Kenyan Business Environment Survey 2014

BUSINESS ENVIRONMENT SURVEY

KENYA


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Foreword

This report represents companies across a wide spectrum, in terms of revenue and staff size, spans all major industries and includes local SMEs and large privately owned companies. In the analysis we attempt to answer three key questions:

1. Have the government’s various policy measures had the desired impact?

2. Should more be done to reinforce these policies and the changes they are intended to bring about?

3. What other areas should the government be focusing on?

We hope that this report and the results will serve as a voice for companies operating in Kenya, to inform the government of the concerns and challenges faced by industry.

We would like to thank all the CEOs that took their time and effort in completing the questionnaire. I hope that our report will lead to a more business -friendly regulatory environment, and in turn greater prosperity for Kenya and its people.

KPMG

Welcome to the KPMG Kenya 2014 Business Environment Survey Report. In this survey we aim to take stock of the current business environment and understand the concerns of businesses in the country. The survey was conducted in the weeks leading to the reading of the National Budget.

Contents

Findings and Insights

1. Rising costs and inflation, exploring new markets and manpower resource constraints and improving productivity are the main concerns of businesses in Kenya:

2. Policy-driven structural changes to Kenya’s economy are coming too slow; the government initiatives are yet to have an impact on business:

3. Tax and other monetary incentives and infrastructure are key investments, which will keep Kenya competitive:

4. The government should introduce initiatives aimed at export promotion, in order to help companies capture global market opportunities:

5. By enhancing productivity to increase job creation and household incomes, the effects of the increasing income gap will be mitigated

6. The tax measures introduced in the previous budget have greatly increased the cost of production


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Findings and Insights

Rising costs and inflation, exploring new markets and manpower resource constraints and improving productivity are the main concerns of businesses in Kenya:

The high cost of living has not spared the business community who cited rising costs and inflation as their immediate concern over the next 12 months. In the recent past, the cost of electricity has shot up and there is a likelihood of the cost increasing further following the failure of the long rains. This is likely to increase the country’s dependence on expensive thermal energy sources for power generation.

The other issue contributing to the high costs is the deplorable state of the roads which contributes significantly to the cost of production. The Government has not made the situation any better with the changes to the VAT Act and the introduction of the Railway Development Levy which have all increased contributed to the cost of production.

The government is already addressing some of these issues through investment in energy, specifically geothermal energy sources and the construction of the standard gauge railway.

Many companies are faced with reduced demand as a result of depressed economic activity and one of the pressing needs for business is getting new markets for their products. On this the Government has to do more to help businesses access regional and international markets.

Improving productivity is another major concern with business leaders expressing concerns on the availability of appropriate skills in the market. In the recent past, universities have acquired mid-level colleges resulting in a skills gap especially for blue collar jobs. There is an urgent need for the national and county governments to strategically invest in Technical and Vocational Educational Training (TVET) institutions to bridge this gap.

Other key concerns for business leaders include access to affordable funding, investments in technology and adapting to the changing global economic environment.

50% of respondents cited rising costs and inflation as their most urgent concern for the next 12 months. 19 % said exploring new markets and improving productivity was their key concern. Manpower resource constraints and improving productivity was the number three concern with 13% of respondents sounding the warning bells for lower productivity.

KPMG Comments

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Policy-driven structural changes to Kenya’s economy are coming too slow; the government initiatives are yet to have an impact on business:

An overwhelming number of the business leaders are concerned with the slow pace of restructuring in government operations. While this can be attributed to the disruptions associated with the devolution of significant government operations to the counties, the changes are too slow, are being implemented haphazardly and generally do not take into consideration the needs of business.

Business is key for economic growth and there is need for the national and county governments to dialogue with leaders of industry on key concerns. The government has shown an ability to rise to the occasion especially for the tourism sector which has faced grave

challenges in the wake of terrorist attacks and travel advisories. It was heartening to witness the swift government reaction to support the industry and business leaders hope to see the government doing more for other sectors of the economy. It is important for government to maintain continuous interaction with business to ensure that emerging threats are identified and addressed before they occur and cripple businesses. In the aftermath of the negative media attention that the country continues to receive, business leaders have called for increased Government investment in branding activities to influence the country’s perception abroad.

71% of respondents said the pace of restructuring was too slow. The government initiatives are yet to have an impact on business.

Specifically, respondents indicated the government should place more emphasis on value-creation activities such as country branding and innovation (4%).

KPMG Comments

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Tax and other monetary incentives and infrastructure are key investments, which will keep Kenya competitive:

Like other countries in the region, Kenya depends heavily on agriculture and tourism for foreign exchange and employment. Any issue that affects any of these sectors has an adverse impact on the country’s economic development. This year, proceeds from tea, which is Kenya’s main cash crop, have dropped with payments to farmers expected to be the lowest in six years. This will have a significant impact across many sectors especially when combined with the deteriorating state of the tourism sector. The reduction in foreign exchange earnings will have an impact on the value of the Kenya shilling which has already experienced a significant fall in value and continues to come under severe pressure.

In the wake of these challenges facing the economy, business leaders have asked for government interventions with key areas being the provision of tax and monetary incentives to spur growth, investments in infrastructure specifically transport and energy and reduction in government bureaucracy.

In the World Bank’s annual ease of doing business survey 2014, Kenya

features at a lowly position 129 compared to Rwanda which ranks at number 34. While Rwanda’s ranking improved by 22 positions, Kenya dropped 7 positions yet the two countries are competing for the same investors. Key areas where Kenya is performing poorly include access to energy, ease of paying taxes, registering property, and backlogs in the judiciary which make it difficult to enforce contracts and support commerce.

Other key areas that require government intervention include investing in the development of local enterprises and increased social spending especially on youth to reduce social instabilities associated with high unemployment rates.

Business leaders await with bated breath the initiatives that the Government will introduce in this year’s budget. Their hope is that the Government will put in place measures to simplify business regulations, encourage entrepreneurship, enhance innovation and digitization of systems and processes, focus on free trade agreements and double tax treaties and encourage foreign direct investment.

27% of respondents said simplifying and making tax and other monetary incentives more relevant would give Kenya a competitive edge. More than a quarter of the respondents also felt investing in infrastructure in areas such as transport and energy would be the more probable choice.

KPMG Comments

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The government should introduce initiatives aimed at export promotion, in order to help companies capture global market opportunities:

With a population of 43million people many of whom lie below the poverty line, Kenya does not have adequate market for spur investments which are necessary for economic growth and development. It is therefore necessary for businesses to tap into regional and global markets if they are to grow beyond their current size.

This issue is especially poignant at this time when Kenya under the auspices of the East African Community is negotiating an Economic Partnership Agreement (EPA) with the European Union. In view of the principles of reciprocity that are likely to be included in the agreement, there is a likelihood that the EPA will provide developed countries with easy access to

local markets crippling efforts of local businesses to venture into manufacturing especially in agricultural value addition and emerging sectors such as energy and natural resource exploitation. It is important to business for the government to negotiate the deals in a way that will allow them access to developed markets without jeopardizing local businesses’ ability to compete for economic opportunities in Kenya.

Key areas that business leaders would like the government to address include facilitating market access, provide more funding options, increasing the talent pool by increasing tertiary/technical institutions and investing in innovation.

29% of respondents thought initiatives aimed at export promotions would open more doors for companies in terms of global market opportunities. 25% thought the government should pay more attention to facilitation of market access.

KPMG Comments

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By enhancing productivity to increase job creation and household incomes, the effects of the increasing income gap will be mitigated

Kenya has one of the world’s highest income inequality ratios which contributes to the social disharmony that the country is currently facing. Business leaders perceive inequality as one of the main threats to economic growth and development and this is a priority issue that the government should address urgently.

Some of the measures that the business leaders have proposed to address this issue include enhancing productivity through appropriate training to equip the people with skills to easily get employment or start their own businesses, providing affordable healthcare to low income earners and increasing funding for education.

The government has already instituted measures to address this issues including the introduction of free maternal healthcare, free primary education (the president has promised free secondary education in the near future), enhanced youth and women funds, tax exemptions on income for disabled persons and increased

opportunities for the youth and women to participate in government tenders.

While the above measures are welcome, there is need for government to evaluate their effectiveness by addressing emerging issues such as deteriorating educational standards as a result of inadequate facilities to cater for the increased enrolment, ensuring that tenders allocated to the youth actually benefit the intended target group, and putting in place measures to ensure that funds set aside for youth and women programs are invested in sustainable projects.

The social investments required to bridge the income gaps will require significant investment especially at this time when government revenues are stretched. Business leaders recommend that the government consider non-tax sources of funding such as sale of national assets, raising income taxes on top earners and increasing/introducing wealth taxes such property taxes/ capital gains tax.

31% of the respondents felt that enhancing productivity, which in turn increases job creation and household incomes, would be the best form of mitigating the increasing income gap. 26% felt that provision of more affordable healthcare for the low income earners would be a better option.

KPMG Comments

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The tax measures introduced in the previous budget have greatly increased the cost of production

Recent Government budgets have all been geared towards addressing the twin issues of economic transformation and reducing economic inequalities. As a result, the Government has had to be bold in its expenditure programs as exhibited in the burgeoning budget estimates with the 2014/15 budget estimated at KShs 1.7trillion. Business and ordinary Kenyans have borne the brunt of the increased government appetite for tax revenues.

An overwhelming number of business leaders attributed increases in their costs of production to tax measures introduced in recent years such as the introduction of the Railway Development Levy, excise duty on financial services, overhaul of the Value Added Tax regime, increase in pension contributions and stringent regulatory measures introduced in the transport industry. Any further increase in taxation will be the proverbial ‘straw that breaks the camel’s back’.

74% of the respondents said the tax measures introduced in the recent budget have mostly increased their production cost. 14% felt the measures had no impact in their businesses.

KPMG Comments

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What is your most urgent business concern for the next 12 months that you expect to tackle?

What is your view of the pace of restructuring of the Kenyan economy?

1.

2.

Option Percentage

Rising costs and inflation 49%

Manpower resource constraints and improving productivity 13%

Managing the impact of the global economic environment 7%

Exploring new markets 20%

Investing in technology 2%

Access to finance 9%

Option Percentage

Too fast, the resulting tight labour market is increasing manpower costs faster than productivity gains

7%

Too fast, many businesses are still unsure of how to restructure and need more help

2%

The government should place more emphasis on value-creation activities such as country branding and innovation

9%

Just right 9%

Too slow, government initiatives yet to have an impact on business 71%

Others 2%


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Where should Kenya invest to keep the country competitive? (Please select 3 options)

What business initiatives do you hope to see in Budget 2014? (Please select up to 4 options)

2.

3.

Option Percentage

Tax and other monetary incentives, to simplify and make it more relevant 27%

Simplify existing government regulations and policies 22%

Investing in developing local enterprises 17%

Infrastructure, in areas such as transport and energy 27%

Social spending, to maintain a stable social environment 6%

Option Percentage

Labour policies calibrated to the unique needs and skills of different industries

11%

Continued focus on productivity 11%

Simplify business regulations 20%

More initiatives to encourage entrepreneurship 19%

More push for innovation and digitalization of systems and processes 14%

More measures to encourage foreign direct investments (FDIs) 13%

More focus on Free Trade Agreements (FTAs) and double tax treaties 13%

Others 0%


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Which area should the Government support to help companies capture more global market opportunities? (Please select upto 3 options)

How should the effects of increasing income gap be mitigated? (Please select up to 3 options)

5.

6.

Option Percentage

Facilitating market access 25%

Providing more options and access to funding 15%

Providing greater access to talent by increasing tertiary and technical institutions

10%

Making bolder moves to encourage innovation 18%

Introduce initiatives aimed at export promotion 29%

Others 4%

Option Percentage

More affordable healthcare for the low income 26%

More government funding for education 19%

Enhance productivity to increase job creation and household incomes 31%

Implement more creative measures to tap into under-tapped labour sources 16%

Enhance social welfare and direct subsidy to vulnerable groups 78%

Encourage more philanthropy 0%

Others 1%


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How should increased spending in the social sector (such as education and healthcare) be funded?

How have the tax measures introduced in recent Budgets affected your business most?

7.

8.

Option Percentage

More funding from non-tax sources such as sale of national assets 44%

No change required - current measures are adequate 28%

Raise income tax rates on top earners 12%

Increase wealth taxes such as property taxes/capital gains tax 14%

Increase VAT rate 0.%

Raise corporate tax rates 2%

Option Percentage

No impact 14%

Increased cost of production 74%

Reduced cost of compliance through introduction of iTax 12%

Increased business revenue 0%

Increased digitalization of systems 0%


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Option Rank

Corruption 1

Terrorism 2

Security and rule of law 3

Inequality 4

Infrastructure 5

Energy 6

Political disruption 7

Public Sector performance 8

Youth unemployment 9

Rank what you consider to be the top national challenges.

Rank what you would recommend as the top strategies to address these.

9.

10.

Option Rank

Integrity and enlightened leadership 1

Investment in systems and processes 2

Public participation and voice 3

Merit based recruitment and deployment 4

Attracting Private Sector Investments 5

Lock down and screening 6

Enterprise development 7

Corporate Social Investments 8


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Conclusion Business leaders perceive social malaise as the key challenge that continue to cripple Kenya’s attempts to attain the Vision 2030 goal of transforming the country into an industrialised middle income country with a high quality of life for its citizens in a clean and secure environment.

The key challenges that Kenya faces include corruption, terrorism, insecurity and breakdown of law and order, inequality, political upheavals, inefficiencies in public sector service delivery and poor infrastructure networks.

While the government has already taken measures to address some of these issues through increased recruitment of police officers and investment in police equipment and security installations, allocation of additional funding for youth and women projects, and introduction of Huduma centres to reduce government bureaucracy, business

leaders feel that the government needs to do more.

Some of the proposals include integrity and enlightened leadership, investment in systems and processes especially resolving impasses in government procurement, enhancing public participation in key decisions, merit based recruitment and deployment. Introduction of measures in this year’s budget that aim to address these issues will go some way in enhancing confidence in business leaders of the Government’s ability to rise to the immense challenges the country is facing.

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The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.

© 2014 KPMG Kenya, a registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity.

KPMG Kenya8th floor ABC TowersP O Box 40612, 00100Nairobi Kenya

Richard Ndung’uTax Partnert: 0709 576 220e: [email protected]

Clive AkoraSenior Tax Managert: 0709 576 245e: [email protected]

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Kenyan Business Environment Survey 2014

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