Month: July 2015

Investment the Kenyan government should seek from the USA government and private sector

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This article first appeared in my column with the Business Daily on July 26, 2015

Kenya witnessed a media blitz around the visit of President Barack Obama and the Global Entrepreneurship Summit (GES). The POTUS’ visit in the context of the GES turned the global eye to our economic and business potential. Kenya should leverage on this opportunity and ensure that its bilateral talks with the US deliver the right type of strategic investment in the country.

Rather than getting caught up in side-line conversations on homosexuality, Government of Kenya ought to squarely focus on exploiting this opportunity. It should be looking to secure investment from US government and private sector in three core sectors – manufacturing, energy and business incubation.

Manufacturing in Kenya is undertapped and contributes a measly 10 per cent to the country’s GDP. The importance of the sector lies mainly in its role in sophisticating the export profile and increasing the forex earning potential of exports. Further, building the local manufacturing sector to create a diverse set of attractive products for local consumption will reduce reliance on imports and generate a healthier balance of trade.  Thus the government should encourage the Obama administration and the US private sector to invest in existing industry and development of new plants.

(source: http://in2eastafrica.net/wp-content/uploads/2014/03/Workers-at-the-Burn-Manufacturing-Company-in-Ruiru.jpg)

Developing the manufacturing sector should be done in a manner that boosts agricultural base by tapping raw materials. Building local industries would also generate significant employment for Kenyans, thereby build disposable income creating stronger domestic demand for goods and services which then drives economic growth.

Secondly, the government should make a pitch for US investment in renewable energy technology such as wind, solar and hydro. Kenya has made it clear it is committed to building the country’s infrastructure; renewable energy and making it a green economy should be a core part of this.

The American government has already indicated its commitment to renewable energy in Africa through the US-Africa Clean Energy Finance initiative. Renewable energy is ideal for Kenya because it is relatively quick and cheap to deploy on a small scale compared with fossil fuels. Further, the US is an ideal partner in renewable energy as it is a global leader and dominates the world’s green investment, particularly solar and wind technologies. The government should ensure Kenya taps into this technical and financing pool through its talks with POTUS and the US private sector.

Finally, Kenya needs to be more aggressive in seeking investment to support business incubation. Incubation is crucial because it helps new and start-up companies develop by providing services such as training, mentorship, office space and networking opportunities. A thriving business incubation infrastructure supported by government will make important contributions to national and regional economic growth. By securing investment in business incubation, the government would enable thousands of incubated businesses to go on and achieve commercial success on a sound footing. The government could experiment with attracting investment from the US government and private sector into an incubation hub into which the parties invest through equity.

(source: http://www.kssuae.com/business-incubation/)

A focus on these three areas by the Kenyan government will ensure that the country has sound strategic direction as the visit from Obama and the GES closes.

Ms Were is a development economist. Email: anzetsew@gmail.com. Twitter: @anzetse

What regional businesses should do to gain from Obama summit

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This article first appeared in The East African on July 23, 2015

The visit by US President Barack Obama to the region and for the Global Entrepreneurship Summit has caused a media frenzy. The President Obama’s visit and the GES have turned global attention to East Africa’s economic and business potential. GES is an important summit East Africans should be poised to take advantage of. But what should the East African businesses be looking for from the summit and thereafter?

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While seeking investments that may arise from GES, regional entrepreneurs need to do three things. First, they should seek to attract long-term patient capital; second, leverage impact investment; and finally find local partners in securing investment deals. East Africa’s economies are young and most entrepreneurs are still in their nascent stage of innovation, creating business activity that can fundamentally shift the structure and direction of the region’s economy.

However, because many entrepreneurs have new business ideas, they may not be sure how long they require for their ideas to take off, and the factors needed to direct the venture into a success that generates attractive returns.

Credit hunger

Sadly, East African entrepreneurs function in a domestic environment that tends to be risk averse and often they find difficulty securing capital to seed their businesses. This has created a culture of credit hunger that may push some entrepreneurs to accept any type of investment without doing due diligence required to ensure the investors they get are a right fit for their businesses.

(source: http://www.greenbookblog.org/wp-content/uploads/2013/08/profit-and-loss-analysis.jpg)

This risks the creation of a scenario where entrepreneurs attract vulture capital where investors (usually venture capitalists who fund risky and new ideas) deprive an inventor control over his or her own innovations and makes most of the money the inventor should have made from the invention. Local entrepreneurs should avoid this and do the due diligence on those from whom they seek capital.

Ideally, East African entrepreneurs should be looking for long-term patient capital where the investor is willing to make a financial investment in a business with no expectation of generating quick profit. Instead, the investor is willing to forgo an immediate return in anticipation of more substantial earnings later. This patience is crucial to give local businesses time to pilot, and get their products and models right so that they have a solid foundation on which consistent returns can be generated. Thus, entrepreneurs should look for the right investment partner rather than letting their credit hunger get the best of them and lead them into deals where they are at a disadvantage.

This leads to the next point, East African entrepreneurs should do their best, where it works, to leverage impact investment funds that seek to generate triple bottom line returns (financial, social and environmental) as this type of capital tends to be patient with an appreciation for returns beyond the financial. Thus, those whose business ideas feed directly into development and improving the lives of East Africans should look for impact investment funds in the US, a sector due to reach $1 trillion over the next few years according to JP Morgan and Rockefeller Foundation.

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(source: http://acumen.org/content/uploads/2014/03/impactinvesting_article.jpg)

Finally, entrepreneurs ought to seek to partner with local companies, particularly business incubators that have a credible track record in attracting capital from the US. This is important because the incubators are experienced in working with US investors and have an understanding of the key features a business should have to attract capital; they will let entrepreneurs know whether they are ready for US investment or not. Also, local incubators can offer young and new entrepreneurs the technical support and mentorship to strengthen their business so that the business is a stronger candidate not only for investment but generating healthy returns.

If East African entrepreneurs consider the ideas above, they will be well placed to ensure that they make full use of the GES and any future investment opportunities that arise from it.

Anzetse Were is a development economist, email: anzetsew@gmail.com; twitter: @anzetse

Obama visit has more to do with US interests than Kenya

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This article first appeared in my column with the Business Daily on July 19, 2015

US President Barrack Obama will be in Kenya this week. It is a good time to take stock of the economic relationship that emerged between Kenya and the US during his administration.

One major thing that the Obama administration has done is to begin catching up with the rest of world in viewing Kenya and the rest of the continent as a viable investment destination.

Before Mr Obama came to power, Kenya was viewed primarily through the lens of aid for social development and support for anti-terrorism activities.Although this notion still persists under the Obama administration, we have seen a visible shift that has already happened in much of the rest of the world; the perception of Kenya as a truly viable business partner rather than a charity case. During the 2014 Africa Leadership Summit, Mr Obama made several announcements on business initiatives targeting the continent, such as Power Africa and the Doing Business in Africa Campaign.

These two changed the tone of economic engagement between Kenya and the US – which had been traditionally defined by the African Growth Opportunity Act (Agoa) where the US was essentially the father figure, giving countries such as Kenya non-reciprocal access to US markets. So although Agoa will be renewed this year, we can expect that details of the deal will be different and will more aggressively protect US interests.

(source: http://www.capitalfm.co.ke/news/files/2015/03/BARACK-HANDSHAKE.jpg)

Mr Obama’s role in building economic momentum between Kenya and the US is seen in the fact that earlier this year, the Corporate Council on Africa — a US organisation devoted to US-Africa business relations and which represents nearly 85 per cent of total US private sector investments on the continent — visited Kenya with an eye on investing in the country.The council plans to ensure that more than 90 companies from the group invest in various sectors of the Kenyan economy over the next three years. The US sees Kenya as truly open for business.

But all these developments ought to be put into the broader context of the economic relationship between Kenya, the US and other countries. In terms of trade, Kenya is a net importer of US goods. According to the Economic Survey 2015, US exports to Kenya were worth Sh57 billion in 2013 while India’s exports were worth Sh258 billion.In terms of foreign direct investment, by 2012 US FDI stock in Kenya was Sh26 billion; juxtapose this with Sh48 billion for China in 2013. So the US has a great deal of catching up to do if it has to compete with the likes of China and India.

 

(source: http://www.theeastafrican.co.ke/image/view/-/1862838/medRes/517820/-/maxw/600/-/g0y51s/-/chindia.jpg)

Economic crisis

Another important shift to note is that the US experienced the worst economic crisis in recent memory during Obama’s presidency. The global financial crisis shattered the confidence that even Americans had in their own economic strength.

Awareness of a weakening global economy has led to the creation of the Trans-Atlantic Trade and Investment Partnership (TTIP), a regional trading bloc comprising the US and the EU.The partnership is an admission that the rich counties are aware of the fact that their global economic clout is declining. So while the US will want to invest in Kenya, the investment will not be done in the spirit of Agoa; it will be done in the spirit of strengthening the US economic footprint in the country and continent with the ultimate goal of strengthening its global economic position.

It’s all well and good if the US can help develop Kenya through investments, but the priority is strengthening the American economy. Kenya would do well to note this.

 Were is a development economist; email@ anzetsew@gmail.com; twitter: @anzetse

How to prevent corruption from arresting economic development

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This article first appeared in my column with the Business Daily on June 12, 2015

Corruption has always been a hot topic for Kenyans but recently it has become a national obsession. We all know that graft is deeply rooted in this country and threatens our economic development. So the focus should now be on: how can we address corruption effectively as a nation?

Firstly, all public bodies that can play a role in arresting graft should not only be more enabled to speedily discharge their constitutional mandate, but also be seen to be doing so. This is crucial because if institutions like the Ethics and Anti-Corruption Commission, the Judiciary, the auditor-general’s office, the Kenya Revenue Authority and even the Kenya Police are seen to be failing in their duty to arrest corruption and seed a culture of transparency in public office, the cynicism in Kenyans will only grow and so will the graft.

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Secondly, those suspected of corruption must be charged and those found guilty prosecuted. This has been said numerous times but Kenyans are still waiting for the day when a high profile public graft case will end with an official being prosecuted and actually facing consequences such as imprisonment. One major problem is that the language of corruption has been politicised and any allegations of graft are interpreted by the accused as witch-hunting.

This is problematic because the politicisation changes the narrative from one where graft is the focus to one where the public postulates as to whether the accused is guilty and/or why they would be “witch-hunted”. The only way this can be arrested is if both leaders allied to government and those who are not are treated in exactly the same manner and undergo the same process. Only then will it be clear that ending graft, and not witch-hunting, is the aim.

Thirdly, ­leverage on technology. We have already seen the role the Integrated Financial Management Information System (Ifmis) played in preventing the fraudulent procurement at the National Youth Service in which Sh826 million could have been stolen. Ifmis flagged the irregularities and allowed action to be taken to prevent disbursement. Kenya should build on this and look up to Chile. Research by the World Bank makes the point that Chile has created one of the world’s most transparent public procurement systems in the world. ChileCompra was launched in 2003, and is a public electronic system for purchasing and hiring. It has earned a worldwide reputation for excellence, transparency and efficiency. In 2012, users completed 2.1 million purchases issuing invoices totalling $9.1 billion (Sh924 billion). We need to study such examples.

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(source: http://supplier.treasury.go.ke/site/tenders.go/app/webroot/img/IFMIS.png)

Finally, we have to understand what graft looks like under devolution. The truth is that with devolution, the number of public officials has increased. Therefore, theoretically speaking, there are more fingers in the public money pot and more avenues through which money can “disappear”. It is crucial that we learn the new governance structures, how counties manage and disburse their funds, and the holes that exist that facilitate both petty and grand graft.

Some of these strategies are being deployed such as technology in the use of Ifmis, but more can be done. It is crucial that Kenyans evolve beyond complaining pessimistically about corruption, believing that no improvements will be made. Rather, they should remain vigilant and determined to end corruption. Only then do we stand a chance of arresting this serious social ill.

Were is a development economist; anzetsew@gmail.com. twitter:@anzetse

What the Treasury should do to share county funds fairly

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This article first appeared in my weekly column with the Business Daily, on July 5, 2015

It’s that time of the year again where government arms and agencies grab a piece of the pie from the Treasury. The 47 counties share the funds this way: population is weighted at 45 per cent, poverty index 20 per cent, land area eight per cent, basic equal share 25 per cent and fiscal responsibility two per cent.

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(source: http://www.magazinereel.com/wp-content/uploads/2015/05/BUDGET-BRIEFCASE.jpg)

Population, poverty and land area are used to determine the cost of service delivery: the larger the population and land area, the more money is required. The poverty index acknowledges that if a county is poor, it needs more money to pull to the level of other counties. The basic equal share provides a basic, equal amount to all counties and is intended to cover administrative costs. Fiscal responsibility is meant to measure how well a county manages public finances; currently, all receive the same amount.

But is this how allocation should be determined? The International Budget Partnership (IBP) suggests that there are three key factors that ought to be considered during budget allocations: need, capacity and effort.

Need addresses part of the poverty question in that more should be given to those counties that need more, particularly if marginalised in the past. It also addresses the population density and land area as it encompasses what it will cost to deliver ongoing services to county citizens.

Capacity addresses the poverty issue and is rooted in the sentiment that poor counties should get more because rich counties are better placed to pay to meet their needs.

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(source: http://blogs.worldbank.org/africacan/files/africacan/images/africacan-measuring-poverty-and-inequality-sub-saharan-africa-knowledge-gaps-and-ways-address-them-540.jpg)

Effort rewards hard work and is based on the idea that more should be given to those who work harder to advance themselves.

A central problem is that it is not clear in the current formula whether counties are receiving enough money to meet needs of their residents. This is an inherently tricky question because the “need” of counties is affected by issues such as poverty, land area and population density, but there are additional problems such as inefficiency and corruption.

So in time it may emerge that some counties are not getting what they “need” but a careful analysis is required to determine whether this is because they genuinely do not have enough money to meet the needs of citizens or if this is due to issues such as financial mismanagement and poor organisational efficiency. Perhaps to make the revenue allocation fairer the government needs to develop a system of determining what counties actually need.

As IBP points out, in South Africa they measure health facility visits and risk of disease by province to estimate health service costs. They also look at school enrolment to measure education need. Although both of these are highly correlated with population, one can argue that they get closer to meeting actual needs.

However, such measures are flawed in that in remote areas, government facilities may be visited less not because fewer people need the services, but because fewer people can get to the facilities. The fiscal capacity issue is a tricky one as it is premised on the idea that counties that can better meet own needs (through levies) should get less from the government. No county will tell the central government they want less money. Also this fiscal capacity issue may disincentivise counties from raising generation capacity, seeding a further reliance on central government.

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(source: https://libraryeuroparl.files.wordpress.com/2013/12/05-legalandinstitutionalaffairs-05-01-budgetsandbudgetarycontrol-thematic_week-picture_week.jpg?w=350&h=200&crop=1)

Perhaps focusing on effort can counter the capacity issue because effort rewards those who manage their funds well, premised on transparency and compliance. Effort also measures and rewards the percentage increase in revenue collection over time and will incentivise fiscal independence.

In short, although the revenue-sharing formula will be refined over time, it is important Kenyans begin to engage in these issues so that we can all make informed contributions to future changes in the formula.

Ms Were is a development economist; E-mail: anzetsew@gmail.com; twitter: @anzetse