2013 Investment Climate Statement - Kenya
Bureau of Economic and Business Affairs
April 2013
Report

Openness to, and Restrictions Upon, Foreign Investment

Kenya has enjoyed a long history of economic leadership in East Africa as the largest and most advanced economy in the region. However, ethnically-charged post-election violence in January-February 2008, which left approximately 1,200 dead and 600,000 displaced, caused many to reassess Kenya’s investment climate. Since then, the economy has rebounded, but GDP growth has not returned to 2007 levels. Serious concerns regarding corruption and governance have slowed Kenya’s economic growth, while some neighboring countries have maintained higher growth rates and more political stability.

The average annual growth rate of gross domestic product (GDP) in the 2000s was 3.6 percent, an increase from the 1990s average of 2.2 percent. By 2010, the growth rate improved to 5.8 percent before falling to 4.4 percent in 2011. Economic growth in 2012 is projected by the World Bank to have been 4.3 percent, lower than earlier projections of 5 to 6 percent growth. The Treasury of Kenya projected 6.4 percent growth projection for the third quarter, based on expectations of favorable rains, and 6.8 percent growth for the fourth quarter. Despite the Treasury’s optimistic growth projections, and even with favorable weather conditions in the third quarter of 2012, nominal GDP grew by 4.7 percent (2.2 percent, seasonally adjusted). Overall GDP growth has been negatively affected by: high interest rates, heightened insecurity due to al-Shabaab terrorist attacks and the emergence of youth gangs, election uncertainty, and depressed global demand due to the Euro-zone debt crisis. Tourism and horticulture have been most affected by the slowdown in Europe. The increase in consumption expenditure in the run-up to the March 2013 elections as well as the pick-up in the construction and trade sectors as a result of improved access to credit, brought by falling interest rates, would accelerate overall growth. The World Bank projects a growth rate of 5.0 percent in 2013 and 5.1 percent in 2014. The Treasury of Kenya projects the growth rate will increase to 6.5 percent in three years based on expectations of stable weather conditions, completion of infrastructure projects, and growth of regional markets for exports. These projections require Kenya to grow at a rate rarely seen in the past 30 years and still below the government’s Vision 2030 target growth rate of 10 percent.

Kenya’s inflation dropped from 16.2 percent in 2008 to 9.2 percent in 2009, partly due to a new methodology for calculating the rate, and fell further to 4.1 percent in 2010. High inflation reemerged in 2011, however, hitting a year-on-year high of 19.72 percent in November 2011. The average annual inflation for 2012 was 9.6 percent, compared with 13.95 percent in 2011. Inflation consistently declined from a peak of 18.3 percent in January to 3.2 percent in December, registering 13 consecutive monthly drops in inflation. In October, Kenya’s year-on-year inflation fell below the Central Bank’s 5 percent target. However, the decline in year-on-year inflation is driven in part by rapid inflation in late 2011 and mask persistent monthly price increases. The average USD/Ksh exchange rate for 2011 was 88.87, and was 84.52 for 2012. At the end of 2012, the shilling was trading at approximately 86 to the dollar.

Kenya’s economic performance and level of global competitiveness remains low relative to global benchmarks. According to the World Economic Forum’s Global Competitiveness Report 2012-2013, Kenya is ranked 106 out of 144 countries evaluated countries, showing a relatively steady performance when compared to last year’s ranking of 106 out of 139 countries ranked. The country’s strengths continue to be found in the more complex areas measured by the Global Competitiveness Index (GCI). Kenya’s innovative capacity is ranked an impressive 50th, with high company spending on R&D and good scientific research institutions that collaborate well with the business sector in research activities. Supporting this innovative potential is an educational system that— although educating a relatively small proportion of the population compared with most other countries—is recognized for quality (37th) as well as for on-the-job training (62nd). The economy is also supported by financial markets that are well developed by international standards (24th) and a relatively efficient labor market (39th). According to GCI categories, Kenya’s overall competitiveness is held back by a number of social factors. Health is an area of serious concern (115th), with a high prevalence of communicable diseases contributing to the low life expectancy of 57 years and reducing the productivity of the workforce. Kenya is ranked 125th in terms of overall security. In 2011, Kenya ranks 143 of 187 countries according to the UN Human Development Index (HDI).

Since independence in 1963, Kenya has pursued at various times import substitution and export-oriented industrialization strategies. It is currently implementing an industrialization strategy outlined in Sessional Paper No. 2, adopted by Parliament in 1996, which aims to transform Kenya into a fully industrial state by 2020. The strategy emphasizes support for export industries, driven by a desire to increase their employment potential. Vision 2030, unveiled in 2007 as the Kenyan government’s long-term plan for attaining middle-income status as a nation by 2030, buttresses the Sessional Paper by also recognizing industrial promotion as an avenue for growth and development. In 2012, the Ministry of Industrialization prepared the National Industrialization Policy (NIP) in line with Vision 2030 to guide development of the manufacturing industry. The NIP has been approved by the cabinet. The Ministry of Industrialization is developing a legal framework to implement it.

Kenya has experienced difficulty seizing opportunities generated by trade liberalization in developed markets to export manufactured commodities. The bulk of its exports to the European Union are agricultural with minimal value addition: tea, coffee, cut flowers, vegetables, fruits, and nuts. Value addition to these primary products leads to tariff escalation in the European Union market. In addition, processed products in Kenya attract value-added tax (VAT) which must be paid first and claimed after exporting, through a reimbursement process in which it can take up to four years to receive the VAT refund. In contrast, manufactured goods (mostly apparel) comprise the majority of exports to the United States under the African Growth and Opportunity Act (AGOA). The textile and garments industry largely depends on imported fabrics and raw materials like cotton, viscose, polyester, denim, nylon, and acrylics, since a competitive integrated domestic cotton industry does not exist. The overwhelming majority of Export Processing Zones (EPZ) products are exported to the United States under AGOA, with AGOA-based exports to the United States reaching US$292 million in 2011. By the end of 2011, Kenya has 44 designated EPZs in which 79 companies operated, employed 40,000 workers, and produced roughly 11 percent of exports.

Kenya has also ventured into services, pioneering mobile money transfers through M-Pesa and other innovative ICT products. The country’s regional leadership position, however, is threatened by persistently high energy costs and interest rates, which drive up the overall cost of doing business in Kenya. The manufacturing sector has shrunk in recent years as a percentage of GDP, exposing a gap in the country’s ability to achieve a fully industrialized economy by 2020. To attain this and other development goals contained in the Vision 2030 roadmap, Kenya’s manufacturers believe the economy must grow by double digits for the next 18 years. The country also needs to address inefficiencies in transport logistics, especially at the Port of Mombasa. The Kenya Association of Manufacturers (KAM) called for the need to protect local manufacturers by banning the sale of second-hand clothes (mitumba). Local textile manufacturers argue that the continued sale of mitumba in the local market could potentially cripple their industry.[1]

Building upon its high ranking in innovative capacity in the GCI, Kenya is poised to become East Africa’s information and communication technology (ICT) hub due to the continued growth in Internet and mobile technology use. The World Bank’s 2011 Kenya Economic Update states that over the last decade, ICT has outperformed all others sectors in Kenya, growing at an annual average of 20 percent. The report concludes that “The benefits of ICT are starting to be felt in other sectors, and have contributed to the conditions for the country to reach an economic tipping point.” Kenya has four undersea fiber cables with approximately 8.56 terabytes of bandwidth. Plans to land a fifth undersea fiber optic cable in Kenya are underway, as part of an effort to increase the country’s current bandwidth capacity to 15 terabytes. Kenya has over 17 million internet users (36 percent of the population) out of which only 6 million people access the Internet through subscription, while the rest use mobile devices to access the Internet.

ICT, especially mobile technology, is an important area of growth and innovation in the Kenyan economy. As of December 2012, there are four mobile telecommunications providers in Kenya: the partially government-owned Safaricom, French-owned Orange (the mobile portion of Telkom Kenya), Indian-owned Bharti Airtel, (formerly Zain), and Indian-owned Yu (formerly Essar Telecom). Foreign telecom companies can establish themselves in Kenya, but must have at least 20 percent local ownership. In June 2010, Kenya’s telecommunications regulator slashed the license fee for third-generation (3G) mobile Internet services by 60 percent to US$10 million in order to raise market penetration, and announced that it would not charge for an upgrade to 4G. The wider applications of ICT are starting to reshape the structure of the economy, especially in the financial sector.

The ICT sector is eyeing a boom in business once the government devolves services to the county level after the March 2013 elections, especially if the government makes more public services available online. Kenya’s new 47 county governments will require better and faster data services to connect with one another and the national government. Moreover, citizens likely will demand more services to be provided online, which will increase public sector demand for ICT hardware and software. Experts have cited power shortages, costly devices, and data usage rates as some of the main issues impeding Internet use. With over 20,000 kilometers of fiber laid across the country, connectivity of this traffic to retail customers still remains a challenge.

Tourism surpassed the pre-election levels with 1.26 million arrivals recorded in 2011, but growth in 2012 is expected to be flat. Consolidated tourist arrivals through airports from January through to September were 906,960 representing a 2.7 percent dip with 932,193 arrivals recorded in 2011 at the same period. Among the key source markets, only India, the United States, and China registered positive growth in 2012, according available statistic for the first three quarters of 2012. Tourist arrivals declined marginally by 0.5 percent for the first quarter of 2012, following the murder and kidnapping of foreign tourists in the northern coastal area of Lamu in late 2011. Several foreign governments issued travel advisories, leading to lower resort and hotel bookings by foreign tourists. Mombasa, located on the southern coastal area, also recorded a decline in the number of tourists in the first eight months of 2012. Contributing factors included incidents of terrorism and activities of the secessionist Mombasa Republican Council (MRC); lower arrivals from Europe due to the economic impact of the Euro-zone crisis; and withdrawal of charter flights to Mombasa as well as other international airlines operating flights to Kenya.[2]

The Kenyan government focuses its investment promotion on opportunities that earn foreign exchange, provide employment, promote backward and forward linkages, and transfer technology. The only significant sectors in which investment (both foreign and domestic) are constrained are those where state corporations still enjoy a statutory monopoly. These monopolies are restricted almost entirely to infrastructure (e.g., power, telecommunications, and ports), although there has been partial liberalization of these sectors. For example, in recent years, five Independent Power Producers (IPPs) have begun operations in Kenya.

In late 2010, the ratings agency Standard & Poor’s (S&P) upgraded Kenya’s sovereign debt rating to B+/B (long-term/short-term) with a stable outlook. The rating is based on S&P’s “expectation of continued political stability, fairly resilient economic growth, improving inflation performance, and continued moderately high deficits, but with more spending on growth-enhancing infrastructure investment.” S&P could lower the rating if “political tensions were to flare up, significant currency pressures were to re-emerge, or fiscal or monetary performances were to deteriorate significantly.”

In November 2012, Moody’s initiated coverage of Kenya, Nigeria, and Zambia. The rating agency assigned Kenya a long-term foreign and local currency rating of ‘B1’ with a stable outlook. It cited economic resilience in the face of various shocks in recent years and a commitment to governance reforms as underpinning the rating. Moody’s also said that even though the debt burden was high, the government had followed prudent fiscal policies in recent years. The report also highlighted risks from the 2013 election, increased activity of militants, a widening current account deficit, and volatile short-term flows. For future Moody’s upgrades, the country needs to diversify the economy and make ‘significant improvements’ in strengthening financial institutions. The country risks a downgrade if there is prolonged political instability following the 2013 election or deterioration in overall security. Moody’s rating is similar to the ‘B+’ rating of S&P and Fitch, so this rating affirms the views expressed by other agencies.

The respective roles of the public and private sectors have evolved since independence, with a shift in emphasis from public investment to private sector-led investment. The Kenyan government has introduced market-based reforms and provided more incentives for both local and foreign private investment. Foreign investors seeking to establish a presence in Kenya generally receive the same treatment as local investors, and multinational companies make up a large percentage of Kenya's industrial sector. Furthermore, there is no discrimination against foreign investors in access to government-financed research, and the government's export promotion programs do not distinguish between local and foreign-owned goods. The ability of foreigners to lease land classified as agricultural is restricted by the Land Control Act. Consequently, the Land Control Act serves as a barrier to any agro-processing investment that may require land. Exemption from this act can be acquired via a presidential waiver, but the opaque process has led to complaints about excessive bureaucracy and patronage.

The Companies Ordinance, the Partnership Act, the Foreign Investment Protection Act, and the Investment Promotion Act of 2004 provide the legal framework for foreign direct investment (FDI). To attract investment, the Kenyan government enacted several reforms, including: abolishing export and import licensing, except for a few items listed in the Imports, Exports and Essential Supplies Act; rationalizing and reducing import tariffs; revoking all export duties and current account restrictions; introducing a free-floating exchange rate; allowing residents and non-residents to open foreign currency accounts with domestic banks; and removing restrictions on borrowing by foreign as well as domestic companies. In 2005, the Kenyan government reviewed its investment policy and launched a private sector development strategy. One component of this effort was a comprehensive policy review by UNCTAD that was the basis for the 2005 UNCTAD Investment Guide to Kenya, published in conjunction with the International Chamber of Commerce (ICC).

Kenya's investment code, articulated in the Investment Promotion Act of 2004, which came into force in 2005, streamlined the administrative and legal procedures to create a more attractive investment climate. The Act’s objective is to attract and facilitate investment by assisting investors in obtaining the licenses necessary to invest and by providing other assistance and incentives. The Act replaced the government's Investment Promotion Center with the Kenya Investment Authority (KenInvest); however, the law also created some new barriers. It set the minimum foreign investment threshold at US$500,000 and conditioned some benefits on obtaining an investment certificate from KenInvest. The government later revised the minimum foreign investment threshold to US$100,000 as an amendment to the act. The minimum investment requirement is likely to deter foreign investment, especially in the services sector, which is normally not as capital-intensive as the agriculture and manufacturing sectors. Another amendment made the foreign investment certificate requirement optional.

Further regulatory reforms include the Licensing Act of 2007, which eliminated or simplified 694 licenses, and a 2008 reduction in the number of licenses required to set up a business from 300 to 16. The Business Regulation Act of 2007 established a Business Regulatory Reform Unit within the Ministry of Finance to continue the deregulation process. In 2009, Kenya launched a national e-Registry to ease business license processing and help improve transparency.

A law passed in June 2007 reduced the maximum share of foreign ownership for companies listed on the Nairobi Stock Exchange (NSE) from 75 percent to 60 percent, creating a disincentive for foreign-owned firms interested in an NSE listing. Although the regulation is not applicable retroactively, it does compel companies with a foreign presence of more than 60 percent to downgrade foreign shareholding before they can apply to the NSE, effectively barring these firms from selling excess shares to non-Kenyans.

Work permits are required for all foreign nationals wishing to work in the country. The Kenyan government issues permits for key senior managers and personnel with special skills not available locally. Firms seeking to hire expatriates must demonstrate that the requisite skills are not available locally through an exhaustive search, although the Ministry of Labor plans to replace this requirement with an official inventory of skills that are not available in Kenya, as discussed below. Firms must also sign an agreement with the government describing training arrangements for phasing out expatriates.

A number of infrastructural, regulatory, and security-related constraints prevent the Kenyan economy from realizing its potential. The 2012 UNCTAD Investment Guide to Kenya provides comprehensive analyses of investment trends, opportunities, and the regulatory framework in the country According to this guide, Kenya faces several key structural challenges, most notably the absence of a reliable and affordable power supply. Many companies invest in costly backup generators to ensure a steady supply of electricity. Tax administration is another significant concern. Investors often face delays in obtaining VAT and other withholding refunds, and the customs clearance process can be drawn out as goods are subject to a multiplicity of inspections. Insecurity driven by domestic and foreign factors is another major concern, though the Kenyan government has taken important steps recently to improve its ability to monitor and respond to security incidents.

An April 2008 survey conducted by the Kenya Association of Manufacturers (KAM), identified constraints similar to those in the UNCTAD report and concluded that Kenya's business climate generally is hostile. According to KAM, energy costs in Kenya constitute as much as 40 percent of total manufacturing costs. Manufacturers in Kenya pay an average of US$0.134/kW of electricity, but their counterparts in Egypt pay US$0.05/kW. KAM reported that because of the costly investment climate, a number of companies have opted to shift from manufacturing to trading, while others have abandoned the Kenyan market altogether. After examining firms’ decisions to close or relocate over the past decade, KAM deemed that legitimate commerce in Kenya is inhibited by:

(a) unfair foreign competition, which dumps counterfeit and pirated products (cosmetics, toiletries, batteries, tires, car parts, medicines, books, electronic media, and software) and secondhand clothes and shoes into the market; passes off new footwear and other apparel items as secondhand to avoid tariffs; and under-invoices imports;

(b) the high cost of manufacturing due to exorbitant electricity tariffs, poor infrastructure (notably roads and rails), and hefty transport costs;

(c) periodic unavailability of raw materials such as crude oil;

(d) labor laws that compel private companies, rather than government, to provide their employees with a social safety net, including paternity and maternity leave and health care, all of which is taxable;

(e) low productivity, lack of worker discipline, and strong labor unions focused on obtaining higher wages and benefits;

(f) onerous licensing requirements and harassment over petty demands (which could be interpreted as demands for bribes); and

(g) the failure of the Kenya Revenue Authority (KRA) to process corporate tax and value added tax (VAT) refunds expeditiously.

KAM noted that Kenya’s export markets have also been diversified away from an over-reliance on Europe to regional markets in Africa. According to the Kenya Economic Survey 2012, Africa is the dominant export destination for Kenyan goods, while Asia is the leading source of Kenya’s imports. Currently Kenya exports three times more than it did 10 years ago—mostly manufactured goods and services—to new markets rather than unprocessed products they sold traditionally.

A recent survey of 145 CEOs by the Kenya Private Sector Alliance (KEPSA) found that high energy costs, the high cost of credit, and insecurity are major constraints for Kenyan businesses. Energy topped the list, with 63 percent of surveyed CEOs citing the cost of electricity as a key concern; 61 percent mentioned the high cost of credit, and 59 percent mentioned insecurity. Other major concerns were high taxes (54 percent), political instability (50 percent), and poor infrastructure (48 percent). Kenyan CEOs were somewhat less optimistic than their Ugandan and Tanzanian counterparts, with 53.8 percent indicating they are confident about future economic prospects, compared to 65.8 in Uganda and 65.4 in Tanzania. This reflects a significant decrease from the last KEPSA survey, conducted in February 2010, in which 68.6 percent of Kenyan executives expressed confidence. The chairman of KEPSA attributed the decrease to uncertainty regarding the March 2013 elections.

The Kenyan government has taken a number of steps to make the country more appealing for foreign and domestic private investment. In August 2008, Prime Minister Raila Odinga began holding quarterly meetings as part of a public-private dialogue called the "National Business Agenda" with the chairpersons of KAM, KEPSA, the East Africa Business Council (EABC), and other business leaders to discuss how to improve the country's business climate. As a result of the first meeting, Prime Minister Odinga and President Mwai Kibaki ordered that the Port of Mombasa operate on a 24-hour basis, the number of roadblocks and weigh stations on the Mombasa-Nairobi-Busia Northern Corridor Highway be dramatically reduced, and that the Kenya Ports Authority (KPA), the Kenya Bureau of Standards (KEBS), and the KRA harmonize their regulations and adopt a common accreditation and computerized clearance system to expedite cargo inspection and clearance. The government dealt with the port and roadblock issues, and continues to address harmonization issues. Subsequently, President Kibaki and then-Acting Finance Minister John Michuki ordered that VAT be reduced or eliminated on energy inputs. The Treasury announced in late November 2008 that it would suspend a 120 percent excise duty on the manufacture of plastics.

In keeping with its privatization strategy, the government announced in mid-December 2008 that it would sell its shares in 16 parastatals, including the National Bank of Kenya, the Kenya Electricity Generating Company (KenGen), the Kenya Pipeline Company, the KPA, and various sugar, cement, dairy, wine, and meat processing firms. The government also put hotels owned by the Kenya Tourism Development Authority up for sale in 2009. In December 2008, the Cabinet approved the proposed legal and institutional framework for public-private partnerships, thereby authorizing private firms to sign management contracts, leases, concessions, and/or build-own-operate-transfer (BOOT) agreements with the government on various infrastructure projects such as water, energy, ports, and roads.

The process of privatizing government parastatals to finance a budget deficit stalled in 2010 after Parliament declined to ratify names submitted for the Privatization Commission by then-Finance minister Uhuru Kenyatta on the basis that the appointments violated standing procedures. In November 2011, Finance Minister Njeru Githae appointed members of the commission, clearing the way for the sale of government assets. The newly installed Privatisation Commission’s plan to sell 23 state-owned assets has received Cabinet’s approval. Three state-owned hotels, five sugar companies and government-owned Kenya Wine Agencies are top on the list of assets to be privatized.

High taxes are a further hindrance to competitiveness for firms operating in Kenya. Consequently, tax evasion is a major concern for the KRA. Kenya has a large number of unregistered or informal businesses known as “jua kali,” which according to the government’s 2012 Economic Survey engages approximately 80.6 percent of the workforce. In 2013, the KRA is expected to fully roll out an online system to register, file returns, and make payments which is expected to ease tax compliance for businesses in Kenya.

According to the Paying Taxes 2013 report by World Bank, International Finance Corporation (IFC), and PricewaterhouseCoopers (PwC), Kenya is ranked 164th of 185 countries overall for the ease of paying taxes.[3] Kenya’s total tax rate of 44.4 percent is comprised of 28.1 percent tax on profits, 6.8 percent on labor, and 9.5 percent on other taxes. Regionally, Kenyan firms carry a heavy tax burden, ahead of Tanzania (45.3 percent) and Burundi (53.0 percent), but trailing Uganda (37.1 percent) and Rwanda (31.3 percent). According to the study, Kenya has five different tax payment dates each month for VAT, corporate profits, withholdings, social security, and health. In total, Kenyan firms have to contend with 41 different tax payments cutting across 16 tax regimes, which take 340 person-hours to file, compared to the global average of 27 tax payments and 267 hours.

Branches of non-resident companies pay tax at the rate of 37.5 percent; the government generally defines taxable income to be income sourced in or from Kenya. VAT is levied on goods imported into or manufactured in Kenya, and on taxable services provided. The standard VAT rate is 16 percent, although the rate charged on a given transaction varies depending on a range of factors. Discussion by the government on VAT in early 2011 focused on reducing or eliminating exemptions to create a broader revenue base rather than raising rates.

In March 2011, the Kenya Revenue Authority (KRA) received the ISO 9001:2008 system certification standard for the scope ‘assessment and collection of revenue for the administration and enforcement of the laws relating to revenue and for connected purposes.’ The ISO 9001:2008 standard is the latest publicly available and internationally recognized set of benchmark standards for customer focused quality management principles.

Kenya was formally admitted as a full member of the Inter American Centre of Tax Administration (CIAT) during the 45th General Assembly held in Quito, Ecuador in April 2011. The KRA has been actively involved in CIAT and other major international organizations responsible for setting international standards and best practices in revenue administration.

After Kenya joined the Global Forum on Transparency and Exchange of Information for Tax Purposes in July 2010, the KRA also became a member of the Forum’s Advisory Panel. This Panel advises the Forum’s Steering Committee on strategies to help developing countries combat international tax avoidance.

KRA and the Directorate of Customs & Excise (DGDA) of the Democratic Republic of Congo signed a Memorandum of Understanding (MOU) in Nairobi, Kenya in March 2011. The MOU will enable KRA and DGDA to work more closely towards achieving productive working relations, enhancing enforcement activities and mobilizing revenue collection for both Kenya and the DRC. The cooperation and administrative assistance within the framework of the MOU will be implemented within the national laws and customs regulations in combating offences detrimental to Kenya and the DRC. The MOU will also enhance prevention of transnational organized crimes that range from smuggling to proliferation of weapons of mass destruction and terrorism.

In 2011, KRA introduced an online PIN and tax compliance certificate (TCC) verification system. Over the years, the PIN has become a vital document for any individual or company wishing to conduct various transactions, including opening a bank account, registering a title deed, and obtaining various government approvals. Other PIN-required services include importation of goods, payment of deposits for power connections, and government contracts for goods and services. Similarly, a TCC is mandatory for businesses that conduct transactions with government agencies and public bodies. The new verification system, known as the PIN & TCC Checker, enables the public to verify PIN and TCC for authenticity and validity. The KRA introduced the facility following numerous complaints of fake PINs and TCCs in circulation. The TCC is issued to business companies with a clean tax record and is normally valid for a period of six months.

In 2008, President Kibaki signed into law the Anti-Counterfeit Act, which established a dedicated Anti-Counterfeit Agency and created a strong legal framework to combat the widespread trade in counterfeit goods, most often imported to Kenya from Asia. In June 2010, the Ministry of Industrialization launched the Anti-Counterfeit Agency (ACA), which has since struggled to build capacity as a result of insufficient funding. The ACA’s effectiveness is hindered by a lack of clarity regarding its role and relationship to other Kenyan agencies with a stake in intellectual property protection, such as KRA, the Kenya Bureau of Standards (KEBS), the Kenya Copyright Board, and the Pharmacy and Poisons Board. Interagency cooperation has proved difficult. Furthermore, the government has yet to adopt regulations to guide implementation of the Act.

In a separate attempt to combat the importation of counterfeits, the Ministry of Industrialization and the KEBS decreed in 2009 that all locally manufactured goods must have a standardization mark issued by KEBS, and several categories of imported goods, specifically food products, electronics, and medicines, must have an import standardization mark (ISM). Under this new program, U.S. consumer-ready products may enter the Kenyan market without altering the U.S. label under which the product would normally be marketed in the United States but must also carry an ISM. Once the product qualifies for a Confirmation of Conformity, however, KEBS will issue the ISM free of charge. The legislative body of the East African Community (EAC) is currently considering a regional anti-counterfeiting bill, which would harmonize these laws across the five member-states as well as increase the authority of port countries like Kenya to inspect and seize suspicious transit good shipments destined for neighboring land-locked countries.

The East Africa Community (EAC), which includes Kenya, Tanzania, Uganda, Rwanda, and Burundi, aims to widen and deepen cooperation among the member-states in political, economic, social, and other fields for mutual benefit. Together, these countries represent a significant economic bloc with a combined population of more than 133 million and a combined gross domestic product of US$79 billion. While integration has progressed slowly, the regional group has the potential to become a significant economic and geopolitical player. The EAC Customs Union and Common Market officially came into effect in January and July 2010, respectively, but actual implementation will take a substantial amount of time. Discussions regarding a Monetary Union, and ultimately a Political Federation, have stalled, and are viewed by many observers as unrealistic in the near-term.

EAC member states, including Kenya, have not passed many of the laws required to fully implement the Common Market protocol, and enforcement of the Customs Union at border crossings is inconsistent. Among the issues to be resolved are centralized collection of revenue at the first point of entry into the EAC and management of transit cargo in a borderless region. Non-tariff barriers (NTBs) also remain an obstacle to greater EAC integration. A November 2012 report from Trademark East Africa and Transparency International-Kenya focuses on bribery as a major NTB in the EAC where bribery is an expected expense for transportation businesses.[4]

The EAC has made slow progress towards implementing a Monetary Union and subsequently missed the deadline originally set for 2012. EAC member states have had difficulty agreeing on coordinated approaches to budgets, inflation, foreign exchange reserves, government debts, and exchange rates, harmonization of which will be critical to formation of a Monetary Union with a common currency. Some of the institutions still to be established include a Customs Union Authority, Common Market Authority, Monetary Union Authority, Central Bank for the Monetary Union, and a Unified Federal Treasury.

Kenya rose to a rank of 139 out of 176 countries from 154 out of 183countries on Transparency International’s (TI) 2012 Corruption Perceptions Index, due to a marginal increase in its score from 2.1 to 2.2. The 2012 Heritage Foundation Index of Economic Freedom places Kenya 103rd out of 179 countries, an increase of three places compared to the 2011 ratings, despite its score remaining virtually unchanged at 57.5 compared to 57.4 in 2011. The 2013 World Bank Doing Business Survey placed Kenya at 121, a drop of 4 places compared to 2012 and a drop of 37 places since 2009. Kenya’s Millennium Challenge Corporation (MCC) scorecard for fiscal year 2013 shows modest gains in government effectiveness, rule of law, control of corruption, land rights and access, and regulatory quality compared to 2012.[5]

If a scroll bar appears below the following table, swipe the table to move left/right of the dashed line.

Measure

Year

Index/Rating

TI Corruption Index

2012

139 out of 176

Heritage Foundation’s Economic Freedom Index

2012

103 out of 179

World Bank’s Doing Business Report

2013

121 out of 185

MCC Gov’t Effectiveness

2013

0.34 (78%)

MCC Rule of Law

2013

-0.10 (44%)

MCC Control of Corruption

2013

-0.04 (47%)

MCC Fiscal Policy

2013

-4.8 (25%)

MCC Trade Policy

2013

66.7% (48%)

MCC Regulatory Quality

2013

0.60 (93%)

MCC Business Start Up

2013

0.907 (53%)

MCC Land Rights Access

2013

0.71 (90%)

MCC Natural Resources Management

2013

67.0 (60%)

Conversion and Transfer Policies

Kenya is an open economy with a liberalized capital account and a floating exchange rate.

Kenya’s Foreign Investment Protection Act (FIPA) guarantees capital repatriation and remittance of dividends and interest to foreign investors, who are free to convert and repatriate profits including un-capitalized retained profits (proceeds of an investment after payment of the relevant taxes and the principal and interest associated with any loan). Kenya has no restrictions on converting or transferring funds associated with investment. Kenyan law requires the declaration of amounts above Ksh 500,000 (US$5,920) as a formal check against money laundering. Foreign exchange is readily available from commercial banks and foreign exchange bureaus and can be freely bought and sold by local and foreign investors. The Kenyan shilling has a floating exchange rate tied to a basket of foreign currencies. A floating exchange rate policy was adopted in Kenya in 1993, allowing the central bank to conduct an independent monetary policy to fight inflation. Interaction between economic agents and firms determine the relative prices between the domestic and foreign currencies (the exchange rate) with the domestic price level left indeterminate. The existing framework requires that the Treasury specifies a price target to be pursued by the Central Bank of Kenya (CBK). The CBK coordinates monetary policy and expectations towards the achievement of the target. This has enhanced the evolution of monetary policy and increased transparency.

Since 2008, Kenya’s foreign exchange market has experienced, either directly or through contagion effects, six major shocks of differing magnitudes attributable to a number of factors, including: the post-election violence of 2007-2008, the Safaricom initial public offering (IPO) of 2008, the U.S. subprime mortgage crisis in late 2008, the Greek debt and Irish banking crises of 2010, and the oil price surge arising from the political instabilities in the Middle East and North Africa region. In 2011, turbulence in the U.S. and European debt markets sparked a flight to safety, as international investors converted their liquid asset holdings to currencies considered ‘safer’.

The shilling was relatively stable in recent years until late 2007, when it increased significantly in value against the dollar, trading briefly below 60 to the dollar. In the aftermath of the 2008 post-election violence, both the economy and the shilling suffered a serious decline. The shilling stabilized in 2009 and 2010, trading between Ksh 75 and Ksh 82 to the dollar, but high inflation and other factors contributed to severe exchange rate volatility in late 2011. The shilling depreciated to Ksh 107 to the dollar in October 2011 and then appreciated to nearly Ksh 80 to the dollar in late December 2011 as a result of aggressive central bank intervention and lower global prices on imported commodities.

To anchor inflationary expectations and stabilize the exchange rate, the CBK’s Monetary Policy Committee (MPC) shifted to a tight monetary policy stance in March 2011. The MPC raised the Central Bank Rate (CBR) to 18.00 percent in December 2011 and lifted the banks’ cash reserve ratio (CRR) from 4.75 percent to 5.25. In July 2012, the MPC began to lower the CBR which ended 2012 at 11 percent. The decline of year-on-year inflation, which dropped to 3.2 percent in December 2012 from a high of 19.72 percent in November 2011, has given the MPC room to relax monetary policy, which should stimulate credit demand and economic growth. Commercial banks have also lowered their lending rates, though spreads remain on average at approximately 17 percent, as of November 2012.

Expropriation and Compensation

Kenyan investment law is modeled on British investment law. The Companies Act, the Investment Promotion Act, and the Foreign Investment Act are the main pieces of legislation governing investment in Kenya. Kenyan law provides protection against the expropriation of private property, except where due process is followed and adequate and prompt compensation is provided. Various bilateral agreements with other countries also guarantee further protection. Expropriation may only occur for either security reasons or public interest. The Kenyan government may revoke a foreign investment license if (1) an untrue statement is made while applying for the license; the provisions of the Investment Promotion Act or of any other law under which the license is granted are breached; or, if (2) there is a breach of the terms and conditions of the general authority. The Investment Promotion Act of 2004 provides for revocation of the license in instances of fraudulent representation to KenInvest by giving a written notice to the investor granting 30 days from the date of notice to justify maintaining the license. In practice, KevInvest rarely revokes licenses.

Judicial System

Kenya’s judicial system is modeled after the British, with magistrates’ courts, high courts in major towns, and a Court of Appeal at the apex of the judicial system. Immediately below the high courts are subordinate courts consisting of the Khadis Courts, the Resident Magistrate’s Courts, the District Magistrate’s Courts, and the Court Martial (for members of the Armed Forces). In addition, a separate Industrial Court hears disputes over wages and labor affairs. Petitioners cannot appeal its decisions, except on procedural grounds. Kenya also has Commercial Courts to deal with commercial disputes. The Companies Act of 1948 provides the foundation for company and investment law. Property and contractual rights are enforceable, but long delays in resolving commercial cases are common.

The new constitution, when fully implemented, will change the court system dramatically. Kenya now has a Supreme Court, a Court of Appeal, a Constitutional Court, and a High Court. In addition, the subordinate courts, Magistrates, Khadis, and Courts Martial, will remain, as will the Commercial Court. The former Industrial Court has been replaced with an Employment Relations Court that has expanded authority to hear individual employment-related complaints.

The Foreign Judgments (Reciprocal Enforcement) Act provides for the enforcement in Kenya of judgments given in other countries that accord reciprocal treatment to judgments given in Kenya. Kenya has entered into reciprocal enforcement agreements with Australia, the United Kingdom, Malawi, Tanzania, Uganda, Zambia, and Seychelles.

Without such an agreement, a foreign judgment is not enforceable in the Kenyan courts except by filing suit on the judgment. Kenyan courts generally recognize a governing-law clause in an agreement that provides for foreign law. A Kenyan court would not give effect to a foreign law if the parties intended to apply it in order to evade the mandatory provisions of a Kenyan law with which the agreement has its most substantial connection, and which the court would normally have applied.

Foreign advocates are not entitled to practice in Kenya unless a Kenyan advocate instructs and accompanies them, although a foreign advocate may practice as an advocate for the purposes of a specified suit or matter if appointed to do so by the Attorney General. All advocates in private practice are members of the Law Society of Kenya (LSK). Advocates in public service are not required to join LSK.

Dispute settlement

The legal system in Kenya is adversarial, and most disputes are resolved through litigation in court; although arbitration and alternative dispute resolution, which are governed by the Arbitration Act, are becoming increasingly popular. Parties opting to refer their present or future differences to arbitration must include an arbitration clause in their agreement. The authority of an arbitrator appointed by virtue of such an agreement is irrevocable, except by leave of the High Court or unless a contrary intention appears in the agreement. Facilities for alternative dispute resolution are provided by Kenya’s Dispute Resolution Centre. In addition, The Chartered Institute of Arbitrators has a Kenya chapter.

Kenya is also a member of the International Centre for the Settlement of Investment Disputes (ICSID), a World Bank agreement for the settlement of disputes between States and Nationals of other States. Under this agreement, Kenya is required to recognize ICSID arbitral awards.

The Foreign Judgments (Reciprocal Enforcement) Act (Chapter 43, Laws of Kenya) provides for the enforcement in Kenya of judgments given in other countries that accord reciprocal treatment to judgments given in Kenya. The countries with which Kenya has entered into reciprocal enforcement agreements are Australia, Malawi, Rwanda, Seychelles, United Republic of Tanzania, Uganda, the United Kingdom and Zambia. Without such an agreement, a foreign judgment is not enforceable in the Kenyan courts except by filing suit on the judgment.

Kenyan courts would, as a general rule, recognize a governing-law clause in an agreement that provides for foreign law. However, the selection of such a law must be real, genuine, bona fide, legal and reasonable. A Kenyan court would not give effect to a foreign law if the parties intended to apply it in order to evade the mandatory provisions of a Kenyan law with which the agreement has its most substantial connection and which, for this reason, the court would normally have applied.

Bankruptcies are governed by the Bankruptcy Act (2009); creditors' rights are comparable to those in other common law countries. Monetary judgments typically are made in Kenyan shillings. The government does accept binding international arbitration of investment disputes with foreign investors. In addition to being a member of the ICSID, Kenya is a party to the New York Convention on the Enforcement of Foreign Arbitral Awards (1958).

Kenya is a member of the World Bank-affiliated Multilateral Investment Guarantee Agency (MIGA), which issues guarantees against non-commercial risk to enterprises that invest in member countries. It is also a signatory to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, which established ICSID. Kenya is also a member of the Africa Trade Insurance Agency (ATIA), as well as many other global and regional organizations and treaties, including the Common Market for Eastern and Southern Africa (COMESA); the Cotonou Agreement between the European Union and the African, Caribbean and Pacific States (ACP); the East African Community (EAC); the Paris Convention on Intellectual Property, the Universal Copyright Convention, and the Berne Copyright Convention; the World Intellectual Property Organization (WIPO); and the World Trade Organization (WTO). Kenya has also signed double taxation treaties with a number of countries, including Canada, China, Germany, France, Japan, Netherlands, and India. On November 27, 2007, Kenya joined with its EAC sister states in signing the first-ever interim economic partnership agreement (EPA) with the European Community (EC). EPA negotiations between Kenya and the European Union are ongoing. The EAC signed a Trade and Investment Framework Agreement (TIFA) with the United States in 2008. In October 2012, the EAC and the United States launched talks on a new trade and investment partnership that includes a regional investment treaty, a commercial dialogue, and a trade facilitation agreement. Kenya is an active beneficiary of trade preferences under the African Growth and Opportunity Act (AGOA) particularly in textiles and apparel.

Performance Requirements and Incentives

Investors in the manufacturing and hotel sectors are able to deduct from their taxes a large portion of the cost of buildings and capital machinery. The government allows all locally financed materials and equipment (excluding motor vehicles and goods for regular repair and maintenance) for use in construction or refurbishment of tourist hotels to be zero-rated for purposes of VAT calculation. The Ministry of Finance permanent secretary must approve such purchases. The government permits some VAT remission on capital goods, including plants, machinery, and equipment for new investment, expansion of investment, and replacement. The investment allowance under the Income Tax Act is set at 100 percent. Materials imported for use in manufacturing for export or for production of duty-free items for domestic sale qualify for the investment allowance. Approved suppliers, who manufacture goods for an exporter, are also entitled to the same import duty relief. The program is also open to Kenyan companies producing goods that can be imported duty-free or goods for supply to the armed forces or to an approved aid-funded project.

Firms operating in Export Processing Zones (EPZ) are provided a 10-year corporate tax holiday and 25 percent tax rate thereafter (the statutory corporate tax rate is 30 percent, but the overall tax rate is 44.4 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; exemption from pre-shipment inspection; availability of on-site customs inspection; and work permits for senior expatriate staff. Kenya’s EPZ law allows manufacturers and service providers to sell up to 20 percent of their output in the domestic market. Manufacturers are liable for all taxes on products sold domestically, however, plus a 2.5 percent surcharge.

By the end of 2011, Kenya had 44 designated EPZs in which 79 companies were operating. Most EPZ firms operate in factory space managed by the EPZ Authority (EPZA). According to figures provided by the EPZA for 2011, EPZ firms employed 32,043 Kenyans and 421 expatriates, who typically serve in mid to senior-level management roles. EPZ firms exported goods worth US$438.2 million in 2011, or roughly 8 percent of total Kenyan exports.

The preferential access and duty free status accorded to Kenyan apparel exports under AGOA fueled an increase in the number of textile factories in Kenya, which along with handicrafts, constitute the bulk of Kenya’s exports under AGOA. EPZ firms servicing AGOA-related contracts employ nearly 80 percent of all EPZ workers and account for roughly 50 percent of total EPZ exports. Kenyan EPZ firms exporting under AGOA employed 25,169 workers directly in 2011, and exported goods worth nearly US$236 million, according to the EPZA.

In order to better take advantage of AGOA, in 2011 Kenya’s Ministry of Trade launched an AGOA Unit charged with developing and implementing a national AGOA strategy; conducting research and market analysis to inform AGOA policies and activities; identifying products for potential export under AGOA; advising the Minister of Trade on all AGOA-related matters; performing regional and county-level outreach to educate the Kenyan public about AGOA; and liaising with AGOA stakeholders across the Kenyan government and within the private sector and civil society.

The government’s Manufacturing Under Bond (MUB) program is meant to encourage manufacturing for export by exempting participating enterprises from import duties and VAT on imported plant, machinery, equipment, raw materials, and other imported inputs. The program also provides a 100 percent investment allowance on plant, machinery, equipment, and buildings. Participating companies must export goods produced under the MUB system. If not exported, the goods are subject to a surcharge of 2.5 percent, and imported inputs used in their production are subject to all other tariffs and other import charges. The program is open to both local and foreign investors, and is administered by the KRA.

Under the Firearms Act and the Explosives Act, manufacturing and dealing in firearms (including ammunition) and explosives requires special licenses from Chief Firearms Licensing Officer and the Commissioner of Mines and Geology, respectively. Technology licenses are subject to scrutiny by the Kenya Industrial Property Institute (KIPI) to ensure that they are in line with the Industrial Property Act. Licenses are valid for five years and are renewable. Manufacturing and dealing in narcotic drugs and psychotropic substances is prohibited under the Narcotics Drugs and Psychotropic Substances Act.

The government does not steer investment to specific geographic locations but encourages investments in sectors that create employment, generate foreign exchange, and create forward and backward linkages with rural areas. The law applies local content rules but only for purposes of determining whether goods qualify for preferential duty rates within COMESA and the EAC.

Although Kenya does not generally set minimums for Kenyan ownership of private firms or require companies to reduce the percentage of foreign ownership over time, a number of sectors do face restrictions. According to the World Bank’s 2010 Investing Across Borders Report, Kenya restricts foreign ownership in more sectors than most other economies in sub-Saharan Africa. Foreign ownership of insurance and telecommunications companies is restricted to 66.7 percent and 80 percent, respectively, although the government allows telecommunications companies a three-year grace period to find local investors to achieve the local ownership requirements. There is discussion of scrapping the local ownership policy in telecommunications entirely. Foreign equity in companies engaged in fishing activities is restricted to 49 percent of the voting shares under the Fisheries Act. In June 2007, the level of foreign ownership allowed for companies seeking a listing on the NSE was decreased from 75 to 60 percent. This change was not applied retroactively. Foreign investors are free to obtain financing locally or internationally. As noted above, there is no discrimination against foreign investors in access to government-financed research, and the government's export promotion programs do not distinguish between local and foreign-owned goods.

Right to Private Ownership and Establishment

Private enterprises can freely establish, acquire, and dispose of interest in business enterprises. The Kenyan legal system is quite flexible on exit options, which normally are determined by the agreement that the investor has with other investors. The Companies Act specifies how a foreign investor may exit from an incorporated company. In practice, a company faces no obstacles when divesting its assets in Kenya, if the legal requirements and licenses have been satisfied. The Companies Act gives the procedures for both voluntary and compulsory winding-up processes. Many U.S. companies remain in the market and continue to do well. The typical reason given for a firm closing its factories in Kenya is restructuring to cut costs and improve efficiency in its African markets. The high cost of production as a result of poor infrastructure, inadequate protection of intellectual property rights, and unreliable and expensive electrical power continues to frustrate Kenya’s manufacturing sector, even as economic growth forges ahead.

As noted above, the Land Control Act restricts the ability of foreigners to own or lease land classified as agricultural, and requires a presidential waiver. Furthermore, under the new constitution only Kenyan citizens, whether male or female, or incorporated companies whose majority shareholders are Kenyan citizens may own land; foreigners are restricted to 99 year leases. Since January 2003, the government sought to nullify all illegally acquired land. The question of title to land acquired irregularly under the Moi government is the subject of continued controversy. This issue is of particular importance to overall economic performance and access to credit as land secures approximately 80 percent of bank loans in Kenya.

Kenya has a long history of land-related conflict and corruption. Despite the agreement that ended the 2007-2008 post-election violence, there has been considerable delay in implementing land reforms. Agenda 4 of the National Accord that formed the Grand Coalition Government in 2008 sought to address historical injustices in terms of land ownership and distribution. Many land transactions continue to suffer delay since the moratorium placed on public and trust/community land by the Cabinet in 2012 will only cease when members of the newly appointed National Land Commission (NLC) take office. The NLC was created to manage public land, advise the government on land policy, and investigate and recommend solutions to current and historical land-related conflicts or injustices.

Protection of Property Rights

Secured interests in property are recognized and enforced. In theory, the legal system protects and facilitates acquisition and disposition of all property rights, including land, buildings, and mortgages. In practice, obtaining a title to land is a cumbersome and often non-transparent process, which is a serious impediment to new investment, frequently complicated by improper allocation of access and easements to third parties. There is also a general unwillingness of the courts to permit mortgage lenders to sell land to collect debts.

Kenya has a comprehensive legal framework to ensure intellectual property rights (IPR) protection, which includes the Anti-Counterfeit Act, the Industrial Property Act, the Trade Marks Act, the Copyright Act, the Seeds and Plant Varieties Act, and the Universal Copyright Convention. However, enforcement of IPR continues to lag far behind legislation, and the widespread sale of counterfeit goods continues to do significant damage to foreign businesses operating in Kenya. Furthermore, Kenyan authorities are limited in their ability to inspect and seize transit shipments of counterfeit products, which the authorities believe often find their way back into Kenya.

As noted above, the 2008 Anti-Counterfeit Act created the Anti-Counterfeit Agency (ACA), which officially opened its doors in 2010, as the lead agency for IPR enforcement[6]. Insufficient funding and the conspicuous absence of implementing regulations to accompany the act continue to constrain the Agency’s effectiveness. Independent investigations have proven nearly impossible for the ACA given its current budget and the prohibitively high cost of environmentally sound destruction of seized products, meaning counterfeit goods remain in warehouses where they can be stolen and returned to the market. The Agency is ostensibly responsible for coordinating the efforts of Kenya’s other IPR enforcement bodies, including the Kenya Bureau of Standards (KEBS), the Kenya Copyright Board (KCB, responsible for copyrights), the Kenya Industrial Property Institute (KIPI, responsible for patents, trademarks, and trade secrets), the Pharmacy and Poisons Board (PPB, responsible for medicines). Interagency cooperation has proved difficult to achieve. Despite the challenges, the Agency has made a number of high-profile seizures of counterfeit goods shipments including Bic pens, HP toner cartridges, Eveready batteries, Nokia cellular phones, Adidas shoes, and a range of other products. Furthermore, penalties under the Anti-Counterfeiting Act are much more punitive than under previous IPR laws. However, Kenya’s law enforcement agencies have failed to implement the improved laws and regulations and convictions are rare.

Kenya’s High Court ruled on April 20, 2012 that parts of the 2008 Anti-Counterfeit Act are unconstitutional, in particular the Act’s definition of counterfeit medicines and certain related sections. The Court argued that enforcement of the violating sections could limit access to generic medicines and, as a result, infringe on the fundamental rights to life, human dignity, and health enshrined in the country’s new constitution. ACA has said it plans to appeal and is confident the ruling will be overturned. The Agency also plans to offer up revisions to the Act that would prevent future challenges on similar grounds.

In another effort to combat the manufacture and sale of counterfeits, the Ministry of Industrialization and KEBS implemented a system of standardization marks required for locally manufactured products as well as certain imported goods, discussed below. KEBS also opened the National Quality Institute in 2008 to train business leaders and consumers. Initially KEBS planned that the Institute would offer IPR courses to magistrates who, along with prosecutors, are often unfamiliar with intellectual property law, but the program has not yet been established.

Kenya’s Copyright Act protects literary, musical, artistic, and audio-visual works; sound recordings and broadcasts; and computer programs. The act is enforced by KCB, a parastatal housed under the Attorney General’s Office. Criminal penalties associated with piracy in Kenya include a fine of up to Ksh 800,000 (US$9,470), a jail term of up to ten years, and confiscation of pirated material. Nonetheless, enforcement is spotty and the understanding of the importance of intellectual property remains low. The sale of pirated audio and video is rampant, although there is little domestic production. According to the Business Software Association (BSA), an estimated US$3.5 million is lost every year because of the use of illegal software, mainly by businesses.

Kenya is a member of the World Intellectual Property Organization (WIPO) and of the Paris Union (International Convention for the Protection of Industrial Property), along with the United States and 80 other countries. The African Intellectual Property Organization (AIPO) embodies a future prospect for patent, trademark, and copyright protection, although its enforcement and cooperation procedures are still untested. Kenya is also a member of the African Regional Intellectual Property Organization (ARIPO). Kenya is a signatory to the Madrid Agreement Concerning the International Registration of Marks; however, the other original EAC members (Uganda and Tanzania) are not.

The Kenya Industrial Property Institute (KIPI), housed within the Ministry of Trade and Industry, is responsible for registering and enforcing patents, trademarks, and trade secrets. Investors are entitled to national treatment and priority right recognition for their patent and trademark filing dates. In addition to creating KIPI, the Industrial Property Act of 2002 brought Kenya into compliance with WTO obligations, although implementation of the act remains weak. The Trade Marks Act provides protection for registered trade and service marks; protection under the act is valid for 10 years and is renewable.

In July 2006, the Ministry of Trade and Industry conceded that over Ksh 36 billion (US$405 million) is lost annually due to the sale of counterfeit goods and a further Ksh 6 billion (US$67 million) is lost in tax revenues to the government. A subsequent KAM study, released in late October 2008, concluded that piracy and counterfeiting of business software, music, pharmaceuticals, and consumer goods costs Kenyan firms about US$715 million annually in lost sales. Consequently, KAM estimated that the Kenyan government was losing over US$270 million in potential tax revenues every year. The most current estimates as of late 2011, summarized in a report by the International Peace Institute called “Termites at Work: Transnational Organized Crime and State Erosion in Kenya,” put Kenya’s counterfeit goods trade at US$913.8 million, resulting in lost tax revenue between US$84 million and US$490 million. The technology firm HP estimates losses of US$7.1 million per year due to counterfeits and 60 percent of HP-branded printer cartridge refills sold in East Africa are thought to be fakes imported from China. Battery manufacturer Eveready significantly reduced its Kenyan production due to pressure from counterfeiters.

Transparency of Regulatory System

The government screens each private sector project to determine its viability and implications for the development aspirations of the country; for example, a rural agro-based enterprise, with many forward and backward linkages, is likely to receive licensing quickly. In theory, all investors receive equal treatment in license screening processes. However, new foreign investment in Kenya historically has been constrained by a time-consuming, highly discretionary, and sometimes corrupt approval and licensing system. In response to appeals from the business community in 2007, the government launched a substantial effort to streamline the registration process by reducing the number of required business licenses and simplifying others. The Licensing Act of 2007 initially eliminated or simplified 694 licenses and in 2008, the government reduced the number of licenses to set up a business from 300 to 16. The review of licensing requirements is ongoing, but no further licenses have been eliminated to date. In 2009, the Kenyan government launched an e-Registry, which sped up the registration of new companies, cut regulation costs, and enhanced transparency by allowing easy access to information on registered companies. Nonetheless, the 2013 World Bank’s Doing Business Report placed Kenya at just 121 of 185. Kenya has fallen behind Uganda, but remains ahead of Tanzania for ease of doing business. The World Bank and IFC contend that the government must significantly reduce the cost of doing business, deal with delays at the Port of Mombasa, and eliminate the requirement of even more licenses to maintain Kenya's current level of economic growth.

In August 2011, the Finance Minister put the Competition Act of 2010 into effect, thereby replacing the outdated Monopolies and Price Control Act and the Monopolies and Prices Commission. Specifically, the Act created the Competition Authority, which is an autonomous public institution that has primary jurisdiction over competition and consumer welfare matters in the economy and is the Government’s advisor on competition matters. All mergers and acquisitions require the Authority’s authorization before they are finalized.

In September 2011, in response to rapidly rising food and fuel prices, President Kibaki signed into law a new Price Control (Essential Goods) Act, which granted the Finance Minister the authority to set price ceilings for any goods designated as essential. The Finance Minister has not exercised this authority, however, and many observers believe the act was simply an attempt to appear responsive to public concerns, rather than a meaningful shift in policy.

Kenya lags behind much of Africa with regard to reliability of supply chains, according to a 2012 World Bank survey on trade logistics. Kenya ranked 122nd out of the 155 countries studied for efficiency in key supply chain areas such as customs procedures, cost of logistics, infrastructure quality, and timeliness. Through the Port of Mombasa, Kenya is a major hub for international and regional trade for neighboring land-locked countries such as Uganda, Burundi, and Rwanda. The survey, however, found that the cost of importing or exporting containers in Kenya and other large economies in Africa remains high compared to the global average. According to the World Bank’s Doing Business 2013 report, it takes an average of 26 days and costs US$2,350 to complete import procedures for a standardized container of cargo. It takes 26 days and costs US$2,255 to complete export procedures for a similar container. In addition to insufficient capacity, corruption is thought to be a major contributor to delays at the Port of Mombasa: in order to free up space inside the port, goods are moved to privately-owned container freight stations (CFS) for customs clearing and onward haulage. These CFSs are suspected of serving as a primary conduit for corruption and facilitating illicit trade. Moreover, they have little incentive to clear cargo efficiently, given that storage fees represent a large share of their revenue.

Investors in Kenya are required to comply with environmental standards. The National Environment Management Authority (NEMA) oversees these matters and is the principal environmental regulatory agency. Developers of certain types of projects are required to carry out Environmental Impact Assessments (EIA) prior to project implementation. Companies are required to submit up-to-date assessment reports to NEMA for verification by the agency’s environmental auditors before they can receive an EIA license.

Efficient Capital Markets and Portfolio Investment

The CBK is the primary regulator of financial institutions. As of June 2012, Kenya had 44 banking institutions (43 commercial banks and 1 mortgage finance company), five representative offices of foreign banks, six deposit-taking microfinance institutions (DTMs), 115 forex bureaus and two credit reference bureaus (CRBs). Out of the 44 banking institutions, there are 31 locally owned banks: three with public shareholding and 28 privately owned while 13 are foreign owned. The six DTMs, two CRBs and 115 forex bureaus are privately owned. The foreign owned financial institutions comprise of nine locally incorporated foreign banks and four branches of foreign incorporated banks. Total aggregate financial sector assets grew by 16 percent to Ksh 2.2 trillion (US$26 billion) in the year to June 2012. During the same period, financial sector pre-tax profits grew by 30 percent to more than Ksh 53 billion (US$627 million).[7]

By the end of 2011, 10 Kenyan banks—including Kenya Commercial Bank, Commercial Bank of Africa, and Bank of Africa—had subsidiaries operating in the EAC and South Sudan. These subsidiaries registered profit before tax of Ksh 2.3 billion (US$27 million), with South Sudan, Tanzania, and Uganda accounting for the majority of profits.[8]

In July 2012, Central Bank of Kenya (CBK) granted authority to Bank of China Limited (BOC) to open a representative office in Kenya. BOC is the fifth foreign bank to receive such authorization. In November 2012, Kenyan banks were authorized to open Yuan-denominated accounts to ease China-Kenya trade. China exported goods worth US$1.7 billion to Kenya in 2011, making it Kenya’s third largest source of imports behind the United Arab Emirates and India.

Bank branches increased by 98 to 1,161 branches in 2011 and each of the country’s 47 counties had a branch. Increased usage of the agency banking model, introduced in May 2010, allows commercial banks to offer banking services through third parties. Increasing access to finance has been abridged with the use of innovation such as agent banking, which allows commercial banks and DTMs to engage the services of third party outlets to deliver specified financial services on their behalf.

Following the roll out of the agency banking model in May 2010, commercial banks have been able to contract varied retail entities. These entities, such as security companies, courier services, pharmacies, supermarkets and post offices act as third party agents to provide cash-in -cash-out transactions and other services in compliance with the laid down guidelines. As of June 2012, ten commercial banks had contracted 12,067 active agents facilitating over 20.4 million transactions valued at Ksh 104.4 billion (US$1.24 million).

As at 31st December, 2011, 23 banks were offering various internet products to their customers. Internet services provided include; opening accounts, transferring funds to different accounts, online viewing of the accounts, online inquiries and requests, online salaries payments, clearing checks status query and instant alerts or messages of account status.

The banking industry in Kenya in collaboration with the Kenya Bankers Association (KBA) rolled out the Check Truncation System in August 2011. Check truncation refers to a process in which physical checks presented for payment in a bank by individuals or corporate bodies are converted into electronic form and the image transmitted electronically to the clearing house for processing and eventual payment by the paying bank. The introduction of this system is expected to speed up clearing of such checks in addition to reducing incidences of frauds and the costs of transporting these checks from one bank to another.

Though small by Western standards, Kenya’s capital markets are the deepest and most sophisticated in East Africa. Investors trade stocks and bonds on the Nairobi Securities Exchange. The Capital Markets Authority (CMA), in conjunction with the Central Bank of Kenya, regulates and supervises relevant financial institutions and intermediaries, and oversees the development of Kenya’s capital markets. In late 2012, the CMA launched the development of a new, five-year capital markets master plan, which is being designed by market experts and participants, including private sector and government representatives

The CMA is working with regulators in EAC member states through the Capital Market Development Committee (CMDC) and East African Securities Regulatory Authorities (EASRA) on a regional integration initiative, and has successfully introduced cross-listing of equity shares. Beginning in 2005, the NSE started settling all equity trades through an electronic Central Depository System (CDS). The combined use of both CDS and an automated trading system has moved the Kenyan securities market to globally accepted standards. Kenya is a full (ordinary) member of the International Organization of Securities Commissions, (whose members represent 90 percent of the world's capital markets), which solidifies its status as a primary capital marketplace in East Africa.

In 2011, the NSE’s All Share Index (NSEASI) dropped by 30 percent due to a weak and volatile shilling, high commodity prices, and the ongoing global credit crisis. The NSEASI went up by 35 percent in 2012, however, surging on the back of a stable shilling and declining inflation, despite lingering economic problems in the West.

The NSE consists of three segments: the Main Investments Market (MIMS), the Alternative Investments Market (AIMS), and the Fixed Income Securities Market (FISMS). The MIMS targets mature companies with strong dividend streams. The AIMS is more favorable to small and medium-sized companies, and allows firms to access lower-interest rate, longer-term sources of capital. The FISMS allows businesses, financial institutions, and governmental and supranational authorities to raise capital through the issuance of debt securities. Fees charged by the CMA on NSE participants are a significant entry barrier for new companies. Small business entry into the stock market continues to lag, though the CMA plans to launch a new securities exchange for SMEs, which will have less onerous regulatory requirements. Though still a nascent industry, foreign and domestic private equity funds are increasingly active in Kenya, providing growth capital to entrepreneurs and helping turn around struggling businesses. Stockbrokers at the Nairobi Stock Exchange are seeking to reduce the ownership stake of the Ministry of Finance’s Capital Markets Authority from 20 percent to 5 percent. The NSE is in the process of becoming a demutualized corporate entity, which itself will become a publicly-traded company.

To facilitate the listing of Small and Medium Sized Enterprises (SMEs), NSE—in collaboration with the CMA and the Central Depository and Settlement Corporation (CDSC)—organized the Growth Enterprise Market Segment (GEMS). In June 2012, the establishment of GEMS received a major boost when the government officially published new listing regulations for SMEs. The NSE is working with the CMA to publish the rules for Nominated Advisors (NOMADS), who will assist SMEs to become publicly traded companies and comply with corporate governance standards.

By amending the Central Depositories Act, the Ministry of Finance seeks to create a single central depository for both equity and debt securities. At present, equity and debt are settled through separate depositories, creating inefficiencies and higher settlement costs. A streamlined securities settlement infrastructure would support Treasury Mobile Direct, which is a joint CBK and World Bank project that will enable Kenyans to trade government debt securities using their mobile phones. Mobile and Internet solutions are already available for trading equities.

Although equities trading is fairly robust, the bond market is still underdeveloped and dominated by trading in government debt securities. Long-dated corporate bond issuances are uncommon, leading to a lack of long-term investment capital. Listed companies, including banks, are therefore heavily reliant on short-term debt, which is relatively expensive and exposes borrowers to undue short-terms risks. Trading in commercial paper and corporate bonds issued by private companies has diversified activity at the NSE. The government regulates such trading through a set of guidelines developed in collaboration with private sector. They allow private companies to raise funds from the public without NSE quotation. Establishing the CDS encouraged the development of a secondary market for the government’s one-year Treasury security. The CDS provided opportunities to small investors by offering products in multiples of Ksh 50,000 (US$590) up to Ksh 1 million (US$11,830). Expenses related to credit rating services by listed companies and other issuers of corporate debt securities are tax deductible. Foreign investments through mergers and acquisitions are not restricted via cross-shareholding and stable shareholder arrangements. Hostile takeover attempts are uncommon. Private firms are free to adopt articles of incorporation, which limit or prohibit foreign investment, participation, or control.

Foreign investors are able to obtain credit on the local market; however, the number of credit instruments is relatively small. Legal, regulatory, and accounting systems are generally transparent and consistent with international norms. The corporate tax for newly listed companies is 25 percent for a period of five years from the date of listing. The withholding tax on dividends is 7.5 percent for foreign investors and 5 percent for local investors. Foreign investors can acquire shares in a listed company subject to a minimum reserve ratio of 40 percent of the share capital of the listed company for domestic investors, with the remaining 60 percent considered as a free float available to local, foreign, and regional investors without restrictions on the level of holding. Dividends distributed to residents and non-residents are subject to a final withholding tax rate of 5 percent. Dividends received by financial institutions as trading income are not subject to tax. In 2007, the Kenyan government granted two fiscal incentives to encourage growth of capital markets: exemption from income tax on interest income accruing from cash flows of securitized assets; and exemption from income tax on interest income accruing from all listed bonds with a maturity of at least three years. The fiscal incentives targeted providers of infrastructure services such as roads, water, power, telecommunication, schools, and hospitals. Company capital expenditures on legal costs and other incidental expenses associated with listing by introduction at the NSE are tax deductible.

In 2009, as a way of widening the investor base and promoting savings among Kenyans, the CBK reduced the minimum entry into treasury bills from Ksh 1 million to Ksh 100,000 (US$11,800 to US$1,190). Infrastructure bonds were issued in 2009. The primary corporate bond market is, however, still dominated by a few leading institutions, with a thinly traded secondary market. The bond market is currently led by government securities, and the corporate bond market accounts for only 9 percent of issuances. In 2009, the government issued a 20-year treasury bond as part of its efforts to deepen the pool of long-term capital available locally.

To restore market confidence, CBK and the market players introduced Sell-Buybacks, similar to repurchase agreements, in October 2011 to provide liquidity for bondholders who required immediate cash but faced difficulties in selling their bonds. Sell-buybacks refers to transactions where two parties, a seller and a buyer agree to exchange a security for cash at a bilaterally agreed price with a promise to reverse the same security and cash at a future date for a specific price. The introduction of sell-buybacks safeguarded bond values, provided liquidity to investors, and reduced panic-induced bond sales. The result is a more stable bond market. The next expected market development is the introduction of over the counter (OTC) bond trading, which will further enhance market liquidity and stability.

Several initiatives have been undertaken over the last five years aimed at achieving the three envisaged goals of stability, efficiency and financial inclusion. These initiatives include; the introduction of the agent banking mechanism in May 2010 where banks were allowed to engage third parties to provide certain banking services; the introduction of credit reference bureaus to collect, collate, analyze and disseminate credit information among credit providers; licensing of deposit taking microfinance institutions (DTMs) to target the lower end of the market, through the Microfinance Act, 2006 (now there are eight of them); the rollout of mobile phone financial services enabling banks to leverage on mobile phone technology to present convenience and lower costs for their customers without compromising quality of service; and lowering the cost of doing business through the establishment of more currency centers.

Since the enactment of the Cooperative Societies (Amendment) Act of 2004, which governs the formation and management of cooperatives in Kenya there have been improvements in the financial sector’s legal and regulatory framework. To regulate Kenya’s burgeoning insurance industry, Parliament passed the Insurance Amendment Act 2006, which resulted in the establishment of the Insurance Regulatory Authority. Parliament passed the Sacco Act in 2007 to strengthen the savings and credit cooperative (Sacco) industry. As a result, access to financial services has improved, especially for those previously unable to take advantage of financial services from traditional banks. Mobile money has grown in size and popularity and now provides transfer, deposit, lending, and insurance services to the large majority of Kenyans who do not have access to traditional banking services.

Only 19 percent of Kenyans have formal access to financial services through commercial banks and the government-owned Post Bank. With the advent of mobile money and its recent linkages to the formal banking system, however, the number of Kenyans with access to electronic financial services has grown rapidly. Kenya has now become a leader in financial inclusion and its example is being replicated in countries around the world. With 29 million cell phone subscriptions, the vast majority of Kenyan adults now have cell phone access, which they use for everything from voice and SMS communication to banking, insurance, internet access, and other services. According to the World Bank, M-Pesa processes more transactions within Kenya each year than Western Union does globally. As of June 2012, 19.8 million Kenyans were using mobile phone platforms to make transfer money, according to CBK figures. There were over 61,000 agents facilitating transactions in excess of Ksh 1.3 trillion (US$15.4 billion) in the year to June 2012. The CBK said the increase in mobile money transfers was fuelled by a high number of consumers moving money in their bank accounts using mobile phones. Safaricom’s M-Pesa, which has a 76 percent market share, has mobile banking arrangements with 25 banks, which has contributed to greater accessibility of the service. Customers have also increased the use of bank platforms through a wide array of services. Mobile money platforms have been used to offer medical insurance, microloans, transfer money to a pre-paid credit card, and even to pay parking, electricity, and water bills.

Beyond money transfers, Kenyans are using mobile phones to disseminate commodity price information, track diseases, monitor social unrest and human-rights violations, mobilize voters, and disseminate election results.

Microfinance institutions (MFIs) also provide financial services to many Kenyans who remain underserved by the traditional financial markets. The Microfinance Act of 2006 became operational in 2008 and provides for the licensing, regulation, and supervision of the microfinance sector. These regulations were prompted by a series of mismanagement and embezzling scandals at micro-finance institutions. The Act also grants regulatory oversight authority of MFIs to the CBK.

In 2003, the inter-ministerial National Taskforce on Anti-Money Laundering and Combating the Financing of Terrorism was formed to develop a comprehensive AML/CTF legal framework. In 2012, Kenya passed the Prevention of Terrorism Act, which criminalizes acts of terrorism and conspiracy to commit such acts. This law provides for the restraint, seizure, and forfeiture of terrorist assets. In 2010, Kenya passed the Prevention of Organised Crime Act, which allows for the prosecution of criminal groups that commit serious offenses and allows for asset forfeiture. Kenya has designated Al Shabaab as an organized criminal group. The Proceeds of Crime and Anti-Money Laundering Act (POCAMLA), passed in 2009, criminalized money laundering, and provided for the creation of a Financial Reporting Center (Kenya’s version of a financial intelligence unit), and an Assets Recovery Agency. With this legal structure in place, Kenya must now work towards implementing these laws and creating functional institutions.

Despite these advances, the Financial Action Task Force (FATF) raised concerns over Kenya’s inability to address deficiencies in its AML/CFT regime as outlined in the jointly developed FATF Action Plan in 2010. A key element of the plan was establishing a financial reporting center. Kenya created the FRC in April, 2012, obtained office space and is hiring staff. It currently has four investigators, an attorney, and administrative staff. To become operational, the FRC needs an automated system to analyze suspicious transaction reports (STRs). The FRC issued guidance notes to commercial banks, non-bank financial institutions, and mortgage finance companies about their responsibilities regarding working with the FRC and began receiving STRS on October 10, 2012. The June 2012 FATF Public Statement advised Kenya that countermeasures by FATF members against Kenya could be applied if Kenya did not show significant progress by the October 2012 FATF meeting and specifically cited the lack of terrorist financing legislation. Kenya passed the Prevention of Terrorism Bill in 2012, which criminalized material support to commit a terrorist act, and addressed a key element in the implementation of the FATF Action Plan. At its October 2012 meeting, the FATF did not impose countermeasures against Kenya.

Competition from State-Owned Enterprises

Public ownership of enterprise expanded from independence in 1963 through the 1980s. However, two commissions, one in 1979 and one in 1982, established the need for Kenya to begin divesting itself of its publicly owned enterprises. The commissions identified 240 state-owned firms, designating 207 as non-strategic and the remaining 33 as strategic. During the first round of privatization, from 1992 to 2002, Kenya fully or partially privatized most of the non-strategic publicly owned firms. From 2003 to 2007, the government of Kenya engaged in a second round, which fully or partially privatized a number of large strategic firms, including KenGen (the primary electricity generator), Kenya Railways, Mumias Sugar, Kenya Reinsurance, Telkom Kenya, and Safaricom. These transactions netted over US$1 billion for development and infrastructure spending. The third round of privatization is scheduled to last through 2013 and includes the Development, Consolidated and National Banks of Kenya, five sugar companies, the Kenya Wine Agencies, nine hotels, facilities owned by the Kenya Ports Authority, the Agrochemical Food Company, the remainder of KenGen, East African Portland Cement, the Kenyan Meat Commission, the New Kenya Cooperative Creameries, the Numerical Machining Complex, and several power stations.

In general, competitive equality is the standard applied to private enterprises in competition with public enterprises. However, certain parastatals have enjoyed preferential access to markets. Examples include Kenya Reinsurance (Kenya-Re), with a guaranteed market share; Kenya Seed Company, with fewer marketing barriers than its foreign competitors; and the Kenya National Oil Corporation (KNOC), which benefits from retail market outlets developed with government funds. Some state corporations have also benefited from easier access to government credit at favorable interest rates.

The Kenyan government seems determined to remove itself from competition with private enterprise, except in certain strategic areas. The government substantially divested the telecom sector from 2002 to 2007, which now benefits from competition. The sugar industry has been partially privatized and will be fully privatized with the next round of divestitures. The energy industry remains the most publicly owned sector in Kenya. The Kenyan government wholly owns the National Oil Corporation, the Kenya Pipeline Corporation, and the oil refinery in Mombasa; therefore, competition is either restricted or limited. KenGen, Kenya Power and Lighting, and the newly formed Geothermal Development Corporation dominate the electricity generation portion of the energy sector, which is another restricted portion of the Kenyan economy. The primary port in Mombasa is mostly government owned but privatization efforts are underway. Beyond these sectors, competition is expected and encouraged among private enterprise in Kenya.

Corporate Social Responsibility

Kenya has only recently begun to apply the concept of corporate social responsibility (CSR). The United Nations initiated discussions under the auspices of the UN Global Compact in Kenya for the introduction of the UN Global Compact/UNDP "Growing Sustainable Business for Poverty Reduction Initiative." In Kenya, surveys suggest that the highest proportion of corporate donations go to health and medical services. In addition, corporations direct funds towards education and training, HIV/AIDS, agriculture and food security, and underprivileged children. The rationale for these philanthropic activities is closely tied to a sense that companies should give something back to the nation and to the communities in which they operate. In Kenya, many companies in the export-processing sector are seeking to mainstream HIV/AIDS programs into their activities as well as other workplace issues. Local campaigns have focused attention on labor rights and abuses in Kenyan export sectors such as textiles, cut flowers, and horticulture. Some companies are taking a positive lead on labor standards, for example Cirio Del Monte is now accredited to the SA8000 standard. The bulk of the business community is challenged to create quality jobs by paying living wages and observing fundamental labor rights. Given that employment creation is one of the most pressing concerns in Kenya, workplace issues, particularly the trade-off between the creation of jobs and internationally accepted working conditions, are likely to remain at the heart of the CSR agenda.

In Kenya, there are relatively few incentives for businesses to adopt responsible or pro-development practices. Few consumers are sufficiently informed or able to pay a premium for responsibly produced goods. While some companies producing for export markets are subject to labor or environmental requirements imposed by overseas buyers, producers selling into the domestic market are unlikely to be subject to such pressures. Even pressures within export markets are patchy, depending on the sector, product, and buyer. A similar gap is apparent between large companies operating in the formal sector, and smaller companies or micro-enterprises, which operate below the radar. Given an economic context in which financial margins are generally very thin, companies are unlikely to adopt higher standards voluntarily unless there is a clear business incentive to do so.

Political Violence

The disputed 2007 presidential election sparked a devastating episode of ethnically-charged political violence, resulting in approximately 1,200 deaths and the displacement of more than 300,000 people. Property damage was in the millions of dollars and agriculture alone suffered US$300 million in damages. The 2007-2008 post-election violence was investigated by the government’s Waki Commission, which identified a number of prominent Kenyan politicians as chief instigators of much of the violence. In December 2010, the International Criminal Court (ICC) released the names of five high-ranking Kenyan government officials and one journalist, whom the Court named as suspects in the incidents of political violence; four of the six were subsequently charged formally with crimes against humanity. Deputy Prime Minister Uhuru Kenyatta and Member of Parliament William Ruto, who are expected to run for president and deputy president in the March 2013 elections, are among the four indicted suspects. Trials are scheduled to begin in April 2013.

It is widely hoped that ongoing implementation of Kenya’s new constitution, approved by a two-thirds majority in a violence-free referendum in 2010, will prevent a re-emergence of violence during elections scheduled for March 2013. However, the constitution calls for a restructuring of many key national institutions, transitioning many powers and functions to newly established county governments. This process is expected to take many years to implement fully. Among other issues, implementation of police, land tenure, and judicial reforms agreed to in the power sharing agreement that ended the 2007-2008 post-election violence have been slow.

The United States maintains a travel warning for Kenya due to the threat of terrorism and violent crime. Kenya’s military incursion into Somalia, which was in response to a series of high-profile kidnappings near the Kenya-Somalia border, has heightened security concerns and led to increased security measures at businesses and public institutions around the country. In addition to the kidnappings, Kenya suffered a series of bombings and grenade attacks targeting Kenyans in northern Kenya and in Nairobi. To date, these attacks have not appeared to target commercial projects or installations. As noted above, security expenditures represent a substantial operating expense for businesses in Kenya.

Kenya maintains friendly relationships with all of its immediate neighbors, although there are strong rivalries against it as the dominant economy in the region from other EAC partners. It remains an active participant in the EAC, which includes both commercial and political initiatives, as well as the Intergovernmental Authority on Development (IGAD), an eight-country multilateral organization that coordinates efforts to mitigate the effects of regional challenges such as drought, famine, and economic hardship. Kenya is also an active participant in the Common Market for Eastern and Southern Africa (COMESA). The Kenyan government has strong ties with governments of neighboring countries, including Somalia, despite the ongoing security issues caused by unstable, porous, and conflicted borders and the presence of violent extremist groups like al-Shabaab. Kenya and its neighbors are working together to mitigate the threats of terrorism and insecurity through African-led initiatives such as the African Union Mission in Somalia (AMISOM) and the nascent Eastern African Standby Brigade (EASBRIG).

In November 2012, the Judicial Service Commission approved the establishment of a special division within the High Court to deal with those responsible for the post-election violence. The International Crimes Division (ICD) will deal with the “middle and lower level” perpetrators of international crimes committed in Kenya during the post-election violence period. The National Council for Administration of Justice (NCAJ) through its technical committee has endorsed the proposal to cover the 2007-2008 period and recommended that the events surrounding the 1992 and 1997 elections also be considered. The court will be composed of seven judges, will have jurisdiction over crimes such as money laundering, cyber laundering, human trafficking, piracy and transnational organized crime. Appeals will be directed to the Court of Appeal with a final appeal to the Supreme Court.

Corruption

Corruption in Kenya is pervasive and entrenched. Kenya is ranked amongst world's most corrupt countries. The 2012 Ibrahim Index of African Governance ranked Kenya 25 out of 52 countries on quality of governance, a decline of two places from 2011. Transparency International Kenya’s Global Corruption Perception Index 2012 has Kenya ranked 139 out of 176 countries, a marginal increase from 154 of 183. Kenya still ranks second from the bottom among the five EAC countries, better only than Burundi. The Corruption Perceptions Index measures the perceived levels of public sector corruption in countries worldwide. Lack of political will, little progress in prosecuting past corruption cases, and the slow pace of reform in key sectors were cited reasons why Kenya is still ranked amongst the 35 lowest-scoring countries.

In December 2003, the Kenyan government signed and ratified the UN Convention against Corruption. In 2003, the Kibaki government enacted the Anti-Corruption and Economic Crimes Act and the Public Officers Ethics Act, setting rules for transparency and accountability, and defining graft and abuse of office. The Public Officers Ethics Act requires certain public officials to declare their wealth and that of their spouses within 90 days from August 2, 2003. Subsequently, the government fired 23 judges for corruption. Nevertheless, opposition leaders castigated the Kibaki government for its lackluster pursuit of individuals suspected of corruption. In 2004, the government established the Kenya Anti-Corruption Commission (KACC), moved forward with the implementation of the Anti-Corruption and Economic Crimes Act, and launched full implementation of the Code of Ethics Act for Public Servants in 2004. The Public Procurement and Disposal Act, which established a commission to oversee all procurement matters, became law in 2005 but has been ineffective in limiting abuse by public officials. Despite the law, large public procurement programs and military procurement have been at the center of a number of corruption scandals in recent years. Enacted in 2007, the Supplies Practitioners Management Act is meant to complement the Public Procurement and Disposal Act by regulating the training, certification, and conduct of procurement officers and imposing penalties for violations.

The KACC launched several investigations in 2006-2007 against senior government officials, including two government ministers; however, none of the cases have been prosecuted successfully, in large part due to bottlenecks in the Attorney General's Office and loopholes in the judicial system. Former Finance Minister Amos Kimunya stepped aside in early July 2008 in connection with the non-publicly tendered sale of a government-owned property, the Grand Regency Hotel, to a Libyan group. An investigatory commission, the Cockar Commission, reportedly exonerated Kimunya of any wrongdoing. He was appointed as Minister of Trade in January 2009, providing an example of the culture of impunity in Kenya. At the end of 2010, he became Minister of Transport.

In 2009, President Kibaki irregularly reappointed the director of KACC, during whose tenure no minister-level official had ever been prosecuted, despite a number of high profile corruption scandals including Goldenberg, Anglo Leasing, Triton, and the maize scandal. After a storm of protest from Parliament, the director of KACC lost his re-appointment vote. This historic vote was the first time that the Parliament overruled the President. In 2010, the KACC Board selected PLO Lumumba as director of KACC. Lumumba took a strong stance against corruption and re-opened some of the older cases, including Anglo-Leasing. In December 2010, in Lumumba’s first major corruption case, the KACC arrested and charged Minister of Trade Henry Kosgey with abuse of office over the illegal importation of automobiles. The case was dismissed on a technicality and the government has said it plans to appeal. As called for in the constitution, the KACC was replaced in 2011 by the Ethics and Anti-Corruption Commission (EACC), which is very similar to the KACC. Hopes that the new body would be a more effective check on corrupt behavior than its predecessor have not been realized as yet; like the KACC, the EACC has investigative power but lacks prosecutorial authority. Furthermore, it is widely believed that Parliament was uncomfortable with the pressure brought to bear by Lumumba and sought to dismiss him by disbanding the KACC. Since it was established in 2011, the EACC has been without a fully constituted board of directors and senior management team, which has hindered its ability to operate effectively.

Bilateral Investment Agreements

Kenya does not have a bilateral investment trade agreement with the United States. Kenya has signed bilateral investment agreements with Burundi, China, Finland, France, Germany, Iran, Italy, Libya, Netherlands, Slovakia, Switzerland, and the United Kingdom, although only those with Germany, Italy, Netherlands, and Switzerland have entered into force as of June 2012. As noted above, Kenya and its EAC partners signed a Trade and Investment Framework Agreement with the United States in July 2008 as a bloc. In 2012, the United States launched talks with EAC on a new trade and investment partnership, which includes a regional investment treaty.

OPIC and Other Investment Insurance Programs

Kenya is eligible for Overseas Private Investment Corporation (OPIC) programs and is a member of the Multilateral Investment Guarantee Agency (MIGA). In September 2011, OPIC approved up to US$310 million in financing for the expansion of Nevada-based Ormat’s geothermal energy facility in Kenya, which also receives support from MIGA. This represents a substantial increase in scale compared to previous OPIC activities in Kenya: in 2008 and 2009 OPIC supported five projects in Kenya totaling US$19.18 million, including two large microfinance projects targeting women.

OPIC is seeking to expand its existing Kenya portfolio of US$320 million to supporting mobile banking, housing, telecommunication and power. In July, 2012, OPIC announced that their Board of Directors “approved US$72 million in financing to help bring affordable high-speed internet service, television programming and telephone service to growing, yet underserved middle class markets in East Africa. The OPIC direct loan will enable Wananchi Group Holdings (WGH), a Kenyan company, to extend fiber optic cable services for high-speed internet, television and voice-over internet telephonic services in Kenya. WGH will also provide pay TV programming via satellite across a broad footprint of cities and rural areas directly to Kenya, Tanzania, and Uganda, and indirectly through agents to a number of other East African countries, including Burundi, Malawi, Rwanda, Somalia, South Sudan, and Zambia.”[9]

Note: OPIC is appointing an Africa representative to the U.S. consulate in Johannesburg to facilitate transactions throughout Sub-Saharan Africa later this year.

Labor

Kenya's population is estimated to be roughly 41 million. Of the approximately 21 million working Kenyans aged 15-64, the Kenya National Bureau of Statistics reports that 10 million are engaged in pastoral and small-scale rural agriculture. Another 8.8 million are engaged in the informal sector, leaving only 2.2 million Kenyans in the formal sector. A 2006 household survey found that 46 percent of the Kenyan population was living on less than US$1/day; newer data is not available, but the Kenyan government believes that the number has decreased considerably due to rising per capita income and a growing middle class, which at 10 percent of the population is now among the largest in Africa. Per capita income, per the Atlas method, is US$820 in 2011. The country’s population growth rate of 2.7 percent per annum coupled with high unemployment and informal employment produces on-going demand for new jobs. Kenya has an abundant supply of well-educated and skilled labor in most sectors. According to the Global Competitiveness Index Kenya ranks 100 of 144 in higher education and training and 39 of 144 in labor market efficiency.

Kenya's laws generally provide safeguards for worker rights and mechanisms to address complaints of their violation, but the Ministry of Labor and Human Resource Development lacks the resources to enforce them effectively. In October 2007, President Kibaki signed five labor reform laws that were drafted with ILO assistance under the U.S. Department of Labor’s Strengthening Labor Relations in East Africa (SLAREA) project to make Kenya’s labor laws more consistent with ILO core labor standards, AGOA compliant, and harmonious with Uganda’s and Tanzania’s labor laws. The new laws are: the Employment Act, which defines the fundamental rights of employees and regulates employment of children; the Labor Relations Act on worker rights, the establishment of unions, and employers associations; the Labor Institutions Act concerning labor courts and the Ministry of Labor and Human Resource Development; the Occupational Safety and Health Act; and the Work Injury Benefits Act on compensation for work-related injuries and diseases. The Kenyan government formally published the amended texts of the new laws in 2008. Also in 2008, the Kenyan government created the National Labor Board to steer stakeholders to meet and propose necessary amendments to Parliament for smooth implementation of the Acts. The Board will set structures and rules as required by the Act. Kenya has signed and ratified 7 of 8 Fundamental Conventions of the ILO and 3 of 4 Priority Governance Conventions. Not ratified are the “Freedom of association and Protection of the Right to Organize (C087)” and “Employment Policy (C122)” conventions.

Under the Labor Relations Act, a minimum of seven workers may initially apply to register a union, but the nascent union must have a minimum of 50 members to be registered. A union must also show a signed membership request from 50 percent of the workers in a workplace to force an employer to recognize the union. There are 42 registered unions representing over 500,000 workers, approximately one quarter of the country's formal sector work force. All but six, including the 240,000 member Kenya National Union of Teachers (KNUT), the University's Academic Staff Union (UASU), and the Union of Kenyan Civil Servants (UKCS), are affiliated with the Central Organization of Trade Unions (COTU), which has about 260,000 members. Union membership is voluntary and organized by craft rather than industry.

Kenya’s constitution protects the right to fair remuneration, reasonable working conditions, trade union activities, and the right to strike in the Bill of Rights as fundamental freedoms. Consequently, workers, especially in the public sector, now enjoy greater latitude to express their grievances. While the law permits strikes, unions must notify the government 21-28 days before calling a strike. During this period, the Minister of Labor and Human Resource Development may mediate the dispute, nominate an arbitrator, or refer the matter to the new Employment Relations Court, which replaced the Industrial Court. A strike is illegal while mediation, fact-finding, arbitration, or other legal proceedings are in progress. The Labor Institutions Act of 2007 expanded the former Industrial Court and gave it the same powers as a High Court to enforce its rulings with fines or prison sentences; the new Employment Relations Court is largely the same as the Industrial Court but may also hear individual employment complaints, which previously were handled by the Ministry of Labor. The court has penalized employers for discriminating against employees because of their union activities, usually by requiring the payment of lost wages. Court-ordered reinstatement is not a common remedy because of the difficulty in implementation.

On August 2011, Kenya re-constituted the Industrial Court elevating it to the status of the High Court to hear and determine disputes relating to employment and labor relations from the perceived subordinated Court status in line with provisions of the new Constitution of 2010 and as part of the on-going judicial reforms in Kenya. This is an attempt to create industrial peace and speedy resolution of increased employment disputes arising from the increased labor freedoms brought by the new Constitution as witnessed by the recent wave of strikes. The Industrial Court has now been integrated with the traditional judiciary. It remains a specialized Court, but removed from the Ministry of Labor to the Judiciary. The new Industrial Court Act 2011 entrenches the Industrial Court into the relatively well funded and independent Judicial Service Commission system from the chronically underfunded Ministry of Labor. To address congestion in the Industrial courts, new branches are being rolled up in the two other Kenyan cities namely Mombasa and Kisumu. The new Industrial Court has both the same status as High Court and appellate jurisdiction to hear and determine appeals from: decisions of the Registrar of Trade Unions; and Magistrate courts, local tribunal or commission. Recognition of Alternative Dispute Resolution system to supplement the court is a key feature of the new Act. The Court has appellate jurisdiction to hear and determine appeals from: decisions of the Registrar of Trade Unions; and Magistrate courts, local tribunal or commission. The Chief justice has also designated all courts in the 47 Counties presided over by Magistrates as special courts to hear and determine Employment and Labor relations cases. This initiative is expected to ease the backlog in the Industrial court.

Kenya has relatively harmonious labor relations. The Industrial Court adjudicated 226 cases in 2008, out of which it gave 192 rulings, compared to 295 cases and 147 rulings in 2007. However, the number of cases subsequently rose to 851 in 2009 and 1,484 in 2010. 361 Collective Bargaining Agreements were negotiated and registered by the Industrial Court in 2011. Late 2011 saw a notable uptick in labor unrest and at least ten unions issued strike notices in the last six months of the year alone. A number of different unions, from postal workers to physicians, exercised their right to strike. There were several large-scale strikes in 2012 involving public sector workers, primarily teachers, health sector workers, and public transportation drivers. Violence was minimal and all strikes were resolved through negotiations.

Labor law mandates the total hours worked in any two-week period should not exceed 120 hours (144 hours for night workers). Negotiations between unions and management establish wages and conditions of employment. There are twelve separate minimum wage scales, varying by location, age, and skill level. Regulation of wages is part of the Labor Institutions Act, and the government establishes basic minimum wages by occupation and location, setting a minimum for monthly, daily, and hourly work in each category. In 2011, the Kenyan government revised the minimum wage upwards by 12.5 percent. In many industries, workers are paid the legal minimum wage and thus benefited from this increase; however, the wage increase was outpaced by increases in the cost of living. As of January 2012, the lowest legal urban minimum wage was Ksh 7,586 (US$90) per month, and the lowest agricultural minimum wage for unskilled employees was Ksh 3,765 (US$45) per month, excluding housing allowance. The Productivity Center of Kenya, a tripartite institution including the Ministry of Labor, the Federation of Kenyan Employers, and COTU, is tasked to set wage guidelines for various sectors based on productivity, inflation, and cost of living indices, but the center lacks strong industry support and employers often do not follow its recommendations. Most minimum wage workers must rely on second jobs, subsistence farming, other informal work, or the extended family for additional support. Furthermore, a large portion of employees in Kenya rely primarily on the informal sector for work and thus are not protected by minimum wage laws. Workers covered by a collective bargaining agreement generally receive a better wage and benefit package than those not covered: Ksh 14,621 per month on average (US$173), plus a housing and transport allowance, which may account for 20 to 40 percent of a Kenyan worker’s compensation package.

Kenyan law establishes detailed environmental, health and safety standards, but these tend not to be strictly enforced. The Directorate of Occupational Health and Safety Services (DOHSS), a department under the Ministry of Labor and Human Resource Development, has the mandate to enforce the Occupational Safety and Health Act and its subsidiary rules. DOHSS has the authority to inspect factories and work sites, except in the EPZs, but operates with less than half of the 168 inspectors needed to adequately cover the entire country. DOHSS developed a program to help factories establish Health and Safety Committees and train them to conduct safety audits and submit compliance reports to DOHSS. The Directorate also maintains a register of approved and certified safety and health advisers whom employers may enlist to conduct safety audits in the factories and other places of work. The Directorate should carry out these audits at least once a year and forward a copy of the audit report to the DOHSS within 30 days. However, according to the government, fewer than half of the largest factories had instituted Health and Safety Committees.

Visas and Work Permits

Work permits are required for all foreign nationals who wish to work in Kenya. An applicant for an entry permit must describe the type work they will perform and will be limited to that specific activity. Although there is no official time limit, a visitor's pass or a visa is usually valid for three months and the Immigration Department must grant applicable extensions upon proper application. Applicants may apply for work permits in any major city in Kenya, but all applications go to Nairobi for processing. Before hiring expatriate workers, businesses are required to demonstrate by an exhaustive local recruitment campaign that suitably qualified Kenyan citizens are unavailable. Foreign firms must also sign an agreement with the government defining training arrangements intended to phase out expatriates. The government is currently working to develop a skills inventory, which should lower the burden on firms hiring expatriates by replacing the labor-market testing procedure, at least for high-skill positions, with a pre-determined list of skills with shortages in the Kenya. As of January 2012, however, the Ministry had conducted a pilot study but had not commissioned a full employment survey. Once implemented, this inventory will allow approved employers to freely hire foreign workers with the listed skills, subject only to verification of the credentials and character of the individuals proposed for employment by the Immigration Department. Despite this measure, high unemployment levels have led the government to make it increasingly difficult for expatriates to renew or obtain work permits, and Immigration has increased the price of a work permit to up to Ksh200, 000 (US$2,370). The Immigration Department has occasionally cancelled work permits before the expiration date without giving reasons. According to the law, the immigration officer issuing entry permits may also require a bond of not less than Ksh 100,000 (US$1,180) for each permit, to be deposited with the Immigration Department.

Foreign Direct Investment Statistics

Through the 1980's and 1990's, the deterioration in economic performance, together with rising problems of poor infrastructure, corruption, high cost of borrowing, crime and insecurity, and lack of investor confidence in reforms generated a long period of low FDI inflows. The GoK has made the attraction of FDI a clear policy priority and established KenInvest as a semi-autonomous agency in 2004. Net inflows increased more than fourteen-fold between 2006 and 2007, from US$51 million (0.2% of GDP) in 2006 to a record US$729 million (2.7%) in 2007, according to the World Bank’s World Development Indicators due to large privatizations in telecommunications and investment in the railways. FDI inflows dropped off sharply in 2008, coming in at only US$96 million (0.3%), and then increased to US$116 million (0.4%) in 2009, US$178 million (0.6%) in 2010, and US$335 million (1.0%) in 2011. These figures compare poorly to neighboring Tanzania and Uganda, which have both posted higher net FDI inflows in dollar terms than Kenya each year since 1993, with the exception of 2007, despite their smaller economies. In 2011, Tanzania reported US$1.095 billion in net FDI inflows and Uganda reported US$792 million. UNCTAD estimates Kenya’s 2011 FDI stock at approximately US$2.6 billion. As of 2008, the market value of U.S. investment in Kenya stood at approximately US$183 million, primarily concentrated in commerce, light manufacturing, and tourism.

Kenya, which has traditionally been seen as a laggard in attracting FDI, is now ranked among top FDI destinations in Africa, thanks to ongoing investments in infrastructure and judicial reforms. FDI Intelligence’s FDI Report 2012 ranked Kenya 10th in infrastructure systems in Africa and 8th in human resource capacity attributes in Africa. The report shows that Kenya attracted 55 projects in 2011 compared with South Africa’s 154 and Morocco’s 70. The highest number of projects were in coal, natural gas, and oil, real estate, hotels and tourism, software, IT services and communications sub-sectors. The number of projects coming to Kenya rose 77 percent from 2010, pushing it ahead of Nigeria, and Egypt. However, the other East African countries did not feature in the ranking. Inflows into the country were boosted by increased fundraising by oil since and mineral prospecting companies seeking a share of Kenya’s rising mineral resource profile. In 2012, Kenya struck oil but its commercial viability is yet to be determined.

FDI from traditional sources such as Europe has been complemented by that from emerging markets. Investors from China (roads, manufacturing, and agriculture), India (ICTs such as Airtel and Yu), and the Middle East (hotel and property development such as Fairmont) are starting to make their presence felt. Large government infrastructure projects are likely to increase FDI in the coming years. The government is presented a PPP bill to Parliament with the intention of attracting US$40 billion in infrastructure finance.

With an industrial base that is relatively advanced compared to the region, Kenya is also becoming an important outward investor in manufacturing, finance and service activities to EAC countries and the wider region. Kenyan companies with a significant regional presence include Tourism Promotion Services Eastern Africa (operating as Serena Hotels), Kenya Commercial Bank, Diamond Trust Bank and Equity Bank, East African Breweries, the Uchumi and Nakumatt supermarket chains, and Nation Media (radio broadcasting and television). Outward FDI reached US$46.0 million in 2009 before decreasing to US$17.7 million in 2010. Meanwhile total outward stock stands at US$306 million.

In 2012, foreign interest in the energy sector grew. Kenya’s energy sector has received significant attention with major breakthroughs in oil and geothermal offsetting slower-than-hoped-for progress in wind and solar energy. Energy sector expansion—including oil, gas, coal, geothermal, wind, solar, biomass, and even nuclear—figures prominently in the country’s Vision 2030 development strategy. Tullow’s discovery of oil in early 2012 prompted significant excitement among government officials and the private sector, as well as among development partners and organizations interested in supporting the government’s energy sector policy reform process. Tullow has not yet determined whether its discovery is commercially viable, although most indications thus far have been positive. More recently, U.S.-based Apache discovered non-commercial quantities of natural gas in its offshore exploration block near Malindi, Kenya. Six U.S. companies now hold stakes in a total of nine Kenyan oil exploration blocks.

Poor data collection in Kenya leads to underestimating actual inflows of FDI. There is no clear mandate by any agency to collect data on FDI. The CBK, the Kenya Investment Authority, and the Kenya National Bureau of Statistics all collect only partial information on either balance of payments inflows or investment projects. The government does not publish data on the value of foreign direct investment (position/stock or annual investment capital flows) by country of origin or by industry sector destination. Neither is data available on Kenya’s investment abroad. If implementation of the new constitution and other reforms moves forward smoothly, this growing domestic investment might be bolstered by a significant increase in FDI inflows.


[1] http://www.kam.co.ke/index.php/latest-news/253-manufacturers-upbeat-about-gains-during-kibaki-era

[2] Source: Kenya Tourism Board

[3] http://www.doingbusiness.org/reports/thematic-reports/paying-taxes

[4] http://www.trademarkea.com/wp-content/uploads/2012/11/Bribery-as-a-Non-Tariff-Barrier-to-Trade-120x160.jpg

[5] http://www.mcc.gov/documents/scorecards/score-fy13-kenya.pdf

[6] http://www.aca.go.ke/

[7] Source: CBK

[8] Source: CBK

[9] http://www.opic.gov/press-releases/2012/opic-board-approves-72-million-internet-expansion-project-east-africa

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