Kenya loses grip on business reforms

Kenya is ranked in position 95 in the Doing Business 2010 report down from last year’s position 84 – indicating that the government is losing its grip on the reform agenda it began four years ago to improve the business environment.

The report could strike a major blow to Kenya’s effort to prop up its flagging economy by attracting foreign direct investments to support sluggish activity that has left many business leaders cautious with spending to guard their profit margins.

“The appetite for foreign investment is already low globally and a destination needs to be exceptionally attractive to win a portion of this little remaining portion,” said Robert Shaw, an independent analyst.

The latest findings present a major setback to the government, which has only recently received international recognition for driving reforms that significantly improved the business environment in the country.

One such key area of reforms has been 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.

The government last year cut down the number of licences required to set up a business from 300 to 16 and has since lined up an additional 337 business licences for review.

Finance minister Uhuru Kenyatta has recently appointed a special committee to look into the permits and recommend whether they should be simplified or eliminated all together depending on their relevance.

“It is for this reason that an electronic register of all valid business licenses in Kenya has been developed to ensure that licensing reforms are not undermined by creeping re-regulation,” he said at the launch of the national electronic registry in Nairobi a fortnight ago.

It has now emerged that these reform efforts have yet to bear fruit in the business environment, culminating to the World Bank and IFC’s finding that the business landscape is not yet even in terms of regulation pointing to frustratingly high cost of landing construction permits.

“Kenya increased the cost of getting construction permits,” the World Bank says in the Doing Business 2010 report.

Players in the construction industry agreed with the findings, saying the licensing reforms have failed to tackle bureaucracy that is the main obstacle to investment in the country.

“The process of obtaining the construction permits is simply cumbersome, bureaucratic and without transparency and this boils down to bloated cost in terms of time and other fundamentals,” said Mr Elijah Agevi, CEO Research Triangle Africa.

Mr Agevi reckons that the situation has been worsened by a silent war between local authorities and the central government over who was in-charge of such permits.

“It has become akin to giving with one hand and taking with another in that the central government tries to cut back on the number of licences but council keep coming up with resolutions that impose new conditions that unfortunately come at a cost,” he said.

Expiry of physical plans in key urban areas such as Nairobi have also left investors at the mercy of corrupt and bureaucratic officials in local authorities bent on taking advantage of the situation.

“Only about 30 per cent of urban centres are currently planned, an indication of how people are reaping from the confusion through deliberate delays in approving projects,” Mr Agevi said.

Ibrahim Mwathane, a surveyor, said lengthy procedures of approving construction permits had put off many investors.

The African Competitiveness Report 2009, published in June jointly by the World Bank, the African Development Bank (AfDB) and the World Economic Forum indicates that corruption and patronage have continued to damage Kenya’s viability as an investment destination.

“The country’s public institutions continue to be assessed as highly inefficient, plagued by undue influence and high levels of corruption,” the report says.

Mr Shaw dismisses the regulatory reforms introduced by Treasury as lacking depth and only tending to concentrate on certain sectors of the economy while leaving out others.

“There is need to coordinate reforms because we keep witnessing clashes in roles by regulators. A notable case has been the Kenya Bureau of Standards that from time to time finds itself at loggerheads with other agencies on regulatory matters,” he said.

World Bank’s acting vice president for Financial and Private Sector Development, Penelope Brook said business regulation would play a critical role as economies step out of recession.

“Business regulation can affect how well small and midsized firms cope with the crisis and seize opportunities when recovery begins,” said Brook.

“The quality of business regulation helps to determine how easy it is to reorganize troubled firms to help them survive difficult times, to rebuild when demand rebounds, and to get new businesses started.”

But despite the drop in competitiveness, the new survey acknowledged government efforts that resulted in improved access to credit following the implementation of a law on credit bureaus which provides a framework for regulated, reliable system of sharing credit information.

Last year’s amendment of the banking act compels banks to share divulge details about their non-performing loans to credit reference bureaus. But as of yet, CRBs themselves are yet to be licensed by the Central Bank of Kenya (CBK).

Mrs Rose Detho, the supervision director at CBK, recently said they were working with the Kenya Bankers Association to put in place the necessary operational framework for credit information sharing.

A Business Leaders’ Confidence Index, separately released by research firm Synovate two weeks ago, also showed that investors considered Kenya unattractive.

Those interviewed including executives from Nigeria, Ghana and Zambia reckon that Kenya looks unattractive compared to its peers Tanzania and Uganda.

Kenya scored 53 points in a scale of 100 as an investment destination compared to Tanzania (54), Uganda (68) and Ghana (73).

“The looming East African Community integration might benefit Uganda more, if we go by this index,” said Mr George Waititu, the CEO at Synovate, arguing that the bureaucratic business regime and the heightened political risks helped lower Kenya’s score.

The five member countries of the EAC are expected to have an operational common market by January 2010, creating a market of 126 million people with a total GDP of $55 billion (Sh4.4 trillion).

As Kenya and other EAC neighbours; Tanzania and Uganda faltered, the new World Bank survey report showed that Rwanda had defied the trend to record an impressive performance climbing to position 67 this year from 143 in last year.

“Rwanda has steadily reformed its commercial laws and institutions since 2001. In the past year it introduced a new company law that simplified business start-up and strengthened minority shareholder protections,” the survey pointed out.

In Rwanda, entrepreneurs are now able to start a business in just two procedures that cumulatively last three days while related party transactions are subject to stricter approval and disclosure requirements. The survey further found that legal provisions determining directors’ liability in case of prejudicial transactions between interested parties were also tightened.

“Rwanda improved regulations to ease access to credit through two new laws. Its new secured transactions act facilitates secured lending by allowing a wider range of assets to be used as collateral.

The law also makes out-of-court enforcement of movable collateral available to secured creditors and gives them absolute priority within bankruptcy,” the World Bank said.