TANZANIA MILK PROCESSORS ASSOCIATION (TAMPA) HARMONIZATION OF REGULATORY FRAMEWORK IN THE DAIRY SECTOR POLICY BRIEF

Transcription

1 TANZANIA MILK PROCESSORS ASSOCIATION (TAMPA) HARMONIZATION OF REGULATORY FRAMEWORK IN THE DAIRY SECTOR POLICY BRIEF July 2011

2 Overview of Dairy Sector in Tanzania The dairy sector has great potential to contribute to economic development in Tanzania through improving food security and welfare, creating employment and opening income-generation opportunities especially for rural households. The livestock industry accounts for 3.8% of the Gross Domestic Product (GDP), with the dairy sub-sector contributing 30% of this output. It is estimated that Tanzania has over 21.3 million cattle, whereby 680,000 are dairy cattle with the capacity to produce a total of 1.65 billion litres annually 1. The dairy sector, though not fully commercialized, employs more than 2 million households and over 100,000 intermediaries through their participation in milk processing and marketing. Dairy production also provides small-scale farmers with a regular cash income that can be several times greater than many other types of on-and off-farm enterprises. Other benefits of dairy production include the establishment of linkages with input service providers, milk traders, and dairy processors; the supply of nutritious and affordable food for the local population; and opportunities for long-term expansion in domestic and regional export markets. Considering the importance of the dairy sector in Tanzania, creating an enabling environment that will enhance its competitiveness is highly desirable. In view of this, the National Strategy for Growth and Reduction of Poverty, the acronym MKUKUTA in Kiswahili, recognizes the dairy sector as one of the key vehicles for poverty eradication and thus advocates its development. The National Livestock Policy is also geared toward encouraging the development of a commercially oriented, efficient and internationally competitive dairy industry. The role of the Government according to this policy is to accelerate the reform process and continue maintaining a favourable macroeconomic policy environment that is conducive for private sector participation in the livestock industry. The move to enhance competitiveness of the dairy industry is also in line with Agricultural Sector Development Programme (ASDP) that aims at creating an enabling and conducive environment for improving the productivity and profitability of the agricultural sector. Despite the potential benefits of the dairy industry in Tanzania, commercial dairy activities are still in their infancy. The bulk of milk produced in the country originates from traditional cattle and is consumed at the household level with very little reaching the market. Data from the Ministry of Livestock Development show that formal milk processing has declined by more than 80% over the last 15 years, and 13 dairy plants have closed. Most of the processing plants are working at less than 30% of the installed capacity, resulting in only 105,000 litres being processed per day currently, down from 496,000 litres 2. In 2009, the country had an annual installed capacity to process 325,600 litres per day but operated at an average rate of less than 100,000 litres (MFEA, 2009) 3. The national per capita consumption of milk is 41 litres per annum, which is low compared with the FAO recommended level of 200 litres, and only a small proportion (10%) of marketable surplus milk filters through to urban markets and processing plants annually. There is a narrow product range which is concentrated on liquid and fermented milk, while demand for processed milk products, particularly in urban areas, is far from being satisfied. The demand-supply gap of processed dairy products is therefore filled by imports of about million litres of Liquid Milk Equivalents (LME) per annum, with a value of US $5 million and imports are increasing at a rate of 9% annually. 1 Ministry of Livestock and Fisheries Development 2 URT, Statistics from the Ministry of Livestock Development indicate that Musoma Dairy has installed capacity of 80,000 litres when it operates for 8 hours, but, only 6000 litres are currently processed. Tanga Fresh processes 30,000 litres per day while it has installed capacity of 50,000 litres. Tan Dairies, Asas Dairies and International Dairy products process between 4, litres per day though they have capacity to process up to 10,000 litres. Other small processors process less than 1,000 litres per day. 2

3 The Policy/Advocacy Issue Competitiveness of the dairy industry in Tanzania has been deteriorating despite the potential that exists in the country to grow the sector. One of the issues that have been raised by stakeholders in many forums 4 is that the regulatory burden increases the cost of doing business and contributes to a decline in competiveness of the dairy sector in the country. Although this concern does not rule out the impact of other factors, such as inadequate raw milk production, the high cost of equipment, inadequate machinery, packaging materials and utilities, poor infrastructure, inadequate management and low milk consumption levels, the impact of the regulatory burden on the competitiveness of the sector is considered to be enormous. In a study conducted by TAMPA in 2007/08, with the support of BEST- AC, it was found that the sector is regulated by more than 15 regulators enshrined in 25 Acts and by more than 25 regulations. A review of the laws and regulations of the dairy sector also reveals that the major focus is on controlling rather than enabling the private sector. Some regulators seek to generate income in the process of enforcing regulations, leading to rent-seeking behaviour, rather than facilitating the private sector. In an attempt to comply with the regulations, enterprises in the dairy sector incur several additional costs including: i) staffing cost of managing regulatory issues; ii) higher input costs; iii) cost of lost sales due to restricted access to markets; iv) cost of meeting reporting requirements; and v) cost of registration, inspection and fines charged by regulators. As a result of such additional costs, the sector s performance has deteriorated, leading to a decline in employment, incomes and government revenue and the failure to take advantage of international opportunities. However, driven by the need to protect milk consumers and producers, the government s argument for regulation is to improve the quality and safety of milk in addition to creating a level playing field for competition. Regulations are meant to ensure that public safety and welfare are attained and that there are good business practices. Their aim is also to integrate the informal sector into the formal sector through registration, training and licensing of informal milk producers and traders. The key challenge though is how to rationalize the sector without adding unnecessary costs and burdens to the private sector while ensuring that good business practices are followed. Even though the key role played by the government is mainly legislative and regulatory, it could strategically engage the private sector in market-based solutions that are cost-effective alternatives to or complements the legislation. The main goal of this policy proposal is therefore to streamline the regulations to increase the dairy sector s domestic and international competitiveness and to ensure sustained economic and social benefits for dairy sector stakeholders while maintaining public safety. This is based on the concept of Regulatory Best Practice (RBP), which seeks to reduce regulatory costs and barriers to competition. RBP requires that the regulatory objective (e.g. minimum safety standard for milk) be achieved without an overlap of regulatory functions. Specific regulatory issues that have been identified in the dairy sector are as follows; i) Multiple uncoordinated inspections of premises, with a variety of regulations aimed at food hygiene (TFDA, TBS, TDB and Zoo-sanitary) and those safeguarding the safety of employees (OSHA, LGAs). ii) Multiple uncoordinated testing of products where the authorities are involved in periodic (annual and otherwise) testing of all kinds of processed milk and dairy products destined for the market. Although the testing fees may be high, the main cost in this case is the market opportunity lost in waiting for the results and the necessary permits. iii) Multiplicity of licences/permits for premises and products, wherbye an average milk-processing business producing six different products is required to have more than 15 licences/permits for the premises (including vehicles) and products, most of which have to be renewed annually. 4 TDB & TAMPA stakeholders workshops and Dairy Conference held in Dar in May,

4 iv) The legal framework does not provide for a clear division of responsibilities and coordination between inspecting authorities, with the result that the efforts of the controlling authorities are duplicated, owing to the lack of communication and coordination. v) The legal control measures in the sector translate into stringent and burdensome obligations for businesses, while no accountability or transparency mechanisms are present for state controlling bodies. vi) Poor relationships between regulators and enterprises, whereby most regulatory agency staff act as police rather than facilitators. This leads to bureaucracy, wastage of enterprises time and money, delays, corruption, frustration and unnecessary inconvenience. vii) Government s use of regulation as a source of revenue, where the revenue earned is not based on the cost of providing the service. This motivates rent-seeking behavior rather than facilitating enterprises to comply. viii) Although the Government through the Business Regulation Unit (BRU) has introduced Regulatory Impact Assessment (RIA) to assess the likely consequences of regulation, most regulations controlling the dairy sector were not developed using the RIA approach. ix) The recent government road map to improve the regulatory environment recognizes the burden caused by the current regulatory system on the performance of the private sector. However, the road map deals with the private sector in general and leaves out the issue of opportunity costs incurred specifically by the dairy sector in complying with the regulations as well as in dealing with the regulators. Even with the road map, the position of Tanzania in the Doing Business Index is deteriorating 5. Impact of Over-regulation Assessing the impact of over-regulation on competitiveness of the dairy sector is not an easy task since the performance of the sector is affected by many factors. Because the competitiveness of firms depends on both the business environment and firms-specific factors, it would be unhelpful to associate competitiveness of the dairy industry with only one factor. However, any factor that adds unnecessary costs to a firm or industry affects its competitive advantage. In this case, additional regulatory costs paid by firms operating in the dairy sector increase the burden on businesses, which therefore affects their ability to compete. Once unnecessary costs are added to firms, the effect is extended to other economic dimensions, including taxes paid to the government, employment and income of the people. Studies carried out in the sector and stakeholders forums 6 have identified the impact of the current regulatory system on the performance of the dairy sector as follows: i) The total cost of compliance for a small dairy processor 7 is estimated at TZS 12,000,000 during the start-up phase and TZS 48,000,000 as recurrent compliance costs. This includes the cost of actual outlays plus the time-related opportunity costs of regulatory compliance. If the tax and social security contributions are excluded, the total recurrent compliance cost which a small dairy processor must pay is TZS 29,000,000/=. However, the Government has recently added new fees for weights and measures that will impose a further regulatory burden on enterprises. ii) The estimated annual cost of compliance for the dairy sector with current capacity is over TZS 800 million, but the cost of compliance would be over TZS 3.3 billion if the industry is restored to its previous capacity 8. If the country were to improve its milk-processing capacity to 50% of 5 Tanzania s ranking on the aggregate Ease of Doing Business Index was number 124 in Doing Business Report for 2008, number 127 in 2009, number 131 in 2010 and number 128 out of 183 countries in the Report of TAMPA, 2007/08, TDB, 2011, stakeholders workshops organized by TDB 7 A small dairy processor is defined here as a processor with a daily capacity of 6,000 litres. The figures presented are shown in Annex 2 as drawn from the costs collected from enterprises. In addition to the costs shown, the Government has introduced a fee for weights and measures that will cost such enterprise at least TZS 500,000/=per annum. 8 See Annex 2 in data sheet 4

5 the milk produced, the cost of compliance would be over TZS 20.4 billion if the regulatory framework remains as it is. iii) When the current level of performance of the dairy sector is compared with its previous performance, the country seems to have lost 9601 jobs per annum as a result of the decline in the capacity of the sector. The sector has also been losing income tax amounting to TZS billion per annum due to declining performance. Indeed, 76,577 jobs and income tax amounting to TZS 103 billion are currently lost due to failure to process at least 50% of the milk in the country 9. iv) The number of days waiting for the necessary permits and licences during the start-up phase exceeds two years (827 days) though in practice it is much less because several activities are carried out simultaneously. In the operational phase, it takes almost a whole year to follow up on compliance. This explains why most medium to large enterprises have full-time employees for compliance matters. The minimum cost of paying an employee engaged by the enterprise to deal with compliance issues exceeds TZS 7,000,000/= per annum. v) The indirect ( hidden ) costs are of greater concern to milk processors. These are associated with the opportunity cost of time lost before the necessary licences and permits are obtained. On that basis, one day lost costs the enterprise the value of 6000 litres of milk, amounting to about TZS 18, 000,000/= per year. If the overlap of functions could be reduced (e.g. through harmonization of inspection of premises and testing of products) by five days for the whole dairy industry, then the reduction in cost of compliance would be enormous. Bureaucratic roadblocks divert time, energy and resources away from productive business activity. They encourage businesses to remain small and informal to avoid detection by enforcement officers. They deter investors bringing money, skills and jobs to Tanzania. They reduce business profits, the competitiveness of products and services, and the potential for business expansion and job creation. A high percentage of milk consumed in Tanzania is raw and may be unhealthy. Due to informality it has been difficult to commercialize the dairy industry for it to participate in international opportunities. As a result, the ratio of exports to imports of dairy and dairy products in Tanzania is only 9%. Informality limits the level of employment that could be created by the commercial dairy sector and the amount of Government revenue collected from the sector. Recommended Policy Changes The recommendations of this proposal are directed toward harmonizing and/or reducing unnecessary processes involved in regulating the sector rather than changing the laws, which is a more complex and time-consuming process. The recommended policy changes aim to address the challenges and problems identified in the current regulatory system. They basically tackle the issues of harmonizing regulatory functions, controlling the use of regulations as a source of revenue, reducing bureaucracy and inefficiency in the regulatory system and institutionalizing regulatory best practices. The key stakeholders to be involved in each recommendation are also described. The specific actions to be taken by the stakeholders are highlighted at the end. 9 The number of jobs lost is computed based on Working population of Tanzania is 21.8 million people (Economic Survey, 2009) and the proportion of the current employment level in the dairy sub-sector that employs 2 million households and over 100,000 intermediaries (TAMPA, 2010). VAT rate is 18% and Corporate Tax rate is 10% of sales. 5

6 i) Harmonization and coordination of premises inspections: The laws establishing the regulatory agencies foresaw the need for coordination of their functions and therefore made explicit provisions to maintain as far as may be practicable, a system of consultation and cooperation. The Tanzania Food, Drugs and Cosmetics Act, 2003, Section 5 (2) (f); The Standards Act, 2009, Section 4 (2) (b); The Dairy Industry Act, 2004 Section 10 (r), (s); Occupational Health and Safety Act, 2003, Sections 24 (1) - (4) and 64 (3). Inspection of premises by LGA, TFDA, TBS, TDB, OSHA, NEMC and Zoo-sanitary department ought to be carried out concurrently. Regulators dealing with food hygiene could agree to form a team of competent inspectors made up of representatives from each agency that will conduct one comprehensive inspection of the premises of a particular milk processor and then share the results. Joint inspections will save costs and production days per processor per year. On the side of regulators, enforcement costs will be reduced through the sharing of resources and wider coverage of clients at a given time. ii) Coordination of products testing: The laws establishing the agencies involved in product testing provide for the establishment of a system of consultation and cooperation among them (Tanzania Food, Drugs and Cosmetics Act, 2003, Section 5 (2) (f); The Standards Act, 2009, Section 4 (2) (b); The Dairy Industry Act, 2004 Section 10 (r), (s); Occupational Health and Safety Act, 2003, Sections 24 (1)- (4) and 64 (3)). TDB, TBS, GCLA and TFDA to conduct product testing concurrently or even share the results. Harmonization of testing procedures would mean that the testing of a given product parameter by one agency need not be repeated by another agency. By not repeating the same test twice or more across the accredited laboratories, the considerable saving in time and cost will benefit dairy processors. Sharing testing facilities and test results will enable the accredited laboratories to satisfy more clients at a lower cost. Quarterly submission of product samples to TBS for retesting and annual renewal of licences to be reviewed. It could be replaced by consultation /continuous training of processors to improve products. iii) Reducing the number of licences/permits: Coordination and harmonization of the inspection of premises will reduce the number of recurrent (annual) licences and permits that relate to food hygiene and premises. This simplification of compliance will also encourage many unregistered SMEs to formalize their businesses, thus improving their access to business development services. It would also remove the unfair price competition between the formal and informal sectors of the dairy industry. Multiple licences for the same premises could be avoided by amending the relevant clauses of the laws concerned so that a licence issued by any of the cooperating agencies is recognized by the others. For example, Section (4) (1) of the Tanzania Food, Drugs and Cosmetics Act, 2003, (Food Hygiene) Regulations may be amended by adding or any of the Authorities indicated in the Schedule to these Regulations. The certificates issued by TBS or GCLA should be accepted by TFDA, TDB and LGAs. In this way, one premises licence from TDB or TBS and one permit (for each product) from TBS could suffice for providing the processor with a permit to operate. In addition, most small and medium dairy enterprises would need only one business licence from BRELA (through LGAs) as required under the Business Activities Registration Act, iv) Regulatory Impact Assessment (RIA): In order to consolidate the gains made in the reform process and prevent the introduction of a new regulatory burden, it is necessary to periodically assess the impact of the regulatory framework on the competitiveness of the dairy industry. Taking advantage of the consultation and cooperation provisions of various laws, the RIA methodology could be institutionalized on an inter-agency basis. RIA,, i.e. assessment of the costs and benefits of regulations, allows for mutually beneficial policymaking and management in terms of food safety and health for the three key players: consumers, private enterprises and the government. 6

7 Mainstream Regulatory Impact Assessment or other equivalent methodologies into the regulatory framework. RIA will inform the current reform process and prevent an increase in the regulatory burden in future. BRU in the Prime Minster s Office and the Road Map Committee be approached to mainstream the regulations affecting the dairy sector into RIA. v) Strengthen the capacity of TDB to become more effective in executing its statutory function. TDB is recognized as the primary regulator of the sector with the role of regulating and facilitating the sector to grow. As in the case of neighbouring countries in the region, if the statutory role of TDB was executed effectively, most challenges of the sector could be addressed. The capacity of TDB should therefore be strengthened through staffing the Board with people having the right skills, training eisting staff and increasing the budget to execute its operations. TDB be empowered through capacity building to undertake the developmental, regulatory and promotional functions of the dairy sector. This includes human resource development, infrastructure development and TDB expansion to cover all districts. Since the Government now has in place a Dairy and Livestock Sector Development Strategy and the TDB as the institution driving the implementation of the dairy sub-sector strategy, adequate funding for institutional support is essential. TDB needs to undertake a capacity needs assessment and develop a capacity-building proposal to be shared with the Government and development partners for support. vi) Remove inefficiency and unnecessary bureaucracy of the regulatory authorities. Besides the common regulatory concerns as stipulated in the law, inefficiency and the bureaucracy of regulatory authorities should be removed. Improving the performance of the regulatory authorities does not necessarily require changing the laws and regulations but rather improving their relationship with enterprises. Regulatory agencies need to improve their working relationship with the private sector and act as facilitators, educators and partners of their clients. This requires training and sensitizing regulatory agencies to treat enterprises as their clients when undertaking their operations. This should also involve reducing reliance on fees charged to enterprises as a source of revenue for regulators. This is in line with the national economic empowerment policy statement no that states that business licensing should be used as a means for coordinating and monitoring economic activities rather than as a source of income. This will be achieved if regulators are largely or fully funded by the Government. It will also mean that regulatory authorities remain regulators only rather than collecting fees from enterprises and shrinking the economy. If the recommended reforms are implemented, the performance of enterprises and of the dairy sector in general is expected to improve. From the studies done by TAMPA and TDB, the annual amount saved by a firm with the capacity of 6000 litres per day would be TZS 15,137,467 and the annual amount saved by the sector based on current capacity would be TZS 218,383,190. If the capacity of sector is restored to 325,600 litres per day the annual amount saved would be TZS 821,459,875. If the sector processed 50% of the milk produced at the present (2,000,000 litres), the annual amount saved by would be TZS 5,045,822,333/=. The savings are significant given the fact that this is just one of the factors affecting the sector. The country would also benefit by regaining some jobs and revenue lost due to over-regulation. There could also be a lot of other benefits, including commercialization of the dairy sector and a reduction in imports of milk and milk products so as to save foreign currency. This would enable other sectors to learn from the dairy sector and institutionalize good regulatory practices by introducing new laws. 7

8 Strategy for Implementing the Recommended Changes Most of the policy measures that support dairy development are not under the sole control of the Ministry of Livestock Development. Rather, they are also the responsibility of other ministries, such as the Ministry of Industry and Trade, Ministry of Health, Ministry of Home Affairs and Ministry of Labour, etc. In view of this, the Ministry of Livestock Development and Fisheries should spearhead the regulatory reform process while involving other Ministries and Government Agencies in the process. The following strategies are therefore proposed for rapid implementation of the recommendations given in this policy proposal. i) The Government Agencies responsible for the inspection of premises and products in the dairy sector should develop and implement a plan for conducting joint inspections and sharing the results. This task could be coordinated by the Ministry of Livestock Development and Fisheries. ii) TAMPA, in collaboration with TDB and the Ministry of Livestock Development, should share the policy proposal with the Prime Minister s Office for incorporating the issue of coordinating the regulatory functions in the dairy sector with the Government Road Map for improving the investment climate in Tanzania. iii) The Government should speed up implementation of the Dairy and Livestock Sector Development Strategy in which the TDB is named as the institution driving the implementation of the dairy sub-sector strategy and thus provide adequate funding for institutional support. This calls for an increase in the Government budget allocated to TDB to strengthen its operational capacity and implementation of its statutory function. For this to happen, the Ministry of Finance should review the budget allocated to TDB and other regulatory agencies to reflect their needs for carrying out the regulatory functions. iv) The regulatory agencies in the dairy sector should address inefficiency and the unnecessary bureaucracy involved in the regulatory processes by making staff aware of the issues of concern in the execution of the regulatory process, institutionalize a client service charter that will recognize enterprises as their clients and train their staff in customer service. v) The Prime Minister s Office through the Better Regulation Unit (BRU) should speed up mainstreaming of RIA into the law-making process. The Government should consider piloting RIA in the dairy sector and/or livestock industry more broadly, championed by the Ministry of Livestock Development and Fisheries. 8

9 Annexes Annex 1: Milk Production in Tanzania in Tonnes ( ) Source: FAOSTAT Annex 2: Estimated Compliance Costs for the Sector Average annual costs Estimated annual costs for a processing firm for the dairy sector (with with capacity of 6000 current capacity of litres per day 86,560 litres per day) Estimated annual costs of the dairy sector if the capacity is restored to 325,600 litres per day Estimated annual costs of the dairy sector if 50% (2,000,000 litres) of raw milk produced is processed Starting the 12,325, ,808, ,836,667 4,108,333,333 business Operating 48,895, ,393,165 2,653,373,551 16,298,363,333 the business Total 61,220, ,201,832 3,322,210,217 20,406,696,667 *Estimated taxes and social security contributions from TAMPA, 2010 study based on an enterprise processing 6,000 litres is 19,977,290 Annex 3: Compliance Cost of a Small Milk Processing Enterprise (with capacity of 6000 litres) Regulation Cost (TZS) Time take to Agencies involved complete the process 1. Starting the business Formulation of MEMAT 400, BRELA Site inspection 120, LGA, NEMC,OSHA Building permit 300, LGA Premises inspection 350, LGA, TFDA, TDB, OSHA, TBS Business registration and licensing 3,340, BRELA, OSHA, LGA, TFDA, TDB Registration of machinery 45,000 5 MIT Installation inspection 200, OSHA, TFDA, TBS, TDB Depot registration 35,000 2 TFDA, TDB Vehicle inspection & registration 35,000 5 TFDA, TDB Environmental Impact Assessment 1,500, NEMC Provisional tax / TIN 500,000 5 TRA Power connection (varying with distance) 3,500, TANESCO Water connection (varying with distance) 2,000, DAWASCO Sub-total 12,325, Operating the business Premises inspection 350, LGA, TFDA, TDB, OSHA, TBS Vehicles inspection (+ zoo-sanitary) 250, MLDF, TDB, TFDA, LGA Equipment inspection (milk cans etc) 20, TDB Fire inspection 200,000 1 MHA Installation inspection 200, OSHA, TFDA, TBS, TDB Weights and measures inspection* - 2 MIT Workers health inspection 400, OSHA, TFDA, TBS, TDB Manufacturer licence (annual) 125,000 5 TFDA Product testing & registration (4 products per year) Evaluation of the product promotional materials ( 4 products each promoted once a year) 60, TFDA, TBS 120,000 5 TFDA 9

10 TFDA annual payments (licence/permits) 290,000 1 TFDA Laboratory sample analysis (4 products for five years = 924,000) 184,800 7 TFDA Product quality standard testing 432, TBS Product standard certification (annual) 886, TBS Fire inspection fee 200,000 5 MHA Social security (20 workers) 7,200,000 2 NSSF Local government levies and contributions 300,000 2 LGA Company return 15,000 5 BRELA VAT 4,646,040 1 TRA Income Tax 2,690,000 1 TRA Special Development Levy 4,076,250 1 TRA Property tax 150,000 1 TRA Vehicle Tax (6 vehicles) 900,000 1 TRA Estimated costs of labour for compliance (1 7,200,000 person fully employed) Estimated revenue resulting from down time 18,000,000 during inspections (at least 2 days) Sub-total 48,895, Total 61,220, *When this study was conducted, there was no fee for weights and measures. Based on the fees introduced in October 2010, the fee for weights and measures for an enterprise with the capacity of 6000 litres is at least 500,000/=. This adds to the cost of compliance by milk processors. 10