Doing Business in Africa: Kenya
In this AFKInsider series, we explore the regulatory conditions that an entrepreneur is likely to face when setting up a business in sub-Saharan Africa. AFKI presents Doing Business in Africa: Kenya.
Doing Business in Africa: Kenya
Situated in the Great Lakes region of East Africa just south of the Horn, Kenya is one of Africa’s most important countries. Along with South Africa and Nigeria it is ranked among Africa’s big three and serves as the cornerstone economy of its region. The country was colonized by the British during the great divvying up of the continent during the 1880s when African holdings were shuffled between the various colonial powers in order to prevent friction between them.
Britain swiftly imposed order in the region once it was awarded the territory and London quickly authorized the construction of what would become known as the Kenya-Uganda railroad – made famous by ‘the Man-eaters of Tsavo’, lions who preyed on many of the construction workers who worked on the project near the Tsavo River. Construction of the railway and the outbreak of the First World War consolidated Britain’s control of the territory and led to the promotion of white settlement of the more temperate highlands region. As elsewhere in colonial Africa whites took the best farmland, dominated the locals, and raised cash crops for export.
Ultimately this status quo was shattered in 1952 when anti-colonial rebels carried out a guerrilla war known as the Mau-Mau rebellion against British rule. While eventually put down, albeit bloodily, by 1959 it demonstrated that—like in India and increasingly in southern Africa—white rule was unsustainable. As a result Britain moved the colony towards independence, which Kenya achieved in 1963.
After some initial instability prompted by ethnic Somali attempts to attach their territory to Somalia and British uneasiness in turning over their former colony to what they saw as anti-colonial radicals, Jomo Kenyatta was elected first as Prime Minister (1963) and then President (1964). He would rule the country until his death in 1978 via a one-party state organized by his Kenya African National Union (KANU) party.
After Kenyatta’s death he was succeeded in power by his vice president Daniel arap Moi, who in turn ruled as president in a one-party, elected-dictatorship until 1992 when he finally allowed multi-party democracy.
Dictatorship, however, might be an overly strong term as Kenyatta and Moi’s Kenya, like Kagame’s Rwanda today, was more like the one-party machines that ruled urban American in the 19th century than the regimes run by the likes of Nigeria’s generals or tyrants like Uganda’s Idi Amin. Democracy was mostly a sham, yes, but because Kenyatta’s and Moi’s power was nonetheless based on a coalition of vested economic interests and ethnic alliances it was not totally unconstrained in what it could do.
That being said, Moi ran his country much like other African despots, only marginally less corruptly and incompetently and economic growth withered under the weight pressed upon it by the Moi bureaucracy. When the Cold War ended and unquestioning Western aid for Kenya dried up with it, the regime led by Moi was forced by international financial institutions to democratize and open up space for political dissent in 1991.
Electoral politics were thus introduced, but democracy as practiced in the West with its peaceful contesting of elections and legitimate acceptance of both victory and defeat were not — as Kenya’s subsequent turbulent election history demonstrated.
Moi was finally forced to leave office in 2002 as a result of these political reforms and was succeeded in office by the democratically-elected Mwai Kibaki and his National Alliance Party of Kenya. Ostensibly a technocrat, Kibaki attempted to guide his country through the painful process of democratization but ultimately stumbled when his proposed constitutional reforms, which would have greatly strengthened his office, were rejected by the populace in 2005.
When Kibaki ran for re-election in 2007 fear of his attempt to hijack more power for his office led to a contested election in 2007 and an outbreak of ethnic tensions and post-election violence thereafter. In turn this led to further political reforms and the formation of a coalition unity government that included most of the official opposition. There matters remained until 2013 when Uhuru Kenyatta and his TNA (The National Alliance) party won elections deemed open, free, and fair by election monitors.
Ease of Doing Business
So how does all this influence business conditions? According to the World Bank, Kenya currently ranks 98th out of 183 countries on its Ease of Doing Business Index – a measure created by the Bank to gauge the degree to which commercial enterprises encounter regulatory hurdles, legal threats to property, and the time and money spent on things such as registering a business, ensuring right of title to property, and acquiring licenses. By way of comparison, the United States ranks 4th on ease of doing business, right after Singapore, Hong Kong, and New Zealand.
What does this ranking mean? Take, for instance, the Bank’s measure of how easy it is to start a business, which is depicted in Figure 1 below. From the figure one can see that the Bank defines business-creation costs as consisting of the time and money outlays involved in the series of legal steps necessary for the entrepreneur must take in order to legally establish an in-country firm. Using this framework, the Bank then tasks researchers to go through this process in order to establish in-country averages.
When this metric is applied to Kenya, the Bank finds that Kenya ranks 125th out of 183 in ease of starting a business, making Kenya one of the most difficult places on Earth to start a legal commercial enterprise. To start a business in Kenya one has to complete 11 bureaucratic procedures that take a total of 33 days at a total cost of about $292, with no minimum capital requirement imposed by the government for the start-up.
Figure 1:
How the World Bank Measures Ease of Starting a Business
Using similar metrics for other aspects of business operations, the Bank has ranked Kenya in a number of other areas. To obtain a construction permit, for instance, Kenya does much better and is ranked 35th out of 183 as it takes the completion of 11 procedures, which takes on average 120 days at a cost of nearly $1,285. While relatively steep, Kenya’s score here nonetheless makes it one of easier countries in the world in which to obtain a construction permit.
Continuing in its assessment, the World Bank has determined that in order to obtain and register property, Kenya does much worse by ranking at 129th out of, again, 183 countries measured. To register property in Kenya, the Bank finds, it takes the completion of eight bureaucratic procedures that takes, on average, 64 days and costs 4.2-percent of the property’s financial value in fees and other costs to complete. This makes Kenya a moderately difficult place in which to register property.
Kenya does much better when it comes to obtaining credit, where it ranks 6th out of 183—making the country one of the best in the world in this area. Here, as depicted in Figure 2, the Bank examines the legal rights of creditors and borrowers in secured transactions and bankruptcy law as well as the strength of credit information bureaus and exchanges. When lenders have both strong legal rights and easy access to a wide variety of information about the client’s creditworthiness, reasons the Bank, the more available credit will be.
When information on borrowers is significantly lacking – as is the case in most of Africa – legal protections for creditors must in turn be very strong. Kenya does admirably well here as it has very strong legal rights for creditors and a wide range of information available on many of the country’s potential borrowers.
Figure 2:
How the World Banks Conceptualizes Credit Acquisition
When it comes to protecting investors and minority shareholders, Kenya does less well, though still ranks much better than many countries in Africa. Here, the country ranks 93rd out of 183 countries. It has received this score because Kenya requires only very modest amounts of levels of conflict-of-interest disclosure by firm directors, has few strong laws that hold directors liable, but is a relatively easy place to bring a shareholder lawsuit.
Kenya unfortunately does much less well in the area of taxation. The World Bank estimates that pleasing the tax man in Kenya requires a total of 41 payments over the course of a year which, in turn, takes up to 393 hours to complete and can consume up to 49.7-percent of a company’s profits. Accordingly, Kenya’s tax burden is ranked 162nd out of 183 nations, making it one of the worst in the world in this area.
When it comes to engaging in cross-border trade, Kenya also does poorly. In Kenya, to import goods into the country one is required to have seven documents for customs officials to inspect. On average, it takes a total of 24 days to import goods into Kenya with the cost amounting to $2,190 (excluding tariffs) per container shipped into the country.
The cost to export goods is roughly similar as Kenya requires eight documents to be inspected by customs’ officials, while the total cost (excluding taxes) is $2,050 per container, with delivery taking up to 26 days from point of origin. Compared to global averages this nets Kenya a ranking of 144th out of 183 on ease of engaging in cross-border trade.
Kenya does somewhat better when it comes to contract enforcement, where it ranks 125th out of 183 countries ranked on this issue by the Bank. On average, reports World Bank analysts, it takes a total of 40 legal procedures to take a contract from dispute to resolution, at the cost of 365 days spent in court or otherwise attending to legal issues. The financial cost of pursing a contract claim, says the Bank, typically accounts for 47.2-percent of the value of the claim.
Finally, in terms of closing or liquidating a business Kenya ranks 85th out of 183 countries. Here it takes 4.5 years to close an estate or enterprise at a total cost of 22-percent of its value with an average recovery rate of 29.8 cents on the dollar.
Table 1 presents a summary of these rankings as well as Kenya’s overall ease-of-doing business rating. All things considered, doing business in Kenya is much easier than in many places in Africa and in the world ranks in the middle of the pack. It does best in the area of credit were it ranks amongst the best the world, but is also notable for the speed at which it expedites construction permits. On the other hand, lackluster scores on ease of starting a business and registering property hints at an inefficient and corrupt legal system and bureaucracy that hurts in-country business formation. Finally, trading across borders is difficult largely due to dilapidated infrastructure and the threat posed to ocean-going commerce by Somali pirates.
Table 1:
World Bank Ease of Doing Business
Assessment and Rankings: Kenya
Prospects
Accounting for 40-percent of East Africa’s GDP, Kenya is the dynamo which keeps the rest of the region running. For years Kenya’s slow, steady growth kept the region going even as socialist-induced lunacy in Tanzania and genocide and civil war in Rwanda and Burundi deeply impacted growth for the worse in those countries. Now with politics seemingly less important a factor in its neighbors it is ironic that politics has arisen as a potential threat to growth in Kenya.
While democratization has inflicted some pain, it has not been without benefits as it was accompanied by a forcing through of liberalizing reforms necessary to spur economic growth. As one can see from the accompanying chart below, this has resulted in steady GDP growth that has averaged 4.66 percent per year over the last decade. Not as spectacular as some on the continent, true, but respectable to be sure.
Figure 3:
Kenya Economic Growth,
Percent Increase, 2003 – 2013
For the time being Kenya’s economic growth remains dominated by agriculture though that may soon be changing. First, the country’s manufacturing sector is the most developed in the region and of Africa’s big three economies the importance of the sector to the overall economy is second only to South Africa. This may seem surprising, but a well-known side-effect of oil-led development such as exists in Nigeria is a withering of other sectors as resources get poured into it and a stronger currency chokes off non-oil exports. Not having an oil sector, Kenya does not have these problems.
For now, at least. International oil explorers operating in the country’s four geologic basins have so far discovered a little over a billion barrels of oil in the country, the majority in the country’s Lokichar Basin in its Southern Great Lakes region. At present global price levels that oil represents about $1 Trillion in wealth just waiting to be unlocked. What’s more, Kenya’s government is keen to see its oil wealth tapped and put to productive use.
Kenya is also likely to play a vital role in the unfolding oil boom in the region as a whole. Slightly smaller amounts of oil have been discovered in Uganda while Tanzania’s onshore potential and South Sudan’s present production all need a way to get to market – and Kenya is almost ideally situated to serve as a transport and export hub. Talks are in the works to create a pipeline linking all these country’s present and predicted oil producing regions with an export terminus somewhere on the Kenyan coast, likely in the Lamu region.
Kenya also has other significant opportunities as well. It remains a center for aerial transport in Africa and tourism, long a mainstay, continues to be important. Urbanization is helping manufacturing remain steady, especially in the light consumerables portion of the market while emerging export zones are likely to assist the country in promoting exports abroad. Combine that with finance, telecommunications, and information technology sectors that go along with being a regional economic hub, and Kenya’s future could be bright.
If, that is, politics can remain being relatively unproblematic. This a tricky thing for any newly democratized country, let alone one as diverse as Kenya. So far the growing pains that have come with having real contested, multi-party politics and elections are relatively mild compared to that in much of the rest of Africa or, indeed, elsewhere in the world. There is no threat as of yet that politics could lead to state collapse nor that the central government could at any time lose control of large swathes of the country. Kenya may become problematic from time to time as does any democracy at election time, but there is no sense that politics will become a problem with a capital “P” as it has in Nigeria.
The other big unknown in Kenya’s future is its larger region. Its western neighbors are relatively stable at the moment while Tanzania has emerged from its many decades of idiosyncratic socialist rule. This leaves its northern neighbor Somalia as the big unknown factor, and it’s a big one. Piracy has had a discernible impact on shipping in Eastern African waters while the chaos in its northern neighbor occasional spills over into Kenya itself. Indeed, the recent horrific gun attack against the Westgate Mall complex in Nairobi by Somali Islamic militants is a case in point.
Then there are the usual problems in Africa. Bad infrastructure, a shoddy legal system, and corrupt bureaucracies make for the usual difficulties in getting business done, but they are at least surmountable and not nearly as bad as compared to elsewhere in Africa. If politics can remain calm, infrastructure improved, business-friendly legal reforms made, and security ensured, Kenya could become an even more important motor of African growth than it already is.
Jeffrey Cavanaugh holds a Ph.D. in political science with a specialization in international relations from the University of Illinois at Urbana-Champaign. Formerly an assistant professor of political science and public administration at Mississippi State University, he writes on global affairs and international economics for AFK Insider, Mint Press News and BAM South.