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February 23, 2019

A Higher Score On Ease Of doing Business Is Good For SMEs

One-Stop Shop: People being attended to at Huduma Centre in Mombasa. The government is cutting bureaucracy in service delivery.
One-Stop Shop: People being attended to at Huduma Centre in Mombasa. The government is cutting bureaucracy in service delivery.

The recently released “Doing Business 2016” report by the World Bank Group shows remarkable improvement in the overall business environment in Kenya. The country has improved in ranking by 21 positions from 129 to108 out of the 189 economies surveyed. It also edged closer to best practice by scoring 58 per cent from 53 per cent in terms of distance from frontier, which measures how close the ease of business is when best practice has a score of 100.

While there is room for further improvement, it is important to note that this was way above the average for the sub-Saharan region which ranked 143 and among the top 10 in Africa. Rwanda (62) was in the lead in Africa, followed by Botswana (72), South Africa (73), Tunisia (74), Morocco (75), Zambia (97) and Namibia (101).

The doing business report measures and tracks changes in regulations relating to 11 areas in the life cycle of a small and medium enterprise that are critical to its survival. The report then highlights how easy or difficult it is for a local entrepreneur to open and run the business while complying with the relevant regulations.

The improvement is good news for the many enterprises that find themselves choosing whether to comply or to survive, because they are unable to do both. With the important role that SMEs play in the economy, it is critical that regulations and ease of doing business continue to facilitate rather than hinder the survival and thriving of such businesses.

The 11 areas that are evaluated and the related rankings for Kenya include; starting a business (151), dealing with construction permits (149) , getting electricity (127), registering property (115), getting credit (28), protecting minority investors (115), paying taxes (101), trading across borders (131), enforcing contracts (102), resolving insolvency (144) and labour market regulations which is not ranked.

The best and largest contributor to the good country ranking is in ease of getting credit with a ranking of 28, from 118 in comparable terms last year out of 189 economies. This ranking covers the strength of legal rights of borrowers and lenders, for which Kenya is in the same ranking with United Kingdom and how much credit information is shared and how widely, where Kenya is also highly ranked. The remarkable improvement is attributed to improvement in access of credit information by passing of legislation that allows sharing of positive information and by expanding borrower coverage through mobile bank innovations. Perhaps the gap in this ranking is for policy makers to find out why the high ranking for access to credit has not lend to reduced credit margins in the economy. Also, factoring the cost of credit would strengthen the relevance of this ranking because SMEs need not only access, but also affordable credit.

Paying taxes and enforcing contracts are two other areas with below overall country rankings, at 101 and 102 respectively. While the ranking for enforcing contracts has remained constant from last year, paying taxes has declined from a previous ranking of 99, a decline of two positions although the distance to frontier has remained constant for paying taxes at a score of 72 per cent. Although paying taxes has become faster because of introduction of electronic filing, the increase in employer contribution for NSSF, and lately NHIF means companies have a higher tax burden. The emerging practice around the world is to make paying taxes faster, easier and less costly for businesses, as well as reducing taxes by allowing for more deductions and allowances and instituting outright tax reductions. Both the ranking and distance from frontier for enforcing contracts have remained the same at 102 and 52% per cent from last year with not remarkable changes.

The other area of major improvement in ranking is getting electricity which improved 14 positions from a ranking of 141 to 127 out of the 189 economies while the distance to frontier improved from 54 per cent to 59 per cent. This is attributed to reduced delays in power connection by enforcing of service delivery timelines and hiring of contractors for meter installation. The time for new power connections is relatively high at an average 110 days while reliability of supply and transparency of tariff index is rated non-existence at 0 in a scale of 0-8.

Property transfer ranking also improved by six positions from 121 to 115 out of 189 economies while the distance from frontier improved from 54 peer cent to 57 per cent. This is attributed to improvement in electronic documentation at the land registry and introduction of a unified form for registration.

Also registering marginal improvement is dealing with construction permits which moved three positions from 152 to 149 and closer to the frontier from 57 per cent to 59 per cent. The construction environment has however become more difficult with requirements for additional building permits as well as increase in building permit fees, as well as water and sewerage connections. In fact dealing with construction permits has the worst ranking for Kenya.

Starting a new business is the most deteriorated ranking and the second worst performing after dealing with construction permits; having reduced three positions in ranking from 148 to 151 although the distance to frontier improved marginally from 73 per cent to 74 per cent. There were however positive reforms in this area, with the reduction in the time it took to assess and pay stamp duty. The low ranking and deterioration in this area means other economies are making improvements at a faster rate.

The Doing Business 2016 report shows overall improvement in most of the areas, but more will need to be done to achieve transformative changes that can transform SMEs to thriving businesses and achieve their potential as major contributors to the economy and job creation.

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