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Diplomacy in Action

2012 Investment Climate Statement - Kenya


2012 Investment Climate Statement - Kenya
Bureau of Economic and Business Affairs
June 2012
Report
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Openness to Foreign Investment

Kenya has enjoyed a long history of economic leadership in East Africa as the largest and most advanced economy in the region. However, ethnically-charged post-election violence in January-February 2008, which left 1,200 dead and 300,000 displaced, caused many to reassess Kenya’s investment climate. Since then, the economy has rebounded but serious concerns about corruption and governance remain. Tourism is nearing pre-election levels with 1.1 million arrivals in 2010 and 1.04 million in the first three quarters of 2011, up 16 percent compared to the same period in 2010. This is despite security concerns following high-profile kidnappings in the coastal city of Lamu, one of the triggers for Kenya’s military incursion into Somalia in pursuit of al-Shabaab militants. Kenya adopted a new constitution in a peaceful 2010 referendum, generating hope that the country will avoid a repeat of the 2008 violence when it heads to the polls again in late 2012 or early 2013.

After experiencing 7.1 percent growth in 2007, the economy slowed to 1.6 percent growth in 2008. The economy in 2009 grew at 2.6 percent, while 2010 growth further improved to 5.6 percent. Growth in 2011 is expected to be in the range of 4.5-5.0 percent, somewhat lower than earlier projections of 5-6 percent growth, due to a combination of factors, including high inflation, drought, and a weak shilling causing prices of imported goods to skyrocket. Kenya’s inflation dropped from 16.2 percent in 2008 to 9.2 percent in 2009, partly due to new methodology for calculating the rate, and fell further to 4.1 percent in 2010. High inflation reemerged in 2011, however, hitting a year-on-year high of 19.72 percent in November 2011 before falling slightly to 18.93 percent in December 2011. Average inflation for 2011 was 14 percent. Agriculture was hard-hit by drought in 2011, but recovered following an unusually long and heavy short rains period in October-November, which also led to severe flooding in some areas of the country.

In late 2010, the ratings agency Standard & Poor’s (S&P) upgraded Kenya’s sovereign debt rating to B+/B (long-term/short-term) with a stable outlook. S&P affirmed this rating in December 2011, despite inflation near 20 percent and exchange rate volatility that saw the Kenya shilling oscillate between Ksh 107 and Ksh 83 against the dollar in a two-month period. The rating is based on S&P’s “expectation of continued political stability, fairly resilient economic growth, improving inflation performance, and continued moderately high deficits, but with more spending on growth-enhancing infrastructure investment.” S&P could lower the rating if “political tensions were to flare up, significant currency pressures were to re-emerge, or fiscal or monetary performance were to deteriorate significantly.”

Since independence, Kenya has pursued at various times import substitution and export oriented industrialization strategies. It is currently implementing an industrialization strategy outlined in Sessional Paper No. 2, adopted by Parliament in 1996, which aims to transform Kenya into a fully industrial state by 2020. The strategy emphasizes support for export industries, driven by a desire to increase their employment potential. Vision 2030, unveiled in 2007 as the Kenyan government’s long-term plan for attaining middle income status as a nation by 2030, buttresses the Sessional Paper by also recognizing industrial promotion as an avenue for growth and development.

Kenya has experienced difficulty seizing opportunities generated by trade liberalization in developed markets to export manufactured commodities. The bulk of its exports to the European Union are agricultural with minimal value addition: tea, coffee, cut flowers, vegetables, fruits, and nuts. In contrast, manufactured goods (mostly apparel) comprise the majority of exports to the United States under the African Growth and Opportunity Act (AGOA). The textile and garments industry largely depends on imported fabrics and raw materials like cotton, viscose, polyester, denim, nylon, and acrylics, since a competitive integrated domestic cotton industry does not exist. Following five years of intense lobbying by fresh produce growers, the U.S. Animal and Plant Health Inspection Service has amended the fruits and vegetables regulations to allow the importation of French beans and runner beans from Kenya into the United State effective December 5, 2011. The move, which opened a new frontier outside Europe for Kenyan farmers, was made in response to improvements in washing, packaging, and processing of Kenyan beans for export.

Information and communication technology (ICT), especially mobile technology, is an important area of growth and innovation in the Kenyan economy. As of December 2011, there are four mobile telecommunications providers in Kenya: the partially government-owned Safaricom, French-owned Orange (the mobile portion of Telkom Kenya), Indian-owned Bharti Airtel, (formerly Zain), and Indian-owned Yu (formerly Essar Telecom). Foreign telecom companies can establish themselves in Kenya, but must have at least 20 percent local ownership.

The respective roles of the public and private sectors have evolved since independence in 1963, with a shift in emphasis from public investment to private sector-led investment. The Kenyan government has introduced market-based reforms and provided more incentives for both local and foreign private investment. Foreign investors seeking to establish a presence in Kenya generally receive the same treatment as local investors, and multinational companies make up a large percentage of Kenya's industrial sector. Furthermore, there is no discrimination against foreign investors in access to government-financed research, and the government's export promotion programs do not distinguish between local and foreign-owned goods. Although there is no specific legislation preventing foreigners from owning land, the ability of foreigners to own or lease land classified as agricultural is restricted by the Land Control Act. Hence, the Land Control Act serves as a barrier to any agro-processing investment that may require land. Exemption from this act can be acquired via a presidential waiver, but the opaque process has led to complaints about excessive bureaucracy and patronage. The new constitution states that non-citizens may not own land, but may lease land for a maximum period of 99 years.

While Kenya was a prime choice for foreign investors seeking to establish a presence in East Africa in the 1960s and 1970s, a combination of politically driven economic policies, government malfeasance, rampant corruption, substandard public services, and poor infrastructure has discouraged foreign direct investment (FDI) since the 1980s. Over the past 25 years, Kenya has been a comparative underperformer in attracting FDI. Although Kenya's performance in attracting FDI has been marginally better since the middle of the last decade, it still lags behind neighboring Tanzania and Uganda in dollar terms, despite their smaller economies. The United Nations Conference on Trade and Development's (UNCTAD) 2008 World Investment Report describes Kenya as the East Africa region’s least effective suitor in attracting FDI. After enjoying a banner year in 2007, attracting $729 million in FDI (2.7% of GDP), Kenya only received $96 million (0.3%) in 2008, $141 million (0.4%) in 2009, and $186 million (0.6%) in 2010, according to the World Bank’s World Development Indicators. Domestic investment exceeds FDI and is making a significant impact on development in Kenya.

The Companies Ordinance, the Partnership Act, the Foreign Investment Protection Act, and the Investment Promotion Act of 2004 provide the legal framework for FDI. To attract investment, the Kenyan government enacted several reforms, including abolishing export and import licensing except for a few items listed in the Imports, Exports and Essential Supplies Act; rationalizing and reducing import tariffs; revoking all export duties and current account restrictions; freeing the Kenya shilling's exchange rate; allowing residents and non-residents to open foreign currency accounts with domestic banks; and removing restrictions on borrowing by foreign as well as domestic companies. In 2005, the Kenyan government reviewed its investment policy and launched a private sector development strategy. One component of this effort was a comprehensive policy review by UNCTAD that was the basis for the 2005 UNCTAD Investment Guide to Kenya, published in conjunction with the International Chamber of Commerce (ICC).

Kenya's investment code, articulated in the Investment Promotion Act of 2004, which came into force in 2005, streamlined the administrative and legal procedures to create a more attractive investment climate. The act’s objective is to attract and facilitate investment by assisting investors in obtaining the licenses necessary to invest and by providing other assistance and incentives. The act replaced the government's Investment Promotion Center with the Kenya Investment Authority (KIA); however, the law also created some new barriers. It set the minimum foreign investment threshold at $500,000 and conditioned some benefits on obtaining an investment certificate from the KIA. The government later revised the minimum foreign investment threshold to $100,000 as an amendment to the act. The minimum investment requirement is likely to deter foreign investment, especially in the services sector, which is normally not as capital-intensive as the agriculture and manufacturing sectors. Another amendment made the foreign investment certificate requirement optional.

Further regulatory reforms include the Licensing Act of 2007, which eliminated or simplified 694 licenses, and a 2008 reduction in the number of licenses required to set up a business from 300 to 16. The Business Regulation Act of 2007 established a Business Regulatory Reform Unit within the Ministry of Finance to continue the deregulation process. In 2009, Kenya launched a national e-Registry to ease business license processing and help improve transparency.

The Kenyan government focuses its investment promotion on opportunities that earn foreign exchange, provide employment, promote backward and forward linkages, and transfer technology. The only significant sectors in which investment (both foreign and domestic) are constrained are those where state corporations still enjoy a statutory monopoly. These monopolies are restricted almost entirely to infrastructure (e.g., power, posts, telecommunications, and ports), although there has been partial liberalization of these sectors. For example, in recent years, five Independent Power Producers (IPPs) have begun operations in Kenya.

A law passed in June 2007 reduced the maximum share of foreign ownership for companies listed on the Nairobi Stock Exchange (NSE) from 75 percent to 60 percent, creating a disincentive for foreign-owned firms interested in an NSE listing. Although the regulation is not applicable retroactively, it does compel companies with a foreign presence of more than 60 percent to downgrade foreign shareholding before they can apply to the NSE, effectively barring these firms from selling excess shares to non-Kenyans.

Work permits are required for all foreign nationals wishing to work in the country, and the Kenyan government requires foreign employees to be key senior managers or have special skills not available locally. Still, any enterprise, whether local or foreign, may recruit expatriates for any category of skilled labor if Kenyans are not available. Currently, foreign investors seeking to hire expatriates must demonstrate that the specific skills needed are not available locally through an exhaustive search, although the Ministry of Labor plans to replace this requirement with an official inventory of skills that are not available in Kenya, as discussed below. Firms must also sign an agreement with the government describing training arrangements for phasing out expatriates.

A number of infrastructural, regulatory, and security-related constraints prevent the Kenyan economy from realizing its potential. The 2005 UNCTAD Investment Guide to Kenya provides comprehensive analyses of investment trends, opportunities, and the regulatory framework in the country, and continues to guide new investors as well as the Kenyan government’s reform efforts. According to the UNCTAD report (and most observers), significant disincentives for investment in Kenya include governmental overregulation and inefficiency, expensive and irregular electricity and water supplies, an underdeveloped telecommunications sector, a poor transport infrastructure, and high costs associated with crime and general insecurity. The telecommunications sector, however, has made rapid progress since the report was issued with the landing of multiple fiber-optic connections and world-leading innovations in mobile technology, such as Safaricom’s M-Pesa mobile payment system.

An April 2008 survey conducted by the Kenya Association of Manufacturers (KAM, Kenya's foremost business association), identified constraints similar to those in the UNCTAD report and concluded that Kenya's business climate is hostile. KAM reported that because of the costly investment climate, a number of companies have opted to shift from manufacturing to trading, while others have abandoned the country altogether. After examining explanations as to why firms either closed or relocated over the past decade, KAM deemed that legitimate commerce in Kenya is inhibited by:

(a) unfair foreign competition, which dumps counterfeit and pirated products (cosmetics, toiletries, batteries, tires, car parts, medicines, books, electronic media, and software) and secondhand clothes and shoes into the market; passes off new footwear and other apparel as secondhand to avoid tariffs; and under-invoices exports;

(b) the high cost of manufacturing due to exorbitant electricity tariffs, poor infrastructure (notably roads and rails), and hefty transport costs;

(c) periodic unavailability of raw materials such as crude oil;

(d) labor laws that compel private companies, rather than government, to provide their employees with a social safety net of benefits, including paternity and maternity leave and health care, all non-tax exempt;

(e) low productivity, lack of worker discipline, and strong labor unions focused on higher wages and benefits;

(f) local government licenses and harassment over petty demands (which could be interpreted as demands for bribes); and

(g) the failure of the Kenya Revenue Authority (KRA) to process corporate tax and value added tax (VAT) refunds expeditiously.

A 2008 analysis of Kenya's tax system carried out by the World Bank, International Finance Corporation (IFC), and audit firm PricewaterhouseCoopers (PwC) judged Kenya’s tax regime as the least friendly in East Africa. The report, Paying Taxes 2009, criticizes Kenya for not having a single government body responsible for all tax collections. Rather, Kenya’s tax regime consists of several government agencies, each with the authority to collect taxes at various times of the year. According to the study, Kenya has five different tax payment dates each month for VAT, corporate profits, withholding, social security, and health. Kenyan firms have to contend with 41 different tax payments cutting across 16 tax regimes, which take 417 person-hours to file, compared to the global average of 31 tax payments and 286 hours.

In addition to the complexity of the tax system, many Kenyans complain taxes are too high. Kenyan firms carry the heaviest taxation burden in East Africa. Despite the East African Community’s (EAC) uniform 30 percent corporate income tax across the five member states, Kenyan firms have to contend with other levies that raise the overall tax burden. Tax experts at PwC say the total corporate tax burden in Kenya is 49.7 per cent compared to Tanzania's 45 percent, Uganda's 32 percent, and Rwanda's 31 percent. This additional burden has raised the cost of doing business in the region's biggest economy and reduced the competitiveness of its firms. Consequently, tax evasion is increasing. Kenya is now witnessing growing numbers of unregistered or informal businesses known in local parlance as “jua kali.” According to the government’s 2011 Economic Survey, the informal sector engages approximately 80 percent of the workforce. Because of these issues, the World Bank-IFC-PwC report placed Kenya 158 out of 181 countries surveyed. The report did praise the KRA for its effective tax collection and welcomed the government’s plans to launch an integrated tax management system. The system is now in place, although improvements are ongoing, and customers can file their tax returns online.

Branches of non-resident companies pay tax at the rate of 37.5 percent and the government generally defines taxable income to be income sourced in or from Kenya. VAT is levied on goods imported into or manufactured in Kenya, and on taxable services provided. The standard VAT rate is 16 percent, although the rate charged on a given transaction varies depending on a range of factors. Discussion by the government on the VAT in early 2011 focused on reducing or eliminating exemptions to create a broader revenue base rather than raising rates.

Crime is another constraint. In a separate 2007 KAM survey, 33 percent of Kenyan firms reported crime as a serious problem, accounting for losses of nearly 4 percent on annual sales. KAM discovered that on average, businesses allocate 3 percent of their operating budgets to private security services and security upgrades. According to a World Bank study conducted in 2004, almost 70 percent of investors reported major or very severe concerns about crime, theft, and disorder in Kenya, as opposed to 25 percent in Tanzania and 27 percent in Uganda. Businesses and other institutions further intensified their security measures in late 2011 as a result of the increased threat posed by al-Shabaab and its sympathizers following Kenya’s military incursion in Somalia. Senior government officials are well aware of these problems.

The Kenyan government has taken a number of steps to make the country more appealing for foreign and domestic private investment. On August 5, 2008, Prime Minister Raila Odinga began holding quarterly meetings as part of a public-private dialogue called the "National Business Agenda" with the chairpersons of KAM, the Kenya Private Sector Alliance (KEPSA), the East Africa Business Council (EABC), and other business leaders to discuss what must be done to improve the country's business climate. As a result of the first meeting, Odinga and President Mwai Kibaki ordered that the Port of Mombasa be open 24/7, the number of roadblocks and weigh stations on the Mombasa-Nairobi-Busia Northern Corridor Highway be dramatically reduced, and that the Kenya Ports Authority (KPA), the Kenya Bureau of Standards (KEBS), and KRA harmonize their regulations and adopt a common accreditation and computerized clearance system to expedite cargo inspection and clearance. The government dealt with the port and roadblock issues, while the harmonization issues continue to be addressed. Subsequently, President Mwai Kibaki and then-Acting Finance Minister John Michuki ordered that VAT be reduced or eliminated on energy inputs. The Treasury announced in late November 2008 that it would suspend a 120 percent excise duty on the manufacture of plastics.

In keeping with its privatization strategy, the government announced in mid-December 2008 that it would sell its shares in 16 parastatals, including the National Bank of Kenya, the Kenya Electricity Generating Company (KenGen), the Kenya Pipeline Company, the Kenya Ports Authority, and various sugar, cement, dairy, wine, and meat processing firms. The government also put hotels owned by the Kenya Tourism Development Authority up for sale in 2009. To date, the government has not completed any of the sales. In December 2008, the Cabinet approved the proposed legal and institutional framework for public-private partnerships, thereby authorizing private firms to sign management contracts, leases, concessions, and/or build-own-operate-transfer (BOOT) agreements with the government on various infrastructure projects such as water, energy, ports, and roads.

Also in 2008, President Kibaki signed into law the Anti-Counterfeit Act, which established a dedicated Anti-Counterfeit Agency and created a strong legal framework to combat the widespread trade in counterfeit goods, generally imported to Kenya from Asia. In June 2010, the Ministry of Industrialization operationalized the Anti-Counterfeit Agency. The nascent agency is still struggling to build capacity as a result of insufficient funding and a lack of clarity of its role vis-à-vis the other Kenyan agencies with a stake in intellectual property protection, such as KRA, the Kenya Bureau of Standards, the Kenya Copyright Board, and the Pharmacy and Poisons Board. Interagency cooperation has proved difficult. Furthermore, the government has yet to adopt regulations to guide implementation of the act.

In a separate attempt to combat the importation of counterfeits, the Ministry of Industrialization and the Kenya Bureau of Standards (KEBS) decreed in 2009 that all locally manufactured goods must have a standardization mark issued by KEBS, and several categories of imported goods, specifically food products, electronics, and medicines, must have an import standardization mark (ISM). Under this new program, U.S. consumer-ready products may enter the Kenyan market without altering the U.S. label under which the product would normally be marketed in the United States but must also carry an ISM. Once the product qualifies for a Confirmation of Conformity, however, KEBS will issue the ISM free of charge. The legislative body of the East African Community (EAC) is currently considering a regional anti-counterfeiting bill, which would harmonize these laws across the five member-states as well as increase the authority of port countries like Kenya to inspect and seize suspicious transit good shipments destined for neighboring land-locked countries.

The EAC, which includes Kenya, Tanzania, Uganda, Rwanda, and Burundi, aims at widening and deepening cooperation among the member-states in political, economic, social, and other fields for mutual benefit. Together, these countries represent a significant economic bloc with a combined population of more than 125 million and a combined gross domestic product of $61 billion. While integration has progressed slowly, the regional group has the potential to become a significantly economic and geopolitical player. The EAC Customs Union and Common Market officially came into effect in January and July 2010, respectively, but actual implementation will take a substantial amount of time. Ongoing planning for the EAC includes a monetary union in 2012 and eventual political federation.

EAC member states, including Kenya, have not passed many of the laws associated with the common market, and enforcement of the customs union at border crossings is far from coherent or uniform. Among the issues to be resolved are centralized collection of revenue at the first point of entry into the EAC and management of transit cargo in a borderless region. Non-tariff barriers (NTBs) also remain a problem in the EAC. A March 2005 report on NTBs and the "Development of a Business Climate Index in the Eastern African Region" by the East African Business Council identified administration of duties and other taxes as the main NTB, followed closely by corruption. The report indicates that Kenya‘s level of investment and business optimism is dampened by low expectations relating to improvements in infrastructure, access to land, and profitability in business.

The EAC states have made slow progress toward adopting the monetary union, set for 2012, and it is likely that the deadline might be extended. The countries have had difficulty agreeing on coordinated approaches to budgets, inflation, foreign exchange reserves, government debts, and exchange rates, which are key elements of a monetary union. Some of the institutions still to be established include a Customs Union Authority, Common Market Authority, Monetary Union Authority, Central Bank for the Monetary Union, and a Unified Federal Treasury.

Kenya held constant at position 154 on Transparency International’s (TI) 2011 Corruption Perceptions Index, despite a marginal increase in its score from 2.1 to 2.2. The 2011 Heritage Foundation Index of Economic Freedom places Kenya 106 of 179 countries, a drop of 5 places when compared to 2010 ratings, despite its score remaining virtually unchanged at 57.4 compared to 57.5 in 2010. Kenya has dropped 16 places compared to 2009, and is ranked 14 out of 46 countries in sub-Saharan Africa. The 2012 World Bank Doing Business Survey placed Kenya at 109, a drop of three places compared to 2011. Kenya’s Millennium Challenge Corporation (MCC) scorecard for fiscal year 2012 shows modest gains in government effectiveness, rule of law, control of corruption, land rights and access, and regulatory quality compared to 2011. The country lost points on fiscal policy and trade policy while maintaining its business start-up score.


Measure

Year

Index/Rating

TI Corruption Index

2011

154 out of 183

Heritage Economic Freedom

2011

106 out of 179

World Bank Doing Business

2012

109 out of 183

MCC Government Effectiveness

2012

0.33 (81%)

MCC Rule of Law

2012

-0.08 (44%)

MCC Control of Corruption

2012

-0.13 (44%)

MCC Fiscal Policy

2012

-5.4 (12%)

MCC Trade Policy

2012

66.7 (46%)

MCC Regulatory Quality

2012

0.60 (95%)

MCC Business Start Up

2012

0.943 (54%)

MCC Land Rights Access

2012

0.743 (87%)

MCC Natural Resources Mgmt

2012

60.85 (51%)

Conversion and Transfer Policies

Kenya’s Foreign Investment Protection Act (FIPA) guarantees capital repatriation and remittance of dividends and interest to foreign investors, who are free to convert and repatriate profits including un-capitalized retained profits (proceeds of an investment after payment of the relevant taxes and the principal and interest associated with any loan). Kenya has no restrictions on converting or transferring funds associated with investment. Kenyan law requires the declaration of amounts above Ksh 500,000 (about $5,600) as a formal check against money laundering. Foreign exchange is readily available from commercial banks and foreign exchange bureaus and can be freely bought and sold by local and foreign investors. The Kenyan shilling has a floating exchange rate tied to a basket of foreign currencies. The shilling was relatively stable in recent years until late 2007, when it increased significantly in value against the dollar, even trading briefly below Ksh 60 to the dollar. In the aftermath of the 2008 post-election violence, both the economy and the shilling suffered a serious decline. The shilling stabilized in 2009 and 2010, trading between Ksh 75 and Ksh 82 to the dollar, but high inflation and other factors contributed to high exchange rate volatility in late 2011. The shilling depreciated to Ksh 107 to the dollar in October 2011 and then appreciated to nearly Ksh 80 to the dollar in late December as a result of aggressive central bank intervention and lower global prices on imported commodities. As of January 2011, the shilling was trading between Ksh 85 and 90 to the dollar, with most experts expecting the rate to stabilize around Ksh 89.

Expropriation and Compensation

Kenyan investment law is modeled on British investment law. The Companies Act, the Investment Promotion Act, and the Foreign Investment Act are the main pieces of legislation governing investment in Kenya. Kenyan law provides protection against the expropriation of private property, except where due process is followed and adequate and prompt compensation is provided. Various bilateral agreements also guarantee further protection with other countries. Expropriation may only occur for either security reasons or public interest. The Kenyan government may revoke a foreign investment license if (1) an untrue statement is made while applying for the license; the provisions of the Investment Promotion Act or of any other law under which the license is granted are breached; or, if (2) there is a breach of the terms and conditions of the general authority. The Investment Promotion Act of 2004 provides for revocation of the license in instances of fraudulent representation to the Kenya Investment Authority (KIA) by giving a written notice to the investor granting 30 days from the date of notice to justify maintaining the license. In practice, the KIA rarely revokes licenses.

Dispute Settlement

Kenya’s judicial system is modeled after the British, with magistrates’ courts, high courts in major towns, and a Court of Appeal at the apex of the judicial system. Immediately below the high courts are subordinate courts consisting of the Khadis Courts, the Resident Magistrate‘s Courts, the District Magistrate’s Courts, and the Court Martial (for members of the Armed Forces). In addition, a separate industrial court hears disputes over wages and labor terms. Petitioners cannot appeal its decisions, except on procedural grounds. Kenya also has commercial courts to deal with commercial disputes. The Companies Act of 1948 provides the foundation for company and investment law. Property and contractual rights are enforceable, but long delays in resolving commercial cases are common. The legal system in Kenya is adversarial, and most disputes are resolved through litigation in court, although arbitration and alternative dispute resolution are becoming increasingly popular. The Arbitration Act governs arbitration. The new constitution, when fully enacted, will change the court system dramatically. Kenya will have a Supreme Court, a Court of Appeal, a Constitutional Court, and a High Court. In addition, the subordinate courts, Magistrates, Khadis, and Courts Martial, will remain, as will the Commercial Court. The former Industrial Court has been replaced with an Employment Relations Court that has expanded authority to hear individual employment-related complaints.

The Foreign Judgments (Reciprocal Enforcement) Act provides for the enforcement in Kenya of judgments given in other countries that accord reciprocal treatment to judgments given in Kenya. The countries with which Kenya has entered into reciprocal enforcement agreements are Australia, the United Kingdom, Malawi, Tanzania, Uganda, Zambia, and Seychelles.

Without such an agreement, a foreign judgment is not enforceable in the Kenyan courts except by filing suit on the judgment. Kenyan courts generally recognize a governing-law clause in an agreement that provides for foreign law. A Kenyan court would not give effect to a foreign law if the parties intended to apply it in order to evade the mandatory provisions of a Kenyan law with which the agreement has its most substantial connection, and which the court would normally have applied.

Foreign advocates are not entitled to practice in Kenya unless a Kenyan advocate instructs and accompanies them, although a foreign advocate may practice as an advocate for the purposes of a specified suit or matter if appointed to do so by the Attorney General. All advocates in private practice are members of the Law Society of Kenya (LSK), while those in public service need not be.

Kenya does not have a bankruptcy law. Creditors' rights are comparable to those in other common law countries. Monetary judgments typically are made in Kenyan shillings. The government does accept binding international arbitration of investment disputes with foreign investors. Apart from being a member of the ICSID, Kenya is a party to the New York Convention on the Enforcement of Foreign Arbitral Awards (1958).

Kenya is a member of the World Bank-affiliated Multilateral Investment Guarantee Agency (MIGA), which issues guarantees against non-commercial risk to enterprises that invest in member countries. It is also a signatory to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States. The Convention established the International Center for Settlement of Investment Disputes (ICSID) under the auspices of the World Bank. Kenya is also a member of the Africa Trade Insurance Agency (ATIA) as well as many other global and regional organizations and treaties, including the Common Market for Eastern and Southern Africa (COMESA); the Cotonou Agreement between the European Union and the African, Caribbean and Pacific States (ACP); the East African Community (EAC); the Paris Convention on Intellectual Property, the Universal Copyright Convention, and the Berne Copyright Convention; the World Intellectual Property Organization (WIPO); and the World Trade Organization (WTO). Kenya has also signed double taxation treaties with a number of countries, including Canada, China, Germany, France, Japan, Netherlands, and India. On November 27, 2007, Kenya joined with its EAC sister states in signing the first-ever interim economic partnership agreement (EPA) with the European Community (EC). In mid-July 2008, Kenya and its fellow EAC members signed a Trade and Investment Framework Agreement (TIFA) with the United States at the conclusion of the 2008 African Growth and Opportunity Act (AGOA) Forum in Washington, D.C.

Performance Requirements and Incentives

The law permits investors in the manufacturing and hotel sectors to deduct from their taxes a large portion of the cost of buildings and capital machinery. The government allows all locally financed materials and equipment (excluding motor vehicles and goods for regular repair and maintenance) for use in construction or refurbishment of tourist hotels to be zero-rated for purposes of VAT calculation. The Ministry of Finance permanent secretary must approve such purchases. The government permits some VAT remission on capital goods, including plants, machinery, and equipment for new investment, expansion of investment, and replacement. The investment allowance under the Income Tax Act is set at 100 percent. Materials imported for use in manufacturing for export or for production of duty-free items for domestic sale qualify for the investment allowance. Approved suppliers, who manufacture goods for an exporter, are also entitled to the same import duty relief. The program is also open to Kenyan companies producing goods that can be imported duty-free or goods for supply to the armed forces or to an approved aid-funded project.

Firms operating in Export Processing Zones (EPZ) are provided a 10-year corporate tax holiday and a flat 25 percent tax for the next 10 years (the statutory corporate tax rate is 30 percent, but as noted above, the overall tax rate is 49.6 percent); a 10-year withholding tax holiday on dividend remittance; duty and VAT exemption on all inputs except motor vehicles; 100 percent investment deduction on capital expenditures for 20 years; stamp duty exemption; exemption from various other laws; exception from pre-shipment inspection; availability of on-site customs inspection; and work permits for senior expatriate staff. The Export Promotion Programs Office, set up in 1992 under the Ministry of Finance, administers the duty remission facility. Foreign investors are attracted to the EPZs by their single licensing regime, tax incentives, and support services provided, such as power and water. The number of enterprises operating in Kenya's EPZs increased from 66 in 2003 to 74 in 2004. They declined to 68 in 2005 following the end of the Multi-fiber Textile Agreement in January 2005 before increasing to 71 in 2006. In 2007, 72 firms were in operation, which increased to 74 in 2008. In 2009, 83 firms were operating in the EPZs, although the number of Kenyans employed actually declined slightly. The number of firms dropped to 77 in 2010, while employment increased marginally to 30,681 and the value of EPZ exports rose 22.5 percent to $28.6 million. The number of remained at 77 through 2011, but ten new firms are expected to begin operations over the course of 2012.

The preferential access and duty free status accorded to Kenyan apparel exports under the African Growth and Opportunity Act (AGOA) fueled an increase in the number of textile factories in Kenya, which along with handicrafts, constitute the bulk of Kenya’s exports under AGOA and 35 percent of EPZ output as of 2010. In 2005, 25 apparel firms in the EPZ's were manufacturing apparel for export under AGOA. That number declined to 18 in 2008 following the January-February 2008 post-election violence. The year 2009 saw the addition of one new apparel firm, although the number of Kenyans employed by these firms continued to drop. Over 70 percent of EPZ manufactured products enter the U.S. market under AGOA provisions. Kenya’s total apparel exports to the U.S. in the first three quarters of 2011 rose substantially, reaching $194.5 million compared to $138.2 million in the same period the year before. In order to better take advantage of AGOA, in 2011 Kenya’s Ministry of Trade launched an AGOA Unit charged with developing and implementing a national AGOA strategy; conducting research and market analysis to inform AGOA policies and activities; identifying products for potential export under AGOA; advising the Minister of Trade on all AGOA-related matters; performing regional and county-level outreach to educate the Kenyan public about AGOA; and liaising with AGOA stakeholders across the Kenyan government and within the private sector and civil society. Joseph Kosure, head of the AGOA Unit, said in late 2011 that establishment of the Unit is an indication that the government is taking AGOA very seriously. The majority of Kenya's manufactured products are also entitled to preferential duty treatment in Canada and the European Union. Kenya's statute does not permit manufacturing companies, whether domestic or foreign-owned, to distribute their own products.

The government also operates a manufacturing under bond (MUB) program that is open to both local and foreign investors. The program aims to encourage manufacturing for export by exempting participating enterprises from import duties and VAT on imported plant, machinery, equipment, raw materials, and other imported inputs. The program also provides a 100 percent investment allowance on plant, machinery, equipment, and buildings. Participating firms are expected to export their products: if goods produced under the MUB system are not exported, they are subject to a surcharge of 2.5 percent and imported inputs used in their production are subject to all other tariffs and import charges. The Kenya Revenue Authority (KRA) administers the program.

Under the Firearms Act and the Explosives Act, manufacturing and dealing in firearms (including ammunition) and explosives requires special licenses from Chief Firearms Licensing Officer and the Commissioner of Mines and Geology, respectively. Technology licenses are subject to scrutiny by the Kenya Industrial Property Institute (KIPI) to ensure that they are in line with the Industrial Property Act. Licenses are valid for five years and are renewable. Manufacturing and dealing in narcotic drugs and psychotropic substances is prohibited under the Narcotics Drugs and Psychotropic Substances Act.

The government does not steer investment to specific geographic locations but encourages investments in sectors that create employment, generate foreign exchange, and create forward and backward linkages with rural areas. The law applies local content rules but only for purposes of determining whether goods qualify for preferential duty rates within the Common Market for Eastern and Southern Africa (COMESA) and the EAC.

Although Kenya does not generally set minimums for Kenyan ownership of private firms or require companies to reduce the percentage of foreign ownership over time, a number of sectors do face restrictions. According to the World Bank’s 2010 Investing Across Borders Report, Kenya restricts foreign ownership in more sectors than most other economies in sub-Saharan Africa. Foreign brokerage companies and fund management firms must be locally registered and have Kenyan ownership of at least 30 percent and 51 percent, respectively. Foreign ownership of equity in insurance and telecommunications companies is restricted to 66.7 percent and 80 percent, respectively, although the government allows telecommunications companies a three-year grace period to find local investors to achieve the local ownership requirements. There is discussion of scrapping the local ownership policy in telecommunications entirely. Foreign equity in companies engaged in fishing activities is restricted to 49 percent of the voting shares under the Fisheries Act. At least one area has seen increased restrictions on foreign ownership: as noted above, a law passed in June 2007 decreased the level of foreign ownership allowed for companies seeking a listing on the NSE from 75 to 60 percent. This change was not applied retroactively. Foreign investors are free to obtain financing locally or offshore. As noted above, there is no discrimination against foreign investors in access to government-financed research, and the government's export promotion programs do not distinguish between local and foreign-owned goods.

Right to Private Ownership and Establishment

Private enterprises can freely establish, acquire, and dispose of interest in business enterprises. The Kenyan legal system is quite flexible on exit options, which normally are determined by the agreement that the investor has with other investors. The Companies Act specifies how a foreign investor may exit from an incorporated company. In practice, a company faces no obstacles when divesting its assets in Kenya, if the legal requirements and licenses have been satisfied. The Companies Act gives the procedures for both voluntary and compulsory winding-up processes. In late 2006, the U.S. multinational personal grooming and hygiene company, Colgate Palmolive, closed its factory in Kenya. ExxonMobil divested and sold its assets to the Libyan oil company, Tamoil, in 2007. In 2008, Chevron divested and sold its assets to Total. Reckitt Benckiser East Africa Limited, a multinational firm that makes household cleaning, health, and personal care products, also closed its Kenyan facility. Many U.S. companies remain in the market and continue to do well. The typical reason given for a firm closing its factories in Kenya is restructuring to cut costs and improve efficiency in its African markets. The high cost of production as a result of poor infrastructure, inadequate protection of intellectual property rights, and unreliable and expensive electrical power continues to frustrate Kenya’s manufacturing sector, even as economic growth forges ahead.

As noted above, the Land Control Act restricts the ability of foreigners to own or lease land classified as agricultural, and requires a presidential waiver. Furthermore, under the new constitution only Kenyan citizens or incorporated companies whose majority shareholders are Kenyan citizens may own land; foreigners are restricted to 99 year leases. Since January 2003, the government has been nullifying illegally acquired land allocations and the question of title to land acquired irregularly under the Moi government is the subject of continued controversy. The issue is particularly important because land secures 80 percent of bank loans in Kenya.

Protection of Property Rights

Secured interests in property are recognized and enforced. In theory, the legal system protects and facilitates acquisition and disposition of all property rights, including land, buildings, and mortgages. In practice, obtaining a title to land is a cumbersome and often non-transparent process, which is a serious impediment to new investment, frequently complicated by improper allocation of access and easements to third parties. There is also a general unwillingness of the courts to permit mortgage lenders to sell land to collect debts.

Kenya has a comprehensive legal framework to ensure intellectual property rights (IPR) protection, which includes the Anti-Counterfeit Act, the Industrial Property Act, the Trade Marks Act, the Copyright Act, the Seeds and Plant Varieties Act, and the Universal Copyright Convention. However, enforcement of IPR continues to lag far behind legislation, and the widespread sale of counterfeit goods continues to do significant damage to foreign businesses operating in Kenya. Furthermore, Kenyan authorities are limited in their ability to inspect and seize transit shipments of counterfeit products, which the authorities believe often find their way back into Kenya.

The 2008 Anti-Counterfeit Act created the Anti-Counterfeit Agency (ACA), which officially opened its doors in 2010, as the lead agency for IPR enforcement. Insufficient funding and the conspicuous absence of implementing regulations to accompany the act continue to significantly constrain the Agency’s effectiveness. Independent investigations have proven nearly impossible for the ACA given its current budget and the prohibitively high cost of environmentally sound destruction of seized products, meaning counterfeit goods remain in warehouses where they can be stolen and returned to the market. The Agency is ostensibly responsible for coordinating the efforts of Kenya’s other IPR enforcement bodies, including the Kenya Bureau of Standards (KEBS), the Kenya Copyright Board (KCB), responsible for copyrights), the Kenya Industrial Property Institute (KIPI, responsible for patents, trademarks, and trade secrets), the Pharmacy and Poisons Board (PPB, responsible for medicines), but this has proved difficult to achieve. Despite the challenges, the Agency has made a number of high-profile seizures of counterfeit goods shipments including BiC pens, HP toner cartridges, Eveready batteries, Nokia cellular phones, Adidas shoes, and a range of other products. Furthermore, penalties under the Anti-Counterfeiting Act are much more punitive than under previous IPR laws. However, Kenya’s law enforcement agencies have failed to implement the improved laws and regulations and convictions are virtually non-existent.

In another effort to combat the manufacture and sale of counterfeits, the Ministry of Industrialization and KEBS implemented a system of standardization marks required for locally manufactured products as well as certain imported goods, discussed below. KEBS also opened the National Quality Institute in 2008 to train business leaders and consumers. Initially KEBS planned that the Institute would offer IPR courses to magistrates who, along with prosecutors, are often unfamiliar with intellectual property law, but the program has not been established to date.

Kenya’s Copyright Act protects literary, musical, artistic, and audio-visual works; sound recordings and broadcasts; and computer programs. The act is enforced by KCB, a parastatal housed under the Attorney General’s Office. Criminal penalties associated with piracy in Kenya include a fine of up to Ksh 800,000 (about $9,400), a jail term of up to 10 years, and confiscation of pirated material. Nonetheless, enforcement is spotty and the understanding of the importance of intellectual property remains low. The sale of pirated audio and videocassettes is rampant, although there is little domestic production. According to the Business Software Association (BSA), an estimated USD 3.5 million is lost every year because of the use of illegal software, mainly by businesses.

In collaboration with Microsoft and HP, KCB has in the past several years carried out a number of major busts. In November 2007, cyber café operators within Nairobi grappled between legalizing their Microsoft software operating system, shifting to Open Source Code, or closing shop all together following a joint KCB-police crackdown on illegal software. Most cyber cafes in Kenya use Microsoft software, although without valid licenses. The KCB raided the Jet Cyber and Dagit Cyber Cafe companies in Nairobi on the suspicion of copyright infringement. The raids on the cyber cafes came after an October 30, 2007 deadline set by the KCB had expired. During the raid, 50 computers containing unlicensed versions of Microsoft Office 2003 were confiscated. Also impounded were counterfeit Windows 2000 and Microsoft Office 2003 installer CDs. The computers themselves were valued at Ksh 1.5 million (about $16,900), while the cost of Microsoft software was estimated at Ksh1.4 million (about $15,700). On September 18, 2008, Nairobi police and agents from Kenya's Bureau of Weights and Measures raided two warehouses suspected of holding counterfeit Hewlett-Packard products and arrested the warehouse owner. Local authorities working with Hewlett Packard (HP) have seized more than 9000 counterfeits in Kenya since November 2008.

Kenya is a member of the World Intellectual Property Organization (WIPO) and of the Paris Union (International Convention for the Protection of Industrial Property), along with the United States and 80 other countries. The African Intellectual Property Organization (AIPO) embodies a future prospect for patent, trademark, and copyright protection, although its enforcement and cooperation procedures are still untested. Kenya is also a member of the African Regional Intellectual Property Organization (ARIPO). Kenya is a signatory to the Madrid Agreement Concerning the International Registration of Marks; however, the other original EAC members (Uganda and Tanzania) are not.

The Kenya Industrial Property Institute (KIPI), housed within the Ministry of Trade and Industry, is responsible for registering and enforcing patents, trademarks, and trade secrets. Investors are entitled to national treatment and priority right recognition for their patent and trademark filing dates. In addition to creating KIPI, the Industrial Property Act of 2002 brought Kenya into compliance with WTO obligations, although implementation of the act remains weak. The Trade Marks Act provides protection for registered trade and service marks; protection under the act is valid for 10 years and is renewable.

In July 2006, the Ministry of Trade and Industry conceded that over Ksh 36 billion (about $405 million) is lost annually due to the sale of counterfeit goods and a further Ksh 6 billion (about $67 million) is lost in tax revenues to the government. A subsequent KAM study, released in late October 2008, concluded that piracy and counterfeiting of business software, music, pharmaceuticals, and consumer goods costs Kenyan firms about $715 million annually in lost sales. Consequently, KAM estimated that the Kenyan government was losing over $270 million in potential tax revenues every year. The most current estimates as of late 2011, summarized in a report by the International Peace Institute called “Termites at Work: Transnational Organized Crime and State Erosion in Kenya,” put Kenya’s counterfeit goods trade at $913.8 million, resulting in lost tax revenue between $84 million and $490 million. The technology firm HP estimates losses of $7.1 million per year due to counterfeits and sixty percent of HP-branded printer cartridge refills sold in East Africa are thought to be fakes imported from China. Battery manufacturer Eveready significantly reduced its Kenyan production due to pressure from counterfeiters.

Transparency of Regulatory System

The promulgation of Kenya’s new constitution in August 2010 put in place a framework to establish regulatory institutions that support investment growth and productivity. In order to operationalize the new laws, however, various pieces of legislation have to be put in place within the next five years, and the content of this legislation will determine whether the new constitution’s potential is realized.

Investors in Kenya are required to comply with environmental standards. The National Environment Management Authority (NEMA) oversees these matters and is the principal environmental regulatory agency. Developers of certain types of projects are required to carry out Environmental Impact Assessments (EIA) prior to project implementation. Companies are required to submit up-to-date assessment reports to NEMA for verification by the agency‘s environmental auditors before they can receive an EIA license.

The government screens each private sector project to determine its viability and implications for the development aspirations of the country; for example, a rural agro-based enterprise, with many forward and backward linkages, is likely to receive licensing quickly. In theory, all investors receive equal treatment in license screening processes. However, new foreign investment in Kenya historically has been constrained by a time-consuming, highly discretionary, and sometimes corrupt approval and licensing system. In response to appeals from the business community in 2007, the government launched a substantial effort to streamline the registration process by reducing the number of required business licenses and simplifying others. The Licensing Act of 2007 initially eliminated or simplified 694 licenses and in 2008, the government reduced the number of licenses to set up a business from 300 to 16. The review of licensing requirements is ongoing, but no further licenses have been eliminated to date. In 2009, the Kenyan government launched an e-Registry, which sped up the registration of new companies, cut regulation costs, and enhanced transparency by allowing easy access to information on registered companies. Nonetheless, the 2012 World Bank’s Doing Business Report placed Kenya at just 108 of 183. Regulatory issues hurting Kenya's ranking include difficulties in starting a business (ranked 132), registering property (133), paying taxes (166), trading across borders (141), and enforcing contracts (127). Kenya scores very well in getting credit (ranked 8) and dealing with construction permits (33). The World Bank and IFC contend that the government must significantly reduce the cost of doing business, deal with delays at the Port of Mombasa, and eliminate the requirement of even more licenses to maintain Kenya's current level of economic growth.

The Restrictive Trade Practices, Monopolies, and Price Control Act of 1989 (with subsequent amendments) governs Kenya's competition framework. The Act is relatively modern and has worked well in avoiding anti-competitive practices since the abolition of price controls in 1994. The Monopolies and Prices Commission, however, is housed under the Ministry of Finance instead of an independent regulatory body. Although the Commission is independent in its investigation of competition-related issues, it must rely on ministerial powers to enforce orders on companies found to have breached competition rules. The Commission lacks the capacity to implement the legislation fully. Practices that seek to block entry into production and that discriminate against buyers (for production, resale, or final consumption) are illegal. Mergers and acquisitions must receive the green light from the Commission and the Minister of Finance in all cases, regardless of the sector, size, or market share of the companies involved. This puts an unnecessary burden on investors and the Commission. However, the Commission has no jurisdiction over the electricity, telecommunication, or insurance sectors. Under the law, manufacturers may not distribute their own products, and they are required to supply information to the government about their distributors. In September 2011, in response to rapidly rising food and fuel prices, President Kibaki signed into law a new Price Control (Essential Goods) Act, which granted the Finance Minister the authority to set price ceilings for any goods designated as essential. The Finance Minister has not exercised this authority, however, and many observers believe the act was simply an attempt to appear responsive to public concerns, rather than a meaningful shift in policy.

Incoming foreign investment through acquisitions, mergers, or takeovers is also governed by Kenya’s new Competition Act, which prohibits restrictive and predatory practices that prevent the establishment of competitive markets and seeks to reduce the concentration of economic power by controlling monopolies, mergers, and takeovers of enterprises. In addition, depending on the industry concerned, mergers and takeovers are subject to the Companies Act, the Insurance Act (in case of insurance firms), or the Banking Act (in case of financial institutions).

Kenya has been ranked among the most accessible and connected markets in Africa. The country stands among the continent’s top five behind South Africa, Tunisia, Guinea, Sudan, and Mauritania with regard to reliability of the supply chain, according to a 2007 World Bank survey on trade logistics. Kenya ranked 76 out of the 150 countries tested for efficiency in key supply chain areas such as customs procedures, cost of logistics, and infrastructure quality. Through the Port of Mombasa, Kenya is a major hub for international and regional trade for neighboring land- locked countries such as Uganda and the Great Lakes region. The survey, however, found that the cost of importing or exporting containers in Kenya and other large economies in Africa remains high compared to the global average. According to the World Bank’s Doing Business 2011 report, it takes an average of 24 days and costs $2,190 to complete import procedures for a standardized container of cargo. It takes 26 days and costs $2,055 to complete export procedures for a similar container. In addition to insufficient capacity, corruption is thought to be a major contributor to delays at the Port of Mombasa: in order to free up space inside the port, goods are moved to privately-owned container freight stations (CFS) for customs clearing and onward haulage. These CFSs are suspected of serving as a primary conduit for corruption and facilitating illicit trade. Moreover, they have little incentive to clear cargo efficiently, given that storage fees represent a large share of their revenue.

Efficient Capital Markets and Portfolio Investment

Kenya has a small capital market overseen by the government-controlled Capital Market Authority (CMA). The market consists of the Nairobi Stock Exchange (NSE), 21 investment advisory firms, 20 investment banks, 6 stockbrokers, 18 fund managers, 15 authorized depositories, 13 collective investment schemes, 7 employee share ownership plans, one credit rating agency, one venture capital fund, and one central depository. The CMA regulates and supervises all these institutions and oversees the development of Kenya’s capital market.

The CMA is working with other East African Community (EAC) member states through the Capital Market Development Committee (CMDC) and East African Securities Regulatory Authorities (EASRA) on a two-year roadmap to integration of their respective capital markets and has achieved cross-listing between Kenya and some of its EAC partners. Beginning in 2005, the NSE started settling all equity trades through an electronic Central Depository System (CDS). The combined use of both CDS and an automated trading system has moved the Kenyan capital market to globally acceptable standards. Kenya has recently joined the International Organization of Securities Commissions, whose members represent 90 percent of the world's capital markets, as a full (ordinary) member, which solidifies its status as the primary capital marketplace in East Africa.

The NSE enjoyed a bull market from January 4, 2005 when its blue chip share index was 2980.48 to January 10, 2007, when it reached an all-time high of 6085.50. Blue chips remained well above 5000 throughout 2007 and eventually the NSE attained a market capitalization of $16.3 billion. However, trading and prices nosedived in the wake of the January-February 2008 post-election crisis, and continued to do so as the world economy entered a recession in late summer 2008. By the end of 2008, the NSE had a market capitalization of approximately $11.4 billion (roughly on par with the end of 2007) but its blue chips had dived to 3521 (a 35 percent drop from 2007). At the end of 2009, NSE market capitalization stood at $11.1 billion and the NSE blue chips had dropped almost 8 percent from 2008 to stand at 3247. Wrapping up 2010, NSE market capitalization boomed to sit at $14.6 billion and the NSE blue chips had increased to 4433. However, 2011 saw these gains reversed as a weak and volatile shilling, high commodity prices, and the ongoing global credit crisis took their toll, leading the market to close the year nearly one-third below its 2010 level: the NSE’s All Share Index (NSEASI) plunged 30.45 per cent to 68.08 points in 2011, down from the 97.82 at the end of 2010.

The NSE consists of three segments: the Main Investments Market (MIMS), the Alternative Investments Market (AIMS), and the Fixed Income Securities Market (FISMS). The MIMS targets mature companies with strong dividend streams. The AIMS is more favorable to small and medium-sized companies, and allows firms to access lower-interest rate, longer-term sources of capital through the capital markets. The FISMS allows businesses, financial institutions, and governmental and supranational authorities to raise capital through the issuance of debt securities. Fees charged by the CMA on NSE participants are a significant entry barrier for new companies. Small business entry into the stock market continues to lag, though the CMA plans to launch a new securities exchange for SMEs in 2012, which will have less onerous regulatory requirements. Though still a nascent industry, foreign and domestic private equity funds are increasingly active in Kenya, providing growth capital to entrepreneurs and helping turn around struggling businesses.

While the equity market has participated in active trading for some time, the corporate bonds market has been active only since 1997. The equity market is far larger and more mature than the bond market. In general, the treasury bonds issued by the government are more active than corporate bonds, although that is beginning to change due to large corporate bond issues. Trading in commercial paper and corporate bonds issued by private companies has diversified activity at the NSE. The government regulates such trading through a set of guidelines developed in collaboration with private sector. They allow private companies to raise funds from the public without NSE quotation. Establishing the CDS encouraged the development of a secondary market for the government’s one-year Treasury security. The CDS opened a shop window for small investors offering products in multiples of Ksh 50,000 (about $560) up to Ksh 1 million (about $11,200). Expenses related to credit rating services by listed companies and other issuers of corporate debt securities are tax deductible. Foreign investments through mergers and acquisitions are not restricted via cross-shareholding and stable shareholder arrangements. Hostile takeover attempts are uncommon. Private firms are free to adopt articles of incorporation, which limit or prohibit foreign investment, participation, or control.

Foreign investors are able to obtain credit on the local market; however, the number of credit instruments is relatively small. Legal, regulatory, and accounting systems are generally transparent and consistent with international norms. The corporate tax for newly listed companies is 25 percent for a period of five years from the date of listing. The withholding tax on dividends is 7.5 percent for foreign investors and 5 percent for local investors. Foreign investors can acquire shares in a listed company subject to a minimum reserve ratio of 40 percent of the share capital of the listed company for domestic investors, with the remaining 60 percent considered as a free float available to local, foreign, and regional investors without restrictions on the level of holding. To encourage the transfer of technology and skills, the government allows foreign investors to acquire up to 49 percent of local stockbrokerage firms and up to 70 percent of local fund management companies. Dividends distributed to residents and non-residents are subject to a final withholding tax at the rate of 5 percent. Dividends received by financial institutions as trading income are not subject to tax. In 2007, the Kenyan government granted two fiscal incentives to encourage growth of capital markets: exemption from income tax on interest income accruing from cash flows of securitized assets; and exemption from income tax on interest income accruing from all listed bonds with at least a maturity period of three years. The fiscal incentive targets providers of infrastructure services such as roads, water, power, telecommunication, schools, and hospitals. Company capital expenditures on legal costs and other incidental expenses associated with listing by introduction at the NSE are tax deductible.

As of the end of 2010, Kenya’s banking sector consisted of 43 commercial banks, one mortgage finance company, two microfinance institution, one credit reference bureau, and 126 forex bureaus, primarily located in Nairobi and Mombasa. At the end of October 2010, total banking assets increased to almost $21 billion. Loans and advances accounted for 51 percent of total assets with 26 percent in government securities and 7 percent in placements with the Central Bank of Kenya (CBK). The ratios of total and core capital to total risk-weighted assets improved from 19.9 percent and 17.5 percent to 20.7 percent and 18.5 percent, respectively, mainly due to a more than proportionate increase in core and total capital. The asset quality of Kenyan banks improved from 3 percent of assets classified as non-performing in June 2010 to 2.4 percent in October 2010. A cumbersome court system complicates the realization of collateral, which makes it difficult for creditors to accept collateral.

The financial sector, in particular the commercial banks, remains relatively robust, aided by a stable macroeconomic environment and stringent supervisory oversight. Despite the global economic downturn, the banking sector expanded by 11 percent in 2009-2010, at least partially due to a continued housing boom in Nairobi. Islamic banking, which started modestly, has continued to take off as the primary Islamic-based banks expand their reach across Kenya into areas with relatively smaller Muslim minorities. Islamic banking solutions, introduced in December 2005, first took the form of deposit products tailored in line with Shariah principles but have grown to include insurance products.

Parliament amended the Banking Act of 2004 to delegate the power to register and deregister commercial banks and financial institutions from the Finance Minister to the Central Bank of Kenya (CBK). The separate Central Bank of Kenya Act enhanced the security of tenure for the Governor, increased the Bank's operational autonomy, strengthened the CBK's bank supervision functions, and codified statutory restrictions on government borrowing from the Bank. The CBK sets requirements for all banking institutions and building societies to disclose their un-audited financial results on a quarterly basis by publishing them in the print media.

Parliament also amended the Central Bank of Kenya Act in December 2004 to establish an independent Monetary Policy Advisory Committee (MPAC) whose mandate is to advise the Bank with respect to monetary policy. The amended act provides for the CBK to publish the lowest interest rate it charges on loans to banks, referred to as the central bank rate. Another amendment introduced an "In Duplum Rule," which limits fees and fines on non-performing loans to the amount of the outstanding principal. However, the rule is yet to be implemented and other means of limiting interest charges are under discussion. A proposal by the Finance Minister in June 2007 to shore up commercial banks by increasing the minimum capital requirement from Ksh 250 million (about $2.8 million) to Ksh 1 billion (about $11.2 million) over a period of three years was rejected by Parliament, and the requirement remains unchanged.

The last five years have seen improvements in the financial sector’s legal and regulatory framework, beginning with the enactment of the Cooperative Societies (Amendment) Act of 2004, which governs the formation and management of cooperatives in Kenya. To regulate Kenya’s burgeoning insurance industry, Parliament passed the Insurance Amendment Act 2006, which resulted in the establishment of the Insurance Regulatory Authority. To strengthen the Sacco industry, Parliament passed the 2007 Sacco Act. As a result, access to financial services has improved, especially for those previously unable to bank. Mobile money has grown in size and popularity and now provides savings and insurance services to the large majority of Kenyans who do not have access to traditional banking services.

Only 19 percent of Kenyans have formal access to financial services through commercial banks and the Post Bank. With the advent of mobile money and its recent association with the formal banking system, however, the number of Kenyans with access to electronic financial services has grown rapidly. Kenya has now become a leader in financial inclusion and its example is being replicated in countries around the world. Since most Kenyan adults own a cell phone, they can utilize mobile money services to receive their salary, do their shopping, pay their school fees, and, now, access savings, insurance, and other financial services. Kenya has four mobile money services: M-Pesa, the dominant service through Safaricom; Zap, run by Bharti Airtel; Orange Money, run by Orange; and YuCash, run by Yu Mobile. The Central Bank of Kenya reported that as of June 2011 the value of mobile money transactions was up 54 percent year on year, and Safaricom’s M-Pesa alone was processing nearly Ksh 2 billion (about $22.5 million) per day just in individual-to-individual transactions. According to the IMF’s October 2011 Regional Economic Outlook for Sub-Saharan Africa, M-Pesa serves over 70 percent of Kenya’s adult population and processes more transactions within Kenya each year than Western Union does globally.

Microfinance institutions (MFIs) also provide financial services to many Kenyans who remain unbanked. The Microfinance Act of 2006 became operational in 2008. The act provides for the licensing, regulation, and supervision of the microfinance sector, necessitated by a series of mismanagement and embezzling scandals at micro-finance institutions. The act also gives the CBK powers to oversee microfinance institutions.

In 2003, the inter-ministerial National Taskforce on Anti-Money Laundering and Combating the Financing of Terrorism was formed to develop a comprehensive AML/CTF legal framework. Parliament passed the Kenyan Proceeds of Crime and Anti-Money Laundering Bill in 2009, and it came into force in June 2010. While the law provides a solid legal framework for enforcement, regulations to guide the act’s implementation have yet to be passed. Key structures have not been established, and to date there have been no charges filed or convictions under the act, despite the fact that the laundering of funds derived from corruption, smuggling, and other financial crimes is a substantial problem. In August 2012, Kenya appointed the Anti-Money Laundering Advisory Board, the oversight body that will guide the creation of the Financial Reporting Center (FRC), Kenya's Financial Intelligence Unit equivalent. Kenya is part of the Eastern and Southern Africa Anti-Money Laundering Group and is collaborating with the intergovernmental Financial Action Task Force (FATF). In its October 28 public statement, the FATF noted Kenya's weaknesses and identified the country as one of the ten jurisdictions with “strategic AML/CFT deficiencies that have not made sufficient progress in addressing the deficiencies.” There is no law to criminalize terrorist financing and the draft legislation has made little progress in parliament.

Kenya's financial sector has a wide range of products, institutions, and markets, but there are gaps in development finance. Commercial banks, which traditionally refrained from offering long-term capital, are beginning to provide long-term capital, at least to large companies. Kenya's corporate bond market is still in an early stage of development. While having attracted a handful of firms, it is faced with the problem of low liquidity; thus, to boost long-term investment growth, deliberate efforts must be made to adequately develop vehicles for mobilizing long-term capital in Kenya. Development Finance Institutions (DFIs) are viable options given the prevailing market condition. However, in Kenya, DFIs have faced several constraints that have made them unable to fill in the development-financing gap.

Competition from State Owned Enterprises

Kenya has a long history of government ownership in industry, dating back to independence. Public ownership of enterprise expanded from independence in 1963 through the 1980's. However, two commissions, one in 1979 and one in 1982, established the need for Kenya to begin divesting itself of its publicly owned enterprises. The commissions identified 240 publicly owned firms, listing 207 as non-strategic and the remaining 33 as strategic. During the first round of privatization, from 1992 to 2002, Kenya fully or partially privatized most of the non-strategic publicly owned firms. From 2003 to 2007, the government of Kenya engaged in a second round, which fully or partially privatized a number of large strategic firms, including KenGen (the primary electricity generator), Kenya Railways, Mumias Sugar, Kenya Reinsurance, Telkom Kenya, and Safaricom. These transactions netted over a $1 billion towards supporting additional development and infrastructure. The third round of privatization is scheduled to last through 2013 and includes the Development, Consolidated and National Banks of Kenya, five sugar companies, the Kenya Wine Agencies, nine hotels, portions of the Kenya Ports Authority, the Agrochemical Food Company, the remainder of KenGen, East African Portland Cement, the Kenyan Meat Commission, the New Kenya Cooperative Creameries, the Numerical Machining Complex, and several power stations.

In general, competitive equality is the standard applied to private enterprises in competition with public enterprises. However, certain parastatals have enjoyed preferential access to markets. Examples include Kenya Reinsurance (Kenya-Re), with a guaranteed market share; Kenya Seed Company, with fewer marketing barriers than its foreign competitors; and the Kenya National Oil Corporation (KNOC), which benefits from retail market outlets developed with government funds. Some state corporations have also benefited from easier access to government credit at favorable interest rates.

The Kenyan government seems determined to remove itself from competition with private enterprise, except in certain strategic areas. The government substantially divested the telecom sector from 2002 to 2007, which now benefits from competition. The sugar industry has been partially privatized and will be fully privatized with the next round of divestitures. The energy industry remains the most publicly owned sector in Kenya. The Kenyan government wholly owns the National Oil Corporation, the Kenya Pipeline Corporation, and the oil refinery in Mombasa. Therefore, competition is either restricted or limited. KenGen, Kenya Power and Lighting, and the newly formed Geothermal Development Corporation dominate the electricity generation portion of the energy sector, which is another restricted portion of the Kenyan economy. The primary port in Mombasa is mostly government owned but privatization efforts are underway. Beyond these sectors, competition is expected and encouraged among private enterprise in Kenya.

Corporate Social Responsibility

Kenya has only recently begun to apply the concept of corporate social responsibility (CSR). The United Nations has instigated discussions under the auspices of the UN Global Compact in Kenya for the introduction of the UN Global Compact/UNDP "Growing Sustainable Business for Poverty Reduction Initiative." In Kenya, surveys suggest that the highest proportion of corporate donations go to health and medical services. In addition, corporations direct funds towards education and training, HIV/AIDS, agriculture and food security, and underprivileged children. The rationale for these philanthropic activities is closely tied to a sense that companies should give something back to the nation and to the communities in which they operate. In Kenya, many companies in the export-processing sector are seeking to mainstream HIV/AIDS programs into their activities as well as other workplace issues. Local campaigns have focused attention on labor rights and abuses in Kenyan export sectors such as textiles, cut flowers, and horticulture. Some companies are taking a positive lead on labor standards, for example Cirio Del Monte is now accredited to the SA8000 standard. The bulk of the business community is challenged to create quality jobs by paying living wages and observing fundamental labor rights. Given that employment creation is one of the most pressing concerns in Kenya, workplace issues, particularly trade-offs between the creation of jobs and reasonable pay and working conditions, are likely to remain at the heart of the CSR agenda.

In Kenya, there are relatively few incentives for businesses to adopt responsible or pro-development practices. Few consumers are sufficiently informed or able to pay a premium for responsibly produced goods. While some companies producing for export markets are subject to labor or environmental requirements imposed by overseas buyers, those producers selling into the domestic market are unlikely to be subject to such pressures. Even pressures within export markets are patchy, depending on the sector, product, and buyer. A similar gap is apparent between large companies operating in the formal sector, and smaller companies or micro-enterprises, which operate below the radar. Given an economic context in which financial margins are generally very thin, companies are unlikely to adopt higher standards voluntarily unless there is a clear business incentive to do so.

Political Violence

The disputed December 27, 2007 presidential election unleashed Kenya’s worst episode of ethnically-charged political violence. Before the antagonists reached a power-sharing agreement in late February 2008, the violence took the lives of 1,200 Kenyans and displaced 300 thousand, including thousands of farmers. Property damage was in the millions of dollars. Agriculture alone suffered $300 million in damages. Tourism took a major hit: arrivals and earnings fell 90 percent in the first quarter of 2008, and were down 30 percent throughout the year. At least 20,000 Kenyans employed in the tourism sector lost their jobs. The violence dissuaded both tourists and potential investors from coming to Kenya. Buyers stopped considering Kenya, resulting in several factories closing. An official government investigation, the Waki Commission, named several prominent Kenyan politicians as having instigated much of the violence. On December 15, 2010 the International Criminal Court (ICC) released the names of six individuals, five high-ranking government officials and one journalist, identified as suspects in the incidents of political violence. A movement to withdraw from the ICC and establish a local tribunal failed, and the ICC is expected to announce whether the 6 suspects will proceed to trial in early 2012.

It is widely hoped that the implementation of Kenya’s new constitution, approved by a two-thirds majority in a violence-free referendum in 2010, will prevent a reemergence of violence during elections scheduled for late 2012. However, the constitution calls for a restructuring of many key national institutions and it will take years before it is fully realized. Among other issues, implementation of police, land tenure, and judicial reforms agreed to in the power sharing agreement that ended the post-election violence has been slow.

Terrorism also remains a serious problem and the U.S. maintains a travel warning for Kenya due to the threat of terrorism and violent crime. Still, Kenya remains relatively stable despite its location in a neighborhood where there are ongoing conflicts and insurgencies. Kenya’s military incursion targeting al-Shabaab militants in neighboring Somalia—Kenya’s response to a series of high-profile kidnappings near the Kenya-Somalia border—has heightened security concerns and led to increased security measures at businesses and public institutions around the country. In addition to the kidnappings, several other incidents occurred in 2010 and 2011, including a suicide bombing of a bus in Nairobi in late December 2011, two grenade attacks on a Nairobi night club and bus stop in October 2011, and a series of explosions and other attacks in refugee camps and towns near the Somalia border. To date, these attacks have not appeared to target commercial projects or installations. As noted above, security expenditures represent a substantial operating expense for businesses in Kenya.

Kenya has good relationships with all of its immediate neighbors. It remains a leader and active participant in the EAC, which includes both commercial and political initiatives, as well as the Intergovernmental Authority on Development (IGAD), an eight-country intergovernmental organization that coordinates efforts to mitigate drought and other regional challenges in East Africa. Kenya is also an active member of the Common Market for Eastern and Southern Africa (COMESA). The government has strong ties with the administrations in neighboring countries, including with Somalia’s Transitional Federal Government, despite the ongoing security issues caused by unstable, porous, and conflicted borders and the presence of violent extremist groups like al-Shabaab. Kenya and its neighbors are working together to mitigate the threats of terrorism and insecurity through African-led initiatives such as the African Union Mission in Somalia (AMISOM) and the nascent Eastern African Standby Brigade (EASBRIG).

Corruption

The current coalition government inherited economic and political corruption on a grand scale. In 2003, the Kibaki government enacted the Anti-Corruption and Economic Crimes Act and the Public Officers Ethics Act, setting rules for transparency and accountability, and defining graft and abuse of office. The Public Officers Ethics Act requires certain public officials to declare their wealth and that of their spouses within 90 days from August 2, 2003. Subsequently, the government fired 23 judges for corruption. Nevertheless, opposition leaders castigated the Kibaki government for its lackluster pursuit of individuals suspected of corruption. In 2004, the government established the Kenya Anti-Corruption Commission (KACC), moved forward with the implementation of the Anti-Corruption and Economic Crimes Act, and launched full implementation of the Code of Ethics Act for Public Servants in 2004. The Public Procurement and Disposal Act, which established a commission to oversee all procurement matters, became law in 2005 but has proven ineffective in limiting abuse by public officials: despite the law, large public procurement programs and military procurement have been at the center of a number of corruption scandals in recent years. Enacted in 2007, the Supplies Practitioners Management Act is meant to complement the Public Procurement and Disposal Act by regulating the training, certification, and conduct of procurement officers and imposing penalties for violations.

The KACC launched several investigations in 2006-2007 against senior government officials, including two government ministers; however, none of the cases have been prosecuted successfully, in large part due to bottlenecks in the Attorney General's Office and loopholes in the judicial system. Former Finance Minister Amos Kimunya stepped aside in early July 2008 in connection with the non-publicly tendered sale of a government-owned property, the Grand Regency Hotel, to a Libyan group. An investigatory commission, the Cockar Commission, reportedly exonerated Kimunya of any wrongdoing. He was appointed as Minister of Trade in January 2009, providing an example of the culture of impunity in Kenya. At the end of 2010, he became Minister of Transportation.

In 2009, President Kibaki irregularly reappointed the director of KACC, during whose tenure no minister-level official had ever been prosecuted, despite a number of high profile corruption scandals including Goldenberg, Anglo Leasing, Triton, and the maize scandal. After a storm of protest from Parliament, the director of KACC lost his re-appointment vote. This historic vote was the first time that the Parliament overruled the President. In 2010, the KACC Board selected PLO Lumumba as director of KACC. Lumumba took a strong stance against corruption and re-opened some of the older cases, including Anglo-Leasing. In December 2010, in Lumumba’s first major corruption case, the KACC arrested and charged Minister of Trade Henry Kosgey with abuse of office over the illegal importation of automobiles. The case was dismissed on a technicality and the government has said it plans to appeal. As called for in the constitution, the KACC was replaced in 2011 by the Ethics and Anti-Corruption Commission (EACC), which is very similar to the KACC. Hopes that the new body would be a more effective check on corrupt behavior than its predecessor have not been realized as yet; like the KACC, the EACC has investigative power but lacks prosecutorial authority. Furthermore, it is widely believed that Parliament was uncomfortable with the pressure brought to bear by Lumumba and sought to dismiss him by disbanding the KACC.

The 2011 Ibrahim Index of African Governance ranked Kenya 23 out of 53 countries on quality of governance, a rise of three places from 2010. After dropping eight places on Transparency International’s (TI) Corruption Index between 2009 and 2010, in 2011 Kenya held constant at position 154 and saw its score increase marginally from 2.1 to 2.2. Kenya still ranks second from the bottom among the five EAC countries, better only than Burundi.

Bilateral Investment Agreements

Kenya does not have a bilateral investment trade agreement with the United States, although there are hopes that this might change sometime in the future. According to UNCTAD, Kenya has signed bilateral investment agreements with Burundi, China, Finland, France, Germany, Iran, Italy, Libya, Netherlands, Switzerland, and the United Kingdom, although only those with Germany, Italy, Netherlands, and Switzerland have entered into force as of June 2011. Kenya and its EAC partners signed a Trade and Investment Framework Agreement with the United States in July 2008 as a bloc.

OPIC and Other Investment Insurance Programs

Kenya is eligible for Overseas Private Investment Corporation (OPIC) programs and is a member of the Multilateral Investment Guarantee Agency (MIGA). In September 2011, OPIC approved up to $310 million in financing for the expansion of Nevada-based Ormat’s geothermal energy facility in Kenya, which also receives support from MIGA. This represents a substantial increase in scale compared to previous OPIC activities in Kenya: in 2008 and 2009 OPIC supported five projects in Kenya totaling $19.18 million, including two large microfinance projects targeting women.

Labor

Kenya's population is estimated to be roughly 41 million. Of the approximately 21 million working Kenyans aged 15-64, the Kenya National Bureau of Statistics reports that 10 million are engaged in pastoral and small-scale rural agriculture. Another 8.8 million are engaged in the informal sector, leaving only 2.2 million Kenyans in the formal sector. A 2006 household survey found that 46 percent of the Kenyan population was living on less than $1/day; newer data is not available, but the Kenyan government believes that the number has decreased considerably due to rising per capita income and a growing middle class, which at 10 percent of the population is now among the largest in Africa. Per capita income, per the Atlas method, is $790. The country’s population growth rate of 2.6 percent per annum coupled with high unemployment and informal employment produces on-going demand for new jobs. Kenya has an abundant supply of well-educated and skilled labor in most sectors at internationally competitive rates. Though there is an apparent modest decline in new infections, high HIV/AIDS prevalence continues to pose a serious threat to human resource development and an economic drain on families and the health care sector. The Kenya AIDS Indicator Survey 2007 (released in July 2008) indicates that 7.4 percent of Kenyans ages 15-64 are infected with HIV, with considerable disparities in prevalence among provinces.

Kenya's laws generally provide safeguards for worker rights and mechanisms to address complaints of their violation, but the Ministry of Labor and Human Resource Development lacks the resources to enforce them effectively. In October 2007, President Kibaki signed five labor reform laws that were drafted with ILO assistance under the U.S. Department of Labor‘s Strengthening Labor Relations in East Africa (SLAREA) project to make Kenya‘s labor laws more consistent with ILO core labor standards, AGOA compliant, and harmonious with Uganda’s and Tanzania’s. The new laws are: the Employment Act, which defines the fundamental rights of employees and regulates employment of children; the Labor Relations Act on worker rights, the establishment of unions, and employers associations; the Labor Institutions Act concerning labor courts and the Ministry of Labor and Human Resource Development; the Occupational Safety and Health Act; and the Work Injury Benefits Act on compensation for work-related injuries and diseases. The Kenyan government formally published the amended texts of the new laws in 2008. Also in 2008, the Kenyan government created the National Labor Board to steer stakeholders to meet and propose necessary amendments to Parliament for smooth implementation of the Acts. The Board will set structures and rules as required by the Act.

Under the Labor Relations Act, a minimum of seven workers may initially apply to register a union, but the nascent union must have a minimum of 50 members to be registered. A union must also show a signed membership request from 50 percent of the workers in a workplace to force an employer to recognize the union. There are 42 registered unions representing over 500,000 workers, approximately one quarter of the country's formal sector work force. All but six, including the 240,000 member Kenya National Union of Teachers (KNUT), the University's Academic Staff Union (UASU), and the Union of Kenyan Civil Servants (UKCS), are affiliated with the Central Organization of Trade Unions (COTU), which has about 260,000 members. Union membership is voluntary and organized by craft rather than industry.

Kenya’s constitution enshrines the right to fair remuneration, reasonable working conditions, trade union activities, and the right to strike in the Bill of Rights as a fundamental freedom. Consequently, workers, especially in the public sector, now enjoy greater latitude to express their grievances. While the law permits strikes, unions must notify the government 21-28 days before calling a strike. During this period, the Minister of Labor and Human Resource Development may mediate the dispute, nominate an arbitrator, or refer the matter to the new Employment Relations Court, which replaced the Industrial Court. A strike is illegal while mediation, fact-finding, arbitration, or other legal proceedings are in progress. The Labor Institutions Act of 2007 expanded the former Industrial Court and gave it the same powers as a High Court to enforce its rulings with fines or prison sentences; the new Employment Relations Court is largely the same as the Industrial Court but may also hear individual employment complaints, which previously were handled by the Ministry of Labor. The court has penalized employers for discriminating against employees because of their union activities, usually by requiring the payment of lost wages. Court-ordered reinstatement is not a common remedy because of the difficulty in implementation.

Kenya has relatively harmonious labor relations. The number of strikes dropped significantly from 24 in 2007 to 8 in 2008, reflecting a 66 percent decrease. In 2008, 4,718 workers were involved in strikes, representing 135,185 person-hours, compared to 36,095 workers involved in strikes in 2007. The number rose to 14 strikes in 2010, involving 8,310 employees and 273,944 person-hours. The Industrial Court adjudicated 226 cases in 2008, out of which it gave 192 rulings, compared to 295 cases and 147 rulings in 2007. However, the number of cases subsequently rose to 851 in 2009 and 1,484 in 2010. Late 2011 saw a notable uptick in labor unrest and at least ten unions issued strike notices in the last six months of the year alone. A number of different unions, from postal workers to physicians, exercised their right to strike. However, in December, a call by the Central Organization of Trade Unions (COTU) for a general strike was roundly ignored. COTU called for all workers, including public service vehicle (matatu) operators, to stop working for 10 days to protest a lack of government response to the country’s rising cost of living. By the end of the first day it was clear that the matatus had determined not to strike, unwilling to take a financial hit by stopping work over the peak holiday season.

Labor law mandates the total hours worked in any two-week period should not exceed 120 hours (144 hours for night workers). Negotiations between unions and management establish wages and conditions of employment. There are twelve separate minimum wage scales, varying by location, age, and skill level. Regulation of wages is part of the Labor Institutions Act, and the government establishes basic minimum wages by occupation and location, setting a minimum for monthly, daily, and hourly work in each category. In 2011, the Kenyan government revised the minimum wage upwards by 12.5 percent. In many industries, workers are paid the legal minimum wage and thus benefited from this increase; however, the wage increase was outpaced by increases in the cost of living. As of January 2012, the lowest legal urban minimum wage was 7,586 shillings (about $89) per month, and the lowest agricultural minimum wage for unskilled employees was 3,765 shillings (about $44) per month, excluding housing allowance. The Productivity Center of Kenya, a tripartite institution including the Ministry of Labor, the Federation of Kenyan Employers, and COTU, is tasked to set wage guidelines for various sectors based on productivity, inflation, and cost of living indices, but the center lacks strong industry support and employers often do not follow its recommendations. Most minimum wage workers must rely on second jobs, subsistence farming, other informal work, or the extended family for additional support. Furthermore, a large portion of employees in Kenya rely primarily on the informal sector for work and thus are not protected by minimum wage laws. Workers covered by a collective bargaining agreement generally receive a better wage and benefit package than those not covered: Ksh 14621 per month on average (about $160), plus a housing and transport allowance, which may account for 20 to 40 percent of a Kenyan worker‘s compensation package.

Kenyan law establishes detailed environmental, health and safety standards, but these tend not to be strictly enforced. The Directorate of Occupational Health and Safety Services (DOHSS), a department under the Ministry of Labor and Human Resource Development, has the mandate to enforce the Occupational Safety and Health Act and its subsidiary rules. DOHSS has the authority to inspect factories and work sites, except in the EPZs, but operates with less than half of the 168 inspectors needed to adequately cover the entire country. DOHSS developed a program to help factories establish Health and Safety Committees and train them to conduct safety audits and submit compliance reports to DOHSS. The Directorate also maintains a register of approved and certified safety and health advisers whom employers may enlist to conduct safety audits in the factories and other places of work. The Directorate should carry out these audits at least once a year and forward a copy of the audit report to the DOHSS within 30 days. However, according to the government, fewer than half of the largest factories had instituted Health and Safety Committees.

Work permits are required for all foreign nationals who wish to work in Kenya. An applicant for an entry permit must describe the type work they will perform and will be limited to that specific activity. Although there is no official time limit, a visitor's pass or a visa is usually valid for three months and the Immigration Department must grant applicable extensions upon proper application. Applicants may apply for work permits in any major city in Kenya, but all applications go to Nairobi for processing. Before hiring expatriate workers, businesses are required to demonstrate by an exhaustive local recruitment campaign that suitably qualified Kenyan citizens are unavailable. Foreign firms must also sign an agreement with the government defining training arrangements intended to phase out expatriates. The is currently working to develop a skills inventory, which should lower the burden on firms hiring expatriates by replacing the labor-market testing procedure, at least for high-skill positions, with a pre-determined list of skills with shortages in the Kenya. As of January 2012, however, the Ministry had conducted a pilot study but had not commissioned a full employment survey. Once implemented, this inventory will allow approved employers to freely hire foreign workers with the listed skills, subject only to verification of the credentials and character of the individuals proposed for employment by the Immigration Department. Despite this measure, high unemployment levels have led the government to make it increasingly difficult for expatriates to renew or obtain work permits, and Immigration has increased the price of a work permit to up to Ksh200, 000 (about $2,250). The Immigration Department has occasionally cancelled work permits before the expiration date without giving reasons. According to the law, the immigration officer issuing entry permits may also require a bond of not less than Ksh 100,000 (about $1,100) for each permit, to be deposited with the Immigration Department.

Foreign-Trade Zones/Free Ports

As of January 2012, Kenya’s 42 Export Processing Zones (EPZ) were home to 77 companies, down from 83 in 2010, with ten more expected to begin operations in 2012. About 70 percent of these companies are engaged in manufacturing, 16 percent in services, and 14 percent in other commercial activities. A government parastatal, the Kenya Export Processing Zone Authority (EPZA), regulates the zones. Of the 42 zones, the public sector develops and manages two: one in Athi River, and one in Mombasa. The private sector, in the form of licensed EPZ developers/operators, owns and manages the rest. Of the 77 enterprises operating in EPZs, foreign investors own 57 percent and Kenyans own 19 percent, with the remainder being joint ventures. The largest privately-owned EPZ is the Sameer Industrial Park located in Nairobi’s Industrial area, which has been operational since 1990. The 339 hectare Athi River EPZ, near Nairobi, is the largest publicly owned EPZ. A second publicly owned EPZ is being developed in Mombasa, Kenya's main seaport.

The United States remained a principal market for Kenyan EPZ exports, 70 percent of which enter the United States under AGOA provisions. The value of AGOA exports was $225.5 million in 2010, up from $207.9 million in 2009 but still below the 2008 level of $255.7 million. AGOA exports of garment products, worth $200.5 million, constituted 89 percent of total AGOA exports in 2010, down from 94 percent in 2008. Apparel exports to the U.S. looked set to rise considerably in 2011, with $194.5 million in the first three quarters of 2011, compared to $138.2 million in the same period in 2010. Firms operating in EPZs also export to Europe, Canada, the United Arab Emirates, Hong Kong, Panama, and Zimbabwe.

Foreign Direct Investment Statistics

Through the 80's and 90's, the deterioration in economic performance, together with rising problems of poor infrastructure, corruption, high cost of borrowing, crime and insecurity, and lack of investor confidence in reforms generated a long period of low FDI inflow. However, net inflows increased more than fourteen-fold between 2006 and 2007, from $51 million (0.2% of GDP) in 2006 to a record $729 million (2.7%) in 2007, according to the World Bank’s World Development Indicators. FDI inflows dropped off sharply in 2008, coming in at only $96 million (0.3%), and then increased to $116 million (0.4%) in 2009 and $186 million (0.6%) in 2010. These figures compare poorly to neighboring Tanzania and Uganda, which have both posted higher net FDI inflows in dollar terms than Kenya each year since 2005, with the exception of 2007, despite their smaller economies. In 2010, Tanzania reported $433 million in net FDI inflows and Uganda reported $817 million. Of course, much of this can be attributed to investment in the two countries’ natural resources. UNCTAD estimates Kenya’s 2010 FDI stock at approximately $2.3 billion. As of 2008, the market value of U.S. investment in Kenya stood at approximately $183 million, primarily concentrated in commerce, light manufacturing, and tourism.

Poor data collection in Kenya leads to underestimating actual inflows of FDI. There is no clear mandate by any agency to collect data on FDI. The Central Bank of Kenya (CBK), the Kenya Investment Authority (KIA), and the Kenya National Bureau of Statistics (KNBS) all collect only partial information on either balance of payments inflows or investment projects. The government does not publish data on the value of foreign direct investment (position/stock or annual investment capital flows) by country of origin or by industry sector destination. Neither is data available on Kenya‘s investment abroad. Although 2011 FDI estimates are not yet available, experts report that domestic investment pulled ahead of FDI last year and has become a key determinant of Kenya’s economic performance and prospects. If implementation of the new constitution and other reforms moves forward smoothly, this growing domestic investment might be bolstered by a significant increase in FDI inflows.



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