Kenya has beaten continental economic giants Nigeria, South Africa and Morocco in the rate of growth of new foreign investments, but Nairobi’s allure will come under fresh pressure in the coming months.

The Foreign Direct Investments (FDI) 2012 report published by FDI Intelligence, a specialist research agency of the Financial Times, shows that Kenya recorded a 77 per cent increase in the number of FDI projects last year, from 31 projects in 2010. It received 55 projects in 2011.

South Africa’s projects grew 57 per cent from 98 to 154, while Nigeria recorded a 29 per cent jump from 34 to 45.

The rise in the number of new FDI projects comes at a time when Kenya has stepped up its search for international investors through eight investment summits to be held in the world’s major financial capitals over the next 12 months.

The first summit was held in August in London during the Olympics.

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As a result, investor interest in Kenya’s economy is expected to gain fresh impetus in the remaining part of the year, helped by rising confidence in the economy.

Threats to investment

However, political risks and slow business reforms continue to taint the investment outlook. Delays in setting up crucial governing bodies under the Constitution enacted in 2010 are dampening investor confidence in the country.

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For instance, the failure to set up the new National Lands Commission has resulted in a hold-up in the renewing of land leases.

This means that property owners are finding it difficult to access finance for investment, and production levels in agriculture could drop as farmers and livestock breeders are unsure about lease renewals. The Commission should have been in place by August 28.

“FDI depends a lot on stable and predictable policy,” said Andre de Simone, chief executive of Kestrel Capital. “What all investors are hoping for is a clear winner and a smooth transition,” he added.

Data from the World Bank shows that over the past three decades, Kenya has had its lowest growth periods in or just following election years, with GDP growth slumping one percentage point on average below the long-term trend.

It is feared that the delay in operationalising the Lands Commission could be exploited by unscrupulous officials at the Ministry of Lands to illegally allocate public land, or reject or allow extension of land leases with the records back-dated.

“The delay due to two pending court cases has created a vacuum on when issues pertaining to leases will be dealt with. This has far-reaching ramifications,” said Ibrahim Mwathane, director at lobby group Land Development and Governance Institute (LDGI).

Such policy and institutional lapses have meant that Kenya’s standing as East Africa’s most attractive destination for foreign investment is under serious threat from neighbouring states, who are cashing in on the country’s lengthy licensing procedures and sluggish commercial dispute settlement to sharpen their competitiveness.

Rwanda remains East Africa’s most attractive investment destination, with a recent survey by the World Economic Forum putting it at the top of the region’s rankings in competitiveness, at position 63 globally, moving up seven places from last year.

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Kenya came second in the East African region at position 106, followed by Tanzania at 120, Uganda at 123 and Burundi at 144.

But in terms of the financial value of investments, the World Investment Report 2012 published by the World Bank shows that Uganda and Tanzania lead the region in attracting foreign direct investment.

In 2011, Tanzania attracted FDIs worth $1 billion, focused largely on its offshore gas fields. Uganda received $792 million in investment, while Kenya drew in $335 million.

Kenya’s vibrant private sector, advanced infrastructure and skills base have been its main selling points in the global investment market.

But red tape, corruption, fears of political instability and a restrictive labour market remain key drawbacks.

Kenya has pegged its long term growth plan on FDI inflows to key sectors of the economy, making the World Bank’s finding an important legal and policy issue for the government.

New projects

The country has been hoping that ongoing reconstruction of infrastructure, rising activity in the mergers and acquisitions market, as well as emerging investment opportunities in tourism, banking and agriculture sectors will keep the FDIs tap flowing.

“The best FDI is the one that brings in several new projects as compared to just a few high-value ones, because that helps in diversifying and distributing employment,” said Eric Kimanthi, a research analyst at Standard Investment Bank.

“The fact that Kenya recorded a lower absolute value in FDI could mean that projects in Kenya are not necessarily capital intensive but labour intensive, such as IT and telecoms — which is a positive thing as it means more jobs in the economy,” he said.

According to the Financial Times FDI report, coal, oil and natural gas were the leading sectors that attracted the interest of foreign investors in East Africa. 

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Last year saw at least 17 notable deals signed in East Africa’s budding oil and gas industry, including five corporate deals worth over $250 million in total, more than double the eight deals in 2010, a recent research brief by investment and strategy firm Jeffries Group indicates.