Lessons on entrepreneurship and innovation from Brazil

Yesterday’s Sunday Standard had an article written by Prof. Anyang’ Nyong’o, Minister for Medical Services on why Kenya needs a science and technology driven economy to thrive. Coming at the back drop of Brazilian President Lula da Silva’s visit to Kenya, the article raises several points for why Brazil is a major emerging economy,  and which Prof. Nyong’o posits is due to the Brazilian government prioritising innovation as a major development concern. In turn he states that policies regarding technology as well as scientific societies need to be mainstreamed into Kenya’s national development.

However probably as a result of column space, a reader could maybe assume that making the public sector friendlier to technology change is all that is required. That ensuring adequate public resources are directed into science and technology will firmly put Kenya on the trajectory to become the middle income economy envisaged in Vision 2030. But that ignores the human aspect.

Brazil has placed emphasis on it's SME sector which accounts, just like Kenya for the majority of jobs and businesses in the economy. Indeed, according to an article on the Kaufman Institute for Entrepreneurship’s website titled Brazil’s Entrepreneurship Boom, the increase in new companies in Brazil has been linked with the country’s developing entrepreneurial culture and mindset. Each year this has been demonstrated by the number of participants in Global Entrepreneurship Week which increased from 1.5 million entrepreneurs in 2008 to 5.3 million in 2009.

And even though the country’s listing on the ease of doing business index has recorded similar challenges as Kenya in terms of high tax rates; as well as having structural impediments such as an education system that does not engender financial literacy, Brazil’s entrepreneurship development policy is strikingly different in that it focuses on promoting high-growth ventures as opposed to Kenya’s policy of just creating enterprises with the hopes that they will one day be able to create jobs.

This has meant that Brazil’s high impact intervention has brought about more immediate impacts on the economy, than the more laid back approach of just creating ventures with little regard for growth.

Similar to Kenya where according to the Ministry of Youth Affairs and Sports, there are 2.5 million unemployed youth and barely 125,000 are absorbed into the formal sector annually; young people in Brazil aged between 18 and 24 years account for 36% of the country’s unemployed. Nevertheless, lessons learned on Brazil’s focus on innovation as well as the promotion of an entrepreneurial spirit does give hope that indeed Kenya could just be on a positive path to Vision 2030, come the 2014 World Cup in Brazil.

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.

Business activism: Positively transform Kenya with the 2009 Budget Campaign

As any entrepreneur knows, business in the current economic climate is becoming well-nigh impossible.

With inflation adversely impacting raw material and final product prices, instability as a result of political bickering, a tax regime that places punitive impositions on micro-enterprises as well as dwindling consumer purchasing power, Kenyan small business enterprises are now under threat.

A few weeks ago on this blog, we decried the fact that the way the government to which we pay taxes was spendthrift, positing that if it were a business, it would have collapsed ages ago.

Well the season of the National Budget has come upon us again. And this time we can make our representatives to parliament more accountable by ensuring that government expenditure provisions reflect the will of the people of Kenya.

As the accountability portal Mars Group and the Partnership for change point out:

“The National Budget as presently constituted is enmeshed in corrupt and wasteful expenditure and there is need for Kenyans to educate each other on this so that we can pressure our representatives to scrutinize the budget to identify such expenditure. Savings can be used to boost development expenditure.”

As entrepreneurs are the main drivers of the economy, we should be in the fore-front of such an initiative. For instance we can demand accountability from our parliamentary representatives on the following:

• A reduction in the size of the Government of Kenya via the enactment of a statute pursuant to section 16 of the Constitution to cap the number of Executive Cabinet Ministries; and the need for integrity criteria for public service.

• A reduction of the recurrent expenditure of Government and the setting of ceilings on recurrent expenditure.

• Demand for full accountability and transparency in the External Public Debt Register which records all debts incurred by the Government of Kenya with international multi-lateral, bi-lateral and commercial creditors.

Apart from contacting your MP, you can also write a letter to the Commissioner General of the Kenya Revenue Authority (either when making payments or not) to register your displeasure that you are fulfilling your business obligations, albeit to a government that does not manage its resources responsibly.

Or, you can join the Partnership for Change 2009 Budget campaign to mobilize public support so that the Government of Kenya becomes accountable and transparent in the borrowing and implementation of the funds it collects from the public in taxes.

This time the onus is on us entrepreneurs to make the change we wish to see in Kenya today.

Update: read Kachwanya's take on the upcoming Budget in "A Letter That Finance Minister will never read".

If the Kenya government was a business, it would have collapsed ages ago

"Why would a company hire someone that sleeps on the job, doesn’t complete assigned tasks and demands a hefty untaxed salary?" - Ken M. a Kenyan Entrepreneur, 16th March 2009

The global financial crisis has led to the closing down of many enterprises. Even the Business Daily today in its headline article “Global crisis wipes out call centre jobs” tells of the local BPO industry as being in jeopardy.

Recession-proofing

Indeed “recession-proofing” business has become a buzz word, even amongst local entrepreneurs. Key in the phrase on Google and you get a result of 4,790,000 website listings.

Ensuring that one’s business can swim the tide of global financial currents, means tightening belts, something that many companies are doing as seen in the number of industries laying off non-essential staff.

In line with this economic outlook, wouldn’t it also be prudent for the government that lives off earnings in the form of tax revenue from Kenyans also tighten its belt?

News stories such as lavish spending on tea and flowers are definitely not in tune with the times.

Mars Group Kenya, a local governance and accountability watchdog in a blog posted today “The Government of Kenya is Broke” has raised critical financial management inefficiencies being perpetrated with outright disregard to the Kenyan people. This coming at a time when the same government (which previously prided itself on being self-sufficient) has whipped out the begging bowl for donors to fill.

Scandals ranging from maize to oil continue unabated, whilst we business people are warned of imminent tax hikes. The grand coalition government seems to have a more voracious appetite in ensuring its parliamentarians are kept in the lap of luxury, whilst continuing to exert pressure on small businesses to pay taxes.

The Mars Group blog outlines several spending issues that if the Kenya government was a business, it would surely collapse.

For instance, the bloated cabinet of 93 Ministers and Assistant Ministers costs Kenyans billions of shillings annually. Out of the government’s budget, 24% goes to servicing external debt leaving 76% for services rendered to Kenya. Out of this balance, 85% is spent on recurrent expenditure (i.e. paying hefty salaries and buying the latest SUV’s) whilst only 15% is left for development.

It is this 15% of expenditure that is supposed to ensure that all Kenyans reach a point of financial stability, in order to pay (“as responsible citizens”) taxes.

One does not have to be an economist, accountant or even a high school student for that matter, to see that the flow of funds here is top heavy; whilst unfortunately it is small business entrepreneurs and lower income Kenyans consumers who bear the brunt of this parasitic government. Taxes such as VAT know no class barrier, thus we “watu wadogo” pay the same taxes as MPs who earn tax free allowances topping up high salaries.

No-brainer questions

The Mars Group blog proposes several reforms, which if given in advice to small business owners would seem a no-brainer: For instance,

• Why would a company have a bloated Board of Directors (i.e. cabinet) whilst revenues remain small?
• Why would a company hire someone that sleeps on the job, doesn’t complete assigned tasks and demands a hefty salary (untaxed!)? (our MPs).
• Why would a business owner retain the services of a financial officer when it turns out that money allocated for specific tasks (such as paying for free education) is diverted for other costs (such as buying maize)?
• How on learning that money has been siphoned out of the enterprise (Anglo-leasing style) by the same finance officer, would the business owner just let the matter drop; notwithstanding the fact that annually 24% of the business budget is religiously paid to external lenders?
• After finding out about the siphoning of funds, wouldn’t a prudent business owner ensure that such corrupt loans cease to be paid immediately?
• Wouldn’t an entrepreneur use legal redress so that the business doesn’t have to pay the corrupt loans?

Either way, remaining in the status quo would without a doubt crush the business before too long. The government is only lucky in that it gets free money from taxes without even having to pretend to offer adequate services.

That is until we finally demand that the government also tightens its belt.

Read THE GOVERNMENT OF KENYA IS BROKE: What Mwai Kibaki, Raila Odinga, and Parliament must do to deal with our current financial crisis