The number of foreign contractors, including Japanese contractors, tendering for infrastructure work in Kenya has increased in recent years, increasing competition for local contractors. The Kenyan government has now responded to pressure from local contractors by introducing regulations which aim to protect the local construction industry. The regulations restrict the categories of work open to foreign contractors and also stipulate that foreign contractors must either establish a joint venture with local contractors or locally subcontract a percentage of the work.
Background to regulations
In 2011, the National Construction Authority Act No.41 of 2011 (the "Act") established the National Construction Authority ("NCA") to oversee the construction industry in Kenya. The Act requires that any person carrying out the business of a construction contractor be registered with the NCA. The Act provides that the NCA may register foreign contractors if they meet the following criteria: (a) the contractor intends to be in Kenya only for the purpose of carrying out the specific works for which it has been contracted and for which the sum payable is not less than the sum prescribed by the NCA board for the class of works for which registration is sought; (b) the contractor has obtained a certificate of compliance from the Registrar of Companies showing that immediately prior to entering Kenya it was trading as a contractor; and (c) the contractor has lodged an affidavit with the NCA board to the effect that, once the contracted works are completed and the defects liability or maintenance period has elapsed, it shall wind up business and not engage itself in construction business in Kenya ("Pre-Registration Requirements"). If a foreign contractor meets these criteria, it is eligible to be registered with the NCA. The new regulations specify the categories of contracts a foreign contractor is eligible to register for, and stipulate the ownership structure of foreign firms who seek to be registered under the Act.
Categories of contract foreign contractors are eligible for
The NCA has eight categories of contracts ranging in monetary value from unlimited value contracts (Category 1 contract) to contracts valued for only Kenya Shillings 20 million. Under the new regulations, a foreign contractor is only eligible to register for a Category 1 contract (i.e. a building contract above Kenya Shillings 500 million) whereas local contractors are eligible to register for all categories of contracts. This is unlikely to affect foreign contractors as generally only Category 1 contracts are likely to be of any interest to foreign contractors tendering for construction work in Kenya.
Requirement for a local partner
The new regulations provide that when a foreign contractor submits its registration application to the NCA it must be accompanied by "an undertaking in writing that the foreign person or firm (i) shall subcontract or enter into a joint venture with a local person or local firm for not less than thirty percent of the value of the contract work for which temporary registration is sought; (ii) shall transfer technical skills not available locally to a local person or firm in such manner as the Authority may determine from time to time". If the foreign contractor breaches its undertaking, the NCA will be entitled to file a claim in damages against the foreign contractor.
The regulations require that at least 30% of the value of the work is subcontracted, or, in the case of a joint venture at least 30% must be Kenyan owned and any profits derived from the construction works carried out by the joint venture must be split based on this ownership arrangement. Furthermore, the new regulations impose restrictions on the type of employees that can be employed by a joint venture as they provide "the employees of the joint venture to which this regulation applies shall be competitively recruited from the local labour market, and recruitment or employment of foreign technical or skilled workers on such contract shall only be done with the approval of the Authority where such skills are not available locally".
Regardless of whether a foreign contractor subcontracts a part of its works or enters into a JVA with a local firm or person, as part of its registration application, the foreign contractor must also provide an undertaking to the NCA that it will transfer technical skills which are not available locally to its local firm or person. However, the NCA determines the manner in which this should be done.
Practical impact for foreign contractors
The regulations do not require the foreign contractor to have entered into a JVA or subcontract agreement before submitting its registration application. However, a practical measure that foreign contractors can take is to enter into a memorandum of understanding with a Kenyan firm or person to enter into a JVA or subcontract agreement with the Kenyan firm or person upon successful registration. This will prevent any delay in commencing construction works if the NCA approves the foreign contractor's application to be registered.