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 economys 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 Kenyas ranking on the following 6 metrics:
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. KPMGs 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 governments 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.