Doing Business in Kenya
Kenya is the most developed economy in Eastern Africa. With a nominal 2011 gross domestic product (GDP) of USD 35.8 billion, it is also the economic, commercial, and logistical hub of the entire region. Kenya’s population is estimated at 41 million with a large number of well-educated English-speaking—and multi-lingual—professionals, and a strong entrepreneurial tradition. It is also a very ‘young’ country with almost 70% of the population under the age of 35. An estimated 50% of Kenya’s people live below the poverty line, and the country's GDP per capita is approximately USD 888.
Kenya's strengths include its human resources, natural assets, and strategic location. After experiencing 7.1 percent GDP growth in 2007, the economy slowed to 1.6 percent growth in 2008, the result of ethnic violence following the 2007 Presidential election.
In 2009, the economy grew at 2.6 percent; growth further improved to 5.6 percent in 2010. At 4.5-5.0 percent, 2011 growth was somewhat lower than earlier projections of 5-6 percent growth, due to high inflation, drought, global shocks, and exchange rate volatility, which caused prices of imported goods to skyrocket in the second half of 2011. A 5 percent growth has been projected for 2012.
The average annual inflation rate was dropped from 16.2 percent in 2008 to 9.2 percent in 2009, and fell further in 2010 to 4.1 percent; Kenya adjusted its methodology for calculating inflation rates to a geometric system in 2009, resulting in a much lower, and more accurate rate. High inflation reemerged in 2011, however, hitting a year-on-year high of 19.72 percent in November 2011 before falling slightly to 18.93 percent in December 2011. Average inflation for 2011 was 14 percent. Increases in overall inflation were due to the negative impact of dry weather on food production, higher fuel and power costs, and the depreciation of Kenya’s currency, the Kenyan Shilling, which hovers around 80 shillings to one US dollar. Like most developing economies, individuals at the bottom of the wage scale are more affected by high inflation due to considerably higher per unit costs for commodities (e.g. detergent and fuel), particularly since these items are usually purchased in very small quantities.
Kenya continues to run a significant current account deficit, which has been offset to some degree by donor assistance and private investment. While exports grew by 11.5 percent from USD 4.45 billion in October 2009 to USD 4.96 billion in October 2010, Kenya’s import bill increased to USD 11.64 billion over the same period. However, export growth still outpaces that of imports, and merchandise trade deficits have trended downward year on year. The increase in value of merchandise imports was largely reflected in machinery and transport equipment, manufactured goods, chemicals and petroleum products.
Kenya’s key economic challenge is to increase its real GDP growth rate. Sustained rapid economic growth is essential if Kenya is to address its high unemployment rate (officially about 10.5 percent, unofficially in excess of 40 percent) and widespread poverty. Significant growth is also necessary for Kenya to achieve the goals outlined in its Vision 2030 development strategy, which aims to make Kenya a globally competitive middle-income country by 2030. Achieving high growth, however, will depend on improved economic governance and greater economic reform to improve the country’s investment climate. The first general elections under Kenya’s new constitution are expected in March 2013 and will usher in a new devolved governance system; however, global economic reversals, continuing underemployment for Kenya’s highly-educated youth, and potential tribal conflicts substantially increase political risk. The country continues to face challenges associated with corruption, unemployment, tribal tensions, land titles, insecurity, and poverty.
The agricultural sector is the largest employer in Kenya, contributing 23.4% of GDP. The country’s major exports are tea, coffee, cut flowers, and vegetables. Kenya is the world’s leading exporter of black tea and tea is one of Kenya’s top foreign exchange earners. In 2010, favorable weather conditions and a stable foreign exchange rate boosted tea export earnings 40 percent to a record level of 441 million kilograms, valued at US$1.2 billion, overtaking horticulture as the leading export earner. However, in 2011, as a result of a drought in the early part of the year, tea exports fell by five percent to 421 million kilograms.
Kenya enjoys an extensive transportation infrastructure, although quality is uneven throughout the country. Nairobi is the undisputed transportation hub of Eastern and Central Africa and the largest city between Cairo and Johannesburg. The Port of Mombasa is the most important deep-water port in the region, supplying the shipping needs of more than a dozen countries despite equipment deficiencies, inefficiency, and corruption.
Kenya's financial and manufacturing industries, while relatively modest in scale, are the most sophisticated in Eastern Africa. Kenya’s tourism industry, one of the most successful in the world, continued to expand until early 2008 when the growth was disrupted by post election violence. The industry bounced back, however, reaching a record 1.26 million arrivals in 2011, and is now the third largest industry in Kenya after agriculture and horticulture. Kenya also is a potentially important source of high-value mineral commodities such as titanium, and oil. In March 2012, oil was discovered in Turkana by the British oil company Tullow. U.S. oil companies have also entered the market with plans to begin drilling exploratory wells in late 2012 or early 2013.
Although the cost of skilled, educated labor in Kenya is high by developing world standards, it is relatively abundant in comparison with neighboring countries. Nonetheless, a large portion of the young population (35 and under) is relatively unskilled, and subsists in an employment environment that offers few opportunities. While Kenya’s physical infrastructure is also superior in many cases to that of its neighbors, it remains rudimentary and is a key obstacle to economic development. Investment over the next decade in transportation infrastructure; reforms that improve government efficiency, transparency and reliability; better competition and business regulation; and judicial system reforms together will determine if Kenya gains or loses ground compared to its neighbors.
Corruption and insecurity also continue to pose significant challenges to business. Transparency International ranked Kenya number 154 of 183 countries surveyed in 2011. Problems exist particularly in land purchases and large government contracts. Kenya’s public contracting law is not an effective tool to limit government officials from steering contracts to those who offer bribes. Although there are relatively few problems company-to-company, it can be difficult, if not impossible, to accurately evaluate the reliability of potential business partners in Kenya based on audited financial statements and official credit ratings. Title to land is also uncertain, reducing the borrowing capacity of families and businesses and constraining Kenya’s ability to broaden its capital base. Widespread violations of intellectual property rights (IPR) related to medicines, videos, music, software, and a wide range of consumer goods continue to cause major problems for many U.S. firms. Counterfeit and substandard goods continue to enter Kenya in large quantities. Furthermore, legal recourse is slow and expensive, and there is considerable cynicism about the objectivity of executive and judicial branch decisions. Foreigners in Kenya should recognize that they have much less local political clout than virtually any Kenyan citizen.
Shipment times from the United States average eight weeks, and customs irregularities are not unusual. If market size warrants, U.S. firms should consider warehousing in Kenya for prompt supply and customer service. Firms operating in Export Processing Zones (EPZ) are provided a 10-year corporate tax holiday and a flat 25 percent tax for the next 10 years (the statutory corporate tax rate is 30 percent, but the overall tax rate is 49.6 percent); a 10-year withholding tax holiday on dividend remittance; duty and VAT exemption on all inputs except motor vehicles; 100 percent investment deduction on capital expenditures for 20 years; stamp duty exemption; exemption from various other laws; exception from pre-shipment inspection; availability of on-site customs inspection; and work permits for senior expatriate staff. The Export Promotion Programs Office, set up in 1992 under the Ministry of Finance, administers the duty remission facility. Foreign investors are attracted to the EPZs by their single licensing regime, tax incentives, and support services provided such as power and water.
On September 29, 2005 the Kenya Bureau of Standards (KEBS) implemented a Pre-shipment Verification of Conformity to standards program (PVoC). Compliance with these requirements in many cases has been problematic, time-consuming, and expensive. The Government of Kenya (GoK) now requires that all consignments of regulated products entering Kenya must obtain a Certificate of Conformity (CoC) issued by one of two firms appointed by KEBS to enact the PVoC program: SGS (Société Générale de Surveillance S.A.) or Intertek. Exporting countries must now certify that goods comply with Kenya Bureau of Standards requirements prior to shipment. The issued certificate is a mandatory customs clearance document in Kenya; consignments of regulated products arriving at Kenyan Customs Points of Entry without this document will be subject to delays and possibly denial of admission into Kenya. In late November 2007, KEBS announced it would waive the CoC requirement on bulk agricultural commodities inspected and certified by USG inspection agencies such as the U.S. Department of Agriculture Federal Grain Inspection Service (FGIS) and Animal and Plant Health Inspection Service (APHIS).
Finally, the government has been unable to provide a secure environment for businesses and families, particularly in urban settings. Property crime and violence are major concerns and have become an unavoidable cost of doing business for companies in Kenya.
Despite the many challenges that Kenya presents, there are many opportunities locally and regionally in five major sectors: information and communications technology (ICT), energy, infrastructure/construction, agribusiness, and medical equipment. A few of these opportunities are outlined below.
The demand for telephone receivers and cellular telephones is expected to continue growing at a high rate following the removal of all duties for these product categories. Growth in Kenya’s mobile telephony sector since 1998 has been phenomenal (from just over 10,000 subscribers to about 26.2 million in 2011), and will continue to provide demand for telecommunication technologies including 3G modems. Mobile Internet users are estimated at 13 million (2011), far outpacing traditional internet access methods such as Cyber cafés. Best sales prospects include 3G/4G modems, computers, data terminals, modems, payphone terminals, routers, broadband equipment, and VSAT satellite equipment. Fiber cable will also be in demand as fiber backbone spreads throughout the country, and service providers begin to roll out fiber to the home (FTTH). Internet equipment based on ADSL technology will also be required when homeowners and apartment dwellers install Internet services in existing buildings that are wired with copper.
Although installed power generation capacity is relatively small by first-world standards, Kenya is the leading electricity generator in Eastern Africa; however, access to electricity in Kenya is only about 23 percent, while electricity penetration in rural Kenya stands at just 12%. Both the national generator, KenGen, and the state-owned distributor, Kenya Power (formerly Kenya Power and Lighting Company, or KPLC), are developing plans to attract private capital to fund expansion. U.S. sales to KenGen to-date have been hindered by the company’s focus on price over value and reliability. KPLC contracts are often awarded based on tied funding from the European Union and Japan. The transmission network requires significant investment to reduce system losses and expand national coverage. Best prospects for U.S. exporters include drilling rigs and associated equipment to tap geothermal sources, electric and electrical cables, transformers, electric meters, electric poles, and switchgear.
In Kenya, the primary markets for material handling equipment are in the mining, farming, and manufacturing sectors. Opportunities include the planned development of the Lamu Port in the Coast Province and the construction and expansion of processing plants. Kenya’s Vision 2030 development strategy emphasizes value addition for coffee and tea exports, which should translate into demand for processing and packing equipment. Industrial activities such as coal and titanium mining are bound to increase the demand for material handling machinery and mining equipment.
In road and housing construction, important opportunities exist for U.S. exporters in the supply of new and used construction equipment (light and heavy earth-moving equipment, loaders, crawlers, tippers, excavators, compactors, graders, and quarry mining equipment), low-cost road maintenance options, and low cost housing construction technology and know-how.
Market Entry Strategy
A traditional entry strategy is to first appoint an agent or stocking distributor, and then to enter and register as a U.S. investor, after sales have grown sufficiently. Kenya is one of the key logistical conduits into East Africa and a regional financial hub. Many foreign companies operating here do business under their own name to manage penetration into the larger, regional market. Companies with strong corporate social responsibility (CSR), education, and training programs will be warmly welcomed.
Kenya enjoys relative advantages over many of its neighbors; however, commercial, political, and legal risks are important factors, which must be well managed. When negotiating an agent or distributor agreement with a potential Kenyan partner, there are many considerations to take into account. The U.S. Commercial Service in Kenya (CS Kenya) strongly recommends that U.S. firms analyze the short-term incentives of a proposed agreement for the potential partner, and assume that recourse under Kenyan law is either impractical or extremely expensive. For example, agreement on what law governs a contract, the timing of payments, and credit terms can form the foundation for negotiations on delivery quantities, price, shared marketing expense, or training.
U.S. firms are encouraged to maintain close communication with distributors and customers to exchange information and ideas on market trends, opportunities, and strategies. The principles of customary business courtesy, especially delivering a prompt response to requests for price quotations and orders, are a prerequisite for exporting success. Friendship and mutual trust are highly valued. There is no substitute for face-to-face contact, and the use of first names at an early stage of a business relationship is acceptable. Kenyan buyers appreciate quality and service, and will pay a premium if convinced of a product's overall superiority and the reliability of customer service. U.S. exporters should allow for additional shipping time to Kenya and ensure that Kenyan buyers are continuously updated on changes in shipping schedules and routing. It is much better to quote a later delivery date that can be guaranteed, versus an earlier one that is not.
Practical Steps to Getting Started
Prospective U.S. investors and exporters are encouraged to contact CS Kenya for additional information and to explore the services available to U.S. businesses.
Business Visas to Kenya
Prospective U.S. investors should contact the Embassy of the Republic of Kenya Embassy in Washington, D.C. for specific information regarding visa requirements.
Make sure to review the current State Department travel advisory for Kenya.
Foreign Corrupt Practices Act
The Foreign Corrupt Practices Act (FCPA) is an important anti-corruption tool designed to discourage corrupt business practices in favor of free and fair markets. The FCPA prohibits promising, offering, giving, or authorizing giving anything of value to a foreign government official where the purpose is to obtain or retain business. These prohibitions apply to U.S. persons, both individuals and companies, and companies that are listed on U.S. exchanges. The statute also requires companies publicly traded in the U.S. to keep accurate books and records and implement appropriate internal controls.
A party to a transaction seeking to know whether a proposed course of conduct would violate the FCPA can take advantage of the opinion procedure established by the statue. Within 30 days of receiving a description of a proposed course of conduct in writing, the Attorney General will provide the party with a written opinion on whether the proposed conduct would violate the FCPA. Not only do opinions provide the requesting party with a rebuttable presumption that the conduct does not violate the FCPA, but DOJ publishes past opinions which can provide guidance for other companies facing similar situations.
More information on the FCPA can be found here: http://www.fcpa.us/
More information on the DOJ opinion procedure can be found here: http://www.morganlewis.com/documents/fcpa/FCPAOpinionProcedureReleases.pdf
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