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Tuesday, July 14, 2009

Why doing business in Kenya cost more

Many un-informed journalists, citizens, politicians & idiots complain about the 'margins' or 'spreads' charged on goods & services. On the surface that is true. Kenyan businesses tend to have wider spreads than what is common in the Western world.

(Let's be clear... I am NOT condoning any sort of scam or counterfeiting or shortchanging or cheating... I am talking of WYSIWYG)

I will try to provide specifics instead of 'general comments' favored by the group/s above.

Let's look a little deeper:
  • Inefficiencies - Many firms e.g. Kenol-Kobil have to deal with an inefficient oil importation regime. They are forced to process 50% (by law 70%) of their requirements through Kenya Petroleum Refineries Ltd (KPRL) which uses much older technology (hydro-skimming) as well as being sub-optimal in size. This leads to lower high-value (white fuels) derivatives. Cost to Kenyans an additional 3/- per litre.
  • Corruption - Many firms e.g. Kenol-Kobil are forced to pass on additional 'charges' to consumers since the management of Kenya Pipeline Company (KPC) has a history of being involved in corrupt deals (including tenders to extend the pipeline). The latest scandal was Triton-KPC. Cost to Kenyans is hard to determine but definitely high.
  • Legal system breakdown - HFCK will take defaulters to court but the case could take 5 years even if HFCK has all the cards. Why? An over-burdened court system which does not have a dedicated 'business' court. Deferrals are common as lawyers postpone, postpone & postpone hearings. And when they do show up, the judge/magistrate does not.
  • KRA (non)refunds - KRA collects VAT, duties, taxes, etc. Penalties abound if a business is late in remitting the payments. In the event of a refund... get in line. We are not talking of disputed refunds. Even simple refunds are not paid to the businesses in a timely manner. KRA claims they are given KShs 1.04 billion per quarter for refunds REGARDLESS of what they collect. Kenol-Kobil & Total could have KShs 1,000,000,000 outstanding to each of them at any one time. So they borrow from the market. And add financing costs to our petrol price.
  • Taxes ad infinitum - The government imposes horrendous amount of taxes in the form of levies, duties, VAT, income tax, etc. Then there are property taxes, license fees, payroll taxes, etc. A retail outlet in the CBD with a 10% margin can't even break-even. And this is before rent is due!
  • Insecurity/theft - Theft by employees is pretty common in Kenya. And I do not mean office supplies. I have so many personal examples. My Dad (an engineer/entrepreneur) used to scour Industrial Area factories for jobs - rewind/resuscitate old (burnt) motors. Reduced imports. Saved Kenya forex. Helped the environment. Provided Kenyans jobs. While he was juggling sales, accounting, etc... the employees were busy stealing & selling NEW copper wire (used to rewind motors) as scrap metal. He soon found out about the theft since income didn't match expenses. The copper wire was bought on credit. He paid the suppliers out of his pocket. Heart-broken. Fired ALL the employees. Shut the business down.
  • Uncertainty - Uncertainty is very costly. The KShs careens all over the place because of Kenya's fragility. These ups & downs creates problems. Look at the volatility of the Kenya Shilling. Or how volatile oil prices caused KQ's KShs 7.5 billion loss on hedges. Or the 'fear' of violence in almost every election. Fear had gripped the country in 2002. and when Kenyans relaxed in 2007, it blew up in their faces.
  • The 'politically-connected businessmen' - How does a legit business compete against these tax evaders who the KRA never touches? Goods come in from Somalia untaxed but nary a raid on Eastleigh or Mandera?
No wonder the markups in Kenya are so high... what else do you expect?

Therefore, even if I feel I am being over-charges vis-a-vis Amazon's prices... my hats off to the businesspeople/entrepreneurs in Kenya!

40 comments:

KW said...

CT,

I wholeheartedly agree with you.

The inefficiencies in our systems are strangling businesses.

When confronted with questions about why more effort is not being made to enhance efficiency, many civil servants & public sector managers hide behind "We are doing the best we can", "We do not have the resources", "We are working on digitizing"....etc. Alot of rhetoric.

My argument is that none of our current systems operate at maximum efficiency (or anywhere near). In other words the
'We are doing our best' argument just does not carry any weight. We need to reorganize and reorder our current systems to ensure they operate at peak efficiency. That way when systems are digitized/modernized, we are modernizing efficient systems.

Gramware said...

touche. so on point. most of us are thieves who like complaining when we get robbed or suffer the consequences.

chegepreneur said...

Theft by employees is common. Many business men loose alot to dishonest employees. Your Dad lost his dream to selfish inconsiderate people. I consider theft by employees as being the stupidity if not foolishness of the highest order because today they will still from their employers @ tomorrow they shall loose their jobs & source of livelihoods because the firm they work for has gone under. What will they feed their families with?

jm said...

Great post. As an entrepreneur whose return to Kenya is imminent, I often think about this problem. Lucky there are things called "cameras" that are cost effective and a natural deterrent to thieves.

gmeltdown said...

That's the reality and the truth. It should be told more often

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moskeyto said...

I completely agree. I applaud a lot of the businessmen in Kenya (and Kenyan's in general) for their guts and persistence. Unfortunately, this aspect of our economy ensures it does not even come close to performing at its potential.

yumbs said...

Thanks. Your article is so on point. I am consoled by the fact that the problems you list are not insurmountable. Good leadership can turn things around. Let us continue to seek leaders who love their country.

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