Technical Report: Doing Business 2011: How Botswana can ... · Table 1: Starting a Business ......

PO Box 602090 ● Plot 50668, Tholo Park, Fairgrounds ● Gaborone, Botswana ● Phone (267) 390 0884 ● Fax (267) 390 1027 ● [email protected]

www.satradehub.org

Technical Report:

Doing Business 2011: How Botswana can improve the business environment as measured by Doing

Business rankings

Keith Jefferis, Financial Economist

Submitted by: AECOM International Development

Submitted to: USAID/Southern Africa

April 2011

USAID Contract No. 674-C-00-10-00075-00

2

TABLE OF CONTENTS

Executive Summary ........................................................................................................... 3

Introduction ........................................................................................................................ 4

Starting a Business ........................................................................................................... 5

Dealing with Construction Permits .................................................................................. 7

Registering Property ......................................................................................................... 9

Getting Credit ................................................................................................................... 10

Protecting Investors ........................................................................................................ 10

Paying Taxes .................................................................................................................... 11

Trading Across Borders .................................................................................................. 11

Enforcing Contracts ........................................................................................................ 12

Closing a Business .......................................................................................................... 13

Summary .......................................................................................................................... 13

Figure 1: Botswana: “Doing Business” Ranking, 2011 ......................................................... 4 Figure 2: Actual and Potential Doing Business Rankings .................................................. 14

Table 1: Starting a Business - Indicator Components .......................................................... 5

Table 2: Starting a Business - Procedures and Time Taken ................................................ 6 Table 3: Starting a Business – Action Items ........................................................................ 7 Table 4: Construction Permits - Indicator Components ....................................................... 7 Table 5: Construction Permits - Procedures and Time Taken ............................................. 7

Table 6: Construction Permits - Action Items ....................................................................... 8 Table 7: Registering Property - Indicator Components ........................................................ 9 Table 8: Registering Property - Procedures, Time Taken and Costs ................................... 9 Table 9: Getting Credit - Indicator Components ................................................................. 10 Table 10: Getting Credit - Action Items .............................................................................. 10

Table 11: Protecting Investors - Indicator Components ..................................................... 10 Table 12: Paying Taxes - Indicator Components ............................................................... 11

Table 13: Paying Taxes - Action Items .............................................................................. 11 Table 14: Trading Across Borders - Indicator Components ............................................... 12 Table 15: Trading Across Borders - Action Items .............................................................. 12 Table 16: Enforcing Contracts - Indicator Components ..................................................... 12 Table 17: Enforcing Contracts - Action Items..................................................................... 12

Table 18: Closing a Business - Indicator Components ...................................................... 13 Table 19: Proposed Action items to improve Botswana’s Doing Business ranking ............ 13

3

Executive Summary

Botswana’s ranking on the annual World Bank/IFC Doing Business rankings slipped in 2011 to 52 out of 183 countries globally. The widely-observed DB survey measures aspects of the regulatory climate related to the ease of doing business, across nine groups of indicators. In 2011, Botswana’s ranking deteriorated in seven of these nine components – not because the business climate in Botswana worsened, but because it stayed unchanged while other countries reformed and improved their business climate.

Reforming the regulatory climate is recognized as a relatively low cost and effective means of boosting economic growth potential. Analysis of the Doing Business results highlights a number of reforms that could significantly improve the business environment in Botswana. Key amongst these include:

Reducing the effective time taken for company formation at the Registrar of Companies to five days, as already targeted;

Abolishing the need for most businesses to acquire trade or industrial licences, and replacing with a simple registration procedure;

Streamlining tax registration with BURS, and allowing e-filing of tax returns and electronic payments;

Removing environmental impact assessment requirements for most construction projects;

Speeding up local authority building and planning approvals, and connection times for utilities;

Establishing a public credit bureau to allow lenders to obtain information (positive and negative) on borrowers;

Reducing the costs of cross-border trade by introducing 24 hour opening at selected border posts, one-stop borders, and electronic document submission;

Establishing a commercial court to facilitate resolution of business disputes.

There is no “quick fix” to improving the DB ranking, but a concerted reform effort including those noted above – which largely reflect proposals already made and agreed in the Botswana Excellence strategy – would mark an important step forward. Fully implementing the above reforms would significantly improve the business climate and dramatically improve Botswana’s Doing Business ranking, from the current 52 to around 21 (depending on actions taken by other countries).

4

Introduction1

The World Bank/IFC Doing Business 2011 report was released on November 4th, 2011. Botswana was ranked 52 globally, out of 183 countries, a drop of 2 places from DB20102. Among the 46 countries of sub-Saharan Africa, Botswana was ranked third, after Mauritius (20th in the world) and South Africa (34th).

The WBDB ranking assesses country performance across nine indicators related to the Ease of Doing Business, focusing on regulatory issues. One of the concerns about Botswana’s 2011 result is that the country ranking deteriorated on seven of the nine indicators (it was unchanged on one and improved on one). The deterioration was particularly marked on “Starting a Business”, where Botswana’s ranking dropped by seven places. More generally, Botswana’s ranking is particularly bad on “Starting a Business”, “Dealing with Construction Permits”, “Trading Across Borders”, and “Enforcing Contracts” (see chart below).

Figure 1: Botswana: “Doing Business” Ranking, 2011

Botswana’s deteriorating position does not reflect any absolute worsening of business conditions; rather, other countries are improving their business environment, while Botswana is standing still.

The Doing Business ranking, while not without its flaws, is increasingly important internationally. It provides a ready indicator of the “business friendliness” of a country’s economic environment that is widely noted and observed. Changes over time provide a useful gauge of improvement (or deterioration) in the quality of that environment, relative to other countries. Many countries now specifically target improvements in their Doing Business ranking as a policy objective. In this note we address how Botswana can improve its ranking, through both short-term and longer-term measures.

1 Prepared by Keith Jefferis in response to a request from the Ministry of Trade and

Industry. Funding for the work was provided by the USAID Southern African Trade Hub (SATH) under assistance provided to the National Strategy Office.

2 The ranking of 50 in 2010 follows a revision of the original data to reflect changes in methodology and country coverage.

5

Starting a Business

Botswana is ranked 90th in the world, down from 83rd in 2010. The ranking is based on scores on the following indicators:

1. Number of procedures to start a business 2. Time taken 3. Cost of procedures/requirements 4. Minimum capital

Botswana’s performance fates badly on the first two of these, with ten procedures to start a business, taking 61 days, and these are the areas where reform should be concentrated.

Table 1: Starting a Business - Indicator Components

Component Result Rank

Number of procedures to start a business 10 145

Time taken 61 162

Cost of procedures/requirements 2.23 28

Minimum capital 0 --

At 61 days, the time taken to start a business in Botswana is very long by international standards (hence the poor ranking). To be in the top quartile (25%) of countries internationally, this needs to be reduced dramatically, to 10 days or less. As discussed below, this requires concerted action across a number of requirements.

It has been noted that there are some mistakes in the Doing Business data. For instance, the assessment refers to the need to advertise the intention to apply for a Trade or Industrial Licence in the Government Gazette, even though this requirement was abolished in 2008 (it may be that this is still included because the Ministry of Trade and Industry’s own website still lists it among the licensing requirements). Doing Business also refers to registering for VAT with the Director of Customs and Excise, even though this has long been subsumed within BURS. Doing Business also miscalculates the cost of registering a business. The total cost of P935 includes P100 as the licensing fee. However, this is just the application fee for a license; it is then followed by the actual license fee, which can vary between P200 and P2000 depending on the type of business. If we take P1000 as the average licensing fee (and which would apply to miscellaneous commercial activities, which is the example used by Doing Business), the actual cost would be approximately double that used in the DB2011 assessment.

Correcting these errors would, however, make no difference to Botswana’s overall ranking. Excluding the gazetting requirement for licensing would cut down the number of procedures from 10 to 9, but would not shorten the time taken as this is recorded as being in parallel with the actual licensing process, which remains a requirement. The impact of this would be offset by the increased cost of registering a business. The overall impact of these two corrections would be to drop the Ease of Starting Business rank from 90 to 91, while leaving the overall ranking unchanged at 52.

The real gains could come from addressing the areas where Botswana does badly, in terms of the number of procedures and the time taken to register a business. These are laid out below.

6

Table 2: Starting a Business - Procedures and Time Taken

Procedure Time Taken (days)

1 Select and reserve company name 3

2 Sign the declaration of compliance of statutory requirements for incorporation before a commissioner for oaths

1

3 Return the complete statutory return to the Registrar of Companies about re-allotment, directors, auditors, company secretary, and registered officers

1

4 Register the company with the Registrar of Companies at the Ministry of Commerce and Industry

18

5 Advertise the intention of applying for a license in the official gazette

21

* 6

Obtain an approval of the working condition after an inspection of company premises

2 (simultaneous with procedure 5)

* 7

Obtain an industrial license from the Industrial Affairs Department, Ministry of Commerce and Industry; or obtain a trading license from the local authority


8 Register for Corporate Income Tax number with the Botswana United Revenue Services and obtain the approval from the Commissioner of Taxes for the appointment of a public officer who is in charge of tax return

7

9 Register for VAT with Director of Customs & Excise 7

10 Register employees for the work injury insurance 1

The largest potential gains come from shortening the time taken to register the company with the Registrar of Companies and obtain a trade or industrial licence. There have been recent improvements in company registration processes, with some computerisation. In principle, company registration can now be done in five days. However, feedback from the private sector suggests that the actual process takes “much longer” than this minimum. Despite computerisation, the registration process remains partially manual and paper based. A dramatic reduction in the time taken could be achieved by allowing full on-line company registration, which would require re-engineering of the IT system, and legal provision for electronic signatures.

A second major gain could come from removing the requirement of obtaining a trade or industrial licence. As explained in more detail elsewhere3, Botswana’s trade and industrial licensing systems need significant reform to be consistent with international best practice. In particular, licensing should be based on legitimate public interest objectives (such as ensuring public health and safety, or preventing pollution) rather than requiring licenses simply to open and operate a business. For almost all businesses, trade and industrial licenses could be abolished and replaced with a requirement to register with the Ministry of Trade and Industry or the local authority (a much simpler process than licensing, as it does not require any approvals, and which could be completed in one day).

In the longer-term, there would be significant gains from establishing a true One-Stop Shop for company registration. This would involve a single point of contact for those establishing companies, an integrated on-line process for selecting and reserving a company name and registering the company, and an automatic link to BURS for tax registration (for both Company Tax and VAT).

3 SATH Policy paper on Trade Licensing and Reform of the Trade Act

7

Action should also be taken to correct the errors in the Doing Business data, by taking this up through established channels for challenging the assessment.

Table 3: Starting a Business – Action Items

Action Impact New Topic Ranking

(currently 90)

New Overall DB

ranking (currently

52)

Abolish trade and industrial licensing requirements except where clear public interest benefits, and replace with simple registration requirement.

Reduces step 7 from 21 days to 1 day

84 50

Reduce effective time taken to register a business with RoC to the claimed 5 days

Reduces step 4 from 18 days to 5 days

86 50

Streamline tax registration with BURS to one procedure taking 5 days

Eliminates one procedure and saves 9 days

84 50

Correct errors in recorded procedures and fees

Reduces procedures from 10 to 9 but doubles fees

91 52

Combined effect of the above 45 44

Introduce OSS and reduce overall time taken to same as Mauritius (6 days, 5 procedures)

9 35

Dealing with Construction Permits

This category is one where Botswana scores badly, with an overall ranking of 127 globally. This is almost entirely due to the requirement to prepare an environmental management plan and an environmental impact assessment (EIA), which is lengthy and expensive.

Table 4: Construction Permits - Indicator Components

Indicator Botswana Ranking

Procedures (number) 24 149

Time (days) 167 77

Cost (% of income per capita)

264.5 114

Table 5: Construction Permits - Procedures and Time Taken

No. Procedure Time to Complete (days)

1 Obtain a site plan from the Department of Surveys and Maps

1

2 Obtain a certified copy of rates certificate from the Gaborone City Council

1

3 Obtain an environmental management plan 90

* 4 Obtain an environmental impact assessment 60 (in parallel with

8

step 3)

5 Submit permit application at Gaborone City Council 1

6 Receive inspection from the Gaborone City Council 1

7 Obtain planning and building permit from the Gaborone City Council

30

8 Apply for sewage connection 1

9 Receive on-site inspection 1

10 Receive inspection from Gaborone City Council of the start of excavation work

1

11 Receive labor inspection 1



14 Receive inspection from City Council of the start of foundation work

1

15 Receive inspection from City Council of the start of concrete work

1

16 Receive inspection from City Council of the start of slabs and damp-proof course

1

17 Receive inspection from City Council of the setup of structure

1

18 Notify the City Council of the practical completion of the building

1

19 Receive on-site inspection 1

20 Request and receive electricity inspection 1

21 Obtain electricity connection 29

* 22 Obtain water connection with Water Utilities Corporation

7

* 23 Obtain telephone connection 7

24 Obtain occupation permit 1

The biggest gains would come from removing the requirement for an environmental management plan and an EIA. It is highly questionable whether these serve any useful purpose for a 1300sq.m warehouse building in Gaborone (the example used in the Doing Business exercise). This would cut the time taken by 90 days, and would dramatically reduce the overall cost. Other benefits would come from reducing the time taken to obtain an electricity connection, and speeding up the approval of planning approvals and building permits by Gaborone City Council.

Table 6: Construction Permits - Action Items


(currently 127)

New Overall DB ranking (currently

52)

Remove environmental management plan and EIA requirements

Reduce time taken from 167 to 77 days and costs by 80%

59 41

Ensure electricity connections within 7 days of application

Reduce time taken from 167 to 145 days

116 50

Ensure planning and building

Reduce time taken from 167 to 151

118 50

9

approval by GCC within 14 days

days

Combined impact – all of the above

Reduce time taken from 167 to 39 days and cut costs by 80%

50 39

Registering Property

Botswana performs reasonably well on this indicator, and is ranked 44 globally (better than Mauritius and South Africa).

Table 7: Registering Property - Indicator Components



Time (days) 16 36

Cost (% of property value) 5 91

The process as recorded by Doing Business involves the following steps:

Table 8: Registering Property - Procedures, Time Taken and Costs

No. Procedure Time to Complete (days)

Associated Costs

* 1 Obtain certificate of compliance at the Lands Department


P100

* 2 Obtain a rates clearance certificate at the Gaborone City council


P1 to P5

3 Notify BURS (Botswana unified revenue services) of VAT payment

5 No cost

4 The conveyancer prepares the deed of transfer

1 Conveyancing fees variable depending on property value. In the case used in the example, fees would be: BWP 7050 + 3*250 + 550 (attorney fees) = BWP 8,350

5 The deed of transfer is lodged at the Deeds Registry

6 days 5% of value or purchase price above BWP 200,000 (transfer duty)

The transfer duty (5%) makes transferring property relatively expensive by global standards and this is where Botswana does worst on this indicator. Cutting transfer duty by half to 2.5% would improve the ranking on this indicator from 44 to 31, and the overall ranking from 52 to 44.

10

Getting Credit

The Getting Credit indicator refers to the legal procedures around using collateral as security against loans, and the quality of credit information (whether lenders can obtain credit information on borrowers). Botswana scores relatively well on this indicator (ranked 46 globally), reflecting a relatively good legal rights index for secured lenders, and reasonably good coverage by private credit bureaux (e.g. ITC). The main weakness is that there is no public credit bureau.

Table 9: Getting Credit - Indicator Components


Strength of legal rights index (0-10)

7 60

Depth of credit information index (0-6)

4 84

Public registry coverage (% of adults)

0

Private bureau coverage (% of adults)

57.6

The main action that could be taken to improve rankings on this indicator would be to establish a public credit bureau, including information on all borrowers (whether loans from banks, micro-lenders, retail stores etc), detailing positive as well as negative credit records (i.e. on-time repayment as well as defaults), with information that can be inspected and checked by the borrower.

Table 10: Getting Credit - Action Items


(currently 46)


52)

Establish public credit bureau

Improve depth of credit information score from 4 to 6

15 44

Protecting Investors

At 44, Botswana’s ranking on Protecting Investors is quite good. The one area of weakness relates to the ease with which minority shareholders can access information in the event of a legal dispute.

Table 11: Protecting Investors - Indicator Components


Extent of disclosure index (0-10) 7 51

Extent of director liability index (0-10) 8 16

Ease of shareholder suits index (0-10) 3 156

Strength of investor protection index (0-10)

6 57

At this point in time, this may not be a priority area for further reform.

11

Paying Taxes

At 21, Botswana’s ranking on Paying Taxes is very good (it is Botswana’s highest ranking in DB2011).

Table 12: Paying Taxes - Indicator Components


Payments (number per year) 19 65

Time (hours per year) 152 47

Profit tax (%) 15.9

Labor tax and contributions (%) 0

Other taxes (%) 3.6

Total tax rate (% profit) 19.5 16

In some ways this ranking is fortunate, as it is based on the taxation of manufacturing activities that benefit from a concessional profit tax rate of 15%, compared to the general tax rate of 25%. However, adjusting for this would only make a small difference, dropping the Paying Taxes ranking to 26 and the overall ranking to 53. There may also be a mistake in the data, in that the number of payments required does not include PAYE Withholding Tax payments, which must be made monthly and which are separate from VAT and company profits tax. Including these would raise the number of tax payments to 31, and would reduce Botswana’s overall DB ranking further, to 55.

The main areas where change is needed relate to the efficiency of the tax system and the bureaucracy associated with tax payments. Significant gains would come from facilitating e-filing and electronic payments to BURS, and improving the quality of BURS’ services; at present, the time spent queuing at BURS to file returns and make payments, which is in part due to the need to query and correct mistakes made by BURS, is a major burden on business.

Table 13: Paying Taxes - Action Items


(currently 21)


52)

Introduce e-filing of tax returns and electronic payment

Reduce number of payments from 19 to 10 and time taken by one-third

8 45

Trading Across Borders

At 151, Botswana’s rank on Trading Across Borders is the lowest of the nine Doing Business criteria. This is partly a consequence of Botswana’s inland, landlocked location, and consequent high cost and duration for importing and exporting containers. However, it is not just about location – other landlocked African countries such as Lesotho, Zambia and Uganda have lower costs. This suggests that Botswana can achieve an improved performance by improving the efficiency of transport routes and border crossings, through initiatives such as 24-hour border opening for key crossing points, one-stop border posts (as has been done between Zambia and Zimbabwe), and electronic / web-based submission of customs documents. Given that the majority of Botswana’s borders are within SACU (those with South Africa and Namibia), it should be possible to minimise

12

border bureaucracy and benefit from the minimal border procedures that should apply within a customs union.

Table 14: Trading Across Borders - Indicator Components


Documents to export (number) 6 66

Time to export (days) 28 140

Cost to export (US$ per container) 3,010 171

Documents to import (number) 9 146

Time to import (days) 41 157

Cost to import (US$ per container) 3,390 169

Table 15: Trading Across Borders - Action Items


(currently 151)


52)

Improve border efficiency through 24 hour border opening and one-stop border posts

Reduce time and cost to export and import to achieve 10% improvement in both.

149 50

Introduce electronic document submission

Combined with the above

Enforcing Contracts

At 70, Botswana’s performance on Enforcing Contracts is poor for a country that generally does well on administration and rule of law issues. The main problem relates to the time taken to obtain and enforce a judgement in a commercial dispute, which is turn largely due to the very long process involved in securing a court hearing.

Table 16: Enforcing Contracts - Indicator Components

Indicator Botswana


Time (days) 625 122

Cost (% of claim) 28.1 99

The main action that can be taken to improve this situation is to establish a commercial court that can hear such cases expeditiously.

Table 17: Enforcing Contracts - Action Items


(currently 70)


52)

Establish commercial court

Reduce time taken to resolve cases by 50 percent (625

25 44

13

days to 312 days)

Closing a Business

At 27, Botswana’s ranking on Closing a Business is one of the country’s best across the DB indicators. This indicator measures the ease with which creditors can recover claims against a failing (insolvent) business.

Table 18: Closing a Business - Indicator Components


Recovery rate (cents on the dollar) 63.7 27

Time (years) 1.7 30

Cost (% of estate) 15 77

Summary

The recommended action items for improving Botswana’s ranking on the Doing Business indicators are summarised below.

Table 19: Proposed Action Items to Improve Botswana’s Doing Business Ranking

Action Impact on Doing Business Indicator

Starting a Business

Abolish trade and industrial licensing requirements except where clear public interest benefits, and replace with simple registration requirement.

Reduces step 7 from 21 days to 1 day

Reduce effective time taken for company formation through the RoC to the claimed 5 days

Reduces step 4 from 18 days to 5 days

Streamline tax registration with BURS to one procedure taking 5 days

Eliminates one procedure and saves 9 days

Total Eliminate one procedure and save 42 days

Construction Permits

Remove environmental management plan and EIA requirements

Reduce time taken from 167 to 77 days, remove two procedures and reduce costs by 80%

Ensure electricity connections within 7 days of application


Ensure planning and building approval by GCC within 14 days


Total Reduce time taken by 138 days to 39 days, cut two procedures and reduce costs by 80%

Getting Credit

Establish public credit bureau Improve depth of credit information score from 4 to 6

Paying Taxes

Introduce e-filing of tax returns and electronic payment

Reduce number of payments from 19 to 10 and time taken by one-third

Trading Across Borders

Improve border efficiency through 24 Reduce time and cost to export and

14

hour border opening and one-stop border posts

import to achieve 10% improvement in both.

Introduce electronic document submission

Combined with the above

Enforcing Contracts

Establish commercial court Reduce time taken to resolve cases by 50 percent (625 days to 312 days)

If all of these changes were undertaken, the aggregate impact on Botswana’s Doing Business ranking would be to improve from 52 to 21 (depending on what happens in other countries). The impact on individual components is shown in the figure below.

Figure 2: Actual and Potential Doing Business Rankings

Clearly there is no “quick fix” to improving Botswana’s Doing Business rankings. The overall result depends on the interaction of a large number of components of the business environment. Improving that business environment requires a concerted effort across a range of wide range of regulations. Although some of the action items listed above require time, financial investment and/or legislative change, others can be achieved quickly and cheaply. Overall, it would be feasible to achieve the dramatic improvement in overall rankings that would result from implementing all of the proposed action items within a period of 2-3 years.

It is also important to treat the exercise not just as an assignment in improving the Doing Business score for its own sake, but as part of the broader process of deregulation and improving the business environment in order to support economic growth and diversification. This process should extend to engagement with the private sector, in order to understand how regulations negatively affect business. On some of the indicators (e.g., the time taken to form a business though the Registrar of Companies), there is a major gap in perceptions between Government and the private sector, which can only be closed through dialogue. An improved Doing Business score will only be meaningful if part of a broader regulatory reform process, which should include regulatory impact assessments and review procedures and go far beyond the reforms proposed here.

15

Finally, it is important for Government to engage with the World Bank Doing Business team and use the processes that are in place for challenging errors in the data. Rectifying mistakes will not necessarily benefit Botswana from a scoring perspective; as noted above, some errors affect the ranking negatively, while others are in Botswana’s favour. However, accuracy is itself a desirable outcome. Dealing with errors and data issues also requires Government to engage in detail and understand how the Doing Business assessment works, which is itself an important part of removing unnecessary regulations and improving the business environment.

Technical Report: Doing Business 2011: How Botswana can ... · Table 1: Starting a Business ......

Documents

Transcript of Technical Report: Doing Business 2011: How Botswana can ... · Table 1: Starting a Business ......