The pendulum swings on Kenya – country focus: Kenya

Ambitious infrastructure plans need risk management Kenya’s ironic perception as an emerging investment market with friendly and educated people, but also as unsafe and relatively volatile, has been reinforced by events in the recent past, helping maintain the pendulum swing on its risk profile. The country has embarked on ambitious investment in infrastructure development. It is reforming its commercial laws to make them more business friendly. It is empowering youth and women through state entrepreneurship soft loans. It has a new constitution that has devolved governance. Its revenue future is boosted by the discovery of oil and rare earth minerals. It has a regional stabilising effect, highlighted by the 2011 decision to use its own resources to invade Somalia and drive out the then expansionist terrorist group Al Shabaab which had taken much of Somalia’s administrative region.hideYet it is just five years ago when it nearly sunk into a civil war because of a disputed presidential election. Armed crime has remained high. The president and his deputy are facing charges of crimes against humanity at The Hague. Al Shabaab has intensified terrorism activity, epitomised by the Westgate Shopping Mall attack in which more than 65 people were shot dead. Infighting in the reformed judiciary is reducing the institution’s credibility. In the eyes of the risk experts, however, risks facing the country abound in the positives as well as, more obviously, in the negatives. Sam Ncheeri, Chief Executive Officer of Eagle Africa Insurance Brokers, sees the ambitious infrastructure construction path taken by the government as a risk. “There are too many projects on the plans and one is not sure when they shall take off,” he said. These projects include the construction of the standard railway gauge from Mombasa to the capital Nairobi, covering a distance of 485 kilometres. A government to government deal with China has secured part of the funding. The rest of the money will come from the collections of the newly introduced Railway Development Levy of 1.5% on all value of imports. The new railway will replace the aging metre gauge railway built in 1909, which has maximum locomotive speed of 40 kilometres per hour. This speed will double with the new line. It will bring efficiency in railway transport and ease cargo haulage through the roads, which takes up 96% of import-export cargo from Mombasa Port to Kenya, Uganda, South Sudan, Burundi and Rwanda. Other projects on the cards are the Konza Technology City being built 60 kilometres east of the capital Nairobi and the mega Lamu Port and Lamu-Southern Sudan-Ethiopia Transport Corridor that will include a railway, modern highway and an oil pipeline all linking the three countries. “The projects need to be systematically planned and implemented,” said Mr Ncheeri. The increasing number of terrorism attacks by Al Shabaab designed to avenge Kenya’s invasion into Somalia that weakened its strengthening grip of the country, is also a major worry for risk managers. While the Westgate Shopping Mall attack was the highlight, there have been more than 100 small scale terrorist attacks, mostly against the government workers and premises especially in northern Kenya, the region that borders Somalia, according to Kenya police data. The choice of weapons in most of the attacks have been grenades and improvised explosive devices. The challenge is that Al Shabaab has growing support in Kenya, especially among communities that reside in northern Kenya and the parts of Mombasa that are mainly populated by Muslims. These people have historical grievances about the equitable allocation of public resources by subsequent Kenya governments since independence in 1963. This has meant government security agents find it very hard to generate any sort of crucial community-generated intelligence on terrorism crime. This is an advantage that Al Shabaab has enjoyed to the full. Tom Gitogo, Chief Executive of Pan Africa Life, the first life insurer to distribute unit-linked products in Kenya, told Commercial Risk Africa that attacks such as the Westgate incident, which bring disruption to normal business, shows how sensitive the Kenyan economy is to such unexpected intrusions. “Any investment made to help improve our country’s ability to forestall such attacks or handle them better should they occur will go a long way towards securing our economic growth” said Mr Gitogo. The attacks, particularly on Westgate, have increased demand for terrorism risk insurance covers as insurance companies earlier declined to pay for damaged properties including vehicles which did not specifically have the terrorism cover. While some insurance companies have paid their clients in kind, the issue has helped more Kenyans become aware of terrorism insurance covers. “We have received overwhelming inquiries from our clients on how they can embed the terrorism cover into their existing motor vehicle and property covers,” said Samuel Gichobi, an insurance agent in Nairobi. Ashok Shah, Chief Executive of the APA insurance company, said the increasing frequency of attacks and the magnitude of Westgate will increase the cost of the terror cover by up to 30%. Time to tackle corruption The arrival of new president Uhuru Kenyatta earlier this year gave many hope that Kenya would finally quash the endemic corruption that threatens its further development in economy and society. These hopes have only been partially met. Corruption has unfortunately been a byword for Kenya. Corruption is not only prevalent among the rich and the middle class whose wealth may be seen as being as a result of corruption but also by the poor. Corruption has nearly become part of people’s culture. But hope is provided by the fact that most Kenyans, based on successive opinion polls, would want to live in a corruption- free environment. The challenge is that while some people make individual efforts not to corrupt or be corrupted, mega corruption in public offices, which go unpunished, become the greatest demoralisers of those personal efforts. When the government of President Uhuru Kenyatta was elected into the office, one of the biggest hopes his supporters had is that he would deal with corruption right from the start. These hopes were bolstered by reform of the judiciary and the office of the director of prosecution, where judges and magistrates found to have participated in corruption were sacked through an internationally constituted tribunal. But it is now nearly eight months into President Kenyatta’s presidency and not a single mega corruption case has been prosecuted. Instead, those public officers suspected of corruption are merely relieved of their duties. Every day, hundreds of traffic rules enforcement police officers take bribes openly across Kenya and no effort has been made to prosecute or even sack the officers. President Kenyatta, to his credit, has been very vocal against corruption and has vowed stern measures for those found to have misappropriated public money. On 31 October, the president unveiled a website where the public can report suspected corruption incidents. A week later, the site had received 2,000 reports from the public, according to State House. The president has subsequently handed over the complaints to the Ethics and Anti-Corruption Commission (EACC) for further action. EACC however does not have powers to prosecute, a fact cited by various anti-corruption commentators as being its major weakness. There are growing worries that the devolution of governance to 47 counties run by elected governors will mean that corruption will merely be devolved. Those fears were confirmed in the first week of November when the EACC released a report that showed corruption thrives in the counties. The report gave estimated value of average bribes asked by public officers in every county. But this would not have been the case if the judiciary had been a bit faster in prosecuting some of the corruption cases, especially those facing public service officers, according to Sammy Mbugua, Director of Ethics and Governance Centre, a training centre on good governance issues. “A successful prosecution and severe sentence will have a very big impact in at least reducing corruption in Kenya. Sustained prosecution will be a major deterrent. There is no reason why we should not have zero corruption in Kenya,” he said. Kenyans may however have to wait longer for such action as the judiciary is itself involved in infighting over the alleged corruption practices by Gladys Shollei, the Chief Registrar of the Judiciary. She has since been sacked by the Judicial Service Commission over accusations of inflated payments, foreign currency manipulation when making payments to suppliers, and illegal award of advance salary among others. “Justice Mutunga and his team have missed a golden opportunity to demonstrate the chasteness of the institution we have placed in their hands. The wrangling is no longer an internal affair. The public wants to know the facts. Only that can redeem the judiciary’s sinking reputation,” notes Barrack Muluka, of Mvule Publishers. According to Mr Gitogo, Kenya needs to do much more to deal with corruption. “We need to do all we can to make Kenya an attractive investment destination by continually improving our legislative framework and dealing head-on with monsters like corruption. Such investments will help us diversify from our economy’s reliance on agriculture and tourism. A predictable and progressive legislative framework will help the corporate sector plan and achieve tangible growth,” he said. Public policy swings, fraud & regional politics all need solutions Unpredictable policies are rapidly emerging as one of Kenya’s main risks that risk managers for Kenyan companies and those keen to expand in the market must analyse closely and keep a keen eye upon. This volatility has been particularly highlighted by two recent incidents in the mining industry and the communications sector. In the mining sector, the current government revoked mining licenses awarded by the previous government from January this year, up to the time the current administration took power. It claimed the licences had been irregularly issued. One of the worst affected companies was Cortec Mining Kenya in which Canadian mining company Pacific Wildcat Resources Corp has an indirect 70% stake through its two subsidiaries. It is Cortec Mining Kenya that made discoveries of rare earth minerals in Kenya’s coastal region worth an estimated US$640bn. The matter is currently in court. In the communications sector, the government has shifted the deadline for digital television migration from analogue broadcasting six times, putting uncertainty into the whole migration deadline. Another macro problem that needs to be tackled by the Kenya authorities is fraud. Fraud against insurance and banks remains at all-time high, according to recent findings by Deloitte Forensic Services in a report titled “Financial Crimes Survey 2013, Where is the Exposure?” released early November. Robert Nyamu, Director for Deloitte Forensic Services in East Africa, said much of the theft in the two sectors is through cash because those involved know that the cash is insured hence giving them the leeway to carry out the theft. The report found out that East African banks, insurance companies, the capital markets, and real estate companies lost a massive $30m to fraudsters between October 2012 and October 2013. Kenya accounted for 45% of this loss. Other focus countries were Uganda and Tanzania. Another problem is political instability that is well represented by the fact that President Uhuru Kenyatta and his Deputy William Ruto both face legal proceedings. The trial of Ruto has started while that of Kenyatta is to start in January 2014 if lobbying to defer his trial succeeds. What this has meant is that substantial attention of the two leaders has been taken by the cases, blocking them from full participation in leadership issues. Then there is the regional politics that have put the integration process of the East Africa Community (Kenya, Uganda, Rwanda, Burundi and Tanzania) to the test. Since June, the trio of Kenya, Uganda and Rwanda had been sending feelers to Tanzania and Burundi that they are ready to go it alone in the planning, funding and implementation of key infrastructure projects in the region. Projects that are high up the agenda have been how to fast track the development of the oil pipeline from Uganda to the Indian Ocean through Kenya, construction of an oil refinery in Uganda, construction of the standard gauge railway line from the port city of Mombasa in Kenya through Kampala to Kigali and the development of the Lamu Port in Kenya. In October, Tanzania and Burundi missed the signing of the EAC Single Customs Territory, a unified and single good clearance model at the borders to improve efficiency and reduce the cost of doing business. Tanzania President Jakaya Kikwete told parliament that his country has been sidelined in crucial meetings by Kenya, Uganda and Tanzania. The dispute is to be solved internally through EAC’s dispute resolution mechanism, according to the body’s secretary general Dr Richard Sezibera. While piracy in the Indian Ocean has been a major risk facing Kenyan and east African economies in general, the incidents are reducing but it is not yet eradicated. There has not been a single successful case of a seized vessel this year compared to the peak piracy period of 2010 when 47 vessels were successfully taken by pirates. At the height of the intense piracy attacks, regional insurance companies imposed a surcharge of 0.05% of the value of goods on top of marine insurance covers to take care of claims arising from pirate attacks. Bob Tarrant, Operational Commander of the European Union Naval Force Rear Admiral, which is helping provide naval power in the Indian Ocean, said Somalian pirates are still attempting to attack ships and this shows they still have the intent and capability to get out to sea to attack and therefore they need to remain vigilant. The range and diversity of big social, political and economic challenges that face Kenya therefore remain big. But, overall, foreign investors and the local population still thankfully on the whole think Kenya is well worth the risk.

The pendulum swings on Kenya – country focus: Kenya

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