Markets & Finance

Local ownership rule scaring foreign investors, says World Bank


Oil drilling at Ngamia 1 in Turkana County in April 2012. World Bank says rules on joint ventures between foreigners and locals are slowing down investments. Photo/FILE

A requirement by the government for foreign investors to partner with locals while setting up businesses has slowed down inflow of international investments, the World Bank has said.

The World Bank’s latest Economic Update lists the regulatory environment as an impediment to foreign investment, saying firms spend a lot of time and resources complying with rules and regulations.

“The long delays in resolving disputes in the Judiciary and other cumbersome compliance items have discouraged foreign direct investment (FDI),” says the World Bank report, citing data from the Central Bank of Kenya (CBK) and the United Nations Conference on Trade and Development.

“In addition, the regulations that require foreign firms to enter into mandatory joint ventures partnerships (30 per cent share) with locals in order to invest in Kenya, makes it a less favourable investment destination.”

Kenya’s FDI dropped from $177 million (Sh15 billion) in 2010, to $140 million (Sh12 billion) in 2011 and then increased to $164 million (Sh14 billion) last year, according to CBK data.

“The FDI Kenya attracted was only equivalent to 0.8 per cent of its GDP in 2010-11, compared to Rwanda (1.2 per cent), Tanzania (2.8 per cent), and Uganda (6.2 per cent) in the same period,” reads the report released Monday.

READ: Dealmakers fault regulatory delays

The government recently passed a regulation requiring that all foreign firms in the mining sector should have at least 35 per cent local shareholding. Investors in the industry have widely opposed the rule, with latest indication from new Mining Cabinet secretary Najib Balala being that the government could reverse the rule.

READ: Kenya to engage mining firms on local stake rule

A similar requirement in the telecoms sector was relaxed to a local ownership requirement of 20 per cent from 30 per cent, though it has still proved to be a headache for firms in the industry.

Two telcos, AccessKenya and Airtel Kenya, have had to seek exemptions from the government to facilitate foreign ownership.

Airtel, which is 95 per cent owned by India’s Bharti Airtel, has plans to sell at least a 15 per cent stake to local shareholders through the Nairobi Securities Exchange to meet the set local ownership limits after failing to find a buyer for a 15 per cent stake in the company.

READ: Airtel freed from local ownership rule

The firm argued when seeking yet another extension to the exemption that finding a buyer for the 15 per cent stake worth about Sh6 billion is difficult given the business is yet to make a profit since it was acquired three years ago.

Dimension Data has meanwhile applied to the Ministry of Information for exemption of the 20 per cent local ownership rule ahead of its takeover of listed data firm AccessKenya.

Dimension Data has, however, taken precautionary measures in case the exemption is not granted, providing that one of the founder-brothers of AccessKenya, Jonathan Somen, will own a 20 per cent stake of the firm post the takeover.

Regulations in other East Africa Community countries allow for bigger ownership of companies by foreign interests, according to the World Bank’s Investing Across Borders report.

In Uganda, there are no foreign ownership restrictions in many sectors, including the manufacturing sector. However, foreign ownership is restricted in electricity transmission and distribution, security sector and limited to 49 per cent for any individual, foreign or local, in the banking sector.

In Tanzania, The only restrictions are in the telcoms sector, at 65 per cent maximum foreign ownership, and in broadcast media (49 per cent).

In Rwanda, there are no restrictions on foreign ownership of companies. However, a number of sectors are characterised by monopolistic or oligopolistic market structures dominated by publicly owned enterprises.

While favourable rules can give a country an advantage in attracting investments, it is also important to demonstrate that there is political stability to safeguard the investments, says Kenya Institute for Public Policy Research and Analysis principal policy analyst Joseph Kieyah.

Kenya, he says, can expect to reap the dividends of a peaceful poll, coupled with sound economic policies.

“While FDI is determined by many things, political stability is a major driver in attracting investors,” said Prof Kieyah. “We can already see this factoring in through the increased investment by foreigners into our stock markets and the stability of the shilling.”

[email protected]