manufacturing priority agenda 2018 -...

MANUFACTURING PRIORITY AGENDA

2018

SPARKING KENYA’S INDUSTRIAL TRANSFORMATION FOR JOB CREATION

Sparking Kenya’s industrial transformation for job creation

• Contribution to Gross Domestic Product (GDP) from 9.2% in 2016 to 15% by 2022

• Increase value and volume of exports• Consumerbenefitsofmanufacturing• Economic and exports diversification

Competitiveness and level playing field

a) Reduce the cost of production for basic commodities b)Promoteaccesstoquality,affordableandreliableenergyc)Addressmultiplecharges,feesandleviesbycountiesd) Increase circulation of money in the economye)Reducetransportandlogisticscostsf)Availlongtermfinancingformanufacturersg)Fightillicittrade,contraband,substandardgoodsanddumping

Export driven manufacturing

a) Increase market access for Kenyan exports b) Incentivize and promote exportersc) Protect local and infant industriesd)Incentivizevalueadditionanddiversificationofexports

Pro-industry policy and institutional framework

a)Predictableandstableindustrialpoliciesdevelopedthrough industry consultations b) National policy and institutional coherence for the manufacturingsectorc)Manufacturingsectordeliveryunit

Government driven SMEs development

a)Facilitatebusinesscompliancewithregulationtoformalize the informal economyb)Accordpreferencetolocalcontentingovernment procurement c) Enhance credit and market access to SMEs

Securing the future of manufacturing industry

a)Greengrowthandsustainabledevelopmentb) Industry 4.0 c) Pro-industry skill developmentd) Enhance access to lande)Fitforpurposepublicservice f) Stable political environment

NAME OF THE PILLAR AGENDA

PILLAR

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PILLAR

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PILLAR

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PILLAR

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PILLAR

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TABLE OF CONTENTS

ABBREVIATIONS ................................................................................................................................. iii

FOREWORD........................................................................................................................................ v

EXECUTIVE SUMMARY ...................................................................................................................... vii

INTRODUCTION ................................................................................................................................. 1

1.1 Backgroundinformation.......................................................................................................... 1

1.2 Overviewofthe2017MPA....................................................................................................... 2

GLOBAL, REGIONAL AND KENYA’s ECONOMIC OUTLOOK ...................................................... 5

2.1 Stateoftheglobaleconomy.................................................................................................... 5

2.2 Sub-Saharan Africa (SSA) ......................................................................................................... 6

2.3 Kenya’s economic outlook ....................................................................................................... 6

2.3.1GDPgrowthrate............................................................................................................... 6

2.3.2 Inflationrate................................................................................................................... 7

2.3.3 Exchangerate................................................................................................................ 8

2.3.4 Interest rates ................................................................................................................... 8

2.3.5 Access to credit .............................................................................................................. 9

2.3.6 Accesstocreditbythemanufacturingsector............................................................. 9

2.3.7 Lendingtothegovernment.......................................................................................... 10

2.3.8 Stock of public debt ...................................................................................................... 10

2.3.9 Oil prices ......................................................................................................................... 11

ANOVERVIEWOFMANUFACTURINGSECTORINKENYA......................................................... 13

3.1 Contribution to GDP.................................................................................................................. 13

3.2 Manufacturingsectorannualgrowthrate............................................................................... 13

3.3 Structureofmanufacturingsector........................................................................................... 14

3.4 Manufacturingsectoroutput................................................................................................... 14

3.5 Valueadditioninthemanufacturingsector............................................................................ 15

3.6 Contribution to exports ............................................................................................................ 16

3.7 Exportmarkets.......................................................................................................................... 17

3.8 Contribution to employment ................................................................................................... 17

3.9 Compensationtoemployeesinthemanufacturingsector.................................................... 18

3.10 Contributionofthemanufacturingsectortotaxes................................................................. 18

3.12 Economichealthinthemanufacturingsector......................................................................... 19

PILLARSTOSUPPORTSPARKINGKENYA’SINDUSTRIALTRANSFORMATIONFORJOB

CREATION ................................................................................................................................. 21

4.1 PILLARONE:COMPETITIVENESSANDLEVELPLAYINGFIELDFORKENYAN

MANUFACTURERS................................................................................................................... 21

MANUFACTURING PRIORITY AGENDA (MPA) i2018

Agendaforcompetitivenessandlevelplayingfieldformanufacturers........................................ 22

4.1.1 Reduce the cost of production of basic commodities .................................................. 22

4.1.2 Promote access to quality, affordable and reliable electricity ................................... 22

4.1.3Addressmultiplecharges,feesandleviesbycounties................................................. 23

4.1.4 Increase circulation of money in the economy ............................................................ 23

4.1.5 Reducetransportandlogisticscosts............................................................................ 23

4.1.6 Availlongtermfinancingtomanufacturers................................................................. 25

4.1.7 Fightillicittrade,contraband,substandardgoodsanddumping............................. 25

4.2PILLARTWO:EXPORTDRIVENMANUFACTURING.................................................................. 27

Agendatopromoteexportdrivenmanufacturing........................................................................... 27

4.2.1IncreasemarketaccessforKenyanexports.................................................................... 27

4.2.2 Incentivizeandpromoteexporters................................................................................ 27

4.2.3 Protect local and infant industries.................................................................................. 28

4.2.4 Incentivizevalueadditionanddiversificationofexports............................................. 29

4.3PILLARTHREE:PRO-INDUSTRYPOLICYANDINSTITUTIONALFRAMEWORK..................... 30

Agendatoensurepro-industrypolicyandinstitutionalframework................................................. 30

4.3.1 Predictableandstableindustrialpoliciesdevelopedthroughindustryconsultations.30

4.3.2 Nationalpolicyandinstitutionalcoherenceforthemanufacturingsector................ 30

4.3.3 Manufacturingsectordeliveryunit................................................................................ 33

4.4 PILLARFOUR:GOVERNMENTDRIVENSMESDEVELOPMENT........................................... 34

AgendatopromotegovernmentdrivenSMEsgrowthanddevelopment.................................... 34

4.4.1 Facilitatebusinesscompliancewithregulationstoformalizetheinformaleconomy 34

4.4.2 Accordpreferencetolocalcontentingovernmentprocurement.............................. 35

4.4.3 Enhance credit and market access to SMEs.................................................................. 36

4.5 PILLARFIVE:SECURINGTHEFUTUREOFMANUFACTURINGINDUSTRY....................... 37

AgendaforsecuringthefutureofManufacturingIndustryinKenya.............................................. 37

4.5.1 Greengrowthandsustainabledevelopment................................................................ 37

4.5.2 Industry 4.0....................................................................................................................... 37

4.5.3 Pro-industry skill development ...................................................................................... 38

4.5.4 Enhance access to land .................................................................................................. 39

4.5.5 Fit-for-purposepublicservice......................................................................................... 39

4.5.6 Stable political environment........................................................................................... 39

SUMMARY AND CONCLUSION........................................................................................................ 40

5.1 Summary......................................................................................................................................... 41

5.2 Conclusion ..................................................................................................................................... 42

ANNEXES.............................................................................................................................................. 43

Annex1:Summaryofpillars,agendaandactionsforMPA2018.................................................... 43

Annex 2: Kenyan balance of trade (Bot) 2010-2016 - Kshs. “000”.................................................... 48

Annex 3: Kenyan export and imports to and from Eac countries (2010-2016) - Kshs. “000”......... 49

MANUFACTURING PRIORITY AGENDA (MPA)ii 2018

ABBREVIATIONS

ACA AntiCounterfeitAgency

AFC AgriculturalFinanceCorporation

AfDB African Development Bank

AGOA AfricanGrowthandOpportunityAct

APPSBG All- Party Parliamentary Small Business Group

BKB Brand Kenya Board

BKBK Buy Kenya Build Kenya

BPD Barrels Per Day

CBK Central Bank of Kenya

CBR Central Bank Rates

CET Common External Tariff

CFTA ContinentalFreeTradeAreaAgreement

CPS Cyber-Physical System

CT CommunicationTechnology

EAC East African Community

EPA EconomicPartnershipAgreement

EPC Export Promotion Council

EPZ Export Promotion Zones

EPZA Export Promotion Zones Authority

ERC EnergyRegulatoryCommission

ERSP EconomicRecoveryandStrategyPaper

FDI ForeignDirectInvestment

FMCGs FastMovingConsumerGoods

GDP Gross Domestic Product

GoK Government of Kenya

ICMS IntegratedCustomsManagementSystems

ICT InformationandCommunicationTechnology

IDF ImportDeclarationFee

ILO InternationalLabourOrganization

IMF InternationalmonetaryFund

IPR IntellectualPropertyRights

ISIS ImportSubstitutionIndustrializationstrategy

IT InformationTechnology

KAM Kenya Association of Manufacturers

KEBS Kenya Bureau of Standards

KeNHA KenyaNationalHighwayAuthority

KIE Kenya Industrial Estate

KIPI Kenya Industrial Property Institute

MANUFACTURING PRIORITY AGENDA (MPA) iii2018

KIPPRA Kenya Institute for Public Policy Research and Analysis

KIRDI Kenya Industrial Research and Development Institute

KITP KenyaIndustrialTransformationProgramme

KNBS Kenya National Bureau of Statistics

KPLC KenyaPowerandLightingCompany

KRA Kenya Revenue Authority

KRB Kenya Road Board

KURA Kenya Urban Roads Authority

MDAs Ministries,DepartmentsandAgencies

MoDP MinistryofDevolutionandPlanning

MoITC Ministry of Industry, Trade and Cooperatives

MPA ManufacturingPriorityAgenda

MSEA Micro and Small Enterprise Authority

MTPs Medium-Term-Plans

NICs NewlyIndustrializedCountries

NSSF NationalSocialSecurityFund

NTB Non-Tariff Barriers

OECD OrganizationforEconomicCooperationandDevelopment

OPEC OrganizationofPetroleumExportingCountries

PDU President’s Delivery Unit

PMI PurchasingmanagersIndex

PPADA Public Procurement and Asset Disposal Act

RDL RailwayDevelopmentLevy

SEZ Special Economic Zones

SGR StandardGaugeRailway

SME Small Medium sized Enterprises

SSA Sub-Saharan Africa

STG SterlingPound

TFTA TripartiteFreeTradeAgreement

TTIs TechnicalTrainingInstitutions

TVET TechnicalandVocationalEducationandTraining

UAE United Arab Emirates

USD United States Dollar

VAT Value Added Tax

MANUFACTURING PRIORITY AGENDA (MPA)iv 2018

FOREWORD

Thisyearthegovernmenthasdeclaredmanufacturingas a top priority investment area for the country to drive economic growth. Hence this is the year forus to demystify the sector and make it everybody’s agenda.Itistheyeartoraisethetenorofdiscourseonindustrialization. Moreover, it is an opportune moment forustoshiftthesediscussionsfrombeingthepreserveof industrialists, and speak to the rest of the country onour conviction forwhywemustprioritizea strongmanufacturingbase.

Astrongmanufacturingbaseforanyeconomyisthefoundationupon which long-lasting economic frameworks are made. Veryfewdevelopedeconomiesaround theworldcanspeakof theirgrowthsuccesswithoutattributingitlargelytotheirmanufacturingsector.ForustoachievetheintendedgrowthofGDPcontributionfromthecurrent9.2%to15%by2025urgentstepsneedtobetaken,theresultsofwhichshouldbetangibleinthenextoneyear.Aclearcommitmenttowardscentralizingindustrializationineveryconversationaboutdevelopmentinthiscountryisneeded,rightfrom the policy makers to each and every citizen.

Aswe look into stemmingmanufacturing in all facetsofpolicydevelopmentinourcountry,weneedtobecognizantofglobaltrajectories on the fourth industrial revolution and sustainable development. The automation processes of many industries provide an opportunity for us to recalibrate our definition andvalue of work. Hence our contribution towards revamping ourproductionprocesses,andusing themascentersofexcellencetowardsskillsdevelopment in thecountrywillgoa longway incatapulting our local industry into global standards. Includingyoung people into the industrialization vision by equippingthemwithskillsandproviding themwith thespace to innovatethroughresearchandDevelopment,willmakethisasharedvisionin the country as it translates into job creation and economic empowerment.

Manufacturingistheonlyguaranteedwayforacountrytoincreasethe number of people earning substantial wages because ofstrongbackwardand forward linkageswithother sectors in theeconomy. The more people have reliable and stable jobs, the moretheycanaffordtheirbasicneeds.Athrivingindustryisalsoa great development partner for Government, as it increasesrevenueandenablesthegovernmenttoprovidesocialamenitiestoallcitizens.Inthelongrunthistranslatestoareducedpovertygapandincreaseinequalityinthesociety.

Industry’s intervention is strengthened by a predictableregulatoryenvironment,aswellasacommitmenttoenforcethe

adherence to the rule of lawfor all stakeholders. If this is actualized many hurdles that standinthewayofgrowingthesector, for example illicit trade, counterfeit goods, corruptpractices amongmany otherswillbeabated.

Lastly, manufacturing shouldnot be seen as one amongmany solutions towardsbuildinganinclusiveeconomicorder, but rather as the primary element from which all otherdevelopment solutions coagulate and take shape. Itshould be the focal point in our national vision towardscreating an inclusive politicaleconomy. Manufacturingshould underline discussions on nation building, equaldistribution of resources and poverty alleviation.

I look forward to workingwithallofour stakeholders inrealizing the potential of thesector towards uplifting ourgreatnation.

FloraMutahiChairlady, Kenya Association of Manufacturers

MANUFACTURING PRIORITY AGENDA (MPA) v2018

“InthefirstpillaroftheBig Four(foodsecurity,affordablehousing,manufacturingandaffordablehealthcareforall),wewillcreatejobsbyexpandingourmanufacturingsector.Manufacturingisaboutbelievingthatwe,asKenyans,canbecompetitiveandambitiousenough,tomakeproductsthatareasgoodasanyotherinthe

world.Lazima Tujiamini”

H.E President Uhuru Kenyatta, CGHPresidentandCommanderinChiefoftheDefenceForcesofthe

republic of Kenya

-12th December, 2017

MANUFACTURING PRIORITY AGENDA (MPA)vi 2018

EXECUTIVE SUMMARY The growth and development of any country isbanked on the ability of its industries to compete regionally and internationally. For Kenya, ourindustrial growth has stagnated with a GDPcontribution of 10 % over the last 10 years, and a further reported decline to 9.2 % in 2016. Hence the need to promote the competitiveness of local industries should be prioritized in our rejuvenated endeavourtofocusonthemanufacturingsectorasa country.

Last year, the Association launched its 10 point agenda whichis echoed in the recently announcedgovernment’s action planfor economic growth and the attainment of Vision 2030. Theagenda highlights priority areas in the quest to double jobs,double exports, increase foreign exchange earnings and raisemanufacturingshareofGDPto15percentby2020.

It is within this context that we have developed the 2018Manufacturing Priority Agenda which outlines the immediateactionthatwillyieldtangibleresultsintheshortterm,andworktowardstheaforementionedindustrygoals.Thiswillcatalyzethecompetitivenessoflocalindustrythatwillbealludedtoaswellasenable our local manufacturers to compete on an international platform.

Underthetheme‘SparklingKenya’sindustrialtransformationforjobcreation’,thisyear’sMPAhighlightstheneedtocreateasectorthathasamultipliereffectintheeconomythroughbackwardandforward linkages in the value chain and consequently, job andwealthcreation.

Firstly, theMPA outlines the need for a competitive and levelplayingfield for localmanufacturingandgrowthof SMEwhichcanbeachievedthroughsoundfiscalandnon-fiscalpolicies.Theagendaalsohighlightstheneedforpredictableandstableindustry policies which should be developed through industryconsultations and linked to the wider national policy makingprocess in order to promote the sector.

Wehavealsohighlightedtheneedtoprioritizetheprotectionoflocal infant industries in order to drive creativity and innovation therebycontinuallycreatingsustainableandproductivejobs.The diversification of export markets is also key as it centreson enabling localmanufacturers to access regional and globalmarketstherebyenhancingexportdrivenmanufacturing.

KAM has consistently championed the adoption of critical tenets of sustainable development and greengrowth towards actualizing agreen economy. In the samebreathe, a green economy isonly possible if theworkforcehave the relevant skills to operate industries effectively and sustainably. This is whyour advocacy for a continued revamp of technical skills under TVET continues to play a centre role in the need for pro-industry skills development.

The Association is committed towards the achievement ofthesegoals, andwewillworkclosely with both nationaland county governments anddevelopmentpartnerstowardsthe industrialization vision for Kenya.

PhyllisWakiagaCEO, Kenya Association of Manufacturers

MANUFACTURING PRIORITY AGENDA (MPA) vii2018

1.1 Background information

Every year, the Kenya Association of Manufacturers (KAM) sets out advocacy priorities in a publication titled “The Manufacturing Priority Agenda (MPA)”. This year’s MPA marks the fourth series since commencement of its production in 2015. The theme of the MPA 2018 is “Sparking Kenya’s Industrial Transformation for Job Creation”. It highlights an urgent need for Kenya to focus on the sector and to reignite its potential to achieve a multiplier effect on the economy, ultimately leading to more investments, expanding markets, job creation and better standards of living for all.

INTRODUCTION

Kenya has the highest unemployment rate in the East African Region and stood at 12.5% in 2015, with unemployment rate of 25% among the urban youths and 9% of the youths in the rural areas (KIPPRA, 2017). Interventions to uplift the manufacturing sector, will create backward and forward linkages that will in turn generate opportunities for innovation entrepreneurship, as well as, productive jobs.

Empirical evidence reveals that for all economic sectors, the manufacturing sector has the highest employment multiplier effect in an economy. For instance, empirical analysis by Bivens (2003) indicated that 100 jobs in the manufacturing sector supported 291 jobs in other sectors of the economy. Further, the latest report from Manufacturing Institute in the US revealed that $1 worth of manufactured product creates $1.34 in the rest of the economy6. This is the largest multiplier of any economic sector.

6 See: http://www.themanufacturinginstitute.org/Research/Facts-About-Manufacturing/Economy-and-Jobs/Multiplier/Multiplier.aspx.

This shows the enormity of economic development that a country can realize through a well-founded manufacturing base.

The Government’s renewed commitment to the sector through an announcement made by H.E The President of Kenya, on the 28th of November 2017, presents a great opportunity for the country to make leaps on critical economic goals set out in Vision 2030. It is the goal of the National Government to increase the contribution of

MANUFACTURING PRIORITY AGENDA (MPA) 12018

http://www.themanufacturinginstitute.org/Research/Facts-About-Manufacturing/Economy-and-Jobs/Multiplier/Multiplier.aspx

http://www.themanufacturinginstitute.org/Research/Facts-About-Manufacturing/Economy-and-Jobs/Multiplier/Multiplier.aspx

the manufacturing sector from the current 9.2% contribution to the gross domestic product (GDP) to 15% by 2022. A raft of policy strategies such as Vision 2030, Kenya Industrial Transformation Programme (KITP), National Trade Policy, Investment Policy and Buy Kenya Build Kenya (BKBK) have been devised to spur the manufacturing sector in Kenya. Further, in 2017, KAM published a ten point priorities agenda for transforming manufacturing sector and creating jobs in Kenya.

The MPA highlights current hurdles hampering Kenya’s industrial growth and articulates proposals on how these can be overcome. The 2018 MPA will be hinged on five pillars as follows: competitiveness and level playing field; export driven manufacturing; pro-industry policy and institutional framework; government driven SMEs development and securing the future of the manufacturing sector.

1.2 Overview of the 2017 MPA

The 2017 MPA was developed and launched on 30th January 2017 under the theme “Driving Industrial transformation for job creation and inclusive economic growth”. It was anchored on five pillars, namely: Policy, Legal and Regulatory Reforms, Level playing field for manufacturing in Kenya, Competitive Local Manufacturing Sector, Make Kenya a manufacturing hub for Exports and Securing the future of Industry.

ItinformedandshapedtheadvocacyworkforKAMduringtheperiodunderreviewandthefollowingaresomeofthekeywins:

• DevelopmentofDraftCountyOwnRevenueSourcingPolicywhichseekstostandardizeinstitutional,frameworkapplicableinallcountiesforcountygovernmentownsourcesofrevenueraisingmeasuresandenforcement.

• Development of the Public Participation Policy guidelines that seeks to guidestakeholder participation in the development of policies and bills at both levels of government.Nevertheless,thereisneedtopushitsadoptionandenactmentacrossallcountiesasonlyafewhavedoso.

• DevelopmentofadraftEastAfricanCommunity(EAC)Non-TariffBarriersRegulationthatseekstogiveeffecttotheEACEliminationofNon–TariffBarrierAct,2015.TheActaimsatremovingconditionsthataffectanddistorttradewithintheEAC,creatingaconduciveenvironmentfortradewithintheregion.

• DevelopmentofIndustrialCompetitivenessReport.Thestudyfindingscallforrenewedeffort toboost themanufacturing sector in the regionand inEACpartner’s states.It also calls for coordination of industrial policies and related instruments under the regionalaegisof theEAC,whileensuringtheirharmonizationwithotherpolicies inparticular trade.

• Development of draft E-Waste Regulations; it provides guidelines for handling,storageanddisposalofe-wasteinKenya.

a

Manufacturing Priority Agenda 2017

DRIVING INDUSTRIAL TRANSFORMATION FOR JOB CREATION AND INCLUSIVE ECONOMIC GROWTH

MANUFACTURING PRIORITY AGENDA (MPA)2 2018

• EstablishmentofClimateChangeCouncil inwhichKAMwasnominated to representprivatesector.TheCouncilshallpublishregulationondesignandproceduretoensureefficacyofpublicconsultation,toensurethattheymakeanimpactonthethresholdofdecisionmakingonclimatechangeatalllevelsofgovernment.

• Judicialprocessesautomationsuchascasefiling,casedateallocationandpayment.

• DevelopmentandlaunchoftheEACintellectualPropertyRights(IPR)studywhichaimstoenhanceregionalprotectionofIPRs,asacontributortoachievingtheindustrializationagenda.

• ThedevelopmentoftheEACTradeRemediesAct,2017thatseekstodealwithunfairtradepracticessuchasdumping,subsidizingandimportsurges.

• LaunchoftheBuyKenyaBuildKenyaStrategydrivenbyanoverridingobjectivethatitssuccessfulimplementationwillencouragetheconsumptionoflocallyproducedgoodsand services.

• Development and launch of National Trade Policy that seeks to unleash Kenya’s potential fortargetingdomestic,regionalandglobalmarkets;and

• DevelopmentofdraftNationalWaterPolicywhichseekstobringreformsinthewatersector in the country.

Someofthependingproposalsmadein2017MPAincludethefollowing:

• Elimination of ImportDeclaration FeeandRailwayDevelopmentLevy.

• Rationalize and harmonization of countylevies,chargesandfees.

• Development of national export and promotionstrategy.

• Establishmentaoflongtermfinancingmechanism for manufacturers.

• AdoptionoftheKenyadraftregulationfor Motorcycles.

• EnactmentoftheEnergyBill,2015.

• Creationofpromptpaymentlegislativeframework.

• ReviewofEACCommonExternalTarrif(CET).

• RatificationoftheEconomicPartnershipAgreement(EPA)byall5PartnerStates;and

• Creation of land banks for industrial investment.

It worthy to note that full implementationof the 2017 MPA proposals could not beachieved due several reasons includingbut not limited to: lack of prioritization of sector issues by government Ministries,Departments and Agencies (MDAs) andprolongedelectioneeringperiod.


2.1 State of the global economy

GLOBAL, REGIONAL AND KENYA’S ECONOMIC OUTLOOK

In2017,globaleconomicgrowthisestimatedtohavereached3%,asignificantaccelerationcomparedtogrowthofjust2.4%in2016;thehighestgrowthraterecordedsince2011(WorldBank,2018).Theimprovementinglobaleconomicconditionshavebeen largely attributed to improvedcommoditypricesandstableglobalmacroeconomicenvironment.Theworldeconomyisexpectedtogrowby3.1%in2018.Thisforecastwillbesupportedbyrecoveryininvestment,manufacturing and trade as exporting developing economies benefit fromrisingcommodityprices.Nevertheless,thegrowthcouldbefragile,withtheriskoffinancialstress,increasedprotectionismandrisinggeopoliticaltensionderailingtheexpansion.

Global conditions for investment have generally improvedamid low financial volatility, reduced banking sector fragilities,recovery in some commodity sectors and a more solid globalmacroeconomic outlook (World Bank, 2018). However, thisimprovement is relative to a low starting point following twoyearsofexceptionallyweakinvestmentgrowth,andaprolongedepisode of lackluster global investment overall. A firmer andbroader based rebound in investment activities may be deterred byelevatedlevelsoftradepolicyuncertaintyaswellasrisingdebtandabuildupoflongertermfinancialfragilities.

Theoilmarketisintheprocessofrebalancingasdemandgrowthsurpassessupplygrowth.Thisisexpectedtospreadthrough2018as the Organization of Petroleum Exporting Countries (OPEC)and non-OPEC oil exporters, including Azerbaijan, KazakhstanandtheRussianFederation,agreedtoimplementacoordinated

reduction in production from January 2017 to March 2018,amounting to 1.8 millionbarrels per day (bpd) in total6. In 2018, crude oil prices are expected to average US$60per barrel which will translateto higher cost of refined fuel.Speculative activities continue to remain influential, creating

shorttermpricefluctuations.

6 See: http://www.goldmansachs.com/our-thinking/pages/2018-global-economic-outlook-as-good-as-it-gets.html.


http://www.goldmansachs.com/our-thinking/pages/2018-global-economic-outlook-as-good-as-it-gets.html





2.2 Sub-Saharan Africa (SSA)

TheoverallGDPgrowthforSSAisestimatedtobe2.4%for2017,areboundfrom1.3%in20167. The improvedgrowthratehasbeenattributedtorecoveryofcommodityprices,favorableandslowinginflationthatliftedhouseholddemand.Currentaccountdeficitsnarrowedbutremainedhigh,withthemediumcurrentaccountdeficitestimatedat7%ofGDP.Currenciesintheregionstabilizedinrealeffectterms.Exchangeratepressureforoilexporterseasedduetoimprovedoilprices,increasedoilproductionandaweakerdollar.HeadlineinflationdeclinedacrosstheSSAregion,reflectingtheconfluenceofstableexchangeratesandslowingfoodpriceinflation.Fiscaldeficitsdeclinedinnon-resource-intensivecountries,butremainedhigh,partlyduetoinfrastructureinvestments.

Economicgrowthisprojectedtoriseto3.2%in2018andtoanaverageof3.6%in2019ascommoditypricesriseanddomesticdemandcontinuetostrengthen,helpedbydeclininginflation.Downsideriskscontinuetopredominate, includingthepossibilitiesofweakcommodityprices, tightglobalfinancingconditionsandregionalpoliticaluncertaintyandsecuritytensionswillintensify.Conversely,astronger-than-expectedpickupinglobaleconomicactivitycouldfurtherboostexports,investment,andgrowth in SSA region. There is also considerable scope for boosting potential growthwithstructuralreforms,includingpoliciestoincreaseinvestmentandimprovehealth8.

IntheEasternAfricanregion,theEACPartnerStates,Tanzania,Ugandaand Rwanda are projected to grow at a rate of 6.8%,5.1% and 5.9%respectively(IMF,2018).Ethiopiaisexpectedtogrowby8.2%in2018.

2.3 Kenya’s economic outlook

2.3.1 GDP growth rate

In2017,economicgrowthrateforKenyadeclinedto4.9%,comparedtoagrowthrateof5.8%in2016(WorldBank,2017).Depressedeconomicgrowthrateachievedin2017wasonaccountofprolongeddroughtthathadadverseeffectontheagriculturalsectorandreducedgenerationofhydropowerand consequently raised the level of inflation and reduced household consumption. Economicactivitywasalsoaffectedbydecliningprivatesectoraccesstocreditandprolongedpoliticalcrisisthatweakenedprivatesectoractivity.Depreciationoftheexchangerateagainstthemajorforeigncurrenciesduringtheyearfurtherexacerbatedthesituationbysuppressingeconomicactivities.

According to theWorldBankEconomic Prospects Report for 2018, Kenya’s economicgrowth isforecast to grow at 5.5% in 2018 and 5.9% in 2019 (Figure 2.1), though this is contingent uponimplementation of supportive economic reforms and prudent management of macroeconomiccondition.

7See:http://pubdocs.worldbank.org/en/575011512062621151/Global-Economic-Prospects-Jan-2018-Sub-Saharan-Africa-analysis.pdf

8 See:http://pubdocs.worldbank.org/en/575011512062621151/Global-Economic-Prospects-Jan-2018-Sub-Saharan-Africa-analysis.pdf


http://pubdocs.worldbank.org/en/575011512062621151/Global-Economic-Prospects-Jan-2018-Sub-Saharan-Africa-analysis.pdf




Figure 2.1 GDP growth rate for Kenya (2010-2018)

Data source: World Bank (2018)

2.3.2Inflationrate

Theaverageinflationratein2017was8%,withMayrecordingthehighestrateat11.7%breachingthesingle-digitinflationtarget.Inflationratehoweverdeclinedto4.5%inDecember2017(Figure2.2).TheCentralBankofKenya(CBK)forecaststheinflationratetoremainwithinpolicylimitswhichtheWorldBankestimatesthatitwillaverage6.8%in2018.Themainthreattothemaintenanceofasingle-digitinflationrateisdrought,whosefrequencyhasincreased;occasioningincreaseinfoodprices.

Figure 2.2: Inflation rate trend in 2017

Data source: KNBS, 2017 (Monthly updates)


2.3.3 Exchange rate

The exchange rate against major international currencies portrayed mixed performance. TheShillingremainedrelativelystableagainsttheUSD,butweakenedmarginallyagainsttheEuroandtheSterlingPound(STG)(Figure2.3).Themainchallengeaffectingtheexchangerateisincreasedimportsoverexports.Theexchangerateisexpectedtostabilizein2018onaccountofstablepoliticalenvironment and sound monetary policies.

Figure 2.3: Exchange rates for Kenya against major currencies in 2017

Data source: CBK, 2017 (Monthly updates)

2.3.4 Interest rates

Banks’ lending rates inKenya dipped sharply from September2016toanaverageof 13.65% following theamendment of the BankingAct, which capped lendingrateswiththeaimtoencourageincreased consumption of credit. The law puts a ceilingon lending rates by banksand financial institutions at4% points above the Central BanksRate (CBR),withaflooron term-deposit rate equal to 70%of theCBR.Theaveragelending and deposit ratesand the CBR remained stable in 2017 after the law cappinginterest rates became effective (Figure 2.4). Further, the CBK

keptitsbenchmarkinterestrateunchangedat10%in2017,whichhasseenbanklendingratemaintainedat14%.

In 2018, the CBK is expected to retain the same rates in view of inflation expectations in the context of favorable weather conditions, sustained macroeconomic stability and the conclusion of a prolonged election period.

Figure 2.4: Interest rate in Kenya before and after the cap

Source: National Treasury, Kenya


2.3.5 Access to credit

AccesstocreditparticularlytotheprivatesectorhassloweddownsignificantlyinKenyasince2014asaresultofaseriesofshocksinthesector(Figure2.5).Privatesectorcreditgrowthfellfromitspeakabout25%inmid-2014to1.6%inAugust2017;thelowestinthelasttenyears.AccordingtotheWorldBank’sKenyaEconomicUpdate2017,theslowdowncanbeattributedtoseveralfactorsincluding the impactof liquidity shock in2015/16; the impactof liquidationof threecommercialbanks;theimplementationoftheinterestratecap;inabilityofsmallbankstoborrowintheinterbankmarketandtherise innon-performingloan.Althoughthe interestratecapwasmeanttoreducethe cost of credit, therebymaking credit accessible to awider range of borrowers, after a yearofimplementation,weaknessinprivatesectorcreditgrowthremains9. The 2018 outlook for credit growthremainsunclear.

Figure 2.5: Growth in private sector credit in Kenya

Data source: National Treasury, Kenya

The interest ratecaphasnegativelyaffectedsmallborrowersandsmallandmediumenterprises(SME’s) as banks have shifted lending to corporate clients whenever possible impacting theallocationofcredittosmallerborrowers.Commercialbankshavealsoincreasedtheirlendingtothegovernment.Kenya’ssaversaccesstointerestbearingdepositaccountshasalsobeenaffectedasbanksarereclassifyinginterestbearingaccountstonon-interestbearingaccounts.

2.3.6 Access to credit by the manufacturing sector

Accesstofinanceisakeyissueforthemanufacturingsector.AccordingtoKNBS’EconomicSurvey2017,creditadvancementtothemanufacturingsectordecreasedforthefirsttimeinthelastfiveyearsfromKshs290.9billionin2015toKshs277.4billionin2016(Figure2.6).

9 See:https://openknowledge.worldbank.org/handle/10986/29033


Figure 2.6: Approved loans to the Manufacturing sector (2010-2016)

Source: KNBS, 2017

2.3.7 Lending to the government

Figure2.5showedthatlendingtotheprivatesectorbyCommercialBankshasbeenon adownward trendhowever, lending to theNationalGovernmenthasincreased(Figure2.7).TheCommercialBanks have re-allocated credit from private to the public sector sincetheintroductionoftheinterestcapsothatcreditgrowthtotheNationalGovernmentaveragedabout15%comparedtothe2.3%totheprivatesectorin2017.CommercialBankshavemovedto T-Bonds andBillswhich have hadbetter profitmargins andsecureunlikelendingtohigh-riskclients.

Figure 2.7: Access to credit by the National Government from the

Commercial Banks in Kenya

Source: National Treasury, Kenya

2.3.8 Stock of public debt

Kenya’spublicdebtaspercentofGDPincreasedby3.3%to57.7%ofGDPby June 2017 (Figure 2.8). Increase in the stock publicdebtwasattributedtotheincreaseinbothexternalanddomestic

debt,asgovernmentborrowedtofinancebudgetdeficit.Thestock of external and internal debtstoodat29.8%and27.4%of GDP respectively, in June2017.Aftertheintroductionofinterest rate cap, governmentsecurities are the most preferred investment options by the Commercial Banks and this tends to crowds-out theprivate sector in the domestic credit market. A sizeable amount of the government’scommercial debts will maturein 2019 and this will haveimplicationsonbudgetdeficitand consequently on the stock of debt especially in a situation where the government maybe forced to borrow to payoff some loans. The stock of public debt is expected to rise on account of unfinishedinfrastructure projects and government borrowing torefinance loans. Care has tobe taken by the governmenton borrowing to reduce thepossibility of running out offiscalspace.


Figure 2.8: Stock of public debt for Kenya as a % of GDP

456 519 660 746 859 1,0511,284 1,420

1,8152,112

515 537565

723764

844

1,1391,423

1,796

2,295

37.739.7 40.7

43.140.6 42.1

47.8 48.8

55.5

57.7

0

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20

30

40

50

60

70

0

500

1000

1500

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2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17

Amou

ntinKsh.(Billion

s)

Domestic External Publicdebt%ofGDP

Data source: National Treasury, Kenya

2.3.9 Oil prices

Oilprices inKenya increased towards theendof 2017 from themonthofAugust, a situationattributed to rising oil prices at the globalmarkets (Figure 2.9). Looking ahead in 2018,oilpricesareforecasttorisetoanaverage$60a barrel from average $53 in 2017. The slightincrease inoilprices in2018willbeasaresultofsteadilygrowingdemand,agreedproductioncuts among oil exporters and stabilizing U.S.shaleoilproduction(WorldBank,2018).Itisalsoexpected that the government will abandonpetroleum price controls which has been inoperation since 2010 and administered by the EnergyRegulatoryCommission(ERC).

Figure 2.9: Prices of super petrol, diesel and kerosene

in Kenya, 2017

Data source: KNBS (Quarterly Reports-2017)

International crude prices declined sharply for the 2014-2016 period but started to increase steadily in 2016-2017 period (Figure 2.10).

Figure 2.10: Average annual OPEC crude oil price from 2010 to 2017 (USD per barrel)

Source: OECD


3.1 Contribution to GDP

Manufacturing sector contribution toGDP has over the years stagnated ataround10%andstoodat9.2%in2016(KNBS,2017)(Figure3.1).Nevertheless,thegovernmentthroughtheKITPaspirestogrowthesharesofmanufacturingsector from 9.2% to 15% by the year 2022.

Figure 3.1: Manufacturing sector contribution to GDP in Kenya, 2010-2016

Data source: KNBS, 2017

3.2 Manufacturingsectorannualgrowthrate

Figure 3.2 illustrates annualgrowth ratesof themanufacturing sector for 2010-2016period. Thehighestgrowthratewasrecordedin2010with5.8%growthandthelowestin2012whenthesectorgrewby-0.6%.Thesegrowthratesarewaybelowtheanticipatedgrowthrateof10%asaspiredunder Vision 2030.

AN OVERVIEW OF MANUFACTURING SECTOR IN KENYA


Figure 3.2: Annual growth rate for the manufacturing sector in Kenya, 2010-2016


3.3 Structure of manufacturing sector

Foodproductssub-sectoristhebiggestcontributingabout43%totheoverallmanufacturingsectorcontributiontoGDP.Underthecategoryof“others”,wehavesub-sectorsuchasleather,woodandfurniture, transport equipment, and Machinery.

Figure 3.3: Sub-sectors in the manufacturing sector and their contribution-2015


3.4 Manufacturing sector output

Thenumberofmanufacturers inthecountryhasgrownovertheyearsandmanufacturingoutputgrewby69%since2010asshowninFigure3.4wherein2010,itstoodatKshs.1,258,527millionandKsh 2,132,259 million in 2016.


Figure 3.4: Manufacturing output in Kenya, 2010-2016


3.5 Value addition in the manufacturing sector

Thevalueaddedinthemanufacturingsectorincreasedby11.6%toKshs658.0billionin2016(Figure3.5)whichisalmostdoubleof2010.

Figure 3.5: Manufacturing value addition in Kenya, 2010-2016


When compared with other sectors in economy, the manufacturing sector value addition lags far behind (Figure 3.6). There is need for structural changes to revive the manufacturing sector which tends to be labor-intensive and can therefore create jobs for the majority of the unemployed especially the youths.


Figure 3.6: Sectoral value addition in Kenya, 2010-2016

Data source: World Development Indicators of the World Bank (2017)

3.6 Contribution to exports

An estimated 18% of Kenyan manufactured goods are exported of which 6.1% exported to the EAC and 12% to the rest of world (KNBS, 2013).

Kenya’s export products are overwhelmingly primary in nature with tea alone constituting about 25% of total value of exports (Table 3.1). Other than being primary in nature, Kenyan exports are also low in technology component. Some of the manufactured exports include food products, on-metallic mineral products, chemical and chemical products, metals, pharmaceutical and botanical products, textiles and apparels. According to KNBS 2017 data, Food and beverage, the largest manufacturing sub-sector, dominated the category of export accounting for 45.2% of total domestic exports in 2016 while industrial supplies (non-food) accounted for 27%.

Table 3.1: Leading commodity exports for Kenya (% share), 2012-2016

Commodity 2012 2013 2014 2015 2016

Tea 21 23 20 25 25

Horticulture 17 2 21 20 22

Coffee, unroasted 5 4 4 4 4

Articlesofapparelandclothingaccessories 4 5 6 6 6

Tobacco and tobacco manufactures 3 3 4 3 3

Iron and steel 3 3 3 2 3

Essential oils 3 2 2 2 2

AnimalandVegetableoils 3 2 1 1 1

Articles of plastics 2 2 2 2 2

Soda ash 2 2 2 1 1

Medicinal and pharmaceutical products 2 2 2 2 3Data source: KNBS, 2017


3.7 Export markets

Kenya’sexportmarketsarerelativelyconcentratedandinneedofdiversification.Ten(10)countriesaccountedfor61%exportsin2016.Fiveoutofthetoptenmarkets;andsevenoutoftoptwentymarkets in 2016 are inAfrica (Figure 3.7).Over 70%of Kenya’s total exports are destined to 12countriesglobally.Kenya’sexportsshareintheglobalmarketremainsdismalat0.03%oftotalglobaltrade.Kenyahasbeenexperiencingdeclinesandmarketlossesinkeytraditionalmarkets.

Figure 3.7: Leading export destinations for Kenya in 2016


3.8 Contribution to employment

According to KNBS 2017, themanufacturing sector recorded employment growth rate of 1.8%(300,900people)of2.55millionwageemploymentin2016upfrom11.9%(295,500people)of2.48millionwageemploymentin2015(Figure3.8).Whileemploymentinthesectorhasbeenincreasinginabsoluteterms,itsshareinformalemploymenthasdeclinedmarginallyinrecentyears,asituationattributedtosluggishgrowthrateinthesector.

Figure 3.8: Number of persons employed in the manufacturing sector in Kenya, 2010-2016



3.9 Compensation to employees in the manufacturing sector

Theemployeecompensationbymanufacturingsectorincreasedby7.2%toKsh.175.2billionin2016(Figure3.9).Overall,employeecompensationbythemanufacturingsectorhasdoubledsince2010,increasingby66%between2012and2016.

Figure 3.9: Compensation to employees in the manufacturing sector (2010-2016)


3.10 Contribution of the manufacturing sector to taxes

Exciseduty,whichismainlycollectedfrommanufacturingentitieswithbeerandtobaccoasmaincontributorsofthetaxgrewby13.3%in2016/17FinancialYearcomparedtoannualaveragegrowthof14.0%inthelastfouryears.Revenuefromexcisedutyhasbeenonanincreasingtradefrom2012-2016(Figure3.10).

Corporationtaxshowedthestrongestperformanceinthelastfouryearsasitgrewby18.2%comparedtoannualaveragegrowthof13.7%.Further,giventheFigure3.9,itisclearthatthemanufacturingsectoralsomakesahugecontributiontothetaxrevenue in termsof incometaxrecipients fromemployees, social and security contributions.

Figure 3.10: Total Excise tax and Custom Duties collected (2012-16)

Data source: KNBS, (2017)


3.11Consumerbenefitsofmanufacturing

Otherthancreationofjobs,manufacturingsectorinacountryalsomakesuseofavailablenaturalresources,resultingintolowerandaffordablepricestoconsumers.

Products and services that manufacturers produce avails to the consumers a basket of varieties from whichtochoosefrom.

Inthelongrun,boththevalueforrealmoneyheldbyconsumersandtheirpurchasingpowerincreases.Over 82% of Kenya manufactured products are consumed locally and the rest exported (KNB, 2013). Asmanufacturingadds value toproductsand rawmaterials (mainly fromagriculture sector), thesectormultipliereffectspillsovertoothersectorsasitisalsoaconsumeroftheirgoodsandservices.Manufacturingalsotendtoreducesbalanceoftradethroughexportsandlocalsourcing.

3.12 Economic health in the manufacturing sector

The Purchasing Managers Index (PMI) is an indicator used to gauge the economic health ofmanufacturingsectorandreportedinFigure3.11.InKenya,thePMIisreleasedonamonthlybasisbyCFCStanbicBankKenyaandreportedbyMarkitEconomics.ItmeasureschangesinactivitylevelacrossKenya’smanufacturingsectorfrommonthtothenext.ThePMIisbasedonfivemajorindicators:neworders,inventorylevel,production,supplierdeliveriesandtheemploymentenvironment.Theindicator ranges fromascoreof0 to100,with50declaredneutral.Anythingabove50 indicatesthattheactivitylevelimproved.In2017,thePMIroseto52pointsinJanuaryandfellto34.4pointsinOctober.ItrecordedasevenmonthsstraightcontractionfromApriltoOctober2017whichwasattributedtoheightenedpoliticalenvironmentinthecountry.

Figure 3.11: The Purchasing Managers’ Index for Kenya, 2017

Source: CFC Stanbic, Markit Economics


4.1 PILLAR ONE: COMPETITIVENESS AND LEVEL PLAYING FIELD FOR KENYAN MANUFACTURERS

There is increased integration of world economies through the forces ofglobalization.Therapidglobalization,technologicaladvancement,changingconsumer preference and evolving government policies are reshaping themanufacturing industry exponentially, accelerating the pace of competitionandcontinuallyraisingthebarontheperformanceofcompanies’acrosstheglobe.

Kenyanmanufacturersarenotanexception.While this is inevitable,oneofdeterminants for thesuccessorfailureofcountriesandcompaniesiswhethertheycanchangeinasimilarorevenfasterpacethantheglobalpace.Atnationallevel,thereisneedforsoundfiscalandnon-fiscalpoliciestoenablemanufacturerstocompetedomesticallyandinternationally.Thegovernmentshouldcreatealevelplayingfieldforallmanufacturerstoensureequalopportunitiesinordertoenhancefairtradeandcompetitivemanufacturinginthecountry.

PILLARS TO SUPPORT SPARKING KENYA’S INDUSTRIAL TRANSFORMATION FOR JOB CREATION

Figure 4.1: An illustration of key drivers of manufacturing sector competitiveness in Kenya

Source: Authors’ conceptualization

Aconducivepolicy,legal&regulatoryenvironmentisnecessaryfor industrial transformation

•Billofmaterials-shouldbeequalorlowertothoseatglobalmarket.

•Costofutilities-thisincludes,costofenergy,water,sewerageamongothersshouldbeminimum.

•Costandproductivityoflabour-Kenyaasoneofthehighestlabour cost.

• Accessandcostoffinance - ifmanufacturingsector is togrowitneedsaccesstomorefinanceatlowercost.

•Transport&logistics-effecientandeffectivetransportandlogistics is important tomove rawmaterials and finishedgoodsfromonepointtoanother.

• Margin - any form of business should earn returns oninvestiment


Agenda for competitiveness and level playing field for manufacturers

4.1.1 Reduce the cost of production of basic commodities

Over82%ofKenyanmanufacturedgoodsareconsumedlocallywhiletherestareexported(KNBS,2013).Thisunderscorestheimportanceofthemanufacturingindustryinthecountry.Thepricesoflocallymanufacturedgoodshavebeenonacontinuousincrease,asituationattributedtoincreasingcostofindustrialrawmaterials.

According to the third quarter Manufacturing Barometer 2017, 45% of manufacturers in Kenyaindicated that the cost of industrial input as one of the major concerns in the manufacturingindustrytoday.Thehighcostofinputsleadstohighpricesoflocallymanufacturedproductstherebylimitingtheircompetitivenessintheregionalandinternationalmarketsandhamperingthesector’scapacity utilization. In order to reduce the cost of basic commodities in the country and improve the competitivenessofmanufacturedgoodsespeciallyintheEACregion,thefollowingactionsshouldbe undertaken:

Zerorateimportdeclarationfee(IDF)forindustrialinputsforbonafidemanufacturers; Zeroraterailwaydevelopmentlevy(RDL)forbonafidemanufacturers; ClearoutstandingVATrefundsandensureVATrefundsprocessingandpaymentisundertakenwithin60daysfromthedateoflodgingapplicationinordertoensurecompanies’healthycashflow;and ExemptbonafidemanufacturersfromWithholdingVAT.

4.1.2 Promote access to quality, affordable and reliable electricity

Electricityisanimportantinputinthemanufacturingprocesses.Thecostofelectricity inthecountryhasbeenhighlyunstablewithbillsrisingbyatleast10%permonth.Onthesupplyside,the government has made tremendous efforts in improvingelectricitygenerationinthecountry.MajorattemptstodiversifyKenya’s sources of electricity especially towards wind andgeothermalsourcesareexpectedtoprovideasmuchas45%ofelectricity supply by 20226.

However, even if power is available, poor transmission anddistribution infrastructure leads to erratic power supply andoutages in the country (Were, 2016). Further, the quality ofelectricity supplied is also a major concern for high voltageandbulkconsumersasfluctuationinpowerandpoweroutageslowerproductivityasmachineshave tobe restartedandtheirlifetimeisshortened.Inordertoencourageaffordable,reliable,qualityandsustainableelectricityformanufacturingindustryinKenya,thefollowingactionshouldbeundertaken:

6 See:http://sbs.strathmore.edu/news/reducing-cost-electricity-kenya/


Finalize the enactment of the Energy bill 2015which seeks to resolve energy relatedissuesinthecountrysuchaspowerquality,reliabilityanddistributionofelectricityamongothers; Establishautonomous regionalKenyaPower&LightingCompany (KPLC)branches toincreasecompetitionandreliabilityofpowersupply; Allowgeneratorsofelectricitytoselltobulkelectricityconsumerstoenhancethequalityandreliabilityofelectricity;and Reviewcontractsofthermalpowerproducersandpegthemonperformancetoensureaccesstoreliablepowerataffordablerates.

4.1.3 Address multiple charges, fees and levies by counties.

In2013,adevolvedsystemofgovernmentwasimplementedcomprisingNationalGovernmentand47CountyGovernments.TheConstitutionempowersthecountiestoraiseownsourceofrevenuebylevies,chargesandfees.Thishasnotonlyincreasedadministrativeandfinancialburdentomanufacturersbutalsocontinuetodiscourageinvestment.Further,theselevies,chargesandfeesarenotharmonizedacross the47counties in thecountry. Inter-countymovementofgoodsnowattract a feechargedbyeachcountyforgoodsthatpassthrough.Thishasresultedtodoubletaxationandconsequentlyincreasedthecostofdoingbusinessbetweenthecountiesandthecountryatlarge.Thechallengeofmultiplecharges,feesandleviesbycountiescanberemediedthroughthefollowingactions:

FasttrackfinalizationandimplementationofcountyownrevenueresourcepolicywhichseekstoprovideguidelinesonrevenuecollectionamongcountiesaspertheConstitution;and Developanational legislation toharmonizeand rationalizecountypoliciesand legislationonfees,chargesandlevies.

4.1.4 Increase circulation of money in the economy

The circulation of money in an economy is necessary to facilitate economic activities. This implies thatissuessuchaslatepaymentofsuppliersbyboththepublicandprivatesectorsreducescashflowoftheaffectedsuppliers.Forinstance,accordingtoAuditorGeneralReportforKenyain2016/17,pendingbills byCounties amounted toKsh. 35.8billion. In order to address the cultureof latepayment and the question of corporate governancewitnessed in the country’s retail sector, thefollowingoughttobeundertaken:

Enactmentofpromptpaymentandaccountabilitylegislation; EstablishmentofaRegulatoryAuthorityfortheretailsector; Set up a supplier portal so that suppliers electronically track status of orders, delivery schedules, potentialproductshortageandpaymentreceived;

Organization of business ethics and integrity compliance trainings for the private and publicsectors;and

DigitizationofpaymentsandrefundsbyGovernment.

4.1.5 Reduce transport and logistics costsTransport is required in the production procedures, frommanufacturing to delivery to the finalconsumersandreturns.Onlyagoodcoordinationbetweeneachcomponentwouldbringbenefitstomaximumtoeachparty.Accordingtothe2016logisticperformanceindexbyWorldBank,Kenyawasranked42ndout160countries,anindicationthata lotneedstobedonetoaddress logistic


challenges.ItcostsbetweenUS$500toUS$1000totransportatwentyfoot(20ft)containerfromtheportforMombasatoNairobibyroad;60%higherthanintheUSandEurope(ShippercouncilofEasternAfrica,2017).Thiswashoweverexpectedtoreducebyatleast30%followingtheconstructionandlaunchofthestandardgaugerailway(SGR)inMay,2017.KenyaRailwayCorporationhaspublishedSGRfreightratesthatsawtransportinga20ftcontainerfromMombasatoNairobicostUS$500(excludingotherportchargesandlastmilecost),acostdeemednotcompetitivebycargoowners.

Port related inefficiencies have been attributed as a key contributor to the cost of transport.AccordingtotheNorthernCorridorReport(2017),theaveragecargodwelltimeis5daysabovetheglobalbenchmarkof3days,makingcargoownerspayhighdemurragechargesforstoragethusincreasingthecostdoingbusiness.Thedelayshavebeenattributedtoinvolvementofmanycargoclearance interveners.

TheKenyaRoadsBoard(KRB)reportof2016indicatesthatKenyahasaroadnetworkofapproximately161,451.4kilometers(outofwhich10%arepaved,whiletherestofthenetworkiseithergravelorearthroads). It isestimatedthatabout30%ofthepavedroadsare ingoodconditionwhileonlyabout20%oftheunpavedroadsareinmaintainablecondition.Thisistosaythatalargeportionofthenetworkis ineitherpoororfailedconditionandrequiresurgentrehabilitationtorestoreittoamaintainablecondition.Poorinfrastructuresuchasroadsincreaseslogisticcostsforthecargoowners.Someoftheactionsthatcanbeundertakentoreducetransportandlogisticscostsinthecountryincludethefollowing:

ReviewtheproposedSGRfreightratetomakethemcompetitive; ImplementtheIntegratedCustomsManagementSystem(ICMS)toenhanceefficiencyofcustomsprocessing; Implementthepre-clearancesystemforcargoanddynamicriskmanagementtoreducetheportcongestionandcargodwelltimeattheport; Fasttrackthecountrywiderolloutofinstantfinesschemeonminortrafficoffensestominimizecorruptiononroadsandsavetime; Mountacampaignonroadsafetyanddisciplinetoreduceroadaccidentsinthecountry;and Create framework between Kenya Urban Roads Authority (KURA) and Counties to enhanceindustrialroadsupgradeandmaintenance.


4.1.6Availlongtermfinancingtomanufacturers

Accesstofinanceespeciallylongtermfinanceiskeyformanufacturersintermsofexpandingbusinessoperationandleveragingbusinessandinvestmentopportunitiesthatarisefromtimetotime.KenyalikeanyotherAfricancountryhasfounditchallengingtomobilizeresourcestoaddresstheneedforlongtermlendinginordertoprovidecapitalinvestmentinthemanufacturingsectorwhichoveryearshashadweak returnsandahighpercentageofnon-performing loans (Tyson,2015).Publicfinancial institutionsuchKenya IndustrialEstates (KIE)have limitedfinancial resources tosupportloandemandfromthemanufacturingsector.Further,whilecommercialbanksarethemostsought-aftersourcesoffinancetothemanufacturingsectoroutsidethefinancingfrompersonalsources,theyhaveunfavorableconditions.MostofcommercialbanksinKenyagiveshorttermloaninordertolimitriskexposureassociatedwithdoingbusiness inKenya.Theworkingcapitalcyclelastssixmonthsonaverage,demandingpatience

Domestic financing to themanufacturing sectordeclinedbetween 2015 and 2016 aftergrowingsteadily between 2006 and 2014. According to KNBS (2017), the total loans advance to themanufacturingsectordecreasefrom290.9billionin2015to277.4billionin2016 (Figure2.6).

Foreigndirectinvestment(FDI)intothesectorhasalsosloweddown.AccordingtoastudyonFDItoKenyaconductedin2015,16%ofFDIinflowwenttomanufacturingin2013.Kenya’schallengesinattractingFDIrangesfromdifficultiesinworkpermits,barriertoqualificationandpoorgovernmentincentives.

Somefinancingthatwouldbeofbenefittothemanufacturingsectordoesnotfinancethesectoritselfbutratherisaimedatimprovingthebusinessenvironmentandenablers.Forinstance,AfricanDevelopmentBank(AfDB)currentlydoesnotdirectlyfinancemanufacturingbutprovidessupporttolocalbanksthroughpartialguaranteefacilities,whichenhancethecapacityofbankstoprovidefinancingandincreaseopportunitiesforbusinessestoaccessfinancing.

Long termfinancing to themanufacturing sector shouldcome fromboth thepublicandprivatesectorthroughimplementationofthefollowingactions:

Incentivize saving institutions suchasNational Social Security Fund (NSSF) to invest in themanufacturingsector; Restructure the Industrial and Commercial Development Corporation, Agricultural FinanceCorporation(AFC)andKenyaIndustrialEstate(KIE)tocreateaKenyaDevelopmentBankwithanindustrialdevelopmentfundcommittedtomanufacturing; Operationalize theMovablePropertySecurityRightsAct, 2017 (theAct) thatprovides for thecreationofanelectroniccollateralregistryforusebyKenyanbanks;and IncentivizeInternationalFinanceCorporation(IFC)andEximbankstoprovidelongtermloanstothe manufacturers.

4.1.7 Fight illicit trade, contraband, substandard goods and dumping

Trade in illicit, substandardandcounterfeitproducts isamajorchallenge facingmanufactures inKenyatoday.AccordingtoastudyoncounterfeitsconductedbyKAMin2013,manufacturersloseupto 40% on market share, 50% on revenue and 10% on company reputation due to the proliferation ofcounterfeitsintheKenyanmarketwhilethegovernmentlosesaboutUS$80millioninpotential


tax revenue.Anenterprisesurveyconductedby theWorldBank in20137 established that one out of four private sector firms in Kenya considerinformalcompetitionasthebiggestobstacle.

Mostcounterfeitedgoods inKenyaare the fastmovingconsumergoods(FMCGs).Thisnotonlyhurts theeconomy,butalsoposeshealth risks toconsumersofthesegoods.Legitimatemanufacturersinvestinresearchanddevelopment,qualitymaterialandmanufacturingprocesses,andwork tomeet the conformity assessment schemes of the product markets. They also worktobuildbrandrecognitionandfostergoodwillwiththeirendusers.Counterfeiters,whoaredirectcompetitors,relyoninfringingbrandnamesandprofitingfromtheirgoodwillandreputationresultinginthedirectlossofsales,lossofgoodwillandtrademarkdilution.

Three institutions including the Kenya Revenue Authority (KRA), KenyaBureauofStandards(KEBS)andAnti-counterfeitAgency(ACA)arecrucialin thefightagainst illicitandcounterfeitproducts.However, there is lackof inter-agency collaboration, misinterpretations of law by enforcementofficersandfailureofcourtstoimposetoughpenalties.

Atregionallevel, lackofharmonizedpolicyandlegislationoncounterfeitsintheEACaffectsthecommonmarketdespitethefactthatallpartnerstate,exceptsouthSudan,aremembersoftheWorldIntellectualPropertyOrganization(WIPO).Thecurrentintellectualpropertyrights(IPR)frameworkwithinEAChinders thefightagainstcounterfeitsas the IPRsarecountryspecificandthere isnomutualrecognitionofIPRwithintheregionasthereisnoregionalpolicyonIP.Further,thereisnoformalmechanismofbringing together the IPofficersof theEACpartnerstates forpurposesofdiscussingcommonissuesofconcern.Thishasgreatlyaffectedenforcementagainstcounterfeitsandillicittradeacrossthebordersduetothefactthattherearebothchallengesoftransitgoodsaswellastheporousborderswhereillicitgoodscouldbesmuggledbackintoanyofthepartnerstates.Therefore, there is need to push for the harmonization of IPR in EAC and the creation of a centralized database for registeredtrademarks inorder tocurbthecounterfeitmenace.Tofight illicit trade,contraband,substandardgoodsanddumpinginKenyathefollowingactionscanbeconsidered:

ImplementthetraderemediesAct(2017)whichseektodeal withunfairtradepracticessuchasdumping,subsidizingand importsurges; Establishanoverarchinginstitutiontofightillicittradewhich mightincludechangingtheAnti-CounterfeitAuthority(ACA) intoAnti-IllicitTradeAuthority; HarmonizeEACIPRframeworkformutualrecognitionbyall partnerstates;and Fullenforcementofexistinglawstoensurefairtradepractices andlevelplayingfield

7See:http://documents.worldbank.org/curated/en/141781468048839839/pdf/923680WP0count000PUBLIC00Kenya02013.pdf

The protection of intellectual property

rights is a critical factor in supporting the

growth of our local manufacturing. Even

as we Buy Kenya and Build Kenya, we cannot enrich fraudsters who, masquerading as well-

known brands, produce dangerous fakes.

H.E President Uhuru Kenyatta, CGHPresident and

Commander in Chief of the Defence Forces of the republic of Kenya-12th December, 2017


http://documents.worldbank.org/curated/en/141781468048839839/pdf/923680WP0count000PUBLIC00Kenya02013.pdf

http://documents.worldbank.org/curated/en/141781468048839839/pdf/923680WP0count000PUBLIC00Kenya02013.pdf

4.2 PILLAR TWO: EXPORT DRIVEN MANUFACTURING

Inthe1970’sthenewlyindustrializedcountries(NICs)adoptedanexport-ledindustrializationstrategywhere incentives were provided to promote non-traditional exports (World Bank, 1993). KenyanexportsarelargelyprimaryinnatureasindicatedinTable3.1.Thus,anexportdrivenmanufacturingstrategycanbeinterpretedtomeanthatnon-primaryproductsareencouragedandpromoted,inotherwords,exportdiversification isencouraged. It canalso involveupgradingprimaryand lowtechnologyprimarycommodityexports.ExportpromotionisemphasizedinVision2030,however,thereisnocoherentpolicyframeworktosupportexports(Page,2016).ThereisapossibilitythatthischallengecanbeovercomeintheNationalExportDevelopmentandPromotionStrategywhichisunderdevelopmentandaimstogrowexportsby20%by2022.

Agenda to promote export driven manufacturing

4.2.1 Increase market access for Kenyan exports

Thethirdquartermanufacturingbarometer2017revealedthatmostofthemanufactureroperateatabout53%capacity.Thissuggestthatcapacitycanbeenhancedforpurposesofexport.In2016,imports from China, India and United Arab Emirates (UAE) accounted for 23.6%, 14.4% and 6.4% respectively of total imports for Kenya or 44.4% (KNBS, 2017). Kenyan export markets are alsoshrinkingespeciallywithin theEAC,akeymarket forKenyanmanufacturedgoods (seeannex3).IncreasedmarketaccesstoregionalandinternationalmarketisnecessaryforKenyatoreducetradedeficit(seeannex2).SomeoftheactionsthatthegovernmentcantaketoincreasemarketaccessforKenyanexportsincludethefollowing:

Seek preferential treatment of Kenyan manufactured goods by countries with huge tradeimbalanceagainstKenyasuchasIndia,ChinaandUnitedArabEmirates; ExploreestablishmentofAfricanGrowthandOpportunityAct(AGOA)liketradeagreementwithCanada; FinalizethereviewtheEACCETandadopta4bandtariffstructurewithanupperlimitof35%topromotevalueadditionandindustrialization; FasttrackContinentalFreeTradeArea(CFTA)negotiationsanditsimplementationtoboostintra-Africatrade; Conclude Tripartite Free TradeArea (TFTA) negotiation and ratify the agreement to increasemarketforKenyanmanufacturedgoods; FinalizeandimplementtheEACEliminationofNon-TariffbarrierRegulation,2017thatseekstogiveeffecttotheEACEliminationofNon-TariffBarriersAct,2015; Undertaketrademissionstotargetspecificmarketsandspecificmanufacturedgoods;and Developaframeworkfordisseminatingmanufacturingmarket intelligencethroughtheKenyatrade portal.

4.2.2 Incentivize and promote exporters

Inordertosuccessfullypromoteanexportdrivenmanufacturing,anefficientandeffectiveincentivemechanismisrequired.Exportersneedconstantcashflowtofundtheiroperations.Taxincentiveswhereataxburdenonamanufacturercanbeeasedcanofbenefittothemanufacturers.Thereisneed to incentivize investors to invest in export-oriented projects or sectors. One of the factor that hasadverseeffectstomanufacturerswhoexportisthenewformulatodeterminetheamountduefor


VATrefund.ThenewformuladoesnotaddressthebacklogofVATrefundsandactsasdisincentivetoexportingmanufacturerswhohavebeeninVATrefundclaimposition.Manufacturerswhoexportalso lackexportfinance facilityandareaffectedbyexchangeratemovements.Exporterscanbeincentivizedthroughthefollowingactions:

RemovetheVATrefundformulaonexports; Offerexportfinancetolocalfirms;and Introducepreferentialforeignexchangepremiumformanufacturersdoingexport.

4.2.3 Protect local and infant industries

Thisagendacanappearlikeanti-freetradeinitiative.Infantindustriesrequireprotectionfromthegovernmentespeciallywherethereareunfairtradepractices.GovernmentschemessuchasSEZandEPZ provide various tax (Table 4.1) and non-tax incentives as stipulated in their respective Acts of establishmentandwhoseroleandmotiveiswidelyacknowledged.

Table 4.1: Tax incentives under the EPZ and SEZ schemes

TAX EPZ SEZ SchemeValue added tax(VAT)-16%

EPZ enterprises are exempt from VAT registration. The supply of taxable goods and services to EPZs is zero rated from VAT

The supply of taxable good and services to SEZs is zero rated from VAT.

Excise Duty – varying rates

Importation of goods and services exempt from excise duty

Importation of goods and services exempt from excise duty.

Income Tax – 30%

Exempt for the first 10 years from the date of first sale and at a rate of 25% for the next 10 years thereafter. 30% rate from the 21st year.

10% for the first 10 years of operation, and thereafter 15% subsequent years

Withholding Tax – 5% to 20%

Dividends and other payments to non-residents during the 10 year tax holiday.Subsequently, withholding tax for non-residents applies as follows:Interest: 15%Dividend: 10%Management&ProfessionalFees:20%Royalties: 20%

Payments to non-residents:Interest: 5%Dividend: 0%Management&ProfessionalFees:5%Royalties: 5%*

Investment Deductions

100%ofthecapitalexpenditureonbuildingandmachineryinthefirstyearofuse.

100% of capital expenditure on buildingandmachineryinthefirstyearofuse.

Import Declaration Fee–2%

Goods destined to EPZs are exempt from ImportDeclarationFees

Goods destined to SEZs are exempt from Import Declaration Fees

Stamp Duty –Nominalto4%

ExecutionofanyinstrumentrelatingtotheEPZ business.

Execution of in of any instrumentrelatingtotheSEZbusiness

RailwayDevelopment Levy–1.5%

Applicable on importation Applicable on importation

ExportLevy–ad valorem

Exports to EPZs are exempt from Export Levy Exports to SEZs are exempt from Export Levy

Data source: Authors’ analysis


Oneofthenon-taxincentiveismarketaccess.FirmoperatingundertheEPZschemecanlegallysellup-to 20% of their annual output in the domestic market provided that all duties are paid to ensure alevelplayingfieldwithotherlocalmanufacturerswhoareoutsidetheEPZscheme.However,inamoveaimedatprovidingcheapernewclothingtoitscitizens,Kenyaappliedforastayofapplicationunder theEACthatallowedtheEPZfirms tosell to theKenyanmarket (only)duty freeandVATfree.ThiscreatesasituationwherefirmsundertheEPZschemehaveanupperhandovernon-EPZfirmsinthedomesticmarketgiventhefavorableincentivesthataccruetothem.Further,thishascomplicatedKenya’stradeintextilesintheEACastextilesaresubjectedtoarigorousverificationprocesstodeterminewhethertheyoriginatefromtheEPZs.Thisputsnon-EPZtextilemanufacturersatadisadvantagewhensellingintheEACmarket.UnliketheEPZs,firmsundertheSEZschemewithhave unlimited access to the domestic market in terms of quotas. Clearly, firmsoperatingunder the SEZ schemehave a competitive advantageover the non-SEZmanufacturers.

Manufacturing firms inKenya are heavily dependentof imports of food andnon-food industrialsupplies.Strengtheningofvaluechainsbyencouragingandpromotingsomeoftheimportedinputswillcreatebackwardandforwardlinkagesintheeconomy.AgoodexampleisedibleoilwherecrudeoilisimportedinKenyabutsunflowergrowingcanbeencouragedtoreducetheneedtoimport.Thus,valuechainanalysisofthosesectorsthatare likelytohavestronglinkages intheeconomyshouldbeidentifiedforpurposesofdevelopingthem.LocalandinfantindustriesinKenyacanbeprotectedinthefollowingways:

Level playing fieldbetweenSEZ, EPZ and local industryby rationalizing andharmonizing taxincentives to all Manufacturers. Createopportunitiesforlocalvaluechainwithforwardandbackwardlinkages;and Undertakevaluechainanalysisandoffersubsidiestostrategicsectorswithstronglinkages.

4.2.4IncentivizevalueadditionanddiversificationofexportsValue addition of export commodities such as coffee, tea and some horticultural products can increase Kenya’sforeignexchangeearnings.Thevalueadditionstrategycanalsobeanexportdiversificationstrategybecausenewproductscanbedeveloped.KenyacanexporteverythingbutarmsintheEUmarketundertheEPAandabout6,000productstotheUnitedStatesundertheAGOA;fullpotentialofthesemarketshasnotexploitedduetolownumberofexportableproducts.

TheGovernmentofKenyahasputemphasisonattractingForeignDirectInvestment(FDI)andhasadedicatedinstitution(KenyaInvestmentAuthority/KenInvest)todealwithFDIsandotherformsof investments. TheKenInvest should reconfigure its approach to attractingFDI, for instancebytargetingaspecificfirminagivencountry.Table4.2providesasummaryandactionstobetakeninordertorealizeanexportdrivenmanufacturingsectorinKenya.Thegovernmentcanincentivizevalueadditionanddiversificationofexportsbytakingthefollowingactions:

CreateKenyanbrandforsomeofthekeyexportcommoditiessuchasteaandcoffee; Targeted FDI campaigns in specific countries targeting specific manufacturers. For examplepursuingToyotaCompanyinJapantosetupanassemblyplantinKenya; HoldsensitizationseminarstopotentialexportersonmarketaccessandproductsthatcanbenefitfromtheAGOAandEPAtradeschemes;and Promote implementationof export oriented investments in SEZsespecially thosewith strongbackwardandforwardlinkageswiththeKenyaneconomy.


4.3 PILLAR THREE: PRO-INDUSTRY POLICY AND INSTITUTIONALFRAMEWORK

Private sector is a major economic actor in any economy and an important agent for poverty reduction and economic development. Business friendly environment in terms of policy, legal and institutional framework is necessary for the private sector activities to flourish and make it better able to further national economic goals. Agenda to ensure pro-industry policy and institutional framework

4.3.1 Predictable and stable industrial policies developed through industry consultations

Thegovernmentandaffiliated institutionsmakepolicypronouncementsondifferent issues fromtimetotimeandinsomeinstances,withoutstakeholderengagement.Inothercases,lawsarealsomadewithoutsupportingpolicies.Thismeansthattheoperatingenvironmentisnotcapturedandlawsarepreparedwithoutreflectiononwhatisonthegroundduetolackof impactassessment.Further,toooftenregulationsaredraftedorenforcedinahaphazardmannerwithtotaldisregardoftherealitiesofbusinesssectorhenceaffectingthemnegatively.Thisagendacanberealizedbytakingthefollowingactions:

Enactanationalpolicyonpublicparticipation; Ensureformulationofoverarchingpoliciesbeforeanenactmentoflaws.

4.3.2 National policy and institutional coherence for the manufacturing sector

National industrial policies

Overtheyears,theNationalGovernmenthascraftedaraftofpolicyinitiativesaimedatsupportingthemanufacturingtomakeKenyaanindustrializedcountry.ThemostrecentpolicydocumentsincludetheExportPromotionZones(EPZ)Act,1990;Kenya’sVision2030;KenyaIndustrialTransformationProgramme(KITP);BuyKenyaBuildKenya(BKBK)initiative;NationalTradePolicy(NTP);NationalExportDevelopmentandPromotionStrategy(NEDPS) and Special Economic Zones (SEZ) Act, 2015. EPZ: The International Labour Organization (ILO) defines EPZs as “industrial zones with special incentives set up to attract foreign investors, in which imported materials undergo some degree of processing before being exported again” (ILO, 2014; pg. 1). Some key featuresof theEPZsare that theyare situatedatdesignatedgeographical areas,have special incentivesand theentireproduction is exported. TheEPZ strategywasmeant tomake themanufacturingsectorinKenyatohaveanexportorientationotherthanbeinginwardlooking.Thisisafterimportsubstitutionindustrializationstrategy(ISIS)provedineffectiveinpromotingindustrialtransformationin the country.

MostofEPZsproductsespeciallytextilesandapparelsfindtheirwayintotheUnitedStatesthroughtheAGOAprogramme.

Vision 2030: In 2003, theNationalGovernment instituted theEconomicRecovery andStrategyPaper(ERSP)forthe2003-2007periodwiththeaimofspeedingeconomicrecoveryandgrowthafter


decadesofeconomicstagnation.ThisERSPwascreditedwithdeliveringaneconomicgrowthrateof7.1%in2007;thehighestinseveraldecades.AfterthelapseofERSP,thegovernmentlaunchedVision2030in2008whoseoverallgoalwastotransformKenyaintoamiddle-incomecountryby2030.Vision2030seekstocreateamanufacturingsectorthatisrobust,diversifiedandcompetitiveundertheeconomicpillar(GovernmentofKenya,2008).ThedevelopmentofindustrialandmanufacturingzonesineightregionsandthedevelopmentofSmallandMedium-Enterprises(SME)industrialparksareidentifiedasthetwoflagshipprojectstosupportthemanufacturingsector.FiveyearMedium-Term-Plans(MTPs)areusedinitsimplementation.UnderVision2030,agro-processing,meatandfishprocess are emphasized.

KITP: RelatedtoVision2030istheKITPwhichwaslaunchedin2015bytheMinistryofIndustry,TradeandCooperatives(MoITC).TheKITPseekstotransformthemanufacturingsectorinKenyaforjobcreationandinclusivegrowth(GovernmentofKenya,2015).TheKITPobjectiveswillbeachievedthroughthefollowingfivestrategies:

• Launchsector-specificflagshipprojectsinagro-processing,textiles,leather,constructionservicesandmaterials,oilandgasandminingservicesandinformationtechnology(IT)relatedsectorsthatbuildonourcomparativeadvantages;

• DevelopKenyanSMEsbysupportingrisingstarsandbuildingcapabilitieswithmodelfactories;• Createanenablingenvironmenttoaccelerateindustrialdevelopmentthroughindustrialparks/zonesalonginfrastructurecorridors,technicalskills,supportinginfrastructureandeaseofdoingbusiness;

• Createanindustrialdevelopmentfund;and• DriveresultsthroughthenewlyformedMinisterialDeliveryUnit.

SEZs: TheconceptofSEZscameintobeinginKenyain2015whentheSEZActwasenacted.Baissac(2011)definesSEZsas“spatially delimited areas within an economy that function with administrative, regulatory, and often fiscal regimes that are different (typically more liberal) than those of the domestic economy” (Pg23).TheSEZisagenericconceptthatencompassesavarietyofzonesincludingtheEPZs(WorldBank,2008).

TheSEZAct,2015identifiestentypesofzones,namelyfreetradezones;industrialparks;freeports;information communication technology parks; science and technology parks; agricultural zones;touristandrecreationalzones;businessserviceparks;livestockzones;conventionandconferencefacilities.

BKBK: In 2017, theMoITC launched theBKBK strategywhose aim is to encourageKenyans toconsumelocallyproducedgoodsandservicesinordertosupportthedomesticeconomy.Fivekeyresultareasincludingpublicprocurement,marketaccess,marketaccess,advocacyandinstitutionalframeworkhavebeenidentifiedforpurposesofimplementingthestrategy(GovernmentofKenya,2017).

NTP: Launched in June, 2017 by MoITC alongside the BKBK and seeks to unleash Kenya’s potential targeting domestic, regional and globalmarket.The Trade Policy articulates provisionsthatpromoteefficiency in thegrowthofdomestic trade through transformationalmeasures thataddress the constraints impedingagainst thedevelopmentof thewholesale, retail and informalsectors.Strengtheningthecurrentsupplychainisapriorityforsustainabledevelopmentofthesetrade sectors


NEDPS: This isbeingdevelopedbyMoITCand it is in itsfinalstagesofcompletion. It isafive-year sector development planwith defined actions on issues that affect export development inthecountry.Itisexpectedtospecifically;Inducesynergiesforhigherproductioninspecificexportsectorstoenablebetterexportperformance;enhancemarketaccessandsustainedperformance;identifyandalignconstrainsintheexportsectorandproposemitigationmeasures;allocateresourcebased on prioritized objectives and streamline the export sector.

Prevailing institutional framework

ThereareahostofinstitutionsthataffecttheoperationsofthemanufacturingsectorinKenya.Forthepurposeofthiscurrentanalysis,focuswillbelimitedtothoseinstitutionsthatimplementpolicystrategiestopromoteindustrialmanufacturingandtheyincludethefollowing:

• MoITC: ThemissionofthisMinistryistocreateanenablingenvironmentforagloballycompetitive,sustainableIndustrial,enterpriseandco-operativesectorthroughappropriatepolicy,legalandregulatoryframework.TheKITPandBKBKstrategyarehostedinthisMinistry.

• Ministry of Devolution and Planning (MoDP): This Ministry spearheads the preparation of MTPsmeanttoactualizetherealizationofVision2030andisintheprocessoffinalizingthethirdMTPfortheperiod2018-2022.IntheMTP,thereisasectorplanforthemanufacturingsectorandprepared by MoITC.

• Kenya Vision 2030 Delivery Secretariat: ItwascreatedtospearheadtheimplementationofVision2030andMTPsbyprovidingleadershipandcoordination.

• Micro and Small Enterprise Authority (MSEA):ThisinstitutionwasestablishedundertheMicroandSmallEnterpriseAct,2012toformulateandcoordinatepoliciestointegrateandharmonizeboth public and private sector initiatives to enable the MSEs to become the key industries of tomorrow. It is instructive tonote that thedevelopmentofMSE industrialparks isoneof theflagshipprogrammeproposedunderVision2030.TheMSEAisundertheMoITC.

• Kenya Investment Authority (KenInvest): KenInvest was established in 2004 to promoteinvestments in Kenya and is under the National Treasury. In discharging its responsibilities,KenInvestoverseestheimplementationofnewinvestmentprojects,providesafter-careservicesfornewandexistinginvestmentsandorganizesinvestmentpromotionsinKenyaandabroad.

• Brand Kenya Board (BKB): Itwas created in 2008 tobuild andenhanceKenya’s imageandnationalidentityandrallyingKenyansbehindit.Oneofitsfunctionsisthatofpromotinglocalproductsandservicestoencourageeconomictransformation.TheBKBisundertheMoITC.

• Kenya Industrial Property Institute (KIPI):ItisagovernmentagencyundertheMoITChavingbeenestablishedin2002.Itsmissionistograntindustrialpropertyrightsandpromotesocialandeconomic development.

• Kenya Industrial Research and Development Institute (KIRDI): The KIRDI is under the MoITC and it is mandated to undertake multidisciplinary research and development in industrial and alliedtechnologies.

• Export Promotion Council (EPC):Itwasestablishedin1992withaviewtodevelopandpromoteexporttradeforthebenefitoflocallyproducedgoodsandservices.Thiswasmeanttogivetheeconomyanoutwardorientationwhichwaslargelyinwardlookingatthetime.TheEPCisunderthe MoITC.


• Export Promotion Zones Authority (EPZA): Itwasestablished in 1990, it ismandatedwithattracting,andretainingexportorientedinvestmentsandtrade.ItisundertheMoITC.

• Special Economic Zones (SEZs) Authority: It was established in 2015 and it is under the MoITC. One of its responsibilities is to promote and market special economic zones to potential economic zone developers, operators or other investors.

• President’s Delivery Unit (PDU): It was established in February 2015 by the President to oversee the implementation of flagship projects. Flagship projects are scattered across 12 sector: information communication and technology (ICT); healthcare; lands; infrastructure; social inclusion; food security; energy; youth and women; security; ease of doing business; and Huduma Centers. It is apparent that there are no specific flagship projects for the manufacturing sector in Kenya.

Rationalizationofnationalpolicyandinstitutionalframeworkaffectingthemanufacturingsectorisnecessarytoensurecoherence.Thisisbyinstitutingactionsthatmightinclude:

Developandimplementanationalmanufacturingpolicy;and Review,andrationalizetherolesofvariousregulatorybodiesinthemanufacturingsector.

4.3.3 Manufacturing sector delivery unit

Itisapparentthattherearemultipleinstitutionswithdifferentmandatesanddrivingindifferentwaystheindustrializationagenda.Rationalizationoftheseinstitutionsis importanttoavoidduplicationandconfusionwithregardstoindustrializationinKenya.Vision2030DeliverySecretariatissupposedtomonitortheimplementationofVision2030flagshipprojectsandtheMTPs;PDUalsooverseestheimplementationofflagshipprojectsandtheMoITCundertheKITPhasproposedtheformationofMinisterialDeliveryUnit.Afundamentalquestioncanbeposed.WhichinstitutionshouldchampionindustrializationinKenya?Asastopgapmeasure,theKAMisoftheviewthatpolicyandinstitutionalcoordination be under the PDU. The PDU does not yet have flagship projects targeting themanufacturingsectorinKenya.ThisshouldchangebecausemanufacturingisoneofthefoursectorsthatHEPresidentUhuruKenyattawillprioritizeinthenextfiveyears.Inhisinauguralspeechon28thNovember,2017,thepresidentnoted“Over my term, we will grow and sustain this manufacturing sector, and raise its share of the national cake from 9 to 15 percent”.Forthemanufacturingsectordeliveryunittobeeffective,thefollowingactionisproposed:

Identification of manufacturing sector flagship projects guided by the proposed nationalmanufacturingpolicytobecoordinatedunderthePDU.


4.4 PILLAR FOUR: GOVERNMENT DRIVEN SMES DEVELOPMENT

The Vision 2030, underscores the importance of the Small and Medium Enterprises (SMEs) subsector in the country’s industrial transformation agenda.TheSMEshavebeenrecognizedfortheirroleinprovidinggoods and services, enhancing competition, fostering innovationandgeneratingemployment leading to alleviationof poverty. TheSMEs cut across all the sectors of the economy and provide one of themainsourcesofemploymentaswellasgeneratingwidespreadeconomicbenefits(GovernmentofKenya,2005).NationalEconomicSurveyreportbytheCentralBankofKenyaof2017,SMEsconstitute98% of all businesses in Kenya, create 30% of the jobs annually and contributes3%ofGDP.Whilethesectorcontinuestocreatenumerousjobsandboostthecountry’sGDP,itfacesamyriadofchallengesthathamperitsgrowth.

Thesechallengesrangefromproductdevelopment,marketaccess(both local and international), access to affordable finance, supplychain/rawmaterialmanagement,qualitystandardsandcertifications,access to technology, production innovation and patenting topolicy, regulatoryandbusinessenvironment problems. In fact, theKNBS 2016 study on the sector revealed that close to half a million small enterprises inKenyadie annually as thebusinessenvironment in the countrygetsbumpy.Furthermore, SME sub-sector has the highest informal sectors in the country with close to 5.58million unlicensed businesses (National Micro, Small and Medium Establishment Survey, 2016).

Agenda to promote government driven SMEs growth and development

4.4.1 Facilitate business compliance with regulations to formalize the informal economy

Unfriendlypoliciesandregulatoryregimesarekeyhindrancestoaconducivebusinessenvironment.Facilitation tobusiness compliance throughSMEsupportive regulationshasbeen seenas keyadriverinformalizingtheinformalbusinesses8.SMEsoperatepartlyorwhollyintheinformalsector,especiallywhenat start-up stages,due to thenatureofmarketswhich areoftenover-regulatedthrough licensingamongothers (AntonopoulosandMitra, 2009).TheNationalMicro,Small andMedium Establishment Survey by KNBS in 2016, established that there were about 1.56millionlicensedSMEsand5.85millionunlicensedbusinessesinthecountry.Challengessuchascomplexandtediousregistrationprocessesandprocedures,highfeesbysomeoftheindustryregulators,chargesandfeesonnewproductdevelopmentandtheirintroductiontomarket,highlocalauthoritiestrade licensing fees, competition from uncontrolled imports and lack of subsidies to supportSMEsexporters,uncleargovernmentpoliciesandregulationsandpoororlackofinfrastructureinproductionzoneshavebeencitedtocausethis.Inordertoaddressthesechallenges,thefollowingactions should be undertaken:

8

“Here in Kenya, the bulk of employment comes from

SMEs, which are an important contributor to our gross

domestic product (GDP). Our plan is to create an additional

1,000 SMEs focused on manufacturing: they will have access to affordable capital, skills and markets; and they will accelerate the growth in

manufacturing”.

H.E President Uhuru Kenyatta, CGH

President and Commander in Chief of the Defence Forces of

the republic of Kenya-12th December, 2017


Promotesimplificationofbusinessstartupprocedures; EncourageinformalindustriesandassociationstoregisterwithMSEAandusethisbodytovoicetheconcernsandideasofthesub-sector;

EstablishincubationcentersforSMEsinall47countiesinordertoresolveissuessuchasproductdesign,accesstotechnology,productioninnovationandpatenting;

Provide trainings for SMEs on cash flowmanagement, marketing and exporting, intellectualpropertymanagementandcorporategovernance; Reducebarrierstoregistrationthroughformulationofapolicythatsimplifiesandspellsouttheregistrationprocess;and CorporateTaxreliefforstart-upSMEsforthefirstthreeyearsofoperation.

4.4.2 Accord preference to local content in government procurement

GovernmentinanycountryisthelargestconsumerofgoodsandservicesandthisimpliesthatitcanbeofgreatbenefittotheSMEsespeciallybyprocuringtheirproducts.Publicprocurementservesasawindowthroughwhichthepublicsectorcaninteractwiththeprivatesector.Howsuchinteractionismanagedisveryimportantinfosteringasenseoffairnessandwideningthebaseforparticipationbythe private sector in public procurement (All- Party Parliamentary Small Business Group (APPSBG), 2006).WhilethepublicprocurementmarketinKenya,likeothercountriesworldwide,dealswithwiderangesofsupplies,SMEshavebeensidelined(Afande,2015).SomecontractsarewithincapabilitiesofSMEsbuttheyareshelvedfromparticipatinginpublicprocurementdespitetheirqualification,sizesandlevelofproductionbecauseofamyriadofissuesrangingfromdocumentation,financials,tounfairprocesses.CreationoflinkagesbetweenlargeenterpriseandSMEsthroughsubcontractingisoneofthemaindeterminantsforthesuccessofSMEgrowthanddevelopment.Theinteractionhasimpactonknowledgeandskilltransferandenhancedtechnologicaladoption.Thegovernmentcouldalsofocusonimprovingtradefinancingwhichwillgoalongwayinimprovingthesector.Ingeneralterms,SMEscanbeaccordedpreferencethroughthefollowingactions:

FasttracktheimplementationofBKBKpolicy; CreatelinkagesbetweenlargeenterpriseandSMEthroughsubcontracting; Review,simplifyandpublishguidelinesofthePublicProcurementandAssetDisposalAct(PPADA),2015withstepbystepinstructionsandtipsonhowtorespondtopublictenderswithafocusonKenyangoodsandservices;and Review PPADA, 2015 to enforce the directive to reserve 40%of the procurement budget forlocallyproducedgoodsandservices.


4.4.3 Enhance credit and market access to SMEs

Understandingthemarketdynamisminboththedomesticandinternationalmarket,wherefinishedproductsaresold,iskeytothesuccessofanyfirm.MostofKenyanSMEsselltheirproductsandserviceinthedomesticmarket.Thedomesticmarketissmallformassproductionandtobenefitfromeconomiesofscale.HenceinabilityforSMEstoreduceunitcostofproductionandtheonlywaytoincreasetheirshareofmarketisbydevelopingnewandinnovativeproductswhichhassubstantialfinancial implication.On thehand, the country’s appetite for importedmanufacturedgoodshascontinued to rise and has had adverse effect on the SME sector in the county competition.

IftheSMEssub-sectorinmanufacturing,istogrow,thereisneedtoaccessmorefinancesandatalowercost.SeveralstudieshaveconsistentlycitedlackoffinancialaccessasamajorproblemamongSMEinthecountry.Accesstofinancialresourcesisconstrainedbybothinternalandexternalfactors.Internally,mostSMEslackcreditworthinessandmanagerialcapacity,sotheyhavetroublesecuringfundsfortheirbusinessactivitiessuchasprocuringrawmaterialsandproductsandinvestinginplantandequipment.Fromtheexternalperspective,SMEsareregardedasinsecureandcostlybusinessestodealwithbecausetheylackrequiredcollateralsandhavelowabsorptioncapacityoffunds.Theyarethereforerationedoutintheiraccesstocreditduetohighintermediatedcosts,includingcostofmonitoringandenforcementofloancontracts.

Further,achallengelinkedtoexpandingbanklendingistheinterestratescap,whichcappedlendingratesat4%abovetheCBKbaseratesinceAugust2016.TheinterestratecappinghasnegativelyaffectedtheSMEsasbankshaveturnedtoriskprofiling,amovewhichhasseentheSMEsfallunderthemostriskycategoryhencecrowdingthemout.AccordingtoavailabledatafromTheNationalTreasury,Privatesectorcreditgrowthfellfromitspeakofabout25percentinmid-2014to1.6%inAugust2017,thelowestintenyears(Figure2.5).Actionsthatcanbetakentoenhancecreditandmarketaccessincludethefollowing:

SetupastockexchangeforSMEsandimplementationofNSE’sframeworktoboosttheaccessofventurecapitalfundstosmallandmediumenterprises; Rethinkingandupdatingriskassessmenttools,especiallywhenassessingSMEs; OfferloanguaranteestoSMEs; Incentivize commercial banks to provide low interest rate loans targetingmanufacturers andSMEs;and EncourageKenyaCreditReferencebureaustoworkcloselywithmanufacturers indeterminingcreditworthiness.


4.5 PILLAR FIVE: SECURING THE FUTURE OF MANUFACTURING INDUSTRY

Tosecurethefutureofthemanufacturingsector,itsoperationshastobeenvironmentallyfriendlyand sustainable, keep pace with the ever changing technological advances which necessitatescontinuousskilldevelopmentofthelabourforce.AlsoimportantisaccesstolandespeciallywiththecomingintobeingoftheCountyGovernments,anefficientpublicserviceandastablepoliticalenvironment.

Agenda for securing the future of Manufacturing Industry in Kenya

4.5.1 Green growth and sustainable development

According to the Organization for Economic Cooperation and Development (OECD, 2011),green growth can be seen as a way to pursue economic growth and development, whilepreventingenvironmentaldegradation,biodiversity loss,andunsustainablenatural resourceuse.Fordevelopment tobe sustainable, it has tomeet theneedsof the currentgenerationwithoutcompromisingtheabilitytomeettheneedsofthefuturegenerations.Thefollowingactionsneedtobetakentopromotegreengrowthandsustainabledevelopment:

Incentivizeindustriesexcellinginenergymanagementthroughanationalaward; Promoteself-regulationformanufactureronenvironmentalissues; Applyforthegreenclimatechangefund; FinalizeandenacttheNationalWasteManagementBill2017; SupportthefinalizationandimplementationoftheNationalWaterPolicy; Promoteindustrysymbiosistoencouragegreeneconomyandcreatenewcultureofeconomicgrowth;and Promoteandrecognizethecertificationmarkforresponsiblecare.

4.5.2 Industry 4.0

Industry 4.0 (4th industrial revolution) is a name for the current trend of automation and data exchange in manufacturing technologies. Industry 4.0 creates what has been called a “smart factory”. It includes cyber-physical systems, the Internet of things, cloud computing and cognitive computing Industry. Given that Industry 4.0 is still a very new concept, one of the action that can be implemented is stated as follows:

Developanationalpolicyframeworkandprogrammetoimplementindustry4.0withsectoralbias.


4.5.3 Pro-industry skill development

Constanttrainingofworkersiscriticalforthemanufacturingsectorbecausetechnologicaladvanceshaveensuredthattheskillgapscontinuetoincreaseandhencetheneedforcontinuoustraining.WhileoverthousandyouthgraduatesfromhighereducationentertheKenyajobmarketeveryyear,the2017 industrialcompetitivenessreportpointsoutdiresituation inskillsector inKenya.Therearegaps in thehumanskill,curriculumandtechnology thatdonotadequatelyaddress theeverchangingskillandtechnologyneedforthemanufacturingsector.

Thereisgrowingmismatchbetweenavailabletechnicalskillandthemarketdemandsduetoaweaklinkagebetween training institution and the industry at the three levels of training (Universities,TertiarycollegesandYouthpolytechnics).Generally,thelabourmarketinKenyaisinthedireneedforabridgingdialogueandstructuredwayforwardbetweentheskillneedbyindustryandtheratherlackingtrainingplaceintechnicaltraininginstitutions(TTIs).

There are various policy instrument and private sector initiatives that have been developed to addresschallenges.TheKAMis implementinga technicalandvocationaleducationandtraining(TVET)projectwithmaingoalofimprovingaccesstotechnicalandvocationaljobsandeconomicopportunities for youth inKenya. Someof thegovernmentpolicy and legal instrumentsgearedtowardsaddressingtrainingatthethreelevelsmentionedaboveinclude:EducationActCap211,SMESessionalPaperNo.2of2005,andTVETStrategy2008,TIVETAct,2013,IndustrialTrainingAct2012,EmploymentAct2007,MinistryofYouthAffairsandSports’CurriculumforYouthPolytechnics–beingpilotedin100YouthPolytechnics.TheNationGovernmentcaninitiateoneofthefollowingpolicy actions:

Introducesubsidizedapprenticeshipprogrammeandprovidetaxholidaysforcompaniestakingupinterns; DevelopmentandimplementationofSectorSkillsAdvisoryCommittees(SSACs)thatwillguideinthedevelopmentofoccupationstandardstoinfluencecurriculumdevelopment; Review thePublicServiceCommission InternshipPolicyandGuidelines for thePublicService(2016)toaccommodateTVETgraduatesinterns; PopularizeandstrengthenTVETeducationandtrainingthroughNationalTVETconferencesandskillsshows; Establishjobmatchingdatabasetolinktheemployersandemployees;and Strengthenthelinksbetweenindustryandacademicinstitutionsthroughresearch.


4.5.4 Enhance access to land

Land is one of the basic factor of production and remain key to vast majority industries in Kenya. The costandownershipoflandinKenyaishighandtheissueoflandhasbeencomplicatedwiththeonsetofCountygovernmentswhichdonothavelandbanksdesignatedforindustrialdevelopment.Processingoftitledeedsistimeconsumingprimarilybecauseitisamanualprocess.Thefollowingactions can foster access to land in Kenya include:

ProactivelycreatelandbanksearmarkedforindustryatcountyandnationallevelsofgovernmentperhapsthroughinstitutionssuchasKIE; Advocateforspeedydigitizationoflandregistry;and PromptissuanceoftitledeedsincludingforSMEs.

4.5.5 Fit-for-purpose public service

Anefficient,responsiveandeffectivePublicadministrationisnecessaryifthemanufacturingsectoragendaandindeedifthecountrydevelops.Thus,effortstorevitalizepublicservicesdelivery,fightagainstcorruptionandreductionoflossofpublicfundsandenhancementoflabourproductivitywillgoalongwayincreatingafit-for-purposepublicservicedeliveryinKenya.Someoftheactionsthatcanbeimplementedtoachievethisobjectiveincludesthefollowing:

Replacecash-basedaccountingsystemwithaccrual-basedaccountingsysteminpublicfinance; Strengtheningperformancecontractingenhancepublicservicedelivery; InitiateanannualPresidentialeventtorecognizetopperformingpublicinstitutionsandpublicservants;and De-pegthepieceratefromminimumwagetoencouragelabourproductivity.

4.5.6 Stable political environment

For the private sector activity to flourish and realize its objective of satisfying the customers, employees and the society, a stable political environment is an important ingredient. For purpose of argument, a stable political environment is one that is devoid of violence or disruptive effects on business. In Kenya, most of elections are disruptive to business and leads to steep reduction in the rate of economic growth. There is need to find a permanent solution to the violence that often erupts during an election year. Some of the suggested actions include the following:

Addresstherootcauseofpoliticalcrisisthateruptsinanelectionyear;and National debate on political cohesion.

Let me emphasize that political stability and harmonious labour relations are the bedrockonwhichwewillachievearobustmanufacturingsector.

H.E President Uhuru Kenyatta, CGHPresidentandCommanderinChiefoftheDefenceForcesoftherepublicofKenya

-12th December, 2017


SUMMARY AND CONCLUSION

5.1 SummaryThe MPA 2018 themed, “Sparking Kenya’s industrial transformation for job creation” willdrivetheKAMadvocacyagendathisyear.Asparkin industrial manufacturing sector is requiredto increase its share to GDP from 9.2% to 15%, create employment for the unemployed majority ofwhomaretheyouthsandintheendbecometheenginethatdrivestheeconomyaswasthecase in the industrialized countries. Creation of the“spark” in themanufacturingsectorwillrevolvearoundfivepillars:competitivenessandlevelplayingfield;export-drivenmanufacturing;pro-industrypolicyandinstitutionalframework;SMEsdevelopment and securing the futureofmanufacturingindustry.

Manufacturers need to be competitive and producegoodsandservicesthatcancompeteregionally and internationally, given that tradebarriers have declined globally as a result ofmultilateral trade agreements and regionaltrade integration initiatives. Fairness, rules ofthe game, and incentives for all categoriesof manufacturing are necessary. Some of theimpediments towards a competitive and levelplaying field include levies such as IDF andRLD, VAT refunds and WVAT, expensive andunreliableelectricity,multiplecharges,feesandlevies by counties, liquidity constraints in the economy,expensivetransportandlogistics,lackof long-term finances to manufacturers; illicitand contraband trade.

A manufacturing sector that is export drivenis required to overcome limitations of small domestic markets. Challenges on access toregionalexportmarketshavetobesoughtandovercome. Disincentives to manufacturers such as VAT refund backlogs with KRA have to beaddressed, protect local and infant industries and incentive value addition and diversify exports.

For the manufacturing sector in Kenya toflourish,thereisneedforsupportivepolicyandinstitutionalframework.Thereisahostofpolicies

such as Vision 2030, KITP, BKBK and the NEDPS that can create confusion instead of clarity in termsofwhatthefocusshouldbeindevelopingand supporting the manufacturing sector inKenya. Responsibilities of implementing thesepolicies rests in many institutions such as Vision 2030 Secretariat, SEZ Authority, EPZA, and PDU among others. This suggest that there is nocentralized entity to harmonize and coordinate activities of these institutions. This needs to change

The importance of SMEs sector contribution to the overall growth of economy cannot beoveremphasized.Thereisneedforgovernmenttoputmorefocusonaddressingthechallengesin the SMEs sector in the country. Robust SMEs financing framework will go a longway in enhancing access to finance amongSMEs. Government need to simplify business registration process while promoting startup business through trainings that focus oncash flow management, intellectual propertymanagementproductdesignanddevelopment,marketaccess,andcorporategovernanceamongothers forSMEs.Promotionof sub-contractingbetweenlargeandSMEwillalsogoalongwayin promoting the subsector. Enforcement ofthe40%localsourcingrequirementwillalsobeinstrument in building the SMEs sector in theCountry.AwidespectrumsuchasthismayonlybetackledbymainstreamingSMEdevelopmentinnationalframeworks

The future of the manufacturing sector inKenya has to be secured. Natural environment iscontinuouslygettingdegradedasaresultofhumanactivity,skillsgapsareincreasingandlifeof skills already acquired shortening becauseof technological advances; land is Kenya is anissueofconcernformanufacturers;aneffectiveand effective public service and a stable political environmentisrequiredforeffectivefunctioningofthemanufacturingsector.


5.2 ConclusionKenyan manufactures need an outward orientation through increased exportsto regionaland internationalmarkets.Aparticular focusshouldbegiven to thosecountriesthatKenyacanhasaneverincreasingtradedeficitwithespeciallyChina,India andUAEand should review anyof the currentbilateral trade agreement toaddress this problem. Exporters need to be incentivized to export more for example throughavailabilityofaffordableexchangerateregime.Localandinfantindustriesrequire support especially those that have strong backward and forward linkagesin theeconomy.Targetedapproach toattract somespecific investors inparticularcountriescanbeusedasinnovativewaytoattractFDItofostervalueadditionanddiversificationofexports.

Policy and institutional coherence is required such that there is only one policy document to guide development and promotion of the manufacturing sector inKenya.Suchpoliciesshouldbepredictableandstableandinvolvingalltherelevantstakeholdersincourseoftheirdevelopment.Thiswillreduceconfusionand“manyvoices”talkingaboutthesamething.TheMPA2018proposesthedevelopmentofaNationalManufacturingPolicywhoseimplementationandcoordinationshouldbeunder the PDU.

A government driven SMEs development (while stakeholder involvement) will beinstrumental in turning around the sector. Government procurement should bepro-SMEsandwitheffectiveSMEsfinancing frameworkanda supportivebusinessfacilitationcompliancewhileencouragingSMEssubcontractingwithlargefirms.

Tosecurethe futureof themanufacturingsector inKenya,greengrowthpracticessuchefficiencyinenergyuse,industrysymbiosisandrecyclinghavetobepursued.Developmentofnationalpolicy frameworkandprogrammeto implement Industry4.0creatingneed-basedcurriculumisnecessarytokeeppacewiththeeverchangingtechnology.Effortstoincreaseefficiencyandroomforleakageofpublicfundssuchasimplementingaccrual-basedaccountingsysteminpublicfinanceandreinvigoratingperformance-basedmanagementsysteminpublicserviceiscrucial.AlastingsolutiontopoliticalcrisisthatKenyaexperiencesinanelectionyearhastobesought.


AN

NE

XES

Anne

x 1: S

umm

ary o

f pilla

rs, a

gend

a and

actio

ns fo

r MPA

201

8

THEM

E: S

PARK

ING

KENY

A’S

INDU

STRI

AL T

RANS

FORM

ATIO

N FO

R JO

B CR

EATI

ON

S/N

NA

ME

OF

THE

PILL

AR

AG

END

AA

CTIO

NS

1.

Com

petit

iven

ess

and

levelplayingfield

a) R

educ

e th

e co

st o

f pr

oduc

tion

for

basi

c co

mm

oditi

es

1)Zerorateim

portdeclarationfee(IDF)forindustrialinputsforbonafidemanufacturers.

2)Zeroraterailwaydevelopmentlevy(RDL)forbonafidemanufacturers.

3)ClearoutstandingVATrefundsandensureVATrefundsprocessingandpaymentisundertaken

within60daysfromthedateoflodgingapplicationinorderensurecompanieshealthycash

flow.

4)Exem

ptbonafidemanufacturersfromWithholdingVAT.

b) P

rom

ote

acce

ss to

qu

ality

, aff

orda

ble

and

relia

ble

ener

gy

1)FinalizetheenactmentoftheEnergybill2015whichseekstoresolveenergyrelatedissues

inthecountrysuchaspowerquality,reliabilityanddistributionofelectricityamongothersin

Ken

ya.

2)EstablishautonomousregionalKPLCbranchestoincreasecompetitionandreliabilityofpower

sup

ply

3)Allowgeneratorsofelectricitytoselltobulkelectricityconsum

erstoreduceenhancethe

qua

lity

and

relia

bili

ty o

f ele

ctric

ity.

4)Reviewcontractsofthermalpowerproducersandpegthemonperformancetoensureaccess

toreliablepowerataffordablerates.

c) A

ddre

ss m

ultip

le

char

ges,

fees

and

le

vies

by

coun

ties

1)Fasttrackfinalizationandim

plementationofcountyownrevenueresourcepolicywhichseeks

provideguidelinesonrevenuecollectionam

ongcountiesaspertheconstitution..

2)Developanationallegislationtoharmonizeandrationalizecountypoliciesandlegislationon

fees,chargesandlevies.

d) I

ncre

ase

circ

ulat

ion

of m

oney

in th

e ec

onom

y

1)Enactmentofpromptpaymentandaccountabilitylegislation.

2)Establishm

entofaRegulatoryAuthorityfortheretailsector.

3)

Set

up s

upp

lier

po

rtal

so

tha

t su

pp

liers

can

ele

ctro

nica

lly t

rack

sta

tus

of

ord

ers,

del

iver

y schedules,potentialproductshortageandpaymentreceived.

4)Organizebusinessethicsandintegritycompliancetrainingsfortheprivatesector.

5)DigitizepaymentsandrefundsbyGovernment.


S/N

NA

ME

OF

THE

PILL

AR

AG

END

AA

CTIO

NS

e)

Red

uce

tran

spor

t and

lo

gist

ics

cost

s1)ReviewtheproposedSGRfreightratetomakecompetitive.

2)ImplementtheIntegratedCustomsManagem

entSystem

(ICMS)toenhanceefficiencyof

customsprocessing.

3)Implementthepre-clearancesystemforcargoanddynam

icriskmanagem

enttoreducethe

portcongestionandcargodwelltimeattheport.

4)HarmonizeKenya’sroadhum

pswithEACstandards.

5)Fasttrackthecountrywiderolloutofinstantfinesschemeonminortrafficoffensestominimize

corr

uptio

n o

n ro

ads

and

sav

e tim

e.6)Mountacam

paignonroadsafetyanddiscipline.

f) A

vail

long

term

financingfor

man

ufac

ture

rs

1)IncentivizesavinginstitutionssuchasNationalSocialSecurityFund(NSSF)toinvestinthe

manufacturingsector.

2)RestructuretheIndustrialandCommercialDevelopmentCorporation,AgriculturalFinance

Corporate(AFC),KenyaIndustrialEstate(KIE)tocreateaKenyaDevelopmentBankwithan

industrialdevelopmentfundcommittedtomanufacturing.

3)OperationalizetheMovablePropertySecurityRightsAct,2017(theAct)thatprovidesforthe

creationofelectroniccollateralRegistryforusebyKenyanbanks

4)IncentivizeInternationalFinanceCorporation(IFC)andEximbankstoprovidelongtermloans

to t

he m

anuf

actu

rers

g) F

ight

illic

it tr

ade,

co

ntra

band

, su

bsta

ndar

d go

ods

and

dum

ping

1)ImplementthetraderemediesAct(2017)whichseektodealwithunfairtradepracticessuchas

dum

ping,subsidizingandim

portsurges.

2)EstablishanoverarchinginstitutiontofightillicittradewhichmightincludechangingtheAnti-

Co

unte

rfei

t Aut

horit

y (A

CA

) int

o A

nti-I

llici

t Tra

de

Aut

horit

y.3)Fullenforcem

entofexistinglawstoensurefairtradepracticesandlevelplayingfield

4)HarmonizeEACintellectualpropertyright(IPR)frameworkformutualrecognitionam

byall

par

tner

sta

tes.

2.

Expo

rt d

riven

m

anuf

actu

ring

a) I

ncre

ase

mar

ket

acce

ss fo

r Ken

yan

expo

rts

1)SeekPreferentialTreatmentofKenyanmanufacturedgoodsbycountrieswithhugetrade

imbalanceagainstKenyasuchasIndia,ChinaandUnitedArabEmirates.

2)Exploreestablishm

entof“AGOA”liketradeagreem

entwithCanada.

3)FinalizetheReviewtheEACCETandadopta4bandtariffstructurewithanupperlimitof35%

to

pro

mo

te v

alue

ad

diti

on

and

ind

ustr

ializ

atio

n 4)FasttrackContinentalFreeTradeArea(CFTA)negotiationsanditsimplementationtoboost

intr

a-A

fric

a tr

ade.

5)ConcludeTripartiteFreeTradeArea(TFTA)negotiationandratifytheagreem

enttoincrease

marketforKenyanmanufacturedgoods.

6)FinalizeandimplementtheEACElim

inationofNon-TariffbarrierRegulation,2017thatseeksto

giveeffecttotheEastAfricanCommunityElim

inationofN

on-TariffBarriersAct,2015.

7)Undertaketrademissionstotargetspecificmarketsandspecificmanufacturedgoods.

8)DisseminatemanufacturingmarketintelligencethroughtheKenyatradeportal


S/N

NA

ME

OF

THE

PILL

AR

AG

END

AA

CTIO

NS

b) I

ncen

tiviz

e an

d pr

omot

e ex

port

ers

1)

Rem

ove

the

VA

T Re

fund

form

ula

on

Exp

ort

s 2)Offerexportfinancetolocalfirms;and

3)IntroducepreferentialforeignexchangepremiumforM

anufacturersdoingexport.

c) P

rote

ct lo

cal a

nd

infa

nt in

dust

ries

1)LevelplayingfieldbetweenSEZ,EPZandlocalindustrybyrationingandharmonizingtax

ince

ntiv

es to

all

Man

ufac

ture

rs.

2)Createopportunitiesforlocalvaluechainwithforwardandbackwardlinkages

3)Undertakevaluechainanalysisandoffersubsidiestostrategicsectorswithstronglinkages.

4)EstablishaNationalAutomotiveCounciltodrivetheagendaforthesector.

d) I

ncen

tiviz

e va

lue

addi

tion

and

diversificationof

expo

rts

1)

Cre

ate

Ken

yan

bra

nd fo

r so

me

of t

he k

ey e

xpo

rt c

om

mo

diti

es s

uch

as te

a an

d c

offe

e.2)Targetedforeigndirectinvestment(FDI)campaignsinspecificcountriestargetingspecific

manufacturers.Forexam

plepursuingToyotaCompanyinJapantosetupanassemblyplantin

Ken

ya.

3)

Ho

ld s

ensi

tizat

ion

sem

inar

s to

po

tent

ial

exp

ort

ers

on

mar

ket

acce

ss a

nd p

rod

ucts

tha

t ca

n benefitfromtheAGOAandEPAtradeschemes.

4)Promoteim

plementationofexportorientedinvestmentsinSEZsespeciallythosewithstrong

backwardandforwardlinkageswiththeKenyaneconomy.

3.

Pro-

indu

stry

pol

icy

and

inst

itutio

nal f

ram

ewor

ka)

Pre

dict

able

and

sta

ble

indu

stria

l pol

icie

s de

velo

ped

thro

ugh

in

dust

ry c

onsu

ltatio

ns

1)

Enac

t a n

atio

nal p

olic

y o

n p

ublic

par

ticip

atio

n.2)Ensureformulationofoverarchingpoliciesbeforeanenactmentoflaws.

b) N

atio

nal p

olic

y an

d in

stitu

tiona

l coh

eren

ce

for t

he m

anuf

actu

ring

sect

or

1)Developandim

plementanationalm

anufacturingpolicy.

2)Review,andrationalizetherolesofvariousregulatorybodiesinthemanufacturingsector.

c) M

anuf

actu

ring

sect

or

deliv

ery

unit

1)Identificationofmanufacturingsectorflagshipprojectsguidedbytheproposednational

manufacturingpolicytobecoordinatedunderthePresidentialDeliveryUnit.


S/N

NA

ME

OF

THE

PILL

AR

AG

END

AA

CTIO

NS

4.

Gov

ernm

ent d

riven

SM

Es d

evel

opm

ent

a) F

acili

tate

bus

ines

s co

mpl

ianc

e w

ith

regu

latio

n to

fo

rmal

ize

the

info

rmal

ec

onom

y

1)Promotesimplificationofbusinessstartupprocedures.

2)EncourageinformalindustriesandassociationtoregisterwithM

icroandSmallEnterprise

Aut

horit

y an

d u

se t

his

bo

dy

to v

oic

e th

e co

ncer

ns a

nd id

eas

of t

he s

ub-s

ecto

r3)EstablishincubationcentersforSM

Esinall47countiesinordertoresolvingissuessuchas

productdesign,accesstotechnology,productioninnovationandpatenting.

4)ProvidetrainingsforSM

Esoncashflowmanagem

ent,marketingandexporting,intellectual

propertymanagem

entandcorporategovernanceforSMEs.

5)Reducebarriertoregistrationthroughformulationofapolicythatsimplifiesandspelloutthe

registrationprocess.

6)SetupadatabaseforformalizedSMEsforinformdecisionmakingandpolicyformulation

7)ReviewregulationaffectingSMEssuch,taxationandrelatedtaxexemption,taxadministration

andbusinessregistrationregulation

8)ReviewEPZandSEZpoliciestomakethem

supportiveofSMEdevelopment.

9)StrengthenSMEcapacitiestoim

provetheircompetitivenessindomestic,regionalandglobal

mar

kets

.

b) A

ccor

d pr

efer

ence

to

loca

l con

tent

in

gov

ernm

ent

proc

urem

ent

1)FasttracktheimplementationofBuyKenyaBuildKenya(BKBK)policy.

2)CreatelinkagesbetweenlargeenterpriseandSMEthroughsubcontracting.

c) E

nhan

ce c

redi

t and

m

arke

t ac

cess

to

SMEs

1)SetupastockexchangeforSMEsandimplementationofNSE’sfram

eworktoboosttheaccess

of v

entu

re c

apita

l fun

ds

to s

mal

l and

med

ium

ent

erp

rises

.2)Rethinkandupdateriskassessmenttools,especiallywhenassessingSMEs.

3)OfferloanguaranteetoSMEs

4)IncentivizecommercialbankstoprovidelowrateloantargetingmanufacturersandSMEs.

5)EncourageKenyaCreditReferencebureaustoworkcloselywithmanufacturersindetermining

creditworthiness


S/N

NA

ME

OF

THE

PILL

AR

AG

END

AA

CTIO

NS

5.Se

curin

g th

e fu

ture

of

man

ufac

turin

g In

dust

rya)

Gre

en g

row

th

and

sust

aina

ble

deve

lopm

ent

1)Incentivizeindustriesexcellinginenergymanagem

entthroughnationalaward

2)Promoteself-regulationform

anufacturersonenvironm

entalissues

3)Applyforthegreenclim

atechangefund

4)FinalizeandenacttheNationalW

asteManagem

entBill2017

5)Supportthefinalizationandim

plementationoftheNationalW

aterPolicy

6)Promoteindustrysymbiosistoencouragegreeneconomyandcreatenewcultureofeconomic

growth

7)Promoteandrecognizethecertificationmarkforresponsiblecare

b) I

ndus

try

4.0

1)Developanationalpolicyframeworkandprogrammetoimplem

entindustry4.0withsectoralbias.

c) P

ro-in

dust

ry s

kill

deve

lopm

ent

1)Introducesubsidizedapprenticeshipprogrammeandprovidetaxholidaysforcompanies

takingupinterns.

2)DevelopmentandimplementationofSectorSkillsAdvisoryCommittees(SSACs)thatwillguide

inthedevelopmentofoccupationstandardstoinfluencecurriculum

development.

3)ReviewthePublicServiceCommissionInternshipPolicyandGuidelinesforthePublicService

(2016)toaccommodateTVETgraduatesinterns.

4)PopularizeandstrengthenTVETeducationandtrainingthroughNationalTVETconferences

andskillsshows.

5)Establishjobmatchingdatabasetolinktheemployersandemployees.

6)

Stre

ngth

en th

e lin

ks b

etw

een

indu

stry

and

aca

dem

ic in

stitu

tions

thro

ugh

rese

arch

.

d) E

nhan

ce a

cces

s to

la

nd1)Proactivelycreatelandbanksearmarkedforindustryatcountyandnationallevelsofgovernment

perhapsthroughinstitutionssuchasKIE.

2)Advocateforspeedydigitizationoflandregistry.

3)PromptissuanceoftitledeedsincludingforSMEs

.

e) F

it fo

r pur

pose

pub

lic

serv

ice

1)Replacecash-basedaccountingsystemwithaccrual-basedaccountingsysteminpublicfinance.

2)Strengtheningperformancecontractingenhancepublicservicedelivery.

3)InitiateanannualPresidentialeventtorecognizetopperformingpublicinstitutionsandpublic

serv

ants

. 4)De-pegthepieceratefromminimum

wagetoencouragelabourproductivity.

f) St

able

pol

itica

l en

viro

nmen

t1)

A

dd

ress

the

roo

t cau

se o

f po

litic

al c

risis

tha

t eru

pts

in a

n el

ectio

n ye

ar.

2)

Nat

iona

l deb

ate

on

po

litic

al c

ohe

sio

n


Anne

x 2: K

enya

n ba

lance

of t

rade

(Bot

) 201

0-20

16 -

Kshs

. “00

0”

20

1020

1120

1220

1320

1420

1520

16

Bala

nce

of T

rade

(537

,412

)(7

88,1

45)

(85

6,74

0)(9

11,0

29)

(1,

081,

085)

(996

,532

)(8

53,6

78)

Tota

l Exp

orts

40

9,79

451

2,60

45,

17,8

4750

2,28

753

7,23

658

1,04

5 5

78,0

67

Tota

l Im

port

s94

7,20

61,

300,

749

1,37

4,58

71,

413,

316

1,61

8,32

11,

577,

577

1,43

1,74

5

Cove

r rat

io (%

)43

.26

39.4

137.67

35.5

433

.20

36.8

340.37

Dat

a so

urce

: KN

BS,

201

7


Anne

x 3: K

enya

n ex

port

and

impo

rts to

and

from

EAC

coun

tries

(201

0-20

16) -

Ksh

s. “0

00”

Cou

ntry

20

1020

1120

1220

1320

1420

1520

16

Tan

zani

a 33

,211

,132

41,743,395

46,0

36,1

63

40,4

96,4

93

42,724,911

33,6

63,3

96

34,796,571

Uganda

52,108,047

75,953,923

67,450,115

65,361,907

60,782,664

68,573,904

62,1

63,3

83

Rwanda

10,5

35,1

64

13,5

53,5

58

16,1

51,3

63

13,4

99,6

95

14,4

40,8

44

17,949,831

17,499,630

Bur

und

i 5,458,274

5,903,760

5,308,763

5,59

8,95

6 7,849,463

6,59

4,98

3 7,242,223

To

tal E

xpo

rt to

EA

C

101,312,617

137,154,636

134,

946,

404

124,957,051

125,797,882

126,782,114

121,701,807

Dat

a so

urce

: KN

BS,

201

7


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http://documents.worldbank.org/curated/en/141781468048839839/Enterprise-surveys-Kenya-country-highlights-2013

http://documents.worldbank.org/curated/en/141781468048839839/Enterprise-surveys-Kenya-country-highlights-2013

Who we areEstablishedin1959,KenyaAssociationofManufacturers(KAM)isthelargestmanufacturingassociationinKenyarepresentingsmallandlargemanufacturersalikeineveryindustrialsector.KAMistheconsistentvoiceofthesectorandtheleadingadvocateforapolicyagendathathelpsmanufacturerstocreatejobsandcompetebothwithinKenya,regionallyandglobally.

Our VisionTobeaworldclassbusinessmembershiporganisationeffectivelydeliveringservicestoitsmemberswherevertheyoperate

Our MissionTopromotecompetitivelocalmanufacturinginaliberalisedmarket

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Kenya Association of Manufacturers15 Mwanzi Road, WestlandsBox 30225 – 00100, NairobiKenya

Phone: +254 (020)2324817,(20)2166657Fax: +254 (020)3200030www.kam.co.keTwitter: @KAM_kenyaFacebook: www.facebook.com/KenyaAssociationOfManufacturers