Economy

Assurance of preferential US market terms lifts Kenya’s EPZ business

epz

Workers at an EPZ factory in Athi River sew garments. PHOTO | FILE

The Kenyan manufacturing sector has in recent years been fraught with challenges including subdued product demand in key export markets, high production costs and competition from cheaper producing rivals especially in Asia.

The exclusive Export Processing Zones (EPZ) are among the segments that for years suffered a downturn due to a high demand for cheaper second-hand clothes and uncertainty over preferential entry of products into the US market under the Africa Growth and Opportunity Act (Agoa).

But a decision by the US Congress in June 2015 to extend the Agoa by another 10 years has triggered fresh enthusiasm in the EPZ business.

Though the Act originally covered the eight-year period from October 2000 to September 2008, amendments by then US President George Bush in July 2004 extended it to 2015.

Several Kenyan products, notably apparel and agricultural produce, are big beneficiaries of this arrangement which has lifted import duty on all eligible products and granted preferential market access upon compliance with Rules of Origin.

Latest statistics in the Economic Survey 2016 showed that the EPZs recorded a 12.1 per cent growth in sales last year underlining a resurgence of the sub-sector that is expected to be a key pillar of Kenya’s development.

The EPZs recorded growth in all key fronts including employment and investment-- offering support for the government’s plan to establish a variant of these zones- the Special Economic Zones (SEZ).

The growth was mostly driven by apparel exports under the Agoa .

“In 2015, enterprises operating under the Export Processing Zone (EPZ) programme recorded increase in employment, exports, imports, and expenditure on local goods and services,” The Economic Survey 2016 states.

“Total EPZ sales went up by 12.1 per cent from Sh57.2 billion in 2014 to Sh64.1 billion in 2015. The number of local employees increased by 8.7 per cent to 50,523 persons in 2015. The bulk of employment was in the garment/apparel enterprises with a total of 41,548 persons mainly due to expansion of existing apparel, and agro-processing firms.”

EPZs in Kenya date back to 1990 when the legislation establishing them was passed with a view to stimulating employment and growing exports.

Investors were given a number of incentives including a 10-year corporate tax holiday and 25 per cent tax thereafter, 10-year withholding tax holidays and stamp duty exemption.

READ: Kenya EPZs ranked low on wealth creation

They also get 100 per cent investment deduction on initial investment applied over 20 years and VAT exemption on industrial inputs.

The programme had a sluggish growth until 2000 when the Agoa deal was made. By 2011, the number of gazetted zones had risen to 44 with a further 13 established since bringing the total to 57. A further four EPZs have been gazetted since January this year.

But their performance has been termed disappointing and the government last year moved to create the SEZs.

At the expiry of their contractual period, existing investors in the EPZs will be required to start paying taxes in line with Kenya’s taxation laws.

They will also have a choice to either move or re-apply afresh to be considered for investments in the SEZs under stringent conditions.

The Economic Survey 2016 shows that investment in EPZs has nearly doubled in the last five years rising from Sh26 billion to Sh47 billion.

This growth however has mostly relied on apparel enterprises under the Agoa deal which accounted for Sh34.6 billion of the exports and employed 41,500 people last year.

This number however pales to the ambitions of the government hence the establishment of the SEZs which are projected to provide hundreds of thousands of jobs.

Kenya is in the process of setting up several SEZs in Mombasa, Lamu and Kisumu. The Kisumu facility is aimed at growing export trade within the East Africa Community (EAC) and the Great Lakes region.

Another SEZ will also be set up close to the geothermal plants in Olkaria. Manufacturers in the SEZs will be offered discounts on power bills because of lower transmission costs from the geothermal plants in Olkaria to the industrial hubs.

The SEZs shall be subject to a reduced corporate tax of 10 per cent for the first 10 years and 15 per cent for the next decade.

Connective infrastructure

Unlike the EPZs which are limited to manufacturing, commercial and service activities, the SEZ Act provides a long non-exhaustive list of activities.

They include business processing outsourcing, manufacturing and processing; livestock marshalling and inspection, refrigeration, deboning, value addition; and services and activities to facilitate tourism and recreation sector.

The World Bank however says that the success of the SEZs will depend on provision of proper infrastructure, both within the zones and connecting them to the outside world.

“Although the infrastructure of a zone is important, it is equally important to develop the connective infrastructure between the SEZs, cities and ports,” the bank said.

Among the factors that have previously held back the success of the EPZs was a poor transport infrastructure and high electricity costs.

Currently, the government is working to reduce the cost of transport with the Standard Gauge Railway (SGR) and the improvements at the Mombasa Port expected to further ease the export-oriented business.

New lease of life

With last year’s extension of the Agoa deal to 2025, the EPZs have received a new lease of life. The EPZ Athi River which is managed by the EPZ Authority (EPZA) has recorded new demand since last year and is now being expanded to host more enterprises.

Of the 89 enterprises operating in Kenya, 44 are located in the complex.

Last year, the EPZA completed an additional 16 industrial go-downs each measuring 16,050 square feet and eight units each measuring 7,600 square feet under the expanded textile and apparel cluster dubbed “Textile City”.

“The ongoing projects are part of the government’s plans to realign the textile and apparel sector to make it contribute significantly to the country’s economic growth through expansion of sustainable textile production,” EPZA said in a recent newsletter.

China which has for a long time been the world’s leading apparel manufacturer is adopting a service economy leaving countries like Kenya to fill the void.

Analysts predict that China will shed about 85 million jobs at the bottom end of the manufacturing sector between now and 2030.

This opportunity coupled with Agoa, improved infrastructure and cheaper power bodes well for the EPZ and SEZ sub-sectors’ growth.