A shot in the arm for the sector as national development policies kick in

While Kenya has been newly classified as a middleincome country with the rebasing of its GDP, sustaining growth over the medium- and long-term will require broad-based re-engineering of the industrial sector and its ancillary infrastructure. Previous efforts have pursued industrial ambitions largely in isolation, but with the country’s development plans, including Vision 2030, targeting an annual growth rate of 10%, increasing productivity in the labour- and revenue-intensive manufacturing sector is now vital.

The government has rolled out a number of plans for developing its domestic industrial fabric and improving regional capacity: the 2011 National Industrialisation Policy Framework 2012-30 (NIPF); the Second Medium-Term Development Plan 2013-17 (MTDP2); and the East African Community Industrialisation Policy and Strategy 2012-32 (EACIPS).

Holistic Planning

The NIPF targets development of value-added industry, but the task of shrugging off the legacy of decades of import substitution is substantive. The NIPF aims to strengthen domestic value-added productivity by 20%, double Kenyan products’ share of the regional market to 15% (and 25% in the domestic market), expand the content of locally manufactured goods for export to at least 60% and up the share of industries located outside urban centres to 50%.

Through the MTDP2 Kenya is looking to develop niche products, build capacity among small enterprises, provide financing, attract foreign direct investment, and develop special economic zones (SEZs) and industrial parks. In line with EACIPS priorities, the country is also looking to expand its profile in regional manufacturing. Segments identified as having strong potential for growth, employment and use of domestic resources are agro-processing; iron, steel and other mineral processing; chemicals; pharmaceuticals; energy generation; and downstream oil and gas processing.

SEZs 

Created under the purview of the Ministry of Industrialisation and Enterprise Development, SEZs will host industry that serves both domestic and foreign markets, and are expected to gradually replace export processing zones (EPZs). The government has set aside 3400 sq km for the estates, and the currently identified sites are Mombasa, Lamu and Juja.

SEZ incentives include 10 years of corporate tax and withholding tax holidays; perpetual stamp duty, import duty and value-added tax exemptions; fast-track licensing; established infrastructure; preferential market access for trade agreements to which Kenya is a signatory; and investment protection. Qualifying for both domestic and export markets, SEZs will be applicable only to new investments that are not in competition with local industry. They will have a broader application than EPZs, incorporating ICT, technology and industrial parks, free trade zones, free ports, recreational zones and regional headquarters.

The SEZs are modelled on the success of the EPZ Export Business Accelerator scheme, which aimed to ease constraints on export activity among small and medium-sized enterprises. With its implementation, local ownership of EPZ companies rose from 17% in 2010 to 26% in 2012. Increasing local ownership is a priority under the new industrial policies. The majority of EPZ enterprises are foreign-owned (52%), with the rest split between joint ventures (22%) and wholly Kenyan-owned firms (26%). EPZs contributed 4% of manufacturing output and 11% of sector employment from 2008 to 2012, attracted $1.5bn in investment, and generated $787m in domestic expenditure and $1.82bn in exports.

Streamlining

The broader impact has been mixed, with Kenya estimated by Tax Justice Network-Africa to be losing $1.1bn a year from tax incentives and exemptions. The Kenya Association of Manufacturers identifies tax legislation and administration as needing reform, and a lack of streamlining is contributing to the country’s declining score in the World Bank’s ease of doing business rankings. Non-financial incentives are increasingly important, with the government focused on expediting licensing, expanding soft infrastructure and strengthening investment protection to draw investors.

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The Report: Kenya 2014

Industry & Retail chapter from The Report: Kenya 2014

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