Power cuts, bureaucracy and borrowing costs shackle Kenyan economy

Tue Apr 23, 2013 8:48am EDT

* Kenyatta pledges to cut red tape, help industry

* Business leaders say this time he must follow through

* Kenya yet to return to 2007 growth rate of 7 pct

* Peaceful election raises hopes for change

By Duncan Miriri

NAIROBI, April 23 (Reuters) - From his leather chair in the boardroom of Jamii Bora bank, Sam Kimani looks out over Kenya's booming capital city and laments the bureaucracy and power cuts that drive up business costs and choke the supply of new homes.

He points through the window at the stand-by generator that is an inevitable expense in east Africa's biggest economy, and he explains how the difficulties of tracking down land ownership documents perpetuate Kenya's housing shortage.

Kenya's Land Registry is a place where "files get lost, so for six months you cannot register a charge," said Kimani, Jamii Bora's chief executive, referring to establishing land ownership for borrowing and building purposes. "It is a very big challenge and land registry must be reformed."

Bureaucracy is one of the shackles that bind an economy which could be growing much faster and lifting many more of Kenya's 40 million people out of poverty.

Newly-elected President Uhuru Kenyatta has acknowledged the need to make official processes simpler. He has promised to ensure a more reliable power supply, attract more foreign investment and promote Kenyan products abroad.

But in Nairobi, where the chugging of generators echoes round the office blocks, hotels and shopping malls whenever rain storms damage transmission lines or demand exceeds generation capacity, many remain sceptical.

Kenya's economy has yet to return to the 7 percent plus growth pace it reached in 2007 before election violence slammed the brakes on. The economy grew 4.5 to 5 percent in 2012, more slowly than some neighbours.

"One of the problems we have in this country is the implementation of the good policies that are written down," said Charles Kibiru, chief executive of property firm Thika Greens.

"The incoming government needs to go an extra mile in the execution of the projects."

Kenyatta, the 51-year-old son of Kenya's first president, won power in peaceful voting last month that has gone a long way to restore confidence in the country as one of Africa's most stable democracies. The main share index is up six percent and the shilling currency has strengthened.

But executives say the post-election glow will fade unless Kenyatta - listed by Forbes as Kenya's richest man - helps other landowners and business leaders to create more jobs.

"BIG CHALLENGE"

For Kimani at Jamii Bora, one of the first targets for reform should be the land registry, where many of his 300,000 clients struggle with slow registration and multiple licensing requirements for construction permits.

The government says Kenya needs to build 250,000 homes a year but for now constructs just 50,000.

The Ministry of Lands says it is digitising records, a project partly funded by Sweden and due to be completed in July 2014. That should cut the scope for backhanders now widely regarded as inevitable to get results.

"We shall cut down on those cartels and brokers who charge for services like searching for a file," a spokesman for the ministry told Reuters. "That is the way to end corruption."

Kenya has some way to go. Transparency International ranks it at 139 out of the 174 nations in its 2012 global corruption perception index. That was up from 154 out of 182 in 2011, but Kenya still lags some of its neighbours.

Even so, wealth is being generated. Average income climbed to $820 in 2011, nearly double the 2003 average, according to the World Bank. That is still below the $1,025 needed to climb into the middle income category.

"Kenya is doing well, but not well enough," Kenyatta told lawmakers in a speech, adding his government aimed to spur economic growth to double digits to help make Kenya become a middle income nation "within a generation."

Such growth is unlikely unless Kenya can free entrepreneurs from the added costs of emergency power generation and bureaucratic blockages, business leaders say.

It can take up to four days to finalise a new export order, according to Jackson Mutua, managing director of battery maker Eveready East Africa. Mutua says this can require approvals from the tax revenue authority, the bureau of standards, the Ministry of Trade and other authorities.

As for power, Kenyan industries pay 17.3 U.S. cents per kilowatt hour while South African rivals pay 5.5 U.S. cents, Mutua says. That figure does not include the essential cost of the private standby generators.

"Out of 100 hours of manufacturing, 30 hours you have to spend using oil or incur the cost of downtime because you have no power - it is a choice manufacturers have to make," he said.

POT OF GOLD

At the opening of the new parliament on April 16, Kenyatta compared Kenya's 1.5 gigawatts of capacity to the 24 gigawatts in Argentina, a middle income nation with a similarly-sized population.

The power problem could be answered by the discovery of oil and gas reserves in Kenya and other east African nations. As well as finding its own hydrocarbons, Kenya can offer transit for landlocked nations via its Mombasa port.

Kenyatta has promised to develop the industry responsibly.

Paul Kavuma, chief executive of Kenya-based private equity firm Catalyst Principal Partners, acknowledges "a risk that the pot of gold is so significant that we may go backward on our corruption indices." Even so, he has a $125 million fund targeting investments in Kenya and the region.

Others businesses are held back by high borrowing rates. The main official rate is now 9.5 percent, but commercial lenders still charge double that - partly because that they have yet to evolve an efficient system for sharing credit scores.

So despite Kenya's growing wealth and demand for new homes, less than 20,000 people have mortgage accounts. Most borrowers raise funds to buy or build properties via short-term personal loans, costly and inefficient.

But demand for personal finance is booming. Kimani of Jamii Bora bank says he has been opening a new branch each month and reported a 50 million shillings ($595,900) profit last year.

"We believe that this is the time to invest," he said.

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