Business Environment Concerns before the SGFSR

From the experience of the first generation of financial sector reforms it was clear that the transition from the centrally planned economy to market economy was not so smooth. The institutional arrangements that are supposed to work well in the market economy were introduced in the environment which was not yet ready for them. It was necessary then to start to create institutions that would create a conducive business environment for the market economy to function efficiently, and hence to enable the reforms that had been undertaken from 1991 in the financial sector to bear fruit. That is why “during this period (1990s), the

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government convened a task force to identify areas of legal reform required to bring the legal system in closer conformity to the requirement of a functioning market economy” (Finnegan, 2004)

5.3.1 Efforts to Improve Business Environment before SGFSR

It is important to acknowledge that there were already efforts to improve the business environment even before the SGFSR, though the efforts were not viewed as major items of the reform agenda itself. In the first generation financial sector reforms the major concern was to create the structure of free market economy. In the first place, reforms were done to remove price controls so as to let the market set the prices of the different financial products available in the market. Measures were taken to allow freedom of entry and exit of the financial institutions in the financial business, both domestic and foreign through the enactment of the BFIA 1991 and the BOT Act 1995. Other measures were directed to remove the direct intervention of the government in the financial institutions functioning apart from providing the legal and regulatory framework. The greatest preoccupation, however, was to strive to privatize the as many of the state owned enterprises as possible, and different donors were interested to support the strengthening of the private sector in Tanzania (African Development Fund, 2000).

At the time of preparation of the agenda for SGFSR, the private sector in Tanzania, was dominated by micro, small and medium enterprises (MSMEs), with a study giving a figure of 2.7 million MSME, 60% of them in urban areas, and with high rate of exit - estimated 60%

exiting the business within the first 5 years (World Bank, 2005b).

However, there existed some major regulatory barriers for doing business. The law had no provision of separation of personal vs business assets, and this made most of the businesses to die once the proprietor died (World Bank, 2005b, p. 4).

It was also difficult to register a company, for company registration could be done in Dar es Salaam only. Also permits to start pharmacies, tour agencies, restaurants and cell phone

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service provision were issued in Dar es Salaam only and costed between USD 4,000 and USD 5,500 (World Bank, 2005b, p. 5).

The officials responsible to handle such procedures were also excessively slow in applying the law, and so most decisions were arbitrary and even when one was not satisfied the options were limited, one could take up to 570 days to have one’s objection granted.

The costs of starting and closing a business were on the average USD 2,700 and 2,750 respectively, which was four times the average yearly wage of a Tanzanian. The access to stock market was also restrictive, demanding a track of profitability for three years, and some USD 50,000 in capital (World Bank, 2005b, p. 4).

Important indicators of business climate in Tanzania at that time are given in the table below together with selected countries for comparison:

Table 2: Selected Business Climate Indicators for Tanzania

TZA SSA KEN UGA CHN IND OECD

Collateral creation cost (% of per capita GDP)

World Bank (2005a) Doing Business in 2006

So it was important that something was to be done to improve the business climate in Tanzania, by removing those regulations, policies and institutional constraints. So business

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environment strengthening was an important ingredient of the institutional reforms of the SGFSR (World Bank, 2005b, p. 4)

5.3.2 BEST agenda

In July 2002, the preparation of the Business Environment Strengthening for Tanzania (BEST) program was completed and was formally adopted under the President’s Office for Planning and Privatization (World Bank, 2003). It was initially funded by DANIDA, DFID, SIDA and the Government of Netherlands: the total cost of $25.4 million over 5 years period from December 2003 (DANIDA, 2008). This BEST program aimed at addressing Legal and Judiciary Issues (Land law, Labour law, Business licensing legislation, commercial court, and tax issues) (DANIDA, 2008). The ultimate aim of BEST was to reduce the burden on businesses by eradicating as many procedural and administrative barriers as possible (Tanzania Bankers Association, 2007b, p. 12). So when the SGFSR was adopted by the Government, the World Bank was willing to join in as a co-donor for the agenda of business environment strengthening.

World Bank signed a MOU in July 2006 (DANIDA, 2008).

5.3.2.1 Business Licensing

In the pre-reform era there were some rigid regulations regarding business licensing that acted as barriers to the starting of new small and medium enterprises. The aim of licensing fee was revenue generation, apart from its normal regulatory function (Ministry of Finance Tanzania, 2004. Para 10). Through the BEST initiative, license fee rule for small businesses was changed from July 2004. From that time on, the license fee was applicable only upon establishment rather than on an annual basis. This was intended to reduce the costs of business.

The reforms were a shift to transparent and efficient licensing for registration, not for revenue generation (Ministry of Finance Tanzania, 2004. Para 10). This spirit of improving the quality of institutions, was already manifesting and was to be the major preoccupation of the SGFSR.

Of course, the SGFSR was to continue with further licensing and other business environment reforms

83 5.3.2.1 BEST Agenda under the SGFSR

Under the SGFSR, there was a new program Tanzania: Private Sector Competitiveness Project (PSCP), whose agenda coincided with the agenda of the BEST program including, the Review of Civil Justice System in Tanzania and the Review of Land Dispute Settlement.

5.3.2.1.1 Review of Civil Justice System in Tanzania

This was a long term project that was undertaken by BEST project from 2005 -2012, and the final report has been published only recently. (URT, 2013), and the major focus is to make the civil cases be decided on the issues at stake, and not to let other issues that do not have direct bearing with the issue at hand be the reason for delay of the cases. Also the review has stressed on the importance of alternative dispute resolution mechanism for commercial cases, as where it is possible it reduces time and expenses of reaching a resolution.