Government now steps in to revamp manufacturing sector after facing exodus of multinational firms
By Staff Writer
About two months ago, World Bank lead economist for Kenya, Eritrea and Rwanda Apurva Sanghi raised an alarm. He was touched by the rate at which multinational firms were leaving Kenya blaming the prevailing influx of cheap imports in the market.
“Because Kenya produces and trades few intermediate goods, researchers suggest that Chinese imports could lead to deindustrialisation,” Sanghi reported to a regional weekly.
Dan Odaba, a lecturer of International Relations, Peace and Conflict Studies, Disaster Risk Reduction, and Development Studies at the United States International University Africa (USIU-Africa), who was also keeping abreast with the issues cautioned.
“If the Government (of Kenya) does not create an enabling environment for both the existing and new companies for investments, Kenya will simply, and very soon lose out on emerging suitable locations such as Ethiopia.”
The experts raised concerns following the exit of over 10 multinational firms to other markets within the last 10 years.
Leading tyre maker Sameer Africa, the producer of Yana tyres, was the latest company to bow out in September, decrying high energy costs, cheap and subsidised imports and the 2005 reduction in custom duties under the EAC Common External Tariff (CET).
The company shifted focus on offshore production of its tyres by manufacturers based in China and India.
In 2014, battery distributor Eveready East Africa shut down its Nakuru manufacturing plant to import batteries from its affiliate in Egypt following stiff competition from cheap illegal imports.
Eveready managing director Jackson Mutua said sourcing batteries from Energizer Egypt would eliminate costs of running the Nakuru factory, as well as boost the firm’s competitiveness in pricing. The decision led to the retrenchment of 99 staff.
Two weeks later, Cadbury Kenya opted to walk the same path. The confectionary manufacturer announced it was ceasing all manufacturing operations in Kenya to retain only the marketing and distribution functions of the business, a decision that cut almost 300 jobs.
The three firms are just a glimpse of companies that have closed shop. Bridgestone, Unilever, Procter & Gamble, Reckitt Benckiser, Johnson & Johnson, Colgate Palmolive and multinational oil marketing firms have also relocated.
“This is not good at all for the EAC giant that Kenya enjoys,” Odaba regrets.
According to him, to avoid deindustrialization, a situation where the size or share of the manufacturing sector reduces in the economy, the government must move fast to lower the cost of production.
This, he says, would create a sustainable environment that supports both domestic and foreign investments.
“The government should make lowering production costs priority, with targets on when and how to achieve this,” he says, adding that if the industries in Kenya attained 80 per cent production, jobs would be created and a lot of tax would be collected. “This would have a ripple effect on the economy.”
Other than institutional arrangements such as inflation and economic restructuring, which have emerged as other causes of deindustrialization in some economies, the lecturer says countries that have established sound business climates are poised to ‘poach’ companies from other markets.
“With breakthroughs in transportation, communication and information technology, a globalised economy that encouraged foreign direct investment, capital mobility and labour migration, and new economic theory’s emphasis on specialised factor endowments, manufacturing move to lower-cost sites.”
Ethiopia for instance, has lately been considered a lucrative investment market by both local and foreign investors.
The country uses a range of incentives to woo investors. In the horticultural sector for instance, investors are exempted from customs duty of up to 100 per cent on imports of capital goods such as plants, machinery & equipment, and construction materials.
According to Ethiopia Investment Commission (EIC), the investors also enjoy income tax exemptions for a period ranging between 1 and 9 years, and loss carry forward for businesses that suffer losses during the income tax exemption period for half of the tax exemption period.
With an exception of few products, no export tax is levied on Ethiopian export products.
Such incentives have attracted various Kenyan-based flower firms into the market, with foreign investments such as Dangote Cement, Unilever and the Chinese shoemaker Huajian Group pitching tent in the country.
Berhanu Ludamo, the head of promotion and information services at the Ethiopian Horticultural Producers Exporters Association (EHPEA) reported to a regional weekly that with the incentives, Ethiopia would soon surpass Kenya’s horticultural sector.
“Last year, we led in the horticulture market in Africa. We expect to improve on the position in less than 10 years,” Ludamo told The East African, adding that the country’s floricultural sector had risen 300 per cent in output, making it the second fastest-growing flower bouquet exporter.
However, Phylis Wakiaga, the Chief Executive of Kenya Association of Manufacturers (KAM) sees a brighter future in Kenya’s industrial sector.
“Deindustrialisation is not representative of the progress we are making as a country towards industrialising,” she reacts.
“We have taken great strides to introduce strategies such as the Special Economic Zones (SEZs), Industrial Parks, and policies and regulations that complement them to create a suitable environment for industry to thrive.”
Wakiaga however admits challenges grappling the sector, clarifying that KAM has been advocating for a competitive business climate that supports both domestic and foreign investments in a bid to spur growth in the manufacturing sector.
“Our economy is taking a big hit with masses rendered unemployed, productive jobs reducing with the massive emigration (of companies). Investors are becoming hesitant about spending their money in Kenya’s economic growth,” Wakiaga explains.
But the government is now doing something
The Chief Executive says through the Kenya Industrial Transformation Programme (KITP), which is a brainchild of the Ministry of Industry, Trade & Cooperatives, the government aims at increasing manufacturing to over 15 per cent of GDP, create about 1 million jobs, increase Foreign Direct Investment (FDI) and improve Kenya’s ranking in the ease of doing business to top 50 by the year 2020.
On the other hand, Wakiaga says the government is expanding and improving on infrastructure in a bid to ease transportation of goods and delivery of services.
“Projects such as the underway construction of Standard Gauge Railway (SGR), expansion of Port of Mombasa and the Lamu Port South Sudan Ethiopia Transport (Lapsset) Corridor will improve on transport infrastructure.”
In a bid to reduce the cost of electricity, Wakiaga says the national grid has generated an additional 500 MW of electricity, a move that has cut government expenditure on the importation of power.
“With a major component of energy mix being from renewable sources, the cost of energy has since dropped from US$18.7/kWh to the current US$15/kWh,” Wakiaga explains.
Through consistent engagements with the government, she says the number of licenses has reduced, and a Single Business Permit is now in place.
Also, KAM has partnered with institutions such as the judiciary to develop the Illicit Trade Manual, which is aimed at combating illicit trade and routing out counterfeited goods.
Signaling a raft of reforms in the sector, Kenya jumped 21 places to position 92 in the recent World Bank Ease of Doing Business report.
The improvement was due to five reforms in the areas of starting a business, obtaining access to electricity, registering property, protecting minority investors and resolving insolvency.
“We will not relent until we attain position 50 by 2020,” chuckled Industrialization Cabinet Secretary Adan Mohamed after receiving the news.
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