Aug 16, 2015

Ease of doing business is an aggregate ranking method for countries, based on indicator sets that measure and benchmark regulations applying to domestic SME businesses throughout their life cycle. The ranking is done by the World Bank, and tracks changes in the following 11 life cycle stages of a business: starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts, resolving insolvency and labour market regulation. The countries are then ranked from 1 to 189, 1 being the best. In the 2015 survey, Kenya was ranked 136 out of 189, a marginal improvement from 137 in 2014.

This ranking is of use to (i) policy makers trying to improve their economy’s regulatory environment for business operations, with yearly changes in rankings providing some indications on the progress, and (ii) international investors, since it ranks countries relative to others and could act as a guide on which countries have more favourable operating environments. In this report, we choose to focus on Kenya’s ranking on the following 6 metrics:

1. Starting a business: With 10 procedures and 30 days to set up, Kenya’s ranking declined from 134 in 2014 to 143 in 2015 despite positive reforms. The reforms during the period was the improvement in the credit information sharing system. This now allows sharing of both positive and negative credit information, which in turn improves access to credit for SME’s. Additionally, the Central Bank has licenced three credit reference bureaus which will enhance the provision of this information. On the other hand, negative reforms include (i) increase in building permit fees which makes construction permits costlier, and (ii) increase in taxation cost by increasing employer’s social security contribution to 6% of an employee’s salary.
2. Dealing with construction permits: The metric assesses the procedures, time and costs of acquiring construction permits. In Kenya, one has to follow 8 procedures from the submission of architectural drawings to when the water and sewerage will have been installed, and this takes approx. 125 days. Kenya’s ranking fell to 95 from 35 in 2014 with the increase in building permit fees being cited as the reason.
3. Registering property: It takes on average 72 days from the time of application of land clearance certificate to the payment of stamp duty (4% of property value), at an administrative cost of approx. Kshs 13,000, leading to a ranking of 136 from 131 in 2014.
4. Getting credit: Kenya’s rank declined to 116, from 111 in 2014. The positive reforms during the period included the adoption of a credit information system that shares both positive and negative information. The credit reference coverage is however still low at 4.9% of adult population.
5. Protecting minority investors: The metric assesses the extent of transparency in transactions and the extent to which minority shareholder’s rights are protected. Kenya’s ranking dropped to 122 from 118 with the trouble areas being the extent of director’s liability, strength of governance structure and extent of disclosures. This can be evidenced by the underperformance of listed companies due to mismanagement e.g. Mumias, KQ and Uchumi.
6. Enforcing contracts: Kenya ranks 137 on the ease of enforcing contracts with the process taking 465 days. The lengthy legal processes act as a hindrance and leads to inefficiencies in business operations.

From the above, it is evident that the process of starting a business and enforcing contracts has the least scores and as such, need for immediate reforms if Kenya is to remain attractive to investors and to continue on its journey to becoming a regional hub.

We have recently had our own experience with an ease of doing business comparison. When we recently incorporated our US affiliate, Cytonn Diaspora, the registration of the company from start to receiving the company registration certificate took 2 hours. With the registration certificate at hand, it took another 30 minutes to the tax identification number, the Kenyan PIN equivalent. With the registration certificate and tax ID number, it took one hour to open and operationalize a bank account. So in total, it took 3.5 hours to get the company registered, get a tax ID and open a bank account. Our estimation is that this would take at least two weeks if aggressively pursued in Kenya. The principal areas of improvement are to move company registration online, simplify tax registration and have company searches online.

Opportunity and difficulty are different sides of the same coin. The difficulties presented by our poor ease of doing business ranking present an opportunity for local partners, such as Cytonn, who are focused on serving foreign capital interested in the local attractive returns. “The difficulty of doing business is a barrier to entry for foreign capital, but with local partners, foreign investors can unlock a massive opportunity for exceptional returns and the BEST asset level liquidity anywhere in East Africa”, said Antti-Jussi Ahveninen, Director of Taaleritehdas Africa Real Estate Fund, the leading global markets real estate investor in the region.

Since we have identified the issues, the next step is to identify our ability and willingness to improve. KPMG’s Change Readiness Index (CRI) which measures how effectively a government, its private enterprises and civil society anticipate and prepare for shocks, opportunities and risks, ranked Kenya 47 in enterprise capability, 84 in government capability, 65 on people and civil capability and 65 overall out of the 127 countries that were surveyed. This was a massive decline as compared to 2013 when Kenya ranked 21 in enterprise capability, 51 in government capability, 51 in people and civil capability and 37 overall. This reiterates the need for improvement in the governance and regulatory environment since government’s responsiveness has been the lowest of the three metrics consistently.

In our view, the change in the governance and regulatory environment will go a long way in improving changes in the business environment as well. As stated in our Cytonn Report #29, the highlighted challenges to entrepreneurship, which included (i) high taxes, (ii) unclear/too many conflicting regulatory hurdles, and (iii) prevalent corruption in the country, all originate from a poor governance framework. If this were to be improved on, the ease of doing business would increase, which would then foster entrepreneurship, consequently improving people and civil society capability.

However, it is worth noting that Kenya is the most responsive in East Africa, with Rwanda, Uganda and Tanzania coming in positions 69, 74 and 78, respectively. Additionally, the government is on the right path towards transformation with the earlier on mentioned transformations including the adoption of a full-file credit information sharing system, the digitization of the Company Registrar, the introduction of Huduma centres and other initiatives such as the Uwezo fund. The country has a well educated workforce with an entrepreneurial spirit and hence companies will not struggle in getting local talent while looking for employees.