Kenya: Worsening Insecurity Impacts Business and the Economy

As another major terrorist attack has hit Kenya, companies should expect this not to be the last one in the near future. Terrorism is creating a growing sense of fear that is harming consumer-oriented businesses and tourism, a major driver of the Kenyan economy. However, despite causing disruptions and uncertainty in the short-term, rising insecurity will not derail Kenya from its path of economic expansion in the medium-term and companies should ensure that they maintain a balanced view of the impact insecurity will have on their operations, customers, and long-term plans for the market.

Kenya WSJAt least 48 people were killed when militants attacked Kenyan coastal Mpeketoni on June 16th (Picture: Associated Press) 

To put Kenya’s terrorist threat into perspective, it is important to understand the underlying dynamics that form the root cause for mounting volatility:

  • Origins of the terrorist threat: Insecurity arises from political instability in neighboring South Sudan and Somalia. Since the Kenyan army’s military incursion into Somalia in 2011, there has been an upsurge in terrorist attacks on public places. The main threat comes from radical Islamist group Al Shabaab and homegrown Islamist militants.
  • The tarnished tourism industry fuels volatility: Tourist numbers tumble every time a new attack hits the country, triggering a drop in prices for hotel rooms. This leads to a rise in unemployment and economic grievances in coastal areas, which creates a fertile recruitment ground for radical causes.

The Toll on the Tourism Sector
New travel warnings to Kenya’s major tourist areas issued by the US, Britain, France, and Australia could cause large job losses and shave off a 1.0% point of GDP growth. The sector accounts for more than 10% of GDP. The number of tourist arrivals already declined by 7.0% from July 2012 to July 2013.

  •  Weak governance exacerbates insecurity: In its fight against terrorism, the government is mistreating Muslims and has arrested thousands of mainly ethnic Somalis. Its behavior is fueling discontent.

However, despite rising insecurity, Kenya’s positive economic drivers will outshine the challenges: Terrorist attacks will cause sporadic disruptions but the vibrant private sector, rising consumer spending and Kenya’s important role as a hub for East Africa are strong economic drivers which are unlikely to be derailed by insecurity. FSG clients should review our recent report, Market Spotlight: Kenya, which covers Kenya’s medium-term macroeconomic outlook and provides strategies companies can implement to be prepared for a rise in insecurity.

Actions companies can take:

  • Guarantee the security of your employees: Refrain from putting employees in international hotels or from holding marketing events in major hotels or malls, as these could become a target.
  • Adapt to changing consumption patterns: Package goods for consumption activity at home, as consumers are more likely to consume at home because of security concerns.
  • Maintain a balanced view: Carefully assess the risks stemming from terrorist activity to your business operations and demand for your products, as these may ultimately not be significant and should not warrant a decrease in investment in the market.

 

What is the East African Community and what does it mean for business?

With all eyes set on the race for oil production between Uganda and Kenya, a development of a different sort is taking place some 200 miles to the south in Arusha, Tanzania. The East African Community (EAC) is conducting a plenary session to discuss trade policies with representatives from the five member states of Burundi, Rwanda, Kenya, Tanzania and Uganda in attendance. Meetings of the sort are not unusual in Sub-Saharan Africa. The EAC, however, is quite unique.

EAC

The East African Community

As Sub-Saharan Africa’s most integrated trade bloc, the EAC is a large, single market with a combined GDP of $US 99.8 billion and 141 million people. It allows for the free movement of goods and labor, and is home to large infrastructure projects that bound the region together. Unlike other African trade blocs such as SADC, COMESA and ECOWAS, the EAC’s goal is not purely economic: its ultimate vision is to become a political federation with a single currency. Despite some frictions between each country’s head of state, the EAC has prioritized regional integration at a pace unforeseen in Sub-Saharan Africa.

MNCs can therefore enjoy several benefits when selling or establishing a local presence in the region:

  • Infrastructure projects and the breakdown of trade barriers create a larger economy that is more attractive to investors
  • The EAC’s ongoing physical and institutional reforms cut the costs and risks of doing business
  • Political stability and proximity to Central Africa, South Sudan, and Ethiopia offer wider regional access
  • Increased competition because of the EAC’s single market results in cheaper goods, but adds pressure to profit margins

While the EAC is home to a broad consumer base that demands a wide variety of goods from various industries, it also faces several challenges to doing business. Inconsistencies in customs valuations, export taxes and rules of origins abound, while the infrastructure is aging. Transport costs along the EAC’s two major corridors are some of Sub-Saharan Africa’s highest. The timeline for integration has not been kept. However, the EAC is addressing these challenges with new projects, investments and treaties. For example, one-stop border posts in select towns will ease bottlenecks associated with intra-regional trade, and the ongoing construction of the LAPSETT transport corridor will provide alternative routes to distribute goods in the wider region. The EAC’s evolving landscape underscores the importance of looking at the region – and Sub-Saharan Africa as a whole – through a long-term lens.

Regional integration is key to Sub-Saharan Africa’s economic growth and will continue to be pushed at the top of policy-makers’ agendas. Old boundaries will continue to break down in favor of highways, pipelines, railway lines and power grids that will redefine regional dynamics. MNCs planning to expand their Sub-Saharan Africa presence should consider clusters of linked markets, as economic zones will continue to influence dynamics in ways more impactful than individual countries. The EAC might be Sub-Saharan Africa’s most integrated trade bloc, yet it is also symptomatic of a bigger, long-term trend of economic realignment on the continent.

To learn more about the EAC, FSG clients may review the full report on our client portal.

Kenya – Let the pictures speak for themselves

Anna Rosenberg, Head of Sub-Saharan Africa at FSG, is currently on a research trip to Kenya, Uganda and Ethiopia. Here are her latest insights:

I am currently sitting on a plane bound for Uganda, gathering my thoughts and impressions of a busy week in Kenya.

Kenya’s business landscape is buzzing with activity – there is no doubt about it. The past two years have seen international companies set up their regional offices in the country to benefit from strong human capital and good infrastructure links.

Western, local and other emerging markets companies are all competing for market share of Kenya’s expanding consumer class. Kenya is therefore becoming an increasingly competitive place to do business.  The pictures I took during my travels through the country speak for themselves:

Nakumatt, a Kenyan supermarket chain, sells a variety of local and international products:
Nakumatt Shelves

Whether in Nairobi or in the countryside, one is bombarded with billboards advertising Huggies nappies, Nivea deodorants, Colgate toothpaste, Samsung electronics, Tusker beer, Johnny Walker whiskey, Coca Cola and Kentucky Fried Chicken, among many others:

Commercial Billboards

 

Kenya 1

Kenya 2

On my way to the airport, I saw two workers put up the Porsche sign at the company’s new outlet in the industrial district, nearby other car retailers such as Toyota and Foton of China:

Kenya 4

High rise apartment blocks and large villas are mushrooming throughout Kenya’s major towns:

Kenya 5

Construction is everywhere. New roads and railways are being built, and the airport and port are expanding. The upsurge in infrastructure will make the distribution of goods in the country much easier:

Kenya 6

Kenya 7

For additional insight from Anna’s research trip in East Africa, be sure to read her earlier posts: Kenya – A Regional TrendsetterNotes from the Field: Kenya, and Nairobi – African Cities Need Urban Planning.

Nairobi – African Cities Need Urban Planning

Anna Rosenberg, Head of Sub-Saharan Africa at FSG, is currently on a research trip to Kenya, Uganda and Ethiopia. Here are her latest insights:

Kenya Traffic

Yesterday I spent 7 hours stuck in traffic versus 4 in meetings. With more and more cars on the streets, there is no doubt that the middle class is rising… and road congestion along with it. Even after spending some time stuck in Luanda’s traffic – which enjoys an abysmal reputation – I have to say it is nothing compared to Nairobi’s.

My experiences on Nairobi’s roads might have been bad luck or indeed a reflection of reality. Either way, I couldn’t help but notice that this traffic must have a negative impact on the economy. Spending hours stuck in a car with the engine running is expensive, environmentally destructive, and above all, unproductive. People become unhappy and unhealthy.

Cities in Europe have undergone a transformation in recent years that turned them into places people actually want to live in. Bicycles now crowd the roads, and people run and walk to work. London is about to build a garden bridge that will turn the daily commute into a pleasant walk in the park.

Africa, however, is a place of reverse innovation. Just think of M-Pesa, the mobile service that made banking accessible to the unbanked, or M-Health and M-Farming that give advice on better healthcare and farming practices, respectively. Think of Cardiopad, a touch screen tablet that electronically transmits medical tests in rural areas to urban examination centers for diagnosis. However, this innovative spirit highlighted by these inventions is regrettably not evident in urban planning.

Real estate prices are rising fast – one acre of land in central Nairobi costs today between US$ 6.0 to 7.5 million – so everyone involved in construction wants to make a rapid profit, overlooking the fact that cities should be livable places. New apartment blocks need matching infrastructure, such as schools and hospitals nearby, and roads to reach them.

Nairobi’s congestion will only get worse as more people buy cars as the consumer class grows, the financial sector matures and consumer credit becomes cheaper. Cars are a status symbol. To quote my taxi driver: “people would get a loan to buy a car, even though they cannot afford to maintain it, just because their friend also owns a car.”

However, rapid economic growth in Africa’s main cities, rising private and public investment in infrastructure, and long-term national development plans are all ingredients that should be translated into building African cities that are pleasant to live and work in.

As I sit in the taxi, I think that urban planning in Africa should embrace innovation to the same extent as the financial services and technology sectors. Better public transport, safe roads to cycle on, car sharing systems are just some examples that would make roads less congested and people healthier, happier and more productive. International companies should engage with the government and advise city councils on building cities of the future – not just cities.

Kenya’s Tatu city, an urban development that aims to provide living and retail space that is pleasant, environmentally-friendly and within easy commuting distance from Nairobi, could lead by example once completed. But innovation needs to first and foremost take place within existing cities, not only newly-built ones.

For additional insight from Anna’s research trip in East Africa, be sure to read her earlier posts: Kenya – A Regional Trendsetter and Notes from the Field: Kenya

Kenya – A Regional Trendsetter

Anna Rosenberg, Head of Sub-Saharan Africa at FSG, is currently on a research trip to Kenya, Uganda and Ethiopia. Here are her latest insights:

My conversations today with business leaders, consultants and journalists revealed that Kenya is a regional trendsetter for many reasons. The country’s private sector is arguably the most dynamic in the region, benefiting from a free market economy since independence. Kenya is much more open to international business as a result, unlike neighbors such as Tanzania that, for a long time, follow a state-led and socialist approach to business.

Kenya is oftentimes the first point of entry for goods traded in the region through its port of Mombasa. Upon clearance from the Mombasa port, goods are then transported via the Northern Corridor to Uganda, Burundi and Rwanda; and from those countries to South Sudan, and the Eastern DRC. The majority of goods not imported from outside the continent and sold across East Africa are produced in Kenya. Its manufacturing sector is underdeveloped but remains bigger than those of other markets. As a result, Kenyan consumer trends, particularly in fashion and technology, are carried throughout the region.

Historical legacy and better infrastructure are not the only reasons for Kenya’s role as regional trendsetter. Kenya’s financial landscape is more sophisticated and mature than its neighbors’ and Kenyan banks are expanding across the region.  Local retailers, such as Nakumatt, are among the most successful in the region and are on an expansion drive. The country’s talent pool and human capital are strong, as multinationals face minimal problems in staffing their local operations.

Anna Rosenberg visited the headoffice of Nakumatt - a leading retailer in East Africa

Anna Rosenberg visited the headoffice of Nakumatt, a leading retailer in East Africa
 

However, not all East African consumers are receptive to these trends. Tanzania’s relationship with Kenya is strained. Tanzanians perceive Kenyans as aggressive and are afraid that they might take over Tanzanian businesses if the country opens up more under the East African Community. As a result, Tanzania is hindering faster progress of regional economic integration.

To put it in the words of two executives I spoke to today, “Kenyans are trendsetters in East Africa” but “they are not well liked in the region.”

Notes from the Field: Kenya

Anna Rosenberg, Head of Sub-Saharan Africa at FSG, is currently on a research trip to Kenya, Uganda and Ethiopia. Here are her latest insights:

Nairobi, Kenya -Anna Rosenberg

Kenya – Security is a Concern
Kenya is an attractive place to do business – that’s the reason I am on the ground doing research. My conversations today with business leaders and ordinary Kenyans alike surprised me in the palpable, growing sense of insecurity they implied. Perhaps our talks were overshadowed by a recent Islamist terrorist attack that had young men storm a church in Likoni, near Mombasa, to open indiscriminate fire, killing six people.

Taking place six months after the Westgate Mall attacks in Nairobi that killed 64 people, the Likoni assault is only a reminder of the underlying tensions within Kenyan society. These tensions do not originate in religious divisions, but economic ones. While Nairobi is bustling with economic activity, the coastal areas are not. Youth unemployment among educated Kenyans is high, which fuels resentment and provides a fertile recruitment ground for radical causes.

Westgate Mall Closed

Nairobi’s shopping mall, Westgate, is closed for reconstruction after a terrorist attack in September 2013

How is this fear impacting business?
I spoke today to the regional head of a company that sells spirits across East Africa. Although his business in Kenya is still growing, he stressed that it is performing worse than other East African markets as consumption activity is shifting to the home, away from public places. Consumers are also buying less alcohol because of negative religious connotations. His employees are scared, particularly when launching marketing events in Nairobi’s flashy Westernized hotels – a prime target for terrorists.

A seasoned Kenyan investor told me that his friends in the tourism industry near Mombasa are severely feeling the economic impact of insecurity. Every incident triggers a drop in prices for hotel rooms, causing dramatic losses in revenues, in turn leading to layoffs that contribute to unemployment. A vicious cycle.

To be clear, as I have heard and seen repeatedly today, Kenya’s business landscape is one of dynamic and fast-paced growth. Business targets typically exceed expectations. Investments in the power sector and nascent oil & gas industry keep rising. Yet for Kenya to remain an attractive hub for multinationals in the region, the government needs to ensure that economic growth creates attractive employment opportunities for the disgruntled youth.

Follow me on twitter @anna_rosenberg

PODCAST: Kenya Prepares for Upcoming Elections

Aly-Khan Satchu, FSG Expert Advisor and Anna Rosenberg, Senior Analyst for Sub-Saharan Africa discuss the implications of Kenya’s imminent election and how businesses operating in the region can best prepare.

Key questions answered include:

  1. Atmosphere in Kenya preceding general elections –how high is the risk of post-electoral violence?
  2. What impact will the election have on companies currently operating in the region and what can companies do to prepare?

To listen to or download the podcast, click on this link to access the iTunes store.

___________________________________________________________________________________________

Aly KhanAly-Khan Satchu is the CEO of the East African Financial Portal http://www.rich.co.ke.  He is a banker by training and worked several years in the City of London. He worked for Credit Suisse First Boston, was a Managing Director at Sumitomo Bank, as well as at ANZ Investment Bank and Dresdner Bank. Aly Khan is originally from Kenya and returned to his home country six years ago, and today is an advisor to a number of African Governments and Investors. For the last three years, Aly-Khan has been an active Investor at the Nairobi Stock Exchange, the USE and various other African Stock markets.

 

Eight big questions for Africa in 2012 (Part II)


(5) With a mandate to govern, can Nigeria’s new government implement positive and sustainable reforms?

Between its petroleum-dominated economics and mind-bending demographics, Nigeria is well-positioned for sustained growth and diversified foreign direct investment in the decade ahead: a leading economist has picked the country to be the world’s fastest growing across the four decades to 2050. With its new government now in place for the best part of four years following the 2011 elections cycle – including key individuals favored by business in seat at the both the Finance Ministry and the Central Bank – the time is overdue for a meaningful political vision to capture that opportunity and steer the country towards its eventual destiny as Africa’s regional super-power. Following the creation of a sovereign wealth fund to manage oil-related windfalls and restructuring of the country’s troubled banking sector under the previous administration, future critical reform milestones to look for in President Goodluck Jonathan’s first full term must include tangible progress on tackling entrenched official corruption at all levels of the country’s extensive bureaucracy. In terms of both their immediate creation of investment opportunities and their wider demonstration of an improvement rather than inertia culture in the country’s legislative system, meanwhile, movement will also be expected on finally enacting long-overdue measures to reform the country’s hydrocarbons industry (the delayed Petroleum Industry Bill) and to liberalize the its public healthcare provision (the National Healthcare Bill, now over six years in hiatus).

(6) Will there be a leadership challenge in South Africa?

Better the devil you know, or the devil you don’t? That’s the dilemma facing many businesses with a footprint in South Africa as they contemplate the possibility of controversial President Jacob Zuma facing a serious challenge to his leadership position and broader policy platform at the ruling African National Congress (ANC)’s elective conference in Mangaung (Bloemfontein) in December 2012. Zuma has disappointed businesses with his inability to kick South Africa’s economy into rapid growth, his apparent inertia (and, at times, alleged complicity) in the face of creeping official corruption at all levels of the country’s bureaucracy, and perhaps most damagingly his ambivalence to growing calls from the ANC’s radical youth wing (the ANCYL) for the nationalization of various sectors of the private economy. Ironically, however, it is steps in recent weeks by Zuma’s leadership team belatedly to silence the ANCYL’s outspoken leader Julius Malema – whose support was critical to Zuma’s initial ascendancy – that have upped the stakes for Mangaung and created the possibility of serious attempts throughout 2012 to displace pro-business moderates from government.

(7) Will Asian companies continue to make the running in Africa?

The story of Chinese investment, and to a slightly lesser extent companies that hail from other Asian countries, in Africa is a popular academic and media topic. The appetite for African growth from businesses that honed their model in Asia is apparently boundless. Asian vehicle manufacturers Honda, Hyundai, Toyota, Suzuki, Tata and Mahindra have all set their sights on South Africa; Samsung hopes to generate $10 billion in annual revenue in Africa by 2015 with a R&D hub in Kenya; and in recent weeks Chinese handsets manufacturer Huawei has announced a major play for the booming Nigerian telecommunications market. Part of Africa’s attractiveness as a market – beyond its raw consumer potential – is its relatively uncluttered competitive landscape. With every year that passes, that scenery becomes more congested. Western companies arguably already lag behind their Eastern counterparts in numerous markets across various verticals; the danger is that recession or slowdown in their home markets into 2012 sees Western firms revisit ever stronger conservatism and risk aversion towards the African opportunity, despite its favorable growth profile, allowing that gap to widen further – potentially beyond reach – as Asian investment continues to flow unchecked into the continent. Meanwhile, side-effects of this trend can also be expected to accelerate in 2012: diversifying trade and investment partners strengthens the hands of African governments, and lessens their dependence on, and motivation to defer to the legislative and regulatory preferences of, Western operators. Given many Asian investors’ emphasis on long-term manufacturing, research/development and supporting infrastructure components to their investments, the overall bar for all businesses entering the market can also be elevated as a result; relationships between employees and host communities and investing businesses can also be substantially altered by these Asian pioneers.

(8) Can East Africa meaningfully integrate?

The East African Community regional bloc (comprising Kenya, Tanzania, Uganda, Rwanda and Burundi) on 1 January 2010 formally launched a common market. All five countries have already adopted a common external tariff, an identical tax applied to imports from outside the bloc, and allowed duty-free regional trade with the exception of Kenya, the largest economy. Given that East Africa lacks a single economy of the scale of Nigeria in the west or South Africa in the south, material progress on implementing the common market and transitioning towards the free movement of people, capital and services across the five countries’ borders, as well as the abolition of import duties, is critical to the region’s future growth prospects. If precedent is a guide, implementation during 2012 and beyond is likely to be under-funded and therefore slow and patchy – while structural obstacles to meaningful integration from both inadequate transportation infrastructure and deficient electrical power supplies will remain significant. Nevertheless, with its booming demographics and swelling natural resource potential as well as its proximity to Middle Eastern and other Asian markets, East Africa remains an exciting growth frontier for investment. Ultimately, the aim is also to introduce a single EAC currency to further simplify regional trade.

To learn more about Frontier Strategy Group’s regular Market Intelligence on Africa’s key investment markets, contact africa@frontierstrategygroup.com to learn how we can help

Eight big questions for Africa in 2012

 

(Tradition continues along Mozambique’s Maputo Development Corridor)

Part one

With unprecedented levels of investor interest both on merit, and because growth may well prove elusive elsewhere, 2012 promises to be an exciting year for sub-Saharan Africa. In this two-part series, I examine some of the key questions businesses looking to the continent should ask themselves as they plan ahead:

(1) Can the continent withstand continuing volatility in commodity prices?

While broadly insulated from sovereign debt and banking-related contagion from the OECD countries, Africa’s vulnerability to commodity price movements – particularly in the form of inflation – remains considerable, and will be a key theme for the region’s macro-economic outlook alongside an average 5.25-5.75% GDP growth projection into 2012, driven by strong domestic consumption. Importers of food and fuel – including Ethiopia, Kenya and Uganda – are already facing sharp inflationary pressure, a situation that could worsen in the year ahead if costs for those inputs trend upward. Producers of oil and industrial metals – Angola and Nigeria the giants in the former category, countries such as Zambia and Congo (DRC) falling in the latter – will meanwhile see their fortunes rise or fall depending on global commodity price and demand shifts, with higher prices boosting government currency earnings but also creating upward pressure on domestic prices. A renewed recession in Western markets, meanwhile, would impact African economies through lower remittances and renewed risk aversion amongst investors from those affected countries. South Africa, with its exposures on metals prices, established manufacturing exports, developed tourism sector, looks particularly vulnerable should worst-case macro-economic scenarios play out in North America, Western Europe and Japan.

(2) Will a series of major elections cause seismic shifts or entrench the status quo?

2011 has been a busy time for elections in Africa: larger countries that have been or are yet to go to the polls this year include Cameroon, Congo (DRC), Nigeria, Uganda and Zambia. Assuming Zimbabwe’s vote is delayed as expected, that country will join a similarly important list for 2012 that also includes Angola, Ghana, Kenya (whose outlook I cover in more detail elsewhere in this list), Mali and Senegal. In addition to the familiar potential for delays, disputes and protests, this wave of elections could be demonstrative of a number of wider cross-border trends. To begin with, that so many countries are organizing and holding broadly free and fair voting each year represents a dramatic and continuing important shift away from the autocratic norms of the 1980s and early 1990s. On the flip side, with accountability and transparency also comes greater policy unpredictability – as mining companies in Guinea discovered in 2010, when a change of president via the ballot box in that country catalyzed a major review of mining licences and royalty payments. Many of the elections will pit very elderly incumbents – Senegal’s Wade and Zimbabwe’s Mugabe are both over 85, while Angola’s dos Santos is entering his 70s – against younger opponents promising an agenda of change, reform and renewal. In addition to generational and policy change, how to manage and beneficially spend these countries’ growing mineral wealth will be a prominent issue in many of the elections – most especially in oil- and diamond-rich Angola and in Ghana’s first vote since it joined the ranks of petroleum producers, but also in Mali and Zimbabwe where mineral finds have yielded much-needed new government revenue streams.

(3) Will North Africa’s wave of anti-government protests shift southwards?

It hasn’t escaped the notice of many Africa watchers that the same cocktail of raw ingredients that broadly underpinned the so-called Arab Spring – long-entrenched and corrupt undemocratic regimes presiding over increasingly youthful and socially connected, technology-savvy populations struggling with unemployment – are also present in a fair number of sub-Saharan countries. It should be noted that mass uprisings leading to regime change are not unknown in the region – the toppling of Madagascar’s previous president in 2009 providing but one recent example – while military-led coups, although far rarer than in previous decades, also continue to occur sporadically in some countries. For some, the question has become why such ‘revolutions’ are not more commonplace given the potentially volatile causal factors in place. The answer to that question likely varies location, but includes – channeling de Tocqueville’s theory of what causes revolutions – a certain degree of lower expectations on the part of poorer African populations (often focused more on basic subsistence / survival or emigrating than marching on the streets) than their Arab counterparts, combined with governments that by and large have still maintained a sufficient monopoly of force and willingness to stamp out dissent fairly ruthlessly before it spreads. With public expectations rising alongside GDP – and food prices – in the months ahead, the potential for more unrest during 2012 is highly credible. Whether this manifests as more ‘manageable’ street protests of the type witnessed already in a number of countries during 2011 (such as Burkina Faso, Mauritania and Uganda) or more sustained disturbances remains to be seen. Other candidate countries for turmoil in the year ahead include Senegal, Gabon, Zimbabwe and Cameroon.

(4) Can Kenya come through a pivotal year unscathed?

It’s been a tough few weeks for Kenya, East Africa’s critical hub market: from the serious food crisis in its north, through the abduction of a female British tourist and the murder of her husband in the coastal resort of Lamu, to a major pipeline fire near the capital Nairobi. The negative impact of such developments on tourist visitor numbers and investor appetite would be negligible compared to the situation should the serious nationwide political violence that accompanied its December 2007 election resurface surrounding new polls due in August 2012. The implementation of a new constitution and wider Kenyan politics remain effectively on hold pending the long-awaited start of hearings at the International Criminal Court in The Hague, involving a number of key politicians accused of involvement in the clashes that paralyzed the country in 2007-2008. Any resurgence in political violence due to the Court’s findings or around the next poll will reverse recovery in the tourism sector, and with it any chance of growth close to the 5.7% YOY GDP figure projected for 2011. In the long-term Kenyan politics needs to move on from confrontational, ethnic-based divisions into more ideological / policy-based debates in order to achieve stabilization and much-needed reform.

To learn more about Frontier Strategy Group’s regular Market Intelligence on Africa’s key investment markets, contact africa@frontierstrategygroup.com to learn how we can help

Weeding out corruption critical to African growth prospects

(A sign promoting the fight against corruption in Zambia - author's photograph)

From examinations of malpractice in South Africa’s police service, via investigations into grand larceny perpetrated by the recently toppled Gadhafi and Mubarak regimes in North Africa, to debates about new anti-graft bodies in Kenya and Zimbabwe, a cursory glance at media stories from the past seven days illustrate that corruption is rarely far from Africa’s headlines. Nor is it often absent from lists of investors’ most common complaints about, or reasons to delay, committing funds to the continent. With the business opportunity in the region proving increasingly difficult to ignore, and legislation governing Western companies’ ethical conduct tightening, developing holistic and effective corporate strategies to avoid entanglement in illegal activity has arguably never been more important.

Shifting sands, but still quicksand

Africa’s changing demographic and governance profile – generally younger and more democratic – is gradually changing its transparency outlook. Observing events in Tunisia and Egypt from close quarters and fearful of similar mass protests mobilized within their own increasingly connected societies and maturing civil society institutions, fewer governments south of the Sahara feel they can be seen to be tolerant of corrupt activity. However, as powerfully illustrated in a compelling recent book about the root causes and impacts of corruption in Kenya, the incentives that drive malfeasance including inter-ethnic competition and poor bureaucratic pay remain strong across most of the continent. The recent experiences of Nigeria, Senegal and Kenya amongst other countries highlight that all too often political movements that surf an anti-corruption and good governance wave to power all too often themselves succumb to temptation once entrenched in government.

Recognizing that transforming a vicious circle – where citizens, bureaucrats and businessmen all feel it is in their immediate personal interest to prolong corrupt practices – into a virtuous one is far from an overnight project, Western governments are increasingly seeking to rupture that co-dependency through extra-territorial legislation in their home countries. Until recently, the US Foreign and Corrupt Practices Act has been the trailblazer in this regard, ensnaring a who’s who of major corporations in its investigations – many of them with a footprint in Africa. A newer kid on the block, the UK Bribery Act, was only enacted on 1 July this year – it has raised eyebrows by outlawing smaller so-called ‘facilitation payments’ or small bribes made by UK entities – the grinding, every day variant of the corruption blight – as well as the large payments intended to skew business outcomes that usually attract the main focus of investigators.

(Percentage of users who report paying a bribe to at least one of nine service providers in the past year; source: Transparency International Global Corruption Barometer, 2010)

Short term pain, long term gain

The howls of protest that greeted the UK legislation – that it’s impossible to do business in places like Africa without paying bribes, that zealous enforcement of its provisions will render UK businesses uncompetitive against less scrupulous competitors – underline the sort of short-term thinking that continues to define the intractability of the problem in the region. In fact, growing numbers of corporations are finding out that taking a zero-tolerance approach even in the most murky and problematic jurisdictions does eventually pay dividends. A short-term opportunity cost – of tenders lost or delays to processes previously greased by bribes – is rapidly replaced by a reduction in demands and enhanced status as an employer and partner of choice. The contribution to overall societal transformation may be more modest, but the benefits in terms of litigation and compromising commercial entanglements avoided are generally a more than sufficient ROI.