Energy costs pose biggest threat to manufacturers

Most company executives single out the increasing cost of energy as the biggest threat to businesses this year, a survey by consultancy firm PricewaterhouseCoopers shows.

The cost of electricity, one of the key inputs in Kenya’s manufacturing sector, has gone up by nearly 60 per cent since March last year as a result of high fuel charges on power bills following a prolonged drought that has resulted in the reduction of Kenya’s hydrogenation capacity.

Big consumers such as manufacturers now pay six shillings per Kwh up from four shillings per Kwh in March 2009 ,according to figures from electricity distributor the Kenya Power and Lighting Company.

Short rains in December and early January which raised hopes of increased generation have since dried up and according to analysts. prospects are looking dim as consumers continue to pay higher prices as electricity generator KenGen continues to rely on thermal generation to meet demand.
Company executives fear costs of production will continue to rise in 2010 as a result of high cost of energy, says the 13th Annual Global CEO survey by PricewaterhouseCoopers.

“From our survey about 52 per cent of 178 CEOs in East Africa told us that they are concerned that high cost of power was going to affect their business. This is a high number compared to the 34 per cent who are concerned about basic infrastructure” says Mr Kuria Muchiru, country senior partner, PricewaterhouseCoopers Kenya.

Electricity distributor—the Kenya Power and Lighting Company —rationed power between August and October due to shortfall in power supplies, causing some companies to shut down or lay off workers.

The government responded by unveiling the Geothermal Development Company to expand energy generation by injecting an additional 1,500 megawatts of power into the national grid. The Prime Minister’s office has also established a team to fast track the use of renewable energy to generate additional 2000 megawatts.

About 56 per cent of Kenya’s total electricity capacity of 1,200 megawatts comes from hydrogenation but this is currently down by 12 per cent owing to drought.

The World Bank has already projected that key sectors such as manufacturing will only expand at three per cent compared to the 3.8 per cent growth in 2008 because of high cost of production. The contraction in the manufacturing sector projected by the World Bank could be the worst in Kenya’s manufacturing sector in six years. The sector registered a 6.5 per cent growth in 2007 before slumping to a 3.8 per cent growth in 2008.

Analysts at PricewaterhouseCoopers say most companies will continue with cost cutting measures to steer their firms to profitability during the year.
“CEO confidence is still tempered, by the slow pace of recovery and the impact of often drastic cost cutting and other steps taken to survive the downturn” says Mr Muchiru.

According to PricewaterhouseCoopers, nearly 77 per cent of CEOs in east Africa who took part in the survey said their companies had initiated cost cutting measures in the past 12 months to mitigate the effects of the global economic contraction while 44 per cent of CEOs in the region are planning to initiate similar measures to protect their bottom lines.

High production costs occasioned by the increasing cost of energy forced some employers, especially manufacturing firms to cut down their payroll in 2008 and 2009. Employment in the manufacturing sector according to the Economic Survey 2009, took a beating in 2008, shrinking by 0.3 per cent to 264,800 workers in 2008 and any further contraction of the output in the sector could hurt jobs and increase poverty levels in Kenya.

But this could change for the better in 2010 according to the survey by PricewaterhouseCoopers which says confidence for future growth has bounced back from the gloomy prospects of a year ago. The confidence has translated to a planned boost in recruitment, with nearly 40 per cent of CEOs planning to recruit more workers in the year.

New recruitment could fill the skills gap—yet another threat cited by company CEOs as likely to affect the smooth running of businesses this year.

The consultancy firm says the confidence of business leaders is returning because the global recession which ate into the bottom lines of most firms is receding with most CEOs in East Africa setting out restructuring activities to navigate growth with key focus on continuing to implement cost reduction initiatives and entering into new strategic alliances and joint ventures over the next 12 months.