Africa:Kenya is losing out to Tanzania and Uganda in Foreign Direct Investment

A report by the Kenya Investment Authority says the country is losing out to Tanzania and Uganda in terms of Foreign Direct Investments (FDIs).

While Kenya attracted investments worth $46 million in 2004, Uganda drew $237 million and Tanzania $270 million. And this reflects the trend since 2000.

Ironically, Kenyan businesses are the second highest investors in Uganda and the third highest in Tanzania.

The Kenya Institute of Public Policy Analysis and Research (Kippra) and the Kenya Investment Authority have launched a project to stem this loss of FDI from Nairobi. Dr Moses Ikiara, executive director of Kippra, explains the situation: “FDI in Kenya is anchored on economic growth, which is currently about 5.8 per cent annually. In Uganda it’s 7 per cent and Tanzania 10 per cent.”

Kippra’s South-to-South Development Research initiative seeks to attract investors from the Southern Hemisphere and Asia, unlike the past when the focus was Europe and the West.

“Currently we’re doing very poorly,” concedes Dr Ikiara. “But these figures should not discourage us from trying. Instead, they should inspire us to make every right move to win the confidence of investors.”

The report shows that while Kenya is becoming less exciting for investors, the neighbouring markets are either fluctuating or booming.

In 2003 investors put $82 million in Kenya compared to $283 million in Uganda and $248 million in Tanzania. The figures in 2002 were $50 million, $249 million and $250 million respectively.

Foreign Direct Investment increases capital inflow, with new employment opportunities bringing additional income and spending power for local people while improving competitiveness of local firms in the global arena.

Kenya’s annual growth rate target is seven per cent this year. “For us to attain this requires investments to contribute about 24.3 per cent of Gross Domestic Product,” says Dr Ikiara.

Eighteen per cent of this is projected to come from domestic sources and the rest foreign. But the current rate of direct contribution to GDP by foreign investments is only one per cent. “This captures the size of the challenge we face,” says Dr Ikiara.

The diminishing FDI status is attributed to a number of factors. One is the trend by mature Kenyan companies extending their operations into Uganda and Tanzania — and lately South Sudan — instead of expanding within Kenya.

The other factors include poor infrastructure, high cost of doing business in Nairobi, security, labour conditions and the legal environment.

Kenya Investment Authority managing director Susan Kikwai says that political stability and predictability, the market size and openness of the economy in the context of globalisation are critical factors.

While Kenya scores quite well on this count, Ms Kikwai says relations with donor countries also influence foreign direct investment, a view echoed by the managing director of a local parastatal who has headed business operations of a Kenyan-based regional company in Uganda and Tanzania.

“The international financial institutions seem to favour Uganda and Tanzania,” says the parastatal chief, citing the 2005 waiver of foreign debts owed by the two governments. Kenya’s plea for a debt relief was turned down by the donors.

The waiver for Tanzania and Uganda had a multiplyer effect on investor confidence and availability of credit.

Kenya’s budget for the year 2006/7 did not factor in donor assistance, while 39 per cent of Tanzania’s budget is funded by donors.

Dr Ikiara says that donor-influenced foreign investment in Kenya has been declining for 20 years.

In 2002, says Dr Ikiara, Kenya’s share of the FDI coming to East Africa was only about 5.3 per cent. “Twenty years ago, it was about 80 per cent. We are coming from a situation where we were doing very poorly in the opposite direction.”

The net value of FDI is pegged on how efficient it is to do business in a country, strategic knowledge of the local and international markets and political safety.

The South-to-South Development Research project will be asking Kenya to do a critical self-examination and make the right moves to attract more foreign investment. The project seeks to reinforce an understanding of the investor’s motivation and goals and raise awareness of the country’s competitiveness, receptiveness of the people to foreigners and provide tailored solutions to investors on any problems they may encounter.

“The secret of increasing investment inflow in the country,” says the parastatal chief who requested anonymity, “lies in an effective public relations campaign for the country.”

He says that many investors hold the view it’s easier and less costly to do business in Tanzania or Uganda.

“Many investors see Kenya as a country where corruption is the passport to success while our neighbours are viewed as the regional ‘Vaticans’ with a sublime investment climate,” says the parastatal chief. “But the reality on the ground is quite different.”

Another reason is that Kenya is a more mature market and for fresh investors it’s a hard nut to crack. “Comparatively, Tanzania and Uganda are emerging markets and that’s why more speculators are going there. Although the figures show we are lagging behind in FDI, it doesn’t mean the business scene in Kenya is dozing. In fact, investors are still doing much more business in Kenya than in Tanzania and Uganda.”

The MD explained that while a low-priced share may sell in bigger volumes than a high-priced premium, “this does not mean the more expensive stock is doing badly. In this case, Kenya is a high-priced stock.”

The parastatal chief says that’s why Kenyan businesses are among the big investors in both Uganda and Tanzania.

“It’s because many businesses that have matured in Kenya want to excel across the border too. The market here is saturated and to increase their sales they have to be adventurous.”

The MD adds it’s for the same reason that South African companies have made inroads in the Kenyan market since the late 1990s. “They know that a grip on Kenya gives them a chance to do good business in the vast East African region.”

The Kenya Investment Authority figures for 2002 show China (20 per cent) was the biggest source of FDI to Kenya, South Africa and India brought 16 per cent, and UK 10 per cent.

Investors in Kenya are focused mainly on manufacturing, service and tourism.

Last year investments from the UK increased to 22 per cent — the same rate as China. India accounted for 10 per cent while South Africa dropped to six per cent. The USA injected 13 per cent.

Mr Gerald Mahinda, East African Breweries Ltd group managing director, says Kenya faces a challenge from Uganda and Tanzania as far as macro-economic policies are concerned.

The parastatal chief who requested anonymity said that Tanzania’s minerals — notably diamonds, gas and gold — tend to attract speculators more than Kenya does. However, he added, the mineral sector is “fragmented with a distinct lack of tax compliance”.

Uganda and Tanzania’s import markets dependent much on Kenya’s infrastructure, notably the port of Mombasa. The parastatal chief said 40 per cent of Uganda’s imports are processed through Kenya.

In an interview with The East African, the outgoing Kenyan High Commissioner in Dar es Salaam, Mr Muburi-Mwita, said that since the introduction of East Africa Common External Tariffs last year, which harmonised the taxation of goods between the three countries, Kenya’s exports to Tanzania had increased by 11 per cent.

In the past, the “trade imbalance” had caused apprehension in Uganda and Tanzania, Mr Muburi-Muita said. “We want to create a win-win situation for every partner to benefit equally,” he added.

This is one of the tenets of the South-to-South project. Coordinated by the Edge Institute of South Africa, KIA and Kippra, it will seek to share FDI inflow on a common platform with participating countries.

Similar initiatives have been launched in India (predominantly focusing on Information Technology) and China, through the China Business Council. Preliminary reports of the project are due in six months.

By JOHN KOIGI
August 28-3 September Issue