Many opportunities for Tanzanian entrepreneurs, but doing business is still no walk in the park

The Tanzanian economy has experienced positive growth over the past few years. However 80% of its workforce is employed in the agricultural sector, which the economy remains dependent on in spite of strong gold production and a growing tourism sector. One of the ways to diversify away from this reliance would be to further encourage an entrepreneurial environment.

A recent report entitled ‘Accelerating Entrepreneurship in Africa’ by the Omidyar Network, surveyed 582 entrepreneurs in six sub-Saharan African countries: Nigeria, Ghana, Ethiopia, Kenya, Tanzania and South Africa. The results show that a number of opportunities and challenges exist for entrepreneurs and businesses in Tanzania. For example, the majority of those surveyed in Tanzania indicated that a large, underdeveloped formal sector “enables small businesses to pursue new opportunities without being blocked by large, established firms”.

“There is also a strong belief that successful steps have been taken to amend costs and processes involved in starting a business,” highlighted the report. “These measures include decentralising business registration by creating a business activities registration system and business registration centres in local authorities, as well as eliminating the requirements for inspections by health, town and land officers as a prerequisite for a business licence.”

In addition, when asked whether they agree that Tanzania is a cost competitive place for various aspects of business, 74% of respondents indicated that they believed this is true for starting a services business, 68% indicated this is true for starting a manufacturing business, and 66% agreed with this in terms of doing business in general.

However, despite some positive developments, the results of the survey reveal that there are a number of challenges to business that are prohibiting the Tanzanian entrepreneurial environment and activity.

Insufficient and unreliable infrastructure

One of the major challenges underlined by respondents in Tanzania is the country’s inadequate infrastructure. The poor quality and limited span of road and rail networks, alongside an unreliable supply of electricity and poor communications infrastructure, have been highlighted as having a negative impact on the cost of doing business.

“Influenced by additional costs such as purchasing generators or grading rural roads, 52% of respondents believe new and growing firms cannot afford the costs of physical infrastructure,” stated the report.

The Tanzanian 2011/2012 government budget emphasised infrastructure investment, with an 85% increase in budget allocation from the previous year according to the research.

“It is worth noting, however, that the government’s ability to fully realise its investment plans is constrained by a significant reliance on loans and grants from foreign entities like the European Union and the World Bank who, along with other general budget support (GBS) partners, contributed 29% of the 2011/2012 budget,” explained the report. “Thus the political reform required by many of these donors is deeply intertwined with Tanzania’s development prospects.”

Prohibitive requirements to access capital

While many businesses have indicated that they are aware of potential sources of funding, a major stumbling block for Tanzanian entrepreneurs is the cost and requirements needed to access funding – which are believed to be prohibitive, especially for newer firms. Only 26% of respondents representing newer firms believe that there is a sufficient supply of debt capital.

“In addition to collateral of over 130% being required by financiers, the need to furnish title deeds is a practical hurdle for obtaining loans,” explained the research. “One interviewee estimated that fewer than 20% of properties in Dar es Salaam are actually registered. As a result, many potential entrepreneurs are prevented from accessing secured debt financing from large financial institutions.”

Furthermore, 56% of respondents from growing firms indicated that they believe there is an insufficient supply of equity capital.

“Financiers and other support organisations, for their part, highlight that many entrepreneurs need to develop more sound business ideas and further analyse potential markets for their products or services,” added the report. “It is difficult to finance many of these ventures as they have not been developed beyond an initial idea.”

However, according to the report, there has been some effort by the private and public sectors to address the need for financing, such as the NMB Jahudi loan scheme for small to medium enterprises.

Income taxes perceived to be prohibitively excessive

According to the results of the survey, 68% of respondents indicated that the level of taxes in Tanzania discourages people from starting new firms, which is considerably higher than the sub-Saharan Africa average of 46%. However, the report added that this might reflect a societal view towards paying taxes rather than the actual taxes being too high.

“Tanzania’s corporate tax rate of 30% and progressive tax policy for non-corporate businesses are in line with African peers,” argued the report.

An example of this is Nigeria, which has the same corporate tax rates but yet those surveyed in Nigeria were significantly less negative about the impact of taxes on starting a business.

“Nonetheless, tax incentives have a potentially significant role to play in further encouraging a culture of entrepreneurship,” concluded the research.