Big deals slip away
East African country pays a heavy price for its worsening reputation for corruption
Kenya has taken a beating. It failed to convince Uganda to build an oil pipeline through it, and was this month dropped by Rwanda, which plans to develop a rail link to Indian Ocean ports through Tanzania instead.
Kenya’s position as a leader has come up against serious challenges now that its landlocked neighbours have changed their attitude to partnering with what is still the region’s biggest economy.
Not long ago President Uhuru Kenyatta led a regional charge for the development of multibillion-dollar infrastructure projects to integrate East African countries’ economies and boost growth.
But Kenyatta’s government has failed to deliver on what was probably its biggest promise: tackling corruption. It is now at risk of losing out to the popular new kid on the block: President John Magufuli of Tanzania, who is tackling the issue with refreshing vigour.
The sacking of Tanzania’s Prevention & Combating Corruption Bureau boss for underperformance, austerity measures to reduce lavish government spending, funds redirected to service delivery and the introduction of integrity pledges for government officials have earned Magufuli positive publicity with investors and the public.
“Magufuli is a disruptor,” says AlyKhan Satchu, a Nairobi-based business analyst. “Both presidents were hired to do the same thing, but only Magufuli has made progress. He walks the talk, while so far in Kenya, we haven’t seen much.”
Kenya’s inability to secure the pipeline was a major blow. A regional pipeline deal to export Uganda’s crude to the Indian Ocean coast was awarded to Tanzania in April, after intense lobbying by French oil company Total, which owns a majority stake in the Ugandan oil fields.
It will fund the construction of the pipeline for US$3.5bn. Total was adamant it would not take part in a project if Uganda were to choose the Kenyan route, citing security concerns. (See Africa & International April 21-27.)
But according to Satchu, Kenya lost the deal in favour of Tanzania because of what he calls “brokerage charges”, a polite euphemism for corruption. “That’s what put Total off. Kenya is a bit of a sit-down; everything is too expensive because of the brokerage charges. Obviously that is a deterrent for foreign investors,” he says.
In recent years, the rise in the frequency of reports of corruption has led to perceptions that it is worsening. Earlier this year, nearly $1bn in funds raised from Kenya’s 2013 Eurobond issue was found to have disappeared, dashing hopes that government was ever going to seriously tackle corruption. The bond money was intended to pay down national debt and fund infrastructure projects.
It is discouraging foreign investors. A survey conducted by Control Risks Group in 2007 found that 35% of companies have been deterred from attractive investments because of a host country’s reputation for corruption.
“Corruption has created an uneven playing field for the private sector — companies that are able and willing to make bribes are the beneficiaries of big government contracts that are often issued at inflated costs to accommodate kickbacks,” says Samuel Kimeu, Transparency International’s Kenya executive director.
And if they refuse, doing business becomes a nightmare, as investor Stephen Jennings found out. The New Zealand millionaire’s company Rendeavour invested $100m in Tatu City, a real estate development project in Kiambu County, but the project has been stalled indefinitely.
Tatu City bank accounts have been frozen, its shareholders have been subject to harassment by immigration authorities and legal action has been launched by allegedly corrupt Kenyan businessmen initially involved in the deal. “It’s a good example of investors committing a lot of money and not being able to work the system”, says Satchu. In other words, someone did not get paid “brokerage charges”.
This atmosphere is undermining competitiveness and unfortunately for Kenya, the implications are already being felt. The country is at risk of becoming a laggard.
The announcement last month that Rwanda would snub Kenya’s standardgauge railway line extension plans and instead turn to Tanzania to connect to the coast only underlines the power shift.
With no partner for the pipeline and the railway line, Kenya is indeed on its own, and its plans for mega-infrastructure projects seem more and more like wishful thinking. Serious work will need to be put in to convince investors that there is still substance behind this government’s discourse.