Disjointed informal industries coupled with low investment and high cost of business has stifled job creation in the Kenyan manufacturing sector, a review showed.
A policy review by the State-run think-tank, Kenya Institute for Public Policy Research and Analysis (Kippra), says the manufacturing sector has continuously missed its jobs target over the years despite its potential as key contributor to the national economy.
The sector created some 700,000 jobs in the four years through 2016 against a projected 1.1 million, an equivalent of a 36.6 percent underperformance.
Projections for formal manufacturing were 338,000 but only 30,000 jobs were created. Informal manufacturing—popularly known as jua kali— was projected to create 770,000 jobs of which 670,000 were realised.
This represents job creation of 8 and 87 per cent respectively for formal and informal manufacturing.
“The manufacturing sector is key in the creation of job opportunities. The sector is, however, plagued by growing informality that contributes close to 90 percent of all the jobs,” the paper reads in part.
“The informal sector is characterised by low productivity in terms of low earnings, and stunted growth potential.”
President Uhuru Kenyatta is banking on modernisation and development of new factories to help generate targeted 800,000 new decent jobs for youth under “the Big Four” economic transformation plan by 2022.
To achieve that, the sector’s contribution to the national wealth, technically called gross domestic product (GDP), is expected to grow to 15 percent from a revised decades-low of 7.9 percent in 2017.
The sector’s share of the GDP has steadily dropped from 10.7 percent in 2013, 10.0 percent in 2014, 9.4 per cent in 2015 and 9.1 percent in 2016 and 7.9 percent in 2017, data by KNBS shows.
Its reduced contribution to the GDP is a result of sluggish growth over the years to a low of 0.2 percent in 2017 from 2.7 percent in 2016, 3.6 per cent (2015), 2.5 percent (2014) and 5.6 per cent (2013).
Treasury Cabinet Secretary Henry Rotich says in the Budget Statement 2018 that the manufacturing sector will have to add $2 billion to $3 billion (Sh200.32 to Sh300.45 billion) every year to GDP to attain the projected 15 per cent share of the national wealth.
The manufacturing pillar under the “Big Four” plan is to create an additional 1,000 small- and medium-sized (SMEs) factories in targeted sub-sectors such as agro-processing, leather, textiles and fish-processing.
“More attention should also be given to agro-processing which contributes close to 68 percent of the labour demand in manufacturing,” the Kippra researchers suggest.
“The textile industry, being the key driver of agro-processing, requires local capacity to create value addition along the production chain for more job opportunities for the unemployed youths.”
The paper, however, calls for increased funding of startups in the targeted sub-sectors— usually run by “youths with good entrepreneurial ideas… to ensure youthful labour force engage in productive employments”.
The stock of bank loans to the sector rose 6.49 percent in 2018 to Sh334.6 billion from Sh314.2 billion in 2017 and Sh275.0 billion in 2016, statistics from Central Bank of Kenya (CBK) shows.
Laws governing National Social and Security Fund (NSSF) and National Hospital Insurance Fund (NHIF), the reports adds, should also be amended to allow investment in the cottage industries.
“The NSSF and NHIF Acts could be reviewed to allow them invest in the informal sector to make the sector more productive and sustainable for the many youths already engaged in the sector and those yet to join,” the report says.
Under the Big Four plan, the targeted sub-sectors are to be facilitated in accessing affordable capital through the proposed merger of State-owned development financiers – Kenya Industrial Estates, Development Bank of Kenya, Industrial Development Bank of Kenya.
They are also to be helped in accessing new exports markets and expanding the existing ones through the Integrated National Exports Development and Promotion Strategy, unveiled in July 2018, whose implementation will cost an estimated Sh800 billion in five years.
Manufacturers have, however, poked holes into Kenya’s industrialisation strategy that seeks to transform Kenya into an exports-oriented economy from a net importer she is today, insisting the local industry’s competitiveness is at least 12 per cent lower than global benchmark.
“Until we comprehensively address the 12 percent cost imbalance between Kenya and competitor countries, the exports strategy stands little chance of take off,” Kenya Association of Manufacturers (KAM) chairman Sachen Gudka said in a past interview.
The manufacturers have also blamed higher electricity charges compared with countries such as Ethiopia and South Africa as well as multiple levies and fees such as 2.5 percent Import Declaration Fee (IDF), 1.5 percent Railway Development Levy (RDL) and delays in VAT refunds for piling up costs.
The Kenya Revenue Authority (KRA) collected Sh11.51 billion from IDF and Sh10.55 billion from IDL in the six-month period ended last December, data by the Treasury shows.
Some 23 manufacturers were owed Sh3.59 billion last August, comprising Sh2.68 billion in withholding VAT dues and Sh908.56 million in VAT export refund claims, KAM said in February, adding that this has created cash flow challenges for firms.
“Policy instruments towards reduction of the cost of production, such as removal of import declaration fee and railway development levy on industrial inputs, and prompt clearance of VAT refunds are key in growing the manufacturing sector. This will ensure increased profitability to be reinvested, and more employment opportunities,” Kippra researchers say.
“Access to dependable and affordable utilities (electricity and water) can reduce the cost of production in the industries. Reduced cost of production can impact positively on investments.”
The Energy ministry introduced night-time tariffs from December 1, 2017, halving power cost for large factories operating between 10pm and 6am, with additional production over and above their average day-time output.
The ministry is, however, yet to reach a deal with manufacturers and taxman over regulations for 30 percent refund on cost of electricity which was to take effect from January 1 following an amendment to the Income Tax Act through the Finance Act 2018.
Average industrial power tariff in Kenya, however, stood at $0.1365 (Sh13.92 where $1 is equivalent to 102 units of Kenyan shillings) per kilowatt-hour in January 2018 was higher than neighbouring Ethiopia’s $0.066 (Sh6.73), Tanzania’s $0.0688 (Sh7.02) and Uganda’s $0.1226 (Sh12.51), according to an analysis by the African Development Bank.
With huge under-performance in manufacturing jobs, only 113,000 formal jobs were created between 2013 and 2016, KIPPRA analysis shows, representing 7.53 percent of the projected 1.5 million jobs.
“This points to an acute shortfall in the creation of decent formal jobs for the Kenyan youths seeking employment opportunities,” the paper says.
The researchers cite retail sector (if regulated), building and construction (if skills are scaled up), and motor vehicle assembly as some of other sources of jobs for the youth.