New regulations encourage foreign companies to partner with local firms

Kenya has a fragmented domestic construction industry, mainly populated by small and medium-sized contractors who may not always have the capacities and capabilities required for large infrastructure projects. As a result, foreign contractors have long played a sizeable role. In East Africa, European and US contractors make up roughly half of the market in terms of current project build, according to Deloitte, and in Kenya, Chinese firms have long had a visible presence.

The government has taken the decision to build major public infrastructure through public-private partnerships, and given the demands of the Vision 2030 infrastructure projects, the medium-term outlook for foreign operators is encouraging. In 2012 Kenya repealed the requirement that foreign firms must have 30% local ownership and the government has invited many firms to compete for national flagship projects.

A New Regulator 

Inaugurated in July 2012, the National Construction Authority (NCA) is mandated with regulating the Kenyan construction industry, including contractors operating in the market, and the development of applicable national building codes. The NCA’s first years have been employed building a new register of national contractors. Previously overseen by the Ministry of Public Works, but handled by several independent ministries in reality, contractors were poorly audited in a weak regulatory framework. By April 2014, 21,000 contractors had been registered by the NCA, which was targeting 25,000 by June 2014. All face stringent auditing. Under NCA legislation Kenyan firms may register under eight bands within the NCA’s registration hierarchy that will qualify them for projects in line with their appropriate ranking. All foreign firms must qualify for and be registered under its highest-tiered rating, NCA1. This entitles them to a one-year temporary registration status only. NCA1 registration is valid for one contract at a time and may only be extended with the approval of government authorities specifically for foreign contractors only. Foreign contractors also pay a registration fee of KSh880,000 ($10,032) in contrast to rates of between KSh10,000 ($114) and KSh100,000 ($1140) for Kenyan firms. There are 320 firms registered under NCA1, of which around 25% are foreign-owned, the NCA told OBG.

The government is also aiming to roll out changes to help improve the overall attractiveness of the business environment in the construction sector. Kenya has begun a World Bank-International Finance Corporation-backed programme to improve construction regulation, notably the issuance of permits, for example. The e-Construction Permit Management System is a first in sub-Saharan Africa and will reduce the time required to approve building plans. Launched in October 2011, it is now being rolled out nationally.

Domestic Strength 

More importantly, there is a need to strengthen Kenya’s domestic contractors. In July 2014 the government passed regulation requiring all foreign firms to subcontract 30% of the value of their work to Kenyan firms, although some projects exceed this requirement. However, capacity may be a challenge, and the NCA has plans to form a National Construction Institute for training by the end of 2015. The NCI has a goal of 1m skilled workers trained and accredited, but is also forging capacity-building partnerships with local educational institutions. “We are establishing offices at the county level nationwide and capacity building training programmes will extend to the constituency level. These will be self-funding after three years and this would not have been possible without devolution,” Francis Njuguna, general manager of the NCA’s registration, compliance and training, told OBG.

Regulatory reform is an essential part of improving Kenya’s attractiveness to foreign investors, particularly as the government looks to evaluate the impact of underperformance from Kenya’s fiscal incentives. The Ministry of Housing developed 30 incentives in 2007 to tackle Kenya’s deficit of affordable housing. There is a heavy emphasis on financial incentives. However, Kenya’s housing deficit has grown and is estimated to stand at 2m, with annual deficit of some 150,000 homes.

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The Report: Kenya 2014

Construction & Real Estate chapter from The Report: Kenya 2014

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