Further development of manufacturing can play a central role in driving economic transformation and job creation in Kenya. There is now a window of opportunity for Kenya (and other East African countries) to capitalise on positive underlying factors in the global economy – including rising wages in Asia, the rebalancing underway in China, and strong regional growth in Africa – and significantly expand its capabilities and global presence in export-oriented, labour-intensive manufacturing within the next 20 to 30 years.
But the recent performance of the Kenyan manufacturing sector has been weak. The share of manufacturing in Kenya’s gross domestic product (GDP) was only 9.2 percent in 2016 (well below average for a country with Kenya’s level of income) and this share has been declining in recent years. Several decades ago, Kenya had a relatively complex and substantial industrial sector by regional standards, but its East African neighbours have been catching up in recent years.
Decisive and comprehensive action is required in order to reverse the decline, double manufacturing production and employment, and increase the share of manufacturing to 15 percent of GDP within the next five years. With this in mind, the Overseas Development Institute (ODI) and Kenya Association of Manufacturers (KAM) developed a 10-point policy plan to transform Kenyan manufacturing and create jobs. These 10 points, based on close co-operation amongst a range of stakeholders, aim to inform pre-election debates and can also be used by the new government to implement a more focused and effective industrialisation strategy.
There has been an analysis of the manifestos of the three main political parties to determine the extent to which they support manufacturing in Kenya and the region. The manifestos of Jubilee, the National Super Alliance (NASA) and the Third Way Alliance were launched at the end of June 2017. All three parties emphasise the industrial agenda as central to Kenya’s economic transformation in general terms, which is encouraging, with NASA emphasising innovative initiatives and especially the small and medium enterprise (SME) and informal sector, and Jubilee and the Third Way Alliance being more specific in their recommendations.
There are a range of notable similarities with the 10 policy priorities in the KAM-ODI booklet. Firstly, all three parties prioritise addressing either general or specific aspects of the enabling environment. The Third Way Alliance commits to addressing counterfeit goods, one of the KAM-ODI action points. Secondly, all three parties want to enforce a fiscal regime that is predictable and fair, a key action point among the ten policy priorities, and emphasise fair taxation in particular. Jubilee further discusses the action point on devolution. The Jubilee manifesto discusses the KAM-ODI action point on land banks and NASA and the Third Way Alliance discuss industrial parks, which need land. The Third Way Alliance pledges to work with county governments to set aside land for industrial parks, offering a practical way to implement the KAM-ODI action point on securing land for SEZs and industrial parks.
The feasibility of the creation land banks and setting aside land for industry will be linked to issues of acrimony over land title and cost of relocating populations on said pieces of land. For example, an SEZ was due to be set up in the Western part of the country but had to be scrapped as an agreement could not be reached on what land could be used due to claims of title on the piece of land. Thus all parties will have to undergo a thorough land audit in the areas the government intends to develop industrial parks and SEZs and begin with areas where there is clear land title that is not contested.
In terms of energy, NASA discusses the need for an energy policy. Jubilee highlights the need for lower electricity tariffs for industrial usage and the Third Way Alliance calls for liberalisation of the energy sector and revisions to electricity billing and pricing to reduce the cost of electricity for key manufacturing sectors. Both NASA and Jubilee highlight the need for investment in electricity infrastructure. Jubilee also emphasises green energy and, in a similar vein, NASA and the Third Way Alliance focus on ramping up clean and renewable power generation.
What most of the manifestos are not clear on is how they will reduce the cost of energy in the country. For example, Kenya needs a reduction of five cents per kilowatt hour would bring the cost down to that in Tanzania. It is only the Third Way Alliance manifesto that states they will tackle the cost of energy issues by liberalising the energy sector and revising electricity billing and pricing. However, an additional problem with energy in Kenya is power outages; Kenya has more power outages than Uganda, Rwanda and Ethiopia. None of the manifestos are not clear on how this will be addressed. All three manifestos are vague on the type of reforms and investments needed to address inefficiencies and incentivise investment in power transmission and distribution.
All three parties suggest the establishment of industrial funds or development banks specific for industrialisation, such as an export-import bank (Jubilee and the Third Way Alliance) or a co-operative fund for agro-processing (NASA). But none of the parties place strong emphasis on suggestions for financial sector development. Similarly, the three parties’ manifestos do not give attention to foreign direct investment (FDI) to promote industrialisation. While these plans sound feasible, the implementation of these financing schemes will determine uptake by private sector. Ideally, the funds should offer financing perhaps at concessionary rates. The most important factor however is that the funds need to be patient such that private sector has time to use the capital effectively and generate returns over a realistic period of time. Yet the manifestos are not very clear on how financing to the sector will be structured. The Jubilee manifesto comes closest to specifics, stating that they seek to provide long-term credit funded by long-term bonds; one wonders why this strategy has not already been deployed. Further, none of the parties place strong emphasis on suggestions for financial sector development or how to promote FDI to support industrialisation.
In terms of skills, NASA and the Third Way Alliance highlight the importance of general education, whilst Jubilee prioritises the need to nurture a globally competitive work force to power industrialisation. NASA and Jubilee stress the importance of linkages between universities and the rest of society, although Jubilee seems clearest on this and explicitly mentions the need to develop formal linkages between the private sector, academia and government. At the moment, there is a sizeable gap between what is taught to students and what the job market requires. Therefore, if curricula are not significantly revised and linked to a push to encourage students to take up of science, technology, engineering and maths (STEM) subjects, any partnerships with academia may not be fruitful in terms of creating a labour force with skills required for industrialisation. Jubilee manifesto’s pledge to promote the study of science, technology, engineering and maths but again, one wonders this has not already been done. Both the NASA and Third Way Alliance manifestos do not contain specific details on which subject areas to target for educational improvements.
NASA and Jubilee highlight the role of a fit for purpose civil service to support industrialisation. NASA stresses the need to reduce contractors’ cost of doing business with government, streamline procurement, process payments promptly and inculcate a zero tolerance approach to corruption. Jubilee wants a truly fit for purpose public service, and mentions the importance of reducing waste, dealing with procurement and rationalising the public sector wage bill. The Third Way Alliance has a narrower focus on measures to combat corruption. This element will likely prove to be the most difficult to implement as Kenya has notoriously been unable to hold those implicated in corruption scandals to account. Thus, it is dubious as to whether any of the parties have the political will required to implement this element of the manifestos.
The Third Way Alliance manifesto places strong emphasis on developing value chains in priority manufacturing sectors, including agro-processing, textiles and leather; but some of the Alliance’s proposals to support value chain development are quite protectionist in nature. The NASA and Jubilee manifestos also mention value chains, with the NASA manifesto emphasising synergies and linkages amongst enterprises. The issue of value chains is closely linked to agriculture and what has become clear over the first iteration of devolution is that agriculture seems to be neglected by both county and national governments in terms of budget allocations. According to the International Budget Partnership (IBP), national government allocated the sector as follows: 2 percent in 2015/16, 1.3 percent in 2016/2017 and 1.8 percent in 2017/18. As IBP points out, the Maputo Declaration 2003 calls for allocation of at least 10 percent of total national budget towards agriculture. The average expenditure on agriculture in Africa is 4.5 percent; Kenya’s national allocations are clearly sub-par. Thus for the value chain manifesto declarations to work, there is need to more robust allocations to agriculture at national and county level and better coordination between the two levels of government; none of the manifestos articulate how they would make this happen.
In the context of the EAC, the push for exports in the KAM-ODI booklet is important. Both NASA and Jubilee press for better market access, NASA for SMEs in particular. Improving and/or maintaining market access in the EAC is an important element of the NASA and Jubilee manifestos, aligning well with the KAM-SET call for an export push. The Jubilee manifesto focuses on expanding Kenya’s access to the US in textiles, whereas NASA emphasises market access for MSEs. In contrast, improving access to markets for Kenyan exports is not prioritised in the Third Way Alliance manifesto.
To be clear, access to EAC for manufactured goods is riddled with problems. Total exports from Kenya the EAC registered a 4 percent decline in 2016 to KES 121.7 billion, with exports to Uganda and Rwanda falling by 9.3 percent and 2.5 percent respectively. Further, opportunities offered by the EAC’s integrated market has institutional and regulatory barriers to trade such as such as customs clearance, standards and certification, rules of origin, licences and permits, truck inspections and language barriers. None of the manifestos address these issues. Further, the entry of China and India into the regional market has eroded Kenya’s EAC market share from 9 percent in 2009 to just 7 percent by 2013. The World Bank claims that Kenya’s trade performance is declining quickly due to an influx of goods from China into Uganda and Tanzania, which are major export destinations for Kenya. In the manifestos it is not clear how EAC market access issues will be addressed. The Jubilee and NASA manifestos make general statements about Kenya’s role within the EAC, but there is little detail in either manifesto in terms of specific measures or priorities to support access for Kenyan goods in the EAC market. The Third Way Alliance’s manifesto does not make any reference to Kenya’s role in a regional context.
Anzetse Were is a development economist; email@example.com
This article first appeared in my weekly column with the Business Daily on June 18, 2017
Manufacturing can play a crucial role in Kenya’s inclusive growth by absorbing large numbers of workers, creating jobs indirectly through forward and backward linkages to agriculture, raising exports and transforming the economy through technological innovation.
It is with this in mind that the Overseas Development Institute and the Kenya Association of Manufacturers coordinated a multi-stakeholder process to determine how the manufacturing sector can create 300,000 jobs and increase the share of manufacturing in GDP to 15 percent in 5 years.
A plan titled ‘10 policy priorities for transforming manufacturing and creating jobs’, has been developed focused on key actions that can be taken to build the manufacturing sector and achieve the aforementioned goals. The plan is rooted in the Kenya Industrial Transformation Programme and the Vision 2030 Manufacturing Agenda targeted at priority sectors of both formal and informal manufacturers (jua kali) as both sectors need support if Kenya is to industrialise equitably.
The first issue to address is the business environment in Kenya. While Kenya has moved up 21 places, in its position World Bank’s Ease of Doing Business Rank, considerable constraints exist particularly in dealing with construction permits, paying taxes and registering property. Thus further action is needed to improve the business environment. Additionally, for manufacturing to flourish the country needs a fiscal regime that is more articulated to support the sector. Fiscal policy at both national and county level needs to be more deliberately leveraged to support industrialisation through, for example, developing fiscal incentives that drive investment into manufacturing.
The third action point concerns making land more accessible and affordable. Research by Hass Consult reveals that the price of land in and around Nairobi has increased by a factor of 6.11 to 8.05 since 2007. Aggressive increases in land price dampen investor appetite for investment in manufacturing which tends to be land intense. Thus there is a need to prevent inflationary speculation on land prices, and develop government land banks earmarked for industry.
Energy costs continue to be punitive in the country and make Kenya’s manufacturing sector less competitive than even its East African neighbours. Government efforts need to not only target increasing energy generation but also lower energy prices and increase the quality and consistency of energy to the industrial sector. This should be coupled with a key gap constraining the sector- access to finance. Manufacturing companies, particularly SMEs and informal industry, are undercapitalised and face multiple obstacles to obtaining access to finance. Bespoke financing mechanisms aimed at the sector, such as through an Industrial Development Fund, need to be fast-tracked.
Kenya cannot leverage manufacturing for economic development without creating a more aggressive export push into regional and international markets. Kenya’s exports to the EAC are declining and opportunities such as AGOA can be tapped into more effectively. Additionally, Kenya needs to reorient education policy and skills development towards STEM subjects so that the skills in the labour pool drive the growth of manufacturing.
Finally, overall coordination in the sector is crucial. An agency in government should be created that coordinates all government entities relevant to industrialisation such as agriculture, education and the National Treasury. The private sector also needs to better coordinate particularly along value chains to drive sub-sector growth in a more robust and targeted manner. Finally, there is a need for better coordination between public and private sector through fostering trust and reciprocity to drive industrialisation forward.
Anzetse Were is a development economist; firstname.lastname@example.org
This article first appeared in my weekly column in the Business Daily on February 26, 2017
Last week I had a chance to attend and speak at the Africa Energy Indaba in South Africa. Several themes emerged during the conference that spoke to the need for and potential of the development of energy infrastructure on the continent, as well as the constraints that hold energy development back.
The first was the issue of energy inter-dependence versus energy sovereignty. Should nations seek to be self-sufficient with regards to energy production or should nations collaborate and pool energy resource to service populations across borders? The idea of energy sovereignty is an important part of national security particularly in countries such as Kenya with porous borders and the threat of terrorism looming. Energy sovereignty allows the country to secure all generators of energy for the country and control access in a manner that interdependence would not allow. If Kenya agrees to rely on neighbours for a significant portion of the electricity servicing the country, it has limited room for recourse should power stations be compromised in neighbouring jurisdictions. At the same time, there is a case for inter-dependence and the creation regional sources of energy where countries support each other as needed. For example, Kenya is current facing a crisis in the energy sector, specifically electricity, due to the drought that has led to insufficient power generation from hydro sources. Had Kenya been in a substantive agreement with neighbours, the country would be able to address the crisis in hydro power and draw energy from regional sources.
Another theme of the conference was approaching energy infrastructure development from a regional perspective. This regional approach to energy infrastructure development seems to already be happening in parts of the continent, particularly Southern Africa. However, formal regional cooperation can only be effected through deliberate planning at the regional level. Regional energy planning has to be methodical and cannot be merely an amalgam of national energy plans of member countries; Africa has found this to be difficult. Another factor constraining regional energy development is the reality that although regional energy plans can be cheaper and more sensible in the long term, getting political buy-in is difficult. Regional energy projects can take years to deliver concrete benefits to member populations; however the politicians leading the creation of such initiatives exist in the bubble of 5-year political cycles. So how can one expect politicians to commit to plans the fruits of which will likely emerge after their tenure? Thus the question then becomes: How can Africa create stable regional bodies that lead and ensure continuity in regional energy development regardless of the politicians in power?
The final theme of the conference was a familiar one: the battle between renewable energy (wind, solar, geothermal and hydro), and non-renewable energy (diesel, coal and nuclear). Both have advantages and disadvantages. The disadvantages of non-renewable sources are that they are pollutants both in extraction and consumption, are finite and some are very expensive. However, they deliver a solid and stable baseload on which other energy sources can build, and technology is making them cleaner and safer. It is not a secret that renewable energy sources have gained popularity in recent times as climate change and global warming have become issues of growing concern. Renewable energy has the advantage of being clean, infinite, easily deployed off-grid in remote areas, and some are becoming affordable. However, the challenge with renewable energy is that it tends to be intermittent and cannot truly provide a baseload. The main renewable that can generate baseload is hydro, but even that is not reliable as Kenya is witnessing during the ongoing drought. Thus what is Africa’s ideal energy mix?
The concluding position was that each country has to assess its domestic energy sources and create energy development strategies based on their own assets and eventually link these to regional energy assets and development plans.
Anzetse Were is a development economist; email@example.com
This article first appeared in my weekly column with the Business Daily on March 1, 2015
Kenyans take the country’s regional hub status for granted. Some argue this is warranted because Kenya has the largest GDP in the region, has been one of the most stable countries over the years, has notable diplomatic clout, houses several regional headquarters of multinational companies, is home to innovation and has better social and physical infrastructure than most of its neighbours.
But focus even at the regional level reveals that Kenya should wake up to the fact that there is a tussle for the crown of the title of ‘Regional Hub’.
Emerging analysis seems to indicate Tanzania strives to become a transportation and tourism hub, Rwanda is focused on becoming a business and trade logistics hub, Burundi is making strides in becoming the regional leader in food security and Ethiopia seems committed to becoming the region’s energy hub.
Kenya ought to be aware of Tanzania’s tourism ambitions and how that may further cripple what used to be one of our top forex earners.
Without the looming threat of terror attacks, Tanzania is positioning itself as safe alternative to Kenya both for the safari experience in the mainland and the coastal experience in Zanzibar.
In terms of transportation Tanzania is again taking on Kenya and seeks dominance in the area that straddles the Indian Ocean and Nile Basin via the Dar es Salaam port.
Further there are plans to construct a new port in Bagamoyo and another at Mtwara, the latter which could serve northern Mozambique and Malawi.
Rwanda has made the greatest strides in the region in making it easier to start and conduct business in the country; Kenyans seems to have taken note of this.
However, Kigali’s ambition in trade logistics has been more subtle. Kenya sees itself as the natural leader in this area having attracted international logistics firms to the country reflecting the country’s role in connecting the region as well as the logistics needs linked to mega infrastructure projects planned in East Africa.
However, Rwanda has clear ambitions in changing this to become the centre of trade logistics services in the region by developing a dry port in its capital (the Kigali logistics platform) to enable quick turnaround of logistics services and reduce associated costs with the ultimate aim of exporting logistics services to neighbouring countries.
Nobody links Burundi to the term regional hub. However, the country has a focused strategy on rice production with a view to becoming a hub for food security.
Rice may seem like an arbitrary crop choice, but research done by an agricultural organisation found that increased production of rice could be an important factor that could save the region $500 million spent on imports annually.
Burundi seems set to beat Kenya to become a leading regional hub for food security by producing high quality, high yielding rice varieties while providing sustainable methods of growing rice to boost regional food security.
Finally, Ethiopia is the one Kenya should watch when it comes to energy. Ethiopia has a grand 25-year plan to make the country the best and cheapest energy supplier in the region.
With an aim of generating up to $1 billion annually in revenues, Ethiopia is digging in for the long haul, investing in energy to not only power Ethiopia and the region but export power to Sudan, Somalia and even Egypt.
Kenyans should get out of the comfort zone and wake up to the reality that countries in the region have ambitions of becoming regional hubs.
They have developed clear strategies on how to do so and are implementing these plans aggressively.
Ms Were is a development economist; E-mail: firstname.lastname@example.org; twitter: @anzetse