BUSINESS ENVIRONMENT

Fix the basics to build Kenya’s industry

As a country, we should aspire for inclusive and sustainable industrial development.

In Summary
  • National government should promote a consistent taxation policy across counties.
  • This will encourage investors to establish industries across the country and not just in major cities, towns.

Kenya has been ranked 115 out of 152 countries in the latest Competitive Industrial Performance report by the UN Industrial Development Organization. This is a clear indication that as a country, we still have a long way to go in terms of improving our industrial competitiveness and performance.

Countries such as Germany, China and Japan, which score highly in the CIP index, have invested heavily in technology-based manufacturing. Improving manufacturing competitiveness has many economic benefits such as increased trade and investment, creation of more jobs and additional tax revenues for government.

Whereas Kenya cannot become an industrial giant overnight, with the right mix of policy and fiscal incentives, we can shift our industry to a highly efficient, competitive and technology-led model.

 

However, we must prioritise a number of areas that perennially undermine the competitiveness of our manufacturing sector, if we are going to transition into a tech-led industrial economy.

First, we need to create the right fiscal environment through a favourable tax regime for industries to thrive. Government should avoid over-burdening businesses with taxes by broadening the taxation base and improving revenue discipline.

This entails streamlining and harmonising the tax regime at the national and county levels. The national government should promote a consistent taxation policy across counties. This will encourage investors to establish industries across the country and not just in the major cities and towns.

On tax administration, the government should enforce prompt tax refunds since perennial delays strain business cash flows further constraining investment in additional manufacturing capacity and new technologies. There is also need to review the Tax Laws (Amendment) Act 2020, which reduced capital allowance on buildings, machinery and equipment from 100 to 50 percent. This is hurting capital intensive businesses like manufacturing. We need a tax regime that encourages local competitive manufacturing.

We cannot expect to grow into a tech-based industrial economy if we do not fix the basics. Also, investors tend to shun countries where the business environment is unpredictable.

 

Second, we must ensure consistency in policies and regulations that affect the business environment. An uncertain policy and regulatory environment discourages investment. Whereas Kenya has consistently improved in the Ease of Doing Business rankings, counties are especially notorious for haphazard policies and rules aimed at increasing revenue at the expense of business, trade and investment.

Yet, services in many counties are not commensurate with the increased taxes and levies, whose overall impact is to burden businesses with high costs of production. Additionally, digitisation of government services at national and county level will significantly improve efficiency and reduce delays and costs of accessing vital public services.

Third, is the need to reduce complexity and inefficiency of land transactions as this creates unnecessary delays for investors who want to build new factories and expand manufacturing enterprises.

Digitising land registries will also ensure transparency and efficiency in property transactions. Counties should also put aside land for special industrial zones in order to attract both large and small manufacturers by making land more affordable and accessible.

 

Fourth, is to lower the cost of energy and scale up investment in renewable energy as this will reduce production costs over the long term. Compared to other countries in the region, the cost of electricity in Kenya remains high, thus make our exports uncompetitive.

Fifth, we need to address the issue of non-tariff barriers on Kenyan exports into the regional (EAC) market. These include customs clearance as well as numerous licences, permits and fees that make Kenyan goods uncompetitive yet EAC is a vital export market for local manufacturers.

These are just a few measures that, if implemented, will make our manufacturing sector more competitive at regional and global level. We cannot expect to grow into a tech-based industrial economy if we do not fix the basics. Also, investors tend to shun countries where the business environment is unpredictable.

As a country, we should aspire for inclusive and sustainable industrial development. The international Sustainable Development Goal 9 includes promotion of inclusive and sustainable industrialisation while promoting innovation. This can only be achieved through a competitive industrial model anchored on the factors outlined above.