Tanzania's SME Policy
Erick E. Kirumba


• Introduction
• The Role of SME in Tanzania's Economy
  • Definition
  • The Role of the SME Sub-sector for Tanzania's Economy
• Industrial Policy
• SME Policy in Tanzania
  • Why SME Policy?
  • SME - Efforts Towards Policy Formulation in Tanzania
  • Small Industries Development Organization (SIDO) Act, 1973
  • SIDO Support Programmes for SME Development
• Role of Stakeholders in SME Development
  • Government Role
  • Private Sector
  • NGOs' Role
• Co-ordination of SME Policies
  • The Inter-ministerial Approach
• The Impact of the Decentralization Process
• Sustainability of SME Support Programmes

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Tanzania's SME Policy
Erick E. Kirumba

Introduction

For years the Government of Tanzania has been adopting various measures for economic development through fiscal and monetary policies.

In the early 1980's, Tanzania's economy was not doing well in many sectors including industries: By 1982, the recorded annual growth rate of the GDP was 2%. To arrest this trend, deliberate efforts have been taken to revise policies. These policies include the Economic and Social Action Programme or Economic Revival Programs I & II, (ERP-1989/90 and 1991/92), the 2nd Union Development Plan 1992/93, and the Rolling and Forwarding Budget 1993/94-1995/96.

Under these economic changes the Government has initiated private sector development through liberalization of the economy, market decontrolling measures, etc. The Central Government has pulled out of productive activities, and instead the private sector is encouraged to invest in these activities. These measures have brought a direct impact on SME development. However, the sector has not yet developed due to various bottlenecks such as weak financial infrastructure, poor communication, lack of entrepreneurial culture etc.

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The Role of SME in Tanzania's Economy

Definition

There is no official operational definition for the SME sector in Tanzania which caters for all stakeholders. However, promoters have their own working definitions that suit their purposes for day to day operations.

The Small Industries Development Organisation, SIDO, classifies small scale industries as those establishments which employ people not exceeding 50 while micro enterprises are those projects which employ 10 people or less. Informal sector projects also are small units but not officially registered. In addition, these have no working premises and are not in official records.

Financial institutions have their working definitions. The National Bank of Commerce is defining a small scale enterprise as a project with capital investment not exceeding US$ 250,000.

The Role of the SME Sub-sector for Tanzania's Economy

The SME sub-sector's contribution to the national and socio-economic development can be seen as follows:-

• It generates income and employment.
• Is a major supplier of goods and services to the people.
• It contributes about 50% of industrial products' GDP.
• It is a main creator of new products, new services, and new entrepreneurs.

In actual fact, the SME sub-sector is contributing most to job creation especially currently where formal employment is no longer in the position to absorb the job-seekers. For example, the retrenchments in the civil service and parastatal sectors have eroded the capacity of the public sector as a predominant employer. This led to many retrenchees resorting to other income generating opportunities in the SME sub-sector.

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In 1993 for instance, it was estimated that about 12% of the rural labour force was self-employed in the SME sector, while in urban areas it was estimated to be 34%.

The average number of school leavers who join the labour market is estimated at 700,000 annually whereas the formal economy creates about 22,000 new post annually. Based on this prevailing economic situation there is no doubt that small and micro businesses will provide an alternative solution.

Industrial Policy

In October 1996, the Government of Tanzania had launched a revised industrial policy namely the Sustainable Industrial Development Policy (SIDP) 1996-2020 to replace the Basic Industry Strategy (BIS) 1975-1995.

Under the new SIDP, SMEs and the informal sector were earmarked as a major vehicle for future industrial growth. To ensure their growth the emphasis will be put on creating a favourable environment.

Immediate promotional measures include:-

• Taxation and duties:-
  A reasonable and special taxation regime on income and sales will have to be introduced for the early stages of enterprises growth. In addition to that, imported machinery, start up raw materials, inputs and required tools for SMEs should be exempted from duties in order to facilitate investment growth.
• Market and trade incentives:-
  The Government, through Industrial Support Organizations (ISO's), will provide market services, training, market information, and export consultancy to ensure that the stakeholders meet market standards for their products on both local and foreign markets.
• Business and financial infrastructure:-
  Preferential treatment in development plans and financial services

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  will be provided to ensure that potential entrepreneurs find a conducive environment with respect to finance and credit.

• Credits:-
  The SME sub-sector will be provided attractive credit terms and conditions. For example, the financial restructuring taking place aims at splitting the National Bank of Commerce into two banks, namely Trade Bank and Micro Finance Bank. This is a step ahead towards solving SMEs' credit problems.
• Promotion:-
  Existing promotional institutions and new ones will be supported, through their strengthening or restructuring in order to enable them address the current economic requirements.
• Licensing and registration:-
  The policy stipulated the need of Government to assist SMEs and the informal sector by removing bottlenecks which hinder the development of the sector. This includes, i.a., the simplifying of the licensing and registration procedures.
• Entrepreneurship development:-
  Measures recommended to foster entrepreneurship development include the provision of techno-economic information on product profiles, and the establishment of a business advisory service facility.

SME Policy in Tanzania

Why SME Policy?

Given its diversity, the SME sub-sector requires effective policies that can address the variety of developmental issues involved. A good SME policy should act as a guiding document and show a vision towards the sector's development.

Furthermore, the SME policy should have the following main objectives:-

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1. As a guidance for state action, the policy will advise all activities of the stakeholders, Government, the donor community, the private sector and entrepreneurs themselves.
2. It should consolidate the scattered regulations on promoting the small business activities in a single legal instrument whose enforcement shall require minimum institutions that will achieve a proper utilization of resources. This could result in the establishment of a national institutional framework, i.e. a SME Board, associations and promotional institutions etc.
3. The SME policy should facilitate intersectoral linkages. Thus, a successful SME policy will enhance linkages with large scale industries, medium industries, agriculture, etc.
4. The SME policy will facilitate the recognition of the sector and thus be considered in the national planning process.
5. An effective SME policy should be a check point for the participation of the lower income group in the processes of political decision and economic development.
6. A good policy should ensure that all participants are involved and effectively co-ordinated.

SME - Efforts Towards Policy Formulation in Tanzania

Up to this point there is no official SME policy which has been formulated to guide the activities of all stakeholders supporting the SME sector in Tanzania. Nevertheless, various policy papers have been prepared in favour of this sector. Such initiatives include:-

• Vice President's Office: Papers on Poverty Eradication
• Ministry of Industries and Trade: Sustainable Industrial Development Policy (SIDP); SME policy preparation by the Commonwealth Secretariat
• Ministry of Community Development, Women Affairs and Children: Gender Policy

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• Ministry of Labour and Youth Development: National Policy for Micro Enterprise and Informal Sector Promotion; Revised Draft Youth Policy; National Employment Policy
• Planning Commission: Informal Sector Survey.

A major concern is that the efforts were not unified to have a national SME policy or document. Thus, all these efforts have turned out to be ineffective with respect to SME development. However, there are a few acts which have been effective. These are the Human Resources Development Act of 1983, and the SIDO Establishment Act of 1973.

Small Industries Development Organization (SIDO) Act, 1973

Following the Party Directive on Small Industries Development of 1973, an Act was enacted that led to the establishment of the Small Industries Development Organization (SIDO). This is a parastatal organization in charge of the development of small industries in Tanzania.

Up to this point, SIDO remains a government arm for implementing SME promotion activities in the country. Its main functions are:-

• the promotion of SME activities in the form of technical advice, training in management, book-keeping and marketing etc.;
• the provision of credits for working tools and start-up capital;
• the provision of common facilities through industrial support programmes, i.e. foundry workshops as well as common facility workshops;
• industrial extension services.

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SIDO Support Programmes for SME Development

Hire Purchase Programme

SIDO introduced urban, rural, women and micro credit schemes aimed at the provision of a meaningful assistance to the small and micro enterprises sectors. Under the Urban Hire Purchase Programme, the entrepreneur is assisted with machinery and working tools. Credit terms include a down-payment of between 10 and 25%, and a grace period of up to five years. These loans attract an interest rate of about 30% (i.e. marginally above the inflation rate) and amounts disbursed range from 100,000 to 6,000,000 Tanzanian shillings.

Extension and Advisory Programme

SIDO has 20 regional offices, one in each region which cater for SME support. Services offered by these offices include technical support in machinery, installation maintenance, repairs and parts fabrication. Also these offices give advisory services in management aspects. Regional offices are administrative centres and are empowered to make decisions on SME support programmes in a particular region.

Technology Acquisition and Transfer

SIDO is also involved in technology development through improvement of locally available technologies as well as acquisition of technology from abroad which suites Tanzania's environment. The Sister Industry Programme and the Sister Daughter Programme are typical examples of SIDO involvement in technology acquisition and transfer.

Role of Stakeholders in SME Development

The roles of different actors in the SME sector change according to political and economic environment changes in the country at a particular time. In Tanzania the Government has changed its role from economy controlling to facilitation, while private sector is encouraged to participate actively in economic ventures.

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Government Role

The government has recognized its role in creating an enabling environment for the emergence of the private sector and its participation in economic activities. It has committed itself to reduce its direct involvement in productive activities. Instead, the private sector is encouraged to invest into these areas.

The main Government role with respect to SME development includes:-

• to provide necessary infrastructure for SME development;
• to set up institutions which support SME activities and to strengthen the existing ones, e.g. SIDO, CARMATEC, TEMDO, through the national budget;
• to ensure equal access to employment for women, youth, and the disabled.

Private Sector

The current economic environment in Tanzania has provided room for the private sector to actively participate in investment activities as opposed to previous socialist policy, when investment activities were under state control. This new atmosphere has created substantial incentives for private investors.

Meantime, the private sector in Tanzania is viewed as an engine of growth, opposite to the former view in which it was regarded as an enemy to socialism. Despite of this, however, organizations of the private sector remain unorganized, weak and hesitant to play their roles effectively. They tend to react rather than taking an initiating role in the process of policy formulation. They are centrally operating from headoffices in Dar es Salaam without having strong branches at regional or zonal levels.

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Private membership organizations include:-

• Tanzania Chambers (CTI and TCCIA),
• Tanzania Exporters Association, and
• Tanzania Co-operative Union (CUT).

In general the private sector in Tanzania has so far been too modest and disorganized to articulate its interests in the policy making process.

NGOs' Role

Between 1954 and 1997 about 8,837 NGOs have been registered in Tanzania in different areas including SME support. In recent years, the country witnessed a mushrooming of NGOs. From 1995 to 1997 more than 1,000 NGOs were registered thus indicating that the economic reform taking place in Tanzania has a great impact. NGOs promoting the SME sector include MEDA, PRIDE Africa, Business Care Ltd., CDTF, Presidential Trust Fund, Gasby Trust, SERO, SWISS CONTACT, AMKA, FAIDA Oxfam, Plan International, etc.

The NGOs which are involved in SME support are operating without co-ordination which resulted in a low impact on the sector. Other factors which contributed to the poor performance include:-

• poor management;
• too broad objectives;
• lack of experience;
• duplication of efforts and outright competition among the NGOs;
• piece-meal programmes that fail to meet the full range of social and economic needs.

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Co-ordination of SME Policies

The Inter-ministerial Approach

The Ministry of Industries and Trade has a section for small business development which is responsible for the co-ordination of all the stakeholders in the field of SME promotion in the country. Its main functions include:-

• policy formulation and planning of SMEs development;
• monitoring and evaluation of policy implementation;
• co-ordination of small scale industry and micro project development in Tanzania;
• liaise with donors and local institutions which are engaged in the SME sector.

Apart from the Ministry of Industries and Trade there are at least seven ministries which are involved in SME activities, namely the:-

• Ministry of Community Development, Women and Children Affairs;
• Planning Commission;
• Vice President's Office;
• Ministry of Higher Education, Science and Technology;
• Ministry of Finance;
• Prime Minister's Office.

Unfortunately, there is no inter-ministerial committee or board which co-ordinates these efforts.

The Impact of the Decentralization Process

In 1972 the government had announced a Directive for a regional decentralization process aiming at empowering regional authorities in the decision-making, planning and policy implementation.

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The decentralization strategies at regional and district levels were intended to facilitate the participation of the community in development activities, and create a link between the Prime Minister's Office and district administrations. Under this new structure, the district prepares a development plan, while the regional administration is the central government representative and main co-ordinator of both central and local government activities in the region.

Through this system, local councils have a number of functions in relation to SME activities, e.g. allocation of plots, licensing, tax collection, and marketing of goods and services of SMEs through tender boards.

In addition, the Regional Executive Director who is responsible for regional planning and policy implementation is also a chairperson of the Small Regional Enterprise Committee, where SIDO loan applicants are approved. However, the decentralized process had shown little impact on SME growth because of various bottlenecks including the unavailability of funds, infrastructure, etc.

Sustainability of SME Support Programmes

The analysis of the SME support programmes have shown that most of them are not sustainable. The main reasons for this can be summarized as follows:-

• Low interest rates offered by government and donor programmes to small businesses created a distorted perception of the viability of the projects.
• In most cases SME programmes do not involve beneficiaries in the planning stage.
• There was no continuous and steady supply of credit to SMEs. However, in 1994 the Government of Tanzania established the National Entrepreneurial Development Fund (NEDF) as a source of credit to the small business sector. The initial capital of the fund was TSh 500 millions. It is a revolving fund administered by the Ministry of

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  Industries and Trade and implemented by SIDO. By July 1997, 3,991 projects were established which employed 11,288 people. The credit recovery rate stands at about 70% nation-wide.

• Programmes lack long-term viability. As an example, the Sister Industry Programme (SIP), implemented by SIDO, was established and supported by Swedish donor funds in 1977. The basic mission of SIP was technology transfer from industrialized countries to Tanzania in order to foster SME development. During the supporting period the programme was shining and seemed to be successful. About 30 projects were established. However, after the withdrawal of SIDA support the programme collapsed.