Getting over the challenges of doing business in East Africa

• This is a paper presented at the Institute of Certified Public Accountants of Kenya (ICPAK) economic symposium in Nairobi on Friday, Feb. 26, 2010.

In recent years, East Africa has gained a reputation as the leading technology adaptor in Africa. M-Pesa, one of the biggest things to happen in the digital economy, was founded right here in Kenya. Rwanda has one of Africa’s most ambitious IT programmes, and its e-government is second only to South Africa. Today, digital buses travel to every corner of Rwanda to spread the digital Bible, and by 2012 the whole country will be one big hotspot.

Kenyans are top in Africa when it comes to the number of page views on the Internet using mobile phones. They also beat the Italians, Britons, Germans, on this score.

You would think, then, that given these facts, we would have the largest mobile phone or Internet companies in Africa. Or, given our smarts, some of the biggest companies in Africa would be East African.

Well, I just looked at the latest Top African 500 Companies published by Africa Report. The highest ranked East African company, in terms of turnover, is KENOLBIL. It is at 79. The next is Kenya Airways, at 133. Then Safaricom, at 139. There is a sprinkling of other Kenyan companies. Outside Kenya, the highest ranked East African company is Tanzania’s VODACOM, at 305, then MTN Uganda at 316. Then a couple more Kenyan companies. To be transparent, I will say NMG didn’t make the list, but then you don’t expect a media house to. Africans don’t read too many newspapers.

There is a story there. Why don’t East Africans translate their smarts into continental leadership? How can we be so innovative and still not be among the richest. And, if you add the population of the wider Eastern African population (including Ethiopia and Sudan) we are by far the most populous region. In fact, at the present growth rates, by 2050 over 60 per cent of Africans will be living in Eastern Africa.

SO, WHAT THE ARE STUMBLING BLOCKS, THE CHALLENGES THAT MAKE IT DIFFICULT FOR US TO REALISE OUR FULL POTENTIAL?

Challenge 1: Mindset. The mindset of East Africans is changing to embrace local initiatives from an obsession with foreign products. Local banks, local programmes on TV, and local providers of services. This has been long coming but it’s finally there. It means we can sell more of our own to our people. But if we stop there, we shall remain small companies. We need to be global in our thinking. In other words, to use the popular word, to be “glocal”— global and local. We need training institutions and universities that help us produce glocal citizens. Right now they don’t exist.

Challenge 2: Lack of a transparent enabling policy framework. Kenya has just come from a devastating drought. We have chunks of land that can be used particularly to dramatically increase food product through irrigation like happens in most other countries. Malawi, a country several times poorer than Kenya, did it in a few short years. It moved from a food deficit to food surplus country – and we import maize from them now! Instead, we wake up one morning and hear Qatar is being offered 40,000 hectares to farm. For what reason? To secure food for their citizens in an otherwise desert country. How many of us would even stop what we do to go and farm if such land was available at such attractive rates? The problem is that the government does not tell us that 40,000 hectares is up for grabs for someone who can farm it at the highest standards.

Challenge 3: Too much politics and too little action. This is a common denominator across East Africa although its much more pronounced in Kenya. The last two weeks, for instance, have had intrigues that have threatened to reverse the gains that we have been experiencing at the stock exchange and almost made the constitution making look secondary. Let me not be misunderstood. It is healthy for a democracy to debate all the time. The problem is that political debate in Kenya has substituted everything else. This creates uncertainty and makes many businesses hesitate to make new investments or take risks which are necessary for growth. No one is passionate about the port of Lamu that will expand our opportunities to Ethiopia and Sudan or even the railway line that should connect the same areas. Yet it is one thing that can really change the fortunes of Kenya in particular, and East Africa in general.

Challenge 4: Mutual suspicion amongst East Africa states. Its much easier for a Chinese company to get licensed to do business in any of the East Africa countries than it is for any local companies moving across the borders. Many in government have what President Museveni calls the “pygmy syndrome”. This syndrome is the idea that you are bigger than me and by supporting you, you will get bigger and bully me as you are my neighbour. In Tanzania it is quite pronounced and reared its head when Tanzanians could not be “allowed” to buy Safaricom shares in Kenya, and Kenyans are not allowed to participate in Tanzanian IPOs. The result is that though intra-regional trade has grown in recent years, it has done so at much lower levels than it should have done.

Challenge 5: The challenge of real east Africa integration. I must say this has moved further and faster than the most optimistic projections at the beginning. However, we are still painfully far. Kenya and Rwanda has removed work permits for East Africans (Kenya did it for Rwandans).The custom union comes into effect later this year but you sense resistance both from the business community (e.g. Uganda) and some government elements like in Tanzania. This is one area we must all help to drive as it gives all of us a ready market of more than 100 million people! The competition from the east comes from markets whose cost of goods is low, driven by economies of scale created by big domestic markets.

Challenge 6: The role of Kenya’s private sector in East Africa. The private sector in Kenya has also not been altogether helpful. The tendency has been to get to a market e.g. Tanzania, declare workforce lazy and incompetent and start shipping expatriates from Kenya. In other words, we lack sufficient cultural intelligence. One could say this is understandable, and we should have invested enough in bringing Tanzanians to Kenya to learn the ropes. However, even this would lead to resentment by the local people. After all, both Tanzania and Uganda have posted higher economic growth rates than Kenya in recent years. And they did either without us, or in partnership in some areas.

We should be aware that now Rwanda has pulled ahead of Kenya as the East African country where it is easiest to do business. So Kenyans should learn where their strengths are, and acknowledge where the other EAC partners are better. We will be a much more successful regional lead economy that way.

Challenge 7: Corruption. Though this is not unique to East Africa, it is still a significant issue. There are estimates that put the price of goods and services at 15 per cent more expensive because of the corruption input in the cost of goods. At the very basic level, it’s difficult still to have a truck move from Mombasa to Rwanda without having to part with a tidy sum to facilitate the movement across the patch. What about the private sector? We are guilty of outsourcing corruption. Since we cannot do it ourselves, we are forced to appoint agencies in the name of outsourcing “non-core” activities but in effect, we ask them to get goods cleared at the port in 24 hours no matter what! The thing with corruption is that it makes our goods and services much more expensive than they should be, thus reducing our market.

Challenge 8: Availability of reliable data and information. Right from population levels (it is still a bit of a secret in Kenya at the moment), to population distribution, economy size and growth rates, and so on. is still a challenge which varies from country to country.

Challenge 9: Lack of common regulatory Standards. This is especially true of manufacturing, where in some cases you have to satisfy different regulatory bodies that have different standards. The way companies have overcome this is by manufacturing to the standards of the most demanding regulatory body or ensure that company’s own standards are higher than any of the local requirements. The problem though is that local companies compete with products, particularly from China, which come through panya routes and which cannot pass any quality standard in any of the countries.

Challenge 10: Real threat of Fake and Parallel imports. The fake and parallel imports’ problem seems to grow from year to year. One of the factors perpetuating the spread of fake products is that the penalties in any of the countries are not very stiff. Another factor is when parallel imports come in through panya routes without paying duty and compete with a manufacturer who paid duty for the raw materials.

Some Good News

All the East African governments seem keen to address those issues and are at different stages of a solution. What we need as private sector is to keep the pressure through business forums and actual engagements with the governments and through the East African Business Council to fast track them. We can also do some things ourselves; for example we can get together and collect good data that will help us all. We need to each take responsibility for the destiny of this richly blessed sub-region.