Why MSMEs are key to Tanzania’s inclusive growth

Wednesday February 14 2018


By Zahra Nensi

Tanzania’s transformation to a middle-income economy through industrialisation is predicated on the growth of the private sector to foster job creation and enhance agricultural productivity.

The private sector landscape in Tanzania is dominated by Micro, Small and Medium Enterprises (MSMEs), which also serve as an important source of employment for youth and women, who are currently underrepresented in both the formal and informal sectors. Many of these youth and women are working in the agriculture sector, which is estimated to employ approximately 70 per cent of Tanzania’s workforce.

Tanzania’s 2017/2018 budget was purposefully designed to foster growth and industrialisation for economic transformation. The establishment of Tanzania Entrepreneurship and Competitive Centre (TECC) to promote entrepreneurial innovation and competitiveness in the country reaffirms the government’s commitment to spur private sector development.

The biometric Voter ID cards introduced in 2015 have also provided Tanzanians with the required form of identification helping to extend financial inclusion to MSMEs. Collectively, these reforms have helped to move Tanzania eight positions forward over a five-year period from 145 in 2013 to 137 in 2018 in the latest World Bank (WB) Ease of Doing Business report. A signal that the enabling environment is improving and that barriers for doing business in the country are reducing.

However, in spite of this progress, there still remains significant constraints hindering small enterprises from thriving in the current environment. Regulations are complex and burdensome, access to information for decision-making is scarce, resource and infrastructure availability is inadequate, MSME management skills are limited and the innovation ecosystem is in its infancy.

The analysis below provides more details on challenges affecting the overall business enabling environment along with current initiatives and proposed reforms to address these constraints.

High cost of doing business

The fragmentation of policies, regulations, and procedures, particularly for business registration, is resulting in complexity, variability and unpredictability in the process deterring small businesses from formalising. Several of these policies and procedures are stipulated by the national government and do not fall under the jurisdiction of the district councils, limiting the amount of information and assistance that a Local Government Authority (LGA) can share with their constituencies. Furthermore, the implementation of these policies is not consistent and greatly varies within and across districts.

By taking steps to harmonize the policies and procedures for business registration under the various jurisdictions, Tanzania can greatly reduce the amount of time and overall costs to register a business. According to the latest World Bank (WB) Ease of Doing Business report, Tanzania requires 11 procedures and takes up to 28 days (on average) to register a business compared to 8 procedures and 24 days for the Sub-Saharan African region. The introduction of the online business registration system by Business Registration and Licensing Agency (BRELA) is an important step in improving the efficiency in this registration process and moving away from lengthy manual procedures. The establishment of the business environment desk by the government reiterates the government’s commitment towards increasing dialogue between the public and private sectors and improving Tanzania’s business and investment environment.

Automating the business registration process and synchronising unique identification numbers for business registration, social security, tax identification number (TIN) and value-added tax (VAT) numbers can serve as a case study that has helped Rwanda reduce the number of days for business registration to five days.

Lack of empirical data to evaluate impact of tax rates and trade policies

The tax burden, in terms of the number of taxes, the amount of tax payable and additional fees for tax preparation, have been cited as constraints preventing informal businesses from formalising. There is also little segmentation on how taxes are differentiated for different sizes of businesses (micro, small, medium and large) and industries with no evidence to demonstrate that tax reforms are protecting local food crop processing industries of interest to Tanzania, such as rice and maize.

In 2015, the government offered tax relief to commercial farmers by exempting them from paying the Skills and Development Levy (SDL) which could also potentially be scaled up to include small-scale farmers.

Aligning the tax policies by co-locating the payment processes through an electronic portal will assist with enhancing tax compliance for small businesses broadening the tax base for the country. In order to reduce the costs of tax compliance for local MSMEs, South Africa has introduced a regime specifically for small businesses simplifying the tax return process eliminating the need to outsource to expensive tax preparers. Additionally, the South African Independent Regulatory Board for Auditors (IBRA) uses a risk-based audit selection to target its efforts on businesses that are most likely to evade significant amounts of tax subjecting less than 5 per cent of local MSMEs to any kind of inspection or audit.

Gathering data to evaluate the impact that domestic tax rates and trade policies have on local businesses, particularly for agricultural processors, will be an important first step towards understanding tax implications in the districts and informing evidence-based policy decisions for promoting inclusive broad-based growth.

The meeting scheduled to take place next month between seven government ministries and the private sector representatives, being facilitated by Tanzania Private Sector Foundation (TPSF), aims to constructively discuss practical recommendations to address major challenges affecting the operating environment for business in the country.

Resource shortage resulting in operational inefficiencies and decreased profitability:

In addition to infrastructure challenges regarding unreliable and inadequate access to public utilities (water, electricity, transportation network and broadband internet), high interest rates and collateral requirements restricting access to capital, the lack of a complete business directory, congested marketplaces and shortage of post-harvest storage facilities are additional constraints that affect the day-to-day operations of domestic enterprises. In order to address demand-side access to finance barriers, the donor-funded Financial Sector Deepening Trust (FSDT) has started working with financial institutions to develop a tailored credit scoring method and redesign lending products to include cash-flow based lending and value-chain financing more suited to MSMEs.

Additionally, FSDT, in collaboration with TPSF, has recently launched a MSME mobile application with the objective of promoting networking among MSMEs and providing an up-to-date MSME directory and BTB Matchmaking Tools in addition to information on training programs, business registration procedures, financial services and products, business development services, market research and other updates pertinent to MSMEs. In order to address congested marketplaces, Local Government Authorities (LGAs) have started to conduct viability studies for potential Public-Private Partnerships (PPPs) for new or upgraded marketplaces to increase the number of economic centres in the district and reduce the pressure on current marketplaces that are already crowded. With the help of the Rockefeller Foundation YieldWise Food Loss project, smallholder farmers in Tanzania are starting to transition from the traditional kihenge (storage made from mud and dung) storage solutions to new technologies (including hermetic cocoons and metal silos) to minimize post-harvest losses.

The Government of Tanzania also has ambitious plans to improve infrastructure and has allocated 45 per cent of the 2017/2018 budgets towards development projects in power, water, transportation and communication.

Collectively, these efforts demonstrate the concerted efforts that are being made to address resource constraints, both structurally and operationally, to improve the enabling environment for small businesses.

Insufficient training available and accessible to the formal and informal sectors:

The formal training programs for technical assistance and entrepreneurship training are not reaching the grassroots level where they are needed most.

Furthermore, the trainings that are delivered use ineffective traditional classroom trainings rather than experiential application-based learning models.

The informal sector is also largely excluded and absent from a majority of these training programs due to membership restrictions. Moving towards an apprenticeship model will be more effective for providing practical technical assistance to smallholder famers in both the formal and informal sectors.

In Singapore, like in Tanzania, employers are required to pay the Skills and Development Levy, however, in return, they are granted a 95 per cent subsidy for the sending their staff to vocational centers for training and skills upgrading incentivising SMEs to invest in the development of their employees.

Germany offers an innovative dual vocational training program including both classroom and on-the-job training for youth prior to their entry into the workforce, which could be applied to equip Tanzanian youth with the required skills before they that start their own small businesses. If we apply these concepts to Tanzania, the funds collected from the Skills and Development Levy could be used to finance on-the-job technical apprenticeships (such as fishing, soil testing, seaweed fishing, sunflower oil milling, livestock, transportation of agricultural products) to MSMEs in addition to providing subsidies for the training modules that are offered by Trade and agriculture extension officers, Veta and Sido.

MSMEs do not have opportunities to experiment with new technologies and innovation practices as a means for improving the productivity of their businesses. These investments could include experimenting with new seed varieties, the usage of fertiliser or new irrigation practices to improve overall yields.

Ms Nensi works with Deloitte East Africa and can be reached at zanensi@deloitte.co.tz. The views expressed above are her own and do not necessarily represent those of the firm.