Doing Business in Africa: São Tomé and Príncipe
In this AFKInsider series, we explore the regulatory conditions that an entrepreneur is likely to face when setting up a business in sub-Saharan Africa. AFKI presents Doing Business in Africa: São Tomé and Príncipe.
Doing Business in Africa: São Tomé and Príncipe
Colonized by the Portuguese in the 1490s, the twin-island state of São Tomé and Príncipe sits in Africa’s Gulf of Guinea just off of Gabon and Equatorial Guinea. During its time as a Portuguese colony the two islands became a major source of plantation crops such as sugar, cocoa, and coffee, but inevitable decline set in once trade and competition from other parts of Africa and Latin America whittled away at the colony’s lead.
As with Portugal’s other African colonies São Tomé and Príncipe gained independence in 1975 after a revolution in Portugal brought about the end of a right-wing dictatorship and instituted a democratic form of government.
After independence São Tomé and Príncipe nationalized the country’s plantations and aligned itself with the communist world, deepening connections with Moscow and generally aligning its political and economic policies in a socialist direction. One party rule was instituted and in 1978 an abortive coup was put down with assistance from Angolan troops.
In the 1980s the economy declined as the Soviet bloc began to collapse and towards the end of the decade the country began realigning itself towards the West. Beating the many of the USSR’s Soviet clients to the punch, the islands ultimately became one of the first in Africa to embrace democratic and market-based reforms.
This transition, however, was not without difficulty.
In 1990 a new constitution was put into place and multi-party elections were held for the first time, but political problems caused by austerity measures and economic reform led to instability throughout the next two decade with a successful coup briefly toppling the government in 2003.
Negotiations ended the bid by the military to take power and further democratic reforms and anti-corruption campaigns has, for the time being, headed off further instability. Today São Tomé and Príncipe is considered a free country by international analysts though corruption, and the lingering threat of rebellion, remains a significant problem.
Ease of Doing Business
So how does all this influence business conditions? According to the World Bank, São Tomé and Príncipe currently ranks 178th out of 183 countries on its Ease of Doing Business Index – a measure created by the Bank to gauge the degree to which commercial enterprises encounter regulatory hurdles, legal threats to property, and the time and money spent on things such as registering a business, ensuring right of title to property, and acquiring licenses.
By way of comparison, the United States ranks 4th on ease of doing business, right after Singapore, Hong Kong, and New Zealand.
What does this ranking mean? Take, for instance, the Bank’s measure of how easy it is to start a business, which is depicted in Figure 1 below. From the figure one can see that the Bank defines business-creation costs as consisting of the time and money outlays involved in the series of legal steps necessary for the entrepreneur must take in order to legally establish an in-country firm. Using this framework, the Bank then tasks researchers to go through this process in order to establish in-country averages.
When this metric is applied to São Tomé and Príncipe, the Bank finds that São Tomé and Príncipe ranks 177th out of 183 in ease of starting a business, making São Tomé and Príncipe one of the worst places on Earth to start a legal commercial enterprise.
To start a business in São Tomé and Príncipe one has to complete 10 bureaucratic procedures that take a total of 144 days at a total cost of about $881 and minimum capital requirement imposed by the government of $4,300—a huge obstacle for most residents.
Figure 1:
How the World Bank Measures Ease of Starting a Business
Using similar metrics for other aspects of business operations, the Bank has ranked São Tomé and Príncipe in a number of other areas. To obtain a construction permit, for instance, São Tomé and Príncipe does much better, but still not great, ranking 113th out of 183 as it takes the completion of 13 procedures, which takes on average 255 days at a cost of $6,328. Clearly this is a very high price to pay and a clear barrier to your average citizen of São Tomé and Príncipe in building or expanding a business.
Continuing in its assessment, the World Bank has determined that in order to obtain and register property, São Tomé and Príncipe does worse as it ranks 161st out of, again, 183 countries measured.
To register property in São Tomé and Príncipe the Bank finds it takes the completion of seven bureaucratic procedures that takes, on average, 62 days and costs 10.9-percent of the property’s financial value in fees and other costs to complete. This makes São Tomé and Príncipe a fairly difficult place in which to register property.
São Tomé and Príncipe does worse when it comes to obtaining credit, where it ranks 176th out of 183—making the country one of the worst in the world in this area. Here, as depicted in Figure 2, the Bank examines the legal rights of creditors and borrowers in secured transactions and bankruptcy law as well as the strength of credit information bureaus and exchanges.
When lenders have both strong legal rights and easy access to a wide variety of information about the client’s creditworthiness, reasons the Bank, the more available credit will be. When information on borrowers is significantly lacking – as is the case in most of Africa – legal protections for creditors must in turn be very strong. São Tomé and Príncipe performs poorly because creditor rights are weak and there is little information available on potential borrowers.
Figure 2:
How the World Banks Conceptualizes Credit Acquisition
When it comes to protecting investors and minority shareholders, São Tomé and Príncipe is also a poor prospect. Here, the country ranks 154th out of 183 countries. São Tomé and Príncipe receives this score because it requires little in the way of director disclosure, does not hold directors liable, and is only a moderately easy place to bring a shareholder lawsuit.
São Tomé and Príncipe does better in the area of taxation. The World Bank estimates that pleasing the tax man in São Tomé and Príncipe requires a total of 42 payments over the course of a year which, in turn, takes up to 424 hours to complete and can consume up to 33.3-percent of a company’s profits.
Accordingly, São Tomé and Príncipe’s tax burden is ranked 154th out of 183 nations, making it one of the very worst in the world in this area.
When it comes to engaging in cross-border trade, São Tomé and Príncipe breaks somewhat with its poor performance in other areas. In São Tomé and Príncipe, to import goods into the country one is required to have eight documents for customs officials to inspect. On average, it takes a total of 29 days to import goods into São Tomé and Príncipe with the cost amounting to $577 (excluding tariffs) per container shipped into the country.
The cost to export goods is similar as São Tomé and Príncipe requires eight documents to be inspected by customs’ officials, while the total cost (excluding taxes) is $690 per container, with delivery taking up to 27 days from point of origin. Compared to global averages this gives São Tomé and Príncipe a ranking of 92nd out of 183 on ease of engaging in cross-border trade.
São Tomé and Príncipe’s ranking returns to form when it comes to contract enforcement, where it ranks 179th out of 183 countries ranked on this issue by the Bank. On average, reports World Bank analysts, it takes a total of 43 legal procedures to take a contract from dispute to resolution, at the cost of 1,185 days spent in court or otherwise attending to legal issues. The financial cost of pursing a contract claim, says the Bank, typically accounts for 50.5-percent of the value of the claim.
Finally, in terms of closing or liquidating a business São Tomé and Príncipe ranks 183rd out of 183 countries as there is not history of the practice.
Table 1 presents a summary of these rankings as well as São Tomé and Príncipe’s overall ease-of-doing business rating. As can be seen, the numbers indicate the country is one of the worst in the world in terms of doing business. On nearly every measure it ranks well below the median—indeed near the bottom—on these measures. If there is any category it does well in, however, it is in the area of cross-border trade where it does the least poorly.
Table 1:
World Bank Ease of Doing Business
Assessment and Rankings: São Tomé and Príncipe
Prospects
As Africa’s second-smallest country and an island-state to boot, one would expect São Tomé and Príncipe to be a relatively sleepy place that is of little interest to foreign investors. While it is true that in most respects the country remains something of a backwater mostly dominated by large plantations and a cash-crop economy, there is some interesting work being done in the country’s oil and gas sector.
Presently, São Tomé and Príncipe have no proven reserves of oil and gas in its offshore areas. Periodic exploration of its waters has turned up little and a well drilled by Chevron early in the last decade found only non-commercial quantities of oil and gas.
However, the Gulf of Guinea is itself thought to hold around 10 billion barrels of oil and exploration work in the country’s offshore areas is again seeing an uptick in both activity and interest. Since 2010 the island-state’s government has awarded offshore license grants to several companies and seismic work by at least one of them is likely to begin in 2015.
Figure 3:
São Tomé and Príncipe Economic Growth,
Percent Increase, 2003 – 2013
So, in some respects São Tomé and Príncipe represents something of a ground-floor opportunity for the risk-seeking investor. Until commercial quantities of oil and gas are discovered the island’s economy will remain a low-price, agriculture-dependent economy with some potential as a tourist destination.
Once oil is discovered, however, the country’s low prices and cheap real estate will begin to disappear and a more high-end retail and service economy will emerge. Depending upon how confident one is about the likelihood of oil being discovered, getting in now while no one is there could lead the savvy investor to reap a bundle when the islands’ economy takes off from oil-and-gas riches.
If, that is, politics remains stable—the government there said it put down another coup attempt in 2009—oil is actually discovered, and one is able to make headway against the country’s stifling bureaucracy and relative isolation. But, that’s par for the course in emerging Africa, where the name of the game is all about balancing significant risks against the possibility of significant rewards.
Jeffrey Cavanaugh holds a Ph.D. in political science with a specialization in international relations from the University of Illinois at Urbana-Champaign. Formerly an assistant professor of political science and public administration at Mississippi State University, he writes on global affairs and international economics for AFK Insider, Mint Press News and BAM South.