The KENYA INSTITUTE for PUBLIC POLICY RESEARCH and ANALYSIS No. 01/2022-2023 Thinking Policy Together Towards Effective Regulation of Wholesale and Retail firms in Kenya By John Karanja Introduction The wholesale and retail firms are very significant in the government agencies similarly regulate the sector country’s development process and, as such, the sector depending on the type of business activity the firm is was identified as a contributor to the achievement of engaged in. As such, it is evident that the wholesale and the Kenya Vision 2030 through job creation. That said, retail firms are regulated by the two levels of government the growth of the wholesale and retail sector has been as illustrated in Table 1 and Table 2. declining over the years, constraining its ability to Table 1: County governments regulations for wholesale contribute to job creation as envisioned by the Kenya and retail firms Vision 2030. A key factor that influences the growth of the sector is the regulatory framework that has implications Regulations by county government Responsible on growth of wholesale and retail firms. Trade license/permits County governments In addition, wholesale and retail firms play a major role Cess (Infrastructure maintenance fees, County governments in the economy due to their linkages with other sectors inter-county fees, and any other) by providing readily available markets for products and Outdoor advertising (Motor vehicle County governments services to consumers. The country has experienced an branding) increase in wholesale and retail firms, a majority of which Distribution licenses County governments include supermarkets and hypermarkets, both local and Fair-trade practices in the county County Weights & foreign owned which continue to dominate domestic include inspection, investigation, and Measures office trade in Kenya. As a result, effective regulation of these prosecution of offenses arising from firms is critical to enhancing the sector’s contribution the infringement of the weights and to the improvement of livelihoods through job creation, measures particularly in the post-COVID-19 period, which is a Food, drugs, chemicals, and other County Public Health major concern for the government in achieving the substances that require food hygiene Office aspirations of the Kenya Vision 2030. Table 1 shows the various regulations imposed by County The Constitution of Kenya 2010 devolved the function governments and some of which might hamper the ease of regulation and development of wholesale and retail of doing business in the country, for example the inter- trade to the County governments. Specifically, the issues county fees and distribution licences which increase the of market development, trade licences, and fair-trade costs of trade facilitation from one county to another practices were entirely devolved to County governments and pose a trade barrier. Notably is that counties do not through the Fourth Schedule of the Constitution. Since rely solely on budgetary allocations from the National the devolution of the wholesale and retail regulatory government and their own-revenue raising mechanisms function to County governments, new charges such is through the County Finance Bill. Therefore, the as county fees were introduced, and charges for the County Finance Bill may introduce new charges that did existing ones were increased, thus constraining the not exist or increase the existing charges for the County growth of firms. government to meet its revenue targets for the financial Further, the National government agencies also regulate year. For example, some of the counties in their County the wholesale and retail firms where registration and Finance Bill 2020 have introduced charges such as incorporation of businesses are done by business offloading fees for various agricultural produce, charges registration service (BRS) domiciled at the Office of the on transporting construction materials, and these Attorney General. In addition, the taxation of businesses county business regulations increase the cost of doing is facilitated by the Kenya Revenue Authority (KRA) business due to the various permits and licenses that on behalf of the National government. Other national the firms require, thus constraining the growth of firms. KIPPRA Policy Brief No. 01/2022-2023 1 Table 2: National government Regulation for wholesale and retail firms Regulations by National government agencies Responsible agency Registration of business/companies BRS Taxation KRA Trade finance National Treasury, Central Bank of Kenya Self-regulation Micro and Small & Enterprise Authority Inspection and enforcement of counterfeiting and counterfeit products Anti-Counterfeit Agency Quality of products and processes Kenya Bureau of Standards (KEBS) Mergers and acquisitions Competition Authority of Kenya Retailers operate delis and bakeries Tourism Fund Retailers dispense milk Kenya Dairy Board Regulate distribution and sale of pest control products Pest Control Products Board Retailers dealing with seeds Kenya Plant Health Inspectorate Service (KEPHIS) Table 2 shows that several National government Notably, from the empirical analysis, business agencies regulate various areas of wholesale and registration regulation was found to negatively affect retail trade that have to be complied with by firms. the growth of wholesale and retail firms. That said, the These regulations are additional to those provided by business registration waivers provided by the business the County governments. The presence of both levels registration service (BRS) to encourage business of government in regulating wholesale and retail firms registration and ease of doing business in the country demonstrates that the sector is heavily regulated. While still impede the growth of wholesale and retail firms. regulations cannot be eliminated, making compliance For example, the BRS provides a waiver for single with these regulations easier and less expensive for business permit fees for the first 24 months of all new firms is critical. With multiple licenses and permits businesses registered, while the County government required, wholesale and retail firms struggle to grow, trade regulations require that every wholesale and retail considering the cost, time, and processes that go along firm obtain a trading licence or permit from the County with complying with multiple regulations. government to conduct business irrespective of their registration status. Consequently, the registered firm will Business Registration Regulation still be required to obtain a trading permit or licence from the County government irrespective of the 24 months Business registration of wholesale and retail firms is waiver provided by the BRS, a National government regulated under the Companies Act, No. 17 of 2015, agency, under the State Law Office. Therefore, business Partnership Act, 2012, and Business Registration registration regulations that are implemented by the Service Act, 2015. Registration of businesses is very BRS tend not to support growth of wholesale and retail fundamental as it forms the basis for conducting firms as the waivers of business permits for 24 months formal business in the country. The analytical review of are not fully implemented by County governments on all the business registration Acts shows that for a firm to newly registered firms. operate as a company or in partnership form, under the Consequently, every firm has to obtain a county Companies Act 2015, the Partnerships Act 2012, they government business permit/licence, which is issued to have to be registered before commencing their trade all firms irrespective of the business registration status activities. upon fulling specific conditions laid out by the County However, firms that operate under the Business Names governments. Therefore, the wholesale and retail firms Act 2015 are not required to be registered before they takes advantage of this county business permits as begin operations. The firm needs to have completed required by the county trade regulations and engage in the registration within twenty-eight days from the date business without registering their firms with the Business of the commencement of the business. We noted major Registration Service. Thus, implementation of waivers reforms in the registration of business, which include provided by the National government for ease of doing a one easy step registration process where the name business in the country on business registration seems reservation and business registration processes have to be less effective and with little coordination by both been merged into one easy step with benefits such as levels of government as they regulate firms in the sector. National Industrial Training Authority (NITA) registration As a result of the inadequate coordination efforts in for companies with up to 100 employees being waived waivers implementation from the National and County for the first 12 months. Additionally, for ease of doing government to support business registration regulation, business, single business permits have been waived firms’ entry barriers are created, resulting in high start-up for the first 24 months of all new businesses registered. costs and this dissuades more productive businesses Further, on the E-Citizen online platform, the business from entering the formal market as it increases the registration process should take 3-5 days when all entry costs, which constrain the growth of firms. When requirements are complied with to issue a business business entry costs are high, businesses shy off from registration certificate. formalization, and it is the reason why a majority of firms 2 KIPPRA Policy Brief No. 01/2022-2023 in developing countries choose to start their business Self-Regulation operations as informal until they perform well and grow. The concept of self-regulation has been adopted in the Licensing Regulations wholesale and retail trade sector and is supported by the Ministry of Industrialization, Trade, and Enterprise The County governments issue trading licenses and Development. The government through the Ministry permits as guided by the County Government Act of responsible for trade expects the sector to develop 2012, and the various county’s trade regulations. To regulatory rules that are self-specified, conduct self- effectively facilitate licensing regulation of the sector, monitoring, and have rules that are self-enforced. County governments have developed the County As such, self-regulation in wholesale and retail trade Trade Licensing Act, which guides the regulation of becomes a collaborative effort of the players in the licensing of businesses in counties. As such, the county sector. Currently, the sector business membership and government’s trade regulatory framework requires association are regulated under the Micro and Small every firm to obtain a trading licence or permits before Enterprise Act of 2012, since the majority of firms in commencing its business activities. For instance, it MSMEs, equivalent to 57 per cent are in the wholesale is expected that firms involved in distributing goods and retail trade sector. or services to wholesalers and retailers will obtain a distribution licence from the County governments, The Competition Authority of Kenya (CAK) gazetted the among other licenses. According to the Organization Retail Trade Code of Practice intending to address buyer for Economic Cooperation and Development (2016), power abuse issues in the retail sector and enhance the licensing regulations are prevalent in both emerging sector’s self-regulation. The retail code of practice applies and developed countries, with two conflicting goals to all retailers, suppliers, and other sector stakeholders which include regulating the industry and generating to ensure that they deal with each other fairly and revenue for the government. In Kenya, the licensing lawfully. To enhance dispute settlement mechanisms regulations by the County governments are meant for within the sector, the retail code establishes a Dispute regulating business activities and raising revenue for Settlement Committee whose membership is drawn the County governments. As result, Table 1 on County from retailers, manufacturers, suppliers’ associations, regulations shows that wholesale and retail firms suffer county government, and the ministry responsible for from multiple cesses, licences/permits such as trading trade. Despite this effort to enhance self-regulation licence, distribution licences, and inter-county charges in the wholesale and retail trade, the sector business especially when transporting goods for trade from one associations need to be strengthened to enable them county to another or through other counties. County participate in lobbying on issues of importance that can governments efforts to consolidate all business licences influence the policy making and eventually spur the and permits into one single business permit have not growth of the wholesale and retail trade in the country. fully succeeded, and the County government framework Membership in trade associations enhances the growth to deal with intercounty trading licences/permits and of wholesale and retail firms. This is linked to the charges have not been fully put in place by the Council benefits that members access, which include the current of Governors. business practices, use of technology, employees As a result, the licensing regulations not only hurts the training, professional developments through workshops wholesale and retail firm’s dues to the cost of obtaining and seminars that fuel the growth of the firms 1. Business the multiple licenses, but it hurts the country’s economy associations are crucial in advocating for institutional by creating trade barriers and the movement of goods and legal reforms. Furthermore, business associations across the country especially on the inter-county have been linked to advocacy initiatives that require charges. This is against Article 209 (5) of the Constitution greater transparency and accountability when dealing that emphasizes that revenue-raising powers by the with suppliers, and advocating for simplified procedures County governments should not prejudice economic to make doing business in the country easier. activities across county boundaries, or national mobility of goods or services. Conclusion Further, empirical analysis on licensing regulations Firms in the wholesale and retail sector experience a shows that wholesale and retail firms experience multiplicity of regulations by the National government obstacles to obtaining operating licenses/permits. The agencies and the County governments, reflecting licensing regulation affects growth of wholesale and a heavily regulated sector. Additionally, registration retail firms. This corroborates with OECD (2016) on regulations by the BRS, a National government agency, the two objectives of licensing regulations, which are was found to impede the growth of wholesale and retail conflicting at the expense of the firms. It is evident that firms in the country. To facilitate ease of doing business the growth of firms will be impeded especially where in the country, the National government through BRS the County government is in pursuit of raising revenue provided waivers that encourage firms’ registration, through licensing regulations to supplement their especially the waiver of business permits for a period budget shortfalls as this may lead to an increase in cost of 24 months for newly registered firms which is a to the existing licensing charges or introduction of new requirement to trade in counties. This has not been charges through the County Finance Bill. fully implemented as the County government licensing regulations require all firms irrespective of their business registration status to acquire licences and permits and 1 RETRAK services offered to their retail members. KIPPRA Policy Brief No. 01/2022-2023 3 this increases the costs of doing businesses to firms Policy Recommendations that undergo registration process before commencing their trade activities. As such, wholesale and retail firms 1. It is important that business registration regulation would prefer not to undergo business registration but waivers provided by the BRS for ease of doing acquire the County government permit/licences which business in the country is fully implemented is a requirement to start a business in counties. with adequate coordination from the National government and County governments as both Further, licensing regulation is found to serve two regulate the sector. Full implementation of objectives which include regulating business activities the waivers reduces firms’ entry barriers and and raising revenue for the County governments at the encourages business registration in the country. same time. This raises a challenge especially when the County governments have a budget shortfall, which 2. Ensure that licensing regulations by County has to be addressed by either increasing the charges governments support wholesale and retail firms or introducing completely new charges through the by consolidating the trade licences into a single County Finance Bill. That said, multiple licensing by business permit/licence. This is informed by the County governments will not only affect the growth of multiple county trading licences that a firm acquires firms due to the high cost of doing business but also to do business in the county. This will reduce the hurt the economy. costs and procedures associated with acquiring multiple trade licences. Notably, there are very few firms that are members of a formal business association. This situation is 3. Strengthen self-regulation and encourage against the spirit of the MSEs Act 2012 Section 3(e) on membership in trade associations in the sector and promoting representative associations and registration support the existing business associations. Further, of business associations. Strengthening of wholesale there is need to fast-track the implementation of the and retail business associations is critical, as it has been MSEs Act 2012 and the MSEs Regulations (2019) empirically established that firms which are members of on trade associations, and assess their contribution the business association are likely to grow compared to the wholesale and retail trade sector’s self- to those that are not members of business association. regulation. Through business associations, firms can have access to current best practices, technology, market trend understanding, customer support and employee trainings, and other seminars and workshops, all of which can help the firm grow. About KIPPRA Policy Briefs For More Information Contact: KIPPRA Policy Briefs are aimed at a wide dissemination of the Institute’s policy research findings. The findings are Kenya Institute for Public Policy Research and Analysis expected to stimulate discussion and also build capacity Bishops Road, Bishops Garden Towers in the public policy making process in Kenya. P.O. Box 56445-00200, NairobiTel: 2719933/4, Cell: 0736712724, 0724256078 KIPPRA acknowledges generous support from the Email:admin@kippra.or.ke Government of Kenya and the Think Tank Initiative of Website: http://www.kippra.org IDRC, who have continued to support the Institute’s Twitter: @kippra.kenya activities over the years. 4 KIPPRA Policy Brief No. 01/2022-2023