Kenya: Foreign companies to face 30 per cent local ownership rule | Hacker News Reader

Kenya: Foreign companies to face 30 per cent local ownership rule

businessdailyafrica.com

46 pointsbased230 comments

I'm American and I lived and worked in Kenya (as a Linux sysadmin) for over eight years until recently. There were rumors of this sort of "Kenyanization" happening for years. I think this move is a mistake, and only serves as pandering to populist politics. Relevant commentary from another American friend working in cloud startup space in Nairobi a few years ago:

http://varud.com/kenyanization-and-its-affect-on-startups

Note: the alternative is a 5 million fine, in Kenyan Shillings. That's a little under $50k.

It might be a bad alternative depending on how often they can repeatedly fine you for violations of that sort.

I suspect that every-time something like this is done, it is the triumph of the combination of stupidity and greed in the government (or those influencing it and expecting to profit from it). I very much doubt the economics here ever benefit the average citizen (actually it will likely weaken the economy) - if anyone has references of similar experiments that point to the contrary, I would be very interested to know.

This is really another form of what the Chinese practice - transfer of technology.

Want to do business here (in China)? Agree to transfer some of that fancy technology of yours. So far, it's worked so well for the Chinese.

This should be no different. Helps to keep more of the money in the local economy.

Yes. This is nowhere near as catastrophic, especially for an emerging economy, as people here seem to think it will be.

The difference is that the Chinese market is utterly massive regardless of which scale you use. Kenya, comparatively, is tiny. While Kenya has a substantial population (~44 million), it's no where near enough for foreign firms to actually obey that law as it's intended. In addition, China is far more wealthy than Kenya (as measured by: China's GDP per capita ($6,807 USD) is over 5 times higher than Kenya's ($1,245 USD)). China and Kenya's situations are not at all similar in this case.

> The new law will not be applied retrospectively – meaning the Act does not apply to existing foreign companies already registered in Kenya, said Mr Ouma.

Regardless though, this won't have any real effect immediately.

I don't think it is comparable.

One is trade with caveats. This sounds closer to a shakedown and a possible prelude to future ownership demands and that is how it will be perceived by investors.

Big difference between a 30% tax hike and 30% ownership.

30% of the entire company must be locally owned?

That seems unlikely to work out.

Does any country have local ownership rules of this kind?

I believe China has a rule similar to this.

Yes, the UAE requires 51% Emirati ownership for all companies not located in free zones.

It's a terrible policy which has significantly stifled entrepreneurship. Most businesses skirt around it by either funneling their revenue through a free zone or hiring an Emirati "owner."

These sorts of policies are classic populist maneuvers which seem like a good idea, but impose a tax on business activity which outweighs any gains to be had.

But UAE has free zones - plus lots of oil money going around...

The EPZ zones (Export Processing Zones) are indeed the best location to set up factories or warehouses. You can offer jobs to staff typically from India or so, or why not, from Kenya, to work there. Things tend to be entirely tax-free, and you do not need to worry about local politics. I would not put down a factory full of expensive equipment in Kenya. In terms of governance and risk evaluation, it really does not sound like a good idea to do that. The staff would have to come over to the EPZ to work from there.

is it really the entire company or 30% of the local office? seems fairly straightforward to burden the local office with IP payments to the mothership and have no local profit/ dividends then, kind of making the local owners little more than rubber stamping officials

That's actually part of the problem. Such rules discourage forming companies directly in the local jurisdiction and encourage keeping local investment to a bare minimum.

Yes, Zimbabwe introduced a similar rule of 51% ownership and shortly afterwards their economy utterly collapsed (that and they seized white owned farming land to redistribute to blacks citizens).

Zimbabwe had many problems that caused its economy to tank. The local ownership requirement was not even a major factor.

Ok please share what was in your opinion the major factors...

I can remember when 51% ownership was announced that suddenly the grocery stores (which is international companies) didn't have basic products like maize and salt on their shelves anymore because the companies didn't want to invest operating capital into the stores anymore.

China has a 50% cap on foreign ownership. I've been invoked in a few companies forced into this JV arrangement to do business there and its typically not been a great result. I'm amazed they are allowed this as a member of WTO. I imagine this will be a point of contention in coming years.

For most industries, Philippines has a cap at 40%, and for some industries, 100% of the company should be filipino except if you put more than $2M in capital ( retail ) if I remember right. Apparently it is going to change with the new president, let's see.

Thailand has this. I believe it is 50% for a lot of forms of companies and land ownership.

It's 49% allowed foreign ownership for virtually all companies (apart from ones sponsored by the Bord Of Investment of Thailand). Land ownership for foreigners is not allowed.

The land ownership is creating big problems for expats trying to build a future there as they either try to circumvent the law by holding the land in a companies name (which they are not really allowed to control) or in their wifes/girlfriends name which tends to end badly in many cases.

Thailands court system is also not exactly stellar and tends to side with Thais.

Combine that with visa troubles (even if you should be so lucky to get permanent residency, you'll still need a work permit to do any work even voluntary for free, what the?) and you can see that it's tough for foreigners to invest in Thailand and to put roots down and build a future.

If they didn't have the BOI, Thailand would likely have no economy to speak of as none of the bigger companies would have set up their factories there.

Similar (and arguably even bigger) issues are to be found in virtually all countries in south east asia apart from Singapore, Hong Kong and Japan.

Fiji has some similar protectionism in place, but they aren't across the board.

Eg: A foreigner can't own a taxi or handicraft business. If you want to start a business in the fisheries sector, you need 30% local ownership and there's a minimum investment $ amount (I believe USD$250k).

Full list of Reserved and Restricted Businesses: http://imgur.com/a/zx31r

Philippines does. It is not uncommon for a foreign entrepreneur to marry a local citizen and make them the co-owner. I have this anecdotally at SME level. I don't know if it holds true for, say, SM Corporation.

Disregarding the optics of this which is significant, can someone give me an idea of how difficult 30% ownership is? The closest analog would be like an ethnic food outlet in the US fully owned by a family who are all residents but not citizens.

Hopefully, just making the business a partial coop would be satisfactory.

well, it can be worst, in Cuba is 50%, "if" they allow you to create your company

The rule is not that simple to apply. Can a company be owned by another company? I would assume so. If yes, what the "localness" status of a local company? Is it also "local"? If it is, the rule can easily be circumvented:

Imagine the ownership structure of company A1:

A1 = { X:70%, local:30% }

Imagine a chain of ownership that looks like this:

A1 = { X:70%, local:30% } A2 = { X:70%, A1:30% } A3 = { X:70%, A2:30% }

In that case, A3 the compounded ownership for local is: 30%^3=2.7%. Hence, the compounded ownership of A3 is:

A3 = { X:97.3%, A2:2.7% }

Therefore, if you want to restrict local ownership to a maximum of M, you will need a chain of ownership with n nodes, with:

n >= ln(M) / ln(0.3)

Therefore, if they want the rule to be more difficult to circumvent than that, they will have to either prevent chains of ownership and/or beef up initial incorporation charges and/or periodic incorporation maintenance fees.

For large business activity, it could still be worthwhile to set up a 25-node chain or so.

Another way to make the rule ineffective, is to accept local ownership but only if the local owner deposits a sufficiently large amount in escrow in a third country, say, South Africa. Of course, you would have to pay the local owner for doing that, but if he ever misbehaves, you can repossess the amount escrowed in South Africa, where both of you are foreigners, and where being a local Kenyan has no particular advantage over being a non-Kenyan.

> they will have to either prevent chains of ownership and/or beef up initial incorporation charges and/or periodic incorporation maintenance fees.

Not really, this sort loophole is trivial to avoid while writing the law: just calculate by local ownership percentage of total shares and/or total capitalization.

In your example, A3 would have 2.7% of its shares be owned by Kenyans and so wouldn't be local.

Well done

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