- Manufacturers were caught flat footed by the regulation.
- Disruptive regulation, just like technology, requires businesses and industries to be adaptive and efficient in their responses to changes in their operating environment.
- To have been fully cognizant of the regulatory risk, plastic bag manufacturers ought to have anticipated and mitigated repercussions the law would have had on their operations.
- Businesses and industries in the country ought to regularly monitor and manage risks emanating from their operations.
- Special considerations should be placed on evolving technologies and regulatory risks as these might deal a death knell even for the most robust companies.
Kenyans are well acquainted with disruptive technologies and the significant impact they have on business operations. Uber, the Taxi hailing app, changed the way we commute in Nairobi giving many Nairobians a convenient and cheaper way of commuting within the city. The mobile phone, and its internet on-the-go capabilities, lead to the decline and near extinction of cyber cafés that were once ubiquitous on the streets of Nairobi. On a global scale, the internal combustion engine is facing a slow death and will soon be replaced by the electric motor. A case in point is Volvo’s commitment to only manufacture partially or completely battery powered cars from 2019 on-wards.
However, Kenyans rarely witness and experience the upheavals and turmoil businesses undergo due to disruptive regulations enacted by governments under what Risk Managers would categorize as regulatory risk. Regulatory risk can be broadly defined as the risk that a change in the Laws and Regulations of a country could have an adverse effect on certain businesses, industries or market segment.
For example, the interest rate capping bill of August 2016 had significant ramifications for banks and their clients. The bill’s noble intention was to reduce the cost of credit, increase access to cheaper financing and stimulate economic growth. The results are disparate. Banks have cut back on lending, especially to individuals, due to lower interest rate margins and higher risks of default. Job cuts have been announced to curb wage bills and growth in revenue and profitability has been on the decline in the past year for many lenders more so the middle and lower tier banks.
Hot on the heels of the banking legislation, the government has rolled out one of its most business disrupting regulations yet; the ban on plastic bags. So disruptive is the ban that some manufacturers in the plastic bag business have been forced to shut down their facilities leading to jobs losses, redundant machinery and ghost factories.
Disruptive regulation, just like technology, requires businesses and industries to be adaptive and efficient in their responses to changes in their operating environment. Plastic bag manufactures that have been shut down did not foresee, or adequately diminish, the adverse impact the law had on their going concern. To have been fully cognizant of the regulatory risk, plastic bag manufacturers ought to have anticipated and mitigated repercussions the law would have had on their operations.
Recourses would have included strategic transition to the production of alternative bio degradable bags and sale of these to their captive plastic bags markets. Alternatively, exit strategies such as the sale or redeployment of plant and equipment would have been explored.
These murky alternatives would still be costly. Transition to production of bio degradable bags would necessitate the purchase of costly equipment and exit of the market would not alleviate the agonies of job losses. In both cases however, the options would have been less severe and shareholders, staff and management of these companies would have had a softer landing with more time to plan their finances and futures due to prudent risk management of the regulatory risk.
There is a potentially good reason these manufacturers were caught flat footed. This is the third attempt in the past 10 years to ban plastic bags in Kenya. They probably gambled on their extensive lobbying to frustrate and reverse any government efforts to implement the ban, as was the case in the past. Instigating fears of massive job losses and collapse of the ‘kadogo’ economy that is heavily reliant on plastic bags did not work in their favor. It seems the die had been cast and the government had crossed the Rubicon. The lobbying by the Kenya Association of Manufacturers (KAM) was feeble and ultimately futile.
KAM argued that the ban should be addressed by the establishment of a Waste Management Fund where manufacturers would be taxed in order to contribute to sustainable waste management solutions. This subtle and cheeky resolve did little to address a profound matter that is the systematic damage to the environment occasioned by failure to properly manage plastic waste. Taxes on manufactures would have been passed on to consumers further increasing the cost of living. Consumers would have proceeded with degrading the environment albeit at a higher costs.
In light of this, businesses and industries in the country ought to regularly monitor and manage risks emanating from their operations. Special considerations should be placed on evolving technologies and regulatory risks as these might deal a death knell even for the most robust companies.
The writer is a commentator on business and economic issues.