex in Dar es Salaam which has proved to be ineffective in solving the hydra-headed Machinga problem.

The chairman of Tanzania Students Network Programme (TSNP), Abdul Nondo, said regulatory procedures should be reviewed, and entrepreneurial skills should be provided.

Skills provision shouldn’t be left to the private sector, he said – adding that loans should also be provided, especially to budding entrepreneurs, alongside tax exemptions for a specific period in order to support business growth.

“This is what other countries do,” he said. The Tanzania Revenue Authority (TRA) and municipalities impose massive taxes immediately after a business has started operations. This is unacceptable.”

He advised the authorities to stop thinking that business formalization ends at the registration stage.

More steps need to be taken, including providing entrepreneurs with working premises and functional economic infrastructures.

A Dar es Salaam businesswoman, Nanteka Maufi said small entrepreneurs who secured IDs under the president’s initiative should be given priority in securing business premises.

“We have paid Sh20,000 for the IDs, and we should be considered first in the provision of business premises, training courses and financial incentives, including capitation grants,” Ms Maufi said.

Responding to various concerns, Mr Faraji Hassan from the President’s Office for Regional Administration Local Government (PO-RALG) said the government is preparing guidelines to identify, support and coordinate small-scale entrepreneurs in the informal sector, and also create a conducive environment that would enhance their growth and prosperity.

“We have directed 184 District Councils countrywide to set aside 100,000 hectares of land for small-scale entrepreneurs,” he revealed.

“Provision of feasible business areas is an important step in the formalization processes. It is indeed difficult to formalise businesses without creating special areas for them,” he said.