Society

Refuel manufacturing to mirror East Asian success

manufacture

Smart conveyor flat vector illustration. FILE PHOTO | NMG

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Summary

  • Kenya still thrives as the manufacturing hub for East Africa.

According to famed researchers James Kouzes and Barry Posner, one of the top four traits of a successful leader is to provide a vision for followers to understand and get behind.

Kenya's leadership rolled out the Big Four Agenda to much fanfare and with excellent intentions almost two years ago that provided a good new vision.

We surely did and still do need phenomenally more affordable housing, better food security and nutrition, quality universal health coverage, and a robust manufacturing sector.

All of us in Kenya cannot turn on a radio, watch the television, or read a newspaper without seeing some mention of the Big Four Agenda. From Cabinet Secretaries to MPs to governors to academics to businesspeople to pundits all declare hope, eagerness, and scepticism in equal measure about the initiative.

The seven East Asian tiger nations grew with rapid economic expansion by targeting on export-led growth in specific sectors.

They employed favourable terms and support for their chosen unique sectors usually subsectors of the manufacturing industry.

Kenya's Big Four Agenda serves to favour and focus on certain areas because attempting everything at a time yields minimal results.

In follow-up to the Business Talk article on Kenya's income tax rates compared to other countries in the, USIU-A is conducting a survey of manufacturing firms to help uncover needs and gaps in the sector as a pillar for the Big Four Agenda.

Thus far, early results align well with Otiato Guguyu's Business Daily article earlier this week.

Many manufacturing firms are frustrated with issues regarding doing business in Kenya and stand in the throws of monumental strategic decisions of four choices: continue current operations, close down and become a distributor of imports of what they used to produce in Kenya, move to another Comesa country then import back into Kenya, or just close altogether.

Frustrations include one of the highest corporate tax rates in the world, one of the highest electricity costs in the world, bureaucracy and unofficial fees, much cheaper import competition, and inconsistent supply chains.

Regarding cheaper imports, free trade areas and reduced tariff areas prove a double edged sword for businesses.

While Kenya needs trading blocks to export our raw materials more favourably, mainly coffee and tea, but in return, the more value addition sectors get nailed with a flood of cheap imports competition.

Fellow Common Market for Eastern and Southern Africa(Comesa) member Egypt, in particular, provides a thorn in the side of many Kenyan manufacturers.

Egyptian businesses benefit from less bureaucracy, lower effective import duties for their inputs, and then they export to Kenya under the advantageous Comesa terms and many Kenyan manufacturers cannot compete.

Next, given higher Kenyan corporate tax rates and higher electricity costs, both areas show no sign of improvement.

The Kenya Revenue Authority (KRA) continues to increase enforcement while not reducing rates and Kenya Power prices inch higher and higher. Manufacturers report not being optimistic.

In terms of the tax rates, put in tangible terms, a company that earns a profit before taxes of Sh10 million here in Kenya would pay Sh 3 million in income tax while that same company if operating in Europe would pay only Sh2 million.

The figures represent drasticly lower returns on investment for investors in the manufacturing sector.

The silver lining in the sector exists in reduced perceptions of corruption in some transactions. Manufacturers report hoping that the renewed fight against graft will be effective and also lower bureaucracy.

In short, Kenya still thrives as the manufacturing hub for East Africa.

But multiple factors threaten the sector with imminent decline and possible annihilation in the next five years if not addressed urgently. We need reforms impacting manufacturing to mimic the East Asian success when export-led growth anchored in manufacturing pulled them up to become some of the wealthiest nations in the world.