State’s pleas to foreign investors fall on deaf ears

By Benson Kathuri

It is almost a year since Agriculture Permanent Secretary Romano Kiome invited British investors to come and put their money in the agricultural sector but none has turned up so far.

For all that period, the doors have remained open. From the sugar industry to horticulture and retail markets, investors are free to invest either individually or jointly with the Government.

However, the idea seems not to have elicited the much-anticipated interest with some of the investors already in the sector such as James Finlay (K) expressing concern that they might be forced to cease operations due to high costs of doing business.

Agriculture is the lifeline to 80 per cent of the population. It employs over 70 per cent of the labour force and contributes 51 per cent of GDP Photo: File

Others in the horticultural industry have relocated to Ethiopia and Rwanda where the cost of production is lower and state-censored incentives are better.

According to Finlay’s Managing Director Simeon Hutchinson, the company that has invested heavily in the tea sub-sector has lost its competitive edge while the new tea rules that become effective today threaten to interfere with their marketing activities.

"Agriculture is the lifeline to 80 per cent of the population. It employs over 70 per cent of the labour force and contributes 51 per cent of GDP," Kiome told investors in London in July last year. Sources now say after failing to attract direct foreign investment into the economy, the Government is now targeting specific investors to enter into public- private partnership arrangement.

Early this month, Finance Minister Uhuru Kenyatta published rules to govern the arrangement that might help ease financing burden on the cash-trapped coalition Government.

State needs cash

In the agricultural sector, the Government is in dire need of cash to clean the accounts of several highly indebted sugar companies before entering into a PPP arrangement.

According to Kiome, domestic sugar production stands at 520,400 tonnes while demand stood at 748,300 tonnes in 2007 and there is need to raise production to at least meet local demand.

The deficit of 227,900 tonnes is met through imports while there is export potential of more than 500,000 tonnes. Power alcohol and electricity cogeneration is not exploited.

Armed with Sh55 billion, any investor would be assured of getting expansive land and generous incentives like tax holidays and market protection.

Among the targets is the expansion of Sony Sugar factory currently valued at Sh3.4 billion and a potential milling capacity of over 7,000 tonnes a day.

The factory requires Sh12 billion while the consolidation and expansion of milling capacity within the Nyando Basin with three small milling factories would require Sh18 billion.

Milling capacity

In western Kenya, the Government wants to expand milling capacity in one state-owned factory and one privately owned with combined milling capacity of 3,000 tonnes a day.

With export markets in Uganda and Sudan and huge potential for power alcohol and cogeneration, Sh9 billion is required for new investment. Other sub-sectors with opportunities up for grabs include the struggling coffee sub-sector, horticulture and mainly fruits processing, retail marketing for agricultural commodities as well as fertiliser blending and manufacturing.

According to Kiome, there is need for new wholesale markets infrastructure for Nairobi, Kisumu, Mombasa, Nakuru and Eldoret through partnerships estimated to cost Sh8 billion.

"There are also investment opportunities in upgrading of feeder facilities in the rural towns and development of market information systems," he said. With the new rules and regulations now in place, the private sector might be encouraged to enter into joint projects with the state though analysts fear the Government do not have the capacity to negotiate and supervise such complex partnerships.

"We believe the rules have not been subjected to sufficient public scrutiny and might have loose ends that need to be tightened up," said Dr Moses Ikiara, executive director at the state-funded Kenya Institute of Public Policy Research and Analysis (Kippra).

"The Government might not have the capacity to negotiate with the private sector on some projects, leave alone supervise the numerous projects that might crop up."

Partnership projects

Under the rules, Uhuru assured that the public- private partnership projects should be affordable, and provide value for money, while allowing the private party to maintain its financial integrity, attract capital, operate efficiently and compensate investors for risks assumed.

The Government also pledged to take over any political risks involved in the projects, while the private sector players would be required to pay all its debts and debt service. The rules, however, does not guarantee the private sector actors of protection from competition in services delivery saying it will still determine prices in some regulated services.

project’s viability

"The private sector shall accept that tariffs may not be adjusted automatically and hence need to agree on measures to deal with situations such as tax increases that may affect the project’s financial viability adversely," said the gazette notice.

However, the Government is aware that rules alone are insufficient to attract and retain foreign investors when the cost of doing business is high.

"The fact that our legal system is to some extent ineffective in resolving disputes relating to contracts is in itself deterrence to investors," Planning minister Wycliffe Oparanya told participants in an international investment conference in Nairobi last week.

"It is important that we establish a clear and effective framework for contract dispute resolution to protect investors."

Other hurdles include poor services offered by local authorities, including the Nairobi City Council that the minister say are slow in facilitating the investors.