Introduction
The Kenyan government recently gazetted the National ICT Policy Guidelines, 2020, which require licensed ICT companies to have 30% local shareholding. However, a grace period of three years was given for companies to comply. Kenya aims to become a globally competitive knowledge-based economy by 2030, and one strategy it employs is to develop the ICT sector to attract investments and create job opportunities.
More recently, in order to make Kenya an attractive investment destination and digital hub, the government proposed removing the requirement for foreign ICT companies to have 30% local shareholding. Public consultations are being conducted to ensure transparency and adherence to the constitution. The Lawyers Hub organised a Twitter Spaces event titled "Rethinking Local Shareholding Requirements for Kenya's Digital Economy" to discuss and gather further input on this.
Historical Background
The Government of Kenya has recognized the importance of local investment in the ICT sector and has implemented policy changes to encourage Kenyan participation and inclusion. This began with guidelines that reserved a portion of equity for locals in telecommunications companies at an initial 40%, with the percentage gradually decreasing over time. The National ICT Policy of 2006 reduced the equity threshold to 20% to attract foreign investment while still promoting local participation. This balanced approach allowed investors to retain up to 70% of their equity, demonstrating the government's commitment to fostering both local and foreign investments in the ICT sector.
The Government of Kenya has made policy changes over the years to refine local equity participation in the ICT sector. In 2008, the local equity requirement was reduced to 20% with a three-year moratorium to allow foreign investors to establish their businesses. In 2019, the minimum local shareholding requirement was increased to 30% for non-Kenyan companies. The 2020 ICT Policy Guidelines reinstated the 30% local ownership requirement for all companies offering ICT services. These changes aimed to promote stable equity partnerships and align with Kenya's constitutional landscape and Vision 2030.
In a surprising development in 2023, the Kenyan government now proposes the elimination of the 30% local ownership requirement for foreign companies providing ICT services in the country. This marks a significant shift in policy, with the President highlighting the need to recalibrate the regulatory landscape. The President argues that the current requirement is unsustainable, especially for large multinational ICT corporations. The proposal aims to enhance foreign investment and generate more job opportunities for local citizens.
Impact of the Proposed Changes
During the X-space discussions, it was acknowledged that the decision to remove the 30% equity ownership requirement for foreign companies in Kenya's ICT sector will have significant implications. This change is expected to attract more foreign direct investment (FDI) by signalling reduced barriers to entry and creating a favourable environment for foreign investors. The influx of capital, technology, and expertise from foreign companies is anticipated to drive innovation, create jobs, and stimulate economic growth in Kenya's digital economy.
The elimination of the equity ownership requirement aligns with the government's objective of increasing the ICT sector's contribution to the national economy. It is expected to accelerate the sector's growth and position Kenya as a regional technology hub. The influx of foreign investment will foster the development of advanced technologies and nurture a thriving startup ecosystem. Furthermore, removing equity ownership requirements encourages partnerships between foreign and local entities, facilitating the transfer of advanced technologies, processes, and industry insights. This will enhance the local ICT ecosystem and strengthen Kenya's technological capabilities. The policy change also demonstrates Kenya's openness to international businesses, making it more appealing for foreign investment and enhancing its global competitiveness.
However, it is important to establish appropriate regulatory frameworks to safeguard local interests and prevent the displacement of local firms by large multinational corporations. While the elimination of equity requirements facilitates foreign investment and drives economic growth, careful consideration must be given to potential challenges and protecting the local economy.
In summary, the general inclination of the discussion was that the decision to remove the equity ownership requirement for foreign companies in Kenya's ICT sector is expected to attract more foreign investment, drive innovation and job creation, and position Kenya as a regional technology hub. It is expected that it will enhance the local ICT ecosystem, strengthen technological capabilities, and increase Kenya's global competitiveness. However, participants were mindful to point out the concerns around ensuring proper regulations are in place to protect local interests and prevent the displacement of local firms.
Comparative Analysis
In Rwanda, foreign investment and ownership in the ICT sector are allowed without any restrictions on equity or ownership. However, companies are required to have a resident director, who doesn't necessarily have to be a Rwandan citizen but must be a legal resident of Rwanda.
In Nigeria, foreign nationals have the freedom to own up to 100% of a business or invest in any business that is not on the negative list. Communications services are not included in the negative list, which means that non-Nigerians can invest in the sector without any ownership restrictions.
The situation is quite different in Malawi which has the Malawi's Communications Act. The Act stipulates that electronic communications licensees must maintain a local shareholding of at least 20%. Additionally, foreign ownership in businesses providing content services is capped at 20%, ensuring a certain level of local participation and control in the sector.
This position is comparable to South Africa which has the Electronic Communications Act, requiring individual licence applicants to have a minimum of 30% of their shares held by historically disadvantaged groups (HDP), including black people and other historically marginalised groups. This regulation aims to promote economic empowerment and inclusion.
Under Uganda's new Telecommunications Licensing Framework, licensed telecommunications companies are obligated to list at least 20% of their shares on the Uganda Stock Exchange. Existing licence holders have a two-year period to comply, while new players' listing terms will be determined on a case-by-case basis. This requirement aims to promote transparency and public participation in the ownership of ICT companies in Uganda. Tanzania’s regulations on the other hand dictate that licensed companies in the ICT sector must issue a minimum percentage of their shares to Tanzanians. Network and application services licensees are required to issue at least 25% of their shares to Tanzanians, while content service licensees must issue at least 51% of their shares to Tanzanians.
Mauritius generally does not impose ownership restrictions on companies. However, companies holding radio or television broadcasting licences are limited to having up to 20% of shares held by foreigners.
Recommendations and Proposals
Following the discussions, the Lawyers Hub makes the following recommendations for consideration by the ICT Ministry:
Streamlining Regulatory Processes
Simplifying regulatory processes for foreign ICT companies will not only attract investments but also facilitate the transfer of knowledge, technology, and best practices. This exchange of expertise will contribute to the development of local talent, enhance the skills of the workforce, and foster innovation in the domestic ICT sector. By encouraging collaboration between local and foreign companies, Kenya can leverage international expertise to drive technological advancements and accelerate its digital transformation.
While streamlining regulatory processes, it is imperative to maintain a balance between ease of doing business and ensuring regulatory compliance. The government should continue to uphold consumer protection measures and enforce relevant regulations to safeguard the interests of both consumers and businesses. This includes addressing issues such as data privacy, cybersecurity, and fair competition to build trust in the digital ecosystem and foster sustainable growth in the ICT sector.
Additionally, to foster broader inclusion, the government should devise a Policy Strategy that not only encompasses locals but also addresses the needs of marginalised groups, such as women and marginalised communities.
Incentives for Knowledge Transfer
The government should implement targeted incentives and programs to encourage foreign ICT companies to actively transfer knowledge and skills to local employees and businesses. This could include mentorship programs, training initiatives, and collaboration opportunities to ensure that Kenyan talent is equipped with the necessary skills to thrive in the digital economy.
The government should also actively engage in public-private partnerships to support knowledge transfer in the ICT sector. By collaborating with foreign ICT companies, industry associations, and educational institutions, the government can leverage their expertise and resources to develop comprehensive programs that promote knowledge transfer and skill development.
Supplementary tax incentives should also be considered as further tools to encourage compliance and engagement with local content regulations.
Flexibility in Ownership Structures
Instead of mandating a specific local shareholding percentage, Kenya should consider allowing ICT companies to have flexible ownership structures that encourage partnerships between local and foreign investors. This will enable the sharing of expertise, technologies, and capital, creating a collaborative environment that drives innovation and growth. Local companies can benefit from the global experience and resources of foreign investors, while foreign companies can tap into the local market knowledge and networks of their local partners.
By adopting flexible ownership structures, Kenya shall attract more foreign investment in the ICT sector. This approach signals the government's commitment to creating an investor-friendly environment and encourages foreign companies to consider Kenya as a preferred destination for their investments. The availability of flexible ownership structures will remove barriers to entry and provide greater flexibility for foreign investors to establish and operate their businesses in the country.
Strengthening Local Capacity
The government should focus on developing local ICT capacity by investing in education and training programs that equip Kenyan youth with the skills needed to excel in the sector. Investment in education and training programs allows the country to develop a pool of skilled professionals who can contribute to the growth and competitiveness of the ICT industry.
Local content requirements such as mandatory local sourcing plans, reserving unskilled employment opportunities for locals, enforcing mandatory training for locals, and partnering with universities to offer training are imperative as efforts focused on local capacity building which will not only create employment opportunities for Kenyan youth but also position the country as a hub for innovation and technology-driven solutions.
