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Ease of doing business: Highly ranked different reality

Doing business in Kenya can be an excruciatingly painful experience demanding every bit of perseverance.

In Summary
  • Kenya is currently ranked 56 out of 190 countries in the World Bank’s ease of doing business index.
  • But business owners say the going is not that easy because the manner in which laws are enforced is detrimental to business interests.
Demolished structures at Mutindwa Market on August 25, 2020
Demolished structures at Mutindwa Market on August 25, 2020
Image: DOUGLAS OKIDDY

The problem with regulations in Kenya lies in the harsh, arbitrary manner of enforcement.

Imagine going home after a day’s hard work and learning from the late-night news that the line of business you invested in has been declared illegal.

Imagine too getting a call in the middle of the night telling you that a demolition crew is ready to descend on your business premises. You had meticulously adhered to the law and obtained the necessary building permits but it seemed the government’s right hand did not know what the left hand was doing when it gave you the approvals.

Here’s another scenario: You are a market vendor, a business on which your entire family depends for survival. One day, the local authorities declare that your market is to be moved to a site literally in the middle of the bush to decongest the town. You comply and move (grudgingly) but months later, your revenue is down 75 percent due to low sales. In the meantime, another set of traders are allowed to do business at your former site.

Making money has never been easy, if it were, everybody would be rich. Nevertheless, doing business in Kenya can be an excruciatingly painful experience demanding every bit of perseverance. Each day presents challenges that could easily knock out your business.

Kenya is currently ranked 56 out of 190 countries in the World Bank’s ease of doing business index. This was an improvement from position 129 in 2013. But business owners say the going is not that easy because the manner in which laws are enforced is detrimental to business interests.

“Rather than have businesses spend colossal amounts of energy and resources, pushing back against stifling regulations or worrying about which unforeseen unfavourable policies will hit them next; we need to be finding ways to harmonise and stabilise the business environment,” says Sachen Gudka, chairman of the Kenya Association of Manufacturers.

Regulations exist to protect workers, public safety, businesses and investments. A country without laws regulating the conduct of business becomes a gangsters’ paradise. Safety standards get thrown out the window. Investors and consumers lose trust in the economy. This is the situation in war-torn countries where state authority has collapsed. Therefore, the key for governments is to find the right mix of regulatory oversight that allows business to grow.

Cosying up to law enforcers is however no guarantee of staying in business because another group of officials from the same agency may arrive also demanding their share of bribes. This operating environment has created a cartel of fraudsters masquerading as enforcement officers from state agencies.

Among the key achievements in the government’s drive to improve the business climate is the digitisation of licensing processes. Today, businesses can apply for licences and pay electronically, thus, eliminating the need to actually send someone with documents to various state agencies. The registration of companies is in line with 21st-century global trends. There is greater transparency in processes for purchase and sale of property such as motor vehicles and land.

Small-scale traders need only a business permit from their county government. Medium sized to large businesses must comply with the requirements of company registration, the county business licensing regulations, land zoning laws, income tax and VAT registration, health certificates (for food), motor vehicle registration, NSSF, NHIF, and occupational safety regulations.

Businesses dealing in alcoholic beverages are required to comply with liquor licensing laws. Some businesses, such as those in the petroleum industry, sale of communication devices, courier services and aviation, must get additional licences from the regulating authority of that specific sector.

 

Then there are the lesser-known licences that often get people into trouble, such as the Music Copyright licence for playing music in public areas. Many people get surprised that they have to pay music copyright fees for televisions installed at the reception area. Taxi drivers whose vehicles have car radios also get into trouble for not having music copyright stickers on their windshields.

The problem with regulations in Kenya lies in the harsh, arbitrary manner of enforcement. Peter Mwairongo, a middle-aged landlord at the Coast, has first-hand experience of official harassment. “I have to deal with county askaris, National Construction Authority and National Environment Management Authority officials who show up as soon as they see construction materials on the ground,” says Mwairongo. “Even when you have the necessary permits, they will find something they can use to extract money. It’s very frustrating.”

Cosying up to law enforcers is however no guarantee of staying in business because another group of officials from the same agency may arrive also demanding their share of bribes. This operating environment has created a cartel of fraudsters masquerading as enforcement officers from state agencies.

A visit by a group of well-dressed persons claiming to be from the Kenya Revenue Authority is enough to send anybody into a state of panic. The individuals inevitably resort to demanding money after threatening their victims with arrest. State agencies now have SMS shortcodes through which the public can verify the identity of enforcement officers, but the vice continues.

Apart from the day-to-day interaction with officialdom, business has to contend with abrupt changes in national policy that adversely affect operations.

Speaking of bribes, corruption in the public transport business is the best example of the consequences of granting enforcement authorities discretionary powers of arrest. The wide-ranging powers government agencies have over business leave no room for appeal. Public transport operators know from experience that going to court would be a waste of time, hence the tendency to negotiate on the roadsides. Another disadvantage of discretionary powers is it creates an uneven playing field because business owners who bribe gain favours while those that cannot bribe get victimised.

Apart from the day-to-day interaction with officialdom, business has to contend with abrupt changes in national policy that adversely affect operations. Recent changes in policy that put business in trouble include the 2018 crackdown on imported goods, the 2017 ban on plastic bags, the shift in transport of imported cargo from road to railway, the 2019 crackdown on sports betting, and the recent ban on imported used clothes as part of Covid-19 control measures. Those changes created upheaval in businesses, resulting in huge losses, closures and an increase in unemployment.

In its 'Ease of Doing Business Report', the World Bank says inefficient regulations can hamper the growth of business, but Kenya is not the only country where things could improve. In Cameroon and Ivory Coast, it takes eight days to complete the necessary paperwork before a ship leaves port. In contrast, the same process takes only 10 hours in Singapore.

“Economies that score well on the Doing Business indicators benefit from a higher level of entrepreneurial activity. This in turn generates better employment, greater government revenue and higher incomes,” notes the World Bank.