Protection of SMEs in Tanzania

Article/ Feature

25/March/2011

Disorderly Market and Investments to the Detriment of our SMEs

By: Clarence KIPOBOTA (Advocate)*

At this era of liberal marketing, which has been brought about by the command of globalization, the legal regulation and protection of the market interplay between multinational, national and Small and Medium Enterprises (SMEs) is vital.

This is due to the fact that, the liberal marketing has increased economic competitions caused by lack of monopoly of goods and services. It is a ruthless game which does not consider vulnerability of some parties in the competition. The weak players give up and leave a pitch for the strongest. That is, the foreign competitors and few rich Tanzanians.   

The said economic competitions are of two folds. One is internal competitions between the local traders themselves and the other one is between multinational companies and the local traders.

The competitions are very stiff and increasingly quite rowdy because the globalization calls for removal of all sorts of barriers to international trades and foreign direct investments all over the world, Tanzania inclusive.

Increasingly, unskilled Tanzanian traders, who are also low-income such as SMEs are becoming footloose; and this is the beginning of the unmerited struggles in the market, which policies and laws should be premeditated to arrest the situation.

The main question here is whether Tanzania has sufficient legal protection for the SMEs. If yes, then why do our people out there suffer from unruly market, which is increasingly occupied by the foreigners and leave our people ‘servants’ after given up?

Probably the first thing to consider is whether we really need SMEs in economic development. The affirmative response will then give justification for a need to give them legal and economic protection.

It should be noted that the SMEs are a recent phenomenon in Tanzania. They are emerging as part of the economic reforms taking place in the country and have developed to mitigate economic crisis such as lack of broad range of investments, failing businesses, lay off and unemployment especially amongst the youths initiated from 1980s. It now employs more than 30 percent of Tanzanians.

In 2002, the government adopted the Small and Medium Enterprises Development Policy (SMEs Policy) of 2002. The policy defines the SMEs as a nomenclature which is used to mean micro, small and medium enterprises - production, processing supply, marketing businesses and the like.

  

Just at this juncture, we can establish that we need SMEs as a country for both economic and political reasons.

But the challenge here as said earlier on, is a stiff competition mainly between SMEs and foreign investors. Already local producers and traders at Kariakoo Market and elsewhere in Tanzania are complaining of Chinese and other foreigners around. They have good capital, can import and sell cheaply.

Moreover, the foreigners can even displace the local SMEs from their lands and market places. Apart from their economic muscles, they have also justification. That is a liberal market which Tanzania allows just like any other country around the world. What should be the government’s economic and legal duties here?   

There is policy (as shown above) and legal protection in Tanzania. At the end, we shall determine if the protection is sufficient for SMEs’ survival.

Indeed, Tanzania has a very long history of using laws to control and safeguard its economic activities, modes and means of production, markets, prices and the economic actors in this sector. For instance, in 1970s, the government passed two important laws to control and safeguard interests of, inter alia, weak traders and consumers in the markets.

The two laws were the Price Control Act, 1974 and the Regulation of Prices Act, 1973. The duo read together. The 1973’s legislation set rules of determining prices in the markets and 1974’s legislation established the National Price Commission (NPC). The then NPC performed almost same functions as what the current Fair Competition Commission (FCC), which is established in 2003, is vested with at the moment. The FCC is established under the Fair Competition Act, 2003.

The provisions of the Price Control Act, 1974 (now repealed) required the NPC to accomplish the following functions, namely; (a) to determine reasonable price structures on a national basis and provide for their orderly variation when necessary; (b) ensure that prices of goods and services in Tanzania are compatible with and conform to the principles of socialism and the political, economic and social aspirations of the people of the United Republic; (c) to perform such other functions as are conferred on it by this Act or as the President may from time to time confer upon it.

Apparently, it was seen that, by controlling the price in the market, there would be a fair competitions and therefore even the small traders such as SMEs will be protected from imperfect competitions. These kinds of competitions included monopolistic or oligopolistic pricing both at ex-factory, wholesale and retail levels.

As to the determination of price ceilings, Section 12 (2) of the Price Control Act, 1974 required the NPC to consider the factors and effects of ceilings on achievements of intended goals, which include consideration of the costs of production, capital assets and other costs.

With structural adjustments and other economic reforms which required removal of so called obstacles to business, the government policies and laws became loose.

In 1990s government of Tanzania seemed to have struggling to bring back the control of market and protect SMEs. Probably it was too late and the globalization pressure overwhelmed the mission. Then, nothing much has been achieved and therefore SMEs continue to operate defenselessly. 

In 1994 the then Fair Competition Act, 2004 was passed by the parliament to try to address the situation. It was repealed and replaced by the same law in 2003. The new law is the Fair Competitions Act, 2003. It is implemented by the Fair Competition Commission (FCC), which is established under Section 62 of the law. The weakness of this law is discussed later.

Another important law passed in 1990s was the Tanzania Investment Act, 1997.  It provides for more favorable conditions for investors under the Tanzania Investment Centre (TIC).  The law gives all investors equal status and attention regardless of their economic and technological status. This is the first weakness.

Secondly, the law allows number of incentives including exempt of certain taxes under the Income Tax Act, 2004; the Value Added Tax (VAT) Act, Cap. 148; and in other written laws or otherwise.

For instance, fiscal incentives provided to exploration and mining activities include among others; exemption of import duty and VAT on equipment and essential materials up to the anniversary of the start of production, thereafter a percent seal applies; the depreciation allowances of 100 percent; repatriation of capital and profit directly related to mining and non-mandatory government participation in the extraction processes of the minerals. On the side of the artisan mining done by small scale minors, they do not enjoy the same because they did not pass through TIC and in fact not encouraged to do so.

Another incentive provided, which is one sided because it is for foreign investors, is what in the immigration quota. Subsection (1) of Section 24 of the Tanzania Investment Act, provides that every business enterprise granted a certificate of incentives under this Act, shall be entitled to an initial automatic immigrant quota of up to five persons during the start up period.

This is one of the doors, which the foreign investors use or likely to use. Unfortunately the provision does not qualify and specify the nature of immigrant quota. Asians are now flooded the market under the name of foreign investors.

A real investor brings in other four person during the start up period and the immigrant do stay in the country to compete with SMEs by doing even petty trading around the major cities of Tanzania. We have seen at Kariakoo Market the Chinese are selling pairs of shoes, flowers, stationeries, TV sets and other small items. We have also seen supermarkets selling even coconuts, tomatoes and Chapatis, commodities which would have been sold by our Mama Ntilie and other SMEs if the government had to be more serious with its policies and laws.  

These petty foreign traders who get in the country through said weaknesses do import cheaply and therefore sell cheaply as said above. In this way, they kill the business of local SMEs. The immigration quota under the investment law should be removed and the screening under the immigration law, should be tighten in order to protect the local investors in Tanzania.

There is also a need of controlling of what to import in the country. Tanzania should import what is not available in the country. Selling of most common commodities in the supermarkets is actually an extermination factor of the small producers and venders. Why can’t just facilitate them to pack well their items instead of ‘boycotting’ creating market space for them?

We have the Fair Competition Act of 2003 as already mentioned above. However, unlike the 1973 and 1974 legislation, which gave the then NPC powers to set and control prices of goods and services in the markets, the 2003 law does not give those powers to the FCC. Instead, the Fair Competition Act, 2003 gives the competitors wide discretionary powers to decide the ceiling of prices of commodities in the market.

The SUMATRA and EWURA established under the Surface and Marine Transport Regulatory Authority Act, 2001 and the Energy and Water Utilities Regulatory Authority Act, 2001 respectively also have no powers to set prices. They can just conduct ‘negotiations’ and ‘bargaining’ and then, make formal command of what should be the price mainly basing on proposals of the rich business persons and not the SMEs.   

Therefore, the current legal protection is not sufficient for SMEs for number of reasons. Firstly, the Tanzanian legal framework does not also consider important factors such as technology, business knowledge, capital availability for SMEs and the like.

Secondly, the said framework retains a presumption that fair competition means equal treatment of all people in the market. For the purposes of protection of local investors, the focus of the laws should consider the fact that local investors will not, in anyway, stand at equal footing with foreign investors. We need to separate the two to avoid equal treatment of the unequal.  

Thirdly, there is no good political will to safeguard the local SMEs. The Ministry of Trade ordered ultimatum for Chinese and other petty foreign investors out of Kariakoo Market in February 2011.

The deputy Minister went there, the SMEs applauded for his vitality and daring heart. But, as most of us (who know the ‘Nguvu ya Soda’ approach) expected, it was a normal show off that has remained unenforceable to date.

It should be clear that, the argument here is that, while we really need investment money for country’s economic survival, serious legal measures should be adopted and implemented to ensure real investors in our country.

For sure there is no country around the world which allows ‘foreign SMEs.’ Rather, there are countries which have successfully invested in the ability of its local SMEs to boost their macro-economic growth.  

Without taking immediate measures as proposed here, we will continue cherishing the foreigners but to the detriment of our own people. It is high time now we take proactive measures for our people.

Government can actually reduce unemployment rates, petty economic related crimes and win political credits if make practical decision. Why should we wait for xenophobic attacks against the foreigners like it is a situation in those of other countries?  

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* Clarence KIPOBOTA holds Bachelor of Laws Degree (LL.B (Hons)), Masters of Community Economic Development (Msc. CED) and Certificates in Human Rights and UN Treaty Monitoring Bodies. He is an Advocate of the High Court of Tanzania, currently working as Legal Consultant with LEGAL AND DEVELOPMENT CONSULTANTS LIMITED (LEDECO). He is also Human Rights Activist. Email: kipobota@yahoo.com Tel: +255 762776281/ +255 222700695.