Plunge in foreign direct investment into Kenya should worry us all

In an event to launch a new taxi-hailing app, Showfa, Trade Cabinet Secretary Moses Kuria referred to repugnant legislation that required at least 30 per cent local shareholding for international companies registering in Kenya.

This was provided in Section 975 of the Companies Act of 2015. The provision became effective on June 15, 2016, through Legal Notice No. 109 issued by the Attorney general. This was, however, repealed six months later, effective from 1st January 2017, through Section 85 of the Finance Act of 2016.

In addition to the legal gaffe, the CS appeared to chide real hustlers, insinuating it would be ridiculous to expect them to establish partnerships with big international investors. Figuratively, the Trade CS seemed to suggest that only a particular class of domestic investors would have been able to engage in such partnerships.

While CS Kuria may have dramatised the intents of that piece of legislation, an intuitive understanding of the dark business world domestically points towards that direction. It would appear well-connected people in politics and government were salivating to privatise the benefits of Foreign Direct Investments (FDI) without a sweat.

Otherwise, it made no economic sense why it was necessary to make such a provision in the modern global economic order with countries engaging in a cut-throat competition for FDI. Now that the requirement is behind us by deed of the law; the comments raise a valid public discourse on the country's competitiveness to foreign investments.

Both regional and domestic data demonstrate a very worrying trend. The country's bureaucrats and politician seems to be reading from three decades ago when Kenya was the darling of foreign investors. I have previously shared here clear evidence on reversals in intra and inter-regional trade flows in favour of our neighbours.

FDI flows data for 2021 indicates how bad things have become for the country. According to UNCTAD World Investment Report of 2022 on Regional Trends for Africa, FDI flows to Africa increased to US$ 83 billion (about Sh10.375 trillion) in 2021 from US$ 39 billion (Sh 4.875 trillion) in 2020. The bulk of the flows went to Southern Africa at US$ 42 billion. Western Africa, Central Africa, North Africa, and East Africa received US$ 14, 9.4, 9.0, and 8.2 billion respectively.

Political elites

On individual country share within East Africa, Ethiopian FDI inflows increased by 79 per cent, Tanzania 35 per cent, and Uganda 31 per cent while Kenyan FDI flows decreased by 37 per cent in 2021 compared to 2020. The Budget Policy Statement for the fiscal year 2023/24 indicates actual FDI inflows were Sh.7.4 billion in 2021/22 outside the projected Sh.126 billion. The projections for the 2022/23 fiscal year have been revised downwards from Sh.139 billion to Sh.42 billion in the revised estimates for the year.

The difficult question here is: When did the rain start beating us and why?

Unfortunately, the political elites are still talking of a rosy Kenya when the hard statistics are telling us otherwise. Economic data never lies -it respects no political hierarchy or brinkmanship. The shift may appear subtle for now, but the trend is consistently on the decline. It is a matter of time before it floods unless there is a decisive and believable policy change. By then it may be too late because economic floods tend to sweep away existing political and institutional order, together with the people occupying them.

Rationale for FDI

There exists an extensive literature on the benefits of FDI to host countries. In this article, we make reference to the OECD 2002 report on FDI for Development: Maximising benefits and minimising costs. The report alludes to the ongoing competition for FDI among countries through liberalisation of regimes and other policies to attract investments.

According to this report, there are enormous benefits to host countries that receive sufficient FDI inflows. These include FDI being a source of economic development and modernisation of the economy; contribution to income growth and employment; advantages of technology spillovers; and assisting in human capital formation through training and exposure of the workforce to best practices.

Other benefits are that it contributes to international trade integration; helps create a more competitive business environment; and enhances enterprise development. FDI may also lead to improvement in environmental and social conditions through the transfer of 'cleaner' technologies and the adoption of more socially responsive corporate policies.

On the contra side, FDI may lead to deterioration of the balance of payments due to repatriation of profits; lack of positive linkages to local communities; potentially harmful environmental FDIs, especially in extractive industries; impacts of social disruptions from accelerated commercialisation in less developed countries; and negative effects on competition in national markets. To the political elites, increasing corporate power may create perceptions of loss of political sovereignty.

However, to benefit from FDI, a host country must enact supportive policies and attain certain basic levels of development.

Beyond Law

Far from CS Kuria's imagination of legal reforms, the drivers of FDI are complex and dynamic. For starters, we are witness to political elite misdemeanors on transactions involving huge foreign investments into the country. Good cases include the mysterious mobile shareholders in Safaricom; in Tullow Oil case, very well-connected people miraculously became the property owners of the blocks of land rich in oil in Turkana and not the indigenous local communities; and there have been widespread incidences of changes in property ownerships to elites along major infrastructure corridors shortly before the contracts are signed.

Besides, there are persuasive reasons to believe many shadowy foreign registered companies, especially in well-known tax havens, belong to locals. These entities are major conduits to repatriate proceeds of corruption and kickbacks deposited in foreign accounts back into the country.

For instance, it still baffles how the Treasury manages to float sovereign bonds in foreign capitals long before the prospectus is made public. The question is: who are these foreign investors willing to put money in the sovereign state without the primary source document for investor information? Could it be that we are merely cleaning what is stolen from us domestically and stashed in foreign bank accounts?

More tangibly, four factors significantly influence the decisions of foreign investors. One is the cost of doing business. It is without a doubt that the cost of energy, transport, and powerful cartels, coupled with declining household incomes has made the country very unattractive.

Two is the menace of contraband goods and the black market. While we are okay with running the local economy bandit's style, seasoned international investors do not operate under the same codes of ethics and standards.

Three is inconsistent policies, duplications, and tall layers at the two levels of government. Traversing from one government agency to another and to the sub-national level, one might be tempted to think they are dealing with multiple governments.

Finally, is the culture of the big man syndrome -tales abound of how difficult it is for investors to access the correct information, and requisite approvals and to meet relevant public officials in the course of seeking investment opportunities.