Security and accountability are free public goods!

Public goods are those that are non-rivaled and non-excludable. This means, respectively that consumption of the good by one individual does not reduce availability of the good for consumption by others; and that no one can be effectively excluded from using the good. Due to the fact that the use by paying and non-paying consumers cannot be controlled, governments have to step in to ensure provision of such social goods. In turn tax monies go towards enabling governments to provide these social services.

Internal security is one such public good that falls to governments to provide to citizens. Though private sector security companies complement government security, they are constrained in providing this service for all as they do not enjoy economies of scale on the one hand and also to provide security for all is not economically viable in terms of ensuring that all consumers pay for such services.

According to Paul Collier writing in an article titled “Development in Dangerous Places” another public good is accountability. Historically, rulers needed revenue for their armies, which in turn provoked pressure for accountability and good governance from the taxpayers. Ultimately, security and accountability to Collier are not just public goods but expressions of power.

In countries of Collier’s Bottom Billion however, social divisions reign supreme. This lack of national cohesiveness in turn makes it more difficult to provide public goods. For instance, the 2008 post-election violence in Kenya aptly demonstrated the weak bonding of nationhood where tribes hacked one another with machetes and arrows causing the nation’s internal security to run down the doldrums. Kenya, fortunately or unfortunately has in its independence not had to face a massive external threat from an external aggressor which would galvanise its more than 40 tribes into a feeling of being Kenyan against foreign attackers. The Somalia and Ethiopian border squabbles never even reached such a point because the Kenya is home to sub-tribes of both nations. And even the most recent Migingo Island squabbles, were over a piece of land that hosts more Kenyans than Ugandans.

This lack of social cohesion breeds numerous self-identities and cultures which clash, and not without blood being poured. What is left is a fragmented population, where for instance the hint that Luis Moreno-Ocampo intends to prosecute crimes against humanity, send politicians into a tizz, whipping up ethnic hatred at the drop of a hat.

The second weapon politicians use is to invoke the concept of sovereignty forgetting that sovereignty requires a sense of nationhood; something that they themselves have to ensure is muted, so as to contain groupings calling for accountability.

Collier even names the weakened status of the military in bottom billion countries as a tool used by the political elite to retain power. It is this same military that presides over hurried swearing in ceremonies of tin-pot dictators when they steal elections overnight. And it is this same military that terrorises the masses to accept these “democratic election results”. But, it is this same military that must remain toothless in order for unpopular leaders to survive.

During the Migingo saga, many Kenyans commented that a small military battalion should invade the one acre island to shut Museveni up. But Kenyans were told that diplomacy was the way to go, even after President Museveni himself insulted Kenyans and more specifically members of the Luo tribe, from whom the Prime Minister Raila Odinga originates.

This was not the first time Uganda’s army had tried to stray onto Kenya’s territory. In the Moi era, and indeed during Jomo Kenyatta’s reign, Uganda insurgencies were swiftly turned back, and it was common to find the borders being closed as a matter of national security. However, probably as a good neighbour Kenya has turned to diplomacy as its weapon of mass destruction. This in turn has also led to the proliferation of small arms which have intensified a heightened scare amongst citizens for their personal safety.

The impact on business

Providing a safe environment where firms can conduct their business is a key function of any government. Yet, around the world, as many as 15% of firms report losses due to crime. In spite of this, a much higher share of firms (almost 60%) protect themselves from theft by using private security services, which adds to the cost of doing business. Interestingly, 16% of African firms report losses due to crime, at par with Eastern Europe and Central Asia. However, over half of the African businesses employ private security firms. Consequently, African firms spend an unrivalled amount of money on security, equal to over half a percentage point of sales, which is considerably higher than East Asia or South Asia.

The Africa Competitiveness Report 2009 (ACR) shows that most of the competitive disadvantage of African firms is due to invisible costs—that is, losses experienced by factors that include corruption (non-accountability) and lack of security.

The business costs of crime and violence and the sense that the police are unable to provide protection from crime are particular concerns for African entrepreneurs. The ACR disaggregates security into costs of terrorism, crime and violence, organized crime and the perceived reliability of police services. Amongst the survey’s findings Morocco’s weakening security environment was found to contribute to the country’s declining competitive position. The security situation in Kenya is also extremely worrisome, particularly in crime and violence, the potential of terrorism, and the prevalence of organized crime.

Unfortunately for small enterprise, there is no significant difference in the cost of security services borne by small firms compared to medium and large ones (in terms of share of sales), nor is there a difference between foreign and domestic firms. Africa’s export potential is further impaired as local exporters tend to spend more (almost 10% more) than non exporters.

In Africa, individual country’s competitiveness is also adversely affected by the lack of security. For instance, Egypt one of Kenya’s major competitors has relatively high levels of security and a resulting low cost of crime and violence for business. In terms of interest from foreign investors to set up businesses in Africa, security makes many shy away from putting their cash in jeopardy in unsecure environments. Mauritius has been able to exploit insecurity on the continent, benefiting from significant inflows of FDI over the past years in part due to the fact that the level of security in the country is good, particularly by regional standards.

Within East Africa, Kenyan 75% of firms have to pay for private security services. This is 5% higher than the regional average. Kenya also pays the highest cost for these services. In turn government accountability data in East Africa indicates that government wastage of resources is highest in Kenya and the country also has the highest perception amongst its business community that the police are unreliable.

Security and accountability are two public goods that make economic development and growth possible. History has provided more than adequate testimony that civil conflicts in poor countries last longer than international wars. With such a looming dagger hanging over these countries, unless security and accountability to address wrongs are provided (not at cost!), the interest of entrepreneurs to venture into business will be lost. Somalia is a prime example of this where revenues generated from enterprise (whether legal or through illegal means such as piracy) are stashed away in foreign countries, further plundering the country into a failed status.

Finally as Collier states accountability is indeed a two way street between government and citizens. Thus standing up to demand security and accountability is required of us all in the democratic spirit of no taxation without representation!

The Cost of Red Tape for East Africa Business

A study on businesses in Rwanda titled “Cutting The Cost Of Red Tape for business growth in Rwanda” based on a country-wide sample of more than 400 businesses found that regulatory compliance imposes significant costs on local businesses and on the economy as a whole. Overall, the study reported that red tape cost businesses in the formal sector at least RwF 55 billion, equating to approximately three per cent of GDP.

Tax compliance was found by 53% of the surveyed businesses to be the most problematic regulatory area in terms of the time consumed in navigating troublesome regulations. These included preparation of paperwork for tax audits.

Just this week the Kenya Revenue Authority announced that tax returns would now be online, reducing the need to visit the tax offices in person – which, for many businesses, means that someone has to stand in frustrating long queues to file returns and make VAT payments. For most micro-entrepreneurs, such visits mean closure during business hours. translating into further loss of revenue. As the Rwanda red-tape survey states, “standing in one of those queues, with our business on hold, it is hard not to think that regulations are a waste of time – simply ‘red tape’ and nothing more”.

Other hindrances to tax and business regulation compliance include poor customer service from unhelpful public officers, as well as the slow pace of processing forms. Other indirect obstacles include the high costs of public transport, making visits to these offices higher in opportunity costs.

When applying for public utilities such as water and electricity, the need to visit various departments in order to complete company requirements also act as a disincentive, when weighed against profits if the business owner remains at work in their business premises. It thus becomes more attractive to pay for illegal connections than waste time and money moving from one office to another checking the status of one’s status of their connection applications.

For businesses involved in exports, the paperwork requirements are both numerous and complicated. This again turns out to be costly in terms of time. Furthermore, the requirement that each consignment has to be verified by standards bureau’s in turn act as a disincentive to comply with existing rules.

And although Kenya’s President Kibaki ordered that the Kenya Ports Authority operates 24 hours, there still remain substantial delays at Customs for clearing and forwarding agents. These delays are felt not only in terms of time spent, but also involve direct expenses having to be paid to transport companies for the waiting time of their trucks and drivers awaiting clearance. According to the Rwanda survey, some businesses said that delays from Customs in some cases resulted in them losing clients.

There is also lack of clarity about products that fall under tax exemption status. Unfortunately tax regulations offer various interpretations within their exempt goods brackets. Licensing of goods is also mired in misunderstanding as well as long delays in obtaining the necessary approvals. A recent example regards the introduction of bans on certain plastic bags where even larger retail enterprises queried the exact plastic weight of bags that were banned.

The cost of red-tape

Compliance costs are of two types: one-off costs, such as the costs associated with initial business registration and recurring costs, which arise on a regular basis.

In the Rwanda survey, the overall total regulatory costs for the Rwandan economy amounted to at least RwF 55 billion per annum. The majority of these costs were spent on complying with tax regulations (33.8%) followed by costs of complying with export requirements including delays (33.6%).

Tax compliance was found to affect micro-entrepreneurs as much as large companies. For instance in the Rwanda red-tape survey, there was a difference of 15% in the responses of enterprises with over 100 employees and those employing less than 5.

Business registration procedures were most felt by businesses employing less than 10 employees, with temporary interruptions by having to close the businesses in order to comply with regulations being cited most. According to the 2005 Human Development Index Report titled “Aid, Trade and Security in an unequal world” on average the cost of starting a business in sub-Saharan Africa is 224% of the average national income, compared with 45% in South Asia. This factor keeps many entrepreneurs in the informal sector in order to survive.

To comply with red-tape costs, firms are often forced to pass on these costs onto their customers, which in turn have economy-wide knock on effects. For business startups this makes marketing their products and services doubly onerous. Ultimately the government loses revenue and taxpayers may face higher rates as a result of the government seeking to recoup lost revenue from registered businesses.

Higher taxation results in businesses not disclosing full information with regard to income and/or number of employees in order to avoid higher penalties. This in turn sometimes results in employee layoffs as a way to mitigate reduced earnings.

High tariffs on imports also lead to smuggling by unscrupulous entrepreneurs, who often have set up rings where they receive tip-offs of impending raids and offer bribes to evade prosecution. This leads to law-abiding entrepreneurs to exit the market as they are unable to compete on an equal basis with such enterprises.

Even VAT, the most common tax acts as a disincentive to registered enterprises. Businesses are required to pay VAT when they order supplies of inputs, but they often experience a considerable delay between paying the VAT and receiving payment from their customers for the goods or services provided. When combined with the costs of actually buying raw inputs in the first instance, this forces small business to operate with very little working capital.

Reducing the costs of red-tape frees up resources for more productive activities as well as spurring wider economic growth. Thus it is imperative for economic reforms to focus on regulatory and administrative environments that act as the foundation of business-friendly policies thereby stimulating trade and attracting more people to venture into entrepreneurship.

For starters as regards micro-entrepreneurs simplifying procedures that reduce the need for in-person interactions are a first step in the right direction. As seen from the increase in mobile phone cash transfers and banking, revenue and regulatory authorities can also harness these tools. This move should also encourage more entrepreneurs to comply, as well as reduce unnecessary delays in business.