Emmanuel HATEGEKA Chief Executive Officer- PSF Kigali, 22 nd April 2009

1. KNOWING THE SEGMENT: ‘Particularities of SMEs in Africa’ Presentation at the International Tax Dialogue Conference Emmanuel HATEGEKA Chief Executive Officer- PSF Kigali, 22nd April 2009

2. PSF at a glance SMEs in Africa: An overview SME Informality SME Tax challenges Key constraints to business growth Recommendations Some best practice case Presentation Outline.

3. 10 years old! Established in December 1999, replacing the former Rwandan Chamber of Commerce& Industry and the then employers organization. The PSF Mission To represent the interests of the private sector, while providing innovative services for growth and professionalism of member enterprises towards sustainable private sector led development. The PSF Vision To be an effective self sustaining institution supporting strong private sector-wide performance PSF at a glance…

4. As the umbrella organization for Rwanda’s Private Sector, the PSF has put in place a network of institutions to better serve its members as one united voice BDS Posts Chambers Center of Arbitration • Perform Private Sector Advocacy to influence policy reforms for a conducive and competitive business environment • Strengthen Rwanda's Private Sector Companies through biz extension services • Build Human Capacity for Rwanda’s Private Sector • Facilitate Sustainable & long term Funding Sources for Rwanda’s Private Sector • Develop Vibrant & strong Private Sector business Associations & identify sector specific challenges • Sector specific advocacy • Provide dispute arbitration and business challenge assistance

5. SMEs in Africa: An overview • In most African countries, SMEs form the bigger majority of enterprises • However, they form a very narrow tax revenue base. From a FIAS study in Rwanda 0.3% of tax payers contribute 48% of the Tax Revenue • The bigger majority of SMEs operate informally. • In most African countries, SMEs are run by illiterate and semi-literate owners/families. From a PSF Rwanda business census, over 90% of business are MSME’s. 87% of employees are primary leavers or no formal education • Many SMEs are rural based and thus have limited access to urban infrastructure & markets and technology.

6. Most SME’s remain informal. Why? Business perceptions of advantages to being informal Almost half SMEs surveyed in Rwanda cited tax issues as key advantages to remaining informal No advantages No product standards No health & safety inspections Avoidance of labour regulations No price controls No income/profit taxes No social security contributions No problems with licences Source: OTF Group, Rwanda Informal Sector Survey Report, (FIAS) December 2006

7. But they know the disadvantages to informality! Business perceptions of the disadvantages to being informal The major challenges for informal firms are access to finance, raw materials and a broader market No access to and insecurity of land Access to broader market Need to pay bribes to avoid taxes Other Fear of government retribution Lack of access to finance Lack of access to raw materials Source: OTF Group, Rwanda Informal Sector Survey Report, (FIAS) December 2006

8. Tax rates & tax administration are two of the major challenges facing SMEs in Rwanda In addition to the level of taxes, businesses also cite difficulty understanding the tax system and the time burden of filing taxes as major challenges The key reason firms stay informal is to avoid paying taxes & social security The key barriers to becoming formal are the financial burden of the tax system and lack of information about costs & benefits of doing so SME’s also lack the capacity as well as the financial clout to hire expert employees hence resort to family labour … next of kin to run business Some revenue authorities (like Zambia) prefer to leave SMEs out of general tax systems due to the nature and complexity involved in monitoring, evaluating and taxing SMEs. SME challenges center around taxation and capacity…

9. From a recent study on the cost of red tape covering 400 businesses in Rwanda commissioned by PSF 53% of the respondents mentioned tax as the most troublesome regulation for obvious reasons.

10. Not a problem Major problem Neutral (4) Specific tax issues for SMEs – case of Rwanda Percentage of businesses ranking each issue as a constraint Level of taxes on business –corporate tax Level of taxes on business –VAT In addition to the level of taxes, businesses also see information and administrative issues as major constraints Lack of understanding /information on tax system Time spent dealing with tax issues Difficulty filing in tax returns Poor customer service by RRA Source: PSF, OTF Group Business Investment Climate Survey, July 2008, n=881: Qn. 4. How important a constraint on your business are the following tax & legal issues?

11. Other General constraints to business growth among SMEs – Rwanda’s case Percentage of businesses ranking each issue as a major constraint Services Manufacturing Tax rates and administration are major constraints to business growth in Rwanda Source: PSF BICS Survey 2008, OTF Group Analysis. Services n=808, Manufacturing n=59

12. African SMEs need a simplified and less costly Small Business Taxation (SBT) regime Need for increase of SME access to much needed infrastructure and technology Need for SMEs to be given incentives that would encourage them to focus and strive to formalize The actual tax costs should be reviewed to reduce the actual tax burden to SMEs to facilitate their growth/formalization. Recommendations

13. There is also an urgent need for SME capacity building and training to enable them comply with formal business procedures Finally, it is evident that there is a significantly big information gap on the side of SMEs in regard to taxation in general. Sensitization will thus come in handy Need for easier access to finance by SMEs Recommendations continued…

14. Thank you! Website: www.psf.org.rw