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Chapter 1: Doing Business In Kenya

Market Overview Return to top

  • Kenya is the dominant economy in Eastern Africa. GDP reached USD 40 billion in 2012, a 10 percent increase over USD 35.8 billion in 2011. The economy has made a fairly steady recovery since the global financial crisis of 2008; however, to achieve its goals of becoming a globally competitive middle-income country by 2030, Kenya will need substantial foreign direct investment (FDI) in order to achieve double digit economic growth.
  • With the successful conclusion of Kenya’s first peaceful, democratic presidential, senate and gubernatorial elections in April 2013, Kenya is poised to do just that. Given its position as the economic, commercial, and logistical hub of East Africa, private equity capital is now flowing into Kenya, and more U.S. companies are investing in Kenya and setting up local and regional operations to take advantage of Kenya’s strategic location, comprehensive air routes, and status as a regional financial center.

  • U.S. companies are also taking advantage of Kenya's human resources. 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 percent of the population under the age of 35. However, given an unofficial estimate of 40 percent unemployment, 50 percent of Kenya’s people still live below the poverty line, and the country's GDP per capita is approximately USD 888. So companies that come in to Kenya to create jobs and contribute to the local communities through corporate social responsibility programs are most welcome.
  • That’s not to say that business in Kenya does not face its share of challenges. In, 2011 growth was somewhat slower than earlier projections of 5-6 percent growth, due to high inflation, drought, and a weak shilling, which caused prices of imported goods to skyrocket. However, Kenya achieved 4.6 percent growth in 2012, and an optimistic Government of Kenya (GoK) is projecting six percent growth in 2013.
  • The average annual inflation rate fell 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, yet more accurate rate; however, high inflation reemerged in 2011 hitting a year-on-year high of 19.72 percent in November 2011 before falling slightly to 18.93 percent in December 2011 resulting in an average inflation rate of 14 percent. However, inflation in 2012 fell to 9.4 percent.
  • Kenya’s key economic challenge is to increase its real GDP growth rate. Sustained, significant 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. Achieving high growth, however, will depend on improved economic governance and greater economic reform. The first general elections under Kenya’s new constitution will usher in a new devolved governance system; however, global economic reversals and continuing underemployment for Kenya’s highly-educated youth, and potential tribal conflicts substantially increase political risk.
  • According to the Kenya National Bureau of Statistics 2013 report, Kenya’s volume of trade expanded by 4.4 percent in 2012. Although Kenya’s domestic exports fell by one percent, re-export earnings increased by 35.7 percent. Imports grew by 5.7 percent mainly due to purchases of petroleum products, capital goods, food products and chemical fertilizers, which accounted for 58.4 percent of the total import bill. In 2012 the balance of payments improved due to increased foreign exchange reserves and IMF loans. Meanwhile, Kenya’s current account deficit grew from 34 billion shillings to nearly 36 billion shillings.
  • Kenya continues to face challenges associated with corruption, unemployment, tribal tensions, land titles, insecurity, and poverty. Additionally, in 2011, 3.75 million Kenyans required emergency food aid and another 5 million were food insecure. The U.S. Government’s Feed the Future Initiative utilizes innovation, research, and development to improve agricultural productivity, link farmers to local and regional markets, enhance nutrition, and build safety nets. These investments will increase the supply of food where it is needed and help vulnerable people withstand price shocks better.
  • The agricultural sector is the largest employer in Kenya, contributing 25.9% 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 one of Kenya’s top foreign exchange earners.  In 2010, favorable weather conditions and a stable foreign exchange rate boosted production and export earnings to record levels as the best year ever. Unfortunately, in 2011, as a result of a dry spell in the early part of the year, both local tea production and exports fell by five percent to register 377 million kilograms of local production and 421 million kilograms of exports. However, in 2012 good weather yielded bumper crops of wheat and maize, reducing Kenya’s dependency on grain imports.
  • The tourism industry, one of the most successful in the world, continued to expand until early 2008 when the growth was disrupted by the disputed presidential election. The industry bounced back, however, and is now the third largest industry in Kenya after agriculture and horticulture. In 2011 tourism grew by 32 percent over 2010, earning the country revenues of Kshs 98 billion. 1.26 million tourists visited Kenya in 2011, -- representing a 15.4 percent increase over the 2010 visit numbers. Tourism is a socio-economic driver, and one of the largest contributors to Kenya’s current account. The United Kingdom led foreign passenger arrivals, followed by the United States and Italy.
  • Kenya's financial and manufacturing industries, while relatively modest, are the most sophisticated in Eastern Africa. While Kenya’s mineral resources are limited, it is a potentially important source of high-value mineral commodities such as titanium, and oil, where recent exploration off of the Indian Ocean coast began. 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 exploration in late 2012/early 2013.
  • Kenya enjoys an extensive (if uneven) infrastructure. 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 stubborn deficiencies in equipment, inefficiency, and corruption. As a result of these deficiencies, the Port of Mombasa has been earmarked for major expansion and re-habilitation. Additional opportunities in the infrastructure sector are outlined in Chapter 4.
  • The peaceful and historic passage of a new constitution in late August 2010 instilled hope in Kenya's future political and trading prospects. Unfortunately, the implementation has been slow and problematic, mainly as a result of vested political interests. That said the peaceful elections of April 2013 resulted in a new federal administration with19 ministries instead of 34, 47 new county governors and county governments –very similar to U.S. states that can compete on global capital markets to attract new trade and investment. Kenya also now has two houses of parliament (with the addition of a Senate), and is receiving increased attention from the international investment, political and business communities. With Vision 2030, a 20 year development program in place, and partial implementation of a new political reform agenda, Kenya is increasingly regarded as a stable place to invest and trade with the rest of East Africa.

Market Challenges Return to top

  • Kenya is not a low cost economy. In fact, the cost of skilled, educated labor is high by developing world standards. A very large portion of the young population (i.e. 35 and under) is relatively unskilled, and subsists in an employment environment that offers few opportunities. However, Kenya’s skilled, educated labor pool is relatively abundant in comparison with neighboring countries. While Kenya’s physical infrastructure is also superior in many cases to that of its neighbors, it remains rudimentary and a key obstacle to economic development. Investment over the next decade in roads, government efficiency, transparency and reliability, competition regulation, and the judicial system will determine if Kenya gains or losses ground when compared with its neighbors.
  • Despite the price sensitivity of consumers and companies, there is little price competition in Kenya compared with many other fast-developing countries. This is both an opportunity and a challenge for a new investor or trader. There is hope that Kenya’s government will promote price competition to improve market efficiency; however, there are concerns that this is not an immediate priority. Absent regulatory action, it is very unlikely that competitors will choose to pursue additional market share.
  • 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 another unavoidable cost of doing business for companies in Kenya.
  • In 2012, Transparency International ranked Kenya 139 out of 174 countries, which is a vast improvement over 2011, when Kenya ranked 154 of 183 countries surveyed. Problems still exist, particularly in land purchases and large government contracts, with relatively few problems company-to-company. Additionally, Kenya’s public contracting law is not an effective tool to limit government officials from steering contracts to those who offer bribes.
  • Legal recourse is slow and expensive. Popular wisdom supposes that government decisions are often more closely related to the personal incentives affecting judges and bureaucrats than the letter of the law. While there are many honorable and honest judges and civil servants, on balance, there is considerable cynicism about the objectivity of executive and judicial branch decisions. This is especially damaging to companies who refuse to pay bribes.
  • Use of the police and courts by political leaders to abuse others’ rights is unfortunately not uncommon in Kenya. Despite what the law says, a politician (acting in his own interest or on behalf of a friend or business partner) can readily deny others support from the police or recourse to the legal system. Foreigners in Kenya should recognize that they have much less local political clout than virtually any Kenyan citizen.
  • Whereas it is often possible in countries with strong rule of law, such as Germany or the UK, to evaluate the reliability of a company based on audited financial statements and official credit ratings, this is not true in the developing world. Several US investors recently provided short-term debt to a Kenyan borrower based on an “A” credit rating and several years’ solid financial statements. The borrower nevertheless fled the country with almost $100 million, a small portion of which belonged to the U.S. creditors. The US Commercial Section of the US Embassy in Kenya (CS Kenya) can help US companies to lessen or avoid these through our background check service known as an International Company Profile (ICP).
  • Widespread violations of intellectual property rights (IPR) for videos, music, software, and consumer goods continue to cause major problems for some U.S. firms. The uncontrolled entry of counterfeit and substandard goods has caused deaths and injured consumers, and severely damaged the brand names, sales and viability of many consumer packaged goods companies, both in Kenya and neighboring countries. The American Chamber of Commerce (AmCham) in Kenya has a very active IPR committee of rights holders, who are very engaged along with the U.S. State Department in combating counterfeiting in Kenya.
  • Title to land is uncertain, reducing the borrowing capacity of families and businesses and constraining Kenya’s ability to broaden its capital base. Land reform is a divisive and emotional issue, complicated by tribal traditions, land sale scams by con artists, and perceived historical injustices, which Kenya’s young democracy has so far been unable to resolve.
  • In mid-June 2007, the government unexpectedly reduced the threshold for foreign ownership of companies listed with the Nairobi Securities Exchange from 75 to 60 percent. Listed companies with foreign ownership above 60 percent constituted, as of late November 2007, a market capitalization of KSh 268.9 billion (just over USD 4 billion) or a third of the total capitalization of KSh 804 billion (about USD 12.5 billion).
  • Shipment times from the U.S. 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). This is a conformity assessment and verification procedure applied to specific “Import Regulated Products” from exporting countries to ensure their compliance with the applicable Kenyan Technical Regulations and Mandatory Standards or approved equivalents (international standards and national standards). In March 2009, KEBS added the requirement for an import standards mark (ISM) on a broad range of products. Compliance with these requirements in many cases has been problematic, time-consuming, and expensive (see next item).
  • 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).

Market Opportunities Return to top

  • Despite the many challenges that Kenya presents, there are a good number of opportunities locally and regionally. In fact, with the stabilization of the shilling, trading between 83-85 Kenya shillings to the dollar, US exports increased 50.7% in 2012. Last year, Kenya imported aircraft and related equipment, fertilizer, combustion engines and steam turbines.
  • Major opportunities for US firms in five major sectors: ICT, energy, infrastructure/construction, agribusiness and medical. A few of these opportunities are outlined below. Chapter 4 provides more extensive information on best prospects for U.S. companies looking to do business in Kenya, and by extension East Africa using Kenya as a hub or gateway.
  • In ICT, the computer and peripherals industry remains one of the fastest growing business sectors in Kenya. Kenya imports 100% of its computers and peripherals. American built computers are available and popular in the market with brands such as Dell, HP and Apple being clearly visible.
  • On the mobile computing side, the GSM Association estimates that Kenya’s mobile operators will collectively spend US$ 238.2 million in 2013 to expand their data services in response to rising demands for affordable smart phones. According to Business Monitor International (BMI), Kenya’s telecoms market is one of the most dynamic and rapidly growing in Sub-Saharan Africa. It is a regional leader in terms of value-added services, most notably Safaricom's M-PESA mobile banking service, which is a global leader. The rapid expansion of leased international bandwidth has proven to be an important catalyst for data consumption and the conventional mobile market still holds growth potential with a penetration of 77.2 per cent in 2013. A continued push by the Kenya Government to provide more of its services online has contributed to demand-driven growth of the sector.
  • Energy presents major opportunities across various subsectors as the government seeks to meet rising demand and fuel Kenya’s economic growth prospects. 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 25 percent, while electricity penetration in rural Kenya stands at about 12%. Both the national generator, KenGen, and the state-owned distributor, Kenya Power and Light Company (KPLC), are developing plans to attract private capital to fund expansion.
  • One of the areas of particular opportunity for foreign suppliers includes renewable energy such as wind and geothermal energy. The government is also focused on developing the geothermal potential in the country with a 10-year US$2.6bn geothermal exploration plan that will involve sinking 566 wells in the Rift Valley. To tap the geothermal potential, GDC plans to purchase 12 drilling rigs for geothermal resource exploration. Already, four rigs have been procured and GDC will obtain funding to purchase the remaining rigs. GDC also has announced the invitation for concessions of a 400MW geothermal site in Menengai. In addition to the government initiatives, the U.S. firm Ormat, an IPP generating 48MW of geothermal power, secured funding to expand its capacity to 100MW.
  • Construction and infrastructure development will also present new opportunities, especially with the passage of the new public-private partnership (PPP) law which will make government procurements more transparent and less risky. According to report by Kenya National Bureau of Statistics (KNBS), the economy of Kenya grew by 4.9 per cent in the first quarter of 2011 due to the improved productivity in the construction industry, adding USD141.8 million (Kshs. 12.6 billion) to the country’s GDP. This development was supported by the massive road infrastructure projects and the high demand for decent housing due to rapidly expanding population.
  • According to industry analysts, increased government spending on major infrastructure projects in the country and lending to the private sector for real estate development boosted activity in the construction sector in 2012 and leading to an expansion of 9.6% in real terms. Across the period 2013-2016, the sector is anticipated to realize an average annual growth rate of 8.8%.
  • On the consumer side, opportunities exist for US franchises as the franchising market in Kenya is steadily growing and evolving from single-unit owners to multi-unit operators employing professional staff of field and unit managers. There are several franchise companies in Kenya that cover almost every industry, from well-known national brands to smaller and local opportunities but is most common in the Hospitality industry. Other common franchising industries in Kenya include the clothing industry and fuel industry. Franchise businesses seem to exhibit the pattern of establishing franchising outlets within major shopping malls around the country.
  • Consumer Lifestyle Reports in Kenya have noted increased consumer expenditure, on eating, drinking habits and shopping especially among the urban population, as a result of growing disposable income. Kenya’s evolving lifestyle trends can be seen in more shopping malls and recreational facilities coming up across Nairobi and other leading Kenyan cities including: Eldoret, Kisumu, Mombasa, Nyeri, Nakuru and Machakos. This is a key pointer to investors wishing to set up shop in various locations in Kenya. (For more information on Franchising, see Chapter 3)

Market Entry Strategy Return to top

  • A traditional entry strategy is to first appoint an agent or stocking distributor, and then to enter and register as a US company 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. Capacity building to create employment is needed to support Kenya’s economic development goals and to reduce political risk and instability.
  • 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 to 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. CS Kenya can also help US companies to assess potential partners before signing any contracts with our background check service known as the International Company Profile (ICP).
  • 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.

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