Puzzle of firms’ losses in a growing economy - Daily Nation

Puzzle of firms’ losses in a growing economy

Sunday December 9 2018

Kenya Association of Manufacturers CEO Phyllis Wakiaga. FILE PHOTO | NMG

Kenya Association of Manufacturers CEO Phyllis Wakiaga. She says delays in verification of goods is taking a toll on small businesses. FILE PHOTO | NMG 

By EDWIN OKOTH
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The latest profit warnings issued by Nairobi Security Exchange listed firms presents yet another puzzle of how the billions of investments meant to improve the business environment has failed to yield.

On paper, Kenya has improving regulatory environment for businesses, better transport after multibillion infrastructure investments and falling costs of power, all which is good for business. In reality, the situation is different.

PERFORMANCES

Tyre maker Sameer Africa, Kenya Power, Cement manufacturer Bamburi and Housing Finance Group all have issued profit warnings in the recent past and or proceeded to announce dismal financial performances.

Incidentally, the four firms represent the opposite of what one would expect in a vibrant economy which analysts have praised for quickly recovering from last year’s politics and more so after the lauded March 9 ‘handshake’ which created a conducive environment to do business.

SH30 BILLION

One would expect more customers connected to power under the Sh30 billion Last Mile Connectivity scheme translating to increased earnings for the firm, more tyres bought as better earning Kenyans buy cars and houses or build more using the cement, nothing of the sort seems to be happening.

DIFFICULT MARKET

Bamburi Cement which is supposed to be happy about its finances after multibillion construction projects were implemented in the last five years even presented a new oddity — power costs.

“The 2018 full year earnings of the group are expected to decrease by more than 25 per cent compared with the year ended December 31, 2017. The expected decrease is mainly attributable to difficult market conditions, as well as international energy prices for both Kenya and Uganda, increasing power costs in Kenya and additional provisions, mainly receivables, in Uganda,” read the notice to shareholders in part.

MEGA PROJECTS

The cement manufacturer’s woes may have a lot to do with the missed opportunity in the mega projects including the Standard Gauge Railway which saw local manufacturers left out as the Chinese builder imported most of the raw materials, including cement.

LOCAL SUPPLIERS

Transport and Infrastructure Cabinet Secretary James Macharia’s earlier admission that the local suppliers had gotten less than 25 per cent opportunity in supplying for the project was a major pointer.

The CS had pledged to compel the contractor to grant at least 40 per cent opportunities to local suppliers in the second phase from Nairobi to Naivasha. Some Sh150 billion will be spent in the second phase.

TRANGUILITY

This never happened, at least from the admission of multiple industry players with knowledge on the ongoing project.

Analysts are divided on whether the bad business performance comprise mainly the ghosts of the 2017 politics or whether it has developed over a long period. Nairobi-based economist Robert Shaw believes the bad business environment will soon fade owing to the prevailing political tranquility.

CONSTRUCTION

“It will get better even though the recovery is much slower this year but the drops in profit being reported may have more to do with the political climate last year. Also, construction which usually has a lag of say six months has slowed and it may take a while to fully recover,” Mr Shaw said.

INVESTORS

Kenya climbed 19 places to position 61 in the World Bank ease of doing business 2019 rankings. The country had ranked 80 among the 190 countries a year earlier. This is attributed to access to credit, ease of paying taxes and protection of minority investors.

FAKE GOODS

A recent memorandum presented by the Kenya Association of Manufacturing may, however, dim Mr Shaw’s optimistic future. KAM chief executive Phyllis Wakiaga said while the 100 per cent verification to tame entry of fake goods into the market was vital, delays were taking a toll on small businesses.

DEMURRAGE

“We only have four days allowed by the Kenya Ports Authority to clear cargo and any extra day is charged on the importer. This added to other demurrage and transport before and after the SGR terminals add to a huge cost already,” Ms Wakiaga said.

Small businesses which have fallen sharply on the Kenya Revenue Authority’s radar may also not have a rosy future.

PERMITS

The taxman this week asked millions of small traders to immediately pay a newly introduced tax that kicks in from January or risk not getting their business permits renewed.

It is such contracting pictures that may send the government back to the drawing board to establish where the gulf between the numbers and the reality start.