Manufacturing Priority Agenda 2016 by Kenya Association of Manufactures

Manufacturing Priority Agenda 2016

PROMOTING INDUSTRY IN KENYA FOR SHARED PROSPERITY

Promoting Industry in Kenya for Shared Prosperity Contribution to Kenyan GDP International Trade and Foreign Exchange earnings Contribution to Job Creation Consumer benefits of Manufacturing

Pillar One General Policy Framework Complete devolution framework Macroeconomic predictability Regulatory environment that supports longterm investment

Pillar Two Ensure a level playing field

Pillar Three Competitive Local Manufacturing

Pillar Four Make Kenya a manufacturing hub for Exports Manufacturing

Fight illicit trade, contraband and substandard goods

Affordable long-term financing for industry and exports

Develop a National Export Development Strategy

Formalisation of the Informal Economy

Facilitate business compliance with regulation Reduce import clearance time and cost

Special Economic Zones (SEZs)

Taxation that does not discourage domestic production Preferences for Local content in Public Procurement Unfair trade practices

Reduce energy costs

Targeted promotion of FDI Expanding external markets

Pillar Five Securing the future of Industry Availability of Skilled Labour Innovation and technical upgrade Sustainable Development through Green Growth Support SMEs

Combat late payment culture Other Factors of Production

Focus on the Kenya Industrial Transformation Programme as a key driver for industrial growth

TABLE OF CONTENTS MANUFACTURING AS A GROWTH CATALYST FOR KENYA 3 MANUFACTURING KEY TO VISION 2030 ECONOMIC PILLAR 5 ABBREVIATIONS 6 MPA 2016: PROMOTING INDUSTRY IN KENYA FOR SHARED PROSPERITY 8 Introduction 8 DEFINING THE BENEFITS OF THE KENYAN MANUFACTURING SECTOR 10 Sub Sectors in Manufacturing 10 Contribution to the Kenyan GDP 10 Manufacturing Output 11 Contribution to Employment 12 Value Addition by the manufacturing sector 12 Contribution to Public Finance 13 Investment 13 International Trade and Foreign Exchange earnings 14 Other Benefits of Manufacturing 15 PILLARS TO SUPPORT INDUSTRY FOR SHARED PROSPERITY 16 Pillar One: General Policy Framework 16 Complete Devolution Framework 17 Macroeconomic Predictability 18 Regulatory environment that supports long-term investment 18 Pillar Two: Ensure a level playing field 20 Fight illicit trade, contraband and substandard goods 21 Formalisation of the Informal Economy 21 Taxation that does not discourage domestic production 21 Preferences for Local content in Public Procurement 22 Unfair trade practices 22 Pillar Three: Competitive Local Manufacturing 23 Affordable long-term financing for industry and exports 24 Facilitate business compliance with regulation 24 Reduce import clearance time and cost 24 Reduce energy costs 25 Combat late payment culture 25 Other Factors of Production 25 Pillar Four: Make Kenya a manufacturing hub for Exports 27 Develop a National Export Development Strategy 28 Special Economic Zones (SEZs) 28 Targeted promotion of FDI 28 Expanding external markets 29 Pillar Five: Securing the future of Industry 30 Availability of Skilled Labour 31 Innovation and technical upgrade 31 Sustainable Development through Green Growth 31 Support SMEs 32 SPOTLIGHT ON THE KENYA INDUSTRIAL TRANSFORMATION PROGRAMME (KITP) FOR THE GROWTH OF THE MANUFACTURING SECTOR 34 REFERENCES 40

Our economy needs a large number of new non-agricultural jobs to diversify, to cut poverty sharply, and to employ our young people. Without a strong manufacturing sector, our chances of finding many more non-agricultural jobs are low. H.E President Uhuru Kenyatta, CGH, President and Commander in Chief of the Defence Forces of the Republic of Kenya - 9th December, 2014

MANUFACTURING AS A GROWTH CATALYST FOR KENYA Every year, KAM, the leading advocate for policies affecting Kenyan manufacturers, conceptualizes the Manufacturing Priority Agenda – a concise guide on the most burdensome challenges facing Industry. The Agenda contains the issues we feel should receive the highest attention in our engagement with the Government and related public authorities throughout the year. The guide is developed from member’s observations of emerging public policy, a review of the current business environment and relevant regulations. It also captures issues affecting trade and the industry’s perspective on the dynamic context in which manufacturers operate. This ever-changing landscape demands a revision of the MPA every year. For 2016, we have organized the Agenda under the broad theme of ‘PROMOTING INDUSTRY FOR SHARED PROSPERITY,’ which is informed by our deep conviction that Manufacturing is critical to the social, political and economic transformation of our country. The priority areas herein are placed under five key pillars which, if strengthened will lead to a more competitive environment and impactful economic gains for Kenya’s industrial sector. Top on the agenda this year, is the general policy framework discussed under the first pillar. These are Issues related to the overarching principles with the highest impact on the growth of the manufacturing sector namely, the complete devolution framework, macroeconomic predictability and a regulatory environment that nurtures the growth of businesses. The second pillar calls for a level playing field for manufacturers by curtailing the black economy, ensuring that taxation does not discourage domestic production, that preferences for local content are made in public procurement and unfair foreign trade practices are halted. The third pillar advocates for focus on competitive local manufacturing by reducing the cost of doing business in Kenya. Pillar Four, aligns itself with the Kenya industrial Transformation Programme (KITP) and addresses ways in which we can turn Kenya into a manufacturing hub for exports. Hence this pillar aims to champion for export competitiveness and ways to create better access to EAC markets. Securing the future of industry can be achieved through the availability of skilled labour, innovations and technical upgrade, and by supporting SMEs. This is highlighted in the fifth and final pillar. As we present this AGENDA for government’s action, we must recognise and laud key milestones made by the government in 2015 such as the launch of the Kenya Industrial Transformation Programme (KITP). The Blueprint annotes a roadmap to industrialisation through key projects that will increase Jobs and FDI flows in the country. Kenya’s improvement in the Ease of Doing Business Index ranking from 136 to 108 is an impressive leap for local businesses and a notable attraction for potential investors. The reforms made in 5 key areas of the index that led to the improvement were effective handling of construction permits, connection to electricity, registering property, getting credit and resolving insolvency.

Another feat, is that the Government secured the extension of AGOA for a further 10 years and, at the same time, successfully initialled a number of bilateral and multilateral agreements such as the Economic Partnership Agreements (EPAs) negotiations and the Tripartite Free Trade Area (TFTA). These has a tremendous impact on our economy as it further deepens Kenyaâ&#x20AC;&#x2122;s market access for her exports. KAM will continue to work with the government and other stakeholders towards the development of our countryâ&#x20AC;&#x2122;s industrial sector. This Priority Agenda is our contribution in shaping policies and regulatory frameworks that will enable local businesses and trade partnerships to thrive. In doing so the vision of an industrialized country will be realised in a sustainable economy and through better living standards for our citizens.

Pradeep Paunrana Chairman, Kenya Association of Manufacturers

MANUFACTURING KEY TO VISION 2030 ECONOMIC PILLAR The manufacturing sector remains a priority for the economic pillar of the Vision 2030. Kenya aspires to grow at over 10 per cent to attain a status of a newly industrialized economy by 2030. Kenya has achieved lower middle income status and going forward, the expansion of the manufacturing sector to 15 per cent share of GDP as envisaged in the Kenya Industrial transformation programme would contribute to achievement of the double digit growth. The the manufacturing industry contributions to employment has been felt but there still remains a higher potential for jobs and wealth creation in our Country when provided with the supportive environment where they can thrive. Growth in Kenya is largely driven by agriculture and the manufacturing sector. The sectorâ&#x20AC;&#x2122;s growth has continued to be a catalyst to, in part, the growth of the agriculture, whole and retail, and logistics sectors which remain Kenyaâ&#x20AC;&#x2122;s contributors to economic growth and development. The business environment is an important factor in determining the level of investments that take place, expansion plans for businesses, revenue collected by government, employment levels and general well being of the economy. The manufacturing sector continues to face many challenges that have declined its share to GDP. Through the industrialization programme, KITP, the Government has demonstrated high level commitment towards revitalization of the manufacturing sector. We take this time to acknowledge and appreciate the commitment by Government to support the manufacturing sector. In the doing Business comparator studies, Kenya is ranked 108 out of 189, in 2016 compared to 136 in the previous year. There is indeed a notable improvement in the ranking but, as I have highlighted, a lot still needs to be done to create a conducive environment for business growth. This is especially with regard to improvement of the regulatory environment in the wake of a devolved system of Government in Kenya. Through the MPA the manufacturing sector is positioning itself to play its rightful role in engaging government towards the realization of industrialization in Kenya. The Agenda maps out the priority areas with a clear framework to engage the government and other stakeholders to find practical solutions for the industry. The common theme that underlies our recommendations in this guide, is to ensure that a competitive environment is created for local businesses. While the MPA might not be exhaustive, it nevertheless identifies critical areas that require urgent attention from Government in collaboration with the business community. As we head into the next elections it is our duty, as industry, to ensure that government pursues a pro-industrialization policies.

Phyllis Wakiaga Chief Executive Officer â&#x20AC;&#x192;

ABBREVIATIONS GDP

Gross Domestic Product

WDI

World Bank Indicators

KNBS

Kenya National Bureau of Statistics

United States

USD

United States Dollars

European Union

FDI

Financial Direct Investment

United Kingdom

IDF

Import Declaration Fee

VAT

Value Added Tax

KRA

Kenya Revenue Authority

NEMA

National Environment Management Authority

KEBS

Kenya Bureau of Standards

WRMA

Water Resource Management Authority

KEPHIS

Kenya Plant Health Inspectorate Service

EAC HQ

East African Community Headquarters

Ksh

Kenya Shilling

ACA

Anti Counterfeit Authority

KCB

Kenya Copyright Board

KIPI

Kenya Industrial Property Institute

ICT

Information and Communication Technology

LAPPSET

Lamu Port and South Sudan Ethiopia Transport

EAC

East African Community

TFDA

Tanzania Foods and Drugs Authority

CET

Common External Tariff

COMESA

Common Market for Eastern and Southern Africa

African Union

CFTA

Continental Free Trade Area Agreement

FTA

Free Trade Area Agreement

PFM

Public Finance Management Act

SSA

Special Status Agreement

EPC

Export Promotion Zone

KIRDI

Kenya Industrial Research and Development institute

CIF

Cost Insurance and Freight

RDL

Railway Development Levy

GHG

Green House Gases

GOK

Government of Kenya

OECD

Organisation for Economic Co-operation and Development

KENINVEST Kenya Investment Authority BPO

Business Process Outsourcing

SADC

Southern African Development Community

MW Megawatts SCT

Single Customs Territory

WEF

World Economic Forum

KAM

Kenya Association of Manufacturers

NLC

National Land Commission

CRA

Commission for Revenue Allocation

ADR

Alternative Dispute Resolution

IBEC

Intergovernmental Budget and Economic Council

SME

Small Medium sized Enterprises

SEZ

Special Economic Zones

MSMEs

Micro, Small and Medium Enterprise

STI

Science, Technology and Innovation

NACOSTI

National Commission for Science, Technology and Innovation

EPZ

Export Promotion Zones

AGOA

African Growth and Opportunity Act

R&D

Research and Development

KITP

Kenya Industrial Transformation Programme

TFTA

Tripartite Free Trade Agreement

MANUFACTURING PRIORITY AGENDA 2016: PROMOTING INDUSTRY IN KENYA FOR SHARED PROSPERITY Introduction In 2015 the country anchored its position as the 9th largest economy in Africa with an Annual GDP growth rate of 5.8 percent recorded in quarter two of the year. The agricultural sector grew by 3.5 percent while the wholesale and retail trade sector grew by 6.9 percent. However, Manufacturing growth which increased by 3.4 percent in 2014 has continued to lag behind overall economic growth which grew by 5.5 percent in the same period as is shown in chart 1. The contribution of the manufacturing sector has also been static as slightly over 10 percent in the last decade. Chart 1: A comparison of Kenyaâ&#x20AC;&#x2122;s GDP and manufacturing growth 16

Kenyan Manufacturing and GDP Growth

Manufacturing

GDP

0 2011_12011_22011_32011_42012_12012_22012_32012_42013_12013_22013_32013_42014_12014_22014_32014_42015_12015_2 -2

-4

Source: Central Bank of Kenya1

Growth in the sector also performed dismally compared to the growth rates observed in countries undergoing rapid industrialisation as shown in Chart 2. Average growth in the Kenyan manufacturing sector has been at 4 percent per year over the past 5 years and 3.4 percent in 2014. Whereas countries like Bangladesh had a growth rate of 8.6percent, Ethiopia 11 percent and Vietnam 8.4 percent in 2014. Growth in some of these countries like Ethiopia is attributed to a strong focus on manufacturing particularly in sectors like the leather industry whereas Kenya only just released its industrialisation plan to revive its industries mid last year. 1

Central Bank of Kenya (2015). October Monthly Economic Review

Chart 2: The growth of Kenya’s manufacturing sector has lagged behind comparator countries 18

Manufacturing Contribution to GDP in Peer Countries

10 Bangladesh Ethiopia

Kenya Vietnam

0 2006

2007

2008

2009

2010

2011

2012

2013

2014

-2

Source: WDI data

The Manufacturing sector’s contribution to value added and merchandise exports decreased relative to other sectors. Manufacturing share of value to Kenya exports is estimated at 28 percent.2 Given these developments, we are likely to miss the target for the sector set by the Second Medium Term Plan (2013 - 2017)3, of the Vision 2030. The overall goal of the manufacturing sector is to increase its contribution to the GDP by at least 10 percent per annum through growth driven by expansion to local, regional and global markets. The formulation and implementation of the Kenya Industrial Transformation Programme (KITP) is expected to grow the manufacturing sector. According to the World Bank, large manufacturing firms in Kenya are operating well below their capacity and employment growth is far below their potential. The relative size of Kenya’s manufacturing sector has been constant over the years. The sector has also lost competitiveness and is struggling with low productivity and structural inefficiencies.4 Over the last five years, the sector’s share of GDP has constantly been at 10 percent on average. Manufacturing has the potential to play a particularly important role by putting Kenya on a sustainable growth path through its direct contribution to creating quality employment, strong linkages with other sectors, ability to raise capital accumulation and smooth volatility in the economy. It also facilitates global integration and knowledge spillovers which are critical to the process of structural transformation. Therefore this sector demonstrates a potential to contribute to the desired double digit economic growth, if adequately supported to enhance value added exports to the EAC, the FTA region and the rest of the world.

2 3 4

Kenya Economic Update (2014). Anchoring High Growth: Can Manufacturing contribute more? World Bank Group. Government of Kenya. Second Medium Term Plan Kenya Economic Update (2014). Anchoring High Growth: Can Manufacturing contribute more? World Bank Group.

DEFINING THE BENEFITS OF THE KENYAN MANUFACTURING SECTOR Kenyaâ&#x20AC;&#x2122;s manufacturing sector is strongly linked to its agricultural economy, with 50 percent of total output in industry coming from the food, beverages and tobacco sector. The second major sector is chemicals and petroleum, which accounts for 7 percent of total output. The other sectors combined make up about 80 percent of total output from industry in the country.

Sub Sectors in Manufacturing Chart 3: Sub-sector output contribution to the Manufacturing Sector by percentage (2015) Total Output in the Manufacturing Sector in 2014

Non Metallic Minerals 4%

Chemicals 7%

Rubber & Fabricated Metal 7% Plastic Printing 5% & Media 4%

Basic Metals 2% Textiles & Apparel 8%

Paper 2% Basic Pharmaceuticals 1%

Beverage & Tobacco 9%

Wood & Cork 2%

Other 14%

Machinery & Equipment 1% Transport Equipment 1% Furniture 3% Other Manufacturing 1%

Food Products 42%

Source: KNBS

Contribution to the Kenyan GDP The manufacturing sector contributes directly to 10 percent of Kenyaâ&#x20AC;&#x2122;s GDP second largest as per the figure below. The Contribution of Various Sectors to GDP in 2014 Agriculture, Forestry & Fishing 21% Manufacturing 11%

Information and Communication 12%

Construction 16%

Real estate 13%

Financial and Insurance activities 13%

Wholesale and Retail trade; Repairs 14%

The sector contribution to GDP however, has been declining over the years. In 1996, manufacturing constituted 13.1 per cent of GDP. It declined to 11.5 per cent in 2003, 11 per cent in 2013 and now stands at 10 per cent in 2014.

Manufacturing Output 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. 1,821 billion in 2014, an increase of almost 5 percent as shown in Chart 4. Chart 4: Value of output in Kshs Million/Per Year

Source: KNBS

Contribution to Employment Employment in the Manufacturing sector increased in 2014 up from the previous year by around 3 percent as the number of directly employed people reached almost 288 thousand. The improvement was largely attributed to the EPZ Zones which contributed an increase of 15 percent to 46,500 people. The informal manufacturing sector contributed an increase of nearly 5 percent with 2,236,000 jobs. Chart 5 shows a corresponding increase in employee compensation. Chart 5: Employee Compensation in Kshs Million/ Per Year

Source: KNBS

Value Addition by the manufacturing sector Value added by the manufacturing sector rose by 5.9 percent. The sector offers significant multiplier effects beyond the sector itself through economy wide linkages. Manufacturing firms, especially those in the agro processing sector, source critical inputs from the agricultural economy. Chart 6: Manufacturing value added in Kshs Million/ Per Year

Source: KNBS

Contribution to Public Finance Given the figures above it is clear that the manufacturing sector also makes a huge contribution to the tax kitty through income tax receipts from employees, social security contributions and the corporation tax levied on profits. It is estimated that additional government revenue will be raised via the manufacturing sectorâ&#x20AC;&#x2122;s supply chain and also through taxation of the activities supported by the spending of employees working in the sector and its supply chain. In 2014, manufacturing helped the government collect about 30 percent of excise revenue levied from manufacturing products.

Investment In 2014, financial institutions approved loans for projects in the manufacturing sector worth Kshs 238,000 million. This figure amounts to 11 percent of all commercial loans advances in the economy, and indicates a strong contribution of domestic manufacturing to domestic investment. Investment into EPZs is significant; in fact it attracted net new investments totalling Kshs 18,983 million between 2011 and 2015. The Kenyan manufacturing sector has attracted both local and international investors through Foreign Direct Investment (FDI) and Joint Ventures. The sector, particularly within global production networks, provides domestic firms and workers with exposure to foreign technology and knowledge. This may come through foreign direct investment in the sector, through the import of capital equipment embodying foreign knowledge, exporting to international buyers, or competing with foreign firms in regional and global markets. FDI inflows to Kenya and the region is dominated by the manufacturing sector. This shows that Kenya is a potential domestic and foreign direct investments hub. According to KITP, FDIs to Kenya are concentrated on the manufacturing sector. Between 2010 and 2013, manufacturing accounted for, on average, 20 percent of total FDIs to Kenya. Regionally, the same trend is observed where Further, the same trend is observed in FDIs inflow to the Eastern African region. The figure below shows that between 2002 and 2013, FDIs inflow to the region increased but lowest in Kenya. It is important however to note that manufacturing sector constitute a larger share of regional FDIs inflow but highest in Ethiopia, Uganda, Tanzania and Rwanda. This therefore shows the benefits of manufacturing sector in the Eastern Africa region. Figure 1: Sectoral FDI in selected Countries in Eastern Africa

Source: World Bank

International Trade and Foreign Exchange earnings Manufacturing contributes 25 percent of all foreign exchange earnings excluding remittances.5 The African market is the largest destination of Kenyaâ&#x20AC;&#x2122;s exports taking up 50 percent while 23 percent of our goods went to the East African Community in 2014. 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 UK6.

Millions

Chart 7: Value of Kenyan Exports in 2013 and 2014 160

140

120

100 Burundi Uganda

Tanzania Egypt Rwanda

South Africa

0 2013

2014 Exports

Chart 8: Value of Kenyan Imports from select African countries in 2013 and 2014 160000000

140000000

120000000

100000000

Imports 2014

80000000

Imports 2013

60000000

40000000

20000000

0 South Africa

Rwanda

Egypt

Tanzania

Uganda

Burundi

Source: KNBS

5 6

Horticulture and Tea exports excluded from computation of manufacturing exports Manufacturing Survey (2012). A survey of the Manufacturing Sector in Kenya. Kenya Association of Manufacturers: Nairobi.

Other Benefits of Manufacturing Manufacturing is driving regional integration. The growth of manufacturing effectively opens up borders and eases the process of regional integration. An estimated 60 percent of Kenyan manufacturing exports go to the EAC markets. Manufacturing provides a buffer to foreign exchange shocks such as drops in commodity prices and the sector also provides the robustness to withstand such shocks. The sector also produces a variety of goods which greatly benefit local consumers given their high quality, affordability and availability. Buying locally made products is a source of great pride to Kenyans since it eases their reliance on imported goods. Imported goods are not always up to standards and are prone to counterfeiting. About two thirds (or 66 percent) of goods/commodities produced by the manufacturing sector in Kenya are consumed locally while the remaining one third are exported.

PILLARS TO SUPPORT INDUSTRY FOR SHARED PROSPERITY Pillar One: General Policy Framework Under this framework, we consider three key issues; the complete devolution framework, macroeconomic predictability and a regulatory environment that supports long term investments.

Complete Devolution Framework: Service delivery to business and consumers Devolution has made it possible for transfer of services closer to the People. The object of devolution in part is to create sustainable and shared economic growth in Kenya. Counties have been given the mandate to regulate business according to article 209 of the constitution. In other words, they ought to facilitate investment in the manufacturing sector by observing international best practices in business. Improving the regulatory framework and expanding service delivery is key to attracting manufacturing or other investment into their constituencies. Thus, where relevant, county governments should take steps to revise abusive duplicative charges, streamline permits and enhance offers by providing services such as access roads to manufacturing premises, garbage collection, access to water.

1. Enact overarching national laws on County Taxes, Licenses and Permits

There is an urgent need to invoke the provisions of the constitution on taxation and licensing to ensure businesses have a fair and equal chance to thrive in the country. Towards this end, a national framework on County Taxation and Business Licensing should be put in place to guide county governments, business licensing as well as county Revenue laws. The national government should also enact a National Policy on County Taxation with a view to eliminate double taxation. Inter-county trade should be facilitated through inter-county consultations for harmonized County revenue laws. Capacity building programs for County Governments are important to ensure compliance with the Constitution and other devolution legislation as is a Centralized Revenue Administration for coordinated and improved collection efficiency of county revenues. As well as accountable systems established to ensure service delivery is commensurate to revenue collected.

2. Enact a National Policy Law on public participation

The Government should enact a National Policy and Law on Public Participation to guide national and county governments on public involvement (particularly when coming up with policy or legislation of any form), as provided for in the constitution. KAM also seeks representation of industry (through KAMâ&#x20AC;&#x2122;s regional chapters) in the relevant county committees, notably the County Budget and Economic Forum (CBEF).

3. Enact county Revenue Laws

Implementation of all the relevant County Revenue Legislations in all the Counties is a pressing need in 2016. These include the Revenue Administration Laws, Trade License Laws, Rating Laws, Finance Laws and Public Participation Laws. KAM has worked with the Commission for Revenue Allocation (CRA) to develop County Revenue Legislations for County Governments which are Constitutional and which can improve revenue administration, maximize revenue collection and attract investment into the Counties. County Governments should also be assisted to develop tariff and pricing policies for the provision of public services. Through tariff policies, Counties can demonstrate the rationale behind the charges, how these charges relate to the services provided thereby easing compliance.

4. Audit county performance on business facilitation

Counties should be encouraged to make progress on business facilitation. Transparency of reporting and measurement of county performance on these issues is critical to separate top performing from lagging counties. We propose an annual audit and scorecard of County performance on business facilitation.

5. Strengthen the Intergovernmental Budget and Economic Council

The purpose of the IBEC under section 187(2) of the PFM Act is to provide a forum for consultation and cooperation between the National government and County

governments on â&#x20AC;&#x153;any proposed legislation or policy which has a financial implication for the counties, or for any specific County or counties; any proposed regulations to this Act and recommendations on the equitable distribution of revenue between the National and County governments and amongst the County governments as provided in section 190.â&#x20AC;?7

KAMâ&#x20AC;&#x2122;s commitment In 2014-15, KAM supported all counties in the drafting of revenue bills. In 2016, KAM looks forward to actively participate in the different County Budget Economic Fora with a view to ensure proper implementation of bills and pro-business legislation. We will push for the establishment of other fora to engage with county governments in other areas of policy that impact business.

Macroeconomic predictability Manufacturing can only thrive in an environment of macroeconomic stability that encourages longterm planning. High fiscal deficits have an impact on manufacturing through higher taxation and higher borrowing costs and greater exchange rate risk. Furthermore, high debt to GDP levels risk crowding-out the private sector in domestic credit markets. As elections approach, international and domestic investors will be looking closely at fiscal figures in Kenya. Prudent government expenditure and transparent budget utilisation will take on greater importance in 2016. We welcome pledges by government to control the deficit.

Regulatory environment that supports long-term investment Manufacturers rely on stable, balanced and common-sense regulatory environments. Encouraging genuine stakeholder consultations is the best way to build a long-lasting investment climate that promotes growth and the common good. Reducing corruption should be a top priority when reforming regulatory processes. Providing recourse to fast, efficient, and cost-effective alternative dispute resolution mechanisms should become a standard feature of sound policy making.

1. Sound & Stable Regulation

Sound legislation issues from a fair drafting process which aims to assess ex-ante the impact of options available to regulators and integrate views from stakeholders. In 2015, many regulatory bodies drafted laws without any impact evaluation or consultation with the private sector or other stakeholders. This is in direct contradiction of the Statutory Instruments Act 2013, which applies to every statutory instrument made directly or indirectly under any Act of Parliament or other written legislation and requires that authorities to undertake appropriate consultation before making statutory instruments. The government should call for regulatory restraint and respect for due process so as to allow business people to have a say before new legislation passed which is bound to affect them is passed.

Beyond consultation and impact assessment, the government should also encourage greater effort by civil servants, at both national and county levels, to understand the business environment and practices they are called to regulate. Too often regulations are drafted or enforced with disregard of the realities on the business sector. Such regulations afterwards undergo iterations before they are actually implemented.

The legislative agenda for 2016 should include a heavy loaded review of national Laws and Policies affecting business, notably the Income Tax Act, the Contract Law, VAT Act, Public Procurement and Disposal Act, Land Laws, Labour Laws and others. The review of the Income Tax Bill, the Tax Procedures and Excise Duty Act 2015 should be expedited.

Public Finance Management Act. No. 18 of 2012

The Bill is anticipated to simplify the process of tax assessment and payment. Currently Kenya has 41 business taxes enforced under 16 different tax regimes. This makes Kenya’s tax compliance cumbersome. The government should also initiate discussion on the enactment of a Bill on Business Regulations.

2. Reduction of corruption

Corruption and bad management practices eat into the nation’s’ wealth, channelling money away from public projects. High levels of corruption can interrupt investment, restrict trade and reduce economic growth. . Corruption also harms the chances of success for small and medium enterprises. Corrupt individuals should be punished to the full extent of the law. A greater auditing capacity by government control bodies and stiffer penalties for corruption, particularly in high profile cases, would set clear examples that would encourage public trust and participation in rooting out corrupt practices.

KAM encourages the government to exclude from public procurement any private firm involved in cases of bribing, invoicing artificial prices to government agencies or seeking undue favours. Fear of missing out on government programs should provide notable incentives to private sector managers to refrain from corruption and rather choose a more virtuous path of denouncing bribes and extortion.

It is also important to highlight positive narratives that illustrate cases in which the fight against corruption has been successful. Such cases provide inspiration and shift the spotlight and public discourse from the mere description of the destructive act towards the lessons on how to tackle and combat corruption.

The government should also reform institutions with a view to reduce employee discretion, for example, by automating processes or making collegial decisions. The elimination of opportunities for corruption by reforming institutions to minimize discretion is crucial and appropriate checks and balances are needed. The new Constitution strengthens checks and balances as well as the independence of oversight agencies, so it will help in this area as well.

3. Fast, effective and efficient dispute resolution by the Judiciary and regulatory bodies

The Business Court Users Committee is designed as a forum of diverse private and public stakeholders to ensure an accountable, co-ordinated, efficient, effective and consultative approach in the Administration of Justice. The committee was launched in late 2015 and there are high expectations that it will improve access to justice and greater quality of service delivery by all actors in the justice system.

Efficiency in commercial dispute resolution not only entails effective courts, but more importantly, the establishment of Alternative Dispute Resolution (ADR) Mechanisms into regulatory bodies. ADR mechanisms offer faster and cheaper mechanisms to address disputes in a context of confidentiality and neutrality that is indifferent to the law, culture or practice and they do not block eventual recourse to courts in case of challenges.

KAM’s commitment In 2014-15, KAM sponsored the launching of the Business Court Users Committee. In 2016, KAM will engage with various regulators to establish ADR centers. KAM will also ensure that all members sign and implement the Kenyan Code of Ethics, which calls on firms to put in place the mechanisms to safeguard against bribery and corruption. KAM will also institutionalise an internal process to report instances of corruption amongst members and for KAM to carry out an audit on any such claims.

Pillar Two: Ensure a level playing field Pillar two provides for the creation of a level playing field. The strategies include formalisation of the informal economy, the fight against illicit trade, the establishment of effective taxation regime that does not discourage domestic production, granting actionable preferences for local content in public procurement and the elimination of unfair foreign trade practices. All of these factors have put domestic producers at a direct disadvantage and inhibited the growth of the manufacturing sector.

Fight illicit trade, contraband and substandard goods In 2012, KAM carried out an inaugural study on the impact of the counterfeit menace and established that Kenyan Manufacturers were losing 40 percent of their market share to counterfeit products. Studies of other East African countries confirm the significant impact of illicit trade to industrial development. Such evidence suggests a serious imbalance in the playing field which reduces the potential for employment creation and results in losses of revenues for Governments. There is therefore an urgent need for the review of the Anti- Counterfeit Act 2008. This will boost inter-agency collaboration, introduce stiffer monetary penalties and facilitate the forfeiture of assets. Improved inter-agency collaboration can also be strengthened through adequate staffing of trained officials across relevant agencies as well as the implementation of the â&#x20AC;&#x2DC;Enforcement Manual to combat Illicit Tradeâ&#x20AC;&#x2122; launched in 2015. Further, increased collaboration should be pursued at regional level through a review of the EAC Anti-Counterfeit Law. In partnership with manufacturers, the Government should also create consumer awareness on the dangers of purchasing counterfeit goods. Consumer awareness as a means of combating counterfeiting is a core mandate of the Anti-Counterfeit Agency but the agency has achieved limited progress so far. In addition to information the agency should spearhead the development of ICT applications to assist law enforcement officers and consumers to detect counterfeit goods in the market. Many developed and industrializing countries already leverage holograms, markers and tracking devices - coupled with the efficient relay of information - in the fight against illicit trade.

Formalisation of the Informal Economy Overregulation is often cited as a reason for the increase in informality. KAM encourages the government to facilitate registration and regulatory compliance coupled with a clear proposal of access to supporting services to encourage the move into a modern economy. Further, increased formalization of the economy will spread the tax base, increase government revenues while easing the burden of taxation for existing taxpayers. Kenya needs to adopt some of these practices. Industry-led investigations suggest that underreported, mis-declared and outright falsified products are imported through Kenyan ports. In light of the above, KAM seeks to strengthen partnership with KRA and KEBS among other trade facilitation organisations to identify priority sectors at risk and ensure stronger monitoring of imports. County governments should join the fight against illicit trade by also creating policies and monitoring, evaluation and reporting mechanisms.

Taxation that does not discourage domestic production KAM considers that some aspects of the tax regime could be revised so as to improve the competitiveness of the manufacturing sector in Kenya. For example, late VAT refunds shift the Tax burden from consumption into production. Likewise, additional fees such as the Import Declaration Fee (IDF) and the Railway Development Levy (RDL) make imports of inputs relatively expensive in Kenya.

1. Tax policies that drive industrial growth

Relatively high import fees in Kenya render inputs more expensive and contribute to making domestic production uncompetitive in export markets, particularly EAC countries. IDF (2.25%) and RDL (1.5%) combined account for a burden of 3.75 percent of CIF import value, the highest burden in the region. The government should eliminate IDF on all imports of manufacturing input and machinery make Kenyan manufacturers more competitive and thus a preferred investment destination. Over the short term, the government should align it with the lowest fees charged in the region.

RDL was designed as a charge on imports to raise revenue for the construction of the Standard Gauge Railway. As this project comes to completion, the government should put forward a phase-out calendar of the RDL to ease the burden on manufacturers.

2. Reduction of delays in processing tax refunds

The issue of outstanding VAT refunds still remains a big pain for manufacturers who look forward to the expeditious payment of the refunds. A KRA framework to effect the exemptions on VAT for locally procured inputs and raw materials for manufacturers of medicaments is not yet in place until today. KRA has also fallen behind in out of court settlements on old claims with a leading company, causing serious concern among manufacturers about the government’s commitment to upholding property rights.

The government should send immediate messages to reassure the private sector by allowing off-setting of VAT refunds against other government claims. It should also commit to a six week target for standard refund completion and institute payment of accrued interest in case of late refunds.

Preferences for Local content in Public Procurement Many developed and developing countries effectively leverage government procurement in promoting local content. This is an opportunity offered to manufacturing and/or businesses to supply their goods and services to Government so as to enhance their growth. Kenya through the procurement law seeks to grant 40 per cent of its expenditure on purchase of locally produced goods and services with a view to enhance wealth and job creation in the Country. Over the years, government procurement focused on imports of goods and services that can be sourced locally. This, in part, impeded the growth of local sectors that would have supplied goods and services at lower prices. Increasing the local content of government spending maximizes the multiplier effect of fiscal policies towards enterprise development and ultimately poverty reduction. It would lead to increasing employment opportunities in Kenya, greater opportunities for local contractors, as well as creating market openings for locally produced products, materials and components. This has a positive impact on Kenya’s industrial development envisaged in the Vision 2030. KAM acknowledges the Government’s commitment on promotion of local content through procurement as a means to among others grow the manufacturing sector. More effort to ensure the uptake of the 40 percent local content opportunity is needed both by the Government and the private sector. There is an urgent need therefore to align the Public Procurement Act to the Buy Kenya build Kenya Policy that seeks to enhance sourcing of products and services that are competitively available locally. Beyond policies, the government should look into discriminatory procurement practices. For example, the requirement of a ‘10 day’ period to produce a sample is challenging for manufacturers and tends to favour traders who have readymade samples. Furthermore, there are also fears of predetermination during tendering where specifications are tailored to a particular product or whereby some bidders receive advance information. Proof of value addition and actual manufacturing done in Kenya, based on list of pre-qualified suppliers, should be a precondition in the tendering process.

Unfair trade practices Unfair trade practices continue to cause market distortions that inhibit the manufacturing sector. There is need for enhanced public-private partnerships to curb the menace of unfair trade practices for the country to realize its economic transformation agenda. Notably, steel and textiles continue to face competition from cheap imports from heavily supported industries rendering locally produced products uncompetitive. The government should prevent such practices by invoking recourse to trade remedies such as the imposition of an anti-dumping duties and safeguards. Kenya has so far has not made use of trade remedies as the country lacks an appropriate institutional framework to deal with such measures. Passing the Trade Remedies Bill would establish a legal and institutional framework to curb unfair trade practices.

Pillar Three: Competitive Local Manufacturing Kenyan producers face increased operational costs associated with among others the high cost of doing business in Kenya which make domestic goods uncompetitive. High factor costs as well as inadequate provision of public services and red tape are other challenges rendering local production uncompetitive. There is therefore need for the Government to prioritize and implement strategies that would enhance competitiveness of the manufacturing sector. To achieve competitiveness, the Government needs to undertake the following;

Affordable long-term financing for industry and exports High finance costs are a key constraint to investment and competitiveness. KAM believes that a mix of government intervention -through the establishment of an Industrial Development fund -as well as innovations in the private banking sector could deliver significant improvements that would stimulate domestic investment.

1. Speed-up the establishment of the Industrial Development Fund

The establishment of an Industrial Development Fund is envisaged in the Kenya Industrial Transformation Programme. This will facilitate access to affordable credit by the manufacturers to be able to expand their enterprises and create more value added goods for local consumption and exports.

2. Encourage commercial banks to provide low-rate-loans targeting manufacturers and SMEs

Commercial banks should be encouraged to accord preference to industry especially on capital intensive projects to promote manufacturing investments. This could be for example, investments in industrial parks, SME parks, technology parks and special economic zones provided for under KITP and others. Overall, there is need for Government, commercial banks and the private sector at large to dialogue on the need to manage interest rates in Kenya that have remained high over time.

A key first step in this direction would be the set-up of a securities framework to facilitate the movement of long-term loans between private banks before the end of loan maturities. This would entail addressing security concerns, collateral issues and legal fees. Secondly, KAM should work with commercial banks to deepen the offer of trade financing instruments to the manufacturers.

Facilitate business compliance with regulation Regulation compliance should be facilitated so that producers spend less time and resources. A more efficient regulatory framework would benefit all big domestic and foreign firms which are particularly critical to ensuring the success of SMEs. Our regulatory system produces unnecessarily costly rules and duplicate mandates. KAM urges the Government to map and review overlapping licensing, permits, levies and certificates by national and county regulatory bodies. The review should pave the way for continuing regulatory reforms for business activity in Kenya. This would enable strengthening of the e-registry of legal non duplicative business licenses in Kenya. Further, there is need to consider merging all County licenses, fees and charges into the already existing single business permit. The mapping of all business regulations, fees and charges in Kenya would enable the estimation of regulatory burden to enterprises imposed including compliance costs. Kenya should develop a Regulatory Reforms Strategy that would ensure continuous monitoring and review of business regulatory environment to improve on Kenyaâ&#x20AC;&#x2122;s competitiveness. Furthermore, the government should reinstate and strengthen a one stop-shop approach through a Business Regulatory Reforms Authority to enhance service delivery. Complex compliance also facilitates the spread of corruption and is one of the vectors in which corruption becomes a real cost to business.

Reduce import clearance time and cost Kenya needs to continually improve port infrastructure, customs processes and the 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. According to the World Bank Doing Business report, import time and cost are the binding constraints that make Kenya a difficult country for trading across borders.8 8

2016 Doing Business Report retrieved on January 2015 from http://www.doingbusiness.org/data/exploreeconomies/kenya#trading-across-borders

Implementing the WTO trade facilitation agreement, in part, should provide the momentum to address these barriers. The government needs to define an agenda for its implementation, and work with other EAC countries so that they also follow suit.

Reduce energy costs While we acknowledge that a lot has been done by the current government to increase and stabilize energy supply, the energy mix supplied to the grid consists of a mix of thermal power which results in expensive energy supply. This is due to the high cost element of fossil fuels used in generation. Power supply also continues to be unreliable due to the rigidity and the lack of adequate redundancy of our network. Over 60 percent of energy generated into the national grid is used in manufacturing enterprises. Added to the challenges of reliable and expensive supply is the quality issue. Industrial investors experience losses due to interruptions and quality fluctuations and the majority have been forced to invest in generators which are costly to obtain and operate. Industrial firms estimate that power interruptions cost them about 7 percent of sales annually. KAM believes that the government could provide reduced tariffs (time of use) which will encourage selective shifting of production to off-peak hours. While energy distributors have every right to ensure consistent energy supply from generators, the process of ‘selling to the grid’ needs to be made easier for private generators. Additionally, public and private investment in electricity generation (all sources) should be further encouraged. KAM runs a Centre for Energy Efficiency and Conservation that undertakes Energy efficiency, resource efficiency, water and waste water management initiatives and Renewable Energy projects for manufacturers. The centre is also working on climate proofing investments for sustainable growth.

Combat late payment culture Late payment is a highly penalizing practice that can have major implications for the cash management of companies. Many developed and developing countries recognize the need to prevent the worst forms of abuse and have enacted legislation accordingly. Legislation should define and root out truly abusive practices as well as introduce penalties in the form of payment of accrued interest and “reasonable recovery costs” for late payments.

Other Factors of Production 1. Water

Kenya’s water supply is inadequate for industry and the standards and capacity of the water supply pipes are questionable due to the frequent shortages experienced in various locations.

The current supply in Nairobi and satellite towns is below demand. Rapid demand growth due to a growing populations calls for large and sustained investment in the expansion of water supply.

KAM believes that the current situation calls for an Amendment of the Water Bill to streamline water management with a view to reducing the regulatory bodies involved. Secondly, water recycling should be made an integral part of development planning at state and county level. So as to conserve water, the government should provide incentives for industries to treat and re-use effluent water.

KAM in turn can help create awareness amongst manufacturers on the benefits of reusing treated effluent water and in carrying out water and wastewater auditing.

2. Land

Disputes over land have increased and high profile cases cast a negative light on the Kenyan business environment. While disputes shall continue to arise, National and County governments should take step to reassure investors that their interests will be taken into account in such circumstances.

KAM believes that National and County Governments should set aside and build land banks for industrial investors in key towns. This would go a long way into minimizing future litigation and ensuring clarity in land tenure. High land value is also a key issue to be tackled by ending land speculation.

The National Government should also enact regulations for Article 65 of the Constitution to provide investor confidence. An exception clause is need in the Amendment Bill exempting the application of the section to companies incorporated in Kenya that gain foreign majority ownership by virtue of listing in the NSE as well as those companies registered in Kenya which own property and have put the land to commercial use and thereby generate the country revenue and create employment to Kenyan citizens. In addition, a clear and transparent process on the conversion of freehold land and leases of 999 years into the Constitutional 99-year leases should be laid out.

Pillar Four: Make Kenya a manufacturing hub for Exports Pillar four looks into ways in which the industrial sector can increase export competitiveness and gain better access to other markets particularly the EAC market. Kenyan manufacturing will thrive by embracing exportorientation and meeting the challenge of export competitiveness. Competing in export markets is the key path to realizing productivity gains, creating better paying jobs, and helping insulate the Kenyan economy against swings in commodity prices. This requires measures to support building domestic champions as well as ensure integration into global value chains.

Develop a National Export Development Strategy The Kenya Industrial Transformation Programme provides the vision for export growth in Kenya in coming years. We look forward to bringing that vision into fruition. The program identifies priorities in agro based products, leather and textiles, as a priority for the country. It also talks about promoting made in Kenyan coffee brands, attracting investors to boost productivity, identifying new markets for existing products and increasing the quality of Kenya’s product offering to the world. This is a good first step. KAM advocates that we revitalise the export sector. There is need for renewed push on improving Kenya’s export competitiveness through providing competitive energy costs which will reduce production costs, improved connectivity, improve access to credit to enable firms participate more in export activities, improve cargo clearance at the border posts and establish trade information portal to improve traders access to tariff information and procedures and standards requirements, improve linkages between small and large firms in exporting business and operationalize the Special Economic Zones. KAM members are also interested in exploring possibilities of exploring trade finance instruments at affordable rates and we also look forward to addressing the needs of the other sectors that also contribute exports as these sectors also contribute precious foreign exchange to Kenya. The Private and public sectors should work hand in hand to ensure support for entrepreneurs trying to enter new markets through various initiatives, notably more trade missions, increased trade finance instruments, promoting “made in Kenya” branding abroad, as well as ensuring awareness on the capacity to utilize preferences and enforce trade commitments. SME businesses too often lack the know-how and capacity to meet the requirements of formal trading across borders. Even mid-sized companies often find access to information and financial resources necessary to adjust to the price, quality and safety standards in new markets difficult. Measures need to be put in place to assist with access to information and support transparent procedures of formalization, such as licenses and standards. KAM believes that the Government should prioritize exports development investments. The preparation of an Exports Development Strategy should be fast tracked and its implementation plan drawn to spur manufacturing sector expansion and increase value added exports to the FTA region and the rest of the world.

Special Economic Zones (SEZs) SEZs are designated geographic areas with liberal economic laws, highly developed infrastructure and specialized activities deemed to be of economic importance particularly due to job creation opportunities afforded by the zones. In 2015, the President assented to the Special Economic Zones Act, 2015 (“SEZA”) which provides for the establishment of SEZs in Kenya. The Act came into operation in December. The Country needs to implement the Act so that free trade zones, industrial parks, free ports, ICT parks, agricultural zones, tourist and recreational zones, business service parks and livestock zones can be established in the country. This will give a boost to the manufacturing sector and should be a priority initiative for 2016. KAM supports FDI Attraction and SEZ objectives and approach but members are also afraid of being put at a disadvantage.

Targeted promotion of FDI that builds linkages with local economy and supports the export orientation of Kenyan manufacturing Like in many other Sub-Saharan countries, FDI in the Kenyan manufacturing has often pursued market seeking objectives. The SEZ provides the regulatory and institutional framework to venture into a more ambitious FDI attraction strategy that targets export oriented FDI which will help anchor Kenya as a manufacturing hub in Africa and indeed in the world.

Kenya should target FDI in sectors where local manufacturers can actively play significant supplying roles. The presence of FDIs presents among others subcontracting and joint venture opportunities that would enable knowledge and technological transfers with Kenyan firms. Further, export oriented FDIs should be encouraged to enhance exports development in Kenya. KAM believes that the incentives developed by Government will position Kenya as an FDI destination that would provide subcontracting, business partnerships and partnership exchanges that would promote the growth of the Kenyan manufacturing sector and also enhancement of value added exports.

Expanding external markets The expansion of the external market requires the deepening of regional, bilateral and other trade agreements and special arrangements that will deliver preferential access into such markets. Trade agreements help domestic firms to compete in foreign markets and they are also credited with expansion of FDI as they render the country a more interesting hub for regional production.

1. Bilateral and Plurilateral negotiations

While a number of these agreements have been signed, many are still in the various stages of finalisation and have not been ratified by the member states. In addition, ratified agreements are implemented in slow pace due to existing national interest alignments. The Tripartite Free Trade Agreement is the most ambitious initiative for 2016. The trade agreement will enhance intra-Africa trade to 30 per cent. KAM urges the Government to catalyse speedy finalization of tariff offers and rules of origin and conclude all pending areas to enhance market access. Further, fast-tracking the implementation of the Special Status Agreement (SSA) with Ethiopia, removal of trade restrictions between Kenya and Nigeria, finalization of economic partnership agreement (EPAs), as well as conclusion of the double taxation agreement with South Africa are among the key priorities for 2016.

2. Access to EAC Markets

EAC is the most advanced regional economic bloc having attained the common market level of integration. The EAC provides an immediate market for Kenyan products and services. Kenya trade with EAC partners accounts for 3.5 percent of Kenyan GDP in 2014. EAC is a leading market for Kenyaâ&#x20AC;&#x2122;s manufactured products and deepening integration in the region is important to enhancing Kenyaâ&#x20AC;&#x2122;s exports and overall, intra-EAC trade and investments.

First, the review of EAC Common External Tariff (CET) should be tackled as top priority to ensure tariff structures reflect the potential for local manufacturing and encourage the development of the industrial sectorsâ&#x20AC;&#x2122; value chain. Import duty rates that do not conform to agreed band structures should be identified and removed. Furthermore, governments should develop a calendar for phasing out stays of applications and urgently review EAC duty remission regulations 2008 and Part F of the Customs Union protocol to foment intra-regional trade.

The EAC Elimination of Non-tariff Barriers to Trade Bill retains the time bound mechanism to barriers to trade but does not include any penalties or dispute resolution mechanisms. The bill should be amended to include these provisions.

Kenya needs to renew efforts of oversight implementation and the monitoring of commitments under EAC Single Customs Territory and Common Market. The agenda on this issue includes streamlining export procedures to ensure mutual recognition of certificates and documentation within EAC; establishing regular monitoring and review mechanisms; and implementing the revised rules of origin adopted by the Council of Ministers in 2014.

Pillar Five: Securing the future of Industry Pillar Five looks at the factors that ensure the growth of industry by examining the availability of skilled labour, innovation and technical upgrade and the support accorded to SMEs.

Availability of Skilled Labour The Government needs to step up efforts to ensure that higher education meets the requirements of industry. Kenya’s education policy should be aligned to the requirements of the Vision 2030 where Kenya aims to be a newly industrialized economy. More investments on science and technology are needed. KAM urges increased investments in science and technology as well as research and development. Further, establishment of strong linkages between tertiary institutions and industry would enhance production of competent and market ready graduates at all levels from certificates to degree level. The government therefore needs to commit to reviewing curricula to be demand driven, better adapted to industrial needs. KAM expresses its interest to support initiatives that will establish Industry apprenticeship programs where university and technical school graduates are recruited into industry and trained. During 2015/2016 budget process, the Government committed to offer tax rebates to firms that would recruit at least 10 graduates for a period of 6 months to 1 year. These initiatives should be continued. Manufacturing can be a solid platform for graduates to get world experience and exposure. The government should put particular emphasis on strengthening National polytechnics and technical institutes by emulating best practice educational models in Germany. Industry requires Technical education for the development of skills such as welding, plumbing, fitting, turning, moulding and casting, boiler operations and plant maintenance. National polytechnics and other technical training institutes need to have their infrastructure upgraded in order to meet the needs of industry. We urge the Government to establish more polytechnics and technical institutes to create a pool of technicians that would support the needs of Kenya industrialization process.

Innovation and technical upgrade Kenya has a lot to learn in stepping up measures to harness technology, productivity and promote linkages between industry and universities, polytechnic institutes and other training institutions. “The separation and lack of interaction between the knowledge infrastructure and firms slows down processes of learning and competence building with relevance for economic development.”9 The Science, Technology and Innovation Act of 2013 sets the right institutional framework to encourage exchange and collaboration and constitute a decisive step on the right direction. It is necessary to ensure budget presentation makes special reservations for the National Research Fund so that the Kenya Innovation Agency can fulfil its key nodal role and drive the Kenya’s innovation agenda. Apart from creation of institutional framework, stakeholders in academia and government should also strive for the implementation of this framework so that it focuses on the diffusion, adaptation and use of new technology that addresses the specific needs of local industry. The framework should leverage opportunities for ‘borrowing’ and adapting technologies provided by globalisation through the combination of reverse engineering, licensing, sending scholars abroad, inviting foreign firms to set up shop in the country and experts and engaging in international scientific collaboration. International inwards and outwards mobility of highly trained workers, notably in the Diaspora, should be encouraged as vehicles accessing new technology and skills into the country. KAM already runs education and training programs through the Manufacturing Academy which was set up to drive skills development and innovation.

Sustainable Development through Green Growth Although Kenya is considered as a relatively low GHG emitting country, Vision 2030 – the country’s long term development blueprint, aims to transform Kenya into “a newly industrializing, middleincome country providing a high quality of life to all its citizens in a clean and secure environment.” Inevitably, manufacturing is a priority sector under the economic pillar of Kenya’s Vision 2030 setting the scene for rapid growth of the Kenyan manufacturing sector. 9

DYNAMICS OF INDUSTRY AND INNOVATION: ORGANIZATIONS, NETWORKS AND SYSTEMS retrieved from http://www.druid.dk/conferences/Summer2005/Papers/Lundvall.pdf on January 5, 2015

This growth will directly impact on Kenyaâ&#x20AC;&#x2122;s energy intensity as well as on the general demand for environmental goods and services. Along with energy intensity, Kenyaâ&#x20AC;&#x2122;s energy mix is also set to change fundamentally, in view of the recent discovery of fossil fuels. Over the last 20 years, Kenya has highly depended on hydro and geothermal energy. By default, growth of the manufacturing sector, an expanding population coupled with rapid urbanization and nationwide economic transformation will result in increased GHG emissions. There is a risk that the country will advance on a business as usual carbon emission trajectory. It is estimated that the annual GHG emissions will rise from 59 million tonnes of carbon dioxide (MtCO2e) in 2010 to 102 million in 2030 under a business as usual scenario. Kenya has unique opportunities, as outlined under the Kenya National Climate Change Action Plan2013, to grow along a low carbon climate resilient development pathway. This Action Plan acknowledges the challenge of rapid socio-economic growth based on principles of sustainability and sets out an ambitious low carbon climate resilient development pathway. The Government of Kenya has shown its commitment to tackling climate change drivers and its impact by advancing an equivalent of US$ 438 million, between 2005 and 2015, to programs that have been deemed as having a significant climate change component. The government is also actively working on climate change legislation.

Support SMEs SMEs are the backbone of the Kenyan Economy and they play a prominent role in job creation and poverty reduction. Due to the scarcity of resources, SMEs require targeted support programs. SMEs are the primary beneficiaries of steps to facilitate and streamline regulatory compliance. The government should prioritize such efforts. Promotion of SME subcontracting in government procurement, multinational companies, and large local organizations would create a strong economic foundation for industrial development. This can take the form of targeting shares of SME participation in public procurement, or providing direct support and capacity-building programs specific to SMEs so that these firms can effectively participate in public and private procurement. The government should set-up and monitor the attainment of targets for SME participation in public procurement. Clustering, incubation centres, or model factories envisaged under the KITP can also be leveraged to play a role in encouraging sub-contracting between larger and smaller firms. SMEs face a relatively higher cost of capital than larger firms and more credit rationing due to the absence of collaterals. The government should establish Industrial Development Fund and private banks accord low cost financing to SMEs by providing SME-specific instruments and credit guarantee facilities. SME capacity building should be offered in conjunction with the funds.10 A final form of support is targeted training, for example, on business practices and supporting services such as export access and regulatory compliance for SMEs. At earlier stages of development, management capabilities are crucial to SME survival, whereas as SMEs mature, the need for the competent management of human resources and innovation strategies take priority.11 KAM believes the development of SMEs is a foundation for the growth of the manufacturing sector and therefore it is a priority for 2016. We are looking to strengthen SME support through business growth capacity building programmes, increased access to markets, access to finance opportunities and policy advocacy for preferential treatment to spur growth.

10 Retrieved from OECD http://www.oecd.org/cfe/smes/2090740.pdf on January 5th 11 Ibid

KAMsâ&#x20AC;&#x2122; Commitment KAM Commits to promote forward and backward market linkages. These linkages will be with both the government and medium and large private sector companies. KAM can generate a list of products that can be provided locally by SMEs to the government. We can also liaise with financial institutions and potential donors to establish a loan or credit guarantee facility for SMEs and work with SME capacity building institutions and programs to deliver tailor made technical and operational trainings to SMEs. A strong pool of associate consultants can be created to deliver technical and firm level support to SMEs. Finally, KAM can create a strong partnership with Government Agencies like KIPI, KIRDI, EPC, KENINVEST to deliver services to SMEs

SPOTLIGHT ON THE KENYA INDUSTRIAL TRANSFORMATION PROGRAMME (KITP) FOR THE GROWTH OF THE MANUFACTURING SECTOR The launch of the Kenyaâ&#x20AC;&#x2122;s Industrial Transformation Programme (KITP) on September 16, 2015 by the Ministry of Industry, Investments and Trade is of great importance to the industrial sector and the nation as a whole. While vision 2030 lays out broad strokes of our developmental progress, the roadmap is contained in the newly released KITP. The Blueprint therefore, provides easily attainable ways of achieving our economic goals as a country through industrialization. For Kenya to achieve its expected economic growth of 7 percent as predicted by the National Treasury, we must focus on the quick wins available to get us there. The Treasury, in its budget review, has named exports promotion with a focus on expanding regional markets, commodity exchanges and special export zones as some of the sureties to a steady growth in the next three years.

The KITP aspires to grow the shares of manufacturing sector from the current 10 per cent to 15 per cent in the medium term. Subsequently this growth is expected to have a ripple effect in other sectors of our economy namely agriculture, wholesale and retail, finance and insurance, transport and communication. The plan focuses on Kenyaâ&#x20AC;&#x2122;s comparative and competitive advantage, in particular, labour intensive sectors earmarked for accelerating the aforementioned growth. Through enhanced job creation, infrastructure development, skills and technological transfers. Our economic growth has been consumption led and there is need to expand the manufacturing sector to ensure the growth is industry led. The KITP is an initiative towards this end.

KITP Pillars The formulation of KITP is anchored on five pillars, namely Pillar 1: Grow our global exports engines: The pillar targets the tea, coffee, horticulture, agro processing, textile and apparel and leather sectors towards value addition and exports. Pillar 2: Build a food processing hub: The pillar will enhance agro processing development and fish processing. Pillar 3: Build local content for resource and infrastructure investments: The pillar focuses on expansion of construction services and construction materials business, for example, cement and steel and also on oil and gas sector development. Pillar 4: Enhance non-industrial job creating sectors: The pillar provides for job and wealth creation through information communication (IT) and IT enabled services, tourism development and wholesale and retail sectors. Pillar 5: Develop Kenyan SMEs by supporting rising stars and building capabilities with model factories: The pillar will focus on developing SMEs accelerator to grow SMEs and building best practice manufacturing capabilities through model factories.

KITP Enablers To achieve the KITP, five enablers have been identified as follows; Enabler 1: ease of doing business reforms and reach the top 50 by 2020 Enabler 2: Build a network of competitive industrial parks/zones with sector appropriate incentives and supporting infrastructure Enabler 3: Invest in industrial skills by enhancing the capacity of institutions and partners and encouraging youth to sign up for technical courses Enabler 4: Attract local capital and FDI by marketing priority flagship projects to anchor investors and establishing a one-stop shop to facilitate investment Enabler 5: Create an Industrial development Fund that will respond quickly to investment opportunities in priority areas and accelerate the development of the required infrastructure for sector priority projects.

The programme is summarized in the figure below.

Challenges to Industrialization in Kenya KITP identifies the following challenges to industrialization process in Kenya. 1. Infrastructure and land access:• Access to sizeable farm land (>10,000 acres) connected by a good quality transport infrastructure to the farm gate is needed for agro-processing around the country. • Availability and cost of developing zone, logistics and energy infrastructure near the Port of Mombasa critical for keeping costs low and unlocking processing and regional exports • Access to a dedicated fishing port and the supporting infrastructure ( e.g. cold storage) are needed to attract the tuna processing industry • The high price of land in urban centres is restricting the development of low cost housing. 2. Skills and capabilities in priority sectors:• There is lack of skills beyond basics in apparel production (e.g. design and embellishments are needed for seasonal goods and fast fashion) • Low expertise to produce finished leather and leather products are problematic • There is a limited talent pool for engineers in keys sectors (e.g. construction, oil, and mining) and for qualified professionals for BPO. • Limited SME know how, access to market and credit restricts company development. 3. Quality of inputs:• Farmers have low quality agricultural inputs (e.g. seeds, fertilizer) • Low hide quality driven by poor farming and slaughtering practices limits leather potential • Low quality and expensive animal feed are driving high cost of livestock and aquaculture. 4. Cost of operation:• High cost of labour, transport and overhead are causing production costs of 10 to 20% more than the lowest cost of garment manufacturing • High cost of capital is discouraging investment (e.g., in manufacturing plants, mega projects or SME growth) 5. Access to markets:• Lengthy time to market for garment manufacturing (118 days from order to delivery of the US) driven by a lack of local textiles (76% imported) reduces competitiveness. • There is a limited access to international markets (e.g., Canada, South Africa, Turkey and Middle East) for Kenyan branded tea, leather, and textile products. • Informal sales channels (e.g., for meat and dairy) result in the consumption of unprocessed products under less safe conditions. 6. Investor – friendly policies:• There is unfair competition from counterfeit products, tax avoidance, illicit imports and dumping. • There is need to further develop and enforce local content requirements • Extra fees paid on imported raw materials reduce competitiveness • High regulation of the tea market constrains the value addition efforts. • There is lack of comprehensive low-cost housing policies.

KITP Implementation Strategy To capture the industrialization opportunities, the Ministry of Industry, Trade and Investment has developed a KITP five point strategy to be achieved over the next 10 years, by 2025. The strategy is explained below; 1. Launch sector specific flagship projects that build on competitive advantages:• Launch a food processing hub in Mombasa to process imported agro-based products (e.g., wheat, palm oil, rice) • Launch agro-processing zones (e.g., Kisumu, Meru, Galana, Nakuru, and Kwale) to process local commodities (e.g. avocado, mango, cassava, peas, passion fruit, and potatoes). • Establish a fishing port and fish processing zone in Lamu. • Develop an integrated textile cluster in Naivasha and attract anchor investors. • Launch a leather cluster in Machakos and two other locations. • Build national construction services champions and support their participation in infrastructure mega-projects. • Develop a low-cost housing ecosystem with an accessible and affordable environment to support social housing. • Develop local content requirements to support the local manufacturing (e.g., the steel industry). • Attach international oil, gas and mining service firms to locate in Kenya and build local capabilities. • Set up and promote a BPO cluster with best – in – class infrastructure and an ideal location with a focus on catalyzing innovation. 2. Develop Kenyan SMEs:• Select 50 of the highest potential SMEs annually in key sectors and support with credit, training and networking assistance. • Create model factories to impart best in class manufacturing expertise to SMEs. • Strengthen subcontracting policy to improve links between large and small players. 3. Create an enabling environment to accelerate industrial development:• Drive ease of doing business reforms and reach the top 50 by 2020. • Build a network of competitive industrial parks/zones with sector appropriate incentives and supporting infrastructure. • Invest in industrial skills by enhancing the capacity of institutions and partners and encouraging youth to sign up for technical courses. • Attract local capital and foreign direct investment (FDI) by marketing priority projects to anchor investors and establishing a one-stop shop to facilitate investment. 4. Create an industrial development fund:• Establish and industrial development fund to respond quickly to investment opportunities in priority areas. • Accelerate the development of the required infrastructure for sector priority projects. 5. Drive results with Ministerial Delivery Unit:• Establish a Ministerial delivery unit to drive results and coordinate across ministries and implementing agencies. • Measure, track and report progress on priority flagship projects.

MPA Alignment to KITP The Manufacturing Priority Agenda is aligned to the KITP. KAM actively participated in the preparation of the industrialization programme. The challenges and opportunities identified by KITP resonates with the KAM’s Policy and Advocacy agenda for 2016 aimed at improving the industry growth prospects. They include the common challenges of creation of conducive industrial development environment, tax reforms, access to land, markets, enabling infrastructure and a skilled labour market. MPA pillars and proposals would contribute to the achievement of KITP. The sectors identified by KITP are among sectors prioritized by KAM as key in Kenya’s industrial development process. KAM members are categorized into 15 sectors, 12 of which are in processing and value addition while the other 3 offer essential services to enhance formal industry. In line with KAM sectors, and in recognition by the Ministry of Industry, Investment and Trade that industrialization is critical for Kenya’s development, the programme identified 10 sectors earmarked for Kenya’s manufacturing sector share of GDP growth to 15 per cent. KAM on the other hand has come up with the MPA, which is a complement to the KITP. In order to enhance public private partnership, KAM and the Ministry have adopted a sector coordination approach in harnessing opportunities and addressing challenges identified by KITP towards successful implementation of the programme. Finally, KAM commits to work closely with the Ministerial Delivery Unit to drive results and measure track and report progress on priority flagship projects.

REFERENCES Economic Survey (2015). Government of Kenya Economic Survey (2014). Government of Kenya Statistical Abstract (2015). Government of Kenya Manufacturing Survey (2012). Kenya Association of Manufacturers. Nairobi. Kenya. Second Millennium Term Plan (2013). Transforming Kenya: Pathway to Devolution, Socio-Economic Development, Equity and National Unity. Government of the Republic of Kenya Kenya Industrial Transformation Programme (2015). Ministry of Industrialisation and Enterprise Development. Kenya Economic Update (2014). Anchoring High Growth: Can Manufacturing contribute more? World Bank Group. GoK (2013). National Climate Change Action Plan 2013-2017, Republic of Kenya, Nairobi Public Finance Management Act. No. 18 of 2012. Central Bank of Kenya (2015). October Monthly Economic Review. OECD (1998): Small businesses, job creation and growth: facts, obstacles and best practices Lundvall, Bengt-Ă&#x2026;ke (2005): Dynamics Of Industry And Innovation: Organizations, Networks And Systems. Copenhagen, Denmark

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 liberalised market

Established in 1959, Kenya Association of Manufacturers (KAM) is the largest manufacturing association in Kenya, representing small and large manufacturers in every industrial sector. KAM is the consistent voice of the sector and the leading advocate for a policy agenda that helps manufacturers compete both within Kenya, regional and globally and create jobs. We partner with Government to address a wide range of policy and administrative issues that affect the cost of doing business in Kenya. At every turn, we are working on behalf of manufacturers in Kenya to advance policies that help them do what they do best: create economic strength and jobs. 2016 All Rights Reserved A publication of the Kenya Association of Manufacturers (KAM) Kenya Association of Manufacturers (KAM) 15 Mwanzi Road, Westlands Box 30225 - 00100, Nairobi, Phone: +254 (20) 2324817, (20) 2166657 Fax: +254 (20) 3200030 www.kam.co.ke