Kenya Association of Manufacturers




Opinion

Door closes on duty free exports to Europe.....hope it is for a short time

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Door closes on duty free exports to Europe.....hope it is for a short time

 

By Betty Maina

I am saddened as I write this. October 1 2014 is here and with it the end of a long standing trade arrangement between Kenya and Europe which has lasted more than 30 years where exports from Kenya were not subject to customs duties in Europe. The only country in Africa to suffer this fate!

This duty free entry was made  possible under trade arrangements extended to Kenya in the context of the preferential trade arrangement that the EU extended to the African Caribbean Countries (ACP) first under four successive Lome Conventions (Lome I to IV - 1975 to 1999) and lastly under the Cotonou Agreement trade regime (2000 - 2007). Kenya, along with other EAC countries secured continuation of duty free market access to the European Union (EU) after initialling the Framework for Establishment of Economic Partnership Agreement (FEPA) on November 26, 2007.

Kenya was included in the EU Market Access Regulation (MAR) 1528/2007 among other ACP countries that signed or initialled the interim Economic Partnership Agreements (EPAs). This new arrangement was premised on the understanding that the ongoing negotiations of the EPAs will be concluded as envisaged in the FEPA.  The reality of the delay in signing of EPAs is here to bite industries.

 Kenyan products to the European Union will begin to attract General System of Preference (GSP) tariff rates. With effect from today, products to the EU market will start attracting export duty of between 4 percent and 24 percent. Do not hold your breath - competitiveness of local products to the EU market is at risk. A total of 67 percent of the exports to Europe from Kenya are affected.  Kenya is in danger of letting an opportunity of €24.7 billion, which was revenue from the European market, slip through our hands. Goods to Europe will now be subject to customs duties of  approximately Ksh 7.64 billion annually in taxes or about Ksh 637 million per month.

We applaud all in Government led by The President and his predecessors for opening  and maintaining this market over the last 3O years and those who have been working tirelessly to have the agreement signed with no luck.  I am sure they share our deep disappointment at this time.

It has  been a long running battle to get EPAs, which should have been signed in 2007, ratified, an avenue which could see local exports soar and somewhat reduce the trade deficit. Negotiating the EPAs has taken a long time as negotiations started in 2004. It was unfortunate that we have had to do this in a context  where not all partner states in EAC had the same incentives which would have informed the pace and positions adopted on various provisions.

Currently thousands of jobs are under threat mainly in the horticulture and floriculture industry. A  company that exports fish in Mombasa  which had revived operations four months ago and is manufacturing under bond is facing a gloomy future for its operations because of pricing issues under the GSP. Leading exporters of processed vegetables and fruits have radically reduced operations as customers were unwilling  to bear higher prices due to duty increase.  There are many small fresh produce exporters who will be unable to find alternative consumers.

There were, in industry’s view, imaginary fears that signing EPAs will negatively impact food security in the country. The main concerns being that signing EPAs will hurt domestic industrialization and turn us into a dumping ground for cheap goods. 

Even though EPAs should be signed by the EAC trade bloc, Kenya’s position is particularly precarious since the other EAC states are classified as least developed countries and will continue to enjoy duty free and quota free exports to Europe. That is not the case for Kenya.  Kenya is  considered a developing country.

By March this year all outstanding issues were resolved with exception of five issues;  Export taxes,  Relations with the Cotonou Agreement, Agriculture Export Subsidies, Good Governance in the Tax Area and  Consequences from Customs Agreements concluded with the EU. Hopes are now pinned on the joint EAC/EU meeting proposed to take place in October 2014 to finalize the negotiation.

While EPAs may appear to be an issue that solely concerns cut flowers, 24 per cent of all our exports are at stake because they are destined for European markets. 95 per cent of Kenya’s horticultural exports go to the same market. Cut flowers will suddenly be subjected to tariffs of 8.5 percent, fish will attract 6 percent import tariffs, pineapple juice and other fruit juices from Kenya will cost 11.7 percent more for European clients. Processed vegetables and fruits will attract more than 15 percent duty.  In a nutshell, the competitiveness of our goods in European markets will be eroded by around 5 percent to 20 percent. As will tobacco products from Kenya as well as textile products. Last year exports to Europe under this preference regime earned the country more than Ksh 67 billion.

Needless to say this means jobs are threatened. Over two million people are employed or are in some way dependent on the exports to Europe.

While some may say industries should look for alternative markets for Kenyan goods, it is not as easy as just knocking on the next door. Industry has so much respect for the country’s foreign policy which promotes more intra Africa trade but while we appreciate the efforts towards opening new markets but we should also reclaim the existing markets we have already. We also urge the EU to be flexible in the negotiation.

There is need for Government to work with the EAC partners  to expedite conclusion of EPAs as soon as possible and hopefully in the month of October. There will be need for the negotiators on both sides EAC and Europe to show utmost flexibility to conclude this agreement and upon conclusion take all the necessary legal steps to ensure resumption of duty free access. We understand that upon initialisation the process takes eight to twelve weeks.

In the meantime the Kenya Government is called upon to provide the necessary cushions to safeguard continued market opening.  It would be particularly critical for Government to absorb the duties levied on our products estimated at ksh 637 million per month. In addition as this sector is in a VAT Refund position since September 2013, Treasury should immediately release all pending VAT refunds and expeditiously for the next few month.  Other partners in the private sector such as airlines and logistics providers. Banks are also urged to exercise utmost flexibility to ensure that as as country  we minimise losses.

 The writer is the chief executive of Kenya Association of Manufacturers and can be reached on  This e-mail address is being protected from spambots. You need JavaScript enabled to view it

Of rebased statistics and manufacturing

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Of rebased statistics and manufacturing

By Betty Maina

 

The newly rebased national statistics will affect the trajectory of our economic growth. In which direction it is still not clear. But we hope it will be upwards and faster. Granted other African economies have rebased and enjoyed the advantages of the exercise but let us not compare ourselves to them arbitrarily.  Had we rebased our statistics a year ago, and reclassified as Middle Income Country (MIC) then, we would not have been eligible for the quota free access of EU markets granted by the EPA agreement. Not that it would have made a difference as we now have to pay duty on GSP rate due to the stalled negotiations. We are now staring at a loss that will amount to €24.7 billion of potential revenue. The timing is therefore right and it is commendable for the Kenya National Bureau of Statistics to align our statistics to the international classification of economies.

The rebased figures come from the Census of Industrial Production carried out in 2010 by the government. We have updated our base indices which will be used to calculate the growth of the economy in future and to calculate trends as we collect real time figures. This new figure is more accurate and reflects a better picture of the economy and will in turn enhance our analysis of the performance of the economy and help us take into account its continually changing structure.

A study done by MIT showed that economies grow more complex as years go by, and this information is captured in the atlas of economic complexity. After rebasing we will now be better placed to capture the complexity of our economy due to more trade flows,  diversification and the growth of new sectors and subsectors. For the manufacturing sector since we are headed for industrialisation, our industrial structure is continually changing and there have been many technological advancements in business and in industrial processes.

Still there are some shortcomings and these figure will not be a true reflection of our economy if we are not able to quantify the activities of the informal sector which is usually difficult. These changes in turn are expected to have an impact on our policy formulation in various areas and are bound to affect certain industrial areas. If we have not fully incorporated the informal sector in this new set of data, then our policies to expand the manufacturing sector are bound to fail.

The new status will allow us to access more credit from international institutions. Ghana, Nigeria and Burundi rebased some time back and have reaped the benefits of the process. But even as we welcome the new rebased figures and classification, we are left to wonder if this will not affect our market access as in the case of EPAs and if it will not also affect other key areas. Already capacity building programs being offered in the country will reduce considerably since we will no longer be a priority in terms of technical assistance, grants and aids. In the manufacturing sector there are certain projects in crucial areas such as trade facilitation, technological upgrades and skill transfer especially in labour intensive sectors such as the textile and apparel industries and the leather sector which should not be interrupted due to this new elevated status. These sectors are crucial for our industrial growth and as such have been identified by the government for expansion. Industrialisation is a process that requires a lot of skill transfer. Without it, there will be no innovation or entrepreneurship. Something this nation is in dire need of.

We are now standing shoulder to shoulder with the BRIC countries. Expectations are that our products will be able to compete on international markets just like those of any other MICs and we will be expected to have expertise to produce at that level. My main concern then remains that we still have a long way to go before we can arrive at the industrialised status and this new middle position will not be a comfortable one as we try to find our feet.

The writer is the chief executive of Kenya Association of Manufacturers and can be reached on  This e-mail address is being protected from spambots. You need JavaScript enabled to view it

Tripartite Free Trade Area: Any threat to Kenya from SA?

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BY BETTY MAINA

The tripartite negotiations currently ongoing will open new markets for Kenyan goods in the whole of EAC, COMESA and SADC region but how can Kenya respond to the threat of South Africa’s manufacturing industry while still leveraging on the opportunities of a larger trading bloc?

Both nations share similarities since they are fundamentally influenced by access to local resources and therefore have strong food, textiles and metal processing activities. Manufacturers simply transform produce from these sectors.

The largest manufacturing sectors in both nations are predictably food and beverage, and non-metallic minerals processing while petroleum and chemical products are among the fastest growing sub-sectors in both countries. This makes the southern country is a formidable competitor indeed.

However, a comparative study done this year by the Carnegie Mellon University in Australia shows that it could be a David and Goliath scenario since the South African manufacturing industry is 9.3 times larger, less import dependent and more sophisticated. It includes a significant production level of elaborately transformed products such as transport equipment and electrical machinery with an export value that is nearly 13 times higher than Kenya’s.

The only catch is a slower growth rate of 30 percent between 2005 and 2011 compared to Kenya’s 92 percent in the corresponding period. Still, the fastest growing sub-sectors are relatively small while the largest sub-sectors feature modest growth and this is the fundamental reason that the growth rate in both nations has been disappointing.

Manufacturing remains a small and declining part of gross domestic product prompting both nations’ governments to target manufacturing growth to accelerate future development. Overall, in manufacturing trade activities, both nations export much less than they import and both have a significant trade deficit.

If concluded, Kenya will have to contend with South Africa as a manufacturing competitor. To do this it can exploit a few weaknesses that exist in South African manufacturing assistance policies. Despite being various, these policies have been mostly ineffective due to two reasons. In the first place, they adopt a scatter gun approach.

For example, the National Growth Path is said to target economic sectors with the most growth potential but it does not have clear criteria to determine that potential nor is it obvious why fast growth sectors need assistance. At the same time, the Industrial Policy Action Plan II targets 14 different sectors, eight of which are manufacturing sectors and again, the criteria for targeting remain unstated and the list of targets is very long. In effect, the country tries to support all of its industries. Secondly, these policies are aimed at multiple objectives.

The National Growth Path seeks to address economic development but also deals with unemployment, inequality and poverty. The Industrial Policy Action Plan II has mixed goals; while addressing the nation’s industrial development, it also includes historically disadvantaged people and marginalised regions. In a nutshell, while South Africa talks about targeting, it has no strategy for targeting

By contrast, Kenya has a clearer policy and strategic intent. As outlined in the Second Medium Term Plan under Vision 2030, Kenya will develop industrial clusters such as the meat and leather cluster through the establishment of meat processing plants, tanneries and the promotion of dairy products processing. As part of the policy development work within the East African Community some clear targeting criteria have been identified.

Using a framework developed by the UN Industrial Development Organisation (UNIDO), two parameters; attractiveness and strategic feasibility are used with 17 weighted sub-criteria for calculating the two parameters. Industries that score highly on both parameters become a priority. While the scoring system used is unclear in the policy documents, we take this to indicate that Kenya, has an appreciation of the need for a targeting rationale within a national development strategy even though it lacks a sophisticated approach to manufacturing and fails to clarify how these targets fit into the continental supply chains that will emerge with the Tripartite Free Trade Agreement (T-FTA).

The best way to respond to the upcoming T-FTA and alongside, competition with South Africa, is not to attempt to defend all Kenyan industries. Rather, the Kenyan manufacturing industry needs to look at the situation strategically as this will give the biggest impact from any assistance efforts. Kenyan policies should augment the current approach to give it a more pro-Kenyan manufacturing focus.

The targeting of assistance is based on the idea that some activities create benefits for others. In many cases, these benefits are factored into private decisions but when the benefits spread widely through the economy, a role for government emerges. By strategically targeting assistance according to the flow of benefits among private activities, the government ensures that greater benefits are created for the total amount that is spent.

Targeting deals with the question of choosing which industries should be selected for support and targets can either be designed to assist those industries that create benefits for others linked to it or to attract industries that make use of benefits created by other, linked local activities.

Targeting assistance can be allied to policies for clustering activity because the goals of one can be amplified by the other. Clusters work because it is cheaper to do business when other related businesses are close. These are the so-called “agglomeration advantages” which contribute to creating competitive advantages and these benefits typically operate vertically, that is, among suppliers and customers. It is precisely because of the way these advantages are exchanged that private firms are lead to create clusters independently and for the private sector to exploit them fully, agreements need to be specified, monitored and enforced among the affected parties.

Once the firms have been clustered, they will become less assistance-dependent, because they are part of a mutually-supporting structure. If government can build clusters around benefits emanating from strong industries, it can effectively restructure the economy to make it less assistance-dependent and more self-supporting in a way that promises greater benefits with the same base level of government-assistance expenditure.

The Special Economic Zones Bill captures this interest in clustering and if it is adopted and implemented properly within the relevant supply chains, Kenya will achieve production efficiency and economies of scale.

(The writer is the chief executive of  the Kenya Association of Manufacturers and can be reached on This e-mail address is being protected from spambots. You need JavaScript enabled to view it )

Hope for businesses from the County Model Revenue legislation?

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Hope for businesses from the County Model Revenue legislation?

Increase in the cost of doing business in counties has become a cliché for the manufacturers  and the sector is looking forward to a solution to the issue with bated breath.

There is light at the end of the tunnel from the Model County Revenue Legislation Handbook which was launched yesterday. Life has been made easy for County Governments’ legislation formulation by the launch of the county model Handbook which provides the revenue raising model laws that the county government can adapt.

As counties draft their revenue raising laws, key amongst them being; Finance Laws, Trade License Laws, Property Tax laws and the Entertainment Tax laws it would be ideal to refer to the handbook.

Manufacturers as well as other businesses continue to experience challenges as counties are introducing very high taxes that are acting as a barrier to distribution of goods across the country. Such taxes include entry fees, distribution fees, export health certificate, branding fees just to mention but a few.

Spare a thought for the small scale manufacturing sector which is trying to get its feet off the ground and is facing all these charges. Efforts to create more employment and revenue from this sector may be fruitless if the unfriendly business legislation in the counties continues.

For a long time  manufacturers have been at pains trying to  urge counties to improve inter - county trade and remove excess taxes thAat were contributing to the high cost of doing business. 

Inasmuch as industrialists appreciate the need for counties to collect revenue to fund development projects in counties, captains of industry have for a long time been calling for an increase in the tax base and reduction in the number of taxes in order to attract more investment into the counties.

Efforts have been noted from some utilities such as Kenya Power who have engaged the business community in various counties on the progress being made to redress the  power issues which is a welcome move.

The same should be trickled down to other business aspects by counties. Business membership organizations have been engaging county governments on issues that affect business and the most common issue in most meetings has been tax issues. There is need to ensure that counties attract investors and not scare them away by imposing multiple and hefty taxes.

Kenya has a brilliant constitution which clearly stipulates, in Article 209, who may impose a particular tax between the national government and the county government and also what is not allowed.

There is no need to play cat and mouse on trivials at the expense of creating jobs and shoring up the economy from a vibrant manufacturing sector because of unfavourable county legislation.

It is not a new phenomenon that both private and public sector has woken up to, a red flag was raised even before the constitution was implemented and delaying tactics in resolving the issue are costing the country much more.

Over a year down the line in the implementation of the new constitution, one has no plausible reason why double taxation should be allowed to continue. One county introduced cess tax on  all agricultural produce through its Finance Act 2013. Currently the cess from agricultural produce is being collected by the Horticultural Crop Development Authority (HCDA) based on the Legal notice No. 190 of 2011. Producers of horticultural crops are therefore taxed twice when exporting their produce. Needless to say that such a practice will not make local products competitive on the global scene.

Another county reintroduced entry fees for goods into the county in its Finance Act 2013 which currently affects the free flow of goods into and out the county considering that county is a major transit town not only for Kenya but also for the East African Community. Yet Article 209 (3) (c) of the constitution stipulates that a county may impose an additional tax other than property and entertainment taxes only when permitted by an act of parliament. So far no act has been passed to that effect.

Further promotion of partnerships between the business community and counties in building legislative drafting capacities in order to develop favorable revenue raising laws that meet revenue raising targets of the counties as well as attract and retain investors is an option worth exploring.

International best practices require that license fees are collected for purposes of service delivery by the regional/local/county governments. License monies should be targeted at service delivery; and give the public feedback as to what the revenue has been used to do to encourage accountability.

The revenue legislations should focus on the taxes provided for under article 209 3 property rates and entertainment taxes before enactment of further legislations on additional taxes. The drafters should differentiate between fees and taxes. Fees should be for services rendered and taxes for revenue raising.

There are other ways of collecting and retaining more revenue at county level. There is need for counties to develop measures to control revenue leakages at the county level. By sealing off all loopholes and revenue leakages all collections will be utilized towards service delivery and development of conducive environment for citizens and the business community.

It may not be a bad idea for the Council of Governors in partnership with the industry develop a county doing business index to evaluate the ease of doing business within the counties in order encourage attraction and retention of investment as well as assess the performance of each county.

The launch of the County Model Revenue Legislation Handbook is a good starting point in streamlining all county legislation. One hopes that the guidance in the handbook on revenue collection at the County level will be embraced to support business growth. 

Some counties have already imbibed the model legislation and incorporated its contents into their respective legislations which is a welcome development. One awaits to see the speedy implementation of the model legislation by all counties. That would bring some relief and spur the potential of the business sector.

 

ENDS

 

The writer is the Chief Executive of Kenya Association of Manufacturers and can be reached on This e-mail address is being protected from spambots. You need JavaScript enabled to view it

Deepening trade in Nigeria

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By Betty Maina

 

As the trade delegation from Kenya accompanies the President to Nigeria this week, manufacturers are upbeat about the efforts by Government to open new markets in the African region. Oil rich Nigeria is now the largest economy in Africa with a gross domestic product (GDP) of about $490 billion and a population of over 168 million.  

 

A huge number of international organisations and business people have been cautious of doing business in Nigeria for years. This may seem eccentric given that Nigeria is one of the most populous countries in Africa as well as one of the most oil-rich places in the world. Combined with the fact that the country is abundant in many other natural resources you might think that international business would be fighting for a stake in Nigeria.

The GDP value of Nigeria represents 0.42 percent of the world economy.

 

Oil and natural gas are the most important export products for Nigerian trade. The country exports approximately 2.327 million barrels per day, according to 2007 figures. In terms of total oil exports, Nigeria ranks 8th in the world. As of 2009, Nigeria had approximately 36.2 billion barrel oil reserves.

 

Prior to oil production, which surged after the 1970s, agricultural production was the largest export sector for Nigeria. After the country became a largely oil-intensive economy, the agriculture sector took a back seat. However, it still provides employment to almost 70% of the total working population.

 

According to the 2009 figures, the country’s total export volumes stand at US$45.43 billion. Major items of export are oil products, cocoa and timber. The UK and the US are the largest trade partners for Nigerian exports.

 

The fact that Nigeria is not a magnet for international investment could be seen as a tragedy of immense proportions. Years of political instability, regional strife and the weakening influence of massive corruption have resulted in the country failing to capitalise on its many advantages.

 

However huge strides have been made in the last few years to try and tackle the many rife problems which beset the country.  The actions being taken on the ground seem to be bearing fruit.

 

KAM led an Exploration Trade Mission to Nigeria in October 2010. The purpose of the mission was to explore the trade and investment potential in Nigeria, gauge the intensity of the competition for the Kenyan products, enhance brand, corporate and country image as well as to establish and strengthen distributorship network for companies that export to the two markets.

 

Trade between Kenya and Nigeria has been in Kenya's favor, with an average of Ksh. 1.2 billion in exports to Nigeria compared to an average of Ksh 0.109 billion in terms of imports from Nigeria. Over the past decade exports to Nigeria have shown a gradual increase between 1998 - 2001, 2003 - 2006 and in 2008 with declines in 2002, 2007 and 2009. The decline could be as a result of the prohibited list of products by Nigeria which restricts most products that Kenya would otherwise export to this market.

 

Figures from the Kenya Investment Authority (KIA) show that trade between the two countries is low and fell from a peak of KSh3.2bn worth of exports from Kenya to Nigeria in 2008, to KSh2.9bn ($34.2m) in 2012.

 

In early September 2013, led by President Goodluck Jonathan, 500 Nigerian government officials and businessmen visited Kenya in the first tour of the country by a Nigerian president in nearly 26 years. The visit was in reciprocation of the trip made by Kenya's President Uhuru Kenyatta to Abuja in July of the same year. The Nigerian delegation arrived in style and stature in seven private jets with business moguls; Aliko Dangote, Tony Elumelu and Femi Otedola.

 

During the visit, the two Presidents signed a deal for the creation of the Joint Commission Cooperation with work due to begin on eliminating tariff and non-tariff barriers. Dangote also announced that he would invest $400 million in a cement plant in Kenya's Kitui County, local cement makers were provoked to action.

 

Until now, much of the Nigerian business activity in Kenya has been in financial services. Kenya is also exporting its expertise in mobile phone applications to Nigeria. In 2011, mobile financial services company Cellulant won a $8.5m four-year government contract in Nigeria to run a registration and validation system for a subsidised fertiliser programme.

 

What the Kenyan business people need is a level playing field as well as investment incentives in Nigeria. The protectionist government policies, particularly over restrictions on Kenyan manufactured products entering Nigeria needs to be addressed.  Other key impediment for trade is cumbersome visa requirements, lack of infrastructure, poor power supply, inadequate security, inconsistent government policies, inability to access funds, multiple taxation and corruption.

 

Without question Nigeria holds enormous commercial potential as recent administrations have focused on developing the non-oil economy and tackling corruption and red tape. The explosion of industries such as the mobile telecoms market and the unmatched success of foreign companies such as South Africa's MTN have also demonstrated that potential can be turned into reality.

 

In order to facilitate trade between Kenya and Nigeria a lot more must be done beyond government-to-government agreements which includes the communities getting past the negative typecast that have subjugated the past.

 

The writer is the Chief Executive Officer at Kenya Association of Manufacturers and can be reached on  This e-mail address is being protected from spambots. You need JavaScript enabled to view it

Industry says yes to productivity based wage increments

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BY ZIPPORAH MAINA

One of the perennial bugaboos of the manufacturing sector in Kenya is the ceremonial wage increment announced by Government annually on Labour Day which are not productivity based.

Last year, the Government announced a 14pc ceremonial minimum wage increment and that dealt a heavy blow on the profitability and existence of some industries. It has become tradition for Kenyans to expect the President to set a ceremonial wage increment, which the government argues is meant to cushion the working population against the rising cost of living.

The voices of industry notably the Kenya Association of Manufacturers (KAM) have argued that the domino effect of ceremonial wage increases is increased inflation. This is based on a simple fact that wage increments that are not based on productivity will have negative effect on the productive sector and consequently affect the country’s competitiveness on the international market. This ultimately robs the national fiscus of the much needed inflows.

Industry has always argued, and rightly so, in support of wage increments that are based on productivity. Any increments outside this are tantamount to putting Kenyan industries out of business. A perfect example is that of the textile industry, which Government is trying to save due to the effects of last year’s ceremonial wage increment among other ills that bedevil the sector, which resulted in more than 1000 employees being retrenched and a textile factory closed in Nairobi as it could not sustain its operations due to a ballooning wage bill.

This becomes untenable for such a sector, which competes with products produced from countries such as Bangladesh and Cambodia where salaries range from $50 to$75 compared to Kenya’s average of $150. If one factors in other input costs such as high cost of electricity it becomes practically impossible to sustain the industry. Government has a goal of creating one million jobs and for as long as industries cannot sustain the employment rates then the goal will remain a pipedream.

In as much as Government is trying to cushion the high cost of doing business in Kenya by fast tracking projects such as energy transformation programs in power generation, transmission, supply including drastic reduction in cost of power and new connections all estimated at Sh8 billion much more needs to be done to save the manufacturing industry in Kenya. Strategies to support Leather and Textile sectors through the development Special Economic zones, support to new emerging industries and reduction in cost of doing business all budgeted at over Sh5.5 billion are a welcome development but this could all be futile efforts if ceremonial wage increments continue.

All these projects are meant to help the economy grow and create an enabling business environment but with the looming call for a ceremonial wage increase all this is bound to bring gaps in the implementation of the said projects. Moreover cabinet recently rejected the bid to reduce the Value Added Tax on some basic commodities, which as a result continues to hurt industry and the common Mwananchi.

Some companies have already closed shop due to the high cost of doing business in the country, whereas the textile industry is on its knees. This is attributed to high taxation, high energy costs and poor infrastructure, among other major factors. This in turn, defeats the dream of countering unemployment due to the high costs incurred by industry.

The manufacturing sector has strongly called for consultation with industry before announcements of such as this that have a potential to cripple industry are made. In all fairness there is need to cushion the general populace from rising cost of goods but ceremonial wage increments are just as good as shooting ourselves in the foot.

One may say that inflation based increments are the way to go however it still goes back to the same one size fits all solution which has never worked anywhere in the world. Some large companies may be able to sustain this but it would be disastrous for some infant and small industries.

An increase in productivity lowers inflation and increases purchasing power due to lower prices. This can be done through the adoption of piece-rate pay measures where workers are paid per unit to motivate them and boost production

In the interest of creating more jobs and retaining the ones that are there, productivity based wage increments are the way to go!

(The writer is the Head of Finance at Kenya Association of Manufacturers and can be reached on This e-mail address is being protected from spambots. You need JavaScript enabled to view it )

Industry says yes to productivity based wage increments

E-mail Print PDF

BY ZIPPORAH MAINA

One of the perennial bugaboos of the manufacturing sector in Kenya is the ceremonial wage increment announced by Government annually on Labour Day which are not productivity based.

Last year, the Government announced a 14pc ceremonial minimum wage increment and that dealt a heavy blow on the profitability and existence of some industries. It has become tradition for Kenyans to expect the President to set a ceremonial wage increment, which the government argues is meant to cushion the working population against the rising cost of living.

The voices of industry notably the Kenya Association of Manufacturers (KAM) have argued that the domino effect of ceremonial wage increases is increased inflation. This is based on a simple fact that wage increments that are not based on productivity will have negative effect on the productive sector and consequently affect the country’s competitiveness on the international market. This ultimately robs the national fiscus of the much needed inflows.

Industry has always argued, and rightly so, in support of wage increments that are based on productivity. Any increments outside this are tantamount to putting Kenyan industries out of business. A perfect example is that of the textile industry, which Government is trying to save due to the effects of last year’s ceremonial wage increment among other ills that bedevil the sector, which resulted in more than 1000 employees being retrenched and a textile factory closed in Nairobi as it could not sustain its operations due to a ballooning wage bill.

This becomes untenable for such a sector, which competes with products produced from countries such as Bangladesh and Cambodia where salaries range from $50 to$75 compared to Kenya’s average of $150. If one factors in other input costs such as high cost of electricity it becomes practically impossible to sustain the industry. Government has a goal of creating one million jobs and for as long as industries cannot sustain the employment rates then the goal will remain a pipedream.

In as much as Government is trying to cushion the high cost of doing business in Kenya by fast tracking projects such as energy transformation programs in power generation, transmission, supply including drastic reduction in cost of power and new connections all estimated at Sh8 billion much more needs to be done to save the manufacturing industry in Kenya. Strategies to support Leather and Textile sectors through the development Special Economic zones, support to new emerging industries and reduction in cost of doing business all budgeted at over Sh5.5 billion are a welcome development but this could all be futile efforts if ceremonial wage increments continue.

All these projects are meant to help the economy grow and create an enabling business environment but with the looming call for a ceremonial wage increase all this is bound to bring gaps in the implementation of the said projects. Moreover cabinet recently rejected the bid to reduce the Value Added Tax on some basic commodities, which as a result continues to hurt industry and the common Mwananchi.

Some companies have already closed shop due to the high cost of doing business in the country, whereas the textile industry is on its knees. This is attributed to high taxation, high energy costs and poor infrastructure, among other major factors. This in turn, defeats the dream of countering unemployment due to the high costs incurred by industry.

The manufacturing sector has strongly called for consultation with industry before announcements of such as this that have a potential to cripple industry are made. In all fairness there is need to cushion the general populace from rising cost of goods but ceremonial wage increments are just as good as shooting ourselves in the foot.

One may say that inflation based increments are the way to go however it still goes back to the same one size fits all solution which has never worked anywhere in the world. Some large companies may be able to sustain this but it would be disastrous for some infant and small industries.

An increase in productivity lowers inflation and increases purchasing power due to lower prices. This can be done through the adoption of piece-rate pay measures where workers are paid per unit to motivate them and boost production

In the interest of creating more jobs and retaining the ones that are there, productivity based wage increments are the way to go!

(The writer is the Head of Finance at Kenya Association of Manufacturers and can be reached on This e-mail address is being protected from spambots. You need JavaScript enabled to view it )

How does the price of bread go up with VAT?

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By Betty Maina

 

Consumers have been grappling with the increased cost of basic commodities following the introduction of the VAT Act. it is true that products such as bread and milk are exempt from VAT however the reason why the price will go up is not because the manufacturer has increased the prices however it is because if you look at the inputs that result in the total package such as the cover of packaging those do attract VAT and will result in an increase in the cost of the final product.

Other inputs such as the cost of electricity have also gone up as a result of the introduction of the VAT law. Electricity cost used to attract a tax of 12 percent and because of VAT the tax has gone up to 16 percent this therefore entails that the price of the final product may go up.

Therefore the price increases that may be experienced in some sectors are just a once off measure to cushion suppliers against the increases as a result of the implementation of the new law.

 Manufacturers are however upbeat that in as much as there may be a shakeup in the price of basic commodities temporarily there will soon be a reduction in prices if all the grand plans by government to reduce the cost of doing business are implemented.

What both consumers and business alike should understand is that the country has good development plans and for these to be realized there is need to collect revenue inland without incurring huge debts and all citizens have to play a role in the development of the country.

There are plans to build more power plants which will greatly reduce the cost of electricity to about USD 0.09 from the current exorbitant US0.18, which will result in a massive reduction of prices.  For the development journey to be successful money has to come from somewhere and VAT is one noble avenue of collecting revenue.

Economists argue that there is merit in subsidizing production as opposed to subsidising consumption. VAT for manufacturers makes the collection of revenue much easier and removes bottlenecks in the revenue collection system.

It is a no brainer that there are no policies that are a one-size fits all. There are obviously cases that will have to be considered in isolation like the case for pharmaceutical sector which has been negatively affected by the implementation of the new law.  

Medicines are exempt from paying VAT however the inputs that go into making the products are subject to VAT which increases the prices of medicaments. The downside of this is that the local pharmaceutical manufacturing sector becomes uncompetitive both on the local and international scene.  

Kenya’s pharmaceutical sector is the largest in the Common Market for East and Southern African (COMESA) region  and as the country intensifies its market penetration into the African market it is important to address the concerns of this sector.

 

The local pharmaceutical sector manufactures generics medicines and medications that are priced very competitively and are used by 400 million people in the COMESA market.

 

The generic market excels in high volumes and very low margins hence local pharmaceutical manufacturers are very sensitive to any cost increases and face a market where they cannot increase prices.

 

Previously, pharmaceuticals manufacturers were on the zero rated category of goods and were able to claim back their VAT paid on input. This put them on parity with imported generics from India or China.

 

However, in the new VAT Act  pharmaceutical manufacturers are now on the exempt list where they cannot claim this input VAT. The implication of this new change is very grave as VAT will now apply for their inputs and they will be forced to increase their final price. Unfortunately, this increased price will be higher than the imported finished good. It is important to note that the imported pharmaceuticals especially from India and China are already subsidised in their respective countries. The cost of production in these countries is also much lower than that of Kenya.

The bright side of this VAT Act for the country is that there has been a shift from subsidizing consumption to subsidizing production which is good in promoting global competitiveness of locally manufactured goods.

In as much as outstanding VAT refunds stand at over Ksh 20 billion, there is a concerted effort by the revenue authorities to address the situation. There were challenges in the previous system but industry is confident of the measures put in place to speed up the refund process. Manufacturers hold the view that the VAT refund bucket will no longer balloon as in the past as VAT refunds will be fewer.

 

The Revenue Authority had promised and we look forward to the introduction of the green, orange, and red channel that would help expedite payment of VAT refunds.

 

As the payment modalities are being implemented it is important for government to ensure that companies operating in Kenya are provided with an enabling environment in order to be globally competitive. There is need to maintain liquidity within companies so it is pleasing to note that there is a commitment from the Revenue Authority to expedite payment.


ENDS

 

The writer is the chief executive of Kenya Association of Manufacturers and can be reached on  This e-mail address is being protected from spambots. You need JavaScript enabled to view it

Westgate’s aftermath will affect investment in this country

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By Betty Maina


The harrowing events at Westgate played out across our screens like scenes from a terrible horror movie, touching our collective psyche as a country. This act of terrorism did not just affect the families of the victims and the wounded, but each one of us. And as much as we may want to forget it, they continue to haunt us as more details about the last moments of our loved ones and our fellow Kenyans emerge.

The trauma inflicted on us was not just of the psychological kind. It is also had financial and economic aspects. A number of optimistic analyses have been done that predict a quick comeback for the Kenyan economy.

If the performance of the Nairobi Stock Exchange (NSE) is anything to go by in the past one week, then these predictions are right. The stock market has been bullish and this augurs well for investor confidence and the government is still going ahead with its $1.5 billion eurobond as scheduled.

But think of the enormous sums of money that insurance firms will have to pay out. Or of the tourism sector which appears to be the one that will bear the brunt of this attack. The sectors contributes 12% to our GDP and is likely to affect our foreign exchange flows since it brings in 21% of all our foreign currency earnings though the resilience of this industry is very impressive given the comeback experienced after August 1998 and other later sporadic attacks. India’s Tourism sector bounced back quite fast after the 2008 Mumbai attacks and no long term economic setbacks were experienced.

But there are other imperceptible implications that must now be thought of. For those in business, company goodwill is of the utmost importance and a business takes years to build this up. If Kenya continues to be a soft target for these attacks, we just might start getting a reputation for being Al Shabaab’s and Al Qaeda’s punch bag. This is not good for our credibility as an investment location, If prospective investors begin to get the idea that we are a Bermudas Triangle for investments.

Security is a big factor of production and ranks high among factors that investors consider before investing in a country. Security is paramount and very basic and no incentive including tax breaks or free land will convince an investor to bring their money here if security is not assured. And as heroic as our security forces were, especially those soldiers who died in the line of duty, we have to face up to the harsh reality that our best may not have been good enough.  

We may not be able to reverse the attacks, but certain aspects of its outcomes still remain under our control at this juncture. Of importance is the government’s response to the attacks and its ability to contain the situation once it begun. We have to get our act together and set up a terrorism response unit capable of detecting attacks way before they happen and of responding promptly and efficiently if push comes to shove. This will be a sign that we have learned from this incidence and we are doing all we can to ensure that there will be no repeat of the same. Investors are going to be very demanding on this issue and especially big investors who are eyeing the manufacturing industry.

The security forces alone are not to blame. Corruption at our borders is the hand that let loose a Pandora’s box of evils on us. How else did the terrorists get in through our borders undetected and set up shop at the mall? That being said, we have  probably sang this lullaby until it has lulled us to sleep. Westgate was the wakeup call of the dire need to curb this menace.

One way will be through the government’s response to the looting of businesses in the Mall. No one is coming forth with the names of the looters as of now.  What we need to keep in mind is that people made serious investments in Westgate, which were lost not only due to terrorism but due to thieves. These individuals should be identified and dealt with a heavy hand. If the government does nothing to get hold of them, then we will be sending out the wrong signals to the business community and the industrial sector that do not bode well for future investments and for us as a nation.

Another way is through the fight against counterfeit goods. Links to trade in counterfeit goods are slowly being established and for some time now it has been a known fact, that organised crime, at least, is funded through the sale of fakes.

In Kenya, Kshs 70 billion is lost annually to counterfeits. Firms are estimated to lose up to 40% of their market share, 50% of revenue and 10% of company reputation. The society at large loses 56% in revenue and 32% of jobs and income go down the drain due to this problem. The economic impact of this last figures does not bear thinking about.

Clamping down on corruption and counterfeits are long term solutions. Working on our preparedness to future terrorist attacks are short term solutions, but all this will depend on our memory. Let us not forget the events at Westgate, the horror, the loss so that we can learn from it so that we can be better prepared to fight back should another similar attack come. God forbid.

 

 

The writer is the chief executive of Kenya Association of Manufacturers and can be reached on  This e-mail address is being protected from spambots. You need JavaScript enabled to view it

Kenyan manufacturers looking to deepen their presence in African markets

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Kenyan manufacturers looking to deepen their presence in African markets


By Betty Maina


As a high level delegation of industry captains leaves for Ethiopia today under the auspices of the Kenya Association of Manufacturers (KAM) and headed by the Cabinet Secretary for East African Community Affairs, Commerce and Tourism, Mrs Phyllis Kandie, it is pleasing to note the strides that Kenyan manufacturers and the business community in general are making in expand presence and take opportunities in African markets.


KAM was highly instrumental in lobbying government to have the Ethiopian market opened which saw the signing of the Special Status Agreement between Kenya and Ethiopia late last year and this opened doors for immense opportunities for local manufacturers to expand by investing in Ethiopia . The current Government is clear about focusing on opening more trade opportunities in Africa. Currently Kenya exports 45% of its total world exports to Africa and these only account for 15% of the trade in Africa and there is an opportunity to increase the market share in Africa to 40%. While noble, the  strategy to extend Kenyan products’ footprint to more African markets will however need to be supported by a deliberate move by local companies to expand into those markets.


Africa is an emerging global market and it would be foolhardy for the business community in Kenya to rest on laurels expecting anyone from outer space to come and give them markets on a silver platter. Penetrating new markets requires a high level of aggression and due diligence on the feasibility of the venture.


Africa’s combined gross domestic product stands at just over USD 1.6 trillion and is expected  will rise to USD 2.6 trillion in 2020 with a spending power of USD 1.4 trillion.  The continent’s  combined working age population in 2040 of 1.1billion people will be greater than China and India combined. Kenya is poised to have the largest working population by 2040 and there is need to create job opportunities in for the working populace on the continent.


Africa is bursting with opportunity and there is need for concerted efforts towards accessing markets and removing any hurdles in the way to the realization of the African promise.


To maximize on the opportunities available on the continent there is need for commitment, competence and support of foreign missions in the various markets. Kenya needs to strengthen the missions where the country trades so that the country may maximize on the available opportunities.


As businesses are moving their feet and penetrating new markets there is need for Government support in signing and concluding pertinent trade agreements in order for local companies to have access to some markets even as Kenya works on improving its business operating environment. Some Kenyan investors shy away from penetrating into some African countries because of restrictions imposed on trade of some commodities and for some countries there are still protectionist measures in place which frustrate trade.


The Jubilee Government clearly stated its quest to develop markets in Africa and this will be largely supported by the manufacturing sector. Africa is awash with opportunities and it is time for Kenyan companies to take advantage of those opportunities. There is need for more incentives and support for the sector in order to achieve the two digit economic growth rate that the country is aiming for.


Kenya Association of Manufacturers has been leading delegations to countries in Africa as part of ongoing efforts to tap into the emerging markets. A trip by industry giants was held two years ago to Nigeria and Ghana. The last mission was to Zimbabwe which presented a lot of opportunities for Kenyan investors.


The mission to Ethiopia will undoubtedly open doors for more opportunities and lessons as Kenyan investors claim a larger market share in Africa.

Kenya and Ethiopia combined today are home to 14% of Africa’s population. However, the two contribute less than 5% of Africa’s GDP.  There is need to work in concerted ways to increase the slice of this GDP which is expected to increase by 62% in 8 years.


The writer is the Chief Executive of Kenya Association of Manufacturers and can be reached on This e-mail address is being protected from spambots. You need JavaScript enabled to view it

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