Manufacturing Priority Agenda 2014 by Kenya Association of Manufactures

Manufacturing Priority Agenda 2014

Contents Foreword............................................................................................................................................. i MANUFACTURING PRIORITIES 2014.................................................................................................. ii BENEFITS OF MANUFACTURING....................................................................................................... ii ECONOMIC FOOTPRINT OF MANUFACTURING SECTOR.................................................................. ii MANUFACTURING PRIORITIES 2014................................................................................................. vi 1.

Ensure Energy Security – with a Focus on Sufficiency, Reliability, Quality and Cost...................... 1

Ensure Order and Manage the Costs of Devolution...................................................................... 2

Provide Adequate Security.......................................................................................................... 4

4. Sustain Existing Markets and Open up New Markets for Kenyan Goods...................................... 5 5.

Ensure Tax legislation and Tax Administration Promote Production............................................. 7

6. ImproveTrade Logistics and Keep Kenyans and their Goods Moving Swiftly and Safely – with a Focus on Infrastructure, Transport and Borders.............................................................. 8 7.

Provide the Necessary Education, Training and Skills................................................................ 10

8. Set aside Land for Industrial Investment................................................................................... 12 9. Fight Fakes, Substandard and Illicit goods..................................................................................13 10. Policy Stability.......................................................................................................................... 14 Conclusion........................................................................................................................................ 16 SWOT Analysis of the Manufacturing Sector......................................................................................17 References........................................................................................................................................ 18

Foreword Throughout history, the manufacturing sector has played a critical role in transformation of economies, expanding jobs and driving exports. This is true of all the major economies â&#x20AC;&#x201C; indeed Industrialization is synonymous with Development. We refer to Developed Countries as Industrialized Countries and vice versa. Kenya has long aspired to this transformation and public policy recognizes the centrality of industry and the need to focus on the sector. Successive governments have undertaken programmes and projects intended to boost the sector and while its contribution to GDP has generally remained stable, the sectorâ&#x20AC;&#x2122;s contribution turnover has increased tremendously over time. The Manufacturing Priority Agenda (MPA) sets out the views of the Kenya Association of Manufacturers on a comprehensive set of policies that broadly impact on the economy and manufacturing in particular. It is an integrated plan to create an enabling environment for a robust manufacturing sector. We hold the view that in the Vision to Industrialize Kenya, we need to put in place the right strategy and policies with the appropriate elements to encourage growth. The MPA offers our contribution on how Kenya can continue to develop a prosperous, sustainable manufacturing sector and the development of manufacturing-focused public policy and lists the key public policy priorities that when addressed together will promote our competitiveness and spur growth in the sector.

Betty Maina Chief Executive, Kenya Association of Manufacturers

Careful and consistent pursuit of the MPA and development of strategies that deliver on this Agenda will allow Kenya to build a robust base for expansion of manufacturing nationally and in the Counties and boost sustainable job creation.

Manufacturing Priority Agenda 2014

MANUFACTURING PRIORITIES 2014 1. Ensuring Energy Security – with a focus on Sufficiency, Reliability, Quality and Cost 2. Ensuring Order and Managing the Costs of Devolution 3. Provision of adequate Security 4. Sustaining Existing Markets and Opening up New Markets for Kenyan goods 5. Ensure Tax legislation and Tax Administration promote production 6. Improving Trade Logistics and Keeping Kenyans and their goods moving swiftly and safely – with a focus on Infrastructure, Transport, Borders 7. Provision of the necessary Education, Training & Skills 8. Setting aside Land for Industrial Investment 9. Fighting fakes, substandard, illicit goods. 10. Policy stability

BENEFITS OF MANUFACTURING Introduction to the Kenyan manufacturing sector Kenya’s manufacturing sector is among the key productive sectors of the economy identified under Vision 2030 which can spur economic growth and development because of its immense potential for wealth creation, employment generation and poverty alleviation. In addition, the sector is expected to provide impetus towards economic growth as outlined in the post 2015 UN development Agenda. The Medium Term Plan 2 (2013 - 2017) of Vision 2030 states that the overall goal of the sector is to increase its contribution to Gross Domestic Product (GDP) by at least 10% per annum. Kenya’s manufacturing sector is dominated by manufacture of food and beverages, which accounts for over 35% of total sector output. This is followed by refined petroleum products (over 17.5%), non-metallic mineral products (7%), and tobacco and tobacco products (4%). The top three sub-sectors mentioned above account for 50% of the manufacturing sector’s GDP, 50% of exports and 60% of formal employment. Manufacturing in the SME sector, is also significant, accounting for over 10% of total manufacturing sector output.

ECONOMIC FOOTPRINT OF MANUFACTURING SECTOR Contribution to the Kenyan GDP The manufacturing sector contributes directly to 10% of Kenya’s GDP. The sector comprises of about 3,700 manufacturing units and is divided into several broad sub-sectors. The output from the manufacturing sector was valued at Kshs 1.04 Trillion in 2013 (KNBS Economic Survey 2013). The sector offers significant multiplier effects beyond the sector itself through economy wide linkages. For example, more than 25% of the output of Kenya’s transport sector is used as an input to other domestic sectors, including manufacturing. Manufacturing firms, especially those in the agro processing sector, source critical inputs from the agricultural economy.

Figure 1: Quarterly GDP growth (%), Kenya, 2005-2012; b) Gross capital formation (% GDP), Kenya vs. peer countries, decadal averages

Data source: a) Kenya Bureau of Statistics (KBS); b) World Development Indicators

Contribution to Job creation The manufacturing sector employs 277, 900 persons directly and nearly 500,000 indirectly which is 13% of the labour force in the formal sector in Kenya. Compensation of employees in the sector totals to Kshs 111. 377 Billion. The sector employs 1.6 million people in the informal side of the industry. Nearly 50% of manufacturing firms in Kenya employ 50 or less workers. Figure 2: Employment rate in Kenya 1986-2012

Source: Africa Analytics1

Contribution to Public Finance Given the figures above it is clear that the manufacturing sector also makes a huge contribution to the tax kitty in terms of Import Taxes, Excise Duties, Value Added Tax, Income tax receipts from employees, social security contributions and corporation tax levied on profits. In 2012, Kenya collected Kshs. 93.3 billion in excise taxes, up from Kshs. 69.9 billion in 2009. It is estimated that additional government revenue is raised via the manufacturing sectorâ&#x20AC;&#x2122;s supply chain and also through taxation of the activities supported by the spending of employees of both the manufacturing sector and its supply chain. 1 African Analytica. (2012). African analytica. [online] Retrieved from: http://africananalytica.blog.com/ [Accessed: 19 Jan 2014].

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Manufacturing Priority Agenda 2014

Consumer Benefits of Manufacturing The manufacturing sector produces a variety of goods. This is of great benefit to local consumers since the goods are of high quality, affordable and easily available. Buying locally made products is a source of great pride to Kenyans since it eases their reliance on imported goods that can sometimes be substandard. Production of these goods can be classified according to the following categories. I. Agro-processing industries comprising of food, biotechnology, textile, leather, beverages and tobacco, paper, wood and wood products. II. Metal, metallurgy and construction comprising of foundries and forges, secondary steelmaking facilities, pipes and tubes, wire and wire products, general metal fabrication, machine tools and allied, plant and machinery manufacture, bodybuilding and motor vehicle assembly and accessories. III. Electrical, electronics and ICT comprising of electronics, machinery appliances, ICT software and hardware development, electrical components. IV. Chemicals comprising of petrochemicals, fertilizers, industrial chemicals, coatings and adhesives, catalysts, industrial solvents and gases, resins, plastics, agrochemicals and pharmaceuticals. This category in the manufacturing sector has the widest linkages with other industries including Agriculture which provides most of the raw materials, health services as well as domestic goods for everyday use. V. Mining and quarrying comprises of gemstones and precious minerals, industrial minerals, heavy minerals and building stones. Some of the products falling under this category such as soda ash are used in the Food industry. A list of consumer products produced, processed and packaged by manufacturers is listed in the table below. Table 1: Goods produced locally in abundance ANNEX 1: PRODUCT LIST 1. Acaricides 2. Adhesives 3. Advertising 4. Agricultural Products, Machinery & Tools 5. Agrochemicals 6. Alkyd Resins 7. Aluminium Products 8. Animal Feed & Health Products 9. Assembly of Motor and Selling Vehicles 10. Bags and Bailers 11. Baking Flour 12. Bar Soap 13. Barbed Wire and Chain Link Fencing 14. Basins and Baskets 15. Beddings 16. Books and Brochures Printing 17. Bottled Drinking Water 18. Bread, Buns & Rolls 19. Cartons 20. Cement 21. Chip Board 22. Clearing & Forwarding 23. Clothing, Textile and Knit Wear 24. Concrete Blocks 25. Confectioneries 26. Cooking Oil and Fat 27. Corrugated Cardboard and Cartons 28. Cosmetics 29. Crisps and Crisp Ban 30. Dairy Products 31. Detergent 32. Disinfectants 33. Edible Oils

Source: KAM 2013

34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66.

Farming Equipment Financial Services Flavoured Water & Drinks Foam and Foam Products Folding Cartons Food Drinks Foot Wear Furniture, Wood and Metal Plastic Furniture Galvanised Pipes and Wire Garments, Garment Manufacturing for Export & Accessories Hair Care Products Home Baking Flour Industrial Chemicals Information Technology Services & Equipment Juices Kikoy Clothing & Masaai Shukas Knitting Yarn and Knit Wear Labels Laundry Powder and Bar Soap Maize/Wheat Flour Meat Products Medical Equipment and Medicines Mild Steel Pipes Mineral Water Motorcycles, Parts and Assembly Office Furniture Packaging and Packaging Materials Paints & Paints Products Paper and Board Paper Products Perfumes Personal Care Products

67. Petroleum Jelly 68. Pharmaceutical Products, Medical 69. Equipment and Medicines 70. Polythene Products 71. Printing Materials 72. Processed Food 73. Promotional Items 74. Pumps 75. Refined Corn Oil 76. Re-Enforcement Bars 77. Rice 78. Rigid Packaging Containers 79. Rubber Products 80. Salt 81. Sanitary Pads and Towels 82. Snacks 83. Soaps 84. Soft Drinks 85. Square Tubes 86. Steel Products and Hardware 87. Sugar 88. Tea 89. Tobacco and Tobacco Products 90. Toiletries 91. Varnishes 92. Vegetable Oil 93. Vehicle Assembly and Body Building 94. Veterinary Products 95. Water Storage Tanks 96. Wines and Spirits 97. Wire Nails and Products 98. Wood and Wood Products 99. Zed Purlins

International Trade and Foreign Exchange earnings. About two thirds (or 66%) of the goods/commodities produced by the manufacturing sector in Kenya are consumed locally while one third is exported Overall exports of goods and services for 2012 increased by 12.2 percent to reach US$ 9.4b (23.2 percent of GDP), up from US$ 8.4b (24.9 percent of GDP), in nominal USD terms. The African market is the largest destination of Kenyaâ&#x20AC;&#x2122;s exports accounting for 48 percent with 26 percent going to the East African Community. The EU is Kenyaâ&#x20AC;&#x2122;s second main trading partner and accounts for 24 percent of Kenyan exports, of which 7.8 percent go to the UK2. Figure 3: Distribution of export growth by broad economic sector (1980-2011)

Data source: Comtrade via WITS; SITC Rev 2

Investment Kenyan Manufacturing sector has attracted both local and international investors through Foreign Direct Investment and Joint Ventures. The investment in the manufacturing sector leads to global integration, knowledge spillovers, and structural change in the country. The manufacturing sector, particularly within global production networks, provides domestic firms and workers exposure to foreign technology and knowledge. This may come through foreign direct investment in the Kenyan manufacturing sector, through the import of capital equipment embodying foreign knowledge, through exporting to international buyers, and to competing with foreign firms in regional and global markets.

2 Manufacturing Survey 2012. A survey of the Manufacturing Sector in Kenya (2012). Nairobi: Kenya Association of Manufacturers.)

Manufacturing Priority Agenda 2014

MANUFACTURING PRIORITIES 2014 To meet the aspirations of Vision 2030, the manufacturing sector is expected to grow at a sustained growth rate of 10% per year until 2030 so as to create jobs, generate foreign exchange, and attract foreign direct investment. To achieve these goals, Vision 2030 focuses on improving the sectorâ&#x20AC;&#x2122;s productivity; raising the share of Kenyan products in the regional market; and developing niche products in which Kenya can achieve a global competitive advantage. In Kenya, a number of factors constrain investment, growth, productivity, and innovation in the manufacturing sector. Chief among these are the vast shortcomings in trade and transport infrastructure, high costs and low reliability of electricity, inadequate access to credit, the burden of corruption and regulatory constraints, the lack of competitively priced inputs and technical barriers to trade, especially to regional markets. We would like to bring to the attention of the Government the Manufacturing Priority Agenda 2014, which highlights the key issues affecting business in Kenya. The Government has embarked on tackling a number of the issues and this needs to be sustained and addressed conclusively in order for businesses to thrive and create employment and contribute to the growth of the economy.

Ensure Energy Security â&#x20AC;&#x201C; with a focus on Sufficiency, Reliability, Quality and Cost

Overview Kenya currently generates about 1,672 MW of electricity with over 60% of generated energy into the national grid used by manufacturing enterprises. A comparison of the electricity costs between Kenya and key competitor countries like China, India and South Africa, shows that Kenya is quite uncompetitive on cost and quality of power as the cost depends on the amount of thermal energy in the system which is susceptible to changes in international oil prices. The problem mostly arises because Kenyan electric power is mainly hydro-based, thus exposing the country to power shortages in times of drought and is distributed by a monopoly, the Kenya Power Co. Ltd. Manufacturers in Kenya experienced an average of between 8 to 12 power outages per month in 2010, which together with power surges, resulted in an average lost production value of 7% of total annual sales. We acknowledge the plans by the Government to deliver 5,000 MW of power within 40 months and to diversify the sources of energy. We urge that these projects are completed on time to deliver the expected benefits. It is estimated that flagship projects outlined in Vision 2030 will require an estimated 42,700 MW, meaning we need a lot of investment to be energy secure. It is prudent therefore that any energy policies that are proposed must be aligned to the industrialization policies as well as Kenyaâ&#x20AC;&#x2122;s Vision 2030 if we are ever to unlock our over dependence on imported goods.

Manufacturing Priority Agenda 2014

Recommendations 1. We need concerted action that unites industrialists and Government stakeholders in the Energy sector in the delivery of required capacity. The prices should be reasonable and supportive of industrialization. 2. An increase in public investment in electricity generation and the expedition of investment in transmission and distribution can ensure utilization of capacity. Failure to do this means that existing capacity is not fully utilized even though consumers pay for it. 3. The government should also incentivize private sector investments in geothermal, renewable energy alternatives and other least cost energy sectors. Today the private sector accounts for 15 percent of the power supply. It can be increased. The country should enhance exploitation of geothermal, solar, wind and biomass resources to supply at least 5,200 MW for domestic and institutional energy requirements by 2030. 4. Provide support and incentives for industries and businesses to reduce energy wastage. Some businesses have made the required investments and saved themselves lost energy. Others might require support and incentives. Establish clear rules for private generatorsâ&#x20AC;&#x2122; â&#x20AC;&#x153;open accessâ&#x20AC;? to the transmission network, as established in the energy policy. 5. Ensure that electricity pricing maintains the financial viability of power companies, while protecting the most vulnerable consumers. The short term solution to stable energy prices would be to fast track geothermal energy development that will relegate thermal plants to peaking plants and to establish petroleum fuel reserve stocks that can last at least for 90 days to move the economy from the risk of price shocks.

Ensure Order and Manage the Costs of Devolution

Overview The Constitution of Kenya 2010 introduced the devolved system of Government in Kenya. While devolution is meant to improve service delivery in the country, it poses challenges to business and ensuring freedom of commercial activity. It is acknowledged that county governments need resources to enable them deliver on their mandates of service delivery and that the business community are key partners in this quest. However the conduct of county governments needs to inspire existing investors and create the framework for attracting new. Within a year of the introduction of devolved government, Manufacturers are now confronted with the issue of double taxation where members are forced to pay similar charges and levies in more than one county without attendant improvement in service delivery. To ensure devolution delivers the promise and does on exacerbate the costs of doing business, it is critical that National and County Government maintain constant and regular dialogue with business to ensure that Devolution does not exacerbate the Costs of doing business,

Recommendations 1. The levying of fees and charges at the County level should be streamlined through policy and legislation to ensure that tax collection is harmonised. The Constitution in Article 209 (5) guarantees freedom of commercial activity in the country without disruption by multiple taxes and fees. However the overarching legal framework to deliver this and deal with conflict in laws has not yet been enacted. It is critical that such a legislation is developed and enacted expeditiously. 2. Public participation is a key principle under the Constitution of Kenya 2010. Counties are still trying to find their feet in these early stages of devolution, there is need to establish ways to engage the business community at policy and legislative levels on issues that affect the business environment, productivity and competitiveness. 3. With the related drive to disperse economic activities to various regions within the country, there is an opportunity to capture positive spillover effects by nurturing industrial districts through cluster policies. Manufacturing cluster development strategies will enable production cost reductions and will promote innovation. In addition the strategy will promote county manufacturing depending on natural resource endowments of various counties for county-specific products. 4. Improved service delivery by counties charged with the provision of important infrastructure necessary for the smooth running of business. This will bring down the transaction cost of business in the counties. It is is critical that counties identify and prioritise service delivery to industrial zones as many of them are principally rural. If they prioritise rural development over urban service provision, they could compromise industrial development.

Manufacturing Priority Agenda 2014

Provide Adequate Security

Overview Peace and stability are a prerequisite to social and economic development, rampant insecurity is detrimental to the economic growth and shutters economic opportunities for the people. According to the Global Competitiveness Index (GCI), Kenya ranked 131 out of 148 countries in the security. The country continues to be at the epicentre of global terrorism especially after the recent Westgate attacks in Nairobi last year. This is turn has an effect on the overall competitiveness of the country. Security reforms that would lead to a better responses and coordinated efforts in the event of future terrorist attacks have been focussed mainly on police reforms. Kenya lacks a national security policy and until rampant insecurity is arrested, the Kenyan economy will suffer and economic opportunities for our people of Kenya will nosedive.

Recommendations 1. There is need to develop a National Security Policy with security actorsâ&#x20AC;&#x2122; roles, responsibilities clearly prescribed with a move from the authoritarian system of the past, to a new system that is managed and operated in a way that is subject to civil authority and is more consistent with democratic norms, human rights law and the principles of good governance. 2. Reorganization of the security apparatus in Kenya to restore investor confidence and end insecurity. There is need to boost enforcement officerâ&#x20AC;&#x2122;s presence across counties and enforce Community Policing initiative to curb terrorist and other threats.

3. A disaster preparedness team should be in place to map out potential disasters and ensure rapid response in case of disasters and to coordinate response by all agencies in the country in when disasters occur. They should ensure that there is disaster preparedness by training the security personnel. Public and private organisations should also have emergency drills. 4. The country should have the capability to prevent terrorist attacks, and to rapidly and effectively respond to, and recover from, any terrorist attack or major disaster that occurs. To achieve this the Government need to invest in the latest security equipment. 5. Kenya should continue to play the role of an “anchor of stability” in East and Central Africa and ensure that there is peace within the region in order to create a conducive environment for investment and economic growth.

Sustain Existing Markets and Open up New Markets for Kenyan Goods

Overview Increasing industrial output from Kenya also requires outlets. Markets are central in the development of the manufacturing sector. Kenya maintains an open trade policy and is export oriented. This must be safeguarded and enhanced further. Local markets are critical for local producers and service providers. It is therefore critical to expand both local consumption of goods and services and develop new external markets. Exports would enable the country to effectively deal with the fiscal and monetary challenges as it reduces the current reliance on domestic consumption as a major driver of the economy. The government should actively pursue initiatives to grow and diversify Kenyan exports. In order to grow the manufacturing sector, there is need for increased purchase of locally manufactured products by the Kenyan Government, private sector and citizens. In encouraging imports we are actually creating jobs in foreign countries and draining our foreign revenues. “A Buy Kenya; Build Kenya Philosophy” needs to be inculcated in the mind of all Kenyan Citizens.

Manufacturing Priority Agenda 2014

Government has clearly stated its intention to boost consumption of local goods and services. This needs to be harnessed and deepened in all sectors and services and tracked. In a similar manner that Government is tracking consumption of goods and services from young people or women. In addition to boosting local consumption of goods and services, Kenya needs to look at critical markets. Starting with Africa.

Recommendations External and Internal market development 1. There is need to conclude trade agreements and expand the external market through concluding regional, bilateral and other trade agreements and special arrangements that will deliver expansion of such markets. These include the Tripartite Free Trade Area, Europe, and Special Status Agreements with African Countries. 2. East Africa remains a critical market for Kenya. The EAC Customs Union and the Common Market agreements have opened up these markets. It is critical that we make the East African Community work for Kenyan businesses by pushing for the attainment of a true single market with limited barriers for goods and services and freedoms of movements of persons. The government should work towards the elimination of external non tariff barriers in countries we have signed trade agreements with. 3. COMESA represents an additional market for Kenya. Kenya should work towards expanding the number of members who are members of the COMESA Free Trade Area in order to expand liberal market access. 4. Beyond EAC and COMESA, Kenya needs to reach Bilateral market access agreements with significant trading partners in Africa. Kenya signed a Special status Agreement with Ethiopia in 2012. This needs to be ratified expeditiously and the attendant protocols developed to ensure trade and investment in the two countries is realised as per the SSA. In addition Kenya needs to conclude such agreements with other large markets in Southern Africa and West Africa. 5. There is a need to protect the existing trade markets as we work on opening new ones. Exports to Europe average Ksh 100bn a year - and enter the market duty and quota free. Europe is therefore a critical market for Kenya and needs to be safeguarded. The ongoing trade negotiations for an Economic Partnership Agreement between the EAC and Europe present an avenue for maintaining competitive access to this market with great potential.

With regard to the American Trade, AGOA presents great opportunity for entry into the American market and in 2013, Kenya supplied the largest volume of textiles into the US market from Africa. The end the AGOA agreement is looming in 2015 and it is critical that Kenya works with other African countries who are beneficiaries to ensure extension of the same. 6. Local market expansion through preference in local public procurement. Affirmative action in public procurement for local industrial products by government agencies and the public support for Kenyan products. There is need to inculcate â&#x20AC;&#x153;Buy Kenya, Build Kenyaâ&#x20AC;? philosophy as a national culture.

Ensure Tax legislation and Tax Administration Promote Production

Regulations related to paying taxes pose particular challenges to the business community. The four main taxes paid by businesses in Kenya are: corporate tax, which is governed by the Income Tax Act (Cap. 470 of Laws of Kenya); Value Added Tax (VAT), which is governed by the VAT Act 2013 (Cap. 476 of the Laws of Kenya); Customs duty, which is governed by the East African Customs Management Act 2005; and the Excise duty, which is governed by the Customs and Excise Duty Act (Cap. 472 of the Laws of Kenya). The number of tax payments and returns that a business has to make has become untenable and is adding to the cost of compliance and needs to be reviewed and streamlined. They include Corporate tax (5 times p.a), NSSF (12 times p.a), PAYE (12 times), applicable withholding taxes (monthly), Single Business Permit, Standards Levy, Industrial Training levy (2 times per annum), road maintenance levy, fuel excise duty, rates, rents, stamp duty, VAT (monthly returns), and petroleum development levy. Kenyan businesses make up to 65 tax and tax like payments annually which add up to 50% of Profit. These taxes are not collected at the same location and different agencies are collectors. The key challenges in complying with tax regulations that have been identified are as lack of clarity on key provisions including on refunds; delays on the part of the Kenya Revenue Authority (the tax administration Authority in the country); heavy documentation requirements including maintenance of documents up to 10 years back for corporate taxes; and lack of transparency in obtaining tax compliance certificates.

Manufacturing Priority Agenda 2014

Recommendations 1. VAT law should support production (value addition) and not consumption and provide incentives for the manufacturing sector. The current VAT Act 2013 should be reviewed to ensure that it supports the growth of the manufacturing sector. 2. There is also need to regulate refunds and make the process speedy, fair and transparent. KRA currently owes Kenyan businesses a considerable amount in refunds. Time taken to make refunds must be regulated and KRA must be penalized for not administering it right. 3. Streamline the process of making tax payments by reviewing the number of periodic returns required by KRA to simplify tax administration. The complexity of forms and time taken to file returns should be addressed as they impose administrative burdens on taxpayers leading to tax avoidance and high enforcement cost on part of government. 4. Modernization of the Income Tax Law. It is more than 40 years old, has been amended many times, is complex and hard to understand for both business and KRA and therefore woefully in need of modernization which must be considered a priority. 5. Kenya needs to move expeditiously to spearhead the resolution of the anomalies noted in the EAC Common External Tariff to ensure proper classification of products. The Government should set up a permanent inter-ministerial Budget committee to handle various tariff anomalies, especially with regards to harmonization and rationalization of EAC customs Union. Furthermore, provisions to allow for changes in the Protocol should be followed to avoid unilateral decisions in violation of the protocol and imposition of non-tariff barriers by Partner State.

Improve Trade Logistics and Keep Kenyans and their Goods Moving Swiftly and Safely â&#x20AC;&#x201C; with a Focus on Infrastructure, Transport, Borders

Overview An efficient trade logistics system is important for trade facilitation and trade competitiveness. The efficiency of the trade logistics system is based on all the activities and processes between the points of the initial shipment of tradable products to the point of their destination. These include the efficiency of the cross-border clearance processes, quality of trade and transport - related infrastructure, including ports, railroads, roads, and information technology; competence and quality of logistics services, including transport operators and customs brokers; ability to track and trace consignments; and timeliness of shipments in reaching their destination within the scheduled or expected delivery time. The Port of Mombasa on the Kenyan coast plays a strategic role in the facilitation of trade both for Kenya and the neighboring countries. Manufacturerâ&#x20AC;&#x2122;s in particular face numerous challenges when the port performance is inadequate, and hold the view that Mombasa port performance, transit costs and procedures lay at the heart of the logistics supply chain. Currently the inefficiencies at the Port of Mombasa contribute significantly to the cost of doing business on the Kenyan logistics chain.

The launch of the (LAPSSET) corridor in March 2012 and the construction of the Standard Gauge Railway is welcome and has potential to link up Kenya with the region and will bolster trade.

Recommendations 1. The Government should prioritize the Smooth implementation of the Single Window System (SWS) and Electronic Cargo Tracking System (ECTS) and monitors the implementation process. 2. Kenya needs to particularly improve port infrastructure, customs processes and capacity to track and trace freight goods. This will improve efficiency of port or airport supply chains reduce costs and save time for improved efficiency of trade in manufactures. 3. Develop road, rail, air and maritime transport infrastructure, as well as energy supply and telecommunications systems to improve service flows to manufacturing. 4. The collection of revenue for improvement of infrastructure should be ring fenced to ensure that it delivers the desired benefit. The Government needs to deliver its promise to reduce the IDF fees to the same level as other EAC countries. 5. Clear information on procedures for imports and export should be provided to businesses with clear timelines and deliverables.

Manufacturing Priority Agenda 2014

Provide the Necessary Education, Training and Skills

Overview Kenya has invested a lot in developing education with nearly universal coverage of primary education and increasing coverage of secondary education. However we need to be aware of that higher education is critical for sustained growth in Kenya. It can improve productivity by providing the skills; technical, intellectual and behavioral required by the market and drive innovation and growth in the economy. There is also a need to review curricula in tertiary institutions to reflect the latest changes in industrial technology. This should be done on a regular basis in both universities and vocational training institutions. Despite expanded access, many young people still enter the job market without adequate skills. Indeed a stark observation is that 92% of the unemployed youth (between 18 and 25) and those who graduate from higher education lack the skills and right mix to drive competitiveness. The education system should be developed in a manner that ensures that students are able to put classroom theory into practice and even become entrepreneurs, thus creating jobs rather than searching for them. Kenya has a lot to learn in stepping up measures to harness technology, innovation, productivity and promoting linkages between industry and universities, polytechnic institutes and other training institutions. Improvement of policy on R&D, innovation, and technology utilization will boost the countryâ&#x20AC;&#x2122;s global competitiveness.

Recommendations 1. The government must commit itself to delivering quality higher education that meets the requirements for industry and the growing economy by reviewing curricula to be demand driven, better adapted to latest industrial technology. There is need to transform theoretical knowhow to practical usage. 2. The government must allocate sufficient resources to science and engineering. National polytechnics and other technical training institutes need to have their infrastructure upgraded in order to meet the needs of industry. 3. Tax incentives to industry for investment in research and development to promote increased private-sector R&D through increased government spending on Research and Development in Industry through a R&D fund 4. Foster deeper linkages between university and industry to develop the skilled labour for the economy. Closer collaboration between training institutions of higher learning and private sector should be encouraged in order to offer demand-driven curricula that target Kenya and the east African region as well. 5. Improve secondary and tertiary education level enrolment; quality of math and science education; and enrolment in engineering and technical subjects needs to be increased to develop the pool of highly skilled scientists, engineers, technicians and workers.

6. Improve research and development (R&D) encourage staff training; promote linkages between university, vocational, training and other tertiary institutions; and increase funding for R&D. Establishment of research centers, that will develop new and innovative ways of manufacturing.

Manufacturing Priority Agenda 2014

Set Aside Land for Industrial Investment

Overview Governments at national and county level need to set aside and build land banks for industrial investors in key towns â&#x20AC;&#x201C; at present the main path to access to industrial land is purchase of agricultural land and conversion through change of user. Expecting them to get land through the market is making it very expensive and affects plans for de-concentration from the main industrial towns of Nairobi. Access to land remains one of the gravest hindrances to new investment in industry and it is critical for counties and national government to build land banks for industrial investment.

Recommendations 1. Use compulsory acquisition and zoning to build land banks The new Land Act No. 6 of 2012 in Part VIII bestows on the National Land Commission power to compulsorily acquire land when necessary upon receipt of a request to do so from the respective Cabinet Secretary or the County Executive Committee Member and the land owner is fully compensated for such an acquisition. This power should be exercised in instances where the Government focus is to increase local industries for the growth of the countryâ&#x20AC;&#x2122;s economy. 2. Thika Town was planned to be an industrial town from the start. The Thika super highway is complete and this infrastructure is timely for the Government to work towards setting aside land in Thika for development of industries. Such land should be prioritized to be for private investors who intend to set up industries with a priority on local manufacturers. 3. The same idea should also be used in all the counties such that specific areas in the counties be set aside as land for the establishment of industries. For the towns with industrial areas, these areas should be strictly used for industrial purposes and more land in such counties be sourced for expansion of industries.

Fighting Fakes, Substandard and Illicit Goods

Overview Illicit trade is the production, import, export, purchase, sale or possession of goods failing to comply with legislation. It includes production, shipment, receipt, possession, distribution, sale or purchase of such products. It additionally includes all actions or conduct intended to facilitate such activities. Many industries all over the world are affected by this vice. Illicit trade takes many forms including: Trading in prohibited goods e.g. narcotics, ivory, guns and pornographic material, infringement (Stealing) of IPR, smuggling of genuine goods through illegal entry points, counterfeiting operations, false declarations to Customs Officers at point of entry, tax evasion and money laundering, diversion of transit goods into local market. Kenyan manufacturers lose over Kshs 30 billion (US$ 42 million) annually due to counterfeit products. The government loses Kshs 6 billion (US$80million) in potential tax revenue. Small outlets commonly referred to as stalls in the city centre popular for imported items, Electrical and electronics products. According to the Global Financial Integrity (GFI), at Global Agenda Council on Illicit Trade 2012-2013, the value of illicit trade, primarily the sale of counterfeit goods, is estimated at US$ 650 billion worldwide.

Manufacturing Priority Agenda 2014

Recommendations 1. The Judiciary need to determine cases brought before them expeditiously (to reduce the turnaround time). There is need for the Judiciary to be aware of the gravity and nature of Illicit Trade cases brought before judiciary for prosecution. 2. The various Law Enforcement Agencies need to nurture a collaborative approach in addressing Illicit Trade crimes, similar to approach taken against insecurity and disasters. There is need for all enforcement agencies to understand the overlapping nature of their mandate as defined by the various pieces of legislation that govern their operations. 3. Joint prosecution of Illicit Trade offenders by various agencies would result in achieving greater impact â&#x20AC;&#x201C; maximize the charge counts 4. These include stiffer monetary penalties, longer jail terms, deportation of aliens, forfeiture of assets, etc. 5. Legislations on Illicit Trade should be consolidated into a booklet for easy reference and use by the Judiciary and law enforcement officers handling cases on illicit trade.

10.

Policy Stability

Overview Policy uncertainty for investors arises out of unpredictably of investment policies, laws, and regulations. Policies may either be changed without sufficient advance notice and debate or the interpretation applied by public officials varies from time to time or firm to firm. Firms require a stable and predictable policy environment in order to make plans for growth and expansion. The Government in the Vision 2030 Medium Term Plan (MTP 2 2013-2017) has clearly committed to growing the Manufacturing Sector in order to achieve a GDP of 10% by 2017. The manufacturing sector is keen to see the consistency of the policy on manufacturing at legislative and implementation of Government policy.

Recommendations 1. Consistency of government policy is required at the county and national level in order to support manufacturing growth. 2. The Government human resource policy is a critical policy for the growth of the manufacturing sector as the availability of skilled labor is critical for firm competitiveness. The policies of governments with regard to education and training have a great contribution to make with regard to labor force development and assembly of relevant skills. 3. The minimum wage policy, wage bargaining, employment stability, social cost, workplace regulations and hiring and firing have an impact on a firmâ&#x20AC;&#x2122;sâ&#x20AC;&#x2122; labor costs and the wage earners engaged. The Kenyan government has a minimum wage policy which is usually reviewed annually. For a long time, businesses have appealed against this ceremonial wage increase, which is not pegged to productivity of labor. In some industries, the minimum wage set is too high as to discourage engagement of more workers in secure contracts.

4. Tax policies - Tax incentives remain an important strategy for attracting FDI for investors wishing to exploit the natural resource base in Kenya and those viewing Kenya as an export platform for EAC and Eastern and southern Africa (ESA) regional markets. Recent manufacturing incentives schemes, in Kenya have, however, been ineffective. There is need to reform of the incumbent incentives including those related to export zone processing, manufacturing under bond, and other incentives involving tax refunds is therefore necessary to address the challenges reducing their utilization 5. Sector Specific Value Chains Approach in policy decisions- Manufacturing sectors are highly heterogeneous; accordingly, sector-specific strategies and policies are required to ensure that policy alleviates binding constraints.

Manufacturing Priority Agenda 2014

Conclusion While this documents sets out 10 key areas that need to be looked at urgently, it does not by any means exhaust all the issues that the Kenyan government needs to address to lighten the burden for business. The Manufacturing Priority Agenda only touches on the tip of the iceberg. Issues such as the crippling wage undermines industry and hamper job creation and labour absorption especially in the formal sector. Other Factors such as resource mobilisation for industrial investment, water security and environmental conservation are important if production in this country is to be improved and if we are to secure more investments for our country. National policies need to be developed for core issues if we are to harness all the economic capabilities of this Nation. There is also need for out of the box solutions that are tailored to the Kenyan situation if we are to attain industrialisation by the deadline set out in Vision 2030. But more importantly will be the application of multilevel interventions focussed on tackling problems at critical source points that tend to have a ripple effect on other areas of business. If what is suggested in this Agenda is put into effect then the country will see a rapid turnaround for business which in turn will enliven and enrich the lives of ordinary Kenyans.

SWOT Analysis of the Manufacturing Sector WEAKNESSES • Constraints in the manufacturing sector include: • Expensive and unreliable power; • Limited access to finance especially for smallscale processing companies • Limited value addition and product transformation • Production is resource based and uses low technology • High cost of labour • Relatively low productivity compared to emerging economies; • Poorly developed infrastructure; many burdensome regulations leading to high administrative costs; • Multiple regulatory institutions with overlapping mandates lead to high administrative costs; • Sector has not revealed comparative advantage in the world; and • Limitations in innovativeness.

STRENGTHS • Strength for manufacturing sector in Kenya include: • Availability of well trained and skilled labour; • Availability of some raw materials especially in food and beverages sector; • Strong private sector industry associations providing leadership in the sector and • Strong Public Private Sector Partnerships (PPP).

THREATS • Threats for the sector include: • Stiff competition from imported counterfeits and sub-standard products; • Exports are concentrated to a few products; exports are concentrated to a few exports markets with which Kenya has trading agreement; • Climate change and global warming focus a challenge to the availability of raw material used in the sector; • The general liberalization at the multilateral level (WTO) which erodes the current preferential margins.

OPPORTUNITIES • Opportunities for the sector include: • High domestic demand in all manufactured goods; • High demand in EAC Partner State countries and regional market for most manufactures; High demand in developed countries for processed foods and beverages and the current industrial policy has measures to support development of the manufacturing sector.

Manufacturing Priority Agenda 2014

References African Analytica. (2012). African analytica. [online] Retrieved from: http://africananalytica.blog.com/ [Accessed: 19 Jan 2014]. East Africa Plus 1: Year in Review 2013. Kenya Market Update 2013 updated. (2014) StratLink - Africa Ltd East Africa’s Manufacturing Sector: Promoting Technology, Country Report Kenya Innovation, Productivity And Linkages. (2013) Country Report Kenya. BKP Development Research and Consulting. Economic Survey (2013). Government of Kenya Kenyapharmaexpo.com. (2014). Kenya pharma expo. [online] Retrieved from: http://www. kenyapharmaexpo.com/kenya_pharma.html [Accessed: 15 Jan 2014]. Manufacturing Survey 2012. (2013). Nairobi: Kenya Association Of Manufacturers. Republic of Kenya Manufacturing Export Competitiveness in Kenya. A Policy Note on revitalizing and Diversifying Kenya’s manufacturing Sector.

Schwab, Klaus; Sala i Martin, Xavier; World Economic Forum, “The Global Competitiveness Report 2012-2013”, World Economic Forum, Second Medium Term Plan. (2013) Transforming Kenya. Pathway to Devolution, Socio-economic development, equity and national unity. Government of the Republic of Kenya

VISION To be a world class business membership organization effectively delivering services to its members wherever they operate.

MISSION To promote competitive local manufacturing in a liberalized market.

Kenya Association of Manufacturers (KAM) P.O. Box 30225 - 00100 GPO Nairobi 86 Riverside Lane, Off Riverside Drive, Riverside (Temporary) Mwanzi Road, Opposite Nakumatt Westgate, Westlands (from June 2014) Tel:+254 020 2324817/8; 020 8155531/2; 020 2166657 Mobile:+254 722-201368, 0706-612384, 0734 646004/5 Email: info@kam.co.ke Website: www.kam.co.ke