Tough call for firms eyeing S. Sudan

Even though preliminary results point to an overwhelming vote for secession, Kenyan businesses are waiting with bated breath for the announcement of the final outcome of the South Sudan referendum expected any time from next week.

This is not surprising given the amount and extent of their investments and the returns they are reaping from doing business in what is now most likely to be Africa’s newest State.

A report recently released by a group of European and African political think tank shows that Kenyan companies would lose Sh920 billion ($11.5 billion) invested in South Sudan, the largest loss among regional countries.

The report, which is titled The cost of future conflict, shows that Kenya’s loss is followed in magnitude by Ethiopia’s Sh896 billion ($11.2 billion) and Uganda’s Sh504 billion ($6.3 billion).

What is more, there are also over 100,000 Kenyans doing business in South Sudan besides others from East Africa’s biggest economy like Kenya Commercial Bank (KCB), Equity Bank, Crown Berger, among others.

Yet, while they are doing brisk business, beneath their good tidings, there are a myriad challenges to grapple with.

Just like in other countries, including Kenya, the first challenge is the need to have a local partner. In South Sudan, foreign companies are required to have 40 per cent local ownership.

Others feel that a local partner would open doors for them to the Juba administration, a key factor in navigating through the licensing labyrinth in a country with relatively nascent institutions.

Take local security firm, KK Security Group, which in 2005, invested Sh400 million ($5 million) to set up a subsidiary in South Sudan.

To help navigate the political and legal maze, it incorporated Mr Bading Machar, who was given a one per cent shareholding and a non-executive director position on the board of directors.

For one year, business was good as the company’s revenues were growing by 30 per cent per year, becoming one of the largest private sector employer in the country with a staff of 580 people.

But trouble started brewing in 2006 when Mr Machar, who is a nephew to the country’s Vice President, Dr Riek Machar, started “demanding more say in the running of the company.”

Among others, Mr Machar demanded the sacking of eight Kenyans to be replaced by employees of his choice. This despite him being a non-executive director, a position that does not give him any say in direct management of the company.

When the board met, it stripped him of the seat for interference but let him retain the shareholding. Mr Machar, however, forcibly took over the office, commandeered KK vehicles and led to the freezing of the company’s account.

KK Security Group went to court on October 26, and the court sitting in Juba ordered Mr Machar to return all property including vehicles and office furniture belonging to KK Security.

It also ordered him to pay KK Security Sh352 million ($4.4 million) in damages and loss of business arising from the dispute, which saw the security firm’s operations in the country grind to a halt last year. The group is seeking the court’s help to enforce the orders.

“It has been one of the most challenging countries to do business in,” says Mr Rocky Hitchcock, a senior consultant with KK security Group, which operates in more than six countries and derives 50 per cent of its revenue outside Kenya.

Then there is infrastructure, which has been a big headache for manufacturers like Crown Berger, a Kenyan company which has been operating in South Sudan since immediately after the North and South signed the comprehensive peace agreement in 2005.

According to Mr Rakesh Rao, the firm’s chief executive, transport constitutes 19 per cent of the cost of the paint manufacturer’s products in South Sudan. It takes approximately 26 hours to transport goods from Nairobi to Juba in South Sudan.

“In the background of a business environment that has seen the price inputs go up by eight per cent last year, it is a major cost for us and the consumers,” says the CEO.

The company has recorded a 30 per cent growth in business from Southern Sudan from Sh100,000 in sales per month in 2005 to Sh2 million each month.

The same sentiments are echoed by Mr Eric Wabwaya, the country manager of Fastrack Promotions, a trade marketing firm with a branch in Juba.

The sales representative of the firm, which conducts ground marketing for Kenyan companies like East African Breweries Ltd and UAP Insurance in South Sudan, have to travel outside the capital to very remote areas.

The company had to invest in an air-conditioned four-wheel drive vehicle which though helps in the terrain, needs frequent repairs to operate.

“A task that would normally take an hour would end up taking four hours,” Mr Wabwaya says of a firm, which derived almost 90 per cent of new business from South Sudan last year.

Staff accommodation in South Sudan is no small cost. Houses are rented in either six-month or mostly one-year agreements unlike the monthly rent that many a Kenyan worker is accustomed to in Nairobi.

Mr Wabwaya says the company pays as much as Sh14,400 ($180) per night per room in Juba. “Acceptance is a major issue because it takes time before they take you in,” he says.

Due to the long war, lack of skilled labour to drive the economy has forced companies to hire Kenyans or train indigenous people. For instance, Crown Berger has recruited two major distributors and trained 200 painters for the job.

The country not only faces war legacy issues but also their after-effects. The fighting had accustomed youth to be either in the bush or refugee camps where donor agencies provide almost all the necessities.

“There was little motivation to work thus creating a poor work ethic,” says a manager who has worked in two countries in the region on condition of anonymity for fear of antagonising his business partners in Juba.

Bringing in Kenyans to fill the human resource gap has also brought its own challenges including high temperatures and a different work culture as Fastrack found out.

“The temperatures can get as high as 42 degrees meaning fieldwork is conducted in early mornings or late evenings. Locals can get violent when trying to put across their point rather than trying to reason,” says Mr Wabwaya.

Lack of clear law

Lack of a clear law and enforcement system has also handicapped firms. Crown Berger, for instance, demands upfront payments because of the legal grey areas on documents like letters of credit. “The regulation is still unpredictable,” says Mr Rao.

Although varying land ownership laws are hampering businesses such as mortgage finance in the East African region, the problem is more acute in South Sudan. This is especially crucial for banks doing business in South Sudan.

“The country has no title deeds,” said KCB CEO Martin Odour in a memo on the bank’s regional expansion. Despite facing many unique challenges, however, Kenyan companies in South Sudan are unanimous on one thing: If done well, it pays to do business in the country.