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Africa Focus: Spring 2019
World Bank report highlights successes in Africa
Insight

World Bank report highlights successes in Africa

Countries make strides by streamlining regulations across 11 key areas

The World Bank's annual Ease of Doing Business report assesses countries' regulatory environments and includes an "ease of doing business" ranking that orders countries from most to least business-friendly.1 It presents quantitative indicators on regulations affecting businesses across 190 world economies. These cover 11 areas: starting a business; paying taxes; minority-investor protection; labor market legislation; accessing electricity; registering property; dealing with construction permits; enforcing contracts; cross-border trading; getting credit; and resolving insolvency. A rise in ranking usually implies that a country has streamlined several of these regulations.

Across 40 economies of sub-Saharan Africa, 107 business regulatory reforms were recorded between 2017 and 2018.

In 2019, top-ranked countries include New Zealand (No. 1), Singapore (No. 2) and Denmark (No. 3). Lowest-ranked countries include Venezuela (No. 188), Eritrea (No. 189) and Somalia (No. 190). The 2019 report shows strong performances by several African countries. Mauritius (No. 20) and Rwanda (No. 29) ranked in the top quartile globally—Mauritius climbed five places since the 2018 edition. Rwanda climbed 12 places since 2018, a doubly impressive achievement considering that it ranked No. 139 in 2009.

Looking back over five years, Figure 1 shows Ease of Doing Business rankings changes from 2015 to 2019 for all African countries and territories scored in both years. Over this time, ten African countries climbed ten or more places in the global rankings, while six slipped ten or more places: Ghana; South Africa; Ethiopia; Gabon; Sierra Leone; and Tunisia.

Countries that made strong showings improved their rankings largely by making dynamic reforms to their business regulatory frameworks. Across 40 sub-Saharan African economies, 107 business regulatory reforms were recorded between 2017 and 2018. From 2016 to 2017, these 40 countries collectively undertook a further 83 reforms.

Some sub-Saharan French-speaking countries achieved especially notable results. The report recognized Djibouti, Togo and Côte d'Ivoire as among "the 10 economies improving the most across three or more areas measured by Ease of Doing Business in 2017/18." Djibouti made the most impressive rise, climbing 55 places from No.154 in 2018, to No. 99 in 2019. This is especially remarkable given that, over the previous ten years, Djibouti consistently ranked between Nos. 155 and 171. Similarly, Togo climbed 19 places in the past year, and 25 over the previous decade from 2009 to 2018. Côte d'Ivoire's 17-place rise over the past year reflects a more consistent upward ranking trend each year. In total, Côte d'Ivoire climbed 46 places between 2009 and 2018.

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STARTING A BUSINESS

The complexity involved in creating and registering a limited liability company is a key driver of ease of doing business. It is therefore one of the first issues that must be addressed by countries seeking to enhance their business environments. Mauritius, for instance, streamlined its process by linking the databases of the business registry and the social security office. Togo also made it easier to start a business by reducing registration fees and introducing an online platform for company searches. The government of Mauritania eliminated company deed registration fees. Burundi slashed the business cost of registration from the equivalent of 33.9 percent of income per capita in 2017 to just 10.7 percent in 2018, making it three times less expensive to start a business in that country.

Countries also accelerated their regulatory processes by centralizing obligations and documents. Cameroon, Chad, Djibouti, Gabon, Guinea and Togo are among the sub-Saharan African French-speaking countries that addressed this in 2018. For instance, in Togo, entrepreneurs now pay all registration fees directly to a single agency. Djibouti created a similar "one-stop shop" for startups, and Guinea allowed businesses to register with its labor promotion agency.

Removing further obstacles, some countries reduced the minimum capital needed to create a limited liability company. In 2017, Togo required the equivalent of 31.5 percent of income per capita to create a company. Now, an entrepreneur needs only the equivalent of 6.7 percent of income per capita as minimum capital to create the same company. The gap is even more substantial in Central African Republic, where within one year, the minimum capital requirement was reduced from 446.7 percent of income per capita to 40.7 percent.

 

PAYING TAXES

55
Djibouti's rise in rankings in 2019—
from #154 in 2018

Ease of Doing Business report

A transparent, clear and easier-to-use tax system is another key ease of doing business driver. To attract investment and foster entrepreneurship, countries must address not only the level of taxation but also the systems in place for tax calculations, collections and refunds.

Côte d'Ivoire and Togo, for instance, introduced online platforms to improve filing processes and collection rates for corporate, income and value-added taxes. Mauritius upgraded its existing online platform, making it possible to submit invoices and amended corporate tax returns online. The island further streamlined its procedures by introducing a processing system that shortens the time required for repaying value-added tax refunds.

 

CHANGING LABOR LAWS

Several African countries undertook significant labor legislation reforms. For instance, Benin increased the maximum length of fixed-term contracts, with the aim of providing companies with more flexibility in their hiring options. Mali strengthened worker protections by establishing a guarantee of equal remuneration for work of equal value.

 

PROTECTING MINORITY INVESTORS

The risks of majority shareholder abuses frequently deter investors from participating in corporations in which they cannot acquire majority control. The World Bank report places high importance on regulatory measures to protect minority investors. Part of Djibouti's dramatic rankings climb is due to a large number of reforms introduced to its commercial code, including an obligation to make available any information relevant to the subject matter to shareholders who bring a lawsuit against a company. Further, the new regulations require greater disclosures of transactions with interested parties and offer stronger remedies against interested directors. Both Djibouti and Mauritius stress enhanced corporate transparency by strengthening their existing requirements.

 

ACCESSING ELECTRICITY

The Ease of Doing Business report also addressed access to electricity, one of the most severe challenges to commerce and industry in Africa. A reliable power supply and the ability to connect to the electrical grid within a reasonable time, at an acceptable cost, are fundamental drivers of ease of doing business. Both Gabon and Togo began recording data for the SAIDI and SAIFI indices (two reliability indicators of electricity provision) to address power outage issues. This enabled them to improve their monitoring and regulation of power outages. Niger shortened the time needed to obtain an electricity connection by streamlining its internal processes. By limiting the use of external works made by the electricity supplier and reducing the amount required as security for a new connection, Togo reduced the cost of a new electricity connection by 40 percent from 2017 to 2018.

 

REGISTERING PROPERTY

19
Togo's rise in rankings from 2018 to 2019

Ease of Doing Business report

The Ease of Doing Business report noted that effective procedures surrounding property transfers and efficient land administration systems are also fundamental requirements for the development of businesses. Togo was able to lower both cost and time needed for property transfers by creating an office dedicated to property transfer and by reducing the property transfer tax. Djibouti reduced registration fees and set strict deadlines to register the sale agreement with the tax authorities, which made its procedures more effective.

As part of its reforms to increase transparency and make land administration more efficient, Togo scanned most of its capital city's land titles and made ownership records freely accessible online. Similarly, Djibouti scanned the land titles for its capital city and required the registration of all property sales transactions at the land registry as a condition to enforceability against third parties. Niger rationalized the exchange of information procedure between its taxation department and its registration department, and Senegal did the same for its different departments at the property registry.

 

DEALING WITH CONSTRUCTION PERMITS

To operate easily, businesses require efficiency from the agencies responsible for reviewing construction permit applications and issuing construction permits. Entrepreneurs must be able to obtain construction permits at reasonable cost and within reasonable timeframes, and regulators need to ensure that planned constructions are legal and safe. Guinea saw slight improvements in this area. It now takes an average of 151 days to obtain a construction permit, while it would have taken 161 days a year ago.

Madagascar, Togo and Gabon made significant strides in building safety while reducing associated fees. In 2018, Madagascar appointed an independent architect to a commission charged with reducing construction permit costs and enhancing building safety. Results were impressive. The cost of a construction permit dropped from 54.5 percent of warehouse value in 2017 to 36.3 percent in 2018. The country's grade, granted in relation to building quality control also improved. Gabon and Togo were also able to make their processes safer by implementing decennial liability and insurance. For Togo, this was reflected in a dramatic score improvement, from 20 percent in 2017 to 53 percent in 2018.

 

ENFORCING CONTRACTS

The Ease of Doing Business report also considered the quality of the judicial process, as well as the time and cost necessary to resolve a commercial dispute. Djibouti was particularly active in this area, adopting a new Civil Procedure Code, which not only provides a new legal framework for voluntary conciliation and mediation proceedings, but also sets time standards for important events in court. This year, Djibouti also created a specialized commercial disputes division within its first-instance court.

There were also substantial legal developments in West and Central Africa, where the members of the OHADA2 adopted a new "Uniform Act on Mediation" in 2017. This Act provides a sophisticated legal framework related to all aspects of mediation for the OHADA's 17 members. Implementing this new alternative dispute resolution mechanism will make it easier and faster to enforce contracts in the region.

 

CROSS-BORDER TRADING

It is well recognized that intra-African international trade requires improvement to achieve development objectives for the continent. To strengthen economic competitiveness, it is essential to reduce delays and costs surrounding imports and exports. To this end, the Democratic Republic of the Congo implemented a national trade single window, enabling international traders to submit their regulatory documents to a single regulatory body. Guinea eliminated the requirement for pre-shipment inspection of imports. In Mauritius, the introduction of a risk-based management system reduced border compliance time by 14 hours (from 38 in 2017 to 24 now) and eased exportations from the island.

 

ACCESSING CREDIT

Africa's retail banking industry is growing rapidly, but market penetration remains poor by global standards. This hampers entrepreneurs' access to credit— and working capital to grow their business. Efficient, sophisticated security laws are crucial to solving this problem. By offering more legal instruments to banks and other investors to secure their lending, a country can encourage them to offer more credit to its entrepreneurs and lower related costs.

When Djibouti modernized its regulatory framework, it reformed its security law specifically to enhance access to credit. These reforms broadened the scope of assets that can be used as collateral. It is now possible to use future assets as collateral, and secured creditors now have absolute priority, outside of bankruptcy.

The "Uniform Act Organizing Securities," adopted in 2010, brought OHADA members harmonized, sophisticated security law. This reliable legal framework reinforces lenders' rights and enables the use of efficient security arrangement mechanisms, such as out-of-court appropriation (pacte commissoire). It also made it possible to appoint a security agent acting in its own name, on behalf of the lenders. As a result, OHADA members' grades notably stabilized or steadily improved over the last decade.

 

RESOLVING INSOLVENCY

Finally, the report assessed the quality of the insolvency instruments offered by each country's legislation. The Ease of Doing Business report evaluated the time and expense it takes to resolve a commercial insolvency and the recovery rate.

Djibouti enhanced its insolvency proceedings by making them more accessible for creditors and by granting them greater participation in the proceedings. Burundi streamlined the insolvency framework, expanding the scope of insolvency law and introducing preventive measures.

The OHADA member states adopted the Uniform Act Organizing Insolvency in 2015. This Act modernized and clarified rules governing insolvency proceedings in the OHADA member states, which are all in West and Central Africa. It facilitates the preservation of debtors' economic activities and levels of employment and protects viable companies in temporary distress. The Act also establishes a precise payment order for creditors.

Overall, sub-Saharan African French-speaking countries achieved satisfactory, or even gratifying, results. Some countries, such as Djibouti, Togo and Côte d'Ivoire, made outstanding improvements thanks to streamlined reforms of their regulations. The Ease of Doing Business 2019 report particularly highlighted Djibouti's achievements. The efficient legal framework resulting from these reforms, together with the country's strategic geographic position, will reinforce its status as a potential key hub for international investment programs such as China's One Belt, One Road initiative.3

Disappointing rankings for many other African countries contrast with the good news, though in most cases scores did not fall. Among the approximately 20 sub-Saharan African French-speaking countries, only two saw their scores drop from 2018 to 2019. But in an era when many countries are working actively to enhance their ease of doing business scores to promote business development and attract foreign direct investment, those countries that stand still are bound to fall in the rankings.

 

1 http://www.doingbusiness.org/en/rankings
2 OHADA (Organization for Harmonization of Business Law in Africa) is composed of 17 West and Central African countries (Benin, Burkina Faso, Cameroon, the Central African Republic, Chad, Comoros, Côte d'Ivoire, the Democratic Republic of the Congo, Equatorial Guinea, Gabon, Guinea, Guinea-Bissau, Mali, Niger, Senegal and Togo), which have adopted a common system of corporate and business law and implementing institutions. The laws promulgated by OHADA are deemed exclusively business-related and are directly applicable in each of the 17 member states.
3 One Belt, One Road is a development strategy launched by China in 2013, involving infrastructure development and investments in countries across the globe, principally in Asia, Africa and Europe.

 

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Africa Focus: Spring 2019

 

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