Kenya has over the last decade been cited as one of the top Foreign Direct Investment (FDI) destinations in Africa, coming in third in deal volumes and value, after South Africa and Egypt. Kenya’s attractiveness has gathered pace in the preceding three years as the effects of the slowdown in global gross domestic product (GDP) growth, lower commodity prices and elevated political risks start buffet the other leading African economies – South Africa, Nigeria, Ghana, Egypt, Angola and Mozambique, all of which being commodity-driven economies, have suffered from the cyclical commodities downturn.
Kenya is the regional leader in East Africa, a region that has consistently been cited as the fastest growing region in Africa, and indeed the world. Average GDP growth rates have averaged 5% over the last decade, with Rwanda leading at 7.3%, Tanzania at 7%, Kenya at 5.8%, and Uganda at 5%. This compares favorably with other heavyweights in the Emerging Markets category, such as India at 6.8%, and China at 5.8%.
However, with the commodity prices downturn, slower than expected growth in China, unease over Brexit, and souring relations between China and the US, the world’s two leading economies, commodity dependent countries like Angola, Mozambique, Zambia, Nigeria, Ghana and South Africa are grappling with gaping budget deficits, elevated higher country and political risks, and a cost premium that makes Kenya more attractive for investors looking for investment opportunities in Africa, beyond commodities and oil.
Business reform measures have made Kenya a magnet for the discerning investor?
‘Courtesy of a robust economic reforms program, Kenya has initiated and implemented business reform measures over the last decade, that have led to impressive improvements in the World Bank’s Ease of Doing Business annual rankings, a feat that has earned the country accolades as the most improved economy in Africa and the 3rd most improved globally. Kenya has moved from position 139 to 108 in 2016, to position 80 in 2017, and leapfrogging to position 61 in 2018. The target for this year is to break into the top 50 global economies’.
This improvement has been through a recognition that the private-sector plays an important role in development in a market-based economy, and an enabling environment incentivizes the private-sector to participate in areas of the economy where wasteful government has failed to make an impact, or where much needed infrastructural deficits, and where private-sector competencies are in demand.
Therefore, an enabling over-arching enabling framework is being built, through a series of structural, legal and regulatory reforms measures – like the enactment of the 2013 Public Private Partnership (PPP) Act, the subsidiary PPP Regulations, PPP Manual, PPP Secretariat at the National Treasury and nodes in ministries and Counties; development of a PPP Deal pipeline of 71 projects, across several sectors – transport (roads, airports, rail, maritime infrastructure), education, health, energy, water.
These sectors that have underpinned Kenya’s robust growth sector over the last decade in services, manufacturing and the construction sector. Further, a number of macro-economic framework factors including one of Africa’s most robust PPP Frameworks, have enhanced Kenya’s attractiveness for the full range of FDI investments, and these are captured in the Big Four Agenda, Vision 2030 and Medium Term Expenditure Framework 2017-2021. These are driven by the Presidency, with key flagship projects under the Big Four Agenda, in universal health coverage, manufacturing, food security and in Housing.
Other business-friendly reform measures include including enactment of the Companies Amednment Act 2015, the Insolvency Amendment Act 2015, the Business Registration Act 2015, the Finance Act (miscellaneous amendments) Act 2015, the Export Processing Zones Act 2015 as well as one-stop shops (Investment promotion Authority; Brand Kenya; Kenya Tourism Board (KTB), Agricultural and Fisheries Authority (AFFA).
Factors underpinning Kenya’s favourable Investor perception
According to the Foreign Investment Survey 2015 conducted by the Kenya National Bureau of Statistics (KNBS), the 4 key factors that underpin Kenya’s favourable Investor perception are:
1. Adherence to the rule of law and good regulations;
2. Availability of a good quality and a highly a skilled workforce;
3. A fairly good quality of infrastructure and logistics; and
4. Easy access to other markets.
The favorite sectors for investment remain:
1. Wholesale and Retail trade;
2. motor vehicle assembly and repair,
4. Financial and Insurance Services
The KNBS study also notes that the other factors that make Kenya attractive include:
1. a rapidly urbanizing mass, with urban nodes, and expanding middle class – in Nairobi, Mombasa, Nakuru, Kisumu and Eldoret
2. the devolution of services and government to the 47 counties, which opens up lucrative opportunities for construction, fast moving consumer goods (FMCG) and consumables as civil-servants and support staff live in these 47 county Headquarters
Key sources of FDI in Kenya
The key sources of FDI in Kenya remain traditional investment sources like the US, UK, France and UAE as well as BRIC countries such as Brazil, India and China. India and China are now Kenya’s largest bilateral trade partners.
However not all inflows originate outside of Africa. Improving regional integration, through regional trade blocks like the EAC, has also encouraged co-operation between African nations and the growth of intra-African trade and investment. The five member East Africa Community (EAC), comprising of Kenya, Uganda, Tanzania, South Sudan, Rwand and Burundi, though beset by teething regional rivalries, has been a growing destination of Kenya’s investment and market for locally manufactured goods. The Common Market for East and South Africa (COMESA), of which Kenya is a member, and the ambitious pan African Tripartite Free Trade Area (TFTA) bringing together Africa’s key regional economic blocks of EAC, COMESA and the South African Development Community (SADC) are key sources and destinations of investment to/from Kenya.
Key sectors attracting FDI in Kenya
South Africa has been the most active intra-African investor since 2003, followed by Nigeria and Kenya, altogether accounting for around 10% of total projects since 2003. The extractive industries such as mining, oil and gas, infrastructure, hospitality, and financial services remain a significant area of FDI for Kenya.
Capital intensive projects over the last ten years have been focused within the infrastructure sector, which had the highest average capital expenditure spend over the years since 2003. Major Extractives corporations have driven capital intensive projects in these sectors including Tullow & Partners, Kwale Mineral Sands, Africa Oil etc.
The real-estate sector has been a key driver of Kenya’s GDP, and Nairobi for the third year ranks in the Top 20 Global Property HotSpots in Knight Frank’s Index. Major commercial, residential, mixed use projects are underway, like the Two rivers – Sb-Saharan ficAA’s second biggest mall at 64,000sq.m, Tatu City, Golf Cities that serve to underline the countries Construction activity has also been notable as the region responds to rapid urbanisation and demands for real estate infrastructure.
Other mega projects like the US$24.5bn LAPSSET Corridor program including the oil-pipeline and 32 berths in Port Lamu, the U$14 bn KonzaTechnopolis, the Northern Corridor Integration Projects (NCIP), the Central Corridor Infrastructure Projects, amongst several others have driven investor interest in Kenya as an entry into the region
There is comparable investment in infrastructure – energy, roads, railways and airports – like the US$4bn Standard Gauge Railway Project for the Mombasa-Nairobu section and the extension to Naivasha at the cost of another US$1.5bn, the Roads Annuity Plan for the tarmacking of 8,000km of roads, and the 5,000Mw of power within 40 months energy project – all massive infrastructure projects that will drive connectivity, competitiveness, and margins for manufacturers
Manufacturing is getting attention, and although it currently contributes to 10% of our GDP, it has the potential to contribute upto 25% – and the fact that a job in manufacturing translates in to 8-10 jobs through the value-chain means it has one of the greatest impact on GDP growth, and tackling employment. An ambitious Industrialization Plan was published in 2015 by the Ministry of Entreprise Development and Industrialization but however challenges remain including the high cost of power at an average of between US$0.20-0.30 cents which is high compared to our competitors Egypt which has lower manufacturing costs – hence this informed Jubilee’s ambition of 5,000Mw in 40 months as part of Vision 2030 – and a diversification to cheaper sources like geothermal, wind, solar on PPP basis.
ICT is a key investment destination in Kenya, especially with Konza, and the Jubilee’s ‘digital government revolution’ – Nairobi was named as the most friendly technology Hub by Financial Time’s FDI rankings, second was Johannesburg, third Cairo. The same FT Rankings rank Nairobi 5th in Africa on education, skills and talent. Other positives include global connectivity with Europe, Asia, Americas through JKIA, Mombasa, good climate, hospitality, use of English, and time-zone between the west and east as well as on the equator.
With a fairly diversified economy, with services, agriculture, manufacturing and tourism contributing a significant 10% each+ to our GDP, thereby meaning that the commodity prices slump will not affect Kenya’s economic growth, and competitiveness. With fairly stable macro-economic outlook, and predictability in governance and politics driving down country risks, Kenya’s economy will grow to 2019 at a stable rate of 5.6-6%, one of the highest in Africa.
Outlook for 2019
However, even as Kenya works towards maintain its competitiveness and attractiveness as it rolls out reforms in public sector, financial services and capital markets, there is a huge gap between intent and practice in closing the massive infrastructure gap in infrastructure. Only 1 PPP Project has reached Financial close since the enactment of the PPP Act in 2013, and there is an urgent need to consider the incentives and gains to be had by the country and investors, vendors, suppliers and consumers of goods/services in Infrastructure/building and construction. The PPP Amendment Act 2018 is set for debate in this session of parliament, and all indiactions are that it will be passed and enacted.
Kenya needs to continuously improve on the ease of registration of a business, lower the cost of energy, simplify taxation regimes and timelines as Kenya races to establish its Nairobi International Financial centre, decentralize and digitize land records and registration, bring down corruption, enhance security, lower costs of credit/capital, ease work-permits processes and costs, improve on physical infrastructure and continue divorcing politics from business.
By Hezron Gikanga,
Government Relations/Public Affairs