Kisumu, Kenya Potential Opportunities for Investors May 2008

TRANSACTION SERVICES Kisumu, Kenya Potential opportunities for investors May 2008

ADVISORY 310 158 Kisumu survey web 19/5/08 09:50 Page 2

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Terms of reference

This report has been prepared by KPMG LLP (UK), a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future.

In preparing this document we have relied upon and assumed, without independent verification, the accuracy and completeness of various sources of information, some of which have been derived from public sources. We set out a bibliography of our sources in Appendix 3. KPMG LLP (UK) accepts no responsibility or liability to any party in connection with such information or views.

Our core fieldwork and research was performed between July 2007 and October 2007. We have noted the significant events since October 2007; however, we have not performed further fieldwork or detailed research.

Appropriate professional advice should be sought to undertake a more specific examination of the particular situation or circumstances applicable to a potential investor. Contact details of KPMG professionals who could assist in this regard are set out on the back cover.

Acknowledgments

KPMG LLP (UK) would like to thank the Millennium Cities Initiative (MCI) for the opportunity to prepare this report to support its valuable project.

We would also like to thank the following entities and people and acknowledge their contribution in the preparation of this report:

Ministry of Trade and Industry, Ministry of Agriculture, Ministry of Transport, Kenya Investment Authority, Lake Basin Development Authority and Millennium Villages Project.

Adan Mohamed, Ashley Hufft, Ben Kitoto, Bimal Shah, Birey Chatthe, Bobby Singh, David S.O. Nalo, Deepak K. Shah, Elijah Oburu, George Oraro, Gerrie Scheepers, Gerrishon K. Ikiara, Ghulam Abbas Hirani, Glenn Denning, Gurdeep Singh Panesar, Isaac O. Awundo, Isaac Omolo Okero, Jimmy Brooks, Joab Othatcher, John Dale, John Kariuki, Jörg Simon, Joseph Irungu, Joseph Nduva Muli, Karl P. Sauvant, Laban Mburu, Manish Shah, Michael Ndeda, Michael Turner, Mr Soundararajan, Mukesh Shah, Nalan Yuksel, Ndolo Ayah, Nicholas E. Bodo, Nirmal Barbar, Nobby Macharia, Norman Brooks, O. P. Narang, Patrick K. Mutuo, Rajni Somaia, Roger Church, Sailesh Shah, Salima Gilani, Shem Siahi, Simon Bland, Stephen Brooks, Steve Cowell, Sunil Shah, Susan M. Blaustein, Tom Shepherd, Umesh Menon, Vishwas P. Govitrikar, Vitalis A. Ong’ong’o and Willy Diru.

© 2008 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Page 3 Foreword

As part of KPMG’s Global Development The fieldwork and research underpinning Initiative, which focuses KPMG member this report was performed before the firms’ skills and resources on achieving the December 2007 elections in Kenya. United Nations’ Millennium Development The events that followed the elections Goals (MDGs), the UK working with the highlight the impact of inequality and Kenyan firm was asked by the Millennium poverty faced by a large proportion of the Cities Initiative (MCI) to undertake this urban and rural population in Kenya and report on the potential investment bring into perspective the importance of opportunities for investors in Kisumu, Kenya. how socio-economic transformation and political reform can support long term The MCI is an urban counterpart to the stability and prosperity. Millennium Villages Project and was set up in association with the UN Millennium Investment in and around Kisumu can help Project by The Earth Institute at Columbia drive the socio-economic transformation, University. The initiative is focused on and although investors may take a cautious helping a selected number of mid-sized approach in the short term, the relatively cities across sub-Saharan Africa to fast restoration of peace supports our belief achieve the MDGs through economic that there is long term potential in this area. development, with special attention to urban-rural linkages, including with the To this extent, we hope this work will Millennium Villages. contribute to sustainable economic development and poverty reduction, and This report, which explores the will help to secure the future of many investment potential in and around thousands of families in the Kisumu region Kisumu, Kenya, is the first of several through productive investments and that are being produced by KPMG’s employment creation. Transaction Services. It is an excellent example of how KPMG member firms and their people are committed to making a difference to the people in sub-Saharan Africa and is intended to complement the Kisumu Investors’ Guide prepared by the MCI.

Lord Hastings of Scarisbrick CBE; KPMG Professor Jeffrey D. Sachs, International Global Head of Citizenship Director of The Earth Institute and Diversity at Columbia University

The Millennium Cities Initiative (MCI) is a project of The Earth Institute at Columbia University. Launched by the Institute’s Director, Professor Jeffrey D. Sachs, in 2006, MCI seeks to assist, through research and policy analysis, selected mid-sized cities across sub-Saharan Africa to achieve the Millennium Development Goals. Guided by its co-directors, Dr. Susan Blaustein and Dr. Karl P. Sauvant, MCI, more specifically, helps the cities involved to arrive at integrated City Development Strategies. Part of this effort is to demonstrate that more investment, including foreign direct investment, can be attracted to these cities, with the resulting employment and economic growth effects. The staff responsible for working with KPMG LLP (UK) on this report were Karl P. Sauvant, Co-Director of the MCI and Executive Director of the Columbia Program on International Investment, and Jörg Simon, Senior Investment Advisor of the MCI. For further information, please see http://www.earth.columbia.edu/mci/.

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Page 5 Executive summary

Introduction to Kisumu and its Investment challenges Competitive threat addressable markets While Kisumu is perceived to generally Kisumu is likely to face increasing Kisumu’s key strengths from an enjoy better security and lower land costs pressure from Ugandan and Tanzanian investment perspective include its location than other parts of Kenya, investment regions around the Lake Victoria Basin on Lake Victoria (Kenya) as a gateway to challenges in relation to business who enjoy much of the same natural the land-locked countries of East Africa, administration, infrastructure and potential strengths. These regions are now a good environment for agriculture and a skills gaps still exist. We understand that a starting to enjoy a more conducive literate and well-educated population. number of projects and initiatives are in the investment environment. pipeline to address these challenges, but Approximately half a million people live their timing has not been determined. Kisumu may be able to capture the in Kisumu and 10 million in the Kisumu opportunities offered by its natural region (Nyanza and Western provinces), Obtaining land and the necessary strengths if its issues and challenges accounting for approximately 27 percent of business permits is one of the most are resolved quickly. Kenya’s population. significant hurdles a potential investor could face. The government has recently reduced the number of licenses required Investment opportunities to operate a business and the recently opened Investment Promotions Office in There are a number of potential Kisumu may also help reduce the burden investment opportunities driven by of starting a business. the region’s natural strengths. Short to medium term opportunities primarily Poorly maintained and under-developed exist in commercialising farming, transport infrastructure combined with the agro-processing and associated services. poor availability and reliability of utilities results in increased operating costs and Although the region has good quality lower productivity, impacting the potential soils, a favourable climate and two rainy return on investment. Planned projects, seasons per year, current production of such as the Kisumu Airport upgrade and most crops and livestock is driven by the trunk road improvements, should help the subsistence nature of farming. transport situation.

Longer term opportunities include Although the region has a hard-working the broader service sector, e.g., and educated workforce, there is a lack of tourism, retail, distribution and essential formal vocational skills which business process outsourcing. investors will need to bridge, either through training or bringing in expatriate staff.

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Page 7 Contents

Overview 8 Kisumu’s strengths and weaknesses 9 Addressable markets 10 Economic snapshot

Opportunities 12 Primary products 15 Industrial 18 Services 21 Investment entry options

Challenges 23 Overview 24 Business support 26 Infrastructure 28 People

Competitive threat 30 Overview

Appendices 32 2005 agricultural production statistics 33 Key comparative country statistics 34 Sources

Page 8 Overview

Kisumu’s key strengths Key strengths and weaknesses Approximately 0.5 million people live in are its location as a Kisumu is located in Nyanza province, on Kisumu and 10 million in the Kisumu the shores of Lake Victoria, a gateway to a region, accounting for approximately gateway to land-locked number of land-locked regions in east and 27 percent of Kenya’s population. East African countries, central Africa. Despite high poverty levels, poor social its favourable environment There is a road and rail network linking infrastructure (such as lack of housing for agriculture and its Kisumu to Nairobi (Kenya’s capital city) and and sanitation) and a ‘brain drain’ of talent to Mombasa (East Africa’s main port). Lake to Nairobi, the population is literate, well-educated population. Victoria, the second largest freshwater lake well-educated and English speaking. in the world, provides opportunities for fast and cost effective water transport to The region has fertile soils and a favourable neighbouring countries, which are key climate suitable for a variety of crops and markets for Kisumu. However, the poorly livestock. However, the smallholding land maintained and under-developed transport structure and subsistence nature of rain-fed infrastructure presents some challenges to farming has contributed to low production efficient movement of goods and people. yields. Additionally, parts of the region are prone to flooding and droughts. The Kisumu region, defined as Nyanza and Western provinces for the purposes of There is significant potential to this report, accounts for about 4 percent commercialise the agricultural and of Kenya’s total area. livestock sectors including processing products within the region.

Kisumu was a prosperous Pre-independence: Post independence growth: 1963 and before 1960s–1970 regional centre but has Development of Kisumu as a trading hub Period of strong economic growth, experienced industrial and in East Africa. mirroring the growth phase of the • Transport infrastructure established to Kenyan economy. social decline over the last connect Kisumu to rest of Kenya and • Development of sugar, fishing, cotton and 30 years; however, economic other East African countries; brewing industries; • Railway established in 1901; and • Population highly literate; and activity has increased recently. • First airport in East Africa, established in • Health and poverty levels in line with the late 1930s. Kenya as a whole.

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Addressable markets Lake Victoria Basin: Population of The region’s prime location provides good 2 approximately 26 million live access to large domestic and regional around the lake shore in Kenya, markets such as Uganda, Rwanda, Uganda and Tanzania. Potential Burundi and parts of Tanzania and the water transport using Lake Victoria Democratic Republic of the Congo (DRC). should provide good access to this market. The addressable market can be segmented as follows, ordered by ease of access: 3 Kenya: Population of approximately 36 million. Goods transported 1 The Kisumu region and part of primarily by road and rail network. the Rift Valley province: Air freight should be possible after Population of approximately planned Kisumu Airport expansion. 12 million. Source of primary product inputs for East African Community and Kisumu-based industry. 4 part of DRC: Population of approximately 148 million in Kenya, Tanzania, the land-locked countries of Uganda, Rwanda, ETHIOPIA Burundi, and the eastern part SUDAN of DRC. Goods primarily transported by road. Lake transport should make these DEMOCRATIC UGANDA KENYA SOMALIA REPUBLIC KENYA markets more accessible. 31 OF THE Kampala CONGO (DRC) Kisumu LAKE Global: Export goods from VICTORIA 1 5 Kisumu to global markets in RWANDA 2 Nairobi Europe, Asia and the Americas. Mwanza Mombasa BURUNDI INDIAN OCEAN Market accessed from the port of 5 Mombasa or potentially directly TANZANIA from Kisumu Airport (needs 4 international upgrade). Currently Dar es Salaam high transportation costs due to poor road and rail infrastructure, impacting the competitiveness of ZAMBIA goods from the Kisumu region.

MALAWI MOZAMBIQUE

Post-independence decline: Recent upturn Future 1980s onwards Exposure to international competition Privatisation of main sugar mill, alongside Economic growth in the Kisumu region combined with under-investment in established large businesses such as essential for Kenya to achieve the ‘Vision infrastructure causes decline in United Millers, demonstrates that industry 2030’ plan. industrial activity. can succeed in the Kisumu region. • Plan calls for annual economic growth • Trade liberalisation led to influx of cheap • Mumias Sugar producing of 10 percent — focus on value addition imports, exposing inefficiency of sugar profitably; in agricultural industries; and parastatal enterprises; • Re-investment from local business • With the expected trade liberalisation • Cotton collapsed and brewing industry people and increased construction through the East African Community, left Kisumu; indicates that the local economy is Kisumu is well placed to regain its • Uncompetitive sugar industry sustained picking up; and status as a regional trading hub. through import tariffs; and • Kisumu hosts the headquarters of the • Literacy levels fell due to increasing Lake Victoria Basin Commission. poverty with urbanisation becoming a significant problem.

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Kisumu’s economy Economic snapshot currently revolves The Kisumu region’s economic value chain The state of the supporting infrastructure, is largely driven by the primary products while being a challenge to doing business, around agriculture and available locally. The region accounts for also presents some opportunities for retail; opportunities approximately 25 percent of Kenya’s investors with a longer term outlook. agricultural output from 4 percent of its primarily exist in bringing area, although most processing is The following sections present the agro-processing and performed outside the region. opportunities by value chain sector and detail the state of the supporting associated services to Current production of most crops and infrastructure. the region. livestock is driven by the subsistence nature of farming; there is significant potential to increase and/or change the mix of produce.

The main industrial opportunities, bringing agro-processing and associated support services to the region, are dependent on improvements in the primary products sector. There are some opportunities, such as tourism, that depend on wider economic or environmental development in the region.

Primary products Processing/industrial Services The Kisumu region’s economy is dominated There is some processing of The service sector is under-developed by cultivation of primary products: agricultural products, e.g.: with activities primarily in: • Agriculture • Sugar • Wholesale, distribution and retail • Livestock and fishing • Flour • Retail banking

Business support Complex business, investment and regulatory environment

Transport and utilities Under-developed and poorly maintained

SUPPORT People Large pool of literate English speakers; however, skills gap and poor living conditions

INFRASTRUCTURE Largely informal sector workforce

Page 11 Opportunities

Good quality soils, a favourable climate and two rainy seasons per year resulting in good conditions for agriculture and livestock.

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Opportunities: primary products

A wide range of primary products are currently available in the region; opportunities exist to commercialise farming practices.

Kisumu has good quality soils, a Cash crops: coffee, cotton, oil palm, Livestock and fish favourable climate and two rainy seasons pyrethrum, simsim, sugarcane, sunflower, per year resulting in good conditions tea, tobacco. Bees, cattle, chickens, donkeys, goats, for agriculture and livestock, as highlighted guinea fowls, Nile perch, omena, below by the range of primary products Horticultural crops: cabbages, carrots, ostriches, pigeons, quails, rabbits, available in the region. chillies, kale, onions, tomatoes. sheep, tilapia.

Fruit: avocados, bananas, citrus (oranges Agricultural crops and lemons), jack fruit, mangoes, papaya, Other resources passion fruits, pineapples. Food crops: arrow roots, bambara nuts, Copper, gold, limestone, materials for beans, cassava, cow peas, finger millet, ceramics (e.g. kisii stone), rare earth green grams, groundnuts, Irish potatoes, minerals and niobium, rocks for maize, rice, sorghum, soya beans, sweet construction (e.g., granite, tertiary lavas of potatoes, wheat. phonolites and nephelinites), sustainable forests, water hyacinth.

Notes: Ordered alphabetically. See Appendix 1 for further detail on agricultural production

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Agricultural crop Land availability, usage and yields • Improving access to extension production could be services: land preparation support, The Kisumu region has approximately delivery and collection services for increased or the mix 1.6 million hectares of agricultural land. smallholders, training and education changed through farmer However, it is estimated that only with best practice farming techniques, 58 percent of the land is currently utilised. research on improved crop varieties; and support, market creation • Implementing man-made irrigation and better land utilisation. The majority of farming in the lake basin systems: investment in irrigation to region is subsistence driven leading boost yields, although there are to relatively low production volumes. restrictions on use of lake basin water Current crop yields are considered to under the Nile Treaty. be significantly lower than the potential afforded by soil and climate conditions. Mix of products Current low land utilisation and yields are driven by the lack of guaranteed markets A wide variety of produce is available and associated support services. An locally, ranging from large quantities of investor could stimulate farmers into sugarcane to small quantities of honey. increasing production by: Highly fertile land and variations in • Providing a market for produce: temperature and rainfall across the region guaranteed outlet for farmers’ products provides a suitable environment for a at fixed prices, thereby guaranteeing broad range of agricultural crops. There is income and livelihood; further potential for new crop varieties • Increasing farm size: aggregation of or changing the mix of current produce, smallholding farms to gain scale and as demonstrated by the Millennium enable mechanisation; although tea and Villages Project. milk industries demonstrate farming can be efficient at smallholding scale; Smallholder farmers are reported to be • Improving access to farm inputs: willing to switch crops if they are provision of seeds, seedlings, fertiliser, supported by the investor through: agro-chemicals and credit; • Provision of seeds and other extension services to initiate the new crops; and • Guaranteed purchase of the new crop after harvesting.

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Greater output and Improve livestock farming Greater aquaculture activities use of livestock and Like agriculture, livestock farming is The Kenyan part of Lake Victoria covers aquaculture provides currently performed primarily on a approximately 0.4 million hectares further opportunities subsistence basis. Cattle are (4,100 square kilometres), with 550 km predominantly indigenous breeds with of lake shoreline; most of this shoreline for investors. lower milk output than grade cattle. is under-utilised.

Increased output of livestock and related The long term sustainability of current products could be driven by improving the fishing output in Lake Victoria is not clear. quality of and access to support services Increased aquaculture activities could such as: result in greater output and variety of fish from the region while further supporting • Artificial insemination; the farming and fishing communities. • Disease control; • Commercial feed to enable In order to support aquaculture, investors zero-grazing; and would need to provide high quality fish • Training and extension services. feed, extension services and also establish guaranteed markets, which is critical in persuading farmers to invest in aquaculture. 310 158 Kisumu survey web 19/5/08 09:50 Page 15

Page 15 Opportunities: processing/ industrial

The main industrial investment opportunities are based on processing local primary products for regional and international markets, driven by Kisumu’s key competitive advantage of its large source of primary products and proximity to large end-markets.

Key opportunities for industrial investment A number of industries are possible, for utilising local produce are grouped in the example: re-establishing hide tanneries, following areas and examples are detailed fish processing beyond the current on the following pages. filleting, ice production for the fishing industry, increasing milk processing and feedstock production. Utilising agricultural products

Currently, the main industries in the Utilising other resources region are sugar production and grain milling, but historically the region also had There are other industries in the region, a textile industry. for example, manufacturing household plastic goods, soft drink bottling, quarrying Improved agricultural output could enable and some engineering, but most of these industries such as edible oil manufacturing, are small scale. juice extraction, fruit and vegetable canning and re-establishing the cotton ginneries. Investment opportunities appear to be more limited, mainly focused around utilising natural resources (e.g., cement Utilising livestock and fish from limestone, crafts or biodegradable plates from water hyacinth and The region currently has some milk boat building) processing facilities, fish fillet processing and livestock slaughter houses.

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However, to fully utilise the potential from Edible oil and related products sugarcane, there are a number of issues that would need to be resolved: Kenya imports approximately Ksh 12 billion of edible oil (sunflower, groundnut, maize, • The Government would need to cancel oil palm and cotton seed) annually. debt to enable privatisation of the existing parastatal sugar mills; Some oil crop trials have been conducted • New entrants looking to build a sugar in the region, but there is potential to mill would require nucleus estates and significantly increase production of oil agreements with smallholders to crops and process them locally. However, supply cane; the available capacity of the Bidco • Investors seeking to establish processing facility in Nakuru may make a non-integrated processing of sugarcane local facility uncompetitive until there is by-products would need agreements sufficient production of input crops. with existing sugar mills to supply bagasse/molasses; Investors would need to construct a • Efficient electricity generation is likely to modern processing facility, potentially with need a sugar mill with 200–300 tonnes a nucleus estate, and provide support to cane crushed per hour capacity; farmers, such as input and extension • Electricity generation would require a services, to encourage them to use land connection to the national grid and a to grow appropriate crops. Sugar, electricity, ethanol purchase agreement to enable the sale (from sugarcane) of excess electricity; and • If ethanol production is intended for use Aquaculture and fish processing Investors are likely to find opportunities in in transport, the Government would the privatisation and refurbishment of the need to mandate blending of ethanol Existing processing facilities are remaining parastatal sugar mills or with petrol. dependent on lake fishing. The onus is to construction of new mills with potential to: reduce the burden on Lake Victoria through the establishment of fish farms, • Improve sugar production by Fruit and vegetable juice as the sustainability of fishing levels is approximately 20 percent to 600,000 or canning uncertain. Additionally, there is potential to tonnes per year; utilise waste from fish fillet production to • Generate between 400–600 GWh of There is potential to process locally grown produce fish meal, fish oil and fish skins. electricity per year (approximately 7–11 fruit into juice e.g. passion fruits, percent of total Kenyan demand) using tomatoes, pineapples and mangoes. The requirements for successful bagasse (by-product from current aquaculture and fish processing are: sugarcane production) with the potential For example, approximately 5,000 tonnes to utilise the Clean Development of passion fruit is grown in the region, but • Establishing fish ponds, both as part of Mechanism (CDM) and trade CO2 there is potential to increase this to over a nucleus estate and in conjunction with emissions; and 50,000 tonnes resulting in approximately local farmers; • Produce between 20–200 million litres 12,000 tonnes of passion fruit juice. • Providing collection services from of ethanol (depending on how much Although there is a small processing facility farmers and existing fish processing sugarcane is diverted from sugar in the region, it may not have sufficient plants; and production to ethanol production); which scale or support for fruit juice export. • Constructing modern cold storage and can be blended with petrol or used in processing facilities. other power/industrial applications. Investors have the option of refurbishing/reviving existing processing This sector is critical to improving the facilities or building new facilities. state of the Kisumu region. Additionally, investors would need to provide support to farmers, such as input and extension services, to encourage them to use land to grow fruit trees.

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Tanning and leather (cow hides) Paper, pulp and building materials

Currently, hides and skins produced locally A shortage of building materials in the area are transported to Nairobi for processing. means that these have to be brought in by road. Approximately 6,000 tonnes of raw hides and skins are available in the Kisumu There is potential for investing in forestry, region annually which could be processed although this would be a long term locally. Additionally, it may be possible to investment due to the maturity period of source hides and skins from the wider trees and the need to secure large tracts Lake Victoria Basin. of land. However, there is also potential to use forestry as a carbon sink. Investors would need to construct a new tannery and establish sourcing Water hyacinth grows rapidly on the lake agreements, primarily with slaughter and is a major problem. It could be used for houses in the region, but also with particle board manufacture, biodegradable individual farmers. plates and other products. Removal of this fast growing lake weed would have the added benefit of easing lake transportation Cement (from limestone) problems and improving access for subsistence fishermen. Investors would Cement can be produced locally, resulting need to secure agreement to harvest water in cost savings in transporting cement hyacinth with local authorities and from other parts of Kenya into the region. develop/supply harvesting equipment.

There is a limestone deposit, estimated to be 65 million tonnes, in the region which has yet to be exploited. Additionally, there are carbonatite deposits which could also be used for cement; however, they could first be developed for rare earth and niobium minerals. This could supply a small-scale cement plant with a production capacity of approximately 150,000 tonnes per year.

Investors would need to perform extraction feasibility and mineral composition studies and secure gypsum supply as it is not available locally.

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Service sector investment opportunities appear to be more limited than other Opportunities: sectors in the short to medium term due to the dependence on the region’s economy and environment improving.

Short to medium term opportunities are services likely to be focused around the region’s core sectors (agriculture and livestock) e.g.:

Development of the service sector in Kisumu • Tractor hire/land preparation; could evolve from being focused on supporting • Machinery service and maintenance; • Storage/silo facilities; the agricultural sector to wider offerings. These are • Logistics and transportation/collection; likely to become more attractive in the longer term • High quality seed distribution and retailing; as the economy and environment improves. • Feedstock distribution and retailing; • Supply of irrigation systems; and • Pest/disease control. Wider Other sectors such as eco-tourism and lake transport (people and/or freight) should be possible in the short to medium term. Mass market tourism However, they will require improvements in the supporting infrastructure, such as Lake transport dredging the lake and the construction of appropriate facilities.

Further development of Kisumu’s industrial Business processes outsoucing/ICT and export sector should lead to a greater requirement for broader support services Agricultural related services in the longer term, such as: Market reach

Professional services • Professional services; • Information, communication and technology (ICT) support; • Business process outsourcing (BPO); and Research and development Eco-tourism • Research and development (primarily agricultural).

Narrower Short term Time Longer term

Note: Indicative graphic Source: KPMG LLP (UK), 2007

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Tourism and conferences Wholesale/distribution BPO/ICT

The tourism industry, e.g., hotels/resorts The development of Kisumu as a regional There is potential for call centres and and related activities and support services, hub could result in increased freight outsourcing services staffed by an is relatively underdeveloped. volumes. There is potential for: educated, literate, English speaking population, on cheaper wages than Nairobi. Natural tourist attractions in the Kisumu • Expansion and modernisation of the region include: inland container port; and Realising this potential is dependent on: • Wholesale, distribution and • Lake: cruises, water sports, logistics services. • An upgraded telecommunications beaches, islands; backbone; • Kakamega: Kenya’s only rainforest with However, to encourage traffic through • A reliable and high quality a diverse bird and butterfly population; Kisumu, the transport infrastructure will electricity supply; • Mount Elgon: Kenya’s second need to be upgraded. • Training on specific processes and highest mountain; and technology; and • Maasai Mara: closer to Kisumu • Initial demand from African businesses than Nairobi. Retail for outsourced services to demonstrate the capability to the global market. Over the past few years, there has been The local market is growing in size, a shortage of hotel beds in Kisumu. although the poverty level limits scope for This could come under further pressure consumer facing opportunities in the short as meetings and conferences of the to medium term. East African Community begin to be held in Kisumu. Retail opportunities should increase as economic growth drives consumer Developing the tourism potential in the spending. However, development of lake region requires: transport is needed to tap into the wider catchment area. • Marketing of the Kisumu region by the Kenya Tourist Board; • Cleaning up Kisumu’s bay of pollutants, water hyacinth and the snail parasite to enable tourist use; • Introducing regional/international flights into Kisumu Airport; and • Improving roads in the region to enable fast transport to Mara and other attractions.

Page 20 Opportunities: investment entry options

There are a number of investors who have successfully set up in the Kisumu region, either through new ventures, joint ventures or acquisition.

The most suitable entry option is dependent on the opportunity area: for example, the most effective option for entering sugar milling could be through acquisition, whereas developing a specific food crop related opportunity may be realised most effectively through a new venture.

Potential investors should liaise with the Kenya Investment Authority and the MCI to progress specific opportunities.

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Realising opportunities and overcoming challenges: Dominion Farms case study

Dominion Farms was set up in 2004 as a new venture in the Yala Swamp area to primarily produce rice for the local Kenyan market. The area shares many of the difficulties and potential of the Kisumu region and Kenya as a whole. Despite the tropical climate and abundant freshwater from Lake Victoria, 70 percent of the population lives on less than 50 cents a day.

Dominion Farms saw an opportunity to use the natural resources of the area to address a market need and improve the lives of the local population while making a good financial return. The company purchased a 45 year lease on a 6,900 hectare (17,050 acre) plot within the flood plain. The land is being converted primarily to rice paddies, although other products are planned, such as organic crops and fish farming. Initial crop testing suggested that 2.2 rice harvests per year are possible, more than twice Investment entry options the productivity of a comparable farm in the US. New venture Acquisition/privatisation Most industrial or agricultural opportunities A number of business, particularly The lease area had previously been run could be addressed through new ventures. in the sugar industry, are run as by an array of government and charitable An example of an investor setting up a parastatals. Privatisation of these generally bodies; however, it fell into disrepair and new agro-based business in the Kisumu loss-making businesses could make was disused. To rectify this, Dominion region is Dominion Farms. them profitable. Farms has constructed a network of dams, dykes and roads, and due to the Joint venture/partnership An example of this is Mumias Sugar remoteness and isolation of the area, Some opportunities, where there is an Company, which owns and runs the has also constructed water supplies, existing business in the region, may be Mumias Sugar Mill. The mill was loss back-up power generation, a mill, drying best addressed through a joint venture or making as a parastatal but was turned and storage facilities and an airstrip. partnership with a local company. around into profitability after privatisation.

The farm is predicted to break-even in An example of this is the Kisumu Ethanol 2008 and become profitable shortly plant, owned by Energem Resources Inc thereafter producing 100,000 tons of of Canada and Spectre International, a rice annually for the Kenyan market local Kenyan business: (40 percent of Kenya’s import demand) and 20,000 tons of farmed fish for the • The plant was refurbished and has export market, as well as bio diesel and the capacity to produce approximately feedstock by-products. Alongside the 60,000 litres of potable ethanol per commercial opportunities, Dominion day; and is also constructing a youth centre, • Ethanol is sold into the Kenyan market classrooms, public roads and medical and exported to neighbouring countries. clinics and its US$1.6 million annual payroll is estimated to have moved 50,000 people above the poverty line.

Page 22 Challenges

The cost and difficulty of starting a business in the Kisumu region, and more generally in Kenya, potentially impacts the commercial viability of opportunities.

Page 23 Challenges: overview

Potential investors are The cost and difficulty of starting a business in the Kisumu region, and more likely to face challenges generally in Kenya, potentially impacts the due to business support, commercial viability of opportunities. The current supporting infrastructure and infrastructure and business processes are not conducive to a people issues. flourishing investment environment.

However, despite a challenging environment, the region has a number of successful businesses such as United Millers, Dominion Farms and Mumias Sugar.

Challenges to starting and running a business in the Kisumu region

Starting a business Running a business Key issues include: Key issues include:

• Acquiring suitable land; • Transport costs; • Obtaining business and work • Availability and reliability of key utilities permits quickly; and services; and • Building/plant construction; • Workforce management and staff • Sourcing/importing equipment; turnover due to poor health. • Finding appropriately skilled staff; • Securing input materials, either locally Kisumu’s advantages over other parts of sourced or imported; and Kenya is its proximity and accessibility to • Obtaining cost effective key East African countries. commercial finance.

Kisumu’s advantages over other parts of Kenya include:

• Lower land and people costs; and • Better security and lower crime historically.

Page 24 Challenges: business support

Starting a business efficiently is the most significant challenge facing potential investors, especially obtaining land and the necessary business permits. The Kenya Investment Authority opened an Investment Promotions Office in Kisumu during 2007, which should help reduce the burden of starting a business.

Land

There appears to be plenty of idle land (agricultural and industrial) available in and around Kisumu at cheaper rates than Nairobi. However, investors have to negotiate directly with private landowners which can be a time consuming and uncertain process. Ensuring legitimate title to land is particularly difficult as the land registry is not computerised.

Foreigners are not permitted to own agricultural land in Kenya; however, this is subject to presidential exception.

Potential investors should prioritise land acquisition/leasing early in their investment process.

The Kenya Investment Authority should consider acquiring unused land in and around key industrial areas of Kisumu for leasing to potential investors (as exemplified by the investment authority in Uganda).

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Bureaucracy Work permits Hurdles and opposition

A single business licence is required to Expatriate employees are often Investors may find opposition, interference start a company but approximately 30–50 necessary to plug the skills gap and and hurdles, for example due to other permits are typically needed in provide management expertise. However, environmental concerns, from a variety of addition to the single licence. an unclear and inconsistent process to local people, groups and organisations. obtain permits combined with limited In total, there are over 1,300 licences in availability poses a serious problem for Marketing the benefits of the investment existence with varying processes for potential investors. and getting support from government and obtaining them, adding to the uncertainty community leaders is likely to be an in business start-up timings; approximately An estimated 6,500 expatriate work important driver of success. half of these are administered by permits are in operation annually, of which local authorities. 2,500 are new or renewed annually. This is a key limiting factor as many permits are Another example of the difficulty in starting already assigned to existing businesses. a business in the Kisumu region is that key actions, such as registering a business The official cost per permit is Ksh 200,000 name, have to be completed in Nairobi. for two years, although in practice there are additional costs, understood to be Investors should seek professional facilitation costs. assistance in understanding and commencing the licensing requirements Investors should carefully plan staffing early in their investment process. requirements to ensure the appropriate number of work permits are obtained. The Government of Kenya should continue with its commitment to The Government of Kenya should reform eliminate or simplify 800 business licences its work permits policy in line with best (approximately 350 completed to date). practice countries.

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Challenges: infrastructure

Poorly maintained and under-developed transport infrastructure presents a financial and logistical challenge to businesses. Transportation costs are estimated to be two to three times more than in developed countries.

Roads Rail Air

Roads are currently the main method of The railway in Kenya is operated under Kisumu Airport has eight daily passenger transporting goods in, out of and around the concession by South African Rift Valley flights between Kisumu and Nairobi. The Kisumu region. However, main and feeder Railways (RVR), which is responsible for domestic-only airport, however, has very roads are poorly maintained, leading to investing in infrastructure and services. limited cargo capacity due to a short higher business costs through longer journey runway and small terminal building. times and increased vehicle maintenance. The Kisumu-Nakuru branch line provides links to Nairobi and Mombasa. However, It is understood that the Government has Additionally, the poor road infrastructure light axle load line limits freight capacity plans to upgrade the airport. The Ksh 2.6 results in difficulties for farmers to get between Kisumu and Nakuru, thereby billion World Bank-financed expansion of goods to market in time. increasing freight costs. Kisumu airport is scheduled to start in the second half of 2008 to provide a It is understood that the government has Upgrade costs are substantial as over 20 longer runway and reconstruction of the plans to improve the road infrastructure in bridges are too weak to support larger terminal building. Kenya generally; however, there is trains and approximately 160km of the line uncertainty over timing and scale of the needs upgrading. There are no plans to make Kisumu Airport programme. international. Investors requiring direct Upgrading bridges and the line on the international air transport from the airport There is potential to invest in road Kisumu to Nakuru route is needed to should liaise with the Ministry of Transport construction, maintenance and provide increased capacity into the Kisumu to understand the future possibility of toll operation. region. However, public/donor funding may providing international services. be necessary as RVR is focusing investment on more profitable routes.

There is potential for long term investment in the railway infrastructure. Interested investors should liaise with the Kenya Investment Authority and Kenya Railways to gain a more detailed understanding of the opportunities. © 2008 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 310 158 Kisumu survey web 19/5/08 09:51 Page 27

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Lake Water/sewage Poor availability and reliability of utilities Kisumu Port is managed by Kenya Although improvements in the availability Railways with one railway wagon ferry of water and sewerage services are results in increased operated by RVR between Kisumu and underway by KIWASCO (Kisumu Water operating costs and Mwanza (Tanzania). and Sewerage Company), the current situation is contributing to the poor state lower productivity. However, infrequent lake transport and of the region’s human capital. the lack of container port facilities limit the ability for businesses to use the lake. Investors may need to investigate Additionally, the low water level by the obtaining water from boreholes if an port restricts the size of boat able to adequate supply is not available in the access the port. proposed location.

KPMG is not aware of any plans to improve the condition of the lake for Telecoms transport. However, to fully utilise the lake’s potential, improvements such as The fixed line telecoms infrastructure dredging, water hyacinth removal and lake is basic, although internet connectivity surveying will be needed. This would is available. improve the potential in container port construction/ maintenance/ operation and However, mobile phone network coverage, lake cargo services. including GPRS, is relatively good throughout the region, although call quality and data rates are of variable quality. Electricity KPMG understands that there are plans to The cost and reliability of electricity lay an internet backbone cable from significantly impacts business operation. Nairobi to Kisumu. However, KPMG is not Businesses are effectively forced to aware of the technical details or progress install expensive back-up diesel or fuel of the project. oil generators to ensure continuity of operations. Additionally, obtaining an Potential investors with heavy telecoms electricity connection, especially in more requirements should further investigate rural locations, can be a difficult and the availability, suitability and cost of lengthy process. telecoms connectivity in the region. Given the current structure of the The Sondu/Miriu hydro-power station telecoms industry in Kenya, the should improve the situation by providing investment opportunities appear approximately 330 GWh annually. to be limited.

By using bagasse (waste from sugarcane processing) cogeneration, the region’s current additional power requirements could be met. Additionally, bagasse generated electricity would complement hydro-power as the two are counter cyclical.

Potential investors, especially those with high expected power usage, should investigate the availability and reliability of electricity in the proposed location to understand cost and operational implications.

Page 28 Challenges: people

The region has a hard-working and highly educated workforce. However, there is a lack of essential formal vocational skills.

Education and capability Health

There are large numbers of well-educated, High poverty rates and the resulting literate, English speaking unemployed disease burden depletes human capital people in the area. However, local and damages labour productivity. business reports a lack of technical and professional skills such as carpentry, Investors should aim to provide health engineering, architecture and accountancy. services and support for staff to ensure health issues do not impact A restrictive work permit scheme (see staff productivity and turnover. earlier) makes it hard to employ expatriates to fill the skills gap in the short term. Housing The people in the region may not be as entrepreneurial, commercial or driven as There is a lack of available low-cost other parts of Kenya and this appears to housing adding to social and health have contributed towards the subsistence problems in the region. nature of farming. Additionally, a lack of technical farming know-how has resulted in Investors may need to provide appropriate reduced levels of agricultural productivity housing for staff, especially if the business location is outside Kisumu. This could help Investors will need to either provide reduce health problems, resulting in better appropriate training to local people or obtain productivity and staff morale. work permits for expatriate staff for certain key management or functional positions. Constructing and providing low cost housing, either as a managed service to Investors in the agricultural sector will need businesses or for sale to the general to provide education/training services to public, is an opportunity for investors. ensure farmers have sufficient support to increase land utilisation and yields. This creates investment opportunities in technical education and training.

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Competitive threat

Kisumu’s opportunity to become a leading trading hub in East Africa is under threat from some of Kenya’s neighbours.

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There is a risk that trade Kisumu’s development is key … but advantages of the and industry bypasses to achieving Kenya’s region could be lost to Vision 2030 … neighbouring countries western Kenya, as there is currently a more The Kisumu region is a high potential area, Other regions around Lake Victoria in strategically located on Lake Victoria, with Tanzania and Uganda have the potential to conducive investment a sizable natural resource endowment and surpass Kisumu due to their improving environment in Uganda the ability to become a regional industrial investment environment. and trading hub. and a rapidly improving Uganda investment environment Development of the Kisumu region is Ugandan authorities encourage new considered to be crucial if the country is to business through a one-stop investment in Tanzania. Additionally, reach the growth targets of Vision 2030: authority which: local industrial opportunities sustained economic growth of 10 percent per annum. • Grants land and work permits are currently being to investors; and captured by Nairobi or Additionally, if greater investment does • Offers tax incentives and subsidies. not start flowing into the region, Nakuru. Kisumu may there is significant risk that the social Recent investments in Uganda show that be able to capture and environmental impact will continue the environment appears to be more to worsen. investment-friendly then Kenya. these opportunities. For example, Bidco (a manufacturer of edible oils, fats and hygiene products) tried to set up a palm oil plantation in the Kisumu region but was forced to look elsewhere after facing hurdles and opposition; it ended up realising the opportunity in Uganda.

Tanzania There is potential for Mwanza in Tanzania to challenge Kisumu if transport infrastructure linking it with Dar es Salaam is improved. Dar es Salaam is the second largest port in East Africa and Mwanza is the second largest city in Tanzania.

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Appendices

1 2005 Agricultural production statistics 2 Key comparative country statistics 3 Sources

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Appendix 1: 2005 agricultural production statistics

Production Area under cultivation Yield (000 tonnes) (000 hectares) (tonnes/hectare)

Food crops Maize 927 459 2 Cassava 518 44 12 Sweet potatoes 456 43 11 Beans 174 296 1 Sorghum 74 59 1 Irish potatoes 41 3 16 Finger millet 20 27 1 Rice 13 5 3 Cow peas 12 9 1 Groundnuts 11 19 1 Arrow roots 7 1 13 Soya beans 2 3 1 Greengrams 2 4 1 Wheat 1 1 1 Bambara nuts <1 <1 <1

Industrial crops Sugarcane 5,627 98 57 Tea 151 20 8 Tobacco 18 13 1 Coffee 11 6 2 Cotton 5 8 1 Sunflower 5 4 1 Oil palm <1 <1 5 Pyrethrum <1 <1 <1 Simsim <1 <1 <1

Horticultural crops Kale 179 14 13 Tomatoes 149 8 18 Cabbages 52 3 19 Onions 35 3 12 Local vegetables 23 11 2 Chillis 2 <1 5 Carrots <1 <1 5

Fruit Bananas 644 35 18 Pineapples 78 5 16 Avocado 28 2 14 Mangoes 23 3 7 Pawpaws 20 2 10 Citrus (oranges and lemons) 5 1 5 Passion fruits 5 1 4 Jack Fruit <1 <1 11

Note: Reliable and consistent data on 2006 and 2007 statistics was unavailable during our fieldwork. Production volumes vary by year and potential investors should seek the most recent information before developing a specific investment opportunity. Sources: Nyanza Provincial Commissioner’s Office, Western Provincial Commissioner’s Office, Ministry of Agriculture, KPMG analysis 2007

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Appendix 2: Kenya — key comparative statistics

Sudan 25.5 39.4 61%

Kenya 17.4 36.9 85%

Ethiopia 13.3 76.5 43%

Tanzania 13.1 39.4 69%

Uganda 8.5 30.3 67%

DRC 8.0 65.8 66%

Somalia 2.5 9.1 38%

Rwanda 2.0 9.9 70%

Burundi 0.8 8.4 59%

Notes (a) All information from the same source for comparative purposes. (b) GDP does not include informal sector output. (c) Various dates, all post 2000.

Source: CIA, The World Factbook, 16 August 2007

Kenya is part of the East African Community (EAC), and has preferential access to the Common Market for Eastern and Southern Africa (COMESA), the EU market and also to the US market for a number of products through the African Growth and Opportunity Act (AGOA).

The official languages of Kenya are Kiswahili and English.

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Appendix 3: Sources

The primary sources of information have been the interviews conducted in Kenya (see Acknowledgments). The interviewees cover a wide range of organisations from international through to local businesses and across a number of sectors including financial, industrial, infrastructure and government.

Actis, Agro-Chemical & Food Company, Barclays Bank, British High Commission, Cameco (Caneland Ltd), Cedar Investment Group International, CFC Bank, Channan Agricultural Company, Commercial Bank of Africa, Department for International Development, Dominion Farms, Homa Lime, Imperial Hotel, Kenya Investment Authority, Kenya Railways, Ministry of Agriculture, Ministry of Trade and Industry, Ministry of Transport, Nyanza Provincial Commissioner's Office, Oraro & Company, Rift Valley Railways, Rotary Club of Kisumu, Sojpar, Strategic Consultants, The MDG Centre, The Millennium Villages Project, United Millers Limited and Western Provincial Commissioner’s Office.

In addition, the following publicly available sources were consulted:

• Ministry of Agriculture, various publications • Ministry of Trade and Industry, various publications • Nyanza Provincial Commissioners Office, various publications • Western Provincial Commissioners Office, various publications • The Study Of Integrated Regional Development Master Plan For The Lake Basin Development Area, Japan International Cooperation Agency, October 1987 • Kenya Investment Authority (www.investmentkenya.com) • Kenya National Bureau of Statistics (www.cbs.go.ke) • AllAfrica.com, various news articles on Kenya, Uganda and Tanzania • Lake Victoria Development Programme (http://eac.int/lvdp) • Sugar Cane Bagasse Energy Cogeneration – Lessons from Mauritius, Dr Kassiap Deepchand, Mauritius Sugar Authority, 5–7 October 2005 • Attracting Investment to Kisumu: Opportunities and Challenges, School of International and Public Affairs Columbia University, 10 May 2007 • Improved land management in the Lake Victoria Basin, World Agroforestry Centre, 2006 • The World Factbook, CIA, 16 August 2007 • The World Bank (www.worldbank.org) • Uganda pulls plug on Lake Victoria, New Scientist, 9 February 2006 • Bidco-oil.com, various press releases • www.domgp.com/farms.html

kpmg.co.uk

Sanjay Thakkar Partner KPMG LLP (UK) T: +44 20 7311 1000 [email protected]

Sheil Malde Associate Director KPMG LLP (UK) T: +44 20 7311 1000 [email protected]

Richard Ndung’u Senior Partner KPMG East Africa Limited T: +254 20 2806000 [email protected]

Josphat Mwaura Partner KPMG East Africa Limited T: +254 20 2806000 [email protected]

The information contained herein is of a general nature and is not intended to address the circumstances of any © 2008 KPMG LLP, a UK limited liability partnership, particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no is a subsidiary of KPMG Europe LLP and a member guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the firm of the KPMG network of independent member future. No one should act on such information without appropriate professional advice after a thorough examination firms affiliated with KPMG International, a Swiss of the particular situation. cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. Designed and produced by KPMG LLP (UK)’s Design Services Publication name: Kisumu: Potential opportunities for investors Publication number: 310-158 Publication date: May 2008