Bureaucracy cuts down Kenya’s trade ratings

Cutting red tape in public tenders and easing the business licensing regime are some of the proposed measures to address the waning appeal of Kenya to foreign investors.

This follows the release of a World Bank report which says that Kenya now lags behind Rwanda in terms of investor-friendliness.

“We created a system in which suspicion of corruption surrounds every government project. We have made investors feel we don’t do things the right way. And so we put in place this very cumbersome procurement system that has again served to discourage FDI,” said Gerishon Ikiara, a former trade and transport PS and now an international economics lecturer at the University of Nairobi.

He explained that countries such as India and Singapore had been more open to FDI which has in turn propelled their economies to fast growth. In the eastern African region, he said that Rwanda has created an open system for investors by improving the business environment tremendously.

“We need a change of attitude both from the media and the public so that we don’t allege corruption even when it is not there because this delays projects,” he said.

Analysts have noted that, for example, the northern corridor project sponsored by the World Bank took three years before it could start because of the bureaucracy and procurement process involved.

On the basis of an index developed by the institution and published in a report titled Investing Across Sectors 2010, the most restricted sectors are insurance, transport, media and telecommunications.

The most open sectors to FDI are mining, agriculture and forestry, light manufacturing, banking, construction, tourism, retail, health-care and waste management.

In terms of the WB index, Kenya scores 88.6 on average across sectors, against a Sub-Saharan Africa (SSA) average score of 90.2 and 89.4 score globally.

In Kenya, the most restricted sector is insurance with a score of 66.7, followed by telecommunications and transport both at 70.

The report says: “Among the countries in Sub-Saharan Africa covered by the Investing Across Sectors indicators, Kenya restricts foreign ownership in more sectors than most other economies.”

It noted that capital participation in telecommunications is limited to a maximum of 70 per cent though “the law provides foreign investors with a grace period of three years to build up the required domestic capital contribution of 30 per cent.”

In the transportation sector, there are ownership restrictions in railway freight, port and airport operation, in which foreign investment is allowed only up to 50 per cent, it said.

But it stressed that unlike in most other countries covered by the indicators, domestic as well as international passenger air transportation is fully open to foreign capital participation.

“The tourism sector, one of the country’s most prosperous industries, is fully open to foreign companies as well, as are other manufacturing and primary sectors,” it said.

The Kenyan case seems to have attracted researchers even in the past.

“The level of FDI has been l stagnant over the past couple of years and well below Kenya’s potential. There has also been a worrying trend of foreign investors moving out of Kenya and gravitating to other countries,” said Elijah Kinaro in a study for the African Institute of Economic Development and Planning in Dakar, Senegal.

He showed that 75 per cent of the variations in FDI is explained by variables which include economic openness, human capital, real exchange rate and inflation.

He said this means that Kenya needs to adopt policies geared towards more economic openness, increase secondary school enrolment rate and allow a flexible real exchange rate since over-valuation of the currency discourages FDI.

The same lack of economic openness in some sector is identified by the World Bank report as contributing to discouraging FDI.

Mr Kinaro also noted that inflation was found to have been negatively influencing FDI inflows to Kenya.

Noting the high inflation numbers were discouraging investors, the government has since early this year changed the method of calculating inflation causing it to slump considerably as the role played by food prices was reduced.

But low inflows to Kenya seem to be an indication of low attraction of FDI inflows to eastern Africa, according to the 2009 UNCTAD’s annual review of investment trends.

Whereas FDI reached a record high of $88 billion in 2008, the inflow into East Africa represented a mere five per cent ($4 billion) of the total, the same amount as in the previous year.

In the neighbouring Tanzania, the World Bank report noted that the media is the most controlled sector in terms of restriction on foreign ownership with an index of 24 compared with a SSA regional average of 100 (full foreign ownership allowed) and global average score of 96.

Equity ownership

It noted that the country imposed foreign equity ownership restrictions on a number of service sectors with such participation in the telecommunications sector limited to a maximum of 65 per cent.

In the region, Uganda is more open to foreign investment with only banking and the electricity sectors restricted to foreigners.

Of the 33 sectors covered, 30 are fully open to foreign equity ownership in Uganda, including manufacturing and primary industries.

“The country imposes foreign equity ownership restrictions on a small number of service sectors. The electricity transmission and distribution sectors are closed to foreign capital participation and characterized by monopolies. In the banking sector, Ugandan law specifies that a single shareholder, foreign or domestic, cannot hold more than 49 per cent of the shares of a local bank,” the report said.