Kenya’s attraction of foreign direct investment (FDI) has no doubt been impressive in the past few years, buoyed by demand in consumer and real estate sectors.
East Africa’s largest economy for instance received an estimated $1.9 billion in FDI in 2015, a 65% climb from 2014, data by the African Development Bank (AfDB) shows, cementing its unique position among countries with no significant natural resources that are receiving significant FDI inflows targeted at their consumer-oriented sectors.
In its medium-term economic framework, Kenya actually aims to tap FDI proceeds to help boost its economic performance amid wobbly returns from agriculture that has for decades been its mainstay in terms of GDP contribution.
A new regulation sneaked through the East Africa nation’s Parliament requiring foreign companies to allocate 30% shareholdings in their operations in Kenya to local investors. This threatens to reverse gains in FDI attraction.
“It may be very expensive, if not impossible, for Kenyan individuals to purchase or invest at least 30 percent in a foreign company. The process of carrying out due diligence in a company in another jurisdiction to effect the share sale or allotment would not only be time consuming, but also expensive,” says a lobby of United States investors, the American Chamber of Commerce, in Kenya.
Investors who fail to comply with the fresh ownership rules will be slapped with a fine of KSh5 million ($50,000), so states clause 975(2b) of the Companies Act 2015 that was adopted last November.
“This requirement may do more harm than good to the Kenyan economy. To start with, this 30 percent rule flies in the face of Kenya’s goal of being a regional business hub. A major concern is the conflict between this rule and the fact that Kenya is a liberalized market economy which embraces the free-market ideology. This rule is a form of protectionism,” says Lois Musikali, a legal expert at the Nairobi-based Centre for Applied Research in Law and Policy (CARLP).
Several leading foreign firms, including Vodafone, Coca-Cola, Diageo, General Electric (GE), and Bharti Airtel, have operations in Kenya and authorities should strive to maintain a friendly and predictable business profile that would attract more investors.
“There are concerns that foreign companies will look elsewhere for an investment partner. It is also true that many Kenyans will find it almost impossible, in terms of cost, to acquire a 30 percent stake in a foreign company that wants to register in Kenya,” says Musikali, noting that the absence of guidelines for foreign companies on how or where to find these Kenyan citizens creates a loophole for rent seeking, whereby corrupt public officials could acquire stakes in foreign firms seeking registration in Kenya using taxpayers money thereby advancing crony capitalism.
These resentments are weighty and Kenya has no option but to expunge the regulations from its laws to prevent polarizing investment.
Kenya’s Attorney General Githu Muigai says the regulation will be repealed through the Finance Bill 2016 that is currently before Parliament.
“The clause was unilaterally inserted and does not reflect the investment policy of the Kenyan government. The rule will be repealed through the Finance Bill 2016 that is at the committee stage in Parliament,” he says.
Nonetheless it is baffling that the regulations were allowed to see the light of day because Kenya has previously unsuccessfully tried to introduce a local ownership rule in its telecoms industry after it emerged hat foreign firms were facing difficulties in securing local partners with the right expertise and financial muscle to support the business.
Under this rule foreign companies investing in the telecom sector were required to reserve at least 30% of their shareholding for local partners. This shareholding was reduced to 20% and eventually reviewed for discouraging foreign capital flows in the country.
Kenyan authorities must pull off this path or risk causing ripples among foreign investors given the realities of other outlier factors such as the prevailing global economic slowdown.
The International Monetary Fund (IMF) projects that Kenya’s FDI will fall by nearly a quarter this year, thanks to declining inflows into hydrocarbons exploration and an adverse global economy. According to the latest IMF update on the Kenyan economy, FDI could fall by 23.7% to $981 million.