12 Aug 2019
Section 2: Labour & Land Resources in Kenya
Fitch Solutions Labour Market Risk Index
- Kenya is placed in second position out of 11 East Africa states and in 133rd position out of 201 states globally in Fitch Solutions’ Labour Market Risk Index.
- Kenya outperforms the East Africa average in terms of education and availability of labour; however, underperforms regionally for labour costs.
Labour Market Risk Index: Methodology and Components
- 100 = Lowest risk; 0 = Highest risk
- The overall Labour Market Risk score is calculated from the average of the Availability of Labour, Education and Labour Cost sub-component scores.
- Education: the education sub-component focuses on general and tertiary schooling. Scores are based on enrolment at each level of education and interest in technical subjects, such as science, manufacturing, construction and engineering. This gives an indication of the talent pool available in a country, and emphasises higher value technical skills.
- Availability of Labour: the availability of labour score takes into account the size of the workforce, the quality, age and health of the labour pool and its composition (both with regards to the nationality of workers, and their occupations).
- Labour Cost: this sub-component assesses worker flexibility and the cost of hiring in a particular country. It includes factors such as the minimum wage, severance pay and unemployment. The scores are calculated to reward the countries with the lowest cost of hire.
Labour Supply & Skills
Kenya has a large working-age population and rising population growth rates. Just over 60% of the working age population is in employment, which is fairly low by regional standards. A key advantage for businesses operating in Kenya is the quality and variety of options available in the workforce in comparison with its close competitors for investment: Ethiopia, Uganda and Tanzania. Kenya benefits from having a comparatively superior education system and an increasing internet penetration rate. Together, this boosts skills development and facilitates more cost-effective training for specific tasks. This means that businesses in the country have less trouble finding adequately skilled staff, particularly for sectors such as manufacturing. The slow progress of urbanisation does pose a downside risk, however, as it may limit the availability of workers in towns and cities and for labour-intensive industries including manufacturing.
Health-related risks remain a concern, as the high prevalence of HIV/AIDS and malaria continues to take a toll on the population and overall productivity levels. These factors limit recruitment options for investors and increase (already elevated) labour costs due to productivity disruptions and the need to import employees from abroad.
Labour Costs & Regulations
Labour costs are regionally uncompetitive in Kenya; the country has the highest monthly minimum wage rate in the region, at US$271.8 per month. This is much higher than all of Kenya's immediate neighbours and means that businesses in Kenya face significant extra fixed costs. Moreover, the relatively high minimum wage has not had a positive impact on productivity. This has resulted in firms facing low returns on their wage expenditure in comparison to neighbouring states such as Rwanda and Ethiopia, where there is no minimum wage set.
Kenya’s workforce is highly unionised and consequently, businesses operating in the country face rigid wage determination structures and the threat of strike action. Pressures are mounting as the collective bargaining power of trade unions pushes up wages and increases the threat of strikes and productivity losses. Security risks and hardship pay considerations raise the cost of attracting foreign skilled labour. These factors collectively reduce the country's appeal to labour-intensive industries compared to emerging manufacturing hubs such as Ethiopia.
The Kenyan labour force is well regulated in comparison to other countries in East Africa. High redundancy costs make the task of hiring and firing burdensome for businesses, reducing their ability to adapt to changing economic conditions. However, on a more positive note, Kenya benefits from low mandatory social security and tax obligations.
Foreign investors may face risks in terms of land rights, as the purchase and leasing of agricultural land is not open to foreigners. Kenyan citizens or companies with majority Kenyan ownership may acquire leases for other types of land. Foreign investors are limited to 99-year leases on permitted land, which increases costs and the risk of expropriation in the long run. According to Kenya's Constitution, the state has the power to review leasehold land at the expiry of the 99 years, deny lease renewal and confiscate the land if it determines the land has not been used productively. Land issues have delayed several major infrastructure projects in the past.
Construction Permits & Registering Property
While obtaining a construction permit is subject to only moderate delays on a regional comparison, taking 159 days on average, the high number of procedures (16) which must be undertaken increases the risk of blockages or delays caused by government departments. In terms of costs, obtaining a construction permit generally costs 4.7% of warehouse value, which is competitive against the Sub-Saharan Africa average of 8.8%. In 2018, Kenya made dealing with construction permits less expensive by eliminating fees for clearances from the National Environment Management Authority and the National Construction Authority.
In 2019, Kenya made registering property easier by introducing an online system to clear land rent rates. In the ongoing land registry digitisation process, the Kenyan government is working on a database, known as the single source of truth (SSOT), to eliminate fake title deeds in the Ministry of Lands. The SSOT database will use blockchain technology, distributed ledger technology, as the primary reference for all land transactions.