Ethiopian Capital Addis ababa is the centre of business activity
EAC Industry

New Business in East Africa: Regulations You Need to Know

East Africa is home to some of the fastest growing economies in the world with Ethiopia, Kenya, and Tanzania all showing impressive results for 2018. Companies that wish to have a presence here must be aware of the regulations before setting up, as any administrative mistakes can waste valuable time and resources.

The East Africa Community (EAC) is an intergovernmental organisation composed of six countries in the region, excluding Ethiopia. Although the EAC is primarily designed to improve business conditions for domestic firms, it also has a direct effect on FDI. There is often a minimum capital expenditure to set up a new entity in Africa – Ethiopia for example requires foreign investors to deposit at least US$ 200,000 with an indigenous bank.

Corruption is still an issue for the continent and remains a serious concern among directors and entrepreneurs who want to set up. That being said, all East African governments are keen not just to attract foreign investors, but also keep them. Much of the corrupt behaviour that goes on mainly effects areas of business completely unrelated to FDI. International investors are also consistent in reporting that they are not faced with demands for bribes.

There are a number of support networks in Europe, US and East Africa itself to combat any fraudulent activity effecting foreign operations. Transparency International is the main recognised coalition against corruption. Although they don’t provide consultancy services, the organisation works tirelessly on global conventions and research.

The Business Anti-Corruption Portal is another useful platform offering tools on how to mitigate risks and cost of criminal activity when doing business abroad. All the information on the Portal is produced by GAN Integrity Solutions, a Denmark based IT & Professional Services firm. The Portal was established in 2006 and is supported by the European Commission and a number of European governments.

Growing middle class

It is an exciting time for East Africa with opportunities available in a number of sectors. A growing middle-class means the average-Joe has more money to spend on luxuries such as quality healthcare, electronic goods, eating out, travel and designer clothes. With a young, vibrant, well-educated workforce across the region, countries like Ethiopia and Kenya are perfect for business outsourcing services such as software development, data entry, digitisation and call centres. On a larger scale; manufacturing, mining and of course agriculture are continued areas of growth that won’t slow down anytime soon. A number of well known hugely profitable corporations are already operating out of Ethiopia, Kenya and Tanzania. As an example, in the last year alone, Pizza Hut has opened three outlets around Ethiopia and can boast of over a hundred stores throughout Sub-Saharan Africa.

“We have partnered with franchisees to expand our reach,” said Travis Purcell, Head of Africa for Pizza Hut. “Pricing can be an issue and the cost of eating here is still out of reach for many people. We do have a strong customer base and have been turning over a healthy profit.”

Although Western consumer brands have the potential to do well in East Africa, native companies have been known to fight back fiercely against competitors. It is for this reason, prior research and well-funded entry is needed to ensure good performance over local counterparts in a similar industry. On the whole, international companies are better managed and offer more pleasant experiences to customers and employees alike. But to prosper in a country like Ethiopia or Kenya, the image surrounding a brand’s operations must adapt to its new surroundings. For instance, at a recent convention in Addis Ababa I was impressed with how one Indian food company had re-thought the strategy, advertising campaign and packaging behind for one of its top selling products; a cooking oil. What will entice their customers back home in India, won’t necessarily attract the same desired number of consumers in Ethiopia - especially if they are paying a premium. To increase sales when bringing a new product to market, brands must be sensitive to the culture and people they are targeting.

Inexpensive workforce

As well as a strong consumer market, East Africa has become an attractive destination for business process outsourcing (BPO) due to its inexpensive yet well-educated workforce. Although a relatively new sector for the region, well-populated cities like Nairobi can thrive in this industry – especially as a large percentage of the population speak English to a high level. The same can be said for Addis Ababa in Ethiopia where 23% of the population are out of work, many of whom have the necessary skills to work in BPO. Jobs have been made available throughout the country in Industrial Parks but the general consensus is that they are monotonous and underpaid. Ethiopian graduates and job seekers are also keen to move away from the Public Sector, and this opens up a good pool of candidates for private companies to select from.

Business process outsourcing involves contracting the operations and responsibilities of a specific business process to a third party service provider, often abroad. Sub-sectors such as knowledge process outsourcing (KPO) and information technology outsourcing (ITO) use a similar model. Up until now; India, China and Malaysia have been the main players in this market but rising wages have forced firms to start exploring opportunities for employing workers outside of Asia. Salaries are considerably lower throughout East Africa and much like China in the 1980s, the region offers an abundant, energetic workforce. In terms of wages, Ethiopia, Kenya and Taznania are on a similar par with Bangladesh. They are highly favourable though due to having a better network of universities, a greater number of English speakers and a far more aspirational culture.

“The prices in Ethiopia are hard to match,” said Ben Goertzal, CEO of iCog Labs in Addis Ababa. “Although some other African countries offer similar outsourcing opportunities, one thing that makes this country stand out is the high quality education system. Where technical matters are concerned, the students and faculty I met at Addis Ababa University might just as well have been at any top engineering school in the developed world.”

Most countries in East Africa, and the continent as a whole, offer good investment opportunities for existing businesses and new start-ups. Ethiopia, Kenya and Tanzania have shown consistent growth in the region and unique openings are available across numerous industries. I myself am slightly bias towards Ethiopia as many of my friends live there and this year (2018) I’ve visited three times. It is important to learn as much possible about any country before setting up an office. Having a good support network in Africa itself, and back home, will go a long way to ensuring your success. All the countries I’ve mentioned have a Chamber of Commerce and Investment Commission where companies can get the information they need to start a business and gain access to market.

Kenya

Kenya's capital Nairobi

Kenya has a population of almost 50 million and is expected to achieve GDP growth of 6.2% in 2019. The country describes itself as “the entertainment capital of Africa” and offers many attractive opportunities for FDI. As with Ethiopia, an emerging urban middle class has increased appetite for high-value goods and services.

KenInvest is the government’s official investment promotion agency and they assist companies obtain licenses and navigate the various regulations in place. The minimum capital expenditure for a foreign business entering Kenya is US$ 100,000. This country is known for treating investors well and its export programmes do not distinguish between goods produced by local and offshore-owned firms. The government encourages investments in sectors that create employment and generate foreign exchange - BPO being one of these.

In Kenya, firms are allowed to be 100% foreign owned although some entities within certain sectors (such as telecommunications and mining) do require Kenyan shareholders. As with many of these countries - the authorities have created a one-stop-shop where organisations can easily register and obtain all relevant licenses to trade. In the past few years, Kenya has improved its laws regarding anti-bribery and money laundering as well as offering a number of incentives to new investors. Much of Kenyan business law is modelled on the English system and as a member of the UN / commonwealth, adheres to many of the regulations we are used to in parts of Europe. The most common forms of vehicle are private limited companies (LLCs), limited liability partnerships (LLPs) and branches - similar to the majority of East African nations.

Private limited companies in Kenya require a minimum of 1 director and 1 shareholder who can be living outside the country. Companies must register for tax with the Revenue Authority and prepare financial statements to be audited. Corporation tax stands at 30% and VAT at 16%. LLPs require two corporate or individual partners and a manager who must be allowed to work in Kenya. Unlike other countries, all members of a Kenyan LLP can be limited partners, enjoying limited liability against the partnership’s losses. The main advantage of an LLP is less corporation tax as income is directly taxed at the partner’s level and must be included in their personal / corporate tax filings. Kenya also has a different company formation for manufacturing and agricultural businesses wishing to export out of the country called EPZ (export processing zone company).

Tech is currently doing very well in Kenya with Nairobi’s Silicon Savannah housing many exciting startups. Agriculture and finance are two areas in which new technologies can do the world of good for Africa and the digitisation of traditional paper-based systems is in demand. Mpesa Mobile Money are a Kenyan business credited with drawing millions of unbanked people into the formal financial sector. People can now have access to services they would never of dreamed about just five years ago. In the agricultural sector companies like UjuziKilimo are changing the face of farming through data analysis and interactive SMS. These young startups are helping the poorer people of Africa with innovations that can be accessed anywhere through a mobile phone, internet connection or SMS. On a larger scale, aerial images from satellites, weather forecasts and soil sensors are making it easier to manage crop growth in real time. Wanda Organic is another Kenyan start-up providing bio-fertilizers to small and medium-sized farmers. Clients can order products by sending a simple text message with their phone. The company works with commercial businesses to improve efficiency while ensuring value for stakeholders at the same time. The results are evident.

“Productivity from my fruit trees have improved greatly,” says Riya Allen, a Wanda Organic client. “Access to fertilizer is faster than it has ever been and it’s all at the touch of a button. My prices are good and demand has increased in the market.”

Ethiopia

Setting up a business in Ethiopia requires a minimum capital expenditure of USD 200,000 for foreign investors and US$ 150,000 if done in partnership with a citizen of the country. As with Kenya, the government offer a one-stop-shop to make the process easier and faster. A memorandum of association needs to be filled out in order to start and this must be submitted to the Licensing and Registration Department, who may ask for certain changes to be made. When setting up a private limited company the first deposit needs to be made with the National Bank of Ethiopia. Finally, an investment permit has to be collected from the Ethiopian Investment Commission (EIC). Recommended banks are Abyssinia for a PLC and and Dashen Bank for a rep office.

All trade in Ethiopia is regulated by the MIT with corporation tax standing at 30% and VAT at 15%. The government offers a comprehensive set of fiscal and non-fiscal incentives to encourage investment into priority sectors. These include customs duty exemptions, income tax exemptions and various non-fiscal incentives for exporters. Other than corporation and VAT, the Ethiopian tax system comprises of personal income tax (0% up to 35%), excise tax (10% up to 100%) and withholding tax (2%) among others. Entry-level salaries in manufacturing (at the very bottom) range from $35 to $40 (32 to 37 Euros) per month - lower than India’s minimum wage of $68 per month and far below the average wage of $500 in China. The World Bank has extensive information on doing business in Ethiopia and the regulations.

PVH Corp, Velocity Apparelz and British company, Intrade UK are all manufacturing textile products in Ethiopia. Industrial parks up and down the country are employing thousands of people thanks to FDI. Export of products to the US and Europe are duty free. There are 12 parks either under construction or fully operational and they have good access to the Addis-Djibouti electric railway. This country now has business stakes in all major sea ports in East Africa and state-owned Ethiopian Airlines freights cargo to over 40 international destinations. British company, Intrade UK Ltd, recently made a $100 million investment on spinning and making textiles at the Mekelle Industrial Park in the country. Construction is expected to be completed next year and when it begins operating should create job opportunities for 1,300 local people. In addition, the company is looking at starting a cotton farm which is clear evidence manufacturing is a big growth area for Ethiopia. That being said, the Industrial Parks Development Corporation (IPDC) have been criticised for not regulating the industry well enough as workers regularly complain of being underpaid.

Tanzania

Tanzania's Dar es Salaam city

Tanzania is a democratic republic of over 53 million people and has had an annual GDP of 7% over the past decade. There is no minimum paid up share capital when setting up an LLC here but when setting up a PLC at least US$ 300,000 must be deposited in a Tanzanian business account. A Private Limited Company needs to have 2 directors and 2 shareholders who can be of any nationality. Companies must also register for VAT unless their annual sales are under US$ 45,000. A Tanzanian Public Limited Company should appoint 2 directors and 7 shareholders with 1 citizen as a 40% shareholder. Similar to other countries there is also the option to set up a branch office and rep office. Not similar to other countries, Tanzanian branch and rep offices have a lot more freedom to trade through importing and exporting.

The TIC was established in 1997 and is the primary agency of the government to coordinate, encourage and promote investment. Corporation tax is 30% and VAT is 18% but a number of financial incentives are available, especially for those exporting out of the country. The mining industry makes a significant contribution to the Tanzanian economy, mainly through the extraction of copper, gold, and silver, along with some industrial minerals and gemstones such as diamonds. This is a strong area of growth as minerals accounted for USD 1.37bn of the total value of Tanzania’s exports last year with gold representing more than 90% of this. Most of these resources are being exported in their raw form without being processed; which denies the country’s people of jobs. Investment-ready opportunities available include establishing refineries, processing nickel and smelters. However, to really add value to the economy it is important local workers are employed to process minerals inland before being exported.

There are a number of advisory firms in London and around the world to consult businesses on working in Africa. Africa Matters and Africa Practice are two companies specialising in market intelligence and dispute resolution. Healy Consultants in Singapore assist with the setting up process and can also help with the recruiting native talent. It is important companies operating in Africa have a good support network, as issues do and will arise. For instance, inconsistencies in tax assessments and excessive penalties have been highlighted as a risk by the Department for International Trade of Great Britain. Companies planning to conduct business in any developing economy should have regular contact with advisory firms, law firms and consultants to ensure they are always doing the right thing at the right time. Having an African accountant to hand who knows the market is also worthwhile.

BY RUARI PHILLIPS