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 178^th 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 4^th 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 177^th 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 113^th 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 161^st 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 176^th 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 154^th 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 154^th 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 92^nd out of 183 on ease of engaging in cross-border trade.