Building resilience and sustainability of manufacturing sector

KAM says keen to prevent sector from shocks brought about by crises, such as Covid-19.

In Summary

•A survey in partnership with KPMG revealed 78 per cent of manufacturers had to swiftly shift their focus from increasing profitability, revenue and domestic market share pre-Covid.

•Currently reducing costs, retaining jobs, and improving cash flow remains key.

Kenya Association of Manufacturers CEO Phyllis Wakiaga/COURTESY
Kenya Association of Manufacturers CEO Phyllis Wakiaga/COURTESY

Manufacturing like any other sectors of the economy has been affected by Covid-19. The Star’s Martin Mwita spoke to the Kenya Association of  Manufacturers CEO Phyllis Wakiaga, on the state of the sector during the pandemic and post Covid-19 recovery strategies.

In a nutshell, what would you say is the status of manufacturing in the country?

Covid-19 has had an impact on all sectors and the manufacturing sector has not been spared. Earlier this year, we conducted a survey in partnership with KPMG. From the survey 78 per cent of manufacturers had to swiftly shift their focus from increasing profitability, revenue and domestic market share pre-Covid to currently reducing costs, retaining jobs, and improving cash flow. Currently, our focus is on building the resilience and sustainability of our manufacturing sector to preventing us from suffering from shocks brought about by crises, such as Covid-19.

What are the major challenges manufacturers are facing this period?

From the KAM, KPMG survey, that I mentioned earlier, the pandemic led to reduced output and consumption, attributed to reduced working hours, difficulties in sourcing for raw materials due to supply chain disruptions and cash flow constraints. KAM is constantly engaging the government on policy measures to cushion businesses in the country to ensure their continuity.

The country has witnessed job losses during this time. How many have been affected in manufacturing? 

From the survey, manufacturers’ top priority was reducing costs, job retention, and improving cash flows. However, 40 per cent of manufacturers had to reduce their casual workforce with 73 per cent retaining their permanent employees.That said, we are glad to note that companies that repurposed their lines to manufacture essential items were able to call back their casual workers whereas other created new jobs. One thing to reckon is that even as manufacturers saw a reduction in output and sales, most did not increase the prices accordingly. This is attributed to a moral obligation to be very supportive of our country as we all work together to overcome the current crisis.

Which are the most hit sub-sectors?

An overwhelming number of manufacturers experienced a fall in turnover, with at least 23 per cent registering losses in the range of 65-100%, and 51% between 30-65%. This was attributed to a fall in demand of products. The worst hit sectors were the textile and apparel and timber, wood and furniture sectors followed by the leather and footwear who had a loss in turnover of more than 65%. However, some sectors saw an increase in turnover. These include metal and allied (18%), chemical and allied (6%), paper and paperboard (5%) and food and beverages (3%).

Are there any opportunities seen during this period? If any have, we capitalised on them?

Definitely! we have identified 76 opportunities for investment and value addition through our Manufacturing Resilience and Sustainability Policy Toolkit that we launched last month. Among them, the manufacture and supply of medical equipment, investments in adopting new technology, increased attention to developing local value chains to reduce dependence on imports, circular value chain, agro-processing, regional leather value chain integration and packaging materials. We are keen to see local industry take up these opportunities and shall continue to engage the government on the overarching interventions needed to aid in the recovery of the manufacturing sector and economy, even as we navigate different challenges brought about by the pandemic.

Cabinet approved the formation of a credit guarantee scheme with an initial seed of Sh5 billion in the current financial year, will this make a difference?

The approval of the formation of a credit guarantee scheme is a step in the right direction, especially because small and medium enterprises (SMEs) constitute 80% of the private sector. However, this amount needs to be increased to cater to more SMEs in the country. This is because cushioning SMEs will increase their resilience to shocks arising out of Covid-19, thus accelerating the country’s economic revival. As a long-term solution, we should make efforts as a country to boost inclusive economic development for job and wealth creation by creating an enabling environment for businesses to thrive in.

How is VAT refunds going? 

Kenya Revenue Authority has commenced payment of VAT and WHVAT refunds. A number of manufacturers have started receiving their claims in the last three months. However, other manufacturers are yet to get the refunds on their claims We have engaged KRA and we are hopeful that these challenges will be resolved to enable manufacturers unlock their cash flow.

The government has given some help with taxes, has it had any relief on manufacturers?

From the KAM, KPMG survey on the impact of Covid-19 on the manufacturing sector, manufacturers welcomed the reduction in PAYE rates from 30% to 25% to cushion Kenyans from the impact of the pandemic. This was helpful in increasing the disposal income of their employees. 71% of manufacturers found the exemption of tax to those earning below Sh24,000 helpful whereas 60% of surveyed manufacturers responded positively to the reduction of corporate tax from 30% to 25%. The amendment of the corporate tax rates for resident companies aimed to cushion the companies from Covid-19 and at the same time reduce the tax burden. This incentive may not benefit companies that are in significant tax losses, which primarily arise out of investment deduction claims. This coupled with the some of the measures introduced through the Finance Act, 2020 that introduced a minimum tax, may work against cushioning companies and citizens from the impact of Covid.

What do you have to say to banks during this time noting manufacturing is a capital-intensive sector?

Financial institutions are strategic partners in the growth of the manufacturing sector.The association continues to partner with banks to identify and analyze funding gaps, institutional challenges and key impediments in the manufacturing sector and collaborate on implementing solutions to access to finance for local manufacturers. I urge banks to tailor-make financial solutions for industries seeing that they are capital-intensive. Additionally, provide affordable finances to the sector players, particularly SMEs who may not have collaterals required to acquire financing.

Apart from financing and tax relief, is there anything else that needs to be done to cushion players in the industry?

As I highlighted earlier, we launched a Manufacturing Resilience and Sustainability Policy Toolkit that makes recommendations to aid the country’s economic and manufacturing sector’s recovery from the impact of Covid-19 as businesses navigate challenges caused by shocks arising from the virus. The interventions include the adoption of a do-no-harm principle by the government whilst intervening in the market. This is by conducting a regulatory audit geared towards the creation of a supportive regulatory environment in Kenya as well as deferring any tax policies that will increase the burden to taxpayers. There is a need to support Small and Medium Enterprises (SME) development through provision of affordable credit. Additionally, we need to increase the resilience of the manufacturing sector by ensuring long term policy stability, improving the ease of doing business and developing regional value chains to minimize exposure from external shocks.

Has the private sector done anything to support its own? 

Whilst the government is the largest consumer of locally produced goods, the private sector, being champions of the Buy Kenya Build Kenya initiative, are keen on supporting each other. For example, through subcontracting opportunities between large companies and SMEs. As private sector, we can take up government’s instruments to support the production and consumption of locally produced goods in national policies and strategies and embed them in our day to day running of our companies. However, we must all be deliberate about the consumption of our locally made products for the sake of our country’s present and future economic sustainability.

How is the tax regime at county level and the cost of doing business in the country? 

Multiple fees and charges imposed by counties on manufacturers, among other businesses trading with the country, slow down our efforts to sell our products in the domestic market. The numerous county charges coupled with other regulatory licenses at national level make Kenya unattractive to do business in, as locally made goods became uncompetitive. Devolution has opened up the country and has not only created huge opportunities for manufacturing but has also enhanced local market access for locally made products. It is critical that these charges are harmonized across the counties to ensure that local industries are competitive and thrive. County governments need to be sensitive to the role of business community in the counties. An agreement must be reached to scrap the multiple business permits and other levies charged as goods move across counties.

How is the manufacturing and its supply chain doing during this pandemic? 

Manufacturers faced challenges in sourcing for raw materials and intermediate products due to disruptions in the supply chain caused by some of the measures put in place to curb the spread of the virus. Supply chain shocks caused by the Covid-19 pandemic revealed the risk of over-relying on imported goods and therefore laying bare the need to support and develop local industry. However, local industries went over and above to cushion the country from the impact of the pandemic. They ensured that we do not run out of supplies, by continuing with production to Keep Kenya Moving. They also made donations to their communities of food packs, sanitation items including soaps, hand sanitizers and tanks.

The Buy Kenya Build Kenya is being fronted as one way to help local industries remain afloat and grow post Covid, are we getting it right? If not what needs to be done? 

Government has put in place some measures to promote Buy Kenya Build Kenya, for example, development of a list of goods to be exclusively sourced locally. However, more needs to be done to ensure the success of the initiative. We urge the government to expand this list, to include all sectors of manufacturing to ensure more market share for industry. Additionally, it must fully support the production and consumption of locally produced goods in the country. This includes driving the competitiveness of the sector through predictable policies, reduced costs and levies charged in counties, lower cost of electricity amongst others. Local industries have the potential and substantial capacity to serve our local markets if only such opportunity is provided. This will be a sure way to grow local industries, create massive employment along the value chains and ultimately, led to the realization of the Big 4 Agenda. Furthermore, consuming our local products as a nation instills in all of us a sense of ownership in the making our economy.

Cost of power has been one of manufacturers concerns, what is the current situation?

Electricity is an important input in the manufacturing processes. Energy uses and costs will vary from sector to sector within the manufacturing industry. In some sectors they may be as low as five per cent-one per cent of costs whereas in others they may account for up to 30%. The industry has often expressed concerns over quality, reliable and cost of electricity supply for manufacturing. Whilst the country has made a lot of investments in increasing our installed energy capacity, the Purchase Power Agreements signed by the government are expensive. This means that consumers have to bear the high fixed costs paid to investors. Furthermore, there are many taxes and levies imposed on the electricity bills such as Rural Electrification, WARMA and EPRA Levies, VAT and Fuel Cost Adjustment among others, which impact on the cost of electricity. We are also experiencing depressed demand growth despite the increased power generation in the country. This can be reversed by increasing the competitiveness of local industries and encouraging the growth of SMEs to increase productivity and in turn, increase power demand.

Is there something that can be done to ensure affordable power for the country’s industrial sector?

To ensure affordable power for industry, government can complete energy projects across the country to ensure access to affordable, good quality energy for local manufacturers. For example, the Mombasa – Nairobi evacuation line is yet to be completed. The introduction of the Energy Rebate Programme was a welcome move for manufacturers as it would reduce their electricity cost, which is one of their significant direct. This was a government’s incentive to promote manufacturing in line with its Big Four Agenda. Unfortunately, in this year’s Finance Act, it was scraped, exposing manufacturers to an increase in the cost of power. I urge government to reconsider this decision to enable local industry to reduce the cost of inputs. Industry can also take advantage of the Time of Use Tariff, and operate in the off-peak hours, to help them save on energy costs.

The government is keen to rise manufacturing sectors and ontribution to GDP to above 15% by 2022, is it still achievable under the current conditions?

Manufacturing has been identified as a key pillar in the country’s development goals, as outlined in His Excellency, the President’s Big Four Agenda. At present our focus as a country is to build the resilience of our economy and one way to do so is to nurture the local manufacturing sector. This is such a difficult time; we have seen businesses suffer from the impact of Covid-19. If we implement the proposals outlined in our recently launched Manufacturing Resilience and Policy Toolkit, we shall be able to bounce back to striving to achieve a 15% contribution to the GDP.

On tariffs and levies in cross-border trade in key blocs of EAC, COMESA and SADC, are there any concerns/proposals by manufacturers in Kenya? 

Regional trade integration is a cornerstone of EAC and COMESA trade policies. This involves strengthening of public institutions and private sector organisations involved in export promotion. Trade contributes towards industrialization and structural transformation. The prosperity of any nation not only depends on a country’s productivity but also on the strategic choice of trading partners, export products, and policies that promote trade. Through EAC and COMESA trade, we hope to realize enhanced market access, reduced cost of doing trade, smooth flow of goods and services within the region, removal of trade and non-trade barriers and improved standards of goods produced in the region for enhanced consumer protection. However, regional trade continues to face a number of challenges, including illicit trade, trade and non-trade barriers, an inefficient transport and logistics system and delays in clearance at the ports of entry.

There have been calls for a predictable business environment, what does this mean in manufacturing?

For any economy to attract investments, it must be able to earn and maintain investor trust. Both local and foreign investors gain confidence to trade in a business environment that guarantees a stable and predictable macroeconomic framework for businesses. Predictability and investor confidence are mutually inclusive. Investors derive confidence to invest where they trust policymakers and the government’s intent to maintain a predictable environment as much as possible for their investments to yield returns. Without predictable policies, investors are not only discouraged from scaling up their business, but they begin seeking alternatives which are basically more suitable, predictable and secure markets to relocate their businesses.

Any policies needed to support post Covid-19 recovery?

There are various policies that we need to implement to support post Covid-19 recovery. These include the adoption of a do no harm principle, supporting SME development, and increasing the resilience of the manufacturing sector by ensuring long-term policy stability. Additionally, the government can nurture nascent and emergent business opportunities uncovered by the Covid-19 pandemic and create fiscal space by rationalizing government expenditure through operationalization of the public investment management guidelines. By taking the following into account, stakeholders in the manufacturing sector will be in a position to better build business resilience plans and policies, prioritize their workers, monitor potential pain points, and implement measures to stay resilient during this crisis and beyond.

KAM has launched a Centre for Green Growth and Climate Change. Tell us about it?

Through the Centre for Green Growth and Climate Change, KAM seeks to provide a one-stop solution to deepen industry level interventions, promote circular economy, promote climate change actions, and financial linkages that prioritise people and planet. The Centre shall develop a strong pipeline of investor-ready green projects and work with green financiers to reach financial closure, transfer knowledge on a business-case for Climate Change initiatives at the firm level in complying with government policies and regulations. Additionally, it shall provide industries with the best practices on environmental compliance through capacity building and compliance assessment in line with environmental regulation, reduce industrial carbon footprint by creating awareness and promote a circular economy in the manufacturing sector to ensure sustainability.

What has Covid-19 taught you and which way forward for manufacturing in the country?

Local manufacturers have demonstrated their capacity to produce high-quality goods, with the most recent demonstration being the certification of the first locally manufactured ventilator by KAM’s automotive sector led by Mutsimoto Motor Company Limited. Supply chain shocks caused by the Covid-19 pandemic revealed the risk of over-relying on imported goods and therefore laying bare the need to support and develop local industry.We can forge the resilience of our industries by enhancing our local value chain from raw materials to finished products. By doing so, we can shelter the manufacturing sector from industrial and trade risks arising out of external shocks. This way, Kenya can source raw materials and intermediate products locally, before turning to international markets.