After a challenging 2017, the industrial sector has started to show signs of recovery, suggested by improved output figures. The turnaround came about at the end of 2017, as the sector continues to focus on longer-term prospectives and transforming itself into a key driver of economic activity.
A Slow Start
Before Kenya gained independence in 1963, official British policy deterred the development of manufacturing in its colonies, mandating instead that those areas were to be used mainly as a resource pool for British industries. So even though supplies such as coffee were being produced in Kenya, much of the output was processed elsewhere in a bid to reduce threats to the British manufacturing industry. Among the British colonies in Africa, however, Kenya was subjected to the lightest restrictions. After the end of the Second World War, industry in Kenya grew rapidly, and it began producing everything from paints to soft drinks.
Following its independence, Kenya implemented a import substitution policy to enhance and protect the industrial sector; however, the programme was not largely successful. Though it helped to develop a number of subsectors, such as leather, textiles and food processing, and was responsible for a high rate of industrial growth, import substitution did not generate sufficient employment, nor did it have an impact on the country’s balance of payments. The policy fell apart in the 1970s as the commodity boom raised the prices of Kenyan manufactured products. A structural adjustment programme was put into place in the 1980s in an effort to eliminate fiscal imbalances, regulate trade, revive economic growth and liberalise the market. In 1992 the Export Promotion Council was established and a number of related policies were implemented, and by 1994 price controls in Kenya were abolished.
The new millennium has been an era of big strategies. In 2000 the US enacted the African Growth and Opportunity Act (AGOA), which has been important for Kenya’s industrial development, as it has allowed for the duty- and quota-free export of garments and textiles to the US. In 2007 the Kenyan government implemented the National Industrial Policy (NIP), which took stock of strategies in the sector. The plans outlined in the NIP were not successfully implemented due to a lack of coordinated and coherent industrial policy. Thus, the NIP proposed the creation of institutions to help facilitate industrial development with clearer targets.
Undefined Despite the various efforts and policy enactments to encourage growth, however, the industrial sector has developed modestly. In 1960 manufacturing contributed 8.7% to GDP, which rose to a peak of 12.8% in 2007, before dropping to 8.3% in 2017. The share of industry overall was 16.9% of GDP in 1960 and 17.5% in 2017. Though industrial production growth dipped below 5% in 2017, it has been performing steadily since a slowdown in 2009.
At the macro level, the country has shown signs of improvement in recent years. In 2017 EY cited Kenya as the second-most attractive country in Africa for investment after Morocco. The World Bank’s “Doing Business 2018” report ranked Kenya 80th out of 190 countries for ease of doing business, up from 136th in 2013 and 92nd in 2016. According to the index, the country is strong in the getting credit, getting electricity and protecting minority investors categories, but could improve in areas such as registering property, dealing with construction permits and starting a business.
In April 2018 the World Bank forecast that the economy would expand by 5.5% that year, up from 4.8% in 2017, due to better weather conditions and lower political risk following the 2017 presidential election.
According to the Kenya National Bureau of Statistics (KNBS), manufacturing output in the second quarter of 2018 expanded by 3.7% year-on-year to KSh175.7m ($1.7m). Formal employment in the sector increased by 0.8% in 2017 to 303,300 people, representing 11.4% of total jobs. The largest manufacturing subsector in 2015 was food products with a share of around 43%, followed by the beverage and tobacco subsector with 9%.
In the second quarter of 2018 manufacturing grew by 3.1%, compared to a contraction of 0.2% in the same quarter of 2017. The growth was mainly due to increased agro-processing activities, such as the processing of milk, which grew by 12.2% over that period.
One of the main challenges to industry in Kenya – including the manufacturing of agricultural products – is the lack of technological development, according to Dennis Awori, chairman of Toyota Kenya. “Technology development is crucial for agricultural manufacturing. Not only does it facilitate the growth and harvest of products, it also allows for the modernisation of marketing those goods,” Awori told OBG.
As the economy slowly gains traction, the authorities are increasingly focused on implementing visions, fixing persistent problems and leading the country towards the future. At the centre of government efforts is the Big Four plan, which targets food security, affordable housing, universal health care and manufacturing.
The administration plans to boost manufacturing’s contribution to GDP from about 9% in 2016 to 15% by 2022 (see analysis). Additionally, Kenya plans to create 1.3m manufacturing jobs by 2022, which equates to 706 per day. The Big Four agenda specifically targets agri-business, textiles, leather processing, construction materials and IT. Additionally, the country is looking to support value addition in the extractive industries.
Furthermore, revenues from the textile industry are expected to climb from KSh3.5bn ($34.3m) to KSh2trn ($19.6bn) in 2022, while 100,000 clothing-related jobs are forecast to be created. In agro-industry, the government intends to generate 200,000 jobs by 2022.
Kenya has been cutting its base lending rate since the beginning of 2016. As of July 2018 the lending base rate stood at 9%. Due to an interest rate cap instituted by the Parliament in 2016, banking institutions are limited to lending at only four percentage points above the base rate, which means that the lending cuts could actually have a negative impact on the market and result in a decline of credit.
Credit expansion has slowed significantly since 2014, with private sector credit growth dropping from about 25% to below 2% by mid-2017. The situation has been particularly difficult for the manufacturing sector, with credit to the sector dipping for the first time since 2011 to KSh277.4bn ($2.7bn) in 2016, a drop of 4% compared to the previous year. As a result, the sector growth stalled at 3.5% in 2016 compared to 3.6% in 2015.
In terms of foreign lending to Kenya, the Treasury allowed a $1.5bn IMF standby facility to expire following a six-month extension in March 2018, according to international media in September 2018. The funding was originally agreed upon in March 2016 and designed to protect Kenya from global economic shocks. Some observers noted that the decision against renewing the loan may dampen investor sentiments.
A number of measures are already being taken to improve industry and meet growing local demand. For example, motorcycle manufacturers will soon be required to source 90 out of 300 parts within the country and employ a minimum of 35 workers in order to be registered as manufacturers, according to local media in February 2018. The government is expected to offer a zero tax rate to companies that comply with these requirements.
Several other measures are also being taken to ensure that the objectives outlined in the Big Four strategy are met. In late December 2017 President Uhuru Kenyatta reduced electricity rates for manufacturing companies by 50% between 10.00pm and 6.00am. Kenya has installed capacity of 2.3 GW and charges about KSh15.7 ($0.15) per kilowatt hour, higher than most countries in the region.
In its Manufacturing Priority Agenda 2018, the Kenya Association of Manufacturers (KAM) echoes the government’s goal of increasing the manufacturing sector’s contribution to the economy. The 10-point agenda dovetails with Vision 2030, and its objectives include achieving a level playing field, promoting export manufacturing, and generating pro-industry policies and support for small and medium-sized businesses. Chris Kiptoo, principal secretary in charge of the State Department for Trade at the Ministry of Trade, Industry and Cooperatives, told local press in July 2018 that he expects the manufacturing sector, among others, to drive national export growth.
The manufacturing agenda aims to establish zero import duties for inputs, eliminate a railway development tax, ensure 60-day processing of value-added tax (VAT) refunds and exempt manufacturers from withholding VAT. To improve power rates, reforms to the Energy Bill 2015 have been suggested, which aims to raise competition in the market and permit the creation of bulk electricity sales agreements with major buyers.
Other areas that could be improved include trade activity. Unfavourable trade practices could be tackled by the Trade Remedies Act 2017, which seeks better terms for exports and preferential trade agreements. Specifically, the establishment of an AGOA-type trade agreement with Canada and the conclusion of Continental Free Trade Area and Tripartite Free Trade Area negotiations would help increase Kenya’s export market access. “For Kenya to increase the manufacturing sector’s contribution to GDP, Africa needs to remain the single most lucrative market for exports,” Peter Biwott, CEO of the Export Promotion Council, told OBG.
Increasing foreign direct investment (FDI) for the sector is another priority for KAM. In 2015 the manufacturing sector accounted for 20.7% of the total stock of FDI liabilities, down from 21% in 2014, according to the most recent statistics available from the KNBS. KAM is working on attracting investment from the National Social Security Fund and other similar institutions, creating a Kenya Development Bank with a fund dedicated to manufacturing and implementing the Movable Property Security Rights Act 2017.
The establishment of manufacturing factories is set to boost investment and capacity. Construction of a KSh2.2bn ($21.6m), 500-acre leather industrial park in Machakos County was completed in 2017, with other facilities under way. Japan’s Toyota Tsusho is establishing a KSh123bn ($1.2bn) fertiliser plant in Uasin Gishu. The plant is only expected to mix ingredients, however, as Kenya does not produce the raw materials needed to produce fertilisers. Kenya Breweries is building a new KSh15bn ($147m) facility at Kisumu, and is working to source all of its sorghum and barley locally by 2020. The project is expected to create 100,000 jobs and begin operations in 2020.
The government is also working to revive old industries and failed factories in an attempt to employ more people. For instance, it is pushing ahead with the development of the KSh3.4bn ($33.3m) industrial zone in Naivasha, which will be run on geothermal energy, providing lower costs for factories. Meanwhile, Mombasa is being transformed into a food-processing hub, while an agro-processing zone at Lake Victoria, expected to create 100,000 jobs, is under development.
To attract foreign investment, there are many platforms available for investors seeking to enter the country. For instance, the Special Economic Zone Act of 2015 allows for the creation of 10 types of zones, from free trade zones to IT parks. In 2015 the country had 71 export-processing zones, up from 50 in 2014, which employed more than 55,000 people.
A number of logistical obstacles remain in the way of expanding manufacturing’s contribution to the economy. For example, moving a 20-foot container from Mombasa to Nairobi would cost between $500 and $1000, about 60% more than what would be charged in the US or Europe. Even with the new KSh327bn ($3.2bn) Mombasa-Nairobi standard gauge railway, which was completed in 2017, moving the same product is still expected to cost around $500.
Port inefficiencies are also noted by manufacturers as an area hindering sector performance. Cargo dwell time in the country is about five days, which results in high demurrage charges and increasing costs. Transporting goods via road is not a favourable alternative as only 10% of Kenya’s roads are paved and only 30% of paved roads are in good condition.
High costs have also been highlighted as obstacles in the sector. According KAM’s third-quarter Manufacturing Barometer 2017, 45% of manufacturers said that the high cost of inputs was a major constraint for their businesses. High input costs result in expensive outputs that are not competitive with imports from many countries. Additionally, Lawrence Githinji, regional general manager of Sweden’s industrial company Atlas Copco, told OBG that manufacturers in Kenya also struggle with the high cost of energy.
Concerns have also been raised about the duplication of levies as a result of the devolution of government. In many cases, counties already charge levies at the national level, and sometimes goods passing from one county to another are charged again, leading to double taxation and higher costs. Late payments are also causing significant problems among manufacturing companies. Industrial players are calling for legislation that establishes prompt payments, a regulatory body to oversee the retail sector, supplier portals that would allow for the tracking of a transaction, the digitisation of government payments and a system to address persistently overdue payments.
A historically strong manufacturing segment, cement reported a drop in production in recent years. Cement consumption in 2017 fell by 8.2% to 6163 tonnes, compared to 9.8% growth in 2016. The KNBS attributed the decline to low demand in the construction sector. In contrast, imports dropped by 7.6% in 2017, an improvement on the 38.3% decline in 2016.
There are seven major cement manufacturing companies operating in Kenya, including Bamburi Cement, East African Portland Cement, ARM Cement, Lafarge, National Cement, Mombasa Cement and Savannah Cement. A number of these companies have announced that they intend to make sizeable investments in capacity. In 2017 Mombasa Cement reported that it plans to double annual production volume of Portland Pozzolana Cement and Ordinary Portland Cement to 3.2m tonnes, while Savannah Cement plans to increase its annual capacity to 2.4m tonnes.
National Cement has invested $280m to build a clinker plant and a 15-MW power plant in Kajiado County. The power plant was inaugurated in February 2018 and has the capacity to produce 1.2m tonnes per year. The project is expected to employ 700 people, with employment set to increase by up to 10-fold by 2019. The facility is the largest and most up-to-date plant in the area, and President Kenyatta told local press that it would help support the Big Four agenda. In April 2018 about $97m in the form of both debt and equity from the International Finance Corporation had been raised for the expansion of the National Cement plant.
Beyond the major manufacturers, a consortium of small local quarry companies are set to construct a KSh5bn ($49m) cement plant in Athi River with production capacity of 1m tonnes. The announcement was made in November 2017 and the facility is expected to take 18 months to complete.
As a result of the added capacity from several companies, prices for cement have dropped to a 15-year low: the average price of a 50-kg bag of cement fell from KSh750 ($7.35) in 2008 to about KSh600 ($5.88) in 2018. The price cuts have placed a lot of pressure on producers as efforts to raise demand have not been successful. For instance, East African Portland Cement is facing difficult times and had to let go 520 employees in August 2018 in an attempt to stay in business.
Industry is expected to perform well in the coming years, as several government initiatives and programmes are focused on boosting the manufacturing sector and its contribution to Kenya’s economy. Although official efforts are already under way, implementation of policies concerned with raising local output and lowering production costs could help Kenya on its path to becoming the industrial hub of East Africa.
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