FDI: Kenya Should Sew the Torn Pockets!

Published on 11th October 2005

Kenya and the East African region offer excellent investment opportunities in a wide range of sectors. The basis for Kenya’s sustained success is a combination of factors: an educated workforce, liberalization, changes in consumer behavior, a moderate climate, and recent improvements in banking and telecommunications. The formation of the East Africa Community (EAC) in January 2005 provides even greater opportunities for those considering Kenya to invest in.  

Kenya was a prime choice for foreign investors seeking to establish a presence in Eastern and Southern Africa leading to a steady growth of Foreign Direct Investment (FDI) through the 1970s.She had a relatively high level of development, good infrastructure, market size, growth and FDI openness to compared to other countries in the region that had relatively closed regimes.

Kenya’s FDI in the1970’s was about $10 million a year peaking to approximately $80 million in 1979-80. However, the early 1980’s saw a decline in FDI as a result of numerous factors such as the deterioration in economic performance, stop-go nature of economic reforms, political instability, rising costs of services and doing business, mediocre growth performance, corruption, poor governance, deterioration of public services and infrastructure.

Kenya’s FDI inflows in 1996-2003 averaged $39 million a year, a drop in the ocean compared to inflows to Tanzania and Uganda that surged to $280 million and $220 million, respectively, from negligible levels in the 1980s. Around this time, the average inflow to African countries was six fold. Although developing countries as a whole attracted an annual average of $41 of FDI per capita in 1996-2003, Kenya only drew average inflows of $1.3 per capita. In fact, UNCTAD\'s FDI performance index ranked Kenya 125th (out of 140 countries) in 2003.

Notable recent trends in sectoral composition of FDI are in horticulture, floriculture, garments, and tourism. While interest in horticulture and floriculture has been in response to favorable local conditions linked to climate and transport infrastructure, Garment investment has been in response to the U.S. granting preferential access to its market under AGOA. Manufacturing FDI has concentrated on consumer goods sectors, such as the food and beverage industry. Most foreign investment in manufacturing since 2001 has been in the Export Processing Zone (EPZs), with the majority in AGOA-related textiles. There were 55 foreign or joint-venture enterprises operating in EPZs in 2003. EPZs have expanded from their initial textiles focus to also produce a number of other goods. The largest single investment is the De La Rue currency printing operation with a value of $48 million.

FDI in services has been directed to a wide array of sub-sectors such as tourism, financial and business services and telecommunications. Kenya has attracted foreign investors in banking and professional services. Companies such as Deloitte and Touche, Ernst and Young and KPMG base their main East African operations in Kenya. 13 of the 43 banks in Kenya are foreign, controlling 51% of total banking assets in the country. Considering the power sector; four of the 14 Independent Power Producers (IPP) in Africa are based in Kenya. The telecommunications sector has witnessed foreign shareholding in the cell phone services industry. Safaricom for example, is 40% owned by Vodafone of the U.K. while Celtel Kenya is 60% owned by Celtel of Netherlands. A third national mobile operator, Econet (South Africa), was awarded a license in 2003, but has not yet commenced operations.

Privatization in the 1990s led to the sale of 207 enterprises. Kenya Airways (KQ) was rated the most successful privatization venture in Africa. The Government  has earmarked 33 companies for full or partial sale, these include; the National Bank of Kenya (NBK),the Kenya Commercial Bank(KCB), the Kenya Power and Lighting Company (KPLC), KenGen, Kenya Petroleum Refineries, the Kenya Ports Authority     (KPA), Telkom Kenya and Kenya Railways Corporation. The methods of sale will range from concessioning, sale at the Nairobi Stock Exchange, and securing strategic partnerships with major players in the relevant sectors.

FDI has elicited diverse impact. Looking at the Capital and Investment, the auction of two mobile phone licenses in 1999 and 2000 led to the rapid build up of infrastructure. The competition introduced in mobile telephony generated an increase in the availability and quality of services, with the number of users reaching 3 million in 2003 and mobile phone subscriptions to fixed line connections reaching a ratio of 6 to 1. On the other hand, the opening of the power generation sector to private investment in the late 1990s allowed the rapid increase in power supply. The 4 IPPs currently account for about 20 % of total capacity.

On Technology and Skills, FDI has given rise to more complex technology use or advanced processes in manufacturing in several firms such as General Motors and Tetrapak. Tetrapak has applied World Class Manufacturing techniques to its Kenyan operations since 2001 as part of a global programme. The Dutch-owned Oserian (horticulture) has installed one of the world\'s biggest geothermal heated greenhouses in order to reduce disease pressure and increase rose yield through more uniform temperatures.

FDI has greatly influenced employment and linkages. The rise in FDI in labour-intensive garment production employed 35,000 people in EPZ. Around 12,000 additional jobs were created indirectly through sub-contracting EPZ employment. The garment production accounted for approximately 17% of total formal manufacturing employment in 2003, up from 3% in 1999. Purchases by leading exporters from smallholders account for approximately 27% of exported fresh vegetables and 85% of exported fresh fruit. Homegrown, the country’s leading horticultural producer uses about 1,000 outgrowers. It operates a support policy for these outgrowers providing them with seed, technical expertise and training to produce a high quality product.

What should Kenya do to attract FDI? There is need to reduce cost of doing business, simplify the regulatory environment, operationalize the 2004 Investment Promotion Act, improve governance and security, eradicate corruption and implement various Investment Policy recommendations  such as the UNCTAD’s Investment Policy Review of Kenya 2005. Kenya needs to build on four key strengths and opportunities: Her human resource base, which has the potential to be among the best in Africa; Her relative level of industrialization and economic development compared to neighboring countries; Her membership to preferential trade agreements, including COMESA and the EAC; and land and climate, which offer decisive comparative advantages in certain key agricultural sectors and in tourism.

Excerpts from Susan Kikwai’s speech during the official launch of Investment Guides to Kenya and the East African Community, and the World Investment Report on 29th September 2005, at Hotel Intercontinental, Nairobi.

 


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