Doing Business

Africa is naturally endowed with abundant natural resources and fantastic weather that makes it highly sought after by global investors, however, the ease to which businesses can be conducted on the continent in line with global best practices is more often described as herculean given the perceived hurdles that local and international businesses have had to surmount to get their businesses off the ground. The Doing Business 2016 index by the World Bank on 189 economies shows that 85 developing economies mainly from Africa implemented 169 reforms in the past year, indicative that African countries have made giant  strides in global reforms with five of the countries ranked among the top ten that have made economic progress coming from Sub-Sahara Africa. This gives credence to the fact that further political growth and stability with a better informed populace would bring about globally comparable economic growth and development.

Ease of Doing Business is a World Bank published index containing an aggregate figure that shows different parameters defining the ease of doing business in a country. It is calculated by aggregating the distance to frontier scores of different economies using the regulatory best practices for doing business as the parameter and bench marking each of the economy according to the parameters used. The distance to frontier score signifies the distance of an economy to the best performances observed on each Doing Business indicators across all economies and years included commencing from 2005. An economy distance to frontier is rated on a scale of 0 to 100, wherein 0 represents the lowest performance and 100 the Frontier. An economy for instance with a score of 70 in 2014 is an indicator that he economy is 30 percent points away from the best performances across all economies and times. A higher score of say 75 in year 2015 gives credence to an improving economy.

The Indicators in which distance to the frontier are computed form the bases for assessing and ranking each country for Ease of doing business. Economies are ranked from 1-189, a high ease of doing business signify that the regulatory environment is more conducive for the starting and operations of a new business locally.  The rankings are determined by sorting the aggregate distance to the frontier scores for 10 major criteria with each comprising of several indicators.

  • Starting a Business

Starting business criteria is a checklist list of all requirements and procedures officially required for a business to legally commence operation, the time recorded in calendar days, cost as a percentage of the economy’s income per capita and minimum paid up share capital required to formalize the start up in a country.

The ranking for starting a business is determined by sorting their distance to frontier scores through the most efficient practice or highest score achieved on each indicator.

Mozambique was able to drastically cut down on the time to start a new business from 168 days to 19 days presently, while Senegal lowered minimum paid up share capital to commence a business.

Registration

                           Source: World Bank EODB Index

  • Construction Permit

Construction Permit is a checklist of requirements mandatory for the establishment and operations of a construction business including the time, cost, quality control, building regulations, statutory permits, safety, insurance and professional certification. Each country’s economy is ranked under this indicator by sorting their distance to frontier scores for dealing with construction permits. These scores are the simple average of the distance to frontier scores for each of the component indicators

Benin Republic for instance as part of the reform reduced the number of signatories from five to two for obtaining a Building permit.

Permits

                                Source: World Bank EODB Index

  • Electricity Connection

Permanent supply and connection to existing electricity grids requirements and the procedure using standardized warehouse as yardstick. The procedures include applications, contracts with statutory agencies, inspections and approvals from the distribution utility and other agencies, final connection works, reliability of supply and transparency of tariffs

The ranking of economies on the ease of getting electricity is determined by sorting their distance to frontier scores for getting electricity. These scores are the simple average of the distance to frontier scores for all the component indicators except the price of electricity which are based on standardized assumptions to ensure comparability across different economies

The system Average Interruption Duration Index (SAIDI) and the System Average Interruption Frequency Index (SAIFI) are used to measure the duration and frequency of power outages in the largest business city of each economy. SAIDI is the average total duration of outages over the course of a year for each customer served, while SAIFI is the average number of service interruptions experienced by a customer in a year. Both SAIDI and SAIFI estimates include load shedding.

An economy is eligible to obtain a score on the reliability of supply and transparency of tariffs index if the utility collects data on electricity outages and the SAIDI value is below a threshold of 100 hours and the SAIFI value below a threshold of 100 outages. An economy, however will not be eligible to obtain a score if data on power outages are not collected and if outages are too frequent or long-lasting for the electricity supply to be considered reliable—that is, if the SAIDI value exceeds the threshold of 100 hours or the SAIFI value exceeds the threshold of 100 outages

Electricity

                                 Source: World Bank EODB Index

  • Registering or Transfer of Property

The full sequence and procedures required for registration or transfer of a property, the ease of transferring ownership title, ability to use the property as collateral in obtaining credit facilities, ease of disposing off the property when required, land administration system in place, time and cost to complete each of these procedures. The quality of land administration index has four dimensions: reliability of infrastructure, transparency of information, geographic coverage and land dispute resolution.

To make the data comparable across economies, several assumptions about the parties to the transaction, the property and the procedures are used.

Assumptions about the parties

  • The parties to the transactions are limited liability companies
  • The parties are located in the economy’s largest business city
  • Are 100% domestically and privately owned.
  • Have 50 employees each, all of whom are nationals.
  • Perform general commercial activities.

Assumptions about the property

  • The property have a value of 50 times income per capita. The sale price equals the value.
  • Is fully owned by the seller.
  • Has no mortgages attached and has been under the same ownership for the past 10 years.
  • Is registered in the land registry or cadastre, or both, and is free of title disputes.
  • Is located in the economy’s largest business city and no rezoning is required.
  • Consists of land and a building. The land area is 557.4 square meters (6,000 square feet).
  • Will not be subject to renovations or additional building following the purchase.
  • Have no trees, natural water sources, natural reserves or historical monuments of any kind.
  • Will not be used for special purposes, and no special permits, such as for residential use, industrial plants, waste storage or certain types of agricultural activities, are required.
  • Have no occupants, and no other party holds a legal interest in it

The ranking of economies on the ease of registering property is determined by sorting their distance to frontier scores for registering property. These scores are the simple average of the distance to frontier scores for each of the component indicators

Transfer of Property

                              Source: World Bank EODB Index

  • Getting Credit

It measures the legal rights of borrowers and lenders with respect to secured transactions through one set of indicators and the reporting of credit information through another is measures the. The first set of indicators measures whether certain features that facilitate lending exist within the applicable collateral and bankruptcy laws. The second set measures the coverage, scope and accessibility of credit information available through credit reporting service providers such as credit bureaus or credit registries. The ranking of economies on the ease of getting credit is determined by sorting their distance to frontier scores for getting credit. These scores are the distance to frontier score for the sum of the strength of legal rights index and the depth of credit information index

Credit facility

                             Source: World Bank EODB Index

  • Protecting Minority Investors

Doing Business measures the protection of minority investors from conflicts of interest through measures such as securities regulations, company laws, civil procedure codes and court rules of evidence. The extent of conflict of interest regulation index measures the protection of shareholders against directors’ misuse of corporate assets for personal gain by distinguishing three critical regulatory components that that addresses conflicts of interest namely: transparency of related-party transactions, shareholders’ ability to sue and hold directors liable for self-dealing, and access to evidence and allocation of legal expenses in shareholder litigation. Several assumptions are however, made to make the data comparable across several economies

The ranking of economies on the strength of minority investor protections is determined by sorting their distance to frontier scores for protecting minority investors. These scores are the simple average of the distance to frontier scores for the extent of conflict of interest regulation index and the extent of shareholder governance index.

Protecting Investors

                     Source: World Bank EODB Index

  • Paying Taxes

The Ease of Doing Business takes cognizance of the taxations, compulsory contributions and the administrative burden an average sized firm must overcome. Taxations and contributions measured include the profit or corporate income tax, social contributions and labour taxes paid by the employer, property taxes, property transfer taxes, dividend tax, capital gains tax, financial transactions tax, waste collection taxes, vehicle and road taxes, and any other small taxes or fees.

The ranking of economies on the ease of paying taxes is determined by sorting their distance to frontier scores for paying taxes. These scores are the simple average of the distance to frontier scores for each of the component indicators, with an empirically derived threshold that is empirical set at 26.1%. All economies with a total tax rate below this threshold receive the same score as the economy at the threshold.

Doing Business measures all statutory taxes and contributions at all tiers of government that apply to the standardized business and have an impact in its financial statements.

Paying taxes 1Paying taxes 2

                    Source: World Bank EODB Index

  • Trading Across Borders

The Ease of Doing Business records the time and cost associated with the logistics of exporting and importing goods in line with documentary compliance, border compliance and domestic transport. Border compliance captures the time and cost associated with compliance with the nation’s customs regulations with these usually becoming more flexible in situations where there are common customs unions among trading nations or economies

The ranking of economies on the ease of trading across borders is determined by sorting their distance to frontier scores for trading across borders. These scores are the simple average of the distance to frontier scores for the time and cost for documentary compliance and border compliance to export and import

If an economy has no formal, large-scale, private sector cross-border trade taking place as a result of government restrictions, armed conflict or a natural disaster, it is considered a “no practice” economy. A “no practice” economy receives a distance to frontier score of 0 for all the trading across borders indicators.

Trading across borders

                         Source: World Bank EODB Index

  • Enforcement of Contracts

The Ease of Doing Business measures the time and cost required to resolve a commercial dispute through a local first-instance court that takes recognises the quality of judicial processes index which measures whether each economy has adopted a series of good practices in its court system that is able to satisfy court structure and proceedings, case management, court automation and alternative dispute resolution

The ranking of economies on the ease of enforcing contracts is determined by sorting their distance to frontier scores for enforcing contracts. These scores are the simple average of the distance to frontier scores for each of the component indicators

Enforcement of contracts 1 Enforcement of contracts 2

                            Source: World Bank EODB Index                                                                                                

Resolving Insolvency

The Ease of Doing Business examines the time, cost and outcome of insolvency proceedings involving domestic entities as well as the strength of the legal framework applicable to liquidation and reorganization proceedings using assumptions comparable across various economies

The ranking of economies on the ease of resolving Insolvency is determined by sorting their distance to frontier scores for resolving insolvency. These scores are the simple average of the distance to frontier scores for the recovery rate and the strength of insolvency framework index

Resolving insilvency 1Resolving insilvency 2                                   Source: World Bank EODB Index123

References: World Bank Group – Doing Business Measuring Business Regulations 2016

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