Kenya's textiles, food processing and construction materials segments show growth

The ongoing push for industrial expansion, as highlighted by the government’s overarching Vision 2030 strategy, has witnessed a number of positive developments over the past year, particularly in the textiles, construction materials and food processing segments. Electricity availability and reliability have improved steadily over the past year as new renewable power plants have come on-line, while a spate of planned construction initiatives, including the Standard Gauge Railway (SGR) and Lamu Port-South Sudan-Ethiopia Transport (LAPSSET) Corridor Project, have helped to drive demand.

At the same time, the sector continues to face serious near-term challenges: non-tariff barriers (NTBs) restrict growth, while the country’s value-added tax (VAT) has been criticised for hampering domestic expansion. Currency depreciation – which makes key imported inputs more expensive – combined with a weakening global demand for some of Kenya’s exports are also having a negative impact on growth.

Nonetheless, the country benefits from its position as the region’s leading economy and major geographic gateway, with rising demand both domestically and within the EAC expected to keep investment and exports on an upwards trajectory well into 2016.

Envisioning Industrialisation

Kenya’s Ministry of Industrialisation and Enterprise Development (MOIED) is responsible for overseeing industrial and manufacturing development in Kenya in line with Vision 2030’s targets, which include increasing manufacturing’s overall GDP contribution by at least 10% annually until 2030, establishing an integrated steel mill to support the iron and steel industry, as well and developing a number of business parks catering to industrial, technology, manufacturing, and small and medium-sized enterprise (SME) tenants.

Given the fact that SMEs contribute around 33% of value-added goods and create 80% of all new jobs, their promotion ranks high on Vision 2030’s industrialisation agenda, with the MOIED’s Kenya Industrial Estates (KIE) providing infrastructure, business development services and financing for new SME projects. Vision 2030 also targets skills development programmes, commercialising research and development (R&D) activities, and increase investment to strategic segments including iron and steel, agro-processing, machine tools and machinery, motor vehicle assembly, and spare parts manufacturing.

MTP 2013-17

Near-term industrial expansion targets are detailed in Vision 2030’s second Medium-Term Plan (MTP), covering the period 2013-17, which lists manufacturing as one of six priority sectors for development. The MTP aims to establish special economic zones (SEZs) in Mombasa, Lamu and Kisumu; new SME and industrial parks; industrial clusters focusing on meat processing, leather and dairy products; and integrated iron and steel mills. In addition, it also intends to boost the ratio of engineers in the country from 1:6700 to 1:5000.

In 2013 the US Agency for International Development (USAID) reported that the country has already made steady progress towards a number of targets under the first MTP, including development of master plans and structural designs for SME industrial parks across Kenya’s major cities and the July 2013 approval of the SEZ concept, with the signing of an agreement between the Kenyan government and the government of Singapore to create an SEZ master plan.

Infrastructure

The MTP also includes a number of ambitious transportation targets that are expected to narrow an infrastructure gap that has driven up the cost of production domestically.

Under the MTP, the government plans to construct or rehabilitate 5500 km of roads, increase rail capacity on the existing Nairobi-Mombasa link to handle 25m tonnes of freight per year, and boost its annual port capacity to 50m tonnes, in addition to signing bilateral agreements that are aimed at substantially expanding the country’s international aviation network (see Transport chapter).

Although high power costs and frequent outages represent a significant challenge for industry, the government’s plans to add 5000 MW of new capacity to the national grid are already progressing steadily, driven by new renewable energy projects. The Olkaria region in particular has benefited, with the Kenya Electricity Generating Company (KenGen) adding 280 MW of new geothermal power to the national grid over the past 12 months alone.

As a result, retail electricity tariffs have fallen by over 30% since 2013, while the Kenya Power and Lighting Company reported that as of August 2015, it has completed the installation of 150 out of a planned 200 new industrial power lines that will provide emergency electricity to industrial firms in the event of a power cut (see Utilities chapter).

The economic benefits of the MTP’s proposed projects will allow the government to reach its manufacturing targets – Mombasa’s proposed SEZ, for example, is expected to add $300m to the economy and create 60,000 jobs. According to a July 2015 report in The Daily Nation, KSh3bn ($33m) will be channelled into SEZ and industrial park development.

NIPF

In addition to Vision 2030, MOIED’s activities are also guided by the National Industrialisation Policy Framework (NIPF) 2012-30, drafted in 2010, which targets achieving 15% annual manufacturing growth until 2017, expanding total local manufacturing production, raising the share of Kenyan products in the regional market from 7% to 15%, increasing foreign direct investment (FDI) in the industrial sector by 10% annually, developing two new SEZs and five SME-focused industrial parks, and increasing the local content of locally-manufactured exports to at least 60%. Here, too, government has begun to make modest progress, most recently in May 2015, when Parliament directed the National Treasury to allocate KSh1.5bn ($16.5m) to buy 8500 ha of land in Olkaria, which will be used to establish an SEZ.

According to the NIPF, high-priority sectors in industry and manufacturing include steel, cement, construction, textiles, leather, furniture, agriculture technology and ICT services, with the policy also targeting creation of 10m new jobs by 2030. The MOIED estimates KSh50bn ($550m) in annual investment will be required to meet these targets, making development of business-friendly policies and legislation a priority for the government.

Export Processing Zones

Although Kenya does not have a generalised incentive scheme governed by an industrial development law, the Manufacturing Under Bond programme and the network of export processing zones (EPZs) offer investors tax holidays; duty exemptions on machinery, raw materials and intermediate inputs; and a removal of restrictions on foreign capital repatriation. Moreover, non-commercial EPZ tenants benefit from a 10-year corporate tax holiday and a 25% corporate tax rate for 10 years after, and a 10-year withholding tax holiday on non-resident remittances, while all tenants are offered permanent duty and VAT exemptions for raw materials, construction materials and machinery, stamp duty exemption and a 100% investment deduction on capital expenditure within 20 years.

The EPZ programme was established in 1990 with the promulgation of the EPZ Act, which established the EPZ Authority (EPZA) to promote export-oriented development within designated zones across the country. Today the country’s EPZ network comprises 50 zones, including 20 in Mombasa, 10 in Kajiado, nine in Nairobi and four in Kilifi. The largest of these is the Athi River EPZ, which is located just outside of Nairobi, and the site of a planned Textile City which is expected to house 100 different companies and employ over 200,000 people before 2017.

The government signed the new SEZ Act in September 2015, creating a new SEZ Authority to administer most regulatory responsibilities in the EPZs, allowing for a simpler interface between government and SEZ enterprises. The bill is designed to enable Kenya to exploit its potential for economic growth and development through enhanced investment and industrial policy guidance to investors as well as supporting technology transfer, upgrading skills and growing Kenya’s domestic technological capacity. The act also includes numerous protections and benefits for companies, including a strong dispute resolution system, considerably faster licensing procedures, and duty-free importation of goods and services.

Recent Growth

The MOIED reports that the manufacturing segment has not surpassed the 11% growth mark in recent years, and despite recording average annual growth of 5.5% in the early 2000s, its industrial exports have decreased in absolute terms. Increasing this base will be critical to both job creation and economic growth as well as domestic and foreign investment. Growth plummeted in 2008 as a result of the global economic downturn and fallout from the country’s 2007-08 post-election violence. Although it has since returned to pre-2008 highs, expansion in 2014 and early 2015 has not been able to meet the government’s ambitious set of targets.

According to the Kenya National Bureau of Statistics (KNBS), the manufacturing sector’s real output rose by 3.4% in 2014, a more modest increase than the 5.6% growth recorded in 2013. The KNBS attributes growth to subdued inflation and reduced oil prices during the latter half of the year, with segments including animal feeds, tobacco, pharmaceuticals, non-metallic minerals, fabricated metal and furniture recording double-digit growth in 2014.

Formal employment in the sector rose by 2.9% to reach 287,500 in 2014, led by growth in the pharmaceutical, paints and varnishes, animal feeds and dairy products segments. Overall growth remained modest in early 2015, with the KNBS reporting that manufacturing expanded by 3.5% in Q1 2015, compared to a growth of 6.4% in Q1 2014.

Trade Deficit 

Growth in manufacturing is expected to help lessen the country’s trade deficit and insulate the economy from currency fluctuations. The shilling lost 22% of its value against the US dollar in the year to August 2015. While depreciation makes the country’s exports more competitive, it also creates a challenge for import-dependent manufacturers. According to the “2015 Economic Survey”, from the KNBS, Kenya’s trade deficit grew by 18.7% in 2014 to hit KSh1.08trn ($11.9bn), from KSh911bn ($10bn) in 2013, as a result of 14.5% import growth, compared to a 7% increase in exports. The export-import ratio fell to 33.2% in 2014, from 35.5% in 2013.

Other African markets continue to be the dominant destination for Kenyan exports and accounted for 44.9% of the total in 2014, while Europe stood in second place. Kenya’s largest source market for imports is Asia, accounting for 61.2% of the total, while imports from the US increased significantly in 2014, to reach KSh187.48bn ($2.06bn), a 122% rise over KSh84.48bn ($929.3m) in 2013.

Challenges

While the overall outlook is bright, the sector faces some notable challenges, including a rising fuel import bill following the closure of the country’s sole oil refinery in Mombasa in 2013, comparatively low levels of productivity and high costs of production, NTBs, and stiff competition from cheap imports, particularly in the cement sector.

One of the biggest hurdles for manufacturers remains the relatively high cost of importing raw materials for manufacture as a result of VAT and other charges, particularly in light of the shilling’s depreciation over the previous year. Rakesh Rao, Group CEO of Crown Paints, told OBG that “Kenya is an import-heavy country, and given the decline of the shilling and the scarcity of local raw materials, prices have increased dramatically for manufacturers.”

Although the government raised import duties on imported sugar, plastic tubes for toothpaste and cosmetic products in June 2015 to reduce competition from foreign manufacturers and simultaneously reduced excise duties on paper products for the packaging industry, as well as aluminium cans. However, many producers have argued this does not go far enough in promoting local industry. VAT still applies to a number of industrial raw materials, while new taxes on locally produced cement have been widely criticised by local players (see analysis).

“Kenya needs to take a more logical approach to its import taxation regime, as raw materials are taxed at the same level, if not a higher level, as finished products, as is the case in the paper industry. To support local manufacturers, the government should lower the taxes on importing raw materials,” Sachen Gudka, managing director of Skanem Interlabels, told OBG.

NTBS

As in other African markets, from Senegal to Mozambique, NTBs also represent a significant challenge, with Kenyan exporters frequently frustrated by delays as a result of excessive red tape, numerous weigh bridges and roadblocks, corruption, unnecessary delays at border crossings, and perhaps most significantly, lack of harmonised import and export standards, procedures and documentation.

Intra-regional trade in East Africa is the highest among any of the sub-regions on the continent, at roughly 30% of overall volumes – which is roughly three times the level of West Africa or North Africa – but cross-border transactions are still onerous. The East African Legislative Assembly moved in May 2015 to approve the new Elimination of NTBs Act, although this will require ratification in each of the five EAC members before it can take effect.

“Trade within the EAC continues to be significantly hampered by NTBs, and Kenya’s share of overall trade volumes has been steadily declining over the past few years,” Gudka told OBG. “Local manufacturers do predict a good amount of potential in the new agreements being discussed, but a lot still needs to be worked out before that comes into effect,” he added.

Financing

Despite the challenges facing manufacturers, the sector’s outlook remains positive and investment was healthy. The KNBS reports that financing for manufacturing projects rose by a robust 30.3% to reach KSh237.9bn ($2.6bn) in 2014, although the value of new projects approved by industrial lenders dropped to KSh569.1m ($6.3m), less than half of the value of financed projects in 2013. The government attributed this to a reduction in the value of approved expenditures by nearly all industrial lenders, except for KIE, although the total number of industrial projects endorsed by financial institutions rose by 105% in 2014 to hit 549, up from 268 in 2013, perhaps reflecting a rising focus on SME lending.

The Industrial Development Bank approved three new manufacturing projects worth KSh74.2m ($816,200) in 2014, down from five projects worth KSh339.1m ($3.7m) in 2013, while the Development Bank of Kenya financed two projects valued at KSh66.6m ($732,600). Agriculture, food and beverage processing received the bulk of KIE financing in 2014, with the KNBS reporting that the majority of the 543 projects that were financed in 2014 were active in this segment. KIE was the only industrial financier that recorded lending growth in 2014, with total loans rising 85.2% to hit KSh194.3m ($2.1m), up from KSh104.9m ($1.2m) previous year.

Agro-Processing

Agro-processing, traditionally a major part of the manufacturing segment, recorded a modest decline in 2014 as a result of reduced quantities of beef, mutton and pork production, although the KNBS reported that certain foodstuffs, such as processed chicken and sausage, actually grew in 2014 – by 10.2% and 9.6%, respectively. Prepared and preserved fruit production declined by 14.1% in 2014, although that of animal and vegetable fats and oils rose by 6.6%, with vegetable oil production rising by 14.3% to reach 186,143 tonnes, according to the KNBS. The volume of milled rice hit 60,500 tonnes, up from 57,000 in 2013, while production of animal feeds rose by 13.2%, mainly due to 26.8% growth in poultry feeds. The dairy sub-sector grew by 6.4% in 2014, with the volume of processed fresh milk rising 4.2% to hit 419m litres, up from 402m litres in 2013, while yogurt and fermented milk production went up by 16.8% in the same period. Grain mill production rose by 8.2% in 2014, and wheat flour production hit 882,300 tonnes, up 10.5%.

Textiles

Kenya’s textiles industry has potential for future expansion, and in addition to the Athi River EPZ’s Textile City, exporters also benefit from the Africa Growth and Opportunity Act (AGOA), under which many made-in-Kenya products in the textiles, leather, horticulture, fish, rubber, iron and steel segments are granted duty-free access to the US market.

Textiles exporters have benefited the most from AGOA, with USAID reporting that total exports from Kenya to the US rose by 28.8% between 2008 and 2012 to reach KSh26.4bn ($290.4m), of which KSh22.3bn ($245.3m), or 84.5%, were EPZ apparel exports. In its “2015 Economic Survey”, the KNBS reported that the textiles industry was one of the best-performing manufacturing segments of 2014, with the total value of exports to the US under the AGOA rising by 24.2% to reach KSh30.1bn ($331.1m).

According to the KNBS, production of knitting wool, woven fabric and blankets rose by 25.5%, 16.4%, and 4.3%, respectively, in 2014, while the apparel sub-sector grew by 4.8% as a result of increases in the production of cardigans and t-shirts which were up 13.4% and 5.2%, respectively. AGOA was extended for a further 10 years in July 2015, after which the government announced that 20 textiles firms are slated to invest KSh8bn ($88m) in new projects.

Construction Materials

The production of construction materials is another area with high potential for growth as a result of major infrastructure projects including the SGR, which will require up to 650,000 tonnes of cement, and LAPSSET, which involves construction of thousands of kilometres of new roads and dozens of new buildings and petroleum processing facilities. The cement industry is one of the primary beneficiaries of such projects (see analysis), but other materials producers have also reported robust activity. Although the KNBS notes that production of galvanised steel declined by 7% in 2014 to 284,500 tonnes, that of iron bars, rods and angles jumped by 19.5%, and fabricated metal products output grew by 13.5%.

Outlook

Kenyan industry has the potential to become a significant economic engine in the coming years, as evidenced by the expansion in the textiles, food processing and construction materials segments. The government is increasingly moving to protect domestic industry, while regional and bilateral agreements have benefitted Kenyan exporters.

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The Report: Kenya 2016

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Industry & Retail chapter from The Report: Kenya 2016

Industry & Retail chapter from The Guide

Industry & Retail chapter from Table of Content

The Report: Kenya 2016

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