Category Archives: Kenya taxation

Visiting the Home of Tusker Beer and KBL

Last Friday, the management of Kenya Breweries (KBL) offered a media tour of their plant at Ruaraka, Nairobi. One of the oldest companies in Kenya, KBL is now part of East African Breweries (EABL) that is controlled by Diageo. The tour was a chance to walk see their production lines for different products like Tusker beers, Senator, and spirits like Kenya Cane. It was also a chance to meet and hear the top management of including Managing Director of Kenya Breweries, Jane Karuku, and heads of some divisions including bottled beer (Janice Kemoli), Spirits (Annjoy Muhoro) Sustainability (Jean Kiarie), and Innovations (Fred Otieno)

EABL has 2017 net sales of Kshs 70 billion (~$700 million) and Kshs 8.5 billion ($85 million) profit. Their financial year ended just before the election season in Kenya which saw nationwide general elections held on August 8 and a surprise repeat Presidential one on October 26. and the KBL Managing Director said that the prolonged elections period had resulted in a slow first half of their new year, including the Christmas season which is usually a peak. EABL gets 72% of its revenue from Kenya, 17% from Uganda, and 11% from Tanzania, and they also serve South Sudan, Rwanda, and Burundi.

Beer is still the cornerstone of the company, accounting for 80% of their revenue. This is led by Tusker, then Guinness (second by volume). Premium and lite beers are growing around the world and KBL has Tusker malt and Tusker Lite. There is also Senator Lager that was introduced in Kenya to combat the illicit alcohol trade. Senator is distributed by kegs and sold by pitcher or glass, And as part of a Kshs 15 billion Senator investments, a  new Senator line was commissioned in Kisumu, and MD Karuku said that the old plant has a great location to serve Uganda, Tanzania, South Sudan, is next to Lake Victoria, and it is modular in design which will allow more product lines to be added on in future. She said beer would continue to be the main part of their future as beer keeps up with GDP (growing at about 5% a year) and grows as young people reach the legal drinking age.

They also have spirits which contribute about 20% of the revenue of the company, and they control half the spirits market in Kenya. They have three segments of spirits; Reserve (luxury) in which they have  Singleton whiskey, Ciroc, and Tanqueray gin. Then they have a Premium segment that includes Johnnie Walker (Kenya was the fastest growing Scotch market for Diageo in 2017) & liquours (Baileys which is marketed for ladies). Finally, they have a Mainstream segment, which is 80% of their spirits business in Kenya. Their main products here are Kenya Cane, a forty-year-old sugar cane blend, and also Chrome vodka. The company invested Kshs 900 million in a line that will double their spirits production capability, and they aim to grow spirits contribution from 20% to 30% of revenue. They also invested in tamper-proof plastic seals to combat a wave of counterfeiting of popular alcohol brand products in Kenya and 50% of the alcohol purchased is illicit.

In life, tastes and consumer preferences are constantly shifting, and the company has an innovation division that tries to anticipate what consumers will like in the future.  New products rolled out include a citrus fusion variant of Kenya Cane, non-alcoholic Álvaro (which is being revamped), a craft premium beer (Hop House 13), Tusker Cider, Tusker draft beer )that is predominantly at all-inclusive hotels at the Kenya coast), and Zinga a new beer brand being piloted that is priced between Senator and their other bottled beer. With the new citrus fusion introduction, sales of Kenya Cane grew 46% last year, and overall innovation contributed 18% to turnover in Kenya and 33% in Tanzania.

Last year EABL contributed Kshs 52 billion in taxes (it was the third largest taxpayer after Safaricom and the Teachers Service Commission) equivalent to  4% of government revenue.   Besides with the Senator beer, KBL also works with the government to explain that importance of a stable tax regime and business environment, and have pushed a caution that alcohol is not price-sensitive to the sin-taxes that seem to be a favourite add-on in the national budget every year. Already, while a Tusker bottler has a recommended retail price of Kshs 140, Kshs 84 shillings will go out as tax, Kshs 23 goes to the distribution chain and the company gets Kshs 33.

For the long-term, EABL which contributes 0.8% to Kenya’s GDP plans to source 100% of their inputs locally by 2020 (up from the current 80%). They work with 31,000 farmers through their East Africa Maltings and pay Barley farmers Kshs 1.7 billion and sorghum ones Kshs 660 million every year, with the new Senator line expected to see 15,000 more farmers contracted, and 5,000 new Senator outlets. The company has 102 distributors (57 main ones, 45 senator ones) and 22,0000 main outlets and 19,000 senator ones and they handle distribution to get products to customers at the lowest price possible.  The outlets have benefitted through getting access to management systems and electronic tax receipt (ETR) systems, and the next step is to harness all the data they have collected to enable better decision-making. Other initiatives of KBL include ‘Utado’ (which encourages responsible enjoyment of their products by advising consumers to take taxis, drink water, eat food) and Heshima (through which the recruited illicit alcohol sellers and trained and turned them into entrepreneurs and sellers of a legal affordable product)

A Tusker Beer remains part of the urban inflation index for tracking changes in the cost of living in Nairobi over time.

Kenya Tax Amnesty 2018

During a funding session for entrepreneurs last year it was revealed that Kenya has an amnesty for people to declare offshore wealth and repatriate this and that the country expected $3 billion in extra collections from this initiative in 2018. The Kenya government currently collects tax revenue of about $14 billion a year and there was a question on if the additional funding generated could become a source of competition for local private equity funds.

Tax amnesty

The actual notice was first published in July 2017 by the Commissioner of Domestic Taxes at the Kenya Revenue Authority (KRA) and read “The amnesty under Section 27B of the tax procedures act is meant to provide a one-off opportunity for Kenyan residents to declare assets and income and voluntarily repatriate the foreign-held assets to Kenya and invest in development of the country”

Applications, filings, and returns are to be made on the online KRA “itax” system before June 30, 2018. If funds are not brought in by that date, there is a five-year window (up to June 2023) to bring the funds back, but with an additional 10% of the amount repatriated as a penalty.

Married couples may file for the amnesty jointly, while assets and income that are in the name of minors can be declared by their parents or guardians. But anyone who had been assessed by KRA or was under investigation or audit over their income and assets prior to the amnesty is not eligible.

Kenya Eurobond 2018 A to Z (Part II)

Excerpts from reading the prospectus for Kenya’s 2018 Eurobond issues totaling $2 billion (~Kshs 202 billion). 

Advisors:  joint lead managers were Citigroup Global Markets, J.P. Morgan Securities, Standard Bank of South Africa and Standard Chartered Bank. The fiscal/paying agent was Citibank (London), Registrar was Citigroup Global Markets (Deutschland), legal advisors were White & Case LLP and Allen & Overy LLP (English and US law), and Coulson Harney LLP and Kaplan & Stratton Advocates (Kenya Law) and the listing agent was Arthur Cox (Dublin).

Citigroup, J.P. Morgan Securities, Standard Bank of South Africa and Standard Chartered Bank each committed to subscribe for $250 million of the 2028 and $250 million of the 2048 bond issues

Codes: for the 2028 Notes: 491798 AG9 / US491798AG90 / 178426192 XS1781710543 / 178171054 and for the 2048 Notes: 491798 AH7 / US491798AH73 / 178426478 XS1781710626 / 178171062

Debt Rescheduling: Kenya has approached the Paris Club three times to seek debt relief and rescheduling; in January 1994 for $535 million, in November 2000 over $301 million and in January 2004 over $353 million. Also to the London Club 1998 over $70 million and in 2003 over $23 million.

Default (defined as): Failure to pay 15 days after due date, or issuer (Kenya government) ceases to be a member of the IMF.

Denomination: The Notes are issued in registered form in denominations of US$200,000 and integral multiples of US$1,000.

Disclosure: The Issuer will publish all notices and other matters required to be published (regarding Condition 14, 10, 13: on the website of the National Treasury.

Finance Management: Kenya’s law provides that: over the medium term, a minimum of 30% of the national budget shall be allocated to development expenditure and the national government’s expenditure on wages and benefits for its public officers must not exceed 35%  per cent. of total national government revenue and over the medium term, the national government’s borrowings should be used only for the purpose of financing development expenditure and not for recurrent expenditure. .

IMF: The second and third reviews of the IMF programme due in June 2017 and December 2017 could not be completed on time due to the prolonged election period. Accordingly, no funds under the SBA-SCF 2 facility are available to Kenya until it has reached certain targets to the satisfaction of the IMF, which will be assessed at the next review. But, even if the IMF agrees to make this or another programme available upon conclusion of their review, the government intends to continue to treat the arrangements as precautionary and does not intend to draw on the facility unless exogenous shocks lead to an actual balance of payments need.

Income tax (enhancement of): A review of the Income Tax Act is ongoing and is targeted to be completed by mid-2018. In an effort to boost domestic revenue mobilisation, the government is undertaking reforms to bolster revenue yields  including roll out of the integrated customs management system, implementation of the regional electronic cargo tracking (RECTS) to tackle transit diversion; data matching and use of third-party data to enhance compliance, integration of iTax with IFMIS to ensure timely collection of withholding VAT and other withholding taxes; expansion of tax base by targeting the informal sector, betting, lotteries and gaming; pursuit non-filers and increased focus on taxation of international transactions and transfer pricing and enhance investigations and intelligence capacity to support revenue collection.

Informal economy: A significant portion of the Kenyan economy is not recorded and is only partially taxed, resulting in a lack of revenue for the government, ineffective regulation, unreliability of statistical information (including the understatement of GDP and the contribution to GDP of various sectors) and inability to monitor or otherwise regulate a large portion of the economy.

Interest Rates: The yield of the 2028 Notes is 7.25% and the yield of the 2048 Notes is 8.25% in each case on an annual basis. The yields were calculated at the issue date.

Listing: The Eurobond Notes will not be issued, offered or sold in Kenya, and the notes may not be offered or sold in the United States. Applications have been made to the Irish Stock Exchange at a cost of 5,500 euros and the London Stock Exchange for GBP 4,200.

Litigation:  The Issuer has appointed the High Commissioner of the Republic of Kenya in London, presently located at 45 Portland Place, London W1B 1AS as its agent for service of process in relation to any proceedings (“Proceedings”) before the English courts permitted by

Indebtedness:  Total national government debt stood at US$41.2 billion as at 30 June 2017, representing a 17% increase from June 2016. The government is permitted under the terms of the PFMA to incur debt within the limits set by Parliament, currently set at 50% of GDP in net present value terms. Following the issue of the (Eurobond) Notes, the total net present value of debt as a percentage of GDP is expected to nearly reach the 50% limit. Although the government may be restricted from incurring further public debt under such circumstances, the Government will be seeking to refinance or repay near-term maturities, and therefore expects to maintain the ratios within the set limits.

Total multilateral debt increased by 15.8% to stand at US $8.0 billion at 30 June 2016 while total bilateral debt increased to US $5.3 billion at 30 June 2016, mainly driven by a rise in stock of debt from the People’s Republic of China, which increased by 21.2%. Also, as at 30 June 2017, the national government guaranteed approximately KES135.1 billion of the indebtedness of the non-financial public sector include Kshs 77 billion to Kenya Airways last year.

Purpose Kenya expects the net proceeds of the issue of the Eurobond Notes, before expenses, to amount to approximately US$1,999,600,000 which it intends to use for financing development expenditures and to refinance part of its obligations outstanding under certain syndicated loan agreements. According to the “Plan of Distribution”, Kenya syndicated loans of from October 2015 (debt now $646 million) and March 2017 ($1 billion)  and proceed from the new February 2018 issue will be used to pay all of the 2015 loan and part of the 2017 loan and  to “manage the maturity profile of the government’s debt.”

Repayments: (for both issues) payable semi-annually in arrears on 28 February and 28 August in each year commencing on 28 August 2018. The Eurobond Notes are not redeemable prior to maturity.

Withholding Taxes: All payments in respect of the Eurobond Notes by or on behalf of the Issuer shall be made without withholding or deduction of any present or future taxes,

See Part I about the 2014 Eurobond issue. 

1USD  = Kshs 101, 1 GBP = Kshs  139, 1 Euro = Kshs 123

Kenya Eurobond 2018

Kenya’s National Treasury has just announced a new $2 billion Eurobond which was seven times oversubscribed amid concerns about the country’s debt levels and intrigues about the availability of an IMF financing line.

The official Kenya Government statement reads: The fact that we got $14billion in investor appetite reflected the continued support the country receives. We now have a dollar yield curve stretching out to 30 years, making Kenya one of only a handful of government’s in Africa to achieve this. 

The funds are earmarked for development initiatives, liquidity management, and ambitious infrastructure programs. It goes further to add that the Eurobond issue will be listed on the London Stock Exchange and that the joint Mandated arrangers were Citi, J.P. Morgan, Standard Bank, and Standard Chartered Bank.

There was little awareness about the bond, no prospectus was publicly released, and there was no indication on which investors the Eurobond was being pitched to, but it appears that the successful issue will be dated February 28, 2018. 

The Eurobond breakdown is for a mix of two equal halves of 10 year and 30 year bonds, priced at 7.25% and 8.25% respectively.

The announcement comes after some potentially embarrassing news reports that the International Monetary Fund had cut off a line of funding, a statement which was later retracted, and others that Moody’s had downgraded Kenya’s ratings, a claim which the government also disputed.

But the ratings cut, and the mysterious IMF news (and retraction) did not appear to have an impact on the pitch to investors.

This is the second Eurobond after another set of bond issues in 2014.
$1 = Kshs 101.4

Kenya 2018 Budget Policy and the Big Four

Kenya’s National Treasury has published the 2018 budget policy statement  (BPS) – titled “The Big Four” – creating jobs, transforming lives.

It has lots of mentions of the “Big Four” agenda which President Uhuru Kenyatta unveiled in his Jamhuri Day speech (December 12, 2017) which are targets of what his government will aim to achieve in its second term. According to the BPS, the “Big Four” Plan (items are) increasing the share of manufacturing sector to GDP; ensuring all citizens enjoy food security and improved nutrition by 2022; expanding universal health coverage; and delivering at least five hundred thousand (500,000) affordable housing units.

BPS excerpts; 

  • The BPS assumes that GDP will be between 6% to 7% over the next five years, and nominal GDP will rise from Kshs 6.7 trillion ($66 billion) in 2016  to Kshs 14.3 trillion ($139 billion) in 2022.
  • The BPS assumptions are premised on improved collections and efficiencies at Kenya’s 47 developed counties to collect revenues, and for them to have and adhere to realistic budgets. Also, that there be reductions in duplication of roles, resulting in simpler government structure. Counties wages as a percent of their revenue has been 37-38% for the last three years.
  • The BPS cites a goal to double income tax from Kshs 625 billion in 2016-17 to Kshs 1.26 trillion in 2021-22 and mentions that a review of Kenya’s income tax code will be completed by June 2018 to enhance tax compliance and ensure the stability of tax revenue. 
  • The BPS notes that interest payments over the same period will rise from Kshs 271 billion to Kshs 491 billion and wages from Kshs 336 billion to Kshs 563 billion. Elsewhere it projects that wages which were 30% of gross national resource in 2016/17 will progressively reduce in subsequent years down to 23.4% in 2021/22.
  • The BPS cites public-private partnership projects that will be undertaken during the 2018-2020 period such as a second Nyali bridge, Lamu coal plant, Lamu port (3 berths),  Lamu-Garissa-Isiolo highway, airport rehabilitation car parks, conference centers, affordable housing projects, and even a Likoni crossing aerial cable car.
  • There are also 22 energy projects – a mix of geothermal, solar, wind, from which the government commits to purchase energy. These include Lamu coal ($360 million per year) and the Lake Turkana wind (€ 110 million per year).

Some risks noted in the BPS include, counties failing to collect & remit revenue, and the Kenya Deposit Insurance Corporation only covers 9.2% of bank assets (the figure should be closer to international goal of 20% to protect against systemic bank risks). Others are terrorist attacks, natural disasters, climate change, disruptions to mobile money systems, unfunded pension liabilities, and most important the sustainability of public debt.