Foreign Direct Investments, Infrastructure and Safety Series – Specific overview - Kenya

As a host country, Kenya plays a lead role both regionally and continentally regarding investments due to its focus on infrastructure such as roads, rail, ICT, and legal frameworks that support the business environment and attract investors. The Kenya Investment Authority (KenInvest) , created by the Investment Promotion Act of 2004, made a trade policy agreement demonstrating what the country offers and what investors are expected to do. Such an agreement has models that give the state flexibility in regulating and managing investments, including risk analysis. As the country strives for a new strategic plan when it comes to attracting investors, the five-year plan Kenya Investment Authority (KenInvest) (2018), which is about to be replaced by the new government elected in 2022, is anchored in "Vision 2030", a strategic policy that aims to develop Kenya into an industrializing upper middle-income country, focused on attracting private investments in five primary sectors (universal healthcare, manufacturing, food security and affordable housing, development of infrastructure) through public-private partnerships. Implementing this policy has been a critical goal for the country to attract FDI. The newly elected government aims to create a mid-term strategic plan that focuses on attracting more FDI, opting for a bottom-up approach that focuses on the local small businesses to uplift the country's power purchase parity, transforming business through small and medium enterprises, investing in affordable housing, digital superhighway, and universal healthcare coverage (USGov, 2023).??

?Among the main concerns and challenges in attracting FDI in Kenya we can cite the burdensome bureaucratic processes, aggressive tax collection attempts, delays in issuing business licenses (USGov, 2021), and even corruption (Transparency International, 2023). The safety concerns are also indicators that negatively affected Kenya's FDI attraction from 2011 to 2019. The decline in FDI in this period has also been recorded elsewhere despite the increase of infrastructure (UNCTAD, 2020), and such inflow decline is also stressed in the 世界银行 (2023) data, see Figures 1 and 2 below.

In this case, Kenya has been a victim of safety concerns, and despite such facts, there is limited research focusing on such issues (Kinyanjui, 2014). Still, there were cases where a positive correlation was witnessed between investments and safety concerns (Baraga, 2016). Thus, this article highlights the effect of safety fears on FDI and the connection to Kenya's quest to improve infrastructure and build attractive legal frameworks to stimulate FDI. The article does not connect safety concerns to infrastructure per se, which is an essential study; however, it only illustrates these concerns and their relation to FDI in Kenya and how they impact Kenya's aim of investments and business.

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Enablers of Foreign Direct Investment in Kenya

The country's leadership recognizes that infrastructure is a crucial component of Kenya's economic growth; such reliable and adequate infrastructure is the engine of productivity and growth for the economy, lowering the cost of doing business and productivity raises the country's regional and global competitiveness, improves the quality of life, modernizes the economy and attracts FDI (GoK, 2013). The same objective has been emphasized over the years, and the 2023-2027 fourth midterm plan stresses infrastructure as the foundation for macroeconomic enablers, including PPP as an engine to attract foreign investment; such enablers also include an efficient legal system and natural resource endowment (Gibba Badji and Amukule, 2023).

The global financial crisis slowed the FDI's positive trajectory in 2007 and 2008 due to high fuel prices. However, there was a positive recovery from 2009 to 2011, followed by a negative setback in 2012, only to rise again in 2013. This rise in FDI was due to infrastructure development (Wekesa et al., 2016). A turnover from stagnation to recovery emerged with the economic blueprint of President Mwai Kibaki's government, focusing on infrastructure development and investments (Wagura, 2016; Otenyo, 2023). A further economic blueprint emerged in 2012 with different policies focusing on economic growth: Vision 2030 emphasized the importance of infrastructure development, improvement of trade and business environment, and establishment of a free trade zone. All these were mechanisms to attract FDI, and infrastructure was allocated the highest budget after the education sector; this was done through a framework of midterm expenditure. Unfortunately, such an aim to attract export-oriented industrialization and FDI did not yield much success (Wekesa et al., 2016).

Kenya has been at the forefront in attracting FDI through its infrastructure focus: the country has excellent aviation connections throughout Africa, with Kenya Airways considered one of the leading aviation connections worldwide. The country has a strong telecommunication infrastructure and a developed logistic hub when it comes to the financial sector. Additionally, Kenya's international waters and its Mombasa port infrastructure are considered a gateway to East Africa (USGov, 2021), and the creation of yet another port with 32 berths in Lamu County is a boost to such infrastructure. Lamu Port and Lamu-Southern Sudan-Ethiopia Transport Corridor (LAPSSET) is an ambitious project with critical importance to the region aiming to connect Kenya's international waters to Ethiopia and South Sudan to connect the mega infrastructure to Douala in Cameroon (Okwany, 2021). Thus, such infrastructure projects are enablers that put Kenya on the international stage when it comes to attracting FDI.

Developments in fields such as transport, water, energy, communication, and waste infrastructure are vital when it comes to the attraction of FDI. For example, the quality of infrastructure in such fields lowers the cost of doing business in Kenya, which affects FDI. Starting in 2013, The inflow of Kenya's FDI as a percentage of GDP has been declining despite the prior increase from 0.4% in 2010 to 0.9% in 2013 (Wekesa et al., 2016); safety concerns were among the major causes of this decline.

Just like any other developing country, Kenya's sustainable economic development is affected by the inefficiency and inadequacy of power supply, roads, and telephone lines, in addition to pollution, mismanagement of waste, and shortage of clean water for consumption. All this demonstrates the demand for infrastructure the country needs for economic prosperity. Apart from these economic indicators, there are also legal measures that attract investments, including political and safety concerns that affect FDI. In this article, a focus on these concerns is explained below.

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Foreign Direct Investment, Legal Measures, and Safety concerns

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Kenya's quest for Foreign Direct Investment is evident in the sessional paper 10 of 1965, an economic blueprint of the country. The policy stipulated the attraction of FDI and laid down strategies for it as a component of a growing economy. The Policy paper also stipulated the need to finance more infrastructure development to stimulate FDI. The session paper 1 of 1986 indicated the same economic focus on attracting foreign investments. These early economic policies stipulated Kenya's advancement in legislations that attract FDI, such as the Investment Promotion Act (IPC) of 2004. The Kenya Investment Authority (KenInvest) was created by the act of parliament in 2004 to attract FDI. The authority regulates licenses, certificates, and permits; it also makes policy frameworks for investments. These investment frameworks strongly attract FDI, offering more clarity to investors, knowing what they should expect. These frameworks favor an adequate risk assessment and flexible regulatory environment, which can only encourage investors, as is the case for Kenya.

In 2013, Kenya issued regulations that attracted investments, sticking to the UN Trade and Development (UNCTAD) policy advice. Kenya created a one-stop shop at the KenInvest offices, and countries such as Uganda and Ethiopia still recorded an increase in FDI inflow despite Kenya's attractive measures (Muteshi et al., 2022). From 2017 to 2018, Kenya improved the business environment through tax reforms as legal frameworks that attract FDI. The Tax Law Amendment Act 2018 and the Finance Act 2018 created the "iTax" platform —an online tax payment processing that simplifies the tax processes. The laws also introduced a system to expedite the flow of goods and simplified business procedures.

??????????? The amendment of the Finance Act 2020 introduced Digital Service Tax (DST). However, it imposed a 1.5% tax on the transaction in the Kenyan digital marketplace. Such a tax increase conflicts with the reforms (USGov, 2021). The current government is aiming for various regulatory reforms to the investment environment. A National Tax Policy (2023), part of the Financial Act 2023, seeks to create a favorable business environment by reducing exported services, fast-tracking tax refunds, and offsetting tax liability claims.

Still, Kenya should promote itself more, with the Kenya Investment Authority (KenInvest) recognizing that the country has not promoted and marketed itself adequately. Kenya still requires a more significant presence of international investors. These facts show the essence of legal measures attractive to FDI. However, safety measures also have a substantial impact on FDI, being vital for both investors and the host country.

Kenya is a developing economy and has been impacted by safety concerns, which affected investments. 2011 to 2016 were some of the worst periods when the country struggled with safety issues (Okwany, 2016). These safety concerns continued to 2019 (Okwany, 2020), and the effects are evident in the World Bank (2023) historical data analysis on Kenya's FDI inflow, showing a decrease from 2011 to 2020, see Figures 1 and 2 below. The year 2010 had a sharp increase in inflow, but a drastic fall in the inflow started right after, with several safety incidents impacting Kenya's investment strategies. Lastly, the COVID-19 pandemic also had its toll on Kenya, like all neighboring countries, worsening the situation.

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In the article introductory to this series, the main economic levers explaining the relationship between safety concerns and FDI have been described. With the above in mind, we should consider the following.

The Central Bank of Kenya data show that Kenya has had an increase in medium- and long-term Loans between 2010 and 2012, which are mostly defense spending. The country's FDI declined from 0.6% or US $186 million in 2010 to US $177 in the same year. The year 2011 saw a further decline in FDI to US $140 million, followed by a slight increase to US $164 million, which is still less than the 2010 figure. The decline of FDI in 2011 marks the struggles against safety issues that Kenya was facing despite the focus on attractive legal and policy frameworks and infrastructure.

In 2011, the country's FDI was at 3.09%, it went down to 2.4% in 2012 and then 1.8% in 2013, and it further went down to 1.2% in 2014, only to reach as low as 0.8% in 2015 (CEIC, 2023). The years 2013 to 2016 have seen a drastic drop in Kenya's FDI inflow due to various safety incidents. Thus, there is a positive relationship between safety concerns and the reduction of FDI inflow. The CEIC Data (2023) shows a slight increase in FDI inflow, witnessed between 2016 and 2017, a decline of inflow in 2019, and later a stagnation at 0.4% from 2019 to 2021, and a slight reduction to 0.3% in 2022.

As indicated above, Kenya has strived to create legal measures attracting FDI. However, safety concerns show why Kenya's neighbors have been attracting FDI while Kenya struggles. 世界银行 and it's parts - the African Development Bank Group and IFC - International Finance Corporation (2023) data confirms these effects of safety concerns, showing the decline of FDI inflow from 2010 to 2022. Therefore, apart from focusing on infrastructure and legal measures as crucial components of FDI, safety is also an essential component that investors must investigate.

Conclusion

Foreign Investment has been Kenya's key goal since independence. The country's leadership has aimed to improve infrastructure to stimulate FDI. Such strategies positively affect, including improving legal frameworks to attract investments. Kenya has made reasonable efforts to improve infrastructure, legal frameworks, and guidelines for attracting FDI. As such, these frameworks and policy guidelines should place Kenya in the lead when it comes to attracting investments and opportunities. However, there are political and safety concerns, both domestic and international, that have an impact on FDI levels. Additionally, corruption and weak institutions also impact the inflow of FDI in Kenya, yet not as evident as safety concerns: a stronger negative correlation between FDI and the rise of safety concerns such a relationship is evident compared to any of the other indicators.

Currently, the country is building a new 2023-2027 Midterm Plan, and the new administration's focus is on tax-friendly guidelines for investments and a bottom-up approach policy, supporting investments that uplift small enterprises and livelihoods. It is worth noting that despite Kenya's effort to improve its legal framework and infrastructure as a stimulus to FDI, its neighbors, such as Uganda and Ethiopia, had an increase in FDI inflow instead as Kenya struggled during the same periods due to recurrent safety incidents. The years 2020 and 2021 show a slight decline in inflow due to the pandemic. Kenya has indeed demonstrated resilience and recovery from these concerns, and the newly elected government has promising plans for developing the 2023-2027 Midterm Plan, legal and policy frameworks on finance and taxation.

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Reference

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Kenya Investment Authority (KenInvest) , Central Bank of Kenya , IFC - International Finance Corporation , African Development Bank Group , AVCA - The African Private Capital Association

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