Weathering the pandemic and growing the manufacturing sector

KAM says the sector has proved to be resilient

In Summary

•The association calls for reduced cost of doing business, as high taxation remains a burden.

•The country’s manufacturing sector has played a major role in the fight against the pandemic, with the local production of PPEs.

KAM chairman Mucai Kunyiha/
KAM chairman Mucai Kunyiha/

As the second quarter of 2021 unfolds, what is the state of the manufacturing sector? 

At the beginning of the year, we were optimistic that we would see economic recovery after being hard hit by the Covid-19 pandemic last year. Currently, our economy is in a frail state–the spiraling debt, high cost of doing business, corruption, an inefficient transport and logistics system, policy unpredictability and instability as well as rolling back of measures put in place to cushion the economy from the effects of the pandemic, which continue to hinder our competitiveness and productivity.

What are the biggest challenges the sector is facing during this pandemic period?

From a KAM, KPMG survey conducted last year, manufacturers saw reduced demand, faced challenges in sourcing for raw materials, cash flow challenges and reduced working hours which drove down production and output. The effect is more severe for SMEs, who face challenges in meeting their financial obligations. Despite these challenges, they did not increase the cost of their goods and even supported the country during the difficult period. To cushion businesses from the impact of the pandemic, government developed measures, such as reduction in tax rates and directives to make payments for pending bills. However, it has since rolled back these measures, and even introduced new taxes, such as minimum tax, through the Finance Act, 2020. The tax will have adverse effects on businesses, including deterring startup businesses, increased costs to consumers as business transfer costs to stay afloat, increased cash flow constraints, which will consequently push struggling entities to reduce operations and worse, premature closure leading to loss of jobs. This will push the economy into a downward spiral of contraction, and disincentivize capital-intensive venture such as manufacturing that have heavy initial investment costs and have a longer payback period, among others. On the other hand, customers’ propensity to spend will be impacted as the cost of products increase in a cash-constrained environment. Not to mention, the effects of dwindling cash streams in many households due to job losses.

You recently launched the Manufacturing Priority Agenda (MPA) 2021, what are the key takeaways?

The MPA is an annual publication that guides the association’s advocacy efforts with government and its agencies. The 2021 MPA is themed “From surviving Covid-19 to thriving: Manufacturing sector rebound for sustained job and investment growth”. Five pillars to support recovery of the sector from the devastating effects of the pandemic guide this year’s MPA. They focus on enhancing competitiveness and level playing field for local manufacturers, enhancing market access for locally manufactured goods both in local and export markets, promoting pro-industry policy and institutional framework, promoting SME development and enhancing industrial sustainability and resilience.

What strategies do you have in place for post-Covid-19 recovery? 

Our post-Covid economic recovery strategy is anchored on the MPA pillars. To enhance competitiveness and level playing field, we are looking at improving regulatory efficiency, promoting access to quality, affordable and reliable energy, reducing transport and logistics costs, and enhancing cash flow for manufacturers to drive our competitiveness. On enhancing market access for locally manufactured goods, our focus is to promote the consumption of locally manufactured goods and diversify our export markets.Creating a healthy manufacturing ecosystem is crucial for the sustainability of businesses, to promote pro-industry policy and institutional frameworks. This can be achieved through sound policy, regulatory and institutional framework. Addressing challenges facing SMEs, to promote their development. Some of these challenges include access to markets, access to finance and governance challenges. Additionally, we will continue to spearhead the advancement of a sustainable and inclusive sector through green growth and skills development, in line with the SDGs and theUN Global Compact Principles. We will also nurture nascent and emergent business opportunities uncovered by the pandemic.

What would be the best support from government in post-Covid recovery? 

The most important economic recovery strategy government can institute is the containment of the pandemic. This is because; the current economic crisis is a product of health crisis caused by coronavirus. It continues to cause anxiety, leading to a downward spiral, whereby precautionary behaviour lowers consumption and investment, further weakening the economy. It is important to note that a conducive business environment is essential for speedy economic recovery. As such, government needs to create a conducive environment for businesses to operate in, by ensuring tax policy stability and predictability. Multiple changes in tax laws create business uncertainty. Government needs to expedite the conclusion of the proposed National Tax Policy. It also needs to review the current regulatory environment. Multiple, overlapping regulatory institutions impose huge costs on businesses. To remedy this, government needs to restructure additional state corporations, following the reforms carried out in 2014. In addition, fast-tracking the enactment of the Government Owned Entities Bill will re-align government functions and agencies with duplicative roles. Furthermore, implementing the Treasury Single Account shall enhance oversight of government cash flows, prioritise prudent management and use of public funds including national debt management. This shall remedy the leakages in government, that see the country lose money, despite the high amount of taxes both businesses and citizens pay. Finally, enhancing collaboration between the two levels of government. National government and counties should create workable mechanisms that permit integrated planning, budgeting and execution of budgets. This will create synergies especially when there is a national emergency such as the one created by the pandemic.

Manufacturing sector had the lowest GDP contribution (7.2% in financial year 2019/20) but highly taxed with the highest contribution to tax revenue (17.5 per cent), why is this?

Our past experience is that manufacturers are easy targets for tax increases with detrimental effects on our competitiveness. Our concerns are growing and especially as the pressure on tax collection rises. We note with much concern, for instance, the recent Budget Policy Statement (BPS) intention to raise taxation even further. From our analysis of the draft Budget Policy Statement, the Economic Stimulus Program (about 0.06% of GDP) is inadequate to guarantee speedy economic recovery. Additional support to households and businesses will not only help in the short run but will also put the economy in good stead as the pandemic wanes.

What impact is this having to the sector and what would be the best way forward?

The high amount of taxes we pay hinders our competitiveness and productivity as a sector. Additionally, sudden fiscal and taxation policy changes harm businesses and becomes a stumbling block to business continuity. Furthermore, where incentives are provided alongside government policies that seek to increase taxes, such as minimum tax and reduction of investment allowance deductions, the outcome is a zero-sum game for both government and local industries. Not only does it discourage investments but also reduces government revenue as production shrinks and jobs decrease. In addition to the newly introduced taxes, we are still experiencing delays in withholding VAT (WHVAT) refunds. We require long-term solutions to these challenges, to enhance cashflow, which ensures business continuity. These taxation challenges make the business environment hostile for manufacturers and hinders investments. We recommend the amendment of the Public Finance Management (PFM) Act 2012 to establish a Tax Refund Fund, increase of monthly budgetary allocation for VAT and excise tax refunds to about Sh5.5 billion and a one- off payment from the National Treasury to clear all outstanding WHVAT and Excise Tax refunds.

Do you think Kenya is competitive enough in-terms of cost of doing business? 

The UNIDO 2020 Competitive Industrial Performance (CIP) Index ranks Kenya’s industrial competitiveness at position 115 out of 152 countries. This is in comparison to our key competitor markets in Africa such as Egypt and South Africa that rank at positions 64 and 52, respectively. An analysis by Kenya Association of Manufacturers (KAM) on the sector’s competitiveness indicated that manufacturing is at a 12.8 per cent cost disadvantage. Competitiveness is requisite, for our economic recovery and our ability to compete in the new markets globally, created through bilateral and multilateral agreement including Africa Continental Free Trade Agreement, Kenya–UK Agreement, among others. It also ensures that we sustainably produce goods and services at the price and quality that the market is willing to pay for.

The government is rallying the Buy Kenya Build Kenya initiative;do you feel it is working?

Buy Kenya Build Kenya (BKBK) has been a great initiative. Initially, it started with government procurement, but it is slowly streaming to the private sector. There is more confidence in locally manufactured and produced goods. For example, this was demonstrated when government committed to source for essential items to be used in the fight against Covid-19. The exclusive sourcing of uniforms and related accessories for the disciplined forces from local manufacturers is a case example of the potential of the Buy Kenya Build Kenya strategy to transform the manufacturing sector. The Cabinet is considering the adoption of the Local Content Policy. This shall enable us enhance the value of our products, such as tea and coffee, by exporting more finished products as opposed to raw materials. A number of retailers have started a BKBK line, indicating that many Kenyans are starting to appreciate locally manufactured products. It is important that both the public and private sectors create awareness on locally manufactured products and encourage consumers to buy local. This entails affirming our commitment to building, creating, adding value and taking pride in the products that we make. Currently, KAM has partnered with Kenya Export Produce and Branding Agency (KEPROBA) and Ministry of Industrialization, Trade and Enterprise Development to raise awareness on locally manufactured textiles, apparels, footwear and fashion. KAM launched its Annual Kenya Manufacturing Summit and Expo aimed at promoting locally produced goods and profiling unique Kenyan inventions. Such trade fairs and exhibitions can be replicated in various counties and used as platforms for young businesses to profile their work. Government, being the largest consumer of goods and services, needs to fast-track the finalization of Local Content Guidelines, approval of Local Content Policy and expanding the scope of Local Content Bill to feature all sectors within manufacturing. The implementation of the above will not only ensure sustainable local value chain integration but also reduce industrial and trade risks arising out of external shocks.

Kenya continues to witness an influx of cheap imports which have eaten into the local industries’ market, why is this? 

As I mentioned earlier, our core issues remain competitiveness and productivity. For locally manufactured goods to have a competitive edge over imports, they need to be able to compete on a level playing field. This means reducing the cost of doing business, by for instance, giving tax breaks for imported raw materials and intermediate products, reducing the cost of taxes, fees, levies and charges imposed both at national and county levels and creating an efficient transport and logistics system.

How best can the sector be cushioned from high cost of power?

The price volatility experienced with varying electricity costs can be attributed to the cost of fuel. For instance, projects that were meant to reduce over-reliance on thermal power generation are yet to be completed. Key among these is the Mariakani Substation, which, if completed, shall ensure maximum evacuation of geothermal power to the Coast region. We urge the Ministry of Energy to fast-track this project, to cut down on the fuel cost component in the electricity bill. Western Kenya continues to suffer power interruptions and Kenya Power is forced to run an expensive kerosene-powered power station to support the region. Kerosene serves a double role of electricity generation and voltage stabilization. To remedy this scenario, we must grow consumption by seeking new markets, such as South Sudan and Southern Africa and reduce generation from thermal power stations to bare minimum while maximizing the use of geothermal and other renewables. Additionally, incentivise power consumption during off-peak periods through pro- industry Time of Use Tariff and ensure stability of energy policies and incentives. For instance, the introduction and sudden repeal of the 30 per cent rebate scheme.

There have been concerns that manufacturers are relocating to neighbouring countries like Ethiopia due to low power costs, is this true?

Generally, investors prefer destinations with accessible, affordable and reliable power that guarantees maximum utilization of machinery and equipment. Kenya is still struggling to meet these conditions, forcing investors to go for destinations that meet their needs. To attract investors, Kenya needs to provide electricity at competitive prices, without compromising on quality and reliability.

Kenya has ratified the Economic Partnership Agreement with the UK. Will it have an impact on local producers? 

The Kenya- UK EPA covers general provisions, trade in goods, fisheries, agriculture, economic and development cooperation and institutional provisions among others. The EPA seeks to provide full, duty-free and quota-free market access conditions for goods originating from Kenya to the UK on a long-term and predictable basis. Trade shall be liberalized progressively, as Kenya enhances her production, supply and trading capacities, in order to enable Kenya to fully benefit from the EPA. Kenya’s top exports to UK are edible vegetables, tea, cut flowers, edible fruit and nuts, games and sports requisites, coffee, preparations of vegetables, fruit, nuts, live animals, oil seeds and oleaginous fruits, beverages, spirits and vinegar. The country has the potential to increase her export products to the UK for products such as textiles and apparels, processed tea and coffee, leather products, fish, livestock products and edible vegetable oils. Following the adverse effects of the pandemic, local industry emerged as a resilient sector. Despite being affected, the sector was able to withstand economic shocks. Local industry ensured to Keep Kenya Moving and ensure business continuity In light of this, and to fully take advantage of the opportunities provided by the EPA, the competitiveness of local industry must be prioritized. This is because in the Kenya-UK EPA, and other trade agreements, we shall be operating in a globalized market, and shall have to contend with global competition. The sven-year moratorium provided by the EPA gives us an opportunity to revitalize industries, in order to make them competitive before tariff liberalization for UK industries commences.

What is your take on the planned trade deal with the US? 

In the Kenya-US trade deal, we call for flexible rules of origin, to include universally accepted principals that should be aligned to the rules of origin that have been negotiated with EU, EAC and AfCFTA. Since Kenya is not isolated from other regional trade blocks, it is important that the US-Kenya FTA rules of origin incentivize production in the region. This shall be achieved by having cumulation provisions that allow originating status for locally manufactured goods to qualify for preferential tariffs, where raw materials and intermediates are sourced from EAC, COMESA, Tripartite and AfCFTA, which Kenya has already ratified. On Sanitary and Phytosanitary Measures (SPS), we need to be consistent with the WTO SPS Agreement. SPS measures should be based solely on internationally recognized scientific principles to minimise distortionary impacts. We also need to have strong provisions on transparency and public consultation on thetechnical barriers to trade. This requires the publication of drafts of standards, technical regulations and conformity assessment procedures. On Intellectual Property Right (IPR), the agreement needs to be built on the existing international conventions, which are compatible with WTO agreement on Trade-Related aspects of Intellectual Property Rights (TRIPS). Measures on both parties’ territory should provide effective protection and enforcement of intellectual property rights while ensuring that these measures do not become barriers to legitimate trade. Provisions on National Treatment in respect of categories of intellectual property such as patents, copyrights and related rights, trademarks, industrial designs, geographical indication should be adhered to. We also need to consider different levels of development between Kenya and US and introduce the principle of asymmetry. Kenya also needs to adhere to the WTO Agreement on Trade Facilitation and ensure that each party administers customs procedures in a manner that facilitates importation, exportation, or transit of goods while complying with each Party’s Customs law. It is critical that a framework of the WTO Trade Facilitation Agreement (TFA) to specifically address bottlenecks associated with both border measures (cost of trading, administrative procedures, customs systems among others) and “behind the border measures”. We propose that “Behind the Border” measures include competitiveness, export promotion, international standards, physical infrastructure, logistics and transport services. Essential measures must be taken to reduce lead time in export of goods, ensure timely delivery and reduce the final cost of exports. The FTA should be built on AGOA’s acquis, to ensure trade continuity between Kenya and USA, both in terms of duty and rules of origin. Additionally, government procurement needs to be protected as per the Local Content policy.

Manufacturing is one of the Big Four Agenda pillars, do you feel it is getting the right support from government?

The prioritisation of the manufacturing sector in the government’s Big Four Agenda was a welcome move. We have since seen the development of policies and initiatives to bolster industrial growth in the country, such as the Buy Kenya Build Kenya strategy, Local Content Policy and the formation of the Multi-Agency Team to fight against illicit trade, among others. However, Government gives with one hand and takes with the other–by developing policies that are not a reflection of this intent. For instance, our taxation policy, which continues to hinder our competitiveness as industry. Government introduced minimum tax payable at the rate of one per cent of gross turnover effective January 1, 2021. The policy makers are hoping to expand the tax base through the reduction of tax incentives/exemptions and introduction of new taxes. However, this is detrimental tolocal businesses, since they are still suffering from the impact of the pandemic.

Is the 15 per cent contribution of manufacturing to the GDP by 2022 achievable? 

Competitiveness and productivity are our key challenges, as manufacturers. If not nurtured, achieving a 15 per cent contribution to the GDP shall remain a pipe dream. As such, government needs to create a conducive environment for businesses to operate in. It is only through this that we shall be able to achieve the 15 per cent contribution to the GDP by 2022.

Where do you see the country’s manufacturing sector in the next 10 years?

Currently, we have been presented with immense trade opportunities with the signing of various trade agreements such as the Kenya-UK EPA. This is in addition to the Africa Continental Free Trade Area (AfCFTA). To grow industry, we must be able to take advantage of these opportunities, and this calls on government to put in place mechanisms or initiatives to enable us to venture into these markets. During the pandemic, we also identified 76 opportunities in the manufacturing sector, which if nurtured, shall lead to the growth of industry. Some of these opportunities are in the textile and apparel, leather and footwear, pharmaceuticals, automotive and green growth sectors. Last year, in partnership with KPMG, we developed a policy toolkit to aid in charting forward the growth, development, and resilience of the manufacturing sector. Some of the overarching interventions highlighted in the toolkit include nurturing nascent and emergent business opportunities uncovered by the Covid-19 pandemic and adoption of a “do-no-harm” principle by government while intervening in the market by conducting a regulatory audit with the aim of creating a supportive regulatory environment in Kenya as well as deferring any tax policies that will increase the burden to taxpayers. Government also needs to support SME development through provision of affordable credit and ensure long term policy stability, improve the ease of doing business and development of regional value chains to minimize exposure from external shocks. Lastly, government needs to create fiscal space by rationalizing government expenditure through operationalisation of the public investment management guidelines.

Parting shot?

For our economy to grow, we must nurture our manufacturing sector. This calls on all partners and stakeholders to strive to make it the backbone of our economy – it is a resilient sector, as demonstrated by the Covid-19 pandemic.