American, Other Foreign Companies Selling Off Holdings : Kenya Corruption Overwhelms Investors
As an American-owned company with a factory here, Firestone Tire & Rubber Co. experienced a familiar raft of problems with the government.
Licenses to import critical raw materials were endlessly delayed, work permits for expatriate technicians went unapproved, price increases were denied.
Government approval of a $25-million plant expansion was held up so long that it was finally scrapped. And officials ignored Firestone’s complaints that contraband tires were being smuggled into the country and sold for less than it cost to manufacture tires here.
In 1985, Firestone finally sold most of its 70% interest in the Kenya plant, retaining only 19% and running the plant under a management contract with the new owners.
After that, things improved. It is an article of faith in the foreign business community here that the reason was this: The majority stake was bought by Sameer Investments, a holding company with ties to President Daniel Arap Moi.
“For Firestone now, there’s no problem,” an American businessman familiar with the saga said recently. “Once you sell to the ‘right people,’ your import licenses get approved, you can send profits home, you get the home phone number of the official responsible for expediting permits. But anyone who knows that story isn’t interested in plunking down their money to invest in Kenya.”
Decline in Kenya
For many present and potential investors in this country, which has long been regarded as capitalism’s shining star in Africa, Firestone’s experience exemplifies the decline of Kenya as a place to do business.
Over the last few years, according to foreign business executives and diplomats, corruption at every level of the Kenyan government and administration has intensified. As many as 50% of the import licenses issued are for sale, often by government officials, although they are supposed to be issued on strictly economic grounds. So many permits are needed to do business in Kenya’s highly controlled economy that getting them all is like getting traffic tickets fixed on a nationwide scale.
Today the corruption is finally taking its toll. Foreign companies, particularly American firms, have been rapidly divesting themselves of holdings in Kenya.
Of the 200 American-owned companies operating here five years ago, only about 110 remain. Of those, many have reduced their direct-equity ownership to as little as 14%. The buyers are generally Kenyans with powerful political connections.
The trend reflects one throughout sub-Saharan Africa. The World Bank estimates that the rate of foreign investment in the region fell from $6 billion in 1980 to a minus $1 billion in 1985, the result of divestiture.
The situation is particularly disturbing in Kenya, which had been an oasis of political stability in Africa and one of its few model capitalist countries.
Costly Situation
It is also bound to be exceedingly costly. Foreign investment is particularly important to Kenya because its employment needs are too great to be satisfied internally. With the world’s highest population growth rate, Kenya will need an estimated 6.5 million new jobs by the year 2000.
According to a study commissioned by the Kenya Assn. of Manufacturers, this will require growth in the industrial base of 7.5% a year. Such a rate, probably unattainable under any conditions, is impossible without massive foreign investment for the construction of factories and development of markets.
But business executives here say the last major private foreign investment in Kenya was General Motors’ installation of an assembly plant for Isuzu vehicles. That was 12 years ago. The association study concludes that “foreign investment in Kenya manufacturing ceased in the late 1970s and shows no signs of being rejuvenated.”
By most accounts, the hallmark of the decline of Kenya’s reputation is the rise of politically connected business conglomerates such as Sameer Investments. In the last few years, Sameer has acquired a majority stake not only in Firestone but also in the Kenya subsidiaries of Eveready Batteries and Bank of America.
Knowledgeable executives here say the transactions were all done at a fair price and on a “willing seller, willing buyer” basis. But in Firestone’s case, the company was nearing agreement with another Kenya-based purchaser when Sameer arose as a potential buyer.
At that point the first bidder ran into problems in obtaining the necessary Kenyan government approval for the transaction. Sameer, unique among the bidders, was able to raise financing and win unusual government permission to pay Firestone in U.S. dollars--thus satisfying the two major conditions Firestone had placed on the sale.
Spokesmen for Eveready, Bank of America and Firestone all say they decided to sell off their Kenyan holdings as part of a global corporate strategy. But apparently all knew that Sameer was placed to benefit from political clout.
“Before Sameer, we were always able to get licenses, but with a hell of a lot more hassle,” the manager of another Sameer-controlled company said. “But that may be coincidence.”
What is remarkable about the flight of foreign capital is that the firms demonstrating the least confidence in the country include some of Kenya’s oldest and biggest economic friends in the post-independence era.
As the owner of Eveready, Union Carbide was the first multinational corporation to build a factory in Kenya after independence in 1963. Firestone’s manufacturing plant was first established in 1969, and its 600 workers make up one of the country’s largest industrial work forces.
But today, one Western banker said, “I don’t know any American businessman here who isn’t completely demoralized.”
Although executives cite many reasons for their disillusionment, including an intractable bureaucracy and a general lack of interest in attracting foreign investment, prominent among them is corruption. It is an art that has flowered here in majestic variety.
Politically connected companies appear to have a clear advantage in getting transactions approved and government contracts signed. Local investors with political ties have an easier time getting permission to buy out foreigners in dollars or sterling rather than Kenyan shillings, often a condition of sale.
One focus of complaints is a Kenyan rite known as harambee , a Swahili word meaning “we must all pull together.” The term was Kenya founder Jomo Kenyatta’s personal slogan, but today it signifies a ceremony at which businesses are expected to make large public contributions for some national goal, such as education for the disadvantaged or training for the handicapped. In practice, the funds are rarely fully accounted for.
“It’s the paying of tribute,” a banker in Nairobi said, “and it’s big money.”
For the so-called Nyayo celebrations of late 1988, which marked Moi’s 10th year in office and the 25th anniversary of independence, the harambee chest contained nearly $20 million. Some individual contributions reached $175,000. According to a public statement issued in April, the celebrations cost about $15 million, leaving $5 million in the account.
Kenya has an official investment code that is as inviting as many others around the world in terms of guarantees against nationalization, protection of the right to export profits and so on. But business executives say its protection is often undermined by bureaucratic interference designed to extract payoffs.
“The code leaves out the hidden world,” one expert said.
In all, a well-known economist here said, corruption “may have reached a critical mass where it’s interfering with the growth prospects of Kenya.”
“American businessmen are discouraged,” he said, “and it’s deteriorated in the last 2 1/2 years.”
Not surprisingly, corruption is a subject that people here discuss gingerly if at all. None of the executives interviewed for this story would consent to be identified by name or company affiliation.
Earlier this year, a Kenya weekly, the Financial Review, was permanently banned after it published stories about Sameer and another growing conglomerate, the Somaia Group, that has been buying up foreign equity, although Moi was not mentioned directly in the stories. One of the stories, which dealt with Somaia, noted that the company is associated with Gideon Moi but did not identify him as the president’s son.
Meanwhile, Kenya may have more to lose than most other African countries in acquiring a reputation for corruption. In contrast to Zaire, for example--whose president, Mobutu Sese Seko, is considered the continent’s quintessential plutocrat and where pervasive corruption reflects a general breakdown in the country--Kenya has long been regarded as the African country that works.
Its railroad functions, its roads are relatively well kept and its commercial port, Mombasa, on the Indian Ocean, is by far the busiest and best equipped on the 5,000-mile coastline between Port Said, Egypt, and Durban, South Africa.
In contrast to every one of its immediate neighbors, and like few countries anywhere else in sub-Saharan Africa, Kenya has had nearly unbroken peace and civil order for 25 years of independence. Millions of Western tourists have come away from visits to Nairobi and the country’s vast game parks and lovely beaches with a fond impression of its fine climate, orderliness and variety.
But Kenya has squandered much of this good-will. For one thing, many consultants in Nairobi are not convinced that the government is serious about attracting foreign investment or willing to make the concessions necessary to attract it. In part, the reason is that Kenyans feel that conditions here are so much better than in the rest of Africa that investors should be pouring in.
“There’s a great tendency to compare Kenya to some of the places around it,” one diplomat said--and as it happens, Kenya is surrounded by some of the sorriest, war-torn and economically inept countries Africa has to offer, including Sudan, Somalia, Uganda and Tanzania. “They don’t realize they’re competing (for foreign investment) with Singapore and Taiwan, not with Tanzania.”
