Turning Risk into Opportunity: Investing in Kenya
Between 2009 and 2019 real GDP growth in Kenya averaged 5.6% per annum compared to 4.1% for Sub-Saharan Africa as a whole, 4,9% for emerging markets and 3.4% for the rest of the globe. Foreign direct investment inflows have grown from under USD500 million per annum on average to USD1.6 billion in 2018, almost 15% of the East African total.
Two key drivers of this outturn – horticulture and tourism – are under especial strain today and will remain so whilst the world grapples with COVID-19 and eventually, recovery. Kenya also faces additional risks this year from locusts and flooding. The stresses are all real, and yet, distant as it may seem, there is a future beyond this trying present. One where Kenya’s needs, advantages and even its challenges offer opportunity for business leaders.
To get there, we expect to see successful businesses grapple with deepening governance risks. Fiscal consolidation must slow for the moment, and government will feel at points like the only game in town (notwithstanding retrenchment on planned capital spending). We expect significant healthcare spending as all expenditure under the Big Four Agenda ($4.2 billion) has been frozen to prioritise the Covid-19 fight. Should the freeze be reversed, we can expect priority areas to be housing for government workers and universal healthcare access. In this environment, we highlight three key risks:
Risk: Wasted time & resources on window-dressed tenders.
It is quite common for government agencies to put out tenders with the sole aim of awarding them to preselected companies who will procure little or no goods and services yet still be paid. Legitimate businesses can expend significant resources preparing bids for contracts they have no realistic chance of winning. There are also “tenderpreneurs” or people close to government officials operating businesses with the sole aim of providing goods and services to the public sector at an inflated cost, if at all.
Solution: deep-dive due diligence to understand counterparty reputational risk/political exposure; engagement of local counsel to advise on laid down tender process. Some of the reputable local firms today areMMAN Advocates, MMC Africa Law and Musyimi and Company.
Risk: High likelihood of being asked “to buy tea”.
It is well-documented that some government actors take bribes from bribe-givers as a fee for introductions to senior decision makers or to help influence the awarding of a contract. This was the case earlier in 2020 when a former sports minister, Rashid Echesa, was arrested for allegedly collecting $115,000 in consultancy fees to introduce Polish investors to officials as part of a $370m arms deal that did not exist. This pervades lower levels of government as well; historically, clearing goods at ports has been notoriously cumbersome with sometimes up to 10 payments having to be made in the process of clearing goods.
Solution: where possible, opt for online payment system for goods clearance; ask for stamped receipts; check with businesses in a similar line of work as you; refuse offers of money which can’t be accounted for publicly or for rendering a service which is already expected; exercise patience!
Risk: Political risk exposure for large-scale projects.
Locally, the involvement of high-level political figures or their allies/family members in seemingly private sector transactions, is not uncommon. Key figures within the incumbent regime and their allies are known to take an almost automatic stake in local businesses, with sectors such as ICT becoming increasingly exposed, given how lucrative the sector is.
Solution: Place emphasis on the value proposition for the nation/sector/community; build up local community buy-in; embed local actors into the supply chain; underscore that a particular project could be a legacy project for the authority in power.
To discuss any of the points raised or to learn more about the work that we do, please don’t hesitate to get in touch at questions@songhaiadvisory.com