Kenya loses the grip on business climate reform

Kenya’s standing as East Africa’s most attractive destination to foreign investment has come under serious threat from neighbouring states, who are cashing in on the country’s lengthy licensing procedures and sluggish commercial dispute settlement to sharpen their competitiveness.

A World Bank study, whose results were released on Wednesday, shows that Kenya has entered East African Community’s Common Market as one of the most restrictive economies, eroding its chances of riding on the enlarged market to boost investment inflows.

Though Kenya, the region’s largest economy, has been the more brazen hunter of opportunities in the integration project, it has retained more laws than Uganda, Tanzania Rwanda and Burundi, the bank says, citing the punitive licensing processes and foreign ownership restrictions in key sectors of the economy.

Of the 21 Sub-Saharan African countries covered in the survey, Kenya has been found to restrict foreign ownership in more sectors than most of its rivals.

The limits are mainly in the telecoms, insurance, media, transport and power generation.

The study polled 87 countries based on restriction of foreign equity ownership, the process of starting a foreign business, access to industrial land, and commercial arbitration regimes.

“These barriers to entry present a tricky challenge for Kenya as it seeks to attract foreign investments to build its economy and create jobs,” said Mr Peter Wachira, a senior investment manager at PineBridge Investments. “Every investor is looking for a destination with the least hurdles and costs.”

Kenya has pegged its long term growth plan on foreign direct investment (FDIs) inflows to key sectors of the economy, making the World Bank’s finding an important legal and policy issue for the government.

“FDI is critical for a country’s development, especially in times of economic crisis,” said Janamitra Devan, the Vice President of Financial and Private Sector Development at the World Bank. “It brings new and more committed capital, introduces new technologies and management styles, helps create jobs, and stimulates competition to bring down local prices and improve people’s access to goods and services.”

Despite the image of running a more business-friendly environment, doing business in Kenya is more challenging for foreign investors compared to Rwanda, says the report published early this month.

It, for example, takes 34 days and 12 procedures to establish a green field foreign business in Kenya or for a multinational to establish a subsidiary,” compared to four days and three procedures in Rwanda.

Similar processes take slightly longer in Tanzania and Uganda –– 38 and 39 days –– and the investor going through 14 and 21 procedures in each country respectively.

Kenyan business leaders however say these are not the only obstacles to the country’s attractiveness to foreign business.

“There is need to bring efficiency in key industries and to sort out perennial problems such as electricity and infrastructure,” said Mr Nkoregamba Mwebesa, the CfC Stanbic Financial Services managing director.

Kenya’s comparatively vibrant private sector, advanced infrastructure and skills base has been its main selling point in the global investment market but heavy bureaucratic red tape, high level of corruption and more recently political instability have become its Achilles’ heel.

The country has been hoping that ongoing reconstruction of infrastructure, rising activity in the mergers and acquisitions market as well as emerging investment opportunities in tourism, banking and agriculture sectors will keep the FDIs tap flowing but the World Bank now says some of the flow is being lost to rival economies.

Of the four parameters used in the survey, Kenya’s score was poorest in the arbitration of business disputes and settlement of court cases.

It takes at least eight months to enforce an arbitration award for a local business dispute, assuming there is no appeal and two months more to enforce a foreign award.

“Despite Kenya’s comparatively strong legal framework, problems remain with the length of arbitration proceedings and the speed of the court process, which further impedes the efficacy of judicial assistance in arbitrations,” says the bank. “Mediation is starting to be used as a dispute resolution technique and on average takes 30 days to finish.”

Kenya’s economy however remains strong on a number of fronts including the ease of foreign ownership of land, making the World Bank to recommend strong action on the governance issues that eroding investors’ confidence in the country.

Only Rwanda allows ownership of land by foreigners while Tanzania and Uganda prohibits it, leaving outsiders with the single option of leasing.

The findings mark a major turning point for Kenya, coming barely two years after the country won international recognition for driving reforms that significantly improved the business environment.

One key area of the reforms was in the business licensing regime where some 315 licences were eliminated in 2007 and another 379 of the 1,325 identified as hindering growth of small businesses, simplified.

That effort continued last year leading to the reduction in the number of licences required to set up a business from 300 to 16 and the identification of an additional 337 business licences for review.

“To attain the high level of growth, we will implement measures at ensuring a stable macroeconomic environment and structural reforms aimed at raising productivity and improving the business climate,” said Finance minister Uhuru Kenyatta in his budget speech last month.

Investor interest in Kenya’s economy is expected to start building up in this second half of the year helped by rising confidence in the economy, although political risks and slow business reforms continue to taint the outlook.

Some business leaders agreed with the World Bank’s findings, saying the licensing reforms have failed to tackle bureaucracy that is the main obstacle to investment in Kenya.

The report finds that countries that do well on the Investing Across Borders indicators also tend to attract more foreign direct investment relative to the size of their economies and population.

Countries that score poorly tend to have higher incidents of corruption, higher levels of political risk, and weaker governance structures.

Business leaders said rampant corruption and licensing difficulties have made Kenya a more hostile place to do business.

Kenya dropped 11 positions to 95 in the global ranking of nations, in terms of ease of doing business, according to the World Bank.