Fiscal pillars that can lift long-term investment, jobs

Miritini Railway Station in Mombasa. FILE PHOTO | WACHIRA MWANGI | NMG 

By ANZETSE WERE

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Summary

• Over the past 10 years, the government has been on an investment drive to build the country’s infrastructure.
• The national budgets over the past few years have thus allocated significant amounts to energy and transport infrastructure such as Lapsset.
• Infrastructure investment is a prerequisite to attracting the third investor type as the ease and cost of transporting goods are an important business cost and variable.

Someone once told me that there are three types of foreign investors in Africa. The first invest in the country in order to exploit raw natural resources and direct them to their projects outside the country. The second are those who invest in countries to flood the country’s markets with their products. The third invest in the country for the long-term in a manner that creates employment, builds incomes, contributes to GDP growth; and, of course, generates profits.

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Africa seems to have little problem in attracting the first two investor types, but often struggles to secure the third. The question for Kenya is, which type of investor is the country attracting? And what can be done to attract the third type of investor?

These questions are important in the context of fiscal policy, of which a key event will take place this week when the National Budget 2017/18 will be read. Fiscal policy ought to and can play an important role in attracting the right type of investor.

Over the past 10 years, the government has been on an investment drive to build the country’s infrastructure.
In principle, efficient public investment in infrastructure can raise the economy’s productive capacity by connecting goods and people to markets.

The national budgets over the past few years have thus allocated significant amounts to energy and transport infrastructure such as Lapsset, the Standard Gauge Railway (SGR), Rural Electrification and the Last Mile Project.

With the SGR due to be completed this year, it will become clear what dividends the country will reap from such heavy fiscal commitment to infrastructure.

That said, infrastructure investment is a prerequisite to attracting the third investor type as the ease and cost of transporting goods are an important business cost and variable.

The second fiscal strategy that can bring long term investors as well as bolster food security and manufacturing is tax incentives to create productive agricultural value chains.

Fiscal policy can more effectively engender a shift from subsistence to commercially productive farming by identifying commercially viable agriculture value chains and linking small holder farmers to manufacturers.

Through incentives such as tax remissions along key food and beverage manufacturing value chains, fiscal policy can incentivise higher productivity in farming and contribute to making manufacturing more dynamic than is currently the case.

The key, however, is consistency in fiscal policy with no abrupt changes in tax remissions or other incentives so as to engender long term investment in food value chains.

Thirdly, the third investor type can be attracted to the country through investment in human capital.

As the IMF points out, more equitable access to education and health care contributes to human capital accumulation, a key factor for growth and an improvement in the quality of life.

Allocations

Fiscal policy has two roles here; the first is creating incentive structures for private sector investment into the country’s private and public education and health network and the second being the country’s own fiscal commitment to health and education sectors.

National budget allocations to education stand at about 23 percent, while commitments to health are at about six percent of the national budget.

Health allocations are paltry and while the education allocations look impressive, a great deal of the funds are directed to free primary education. In order to develop a healthy, highly skilled and productive labour pool, government ought to consider reorienting the almost obsessive fiscal commitment to infrastructure towards more robust allocations to health and post-secondary education.

This should be complemented by the creation of incentive strategies that attract investment into national priority nodes for the sectors.

The fourth means through which fiscal policy can attract the right investors is by managing tax rates at national and county levels.

At the moment, private sector is facing many tax burdens due to the lack of harmonisation of tax rates between national and county governments.

Fees and charges at county level are unpredictable, non-standardised and onerous; business faces multiple payments for advertising and transporting goods across county borders.

While these are not technically taxes, they are a form of tax exerted on private sector with no clear link to the service that should be expected for such payments.

At national level, the main concern for private sector beyond VAT refunds is that a small segment of business and individuals are heavily taxed due to the narrow tax base in the country. Thus national government ought to develop a long-term strategy for broadening the tax base.

A key component of broadening the tax base is addressing informality in the economy where millions of informal businesses do not pay taxes.
The aim here is not to tax informal businesses, as most are micro-enterprises barely making profits, but rather creating an ecosystem that encourages the development of informal business.

Again, fiscal action can be taken by government to direct financing focused at developing micro, small and medium enterprise through more strategic deployment of the Youth, Uwezo and Women’s funds.

The financing architecture of these three funds has to be fundamentally rethought to focus on building technical skills and business management capacity, and improving productivity and profitability in the informal sector.

Additionally, the government ought to develop a strategy for cottage industry which is the Jua Kali (informal industry) sector linked to solid fiscal commitments.

Through fiscal action, the government should create an investment environment that attracts traditional investors as well as non-mainstream financing such as angel investors, impact investors and venture capitalists to invest in Jua Kali (informal sector).

In this manner, action will not only invest in the informal sector, it will create incentives for investment into a sector in which more than 80 per cent of employed Kenyans earn a living in a manner that complements fiscal policy.