Graft in Kenya: Investors Targeted

Kenya's President, Mwai Kibaki (right), inspects the honour guard

Kenya's President, Mwai Kibaki (right), inspects the honour guard on December 12, 2004, at a celebration in Nairobi that marked Kenya's 41st anniversary of independence from Britain. (Photo: Tony Karumba / AFP-Getty Images)

Corruption remains the most significant barrier to doing business in Kenya, according to a World Bank survey.

The survey shows that graft is the number one barrier to investment. The Investment Climate Assessment Survey is entitled “Enhancing the   Competitiveness of Kenya’s Manufacturing Sector: The Role of the Investment Climate.” It says that corruption was rated as a severe handle by three quarters of the sampled firms, while respondents reported that “unofficial payments” to “get things done” are required 57 percent of the time.

Some of the worst offenders, according to the survey, include the Kenya Revenue Authority, the Health inspectorate, Municipal authorities, and utility companies.

According to data collected in a survey of 282 formal manufacturing firms and workers over seven sub-sectors in five towns, more than half of the companies reported that they regularly had to make unofficial payments of over 6 percent of their revenues.

Two thirds felt they were expected to pay bribes for government contracts.

Corruption has long been seen as an impediment or major obstacle by 74 percent of the sampled firms and generally seems to have the same effect across the spectrum.

It appears that the foreign firms in the country are affected more by corruption compared to local ones, as 81 percent of them rated it as a major or very severe problem.

Foreign firms are targeted by officials due to the perception that they have ample resources. An alternative interpretation is that the international experiences of their owners and managers, coupled with their perception of what is normal and acceptable, could lead to their “loud” complaints.

Half of all firms — 48 percent — reported at least a bribe request from them in the past one year. The total amount given out as bribes by most foreign companies in Kenya averaged 3.8 percent of their annual revenue. The figure for Uganda was 2.4 percent.

Firms were asked if informal payments were requested for utility connections, government services, and during inspections by government agencies.

Fifty percent of firms that required telephone connection in Kenya were asked for an informal payment, compared to less than a fifth of the firms in Uganda and Tanzania. The medium payment is $100.

Thirty eight percent that sought construction permits in Kenya were asked for a bribe — more than three times as often in Uganda and Tanzania. The medium payment in this category was $400.

The worst offending inspection agencies include the taxation and municipality authorities. The medium bribe in this category was $400. Many firms, however, admitted to being party to grand corruption by making payment to policy makers or senior bureaucrats in order to win government contracts and influence law making.

Judges and government officials appeared to be among the most partial to bribery. Twenty eight percent of the firms felt that they were able to affect the outcome of commercial cases that directly affect their businesses.

Up to 61 percent of firms in Kenya reported that a “gift” or informal payment was “typically expected,” compared to 33 percent in Tanzania.

The survey also revealed that crime was the third most common complaint among firms and that a third of the firms sampled experienced crime in 2002.

The direct loss to crime is large — 4 percent of annual sales — but the indirect cost of security is also a burdensome 2.7 percent of sales.

An overwhelming indication from the Investment Climate Assessment (I.C.A.) survey is that Kenya’s law enforcement agencies have failed to protect the local businesses. Almost 70 percent identified crime, theft, and disorder as a major or severe constraint.

Kenyan firms’ opinions of infrastructure services were extremely poor according to the I.C.A. survey.

Roughly half the firms rated electricity, transport, water, and telecommunications as a major constraint to their businesses.

Not only is the level high in absolute terms, but the number of dissatisfied firms was greater than it was in Tanzania and Uganda. Domestic and international investment is hindered by high energy costs and power outages. Firms lost nearly 10 percent to power outages, while two thirds lost capital equipment to surges. Firms in Kenya experienced an average of 33 outages in a year and most firms own their own generators to cope with power losses.

The I.C.A. survey says that Kenyan firms have a weak competitive edge over Uganda and Tanzania, and that investment levels are low and declining.

The economy, however, has shown marked improvement in the last two years, while a number of significant incentives have been given to investors.

This is likely to translate to a better and more investor friendly environment.