1. The survey found that rising costs and inflation, exploring new markets, and improving productivity were the top concerns of Kenyan businesses over the next 12 months. 2. Most respondents believed the government's economic restructuring was occurring too slowly and that initiatives have yet to impact businesses. They called for more emphasis on export promotion and initiatives to encourage innovation. 3. Respondents felt that tax and monetary incentives as well as infrastructure investments in areas like transport and energy were most needed to keep Kenya competitive internationally.

1. BUSINESS ENVIRONMENT SURVEY
KENYA

2. BUSINESS ENVIRONMENT SURVEY
2
Foreword
This report represents companies across a wide spectrum, in terms of
revenue and staff size, spans all major industries and includes local SMEs
and large privately owned companies. In the analysis we attempt to answer
three key questions:
1. Have the government’s various policy measures had the desired
impact?
2. Should more be done to reinforce these policies and the changes they
are intended to bring about?
3. What other areas should the government be focusing on?
We hope that this report and the results will serve as a voice for companies
operating in Kenya, to inform the government of the concerns and
challenges faced by industry.
We would like to thank all the CEOs that took their time and effort in
completing the questionnaire. I hope that our report will lead to a more
business -friendly regulatory environment, and in turn greater prosperity for
Kenya and its people.
KPMG
Welcome to the KPMG Kenya 2014 Business Environment Survey Report. In this survey
we aim to take stock of the current business environment and understand the concerns of
businesses in the country. The survey was conducted in the weeks leading to the reading of
the National Budget.

3. Contents
Findings and Insights
1. Rising costs and inflation, exploring new markets and manpower resource
constraints and improving productivity are the main concerns of businesses in
Kenya:
2. Policy-driven structural changes to Kenya’s economy are coming too slow; the
government initiatives are yet to have an impact on business:
3. Tax and other monetary incentives and infrastructure are key investments,
which will keep Kenya competitive:
4. The government should introduce initiatives aimed at export promotion, in
order to help companies capture global market opportunities:
5. By enhancing productivity to increase job creation and household
incomes, the effects of the increasing income gap will be mitigated
6. The tax measures introduced in the previous budget have greatly
increased the cost of production

4. BUSINESS ENVIRONMENT SURVEY
4
Findings and Insights
Rising costs and inflation, exploring new markets and manpower resource
constraints and improving productivity are the main concerns of businesses
in Kenya:
The high cost of living has not
spared the business community
who cited rising costs and inflation
as their immediate concern over
the next 12 months. In the recent
past, the cost of electricity has
shot up and there is a likelihood
of the cost increasing further
following the failure of the long
rains. This is likely to increase the
country’s dependence on expensive
thermal energy sources for power
generation.
The other issue contributing to the
high costs is the deplorable state
of the roads which contributes
significantly to the cost of
production. The Government has
not made the situation any better
with the changes to the VAT Act
and the introduction of the Railway
Development Levy which have all
increased contributed to the cost of
production.
The government is already
addressing some of these issues
through investment in energy,
specifically geothermal energy
sources and the construction of the
standard gauge railway.
Many companies are faced with
reduced demand as a result of
depressed economic activity and
one of the pressing needs for
business is getting new markets
for their products. On this the
Government has to do more to help
businesses access regional and
international markets.
Improving productivity is another
major concern with business
leaders expressing concerns on
the availability of appropriate skills
in the market. In the recent past,
universities have acquired mid-
level colleges resulting in a skills
gap especially for blue collar jobs.
There is an urgent need for the
national and county governments
to strategically invest in Technical
and Vocational Educational Training
(TVET) institutions to bridge this
gap.
Other key concerns for business
leaders include access to affordable
funding, investments in technology
and adapting to the changing global
economic environment.
50% of respondents cited rising costs and inflation as their most urgent concern for the
next 12 months. 19 % said exploring new markets and improving productivity was their key
concern. Manpower resource constraints and improving productivity was the number three
concern with 13% of respondents sounding the warning bells for lower productivity.
KPMG Comments
1.

5. BUSINESS ENVIRONMENT SURVEY
5
Policy-driven structural changes to Kenya’s economy are coming too slow;
the government initiatives are yet to have an impact on business:
An overwhelming number of the
business leaders are concerned
with the slow pace of restructuring
in government operations.
While this can be attributed to
the disruptions associated with
the devolution of significant
government operations to the
counties, the changes are too
slow, are being implemented
haphazardly and generally do not
take into consideration the needs of
business.
Business is key for economic
growth and there is need for the
national and county governments
to dialogue with leaders of industry
on key concerns. The government
has shown an ability to rise to the
occasion especially for the tourism
sector which has faced grave
challenges in the wake of terrorist
attacks and travel advisories. It was
heartening to witness the swift
government reaction to support the
industry and business leaders hope
to see the government doing more
for other sectors of the economy.
It is important for government to
maintain continuous interaction
with business to ensure that
emerging threats are identified and
addressed before they occur and
cripple businesses. In the aftermath
of the negative media attention that
the country continues to receive,
business leaders have called for
increased Government investment
in branding activities to influence
the country’s perception abroad.
71% of respondents said the pace of restructuring was too slow.The government initiatives
are yet to have an impact on business.
Specifically, respondents indicated the government should place more emphasis on value-
creation activities such as country branding and innovation (4%).
KPMG Comments
2.

6. BUSINESS ENVIRONMENT SURVEY
6
Tax and other monetary incentives and infrastructure are key investments,
which will keep Kenya competitive:
Like other countries in the
region, Kenya depends heavily on
agriculture and tourism for foreign
exchange and employment. Any
issue that affects any of these
sectors has an adverse impact
on the country’s economic
development. This year, proceeds
from tea, which is Kenya’s main
cash crop, have dropped with
payments to farmers expected to
be the lowest in six years. This will
have a significant impact across
many sectors especially when
combined with the deteriorating
state of the tourism sector. The
reduction in foreign exchange
earnings will have an impact on
the value of the Kenya shilling
which has already experienced
a significant fall in value and
continues to come under severe
pressure.
In the wake of these challenges
facing the economy, business
leaders have asked for government
interventions with key areas being
the provision of tax and monetary
incentives to spur growth,
investments in infrastructure
specifically transport and energy
and reduction in government
bureaucracy.
In the World Bank’s annual ease of
doing business survey 2014, Kenya
features at a lowly position 129
compared to Rwanda which ranks
at number 34. While Rwanda’s
ranking improved by 22 positions,
Kenya dropped 7 positions yet
the two countries are competing
for the same investors. Key areas
where Kenya is performing poorly
include access to energy, ease of
paying taxes, registering property,
and backlogs in the judiciary which
make it difficult to enforce contracts
and support commerce.
Other key areas that require
government intervention include
investing in the development of
local enterprises and increased
social spending especially on
youth to reduce social instabilities
associated with high unemployment
rates.
Business leaders await with
bated breath the initiatives that
the Government will introduce
in this year’s budget. Their hope
is that the Government will put
in place measures to simplify
business regulations, encourage
entrepreneurship, enhance
innovation and digitization of
systems and processes, focus on
free trade agreements and double
tax treaties and encourage foreign
direct investment.
27% of respondents said simplifying and making tax and other monetary incentives more
relevant would give Kenya a competitive edge. More than a quarter of the respondents
also felt investing in infrastructure in areas such as transport and energy would be the more
probable choice.
KPMG Comments
3.

7. BUSINESS ENVIRONMENT SURVEY
7
The government should introduce initiatives aimed at export promotion, in
order to help companies capture global market opportunities:
With a population of 43million
people many of whom lie below
the poverty line, Kenya does
not have adequate market for
spur investments which are
necessary for economic growth
and development. It is therefore
necessary for businesses to tap into
regional and global markets if they
are to grow beyond their current
size.
This issue is especially poignant
at this time when Kenya under
the auspices of the East African
Community is negotiating an
Economic Partnership Agreement
(EPA) with the European Union. In
view of the principles of reciprocity
that are likely to be included in the
agreement, there is a likelihood
that the EPA will provide developed
countries with easy access to
local markets crippling efforts
of local businesses to venture
into manufacturing especially in
agricultural value addition and
emerging sectors such as energy
and natural resource exploitation.
It is important to business for the
government to negotiate the deals
in a way that will allow them access
to developed markets without
jeopardizing local businesses’
ability to compete for economic
opportunities in Kenya.
Key areas that business leaders
would like the government to
address include facilitating market
access, provide more funding
options, increasing the talent pool
by increasing tertiary/technical
institutions and investing in
innovation.
29% of respondents thought initiatives aimed at export promotions would open more doors
for companies in terms of global market opportunities. 25% thought the government should
pay more attention to facilitation of market access.
KPMG Comments
4.

8. BUSINESS ENVIRONMENT SURVEY
8
By enhancing productivity to increase job creation and household incomes,
the effects of the increasing income gap will be mitigated
Kenya has one of the world’s
highest income inequality ratios
which contributes to the social
disharmony that the country is
currently facing. Business leaders
perceive inequality as one of the
main threats to economic growth
and development and this is a
priority issue that the government
should address urgently.
Some of the measures that the
business leaders have proposed
to address this issue include
enhancing productivity through
appropriate training to equip the
people with skills to easily get
employment or start their own
businesses, providing affordable
healthcare to low income earners
and increasing funding for
education.
The government has already
instituted measures to address this
issues including the introduction
of free maternal healthcare, free
primary education (the president
has promised free secondary
education in the near future),
enhanced youth and women funds,
tax exemptions on income for
disabled persons and increased
opportunities for the youth and
women to participate in government
tenders.
While the above measures are
welcome, there is need for
government to evaluate their
effectiveness by addressing
emerging issues such as
deteriorating educational standards
as a result of inadequate facilities to
cater for the increased enrolment,
ensuring that tenders allocated
to the youth actually benefit the
intended target group, and putting
in place measures to ensure that
funds set aside for youth and
women programs are invested in
sustainable projects.
The social investments required to
bridge the income gaps will require
significant investment especially
at this time when government
revenues are stretched. Business
leaders recommend that the
government consider non-tax
sources of funding such as sale
of national assets, raising income
taxes on top earners and increasing/
introducing wealth taxes such
property taxes/ capital gains tax.
31% of the respondents felt that enhancing productivity, which in turn increases job creation
and household incomes, would be the best form of mitigating the increasing income gap.
26% felt that provision of more affordable healthcare for the low income earners would be a
better option.
KPMG Comments
5.

9. BUSINESS ENVIRONMENT SURVEY
9
The tax measures introduced in the previous budget have greatly increased
the cost of production
Recent Government budgets have
all been geared towards addressing
the twin issues of economic
transformation and reducing
economic inequalities. As a result,
the Government has had to be
bold in its expenditure programs
as exhibited in the burgeoning
budget estimates with the 2014/15
budget estimated at KShs 1.7trillion.
Business and ordinary Kenyans
have borne the brunt of the
increased government appetite for
tax revenues.
An overwhelming number of
business leaders attributed
increases in their costs of
production to tax measures
introduced in recent years such
as the introduction of the Railway
Development Levy, excise duty on
financial services, overhaul of the
Value Added Tax regime, increase in
pension contributions and stringent
regulatory measures introduced in
the transport industry. Any further
increase in taxation will be the
proverbial ‘straw that breaks the
camel’s back’.
74% of the respondents said the tax measures introduced in the recent budget have mostly
increased their production cost. 14% felt the measures had no impact in their businesses.
KPMG Comments
6.

10. BUSINESS ENVIRONMENT SURVEY
10
What is your most urgent business concern for the next 12
months that you expect to tackle?
What is your view of the pace of restructuring of the Kenyan
economy?
1.
2.
Option Percentage
Rising costs and inflation 49%
Manpower resource constraints and improving productivity 13%
Managing the impact of the global economic environment 7%
Exploring new markets 20%
Investing in technology 2%
Access to finance 9%
Option Percentage
Too fast, the resulting tight labour market is increasing manpower costs
faster than productivity gains
7%
Too fast, many businesses are still unsure of how to restructure and need
more help
2%
The government should place more emphasis on value-creation activities
such as country branding and innovation
9%
Just right 9%
Too slow, government initiatives yet to have an impact on business 71%
Others 2%

11. BUSINESS ENVIRONMENT SURVEY
11
Where should Kenya invest to keep the country competitive?
(Please select 3 options)
What business initiatives do you hope to see in Budget 2014?
(Please select up to 4 options)
2.
3.
Option Percentage
Tax and other monetary incentives, to simplify and make it more relevant 27%
Simplify existing government regulations and policies 22%
Investing in developing local enterprises 17%
Infrastructure, in areas such as transport and energy 27%
Social spending, to maintain a stable social environment 6%
Option Percentage
Labour policies calibrated to the unique needs and skills of different
industries
11%
Continued focus on productivity 11%
Simplify business regulations 20%
More initiatives to encourage entrepreneurship 19%
More push for innovation and digitalization of systems and processes 14%
More measures to encourage foreign direct investments (FDIs) 13%
More focus on Free Trade Agreements (FTAs) and double tax treaties 13%
Others 0%

12. BUSINESS ENVIRONMENT SURVEY
12
Which area should the Government support to help
companies capture more global market opportunities? (Please
select upto 3 options)
How should the effects of increasing income gap be mitigated?
(Please select up to 3 options)
5.
6.
Option Percentage
Facilitating market access 25%
Providing more options and access to funding 15%
Providing greater access to talent by increasing tertiary and technical
institutions
10%
Making bolder moves to encourage innovation 18%
Introduce initiatives aimed at export promotion 29%
Others 4%
Option Percentage
More affordable healthcare for the low income 26%
More government funding for education 19%
Enhance productivity to increase job creation and household incomes 31%
Implement more creative measures to tap into under-tapped labour sources 16%
Enhance social welfare and direct subsidy to vulnerable groups 78%
Encourage more philanthropy 0%
Others 1%

13. BUSINESS ENVIRONMENT SURVEY
13
How should increased spending in the social sector (such as
education and healthcare) be funded?
How have the tax measures introduced in recent Budgets
affected your business most?
7.
8.
Option Percentage
More funding from non-tax sources such as sale of national assets 44%
No change required - current measures are adequate 28%
Raise income tax rates on top earners 12%
Increase wealth taxes such as property taxes/capital gains tax 14%
Increase VAT rate 0.%
Raise corporate tax rates 2%
Option Percentage
No impact 14%
Increased cost of production 74%
Reduced cost of compliance through introduction of iTax 12%
Increased business revenue 0%
Increased digitalization of systems 0%

14. BUSINESS ENVIRONMENT SURVEY
14
Option Rank
Corruption 1
Terrorism 2
Security and rule of law 3
Inequality 4
Infrastructure 5
Energy 6
Political disruption 7
Public Sector performance 8
Youth unemployment 9
Rank what you consider to be the top national challenges.
Rank what you would recommend as the top strategies to
address these.
9.
10.
Option Rank
Integrity and enlightened leadership 1
Investment in systems and processes 2
Public participation and voice 3
Merit based recruitment and deployment 4
Attracting Private Sector Investments 5
Lock down and screening 6
Enterprise development 7
Corporate Social Investments 8

15. BUSINESS ENVIRONMENT SURVEY
15
Conclusion
Business leaders perceive social malaise as the key challenge that continue to cripple
Kenya’s attempts to attain theVision 2030 goal of transforming the country into an
industrialised middle income country with a high quality of life for its citizens in a clean and
secure environment.
The key challenges that Kenya
faces include corruption, terrorism,
insecurity and breakdown of law
and order, inequality, political
upheavals, inefficiencies in public
sector service delivery and poor
infrastructure networks.
While the government has already
taken measures to address some
of these issues through increased
recruitment of police officers and
investment in police equipment
and security installations, allocation
of additional funding for youth and
women projects, and introduction
of Huduma centres to reduce
government bureaucracy, business
leaders feel that the government
needs to do more.
Some of the proposals include
integrity and enlightened
leadership, investment in
systems and processes especially
resolving impasses in government
procurement, enhancing public
participation in key decisions, merit
based recruitment and deployment.
Introduction of measures in this
year’s budget that aim to address
these issues will go some way in
enhancing confidence in business
leaders of the Government’s ability
to rise to the immense challenges
the country is facing.

16. Contact Us
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. No one should act on such information without appropriate professional
advice after a thorough examination of the particular situation. KPMG and the KPMG logo are registered trademarks of KPMG International
Cooperative (“KPMG International”), a Swiss entity.
© 2014 KPMG Kenya, a registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG
International Cooperative (KPMG International), a Swiss entity.
KPMG Kenya
8th floor ABC Towers
P O Box 40612, 00100
Nairobi Kenya
Richard Ndung’u
Tax Partner
t: 0709 576 220
e: rndungu@kpmg.co.ke
Clive Akora
Senior Tax Manager
t: 0709 576 245
e: cakora@kpmg.co.ke
+254 (20) 2806000
info@kpmg.co.ke
www.kpmg.com/eastafrica