Columnists

Level cement industry playing field

betty-maina1

Industrialisation, Trade and Enterprise Development CS Betty Maina during SMEs Conference. PHOTO | SILA KIPLAGAT | NMG

jaindikisero_img

Summary

  • As the study by the clinker verification committee has factually demonstrated, locally produced clinker does not need duty protection to thrive.
  • Indeed, one of the compelling findings of the study was that locally produced clinker is cheaper by as much as 30 percent.

Welcome to the politics of the cement industry. If the government succumbs to pressure by a section of cement manufacturers to introduce a 20 percent duty on imported clinker, it will have administered euthanasia to the local cement industry.

That is the conclusion I have reached after going through a report by an independent committee that was appointed by both the Kenya Association of Manufacturers (KAM) and the Ministry of Trade and Industry and tasked to assess clinker production capacity and consumption in Kenya.

I regard the findings of this committee authentic not only because it had representation from both sides of the political divide of the cement industry but mainly because it included experts from the State Department of Industrialisation, the Kenya Bureau of Standards, the State Department of Mining , the Treasury and KAM itself.

Several broad economic policy questions arise. How well do we regulate competition? Should the much-touted policy of ‘Buy Kenya, Build Kenya’ be dogmatically implemented even where there is clear evidence that such a policy portends harm to one of the manufacturing sector’s fastest growing segments? Is the infant industry protection argument relevant in so far this dispute is concerned?

Yet as I continue reading the report of the clinker verification committee, I found myself giving more attention to the politics that underpins this conflict. Indeed, the dispute over the proposal for a 20 percent increase on import duties on clinker is a compelling lesson how politics influences competition policy in the private sector in Kenya.

This conflict reminded me about what I read in theory about the term, crony capitalism. The concept describes a system in which businessmen close to authorities who make and enforce policies receive favours that allow them to earn bigger returns than their competitors. According to the theory, the privileges and favours to the politically-connected businesses and individuals can come in the form cheap credit funnelled to enterprises of cronies through state-controlled banks.

Furthermore, cronies may be rewarded by being allowed to charge higher prices for their output than would prevail in competitive markets. Finally, the politically-connected can be shielded from international competition by high levels of duty protection.

What is my point? It is that what is going on in the cement industry is but the impact of anti-competitive practices brought about by the influence of crony capitalism. It is utterly unfair to — in the name of ‘Buy Kenya, Build Kenya — force cement manufacturers to buy an intermediate good so critical to the price and quality of what you produce from enterprises they are in competition with.

As the study by the clinker verification committee has factually demonstrated, locally produced clinker does not need duty protection to thrive. Indeed, one of the compelling findings of the study was that locally produced clinker is cheaper by as much as 30 percent.

The study has produced statistics that show that literally all the seven cement manufacturers, including the groups campaigning for the 20 percent increase on import duties, have continued to import large volumes of the commodity mainly because of reasons to do with quality and the need for product differentiation.

However, the lower import prices do not translate to lower local consumer prices because commercial producers of clinker peg their prices very close off the import prices.

In the circumstances, the implication therefore is that if import duties go up to 20 percent, the inescapable consequence is that local consumer prices will go up in tandem. If the government wants to help local producers of excess clinker, the sensible thing is to support them to export the commodity duty-free to either the East African Community countries or Comesa.

My parting shot is a theory: In Kenya’s private sector, segments with a greater aggregate share of well-connected firms will tend to experience more anti-competitive practices and policies.