KENYA Investment Guide
Openness to Foreign Investment
The Government of Kenya encourages foreign direct investment. Multinational companies make up a large percentage of Kenya's industrial sector. In the past, Government support for foreign investment was often implicitly conditioned on some form of joint venture whereby a related parastatal or a politically well-connected individual became the local partner. This practice is becoming less common with economic liberalization and privatization of public sector enterprises. Particularly since 1994, the Government of Kenya has sought out foreign investment through investment conferences and foreign trips by the head of state.
Foreign investment is not routinely screened. Nevertheless, investors may
choose to take advantage of the one-stop office of the Investment Promotion
Center (IPC), created in 1982 under the Ministry of Finance, and an independent
agency since 1986. The IPC sets minimal environmental, health and security
requirements for its projects. An investment code has been in the works since
1994. The code would set forth guidelines on investment, enumerate the various
investment incentives and mandate that all new projects obtain IPC approval.
Efforts are under way to harmonize investment regimes in Kenya, Uganda and Tanzania
and, eventually, to remove all tariff barriers between the three East African
countries. In addition, the three Investment Authorities are working towards
harmonizing the investment incentives.
It is Government of Kenya policy to encourage investment that will produce
foreign exchange, provide employment, promote backward and forward linkages and
transfer technology. The only significant sectors in which investment (foreign
and domestic) is constrained are those where state corporations still enjoy a
statutory or de facto monopoly. These are restricted almost entirely to
infrastructure (e.g., power, posts, telecommunications, and ports) and the
media (e.g., radio). Even in these sectors, ongoing commercialization and
economic reform is expanding the room for private business. Two foreign private
sector power producers sell more than 85 MW of electricity to the national
grid. Purchase agreements with two other independent power producers (IPPs)
were put in place in 1999.
In July 1999, Kenya Posts and Telecommunications Corporation was split into
Telkom Kenya, a telecommunications corporation, and Postal Corporation of Kenya,
a postal services corporation. The Communications Commission of Kenya (CCK) was
also established to regulate those sectors. The Government plans to sell up to
49 percent of Telkom Kenya to a strategic partner before an initial public
offer is made on the Nairobi Stock Exchange. With the right competitive
environment, the potential for private sector investments in telecommunications
is enormous.
Branches of foreign companies pay higher income tax rates than local companies and locally incorporated subsidiaries of foreign companies. The 1997/98 GOK finance bill reduced these rates to 40 percent for foreign companies and 32.5 percent for local firms. There is no discrimination against foreign investors in access to government-financed research. Expatriates face difficulties in obtaining work permits, but the requirements are not onerous. The Kenyan Government’s Export Promotion programs do not distinguish between local and foreign-owned manufacturers.
Currency Conversion and Transfer Policies
In December 1995, Kenya repealed its Foreign Exchange Control Act. (Ministerial decrees had previously removed nearly all limitations.) There are no remaining restrictions on converting or transferring funds associated with an investment. No recent changes or plans to tighten remittance policies exist. Foreign exchange is readily available. Kenya has had a floating exchange rate since late 1993. On July 1, 1996, Kenyan shillings became freely convertible into Tanzanian and Ugandan shillings and vice versa.
Expropriation and Compensation
Article 75 of the constitution prohibits the nationalization of private
property without prompt and full compensation. Kenya has also enacted the Foreign Investment Protection Act that
protects foreign investment against expropriation. During the 1980s, however,
the government used its authority on occasion to compel foreigners to sell a
portion of profitable companies to political insiders. The Insurance Act was
amended, for instance, to require large foreign insurance companies to have at
least 33 percent local ownership. Foreign brokerage and fund management firms
are allowed to participate in the local capital market only through locally
registered companies. Such locally registered firms must have local ownership
of at least 51 percent in case of brokerage firms, and 30 percent for fund
management firms. Another example is the International Casino in Nairobi, formerly wholly Italian-owned,
which sold out to local investors after Government regulators ran down its
business. More recently, some telecommunications companies have been compelled
to sell equity to Kenyans to meet the Government's new 60 percent local
ownership requirement.
Dispute Settlement
Government delays in remission of value-added tax on exported goods have caused
frustration to business people generally, but have not resulted in litigation.
Likewise, corruption and slow clearance of imported inputs, goods and capital
equipment has handicapped industry and trade. In the past, tight controls on
foreign exchange led to disputes over the repatriation of profits.
Liberalization of the economy, and the foreign exchange regime in particular,
since 1993 has removed that irritant.
The only legal dispute in the past few years was between the Government and the U.S. company Arkel International. Arkel won contracts in 1987 and 1990 to expand a parastatal sugar factory in western Kenya. Arkel ceased work on the project during the second phase due to the government's failure to make full payment. International arbiters ruled in early 1995 that Arkel was owed approximately $5 million. In November 1995, the Government agreed to pay the amount in five monthly installments. This dispute was unusually complicated, in part because of repeated parliamentary allegations that the contracts were corruptly obtained. Kenya's judicial system is modeled after the British, with magistrates' courts, high courts in the major cities, and a court of appeal. In addition, there is a separate industrial court that hears disputes over wages and labor terms. Its decisions cannot be appealed. Property and contractual rights are enforceable, but long delays in resolving commercial cases are not unusual. The system is subject to political influence and corruption.
Kenya does not have a commercial code. The Export Promotion Council released
in April 1998 a proposed Business Charter, however. It incorporates a Code of
Practice for all business and commercial contracts. The proposal has not been
widely promoted. Kenya does have a bankruptcy law. Creditors' rights are
comparable to those in other common law countries. Monetary judgments are
usually made in Kenyan shillings. The government does accept binding
international arbitration of investment disputes with foreign investors. Kenya
is a member of the International Center for the Settlement of Investment
Disputes. It is also a party to the New York Convention of 1958 on the
Enforcement of Foreign Arbitral Awards.
Performance Requirements and Incentives
Investors in the manufacturing and hotel sectors are permitted to deduct from
their taxes a large portion of the cost of buildings and capital machinery. All
locally financed materials and equipment (excluding motor vehicles and goods
for regular repair and maintenance) for use in the construction or
refurbishment of tourist hotels are zero-rated for purposes of value added tax.
The Permanent Secretary to the Treasury must approve such purchases.
Though formerly a higher rate was applied to investments outside the cities of Nairobi
and Mombasa, now there is one flat investment allowance of 60 percent. Another
general incentive is the Duty Remission Scheme administered by the Export
Promotion Programs Office in the Ministry of Finance. Materials imported for
use in manufacturing for export or for production of duty-free items for
domestic sale qualify. Approved suppliers, who manufacture goods to be supplied
to the exporter, are also entitled to the same import duty relief.
Special incentives exist for qualified investors under the Manufacturing Under
Bond (MUB) program and the export processing zones (EPZs) Authority. MUB
investors receive duty and value added tax exemption on imported plant,
equipment, raw materials and intermediate inputs. They are also entitled to an
investment allowance of 100 percent on immovable fixed assets. Investors in the
EPZs enjoy duty and VAT exemption on imported machinery and raw material inputs;
a ten-year corporate tax holiday; exemption from withholding tax (on dividends
payable to non-resident shareholders) and stamp duty; exemption from certain
industrial regulations and single licensing. Most new investors prefer the EPZs
because they also provide power and water as well as support services.
With the exception of the insurance and telecommunications sectors and other
infrastructure and media companies discussed earlier, Kenya does not require
that its nationals own a percentage of a company. For insurance companies, at
least one-third of the controlling interest, whether in terms of paid-up share
capital or voting rights, must be held by citizens of Kenya. In the
telecommunications sector, at least 60 percent equity must be owned by Kenyan nationals.
In other sectors, joint ventures are encouraged but not mandatory. The
percentage of foreign equity need not be reduced over time. Technology licenses
are, however, subject to scrutiny by the Kenya Industrial Property Office
(KIPO) to assure that they are in line with the Industrial Property Act. The
goal is to obtain new technology and know-how. Licenses are valid for five
years and are renewable. This function of KIPO is under review. Foreign
investors are free to obtain financing locally or offshore.
The Government no longer steers investment to specific geographic locations.
Local content rules are applied but only for purposes of determining whether
goods qualify for preferential duty rates under the Common Market for East and Southern Africa. Kenya has replaced its old policy of import substitution with one
of export promotion. Employment of Kenyan nationals is strongly encouraged. In
fact, the Immigration Department requires that a minimum of Ksh3 million
(approximately $42,000) be invested before it will authorize work permits for
foreigners. The Investment Promotion Center is more flexible. Its minimum is
Ksh2 million (approximately $28,000). Exceptions have been made. Foreign
employees are expected to be key senior managers or to have special skills not
available locally.
Private Ownership Rights
Foreign and domestic private entities have a right to establish and own
business enterprises and engage in nearly all forms of remunerative activity.
The principal exceptions concern public utilities (infrastructure) and the
media. Recent energy sector reforms have provided limited opportunity for
private power generation to fill in a national power deficit. By statute,
manufacturing companies are not permitted to distribute their own products. In
addition, local officials have used their licensing authority to ensure the
retail trade is mainly in the hands of Kenyans. Private enterprises can freely
establish, acquire and dispose of interests in business enterprises.
In general, competitive equality is the standard applied to private enterprises in competition with public enterprises. Nevertheless, certain parastatals have enjoyed preferential access to markets: Kenya Reinsurance, for instance, has a guaranteed market share (although it is being phased out, and there are plans to privatize the parastatal). Kenya Seed Company continues to face fewer barriers in marketing than its foreign competitors. Easier access to cheap Government credit is another advantage from which some state corporations have benefited. The National Oil Corporation of Kenya, for example, is developing a retail marketing operation using Government funds. Certain parastatals have also been held to lower licensing standards. This was the case until recently with Kenya National Assurance Company (KNAC). KNAC had been insolvent for at least five years, yet it was permitted to do business until June 1996.
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—lands, buildings and mortgages. In practice, obtaining title to land is
a cumbersome and often corrupt process. It is frequently complicated by
improper allocation to third parties of access and easements. That many of the
99-year Government leases covering much of Kenya's urban land are expiring is another extenuating factor as is the
general unwillingness of the courts to permit mortgage holders to sell land to
collect debts. Furthermore, foreigners may require presidential approval to
acquire large tracts of agricultural land or any seashore property.
Protection of intellectual property – copyrights, patents and trademarks – is
inadequate. Piracy of audio and videocassettes is rampant. About $3.5 million
is lost every year as a result of illegal software being used, according to the
Business Software Association – a computer industry association established to
protect software copyrights and to prevent software piracy. The software piracy
rate in Kenya is about 90 percent. The most prevalent form of software piracy
in Kenya involves business use of unauthorized copies. Kenya is in the process
of conforming its legislation to the WTO TRIPs Agreement. Patents, trademarks
and trade secrets are the responsibility of the Kenya Industrial Property
Office in the Ministry of Research, Technical Training and Technology.
Copyrights are the responsibility of the attorney general's office. Kenya is a
member of most of the major international and regional intellectual property
conventions. The Copyright Act was amended in late 1996 to provide protection
for computer programs. Literary, musical and artistic works were already
protected. Penalties for infringement remain low, and enforcement and the
understanding of the importance of intellectual property are poor. Criminal
penalties associated with software piracy in Kenya include a fine of up to SHS
200,000, a jail term of up to five years and confiscation of pirate operation
hardware.
Transparency of Regulatory System
Kenyan regulations allow for the establishment of public and private corporations, as well as joint ventures and branches. Under the law, manufacturers may not distribute their own products, and they are required to supply information to the government about their distributors. The Government of Kenya has legislation to control monopolies and restrictive trade practices.
Private foreign investment in Kenya is governed by Kenya's Foreign Investment
Protection Act (FIPA). The act is being reviewed in light of recent
liberalization of foreign exchange and import controls, and as a result a
number of provisions are no longer applicable. For example, the previous
requirement that foreign investors apply for a certificate of approved
enterprise from the Treasury that allowed them to repatriate capital and
profits has been removed. There are no formal requirements on minimum local
participation in either equity or management under FIPA.
Foreign investors are required to sign an agreement with the Government stating
training arrangements for phasing out expatriates. Expatriate work permits are
increasingly difficult to renew or acquire. Government approval for ventures in
agriculture, distributive trade, and small-scale enterprises has become more
difficult to get as the Government seeks to localize these sectors.
There are no special requirements imposed on foreign investors. All investors
(foreign and local) receive the same treatment in the initial screening
process. 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 fairly quickly. However, new foreign
investment in Kenya has in the past been constrained by a time-consuming and
highly discretionary approval and licensing system that has been vulnerable to
corrupt practices. To counter this, the government amended the Investment
Promotion Center Act in September 1992 to require the Center, through its
“one-stop-office”, to process applications for foreign investors within one
month.
Despite the changes in 1992, the process still does not work well. The
Government of Kenya has proposed, therefore, to adopt a new investment code
which will cover local and foreign investment and govern the Investment Promotion Center. The code is expected to set clear
guidelines for processing investment applications and will incorporate the
means to ensure transparency and accountability. It will provide information on
various incentives to investors, including the procedures for obtaining such
information, and how the incentives are implemented. At present, the IPC lacks
proper authority to implement many available incentives and procedures.
Incoming foreign investment through acquisitions, mergers or takeovers is
governed by antitrust legislation that prohibits restrictive and predatory
practices that prevent the establishment of competitive markets. The
legislation is also aimed at reducing the concentration of economic power by
controlling monopolies, mergers and takeovers of enterprises. Mergers and
takeovers are subject to the Companies Act, the Insurance Act (in case of
insurance firms) or the Banking Act (in the case of financial institutions).
The Government of Kenya launched a privatization program in 1991, in which 207
enterprises were targeted for privatization. As of September 1998, the
Government of Kenya had divested from 165 public enterprises. Plans to privatize
two large sugar companies and the Kenya Reinsurance Company are currently in
the works. Senior officials – both Government and non-government – have
repeatedly stated that Kenyans should be given higher priority in the
privatization exercise. Divestiture through public share issues provides little
opportunity to corporate investors. In past divestitures, the Capital Markets
Authority has seen to it that shares are thinly spread over many applicants
thereby ruling out the possibility of a foreign investor acquiring a big stake
in a company. However in the privatization of Kenya Airways, a foreign company
acquired 23 percent of the shares as a “strategic” investor in the airline.
Under a World Bank export development program, the government of Kenya has
abolished, except for a few categories, export-licensing requirements and
initiated three export incentive schemes for both local and foreign investors.
It provides import duty/value added tax remission to importers of raw material
inputs used for manufacture of exports. In addition, the government of Kenya
has an Export Assistance Scheme and an Export Development Support project, both
of which provide grants for export promotion including export market studies
and seminars. Manufacturing under bond facilities and export processing zones
also exist.
In 1990, the Government of Kenya strengthened the law on health and safety in
factories. The revised act authorizes the Labor Minister to undertake formal
investigations of occupational accidents and disease. Factories that employ
over 20 employees are required to have a safety and health committee. The
Government of Kenya also has established a National Advisory Committee on
Occupational Health and Safety and an Occupational Health and Safety Fund.
Political Violence
There have been several clashes in the recent past between police and
demonstrators over political reform and other issues. Although some shops in
major cities, notably downtown Nairobi, have been damaged or looted during
recent disturbances, the damage has been limited and not directed at foreign
companies. In August 1997, ethnic violence hit Mombasa and other nearby areas
on the coast. Most damage was done to property owned by non-coastal Kenyans.
Tourists and foreigners were not targeted. Kenya enjoys good relations with all
its immediate neighbors.
The terrorist bombing of the U.S. Embassy in August 1998 was the result of transnational terrorism and unrelated to domestic Kenyan issues.
Corruption and Crime
Corruption is pervasive in most sectors, particularly in Government procurement and dispute settlement. A police unit was recently established at the Kenya Revenue Authority to tackle tax evaders, including scandals involving duty evasion at the Port of Mombasa. There has been slow progress in fighting corruption. In an ongoing case, three former senior Kenya government officials and a Nairobi businessman and his firm have been accused of stealing Ksh5.8 billion ($82 million) belonging to the government in 1993. The case is part of a massive financial scam in which the Central Bank and Treasury lost over Ksh21 billion ($400 million at average exchange rate of the period) in the early 1990s.
Kenya has adopted laws to combat corruption. The Prevention of Corruption Act
was amended in late 1997 to create the Kenya Anti-Corruption Authority (KACA).
A Director, who is appointed by the President, but has security of tenure,
heads the Authority. KACA is established as an independent body by an Act of
Parliament. It has wide-ranging powers. For example, the Director can take over
cases of corruption from the police, and its employees have powers similar to
those of the police. They are empowered to launch investigations, seize
documents and other evidence, compel witnesses or suspects to testify, and to
arrest and prosecute. Vigorous enforcement of the law by the KACA has been
lacking, however. KACA got off to a poor start when its first Director was
sacked in 1998. President Moi appointed a new Director in March 1999. Although
annual reports of the Controller and Auditor-General and the Auditor-General
for Corporations have identified specific areas of corruption in the financial
accounts of ministries and parastatals, little action has been taken. The same
is true of the reports of the two parliamentary watchdog committees that review
these findings. Anti-corruption efforts would be strengthened by the adoption
of legislation requiring, for example, public officials to disclose their
assets and barring them from making decisions on issues where they have a
conflict of interest.
Labor
Kenya's estimated 2.6 percent annual population growth rate translates into a
high demand for new jobs annually. In 1997, an estimated 1.2 million males and
473,400 females engaged in formal wage employment. In the formal sector, women
worked overwhelmingly in services, men in agriculture, education,
manufacturing, building and construction, trade, and transport. The highest
percentage of female formal sector workers was in education, where women
constituted 40 percent of the total work force. About one-quarter of the women
worked in this area, but only 15 percent of men. Women also constituted more
than 25 percent of the work force in finance, insurance, and other business
services and over 29 percent in public administration and agriculture. Women,
however, staff some textile factories almost exclusively.
The informal sector, known as jua kali, employs approximately 64 percent of all
Kenyan workers and, thus, plays an important role in Kenya's economy. Indeed, a
report by a Kenyan think-tank, the Institute of Economic Affairs, shows that
the informal sector is the most dynamic in the economy in terms of job
creation, accounting for about 90 percent of new jobs outside the smallholder
farm sector. Examples of informal sector business activities include carpentry,
motor vehicle repair, tailoring, and small-scale manufacture of spoons, cooking
pans and ovens. The Government of Kenya and donors are striving to improve
working conditions and infrastructure in the informal sector. However, there
often is a gap between Government policy and implementation.
Kenya's laws provide many safeguards and benefits for workers, with
mechanisms and procedures to address complaints relating to worker rights. The
normal work week is 40 hours, after which overtime must be paid. Kenya also has
a minimum wage scale for twelve different categories of employees. In addition,
benefits, ranging from housing to home transportation allowances, account for
25 to 50 percent of a Kenyan worker's compensation package. Kenyan law
establishes detailed environmental, health, and safety standards that are not
strictly followed in practice.
International Investment Agreements
Kenya signed a bilateral trade and investment agreement with Germany in 1996.
According to the Investment Promotion Center, agreements are pending with the United
Kingdom, Italy, and Russia.
Foreign Trade Zones
Kenya has 14 export processing zones; six are in operation. The six are
inclusive of both GOK and privately owned zones. Samara Industrial Park is Kenya's
largest privately owned space-leasing export processing zone. Located in Nairobi's
industrial area, it has been operational since 1990. Three others have been set
up and are operated by Kenyan firms for their specific needs, while four
privately owned zones are being constructed. The Government of Kenya has
developed a 230-acre zone out of 721 acres allocated for export processing at Athi
River, a Nairobi suburb; GOK is also developing another large export
processing zone in Mombasa, Kenya's main seaport. The export processing zones
are available to both developers (i.e. those intending to put up structures for
lease) and operators.
Incentives provided to manufacturers in the export processing zones include:
•a ten-year corporate tax holiday and 25 percent tax rate thereafter;
•a ten year withholding tax holiday on dividend remittance;
• duty and VAT exemption on all inputs except motor vehicles;
• stamp duty exemption on legal instruments;
• exemption from Industrial Registration act, Factories Act, Statistics Act, and Trade Licensing Act;
• exemption from pre-shipment inspection; on site customs inspection; and work permits for senior expatriate staff.
Export Processing Zone Authority (EPZA) is a Kenya Government parastatal tasked
to facilitate participation in manufacturing in the EPZ.
Foreign Investment Statistics
Kenya does not keep data on the value of FDI (position/stock and annual
investment capital flows) by country of origin or by industry sector
destination. Neither is data available on Kenya's investment abroad. It is
however estimated by the Investment Promotion Center that by 1994, cumulative
foreign direct investment totaled more than $1 billion.
More than 200 foreign companies are registered in Kenya, the majority from
United Kingdom, Germany, and the United States.
Taxation
The corporate income and branch tax rates are 32.5 percent and 40 percent,
respectively, and there is no capital gains tax. The withholding tax on
dividends is 10 percent, unless the dividends are paid to a resident, in which
case, the tax is 5 percent. The withholding tax on interest is 12.5 percent for
non-residents and 15 percent for residents, except interest on bearer
instruments, to which a 20 percent tax applies.
Stock Market
The Nairobi Stock Exchange was established in 1954, and is the fourth largest
in Sub-Saharan Africa. By the end of 1990s the Nairobi Stock Exchange had 57
listed companies.