Political woes put Kenya at risk of losing business

Unending political bickering and delay in implementing key institutional reforms have earned Kenya yet another poor rating, with a new report saying the country has become one of the region’s riskiest places to do business.

A new study by international commercial consultancy firm, Booz Allen Hamilton, says stress linked to last year’s political crisis has continued to depress economic growth.

The report, prepared on behalf of the United States International Aid Agency (USAid), foresees a bleak economic outlook in 2009, in the wake of increased political wrangles.

This comes in the wake of sharp divisions in the ruling Grand Coalition Government over the trial of perpetrators of the 2008 post election violence.

The government is also divided over the planned eviction of hundreds of settlers from Mau Forest in Rift Valley, an issue that has heightened political temperatures in the country.

The report, titled Kenya Agenda for Action — Commercial, Legal and Institutional reforms; A diagnostic of Kenya’s Business Environment, looks at legal and institutional conditions underlying economic development or lack of it in the country.

Analysts have pointed out the negative perception these sharp differences have portrayed Kenya at the international level.

“The international and foreign community see Kenya as a country that does not have strong structures to be trusted with prosecution, hence depicting the country as bad for business,” says Mr Patrick Obath, the chairman of the Kenya Private Sector Alliance (KPSA).

“This report addresses the legal and institutional conditions underlying economic development in Kenya, as well as opportunities for supporting stronger, more broad-based economic growth”.

The study examines the country’s legal framework, institutional arrangement and social dynamics and their effect on business so as to “inform decisions of USAid and other donors that relate to legal and institutional reforms affecting Kenyan businesses.”

The business environment is currently grappling with a host of bottlenecks including a lengthy and costly business registration process, arbitration of commercial disputes and endemic corruption — which have conspired to push the cost of doing business to an all time high.

“The country is constrained by outdated laws and chaotic, dysfunctional courts, hampered by deficient infrastructure and bureaucratic systems that undermine small business and the agriculture sector disproportionately, and beholden to virtually unchecked corruption,” says the report.

This harsh verdict on Kenya’s rising political risk is shared by industry players who lament that the business registration process is cumbersome and an avenue for corruption.

The study comes at a time when the country is gearing to host the 8th African Growth and Opportunity Act (AGOA) conference in Nairobi which begins on Tuesday.

The import of the study is critical as it could ruin efforts at luring American businesses into the country through the Agoa arrangement.

Analysts say the political challenges persist despite the acknowledgement that the country has a rich endowment of resources with the potential of thrusting it into a middle income economy by 2030.

Politics is singled out as the most stifling element in the country’s quest for prosperity. The growing level of political risk was partially blamed for the slowdown in economic growth in 2008, when GDP expanded by a mere 1.7 per cent, down from 7.1 per cent the previous year.

In a survey carried out by PricewaterhouseCoopers last year, political turbulence following the post-election violence was cited as the greatest threat to the business environment in the country.

Although there are signs of recovery with the first quarter GDP growth of 3.9 per cent, the country is facing a crippling food and power shortage which might stoke inflationary pressure thus affecting business.

However, the Booz Allen Hamilton report also acknowledges progress made by the government in easing the businesses environment. This is especially through the Rapid Result Initiative (RRI), a programme rolled out across the public service to boost service delivery.

“The Government of Kenya formed a Doing Business Reform Team, that has been paying special attention to fast tracking specific reforms in starting a business, registering property, getting credit, dealing with construction permits, paying taxes and trading across borders performance,” says the government in its latest report on Improving Kenya’s Performance on Doing Business Indicators.

The report further says that the improvements are mainly as a result of the continued elimination and simplification of licenses, administrative efficiency resulting in time saving, consolidation of procedures and the attendant reduction in administrative costs.

For instance, the government through the RRI has implemented an e-registry, the document management system at the State Law Office, which has seen days taken to register a business reduce from five days to three.

“The ultimate goal under this new system is to issue a certificate of incorporation within one day of presentation of documents”, says Mr Joseph Kinyua, the permanent secretary at the Ministry of Finance.

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“This is to be achieved through eliminating several steps in the registration process such as automatic generation of certificates as opposed to the traditional physical typing”.

The growing concerns over Kenya political stability has seen the country emerge the least preferred destination for Foreign Direct Investment (FDI) in the region, with Tanzania, Uganda and Sudan leading in attracting FDIs.

The report projects that the landing of the fibre optic cable could transform the country into an investment hub, but the gains are likely to be eroded if governance and political concerns are not addressed. Already, the country has seen two cables, the East African Marine Systems (TEAMs) and SEACOM, land.

“It’s now widely accepted that the telecommunication sector will create a more economically viable Kenya with the potential to contribute up to 50 per cent of the country’s GDP”, says Ministry of Information permanent secretary Dr Bitange Ndemo.

The Booz Allen Hamilton report appreciates the progress made in education through free primary education, subsidies in secondary education, and a rich pool of post secondary educated workforce.