Whenever we are in the national budget cycle, a wave of uncertainty sweeps through the manufacturing sector.
As a goods maker, you can wake up one morning to find that the National Treasury has put out a notice publishing its intent to introduce new taxes or duties that are bound to disrupt your operations in major ways.
Instability in fiscal laws are simply maddening. Arbitrary changes in duties and tax and constant mixed signals are the name of the game.
The other day, a source from the National Treasury whispered to me that politically-influential players in the cement industry had successfully managed to lobby the new administration of President William Ruto to agree to increasing duty on clinker from 10 percent to 25 percent.
I treated it as a rumour until I learnt that the industry had dispatched a team to engage the leadership of the Ministry of Trade and Investment on the vexed question.
From what I gather, the industry team this week presented their grievances to the Industrialisation Principal Secretary, Dr Juma Mukhwana.
Here is a bit of background. Clinker is the most important input in cement manufacturing, contributing to up to 70 percent of the cost of production.
We have two types of players in the cement industry, namely, grinding-only factories and integrated plants with capacity in both grinding and manufacturing of clinker.
The number of cement grinding companies has in recent years increased to seven with the latest being Kisumu county-based Rai Cement in 2017.
The other players include Bamburi, Mombasa Cement, National Cement, Savanna, Karsan Ramji - the makers of the brand Ndovu. In total, the industry has an installed capacity of 14 million tonnes.
Last year, National Cement- which is owned by billionaire businessman, Mr Narendra Naval, made a proposal during the budget hearings that the duty on imported clinker is increased from 10 percent to 25 percent.
This proposal was supported by Mombasa Cement. These two players argued that they have sufficient capacity to supply local demand for clinker and that the government should support their proposal in the spirit of buy Kenya build Kenya.
The rest of the factories argued that a tariff increase on clinker would tilt the competitive playing field in favour of Mr Naval’s companies and Mombasa Cement.
They also complained about the quality of locally-produced clinker. With the competing interests having reached a deadlock, a verification committee was established to investigate the competing claims and advise the government on what to do.
That committee found that a sudden increase of duty on clinker would tilt the playing field in favour of one party.
The verification committee argued that since all major players were in different stages of building integrated factories, the correct policy was to allow more players a short window of four years for the industry to integrate into a marketplace with a level playing field.
The proposal by Mr Naval’s factories and Mombasa Cement was shelved.
What has changed? Why is the matter coming up again? With the change in government and the entry of President William Ruto’s administration, the interests who lost during the independent verification process have regrouped to launch a fresh offensive.
This conflict reminded me of what I read in theory about the term, crony capitalism which describes a system in which businessmen close to authorities s receive favours to allow them to earn bigger returns than their competitors.
Under cronyism, well-connected businesses are rewarded by being allowed to charge higher prices for their output than would prevail in competitive markets.
They get shielded from international competition by high levels of duty protection.
As the investigation by the clinker verification committee factually demonstrated, locally produced clinker does not need duty protection to thrive.
One of the most compelling findings of the investigation was that locally-produced clinker is cheaper by as much as 30 percent.
It statistically demonstrated that literally all the seven cement manufacturers, including the groups campaigning for the 25 percent increase in 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.
The reason the lower import prices do not translate to lower local consumer prices is that commercial producers of clinker peg their prices very close to the import prices.
If import duties go up to 25 percent as demanded by Mr Naval’s companies and Mombasa Cement- 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.
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Note: The results are not exact but very close to the actual.
