Nairobi: Local investors have pumped more than Sh100 billion into new projects in the economy the past financial year, overtaking foreign direct investments as the major source of capital project finance and challenging the policy slant in favour of the latter. Investment projects registered by domestic investors grew by a third from Sh79 billion to Sh104.4 billion in the year to June 2010, overtaking FDI, which dropped from Sh85 billion to Sh51 billion — a 40 per cent reverse — during the period.
They have created 11,930 new job openings, absorbing 9,148 Kenyans and only 508 expatriates, data from the Kenya Investment Authority (Keninvest) shows, prompting calls for greater policy support to local entrepreneurs.
The data only represents investments processed by the authority and leaves out the ones channelled through professional or consulting groups and those that fall outside priority sectors.
The surge explains a trend where lending by commercial banks to the private sector has picked up over the last two years and, for the first time, give a pointer to the impact the ongoing infrastructure projects - especially roads - are having on the country’s productive capacity.
'The biggest help the government can give to domestic investors is to upgrade and expand infrastructure, including roads. This will open up new areas for investment and boost access to markets,' said Prof Joseph Kieyah, an analyst at the Kenya Institute for Public Policy Research and Analysis (Kippra).
Despite the growth in domestic investments, FDI is still important for economic growth in terms of impact.
'FDIs may be few but they are still superior to local investments in terms of economic impact because they come in huge dollar value and usually target strategic industries that are critical for growth,' said Mr Andrew Toboso, a strategy director at Vision 2030 secretariat.
To obtain an investment certificate from Keninvest, local investors require at least Sh1 million while a foreigner requires Sh8 million ($100,000).
The growth of domestic investments means the country can be cushioned from a slump in FDI which is more sensitive to a rise in political risk, helping to create new jobs, generate more revenues for the taxman and stabilise the economy.
'Local investors have internalised political risk which foreign counterparts fret. Confidence is now much higher after the adoption of the new Constitution,' Prof Kieyah said.
The government has been using a mix of incentives, including tax holidays and offering free land parcels in a bid to woo more FDI.
The booming construction sector took the lion’s share of the new investments, receiving 79.4 per cent of the new investments made by citizens last year, followed by energy sector at 13.9 per cent and manufacturing at five per cent.
In comparison, mining sector swallowed most of the foreign direct investments, taking up 31.5 per cent of all the projects registered by foreign interests last year; followed by tourism (17.7 per cent), services (17 per cent), manufacturing (14 per cent) and telecoms nine per cent.
Agriculture, the backbone of the economy, attracted negligible support — Sh115 million — from the two classes of investors.
Last year, more than 10 foreign firms burst onto western Kenya’s mining scene to cash in on the region’s gold rush that is expected to intensify in the next 10 years.
Experts have linked the increased activity by firms such as Aviva Corporation of Australia, Afri Ore Ltd, East Africa Pure Gold Ltd, Covenant Mining Ltd, Karebe Gold Mining Ltd, Gold Rim Exploitation (K) Ltd and Abba Mining Company to the rising international gold prices, which peaked at $1,400 per ounce by close of last year.
The rush by local investors for high returns saw the construction sector account for four in every five shillings invested locally in the 12 months to June 2010, representing a growth of 275 per cent over a similar period the previous year.
Returns in the sector has remained stable at between seven per cent and 10 per cent since 2007.
Industry players say they expect the upsurge in investments targeting the construction and property sector to hold in the coming years.
'The property market is an easy investment option for many people and this has been helped by an increase in access to mortgages and construction loans,' said Ben Woodhams, the managing director of property firm Knight Frank.
Kenya’s mortgage finance market more than tripled in the last five years, from Sh19 billion in 2006 to Sh61 billion in May 2010.
Commercial bank lending rates have dropped to an average 13.95 per cent in November 2010 from over 14 per cent in earlier months, with the drop attributed to liquidity in the money markets and low returns from short term government debt papers.
The energy sector saw the highest growth in new capital, standing at Sh14.5 billion in the 12 months to June 2010 from an absence of new investments a year earlier.
The surge in investments was pushed mainly by foreign firms and bilateral donors.
Mr Sammy Onyango, the chief executive of advisory firm Deloitte Eastern Africa, said Kenya will see even more investments targeting renewable energy generation as demand for electricity still outstrips the supply.
'The government has been keen on roping in investors to take part in public-private projects in the area of wind and geothermal power generation and we are starting to see the results,' he said.
With wind and geothermal energy sources key to meeting power demand in the medium term even as the government plans to venture into nuclear energy, Mr Onyango said longer concession periods would attract more investors to the sector.
Kenya has an installed electricity generation capacity of 1,428 megawatts (MW) against peak demand of 1,200 MW but the demand often outstrips the supply during dry spells when hydro generation takes a hit, forcing a larger input of the more expensive thermal generation.
Foreign investors are pumping billions into the tourism sector emboldened by stabilisation of internal politics and improvement of governance structures.
The sector attracted a total of Sh9.2 billion in new capital in the 12 months to June last year compared to Sh3.3 billion a year earlier, with foreign investors accounting for nearly all of the capital increase.
Analysts say tourism is set to see more investments, helped by economic recovery and a positive business environment.
'The setup of the coalition government and the adoption of the new Constitution are two developments that have entrenched peace and boosted Kenya’s governance, thus assuring foreign investors,' said Mr Jake Grieves-Cook, the immediate former chairman of the Kenya Tourist Board.
'There has been an increase in scheduled flights from Europe to Nairobi in tandem with an increase in tourist numbers in the past 12 months and these factors boost the prospects of high returns for investors,' he said, adding that Nairobi has been the biggest beneficiaries of the new investments.
At least seven five star hotels have opened shop in the capital over the past two years including Ole Sereni, Tribe Hotel and Crowne Plaza--leaving the city with additional 2,000 beds.
International arrivals are expected to reach a high of 1.2 million in 2010 with earnings reaching Sh100 billion, beating the 2007 benchmark of 1.04 million arrivals and earnings of Sh63.5 billion.
The ICT sector has recorded a decline in new investments, with analysts saying the lull is normal.
New capital investment in the sector dropped to Sh157 million in the 12 months to June last year, from a high of Sh9.2 billion a year earlier.
'In the 2008/09 period, there were massive new investments in infrastructure, including submarine cables and inland fibre optic lines, leading to the sharp increase in foreign capital inflows,' said Muriuki Mureithi, an analyst at Summit Strategies, an ICT consultancy firm.
The government and private sector investors have invested billions in Seacom, TEAMS, and Eassy sea cables that have been completed, connecting Kenya to high speed global internet.
'After the heavy infrastructural investments, players in the sector are now consolidating their businesses, focusing on quality of service and innovation,' Mr Mureithi said.