KAM’s Industrial Business Agenda – 2012

7/30/2019 KAMs Industrial Business Agenda 2012

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The KAM Industrial Business Agenda

Proposals for the incoming Government.

Kenya Association of Manufacturers (KAM)1 2012

Priority actions to build competitive local industry to expand employment in KENYA


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1Established in 1959, KAM exists to support Kenyan manufacturers in their operations in Kenya and

wherever they operate. The Association has more than 700 members among them Kenyas leading

industries. It has offices in 6 locations where industries are located in Kenya Nairobi, Mombasa,

Nakuru, Eldoret, Thika, Kisumu and Athi River.


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KAMs Industrial Business Agenda Proposals to the incoming Government for the delivery of competitive manufacturing in Kenya post 2012

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Table of Contents

Priority challenges for the next governments 4

Ensure energy security 7

Unblocking the logistics Corridor from the Port 9

Make it less taxing to pay taxes 11

Achieve meaningful regulation 13

We need a wage policy that supports employment expansion 15

Make it possible and easier to sell our goods and services 17

Keep the country moving swiftly and safely 18

Need for strong public institutions that support Industrial Development 19

Mobilizing resources for industrial investment 20

Ensure the implementation of the constitution 21

Work towards water security and Environmental Conservation 23

Set aside dedicated land banks for industrial investors in keytowns and locations 23

Support to innovation and technology development 24

Improving links between education and market 24

Reduction of corruption in business 25


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Foreword

Kenya is moveing towards a seminal election in 2012/2013. It will be the first elections under the Constitution

promulgated in 2010. Kenyans have great expectations that life will dramatically improve with the implementation

of the constitution with more effective and accountable governments. The governments (national and county)

that emerge from the forthcoming elections must therefore be ready and able to implement programmes forimproved service delivery that will impact on the citizens of the country at all levels.

Business is a key constituency in this regard. Enterprises can create jobs and wealth for everyone if provided

with a conducive and supportive environment where they can thrive. Recent growth in Kenya has been driven

largely by the private sector on the demand side mostly through private consumption and exports, and

from the supply side, by a broad array of activities producing tradable and non tradable goods and services,

including horticulture, telecommunication, wholesale and retail trade, manufacturing, as well as construction and

transportation.

However investment rate is low partly because investment returns are not lucrative largely because of the

cost of doing business is high both direct and indirect cost e.g. labour, capital, transportation, energy, crime,

insecurity and burdensome engagement with regulators and government service provider. The net impact of

these costs are reduced sales or high total productions costs which makes goods and services produced in

Kenya uncompetitive.

The business environment in any economy is an important factor in determining the level of investments that

take place, expansion plans for businesses, employment levels, revenue collected and the general well being of

society. The cost of doing business in Kenya has continued to rise over the last few years, making it very difficult

for businesses to thrive.

The performance of Kenya has continued to dip in the Doing Business comparator studies. In 2012 Kenya isranked at 109 out of 179 countries down from 106 in 2011 and our best performance of 93 was in 2007. It is

the same direction noted in the World Competitiveness Surveys by the World Economic Forum where Kenya

is ranked 102 out of 142 countries surveyed.

This kind of performance is disturbing for business and indicates our eroded competitiveness and compromises

our aspirations of 10% growth that will enable our country to become prosperous.

This global positioning reflects the views of investors operating in the country who are the source of such

information. The last comprehensive survey was undertaken in 2007 and the feedback from nearly 700 investors

indicated below.


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Firms reporting major or very severe business constraints:

all formal firms, Kenya, 2007 (%)

This can and needs to be reversed with concerted action so that Kenya can be a leader and competitive again.

Through this Industrial Business Agenda, Kenya Association of Manufacturers presents the key issues affecting

businesses in industry as well as the proposed solutions to tackle these problems through a partnership

framework. This represents our view of what needs to be done.

The common theme that underlies our recommendations is to ensure that our country and counties can create

an environment for competitive Kenyan businesses. Our contribution is inspired by the view that business has

a duty and role to play in shaping the election debate and ensuring that political parties and their aspirants for

office pursue a pro-growth and pro-business agenda.

We call upon all those aspiring for leadership at the national and county levels to take this proposal to the heart

of their preparations for office and upon successful assumption of office to urgently put in place the plans and

team that will address these challenges and create a conducive environment for conducting of business and to

build a strong and winning Kenyan economy. Such businesses and enterprise will be partners to Government in

the creation of desired wealth and employment.

Sincerely,

Betty Maina, MBS, HSCChief Executive


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Priority challenges for the next governments

1. Energy Security: Provision of affordable and sufficient, reliable and clean energy to power industry and

ensure energy supply security, quality and affordability.

2. Moving Kenyans and their goods swiftly and safely: Ensuring safety on the road and seamless movementof people and goods not only through improvement of the integrated transport infrastructure (roads and

rail) but also through unleashing the power of technology to expedite safe movement.

3. Fixing the Port of Mombasa to unblock the logistics corridor: To increase efficiency and productivity. The

inefficiency at the port of Mombasa is the single gravest contributor to the high cost of doing business on

the Kenyan logistics chain. The port is choking with recurrent cases of congestion that are largely caused

by system failures and low labor productivity.

4. Making it less taxing to pay taxes. We need modern, competitive business taxes with reduced complexion

and administrative burden.

5. Elimination of burdensome regulations through the Review of regulations and licensing especially the

power and practice of various regulatory bodies with overlapping mandates as well local government

that have power to to impose many charges that raise revenue through charges with equivalent effect to

taxes e.g. levies.

6. Delivery of a conducive national wage policy and labour regulations that promote employment

7. Making it possible and easier to sell Kenyan manufactured goods locally and externally - Market

Development

8. Building Efficient and effective public services that support industrial development within the country andcreations of strong institutions.

9. Support industrial investment with long term finance.

10. Overseeing the implementation of the Constitution that promotes seamless commercial activity and

with frugality.

11. Set aside dedicated land banks for industrial investors in key towns and locations.

12. Ensuring water security.

13. Promotion of ICT enabled services

14. Ensuring students are fit for work- through better fit between education and workplace demands.

15. Fighting Corruption


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Background and Priority Challenges of the Industrial Sector in Kenya

The Government of Kenya considers industry and manufacturing industry in particular a key pillar of its growth

strategy and has chosen to support it over time as evidenced by various development plans and statements.

Within the current blue print, Vision 2030, manufacturing is one of the pillars alongside tourism, agriculture,

wholesale and retail trade, business process outsourcing and financial services.

Kenyas Vision 2030 aims to transform Kenya into a newly industrialized, globally competitive middle-income

country proving a high quality of life to all its citizens by the year 2030. Industrial sector was identified as

one of the key sectors to address incidences of high poverty levels, unemployment, disparities in regional

development, and major foreign exchange earnings from exports of primary or semi-processed agricultural

produce. The vision for the manufacturing sector is the development of a robust, diversified and competitive

manufacturing. The overall goal for the manufacturing sector is to increase its contribution to GDP by at

least 10% per annum. Manufacturing sector contributes 13% of the total formal employment and Informal

manufacturing accounts for 20% total informal employment.

Kenyas industrial sector comprises of manufacturing, mining and quarrying and construction activities andcontributes 14% to GDP. The manufacturing activities account for the greatest share of industrial production

9.4%, Building and Construction account for 4.1% and Mining and Quarrying account for 0.7%.

Kenyas economy has been experiencing some structural transformation. There was a slight increase in the

contribution of value added agriculture in GDP from 21.4% in 2010 to 24% in 2011 and a rise in the role of

trade in services sector from 18.1% of GDP in 2010 to 20% in 2011. Valued added Industry however reduced

slightly from 15% in 2010 to 14.2% in 2011. In 2011, direct formal employment in the industry increased to

2.8ml with most of these jobs -2.4m in the Informal sector with its attendant vulnerabilities.

In many emerging economies especially in Asia, industry has been the growth engine and is the major tradablesector in those economies.

However Kenyas industrial sector now nearly 20% of the economy enjoys modest growth rates averaging 4.%

p.a over the last decade. Service sector beats it in growth rates. In 2000 manufacturing was the second largest

sub sector of the economy after agriculture. In 2010, it is in fourth place behind agriculture, wholesale and retail

trade, and transport & communication. In most high growth rate countries in Asia manufacturing leads economic

growth in Kenya it lags in services! This poor record of manufacturing sector has contributed to Kenyas decline

in export performance and to the current account deficit. In the 1960s our exports of goods and services was

31% of GDP. It declined to 25% in the 80s and is for the past decade averaged 25.9% of GDP.

An outward oriented trade policy which promotes exports, a secure investment climate and better

infrastructure are key to achieving sustained growth in industry.

In order to achieve the targets in employment expansion and welfare gains anticipated in the vision 2030,

we will need to enhance the competitiveness of manufacturing sector by strengthening production capacity

and local content of domestically manufactured goods, raising market share in regional markets, increasing the

generation and utilization of Research and Development (R&D) results and developing niche products for

existing and new markets.

Kenya will succeed economically and be less vulnerable to shocks only if it balances its economy through stronger

exports. In addition to strengthening the well performing traditional exports of tea, tourism and horticulture,It needs to develop and support its manufactured exports which have picked up in the last 15 years and hold


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a lot of promise. Kenya is well positioned to make new products (such as textiles, chemicals and automotive

parts) and enter new markets if it improve its infrastructure and investment climate. This can be done with the

support from Government.

In this Industrial Agenda, we outline our proposals to the incoming governments.

To help industrial development and the Kenyan economy in general the incoming government should not onlyadopt all the proposals but also set out a programme within 100 days of entry into office of the path to their

implementation in the life of the next parliament.

The proposals have a clear purpose: -to prioritise industrial development as the path to sustainable wealth

creation and growth for the Kenyan economy.


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Summary of the proposals to support competitive Kenyan industry

1. Ensure Energy Security

Due to the key role provision of energy plays, thecost of the products from a manufacturing process

will be related to the cost of energy, all other factors

such as efficiency of production, cost of labor and

raw materials notwithstanding. The higher the cost of

energy is, the higher the price of the products will be.

In the Doing Business rankings, getting electricity in

Kenya falls at position 115 out of the 183 economies

largely because of the length of time it takes to get

hooked up and the cost. There are 4 procedures, 163days and costs 1419.2% of income per capita. The

best performing economy in Africa on this indicator

is Mauritius which has 4 procedures, takes 91 days

to get electricity connection and costs 328.5% of

income per capita.

The costs per unit of electricity in Kenya is high and

volatile lot depending on the amount of thermal energy in the system which is susceptible to changes in

international oil prices. In 2011 for instance industry witnessed an increase in prices by up to 60% from Jan to

Dec. 2011.

The current cost of and quality of electricity is discouraging new investments and constraining the expansion of

industries. This is made worse by the frequent power fluctuations/unscheduled interruptions. This leads to lost

time and equipment damage due to the poor power quality and thus making it difficult to plan ahead.

While a lot has been done by the current government to increase energy supply and stabilize supply and we

acknowledge that, the country is still not energy secure and capacity expansion is not keeping up with demand!

In Kenya, over 60% of generated energy into the national grid is used in manufacturing enterprises. Kenya

currently generates about 1,400 MW. Additional capacity in the pipeline could increase this by 500MW in the

next 3 years if projects are implemented on time. But this is not enough. It is prudent therefore that any energypolicies that are proposed must be aligned to the industrialization policies as well as Kenyas Vision 2030 if we

are ever to unlock our overdependence on imported goods. It is estimated that Flagship projects outlined in

Vision 2030 will require an estimated 42,700 MW, meaning we need a lot of investment to be energy secure.

Kenya needs to create new 41,300MW of energy by 2030. And we need to look at all new sources,

Added to this challenge of inadequate supply is the issue of quality. Industrial investors experience losses due

to power supply quality fluctuation and interruptions and majority have invested in generators which are costly

to obtain and operate. Industrial firms estimate that power interruptions cost them 7% of sales.

Energy security is a critical to any plans to boost productivity in Kenya and for any county that seeks to attractindustrial investors.


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The incoming government needs to Prioritize Provision of affordable and sufficient, clean and reliable energy to

power industry and ensure energy security, quality and affordability.

Given the costs of these services it is strongly recommended that Government provides more support to boost

energy capacity expansion. Kenya cannot deliver competitively priced manufactured goods and service/

products without adequate and reasonably priced energy.

When decisions are made, execution on additional capacity delivery for energy and roads should be expedited.

Delays cost the economy more.

Our recommendations therefore include:

a) We need concerted action bringing together industrialists and Government stakeholders in Energy sector

to agree on how to deliver required capacity at reasonable price that can support industrialization.

b) Increase in public investment in electricity generation,

c) Expedited investment in transmission and distribution to ensure utilization of capacity. Failure to invest in

transmission and investment means that existing capacity is not fully utilized even though consumers payfor it.

d) The government should also incentivize private sector investments in least cost energy sector geothermal

and other renewable. Today the private sector accounts for 15 percent of the power supply. It can be

increased. The country should enhance exploitation of geothermal, solar, wind and biomass resources to

supply at least 5,200 MW for domestic and institutional energy requirements by 2030.

e) Provide support and incentives for industries and businesses to reduce energy wastage. Some businesses

have made the required investments and saved themselves lost energy. Others might require support and

incentives.

f) Establish clear rules for private generators open access to the transmission network, as established in

the energy policy.g) Ensure that electricity pricing maintains the financial viability of power companies, while protecting the

most vulnerable consumers.

h) The short term solution on stable energy price will be in fast tracking of geothermal energy development

that will relegate thermal plants to peaking plants.

i) We would also like to see the establishment of petroleum fuel reserve stocks at least for 90 days to

move the economy from the risk of price shocks.

j) Development of the necessary infrastructure to go hand in hand with the generation.

k) Coal: A clear policy should be developed and more proactive moves on exploiting the locally available

resource.

l) Net metering should be encouraged and developed.

m) Research and Development: Encourage local manufacturing of renewable energy technologies by

providing subsidies for more uptake of the technologies.

n) Empower research institutions like NCST, KIRDI, and Universities on energy related technologies.

o) Removal of energy inefficient products from the Kenya market through various incentives and encourage

local manufacturing of lights, solar products, LEDs etc.


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2. Unblocking the logistics corridor from the Port

The Port of Mombasa on the Kenyan coast plays a strategic role in the facilitation of trade both for Kenya and

the neighboring countries. Manufactures in particular face numerous challenges when the port performance is

inadequate, and hold the view that Mombasa port performance, transit costs and procedures lie at the heart

of the logistics supply chain.

However currently the inefficiencies at the Port of Mombasa is the single gravest contributor to the cost of

doing business on the Kenyan logistics chain. The Port is choking with recurrent cases of congestion that are

largely caused by system failures and low labor productivity

Cargo Clearance Procedures at the Mombasa Port, Border Posts are characterized by lengthy processes,

inefficiency, delays and high cost, an aspect which has led to negative impact on the economy due to high

cost of trade transactions. The inefficiency of the Port have for a long time had a negative impact on regional

competitiveness due to delays at the Port of Mombasa, occasioned by the numerous agencies and bureaucracy

in cargo clearance leading to long transit times, un-competitiveness and loss of business.

Despite relatively low GDP growth rates in 2007 2008, container imports at the port of Mombasa have

risen at an average rate of 10% per annum since 2005. In the year 2010, the port managed to handle a total

of 618,186 twenty foot equivalent units (TEUs) against a designated handling capacity of 250,000 TEUsp.a. A

projected annual average growth of 5% of the economies of the EAC member states for the next five years,

means the port will continue to operate beyond capacity. As a critical link in the logistical chain and the major

channel for importation of raw materials for manufacturing into the region, the operational effectiveness of the

port will have a direct impact on the competiveness of the port from Kenya.

Although there have been minimal improvements over the years, the Port of Mombasa is still faced by

delays in ship berthing, inefficient cargo clearance process causing delays and making the port expensive anduncompetitive.

Although Kenya Revenue Authority (KRA) and Kenya Ports Authority (KPA) have introduced computerized

systems in their operations, delays are still prevalent due to lack of complete integration between the two

systems and frequent systems failures. The clearing process at Mombasa Port, Container Freight Stations and

customs procedures which otherwise are not conducive for attracting business at the port of Mombasa.

The Railway Systems though critical, continues to face enormous challenges. For many years, the Kenya Railways

Corporation has not undertaken any major development either through rehabilitation or upgrading of its

infrastructure, construction of new lines or modernization. The track, besides being operated as a single line, has

not been extended despite its limited coverage. The real issue from importers perspectives is the high costs of

railway transport, unreliability of services and lack of wagons.

The incoming government must therefore Fix the Port of Mombasa to increase efficiency and productivity..

Our Recommendation

Port Reform leading to Commercialization and efficiency improvements - Cases of successful privatized

companies have been cited in Kenya. Having the required framework for privatization would help in fast-

tracking the process. Privatization and commercialization spreads the gains of efficiency and economy

of scale. Attempts at doing this in the past have been thwarted by opposition by labour. The Incoming

Government needs to conclude this process.


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For any real change in the quality, cost and time of travel along the Northern Corridor, the port of

Mombasa and its environs need to be substantially modified to meet the potential freight tasks. This

means investing in both new infrastructure and improvements that allow the port to maximize use of its

existing facilities by improving port layouts, berth and land transport access. Therefore there is urgent

need for expansion of capacity of off-take roads from the Port.

In the short term, there is an urgent need to ensure a back-up for the KRA and KPA systems to ensure no

down time and more integration of the systems, and a reform in the management structure of KPA toinclude representation from relevant private sector institutions and greater productivity.

Otherwise a more permanent solution is the implementation of the Single Window System

Improvements in off-take of cargo from the Port. This will be realized by improvement in off take corridors

both road and rail. This will require new investment especially for Railway and the construction of the

Standard Gauge Railway.

The launch of the (LAPSSET) corridor in March 2012 is welcome and has potential to link up Kenya with

the region and will bolster trade. The plan must receive the requisite investment.

Efficient utilization of Port Resources: There are a significant number of containers that have stayed at the

Port for long. This critical resource should not be utilized as storage.

Implementation of Maritime Regulations to ensure effi

cient service delivery and safety.

Congestion at the port of Mombasa has greatly affected the manufacturing sector. The port not only serves the Kenya market but a

number of other countries in East Africa and if operational efficiencies at the port continue the country stands to lose business to other

ports. Delays in clearing goods also have an adverse effect on productivity and profitability of the manufacturing sector.


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3. Make it less taxing to pay taxes

Kenya remains amongst the most heavily taxed economies in the world with 43% of businesses in the country

finding tax administration a major constraint. The Government thus should increasingly focus on making taxes less

burdensome on business and simple to administer.

We need competitive business taxes with reduced complexion and administrative

burden.

a. Friendly and trade facilitating tax administration.

b. Eliminate multiple regulations by government agencies. There are too any agencies with overlapping

responsibilities who use licenses and charges of equivalent effect like levies to raise revenue.

c. Modernization of the Income Tax Law. It is more than 40 years old, has been amended many times,

is complex and hard to understand for both business and KRA and therefore woefully in need of

modernization which must be considered a priority.

d. Regulate refunds and make the process fair and transparent.

Our proposals

The number of tax payments and returns that a business has to make has become untenable and is adding

to the cost of compliance. We need to stream line the process urgently. The number of taxes, charges

and levies that businesses pay should be reviewed. They include Corporate tax (5 times p.a), NSSF (12

times p.a), PAYE (12 times), applicable withholding taxes (monthly), Single Business Permit, Standards

Levy, Industrial Training levy (2 times per annum), road maintenance levy, fuel excise duty, rates, rents,

stamp duty, VAT (12times), and petroleum development levy. Kenyan businesses make up to 65 tax and

tax like payments annually which add up to 50% of Profi

t. These taxes are not collected at the samelocation different agencies are collectors.

We cannot build up formal enterprise with these sort of taxes and administrative burden little wonder

then that most employment is found in the informal sector. The number of taxes notwithstanding, Kenya

needs to reduce the complexity of forms and time taken to file returns. Complex processes impose

administrative burdens on taxpayers leading to tax avoidance and high enforcement cost on part of

government! The focus should be a move towards a tax system that emphasizes simplification and

reduction of the administrative burden.

Modernise the tax law. One of the principal issues we have in tax is that our legislation is outdated and

archaic. Our Income Tax Act has been around for nearly 40 years (and indeed was probably the same one

we had at independence) and has over the years been amended numerous times. The result is complex

legislation that both business and the authority find difficult to understand and interpret. We must have

a rewrite of the law as a matter of great priority.

As part of this re-write of the legislation, we need to focus on industry sectors. Our tax law in respect

of insurance companies is so convoluted that nobody understands it! Similarly we need to look at the

new industries oil & gas which will play a big part in the future of Kenya. The new legislation must also

take into account the KRAs intention of moving towards a completely online system.

If this parliament does not conclude it, prioritise modernisation and reform of VAT legislation. The

complexities and difficulties of application have been addressed in the proposed legislation; through

there are still concerns about elimination of the incentives for investment contained therein.

Tax Payer Friendly administration. Our revenue administration is cumbersome and onerous for tax payers.

They are subjected to multiple audits and changes in rulings by KRA without due consideration theimplications of changes in rulings to actions of tax payers. This process needs to be much more streamlined

and transparent. Tax payers are willing to offer suggestions to KRA on this.


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Time taken to make Refunds must be regulated and KRA must be penalised for not administering it right.

Tax claims and outstanding refunds of sums owed to business have continued to increase, thus tying up

crucial capital for businesses. Despite numerous assurances and directives to resolve this, not much has

been done. Reforms of the regime and VAT law to minimize incidence of refunds is a priority.

In addition to the above, Kenya needs to move expeditiously to spearhead the resolution of the anomalies

noted in the EAC Common External Tariff to ensure proper classification of products. The Government

should set up a permanent inter-ministerial Budget committee to handle various tariff anomalies, especiallyas regards harmonization and rationalization of EAC customs Union. Furthermore, provisions to allow for

changes in the protocol should be followed to avoid unilateral decisions in violation of the protocol and

imposition of non-tariff barriers by Partner State.


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4. Achieve meaningful regulation

The current business regulatory framework imposes high transaction costs on businesses through the high number

of licenses required as well as the administrative burden imposed by regulators. In 2007, Government repealed

close to 700 superfluous license requirements eliminating about 350 and simplifying almost an equal number

in. However, some of the gains, have been reversed by introduction of new charges of equivalent eff

ect anddisobedience by regulatory agencies.

There are still numerous demands for eliminated licenses and We also have seen introduction of new by-laws

by Local Authorities that do not resonate with existing Acts. In addition, we are increasingly seeing introduction

of new licenses, which are not only cumbersome but also a burden to comply with. All these water down the

Governments licensing rationalisation programme.

Besides local authorities, several regulatory agencies and parastatals impose license fees and levies on

businesses. These include the Kenya Bureau of Standards, National Environment Management Authority, Water

and Sewerage authorities, Department of Weights and Measures, Pharmacy and Poisons Board, Department

of Occupational Health and Safety, Department of Mines and Geology, Kenya Radiation Board, Kenya Forest

Service among others.

The compliance costs related to all these regulations is a great cost to businesses. In addition, there is need to

harmonize the enforcement regime where there is duplication of roles so that businesses can deal with one

government body.

To spur business, there is need to streamline the regulatory framework, development of proper implementation

mechanisms, reduction of the number and cost of licenses, trimming down the burden of compliance and

enhancing the creating capable institutions.


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The incoming Government should consider it a priority to;

consolidate fees and charges by regulatory institutions,

make it less burdensome for investors by implementation of sector one stop shops for regulation

aspects,

Review the funding mechanisms with an objective of reducing the fees and charges related to the

overlapping roles and funding necessary regulatory agencies from the exchequer.

Review of the Acts and mandates of all regulatory institutions and identifying lead institutions of the

various regulatory roles to be responsible or coordinating agency in their respective roles e.g. leaving all

environmental regulatory roles to be undertaken by a single agency rather than multiple agencies.

We recommend that:

A cap should be placed on new licenses and levies and a system for coordination of their imposition of

businesses taxes and levies.

In the context of extensive devolution, it should be ensured that the licenses issued by specific counties

facilitate inter-county trade.. The approach to imposition of taxes and levies by country governments

should obey the Constitution.

Since the county governments will have power to develop laws, the national government should institute

mechanisms for evaluating the Regulatory Impact Assessment of all regulatory proposals at the county

and national governments. This will ensure that only pro-business laws and regulations are implemented.

Develop the mechanism to ensure compliance with th constitution by county governments in the

imposition of business taxes..

The county governments should monitor and evaluate the services offered to the business community vis

a vis the fees and charges collected.

The county governments should be transparent in the expenditure of the budgetary allocation from the

national government. The business fraternity should have a say in the county budget to ensure that theirneeds are also prioritized

Mergers and consolidation of agencies with similar regulatory roles and mandates e.g in IP protection.


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5. We need a wage policy that supports employment

expansion

Kenya requires a wage policy that will support creation of jobs in the manufacturing sector. Besides Infrastructure,

the largest component of costs in employment expanding industries is labor costs. Labour market regulations are

an important factor in determining employment expansion and absorption within the economy. For a country

with large unemployment, it is particularly critical to ensure that labor market regulations do not hamper

absorption especially of young persons.

The competitiveness of Kenya has been seriously undermined by the enactment of the new labor laws in the

2007 which did not take into consideration the views of employers. The private sector has argued that the

implementations of some of the provisions in the labor laws will not only create a hostile environment between

employers and workers but will also drastically increase the cost of doing business in Kenya.

Rigidity in the labour market discourages creation of jobs in the formal sector and con fines even more of the

workforce to the vulnerability of the informal sector. This is not the choice the Kenyan economy should bemaking at this time. However it will be observed that most of Kenyas manufacturing jobs are currently in the

informal sector!

This situation is critical and is affecting the ability of several labour intensive sectors namely plantation agriculture

and textile to weather the tough economic times. Investor shift to capital intensity or outsourcing as is happening

to general services in industry.

Recommendations:

Kenyan Industrial Employers are committed to observing national and best labor practices. However it must be

appreciated that these regulations can hamper labor absorption and employment creation. The New labor lawspassed and implemented in 2007 have had this effect and have actually led to contractions as employers find

alternative ways including mechanization and outsourcing. It is imperative that these labor laws are reviewed

expeditiously and instead the Government and Industrial employers should dialogue at the appropriate

incentives for expanding safe and decent work.

Government needs to pursue labor regulations that will facilitate employment expansion and industrialization.

Rigid and inflexible regime compromise efforts at employment expansion.

This should focus on:

Productivity based wages and departure from ceremonial wage increases.

Training in skills that will lead to jobs or required by industry and to build new skills for new industries.

Recognition that industrial expansion that will create employment will need to be backed up by non-

expansionary wage increases. Any country that maintains a rigid high wage labour regime looses out on

competitiveness for manufacturing.

Industry also recommends that the incoming Government departs from the ceremonial wage increase

on Labour Day. Instead minimum wages ought to be frozen and productivity measures like piece-rate

introduced. Such an approach is intended to spur productivity and performance.

A mechanism should be established to promote closer collaboration between training institutions of

higher learning and private sector in order to offer demand-driven curricula that target not only Kenya

but also the East African region.


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Conduct an updated manpower survey so as to establish appropriate supply and demand levels in human

resources. The last manpower survey conducted 20 years ago is obsolete. The current mismatch of skills

causes unnecessary unemployment leading to low productivity.

Wage guidelines should be more explicit on the proportion of wages for compensation arising from cost

of living indices and productivity so that compensation of wages should be at half the rise in cost of

living indices during the period under review, with any further compensation being based on improved

productivity.

One of the main reasons for the upward creep in wages is the cost of living and tendency to adjust wages due

to inflation and especially related to food. Kenya needs a food policy that supports desired wage policy for

industrialization. There is need to reduce the price of food and essential commodities in Kenya.

A good way to reduce the price of food is to reduce the import duty on imported grains and other food

products e.g sugar. Kenyas food price policy has maintained high prices partly by paying Kenyan farmers above

world market prices and compounding this with high duties on imported grain. Kenyans pay more for grain and

imported commodities than others who consume the same products. Import duties on these commodities and

distribution structures, drive up the price of food. A policy that raises prices above market levels hurts thePOOR most and compromises the drive to increase industrial and urban employment.

The government will therefore need to Professionalize the grain and sugar markets - following the model of

the tea sector (private sector run, transparent auctions).

Manufacturers are calling for a supportive labour framework to enhance production


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6. Make it possible and easier to sell our goods and

services

Industrial producers need to be supported with access to markets. Kenya maintains an open trade policy and

is export oriented. The incoming governments must safeguard this and indeed further enhance and actively

pursue a initiatives to grow and diversify Kenyan exports.

External Market Development

a) Make it possible and easier to sell Kenyan goods in the external market through concluding regional,

bilateral and other trade agreements and special arrangements that will deliver expansion of such

markets. Such include the Tripartite Free Trade Area and those with Europe.

b) Work towards elimination of external non tariff barriers in countries we have signed trade agreements

with.

c) Make the East African Community work for Kenyan Businesses by pushing for the attainment of a true

single market with limited barriers for goods and services and freedoms of movements of persons.

d) Improve coordination of all agencies involved in trade facilitation in order to reduce the time taken to

complete processes for import and export of goods and services.

e) Support entrepreneurs to enter new markets thus developed through various forms including fairs and

exhibitions in destination markets.

f) Establish Export expansion grants and the Export Development Fund to finance export promotion and

related activities.

g) Conclude double taxation agreements with key economic partners.

h) Stimulation of export led industries in special economic zones

i) Local market construction and linkages through improved infrastructure and payment systems.

j) Maintenance of conducive international financial relations and banking structures with integrity and meet

the international requirements of financial systems transparency.

k) Maintain a predictable and stable exchange rate regime that will spur exports.

l) Trade finance (invoice discounting and related credit facilities against confirmed orders. Especially for

smaller operators who may not have the capital to finance orders and cannot wait for the typically 60

days credit period before they are paid.

Internal trade expansion

a) Local market expansion through preference in local public procurements.

b) Protection from trade in counterfeit, unsafe goods and illicit goods in the local market.

c) Protection of local market from uncustomed imported substitute goods that pose unfair competition.

d) Networks of markets in rural areas and ensuring access with improved roads.

e) Affirmative action in public procurement for local industrial products by government agencies.

f) Public support for Kenyan products.

g) Elimination of internal non tariff barriers by trade facilitation agencies


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7. Keep the country moving swiftly and safely

A good transport network is critical to the functioning of a competitive economy. An efficient and safe system

and links will support mobility, delivery of goods to the market and improved well being.

For too long Kenya has relied principally on Roads for goods and people movement. Roads are an important

infrastructure that facilitates the movement of goods. We acknowledge that there has been improvement in

the road rehabilitation and development programs but a lot still need to be done to improve the quality of the

road network in the country and promotion of safe usage.

However delivery of roads is just one dimension of transportation. Urban congestion has reached severe levels

in the Main towns of Nairobi, Mombasa and Eldoret. This results in great loss of time, wasted fuel and delayedbusiness. Added to this is the burden of road safety and ensuring safe usage of road by all users and minimization

of conflict by different groups of users.

However roads are not enough. Kenya urgently needs to modernize its railway to promote mass movement of

persons and goods and introduction of mass transit of persons. It is inefficient and expensive to keep transporting

people in small units as we do through cars and matatus mainly.

We therefore need the government to work with all stakeholders to Keep the country moving safely -

Ensure safe and seamless movement of people and goods through improvement of the Countrys transport

infrastructure (roads and rail) as well as application of technology to promote safety and effi

ciency.

The incoming government needs to commit to the following:

Increase in investment directed at roads and rail to meet the growing demands of the economy

Implement a projects to deliver an integrated transport system

Prioritize roads that have a direct impact on businesses i.e. Trunk Roads, industrial zone roads and feeder

roads in agriculturally productive areas.

In the short term the National Trunk road from Mombasa needs to be kept in top working condition all

the time. It is choking the Port and the region and holding up the country and investments in trucking

capacity. In the medium term commit to the construction and delivery of a modern railway from Mombasa to

Malaba and work with partners in the region to deliver links on the Uganda and Rwanda sides.


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Improvement in the quality and maintenance of roads including weight control. Weighbridge management

in Kenya is still steeped in corruption and not effective in elimination of overloading - which destroys

roads. Weight control management should have penalties for transport carrier owners (not just drivers

and turn-boys), cargo owners (consignors and consignees), law enforcers on duty and points of loading e.g.

KPA or CFS to ensure compliance. Regional approaches to weight control need to be fast tracked and

weighbridges modernized.

Reduction of congestion through timely delivery of bypasses. All major transit roads should not beconstructed through growing towns. This is the source of most congestion.

Prioritize road safety and educate road users on safe usage of roads.

Deploy modern technology to promote road safety and discipline of users.

8. Need for strong public institutions that support

industrial development

There are several Government Agencies charged with support to Industrial Development Ministry of

Industrialization, Ministry of Trade, Ken Invest, EPZA, Kenya Industrial Estates, Kenya Industrial Research Institute

(KIE), Export Promotion Council (EPC), Industrial Development Bank (IDB), KRA, Immigration, Labour etc. they

duplicate and contradict each other from time to time and the process of unraveling the inconsistent or

duplicated actions cost investors a lot of time and money. This is in addition to the multiple regulatory agencies

as well as a myriad of trade facilitating institutions.

For Kenya to become a globally competitive economy, it needs an efficient, world class public service that is

results driven.

The incoming government must prioritize reform of public institutions, rationalizing agencies, merging those

with similar functions, streamlining them to make them efficient and ensuring that tax payers get efficient andaccountable government institutions.

Some key recommendations are:-

To spur industrialization, Kenya needs to ensure that the institutions in place to support this are well

aligned and rationalized. State agencies that perform similar functions should be amalgamated in order to

reduce unnecessary expenditure.

All government services should be automated in order to reduce rent seeking opportunities in pursuit of

services.

Review financing of state agencies and ensure they do not use levies on businesses for revenue generation.


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9. Mobilizing resources for Industrial Investment

In the early years following independence, Government had recognized the need for vehicles for development

finance such as DFCK, IDB, ICDC and KIE among others. The role that these agencies played has not been replaced

by commercial banks and very few give long term support or finance start ups. In recent times Government has

partnered with banks to mobilize and directfi

nancial support to enterprises.

Government gave various incentives and support i.e remission of duty on capital equipment or for exports or

for deconcentration from Nairobi. To support export-oriented manufacturing, Government introduced Tax

Remission for Export (TREO) which grants tax remission on imported raw materials used for manufacture of

export goods. Additionally, the Export Processing Zones Authority (EPZA) offers tax incentives for companies

located in its export processing zones to encourage production of goods or services for export.

The Incoming Government must incentivize and support industrial investment through policy and in specified

circumstances through financial and fiscal support.

Recommendations:

Kenya needs to establish a National Industrialization Fund and recapitalize its development financial

institutions mentioned above. These should be directed to support industrial investment that can

enhance employment expansion and Value addition to Agricultural products in various value chains.

Provision of fiscal incentives to spur desired industrial investment e.g. on use of locally produced

industrial crops or for deconcentration. By sourcing locally produced materials and mapping these into

the supply chain, a transformative multiplier effect is created, including relieving pressure on the local

currency, adding value to existing world-class brands and creating opportunities for innovation that

would provide consumers with safe options, competition in industry and government with revenue.

To support deconcentration from Nairobi, there is need for national and County governments to setincentives and support for investors

Kenya has been largely trading with other countries in East Africa and has been exporting to the rest of the

world and there is potential to boost exports if the operating environment is conducive


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10. Ensure the implementation of the constitution

The Kenyan constitution promulgated in 2010 heralds a new promise for Kenyans and their quest for shared and

accountable government. It is however a rich and complex constitution that needs to be implemented with

care and keen oversight by the Government and vigilance of the people to ensure delivery of the promise.

The Kenya Association of Manufacturers was involved in the process leading to the finalisation and endorsement

of the Constitution. We advanced the following reasons for support:

1. It promises to improve accountability by government and those in power.

2. More focused government with separation of parliament and Cabinet as Ministers would be drawn from

outside Parliament:

3. Framework for Integrity in public life as represented by Chapter 6. Many businesses have suffered in the

hands of public servants who use their offices to extract bribes in the discharge of their duties and who

use regulations and office to harass businesses that fail to pay up. Many businesses have suffered under the

capricious exercise of administrative power by public servants while seeking licenses and permits, paying

taxes, getting approvals for investment.

4. Fixed Size of Government: There is a ceiling for the size of the cabinet-fixed at 24. This will prevent the

escalation of ministries and more importantly it will lead to a consolidation of functions so that they can

be coherently delivered.

5. Protection of Property: The Constitution guarantees the right to own property in any part of the country,

freedom of movement and expands property to include Intellectual property. One of the most thriving

businesses in Kenya at present is the creative industry. Our budding Software industry will grow and

service the world

6. Better Management of Public Finance: The Constitution provides for sound and accountable management

of our resources. The Constitution provides for coherent policies for revenue mobilization, allocation,

spending and accountability under a unified tax system that ensures national coherence and a minimum 15%allocation to counties. It also provides for equalization fund for rapid development of under-developed

regions in the country. To enhance accountability, the Constitution introduces the office of the Budget

Controller to promote prior prevention of abuse of public resources before it happens.

7. Opportunities for Business within Devolution: Devolution promises service delivery close to the people

and business expects to benefit from this and to thrive. We have seen what CDF and other devolved

Funds have done in creating opportunities for local businesses to thrive. No doubt Devolutions provides

an opportunity for our small business to grow and thrive.

8. Separates powers and institutes checks and balances: The Constitution provides for a clear independence

of the three branches of government and introduces checks and balances, sanctions and guidelines for

offi

ce holders and outlines fair removal procedures among others including administrative excesses.9. Independence of the Judiciary: The Constitution provides for complete financial independence of the

Judiciary which means that it can make independent decisions and judgments. The Chief Justice has also

been given powers to discipline wayward judges.

We were however concerned about costs of implementation and assurance of freedom of commercial

activity under devolved government. We remain concerned and need for the government to ensure that

implementation does not break the bank and back of the nation.

The incoming government must guide and oversee the full and ardent implementation of the Constitution. Any

emerging challenges must be tackled expeditiously.


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The required resources and capacity for counties to carry out functions assigned under the constitution must

remain a top priority. Key among these functions will be public financial management and capable service

delivery that delivers the promise. Failure to deliver accountable and capable devolved government will

negatively affect business and compromise the delivery of a better business environment.

Costs of constitutional implementation must be undertaken with due caution and within means. Of concern

to business is the cost of constitutional commissions and creation of several commissions with overlappingmandate. The country cannot afford expensive government it will be unable to deliver and will compromise

the promise of the new constitution.

The Incoming government must rationalise the constitutional commissions established to date and those to be

established later.

KAM remains concerned about the interface between devolution and integration and especially on the question

of whether devolution poses a challenge to integration of the EAC Partner States as the economy is being split

into smaller economic units while business is desirous of taking advantage of the expanded regional market. The

Incoming government must clearly articulate the manner in which it will pursue global and regional trade in thecontext of devolved government.

KAM also remains concerned about decision making process at county levels: While devolution creates

opportunities for capital raising and financial intermediation, there are several levels of approval, and certain

decisions will have to be endorsed by the Central Government. It is anticipated that the approval process will

not be long drawn out or conflictual as business depends on the environment created by Government.

It is hoped that the processed for establishment of formal businesses within the counties will be freed from a

lot of bureaucratic procedures. More importantly it is the expectation of business that the country will adopt

unified law for doing business in the counties that promote national coherence.

Support for Urban Areas: Most of Kenyas counties are rural. However it is an acknowledged fact that most

industrial activity takes place in urban areas. Under the constitution, resources will be managed by county

governments which are made up of mostly rural areas. As per the Urban Areas and Cities Act, at most 5 cities

will have a corporate body to manage them. Business is located in more cities which will not have direct

management yet will have to provide the necessary services for business delivery. In order to create the

necessary business environment, counties must have sufficient resources invested in urban areas. These need to

be safeguarded. Therefore urbanization should be considered as a parameter for the division of Public Revenue

and specific resources earmarked for urban services.

H.E the President Mwai Kibaki waves the new constituion


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11. Work towards water security and environmental

conservation.

Ensuring water security is critical for Kenyas development and the incoming Government must treat this as

priority. The availability of sustainable water and other natural resources will determine the competitive

advantage that Kenya will have over other investment destinations in the region and world over.

The incoming government must demonstrate commitment to conservation of water towers, modernization of

urban water systems and sustainable water use for both commercial and residential needs.

The water sources that support hydro power to the economy need to be protected. These hydro power plants

contribute about 60% of Kenyas electricity output. As outlined in the social pillar of Vision 2030, introduction

of water harvesting and drainage schemes need to be developed as a conservation measure.

Government in partnership with other stakeholders such as schools and private sector should also encourage

the increase of forest cover in the country through increased tree-planting initiatives that will conserve ourecological and hydrological environments.

Government should also ensure that the highest environmental standards are adhered to in the exploration

of oil. The eventual production processes should also be monitored to ensure that the climate change effects

arising out of these emissions are minimized.

12. Set aside dedicated land banks for industrial investors in

key towns and locations.Governments at national and country level need to set aside and builds land banks for industrial investors in

key towns at present the main path to access to industrial land is purchase of agricultural land and conversion

through change of user!. Expecting them to get land through the market is making it very expensive and affects

plans for de-concentration from the main industrial towns of Nairobi.

Access to Land remains one of the gravest hindrances to new investment in industry and it is critical for counties

and national government to build Land banks for Industrial investment

Use compulsory acquisition and zoning to build land banks The new Land Act No. 6 of 2012 in Part VIII

bestows on the National Land Commission power to compulsorily acquire land when necessary upon

receipt of a request to do so from the respective Cabinet Secretary or the County Executive Committee

Member and the land owner is fully compensated for such an acquisition. This power should be exercised

in instances where the Government focus is to increase local industries for the growth of the Countrys

economy.

Thika Town was planned to be an industrial town from the start. The Thika super highway is now almost

complete and this infrastructure is timely for the Government to work towards setting aside land in

Thika for development of Industries. Such land should be prioritized to be for private investors who

intend to set up industries with a priority on local manufacturers.

The same idea should also be used in all the Counties such that specific areas in the Counties be set aside as

land for the establishment of industries. For the towns with industrial areas, these areas should be strictlyused for industrial purposes and more land in such counties be sourced for expansion of industries.


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13. Support to innovation and technology development

We need to facilitate Expansion of the National ICT infrastructure and transfusion to all counties and the

Promotion of transfusion of ICT in government functions and E-government

ICT plays a key role in supporting effi

cient trading and production processes in the world today. This is notonly limited to the private sector but government bodies around the world have taken up ICT as the mode of

service provision. ICT enables and drives innovation and competitiveness. It is an innovation enabler in its own

right by building a digital society where public services and private sector have aligned their processes.

The current slow implementation of E-government presents a challenge and creates a disconnect between

noble policy objectives and business processes in public, private sector and academia as well. This means that

the potential contributions to innovation by higher education are not being realized. We therefore recommend

that;

a. A national innovation policy be developed to harness economic strengths and address weaknesses and

respond to international challenges and opportunities. The construction of the ICT infrastructure in Kenya

is nearly complete. It is critical to stimulate its use by expanding local content development. Regulatory

and fiscal incentives should be introduced to support innovation enabled by ICT. Government agencies,

particularly those supporting trade facilitation, should be revamped to support the ICT industry

a) The National ICT policy should be organized as a continuous process with measures in place for fast

implementation and monitoring instruments.

14. Fit for Work - Improving links between education and market.

A competitive economy requires the right skills and attitudes of the labor force.

Kenya has invested a lot in developing education with nearly universal coverage of primary education and

increasing coverage of Secondary Education. However we need to be aware that higher education is critical

for sustained growth in Kenya. It can improve productivity by providing the skills technical, thinking and

behavioural required by the market and drive innovation and growth in the economy. There is need to review

curricula in tertiary institutions to reflect the latest changes in industrial technology. This should be done on a

regular basis in both universities and vocational training institutions.

Despite expanded access, many young people still enter the job market without adequate skills. Indeed a

stark observation is that 92% of the unemployed youth (between 18 and 25) lack skills. Those who graduate

from higher education lack the skills and right mix to drive competitiveness. The education system should be

developed in a manner that ensures that students are able to put classroom theory into practice and even

become entrepreneurs and thus creating jobs rather than searching for them.

The Incoming government must commit itself to delivering quality higher education that meets the

requirements for industry and the growing economy. It must also commit itself to delivering the right

technical skills required in a rapidly industrializing country. National polytechnics and other technical

training institutes need to have their infrastructure upgraded in order to meet the needs of industry.

The government must allocate sufficient resources to science and engineering.

Foster deeper linkages between university and industry to develop the skilled labour for the economy.

Closer collaboration between training institutions of higher learning and private sector should be

encouraged in order to offer demand-driven curricula that target Kenya and the East Africa region as well.


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15. Reduction of corruption in business.

The Global Competitiveness Report (2012) ranks Corruption as the leading problematic factor to doing business

in Kenya with a significant percentage of 21.2 % of the respondents indicating this. While Kenya is not unique

in facing the problems of corruption, a range of indicators show that corruption remains a serious problem and

a major concern to Kenyans and the international community. Allegations of corruption, from petty extortionto national scandals, are common. Domestic and international investors regularly cite corruption in Kenya as a

deterrent to doing business. Corruption undermines governance, democracy and the rule of law, intensifying

injustice and conflict. It destroys investor confidence, raising the costs of doing business, driving investors and

employers away and reducing economic growth.

Business desires a more ethical business environment. KAM has provided the lead on this and recently launched

the Code of Ethics for Business in Kenya that is aimed at enhancing integrity in the practice of business.

The Incoming government must demonstrate clear and unequivocal commitment to fighting graft and creation

of ethical government.

Recommendations:

a. Government to give total support to the institutions set up with the mandate of the fight against

corruption.

b. Building structures and systems of accountability in devolved government to inject integrity in the

systems, leadership and procedures that will serve the counties. This will help cushion businesses against

losses and impediments that are likely to occur as business opportunities shift to the counties.

c. Criminalize corrupt actions of business and other non-state players.

d. Implementation of the provisions of Chapter 6 of the Constitution on Leadership and Integrity Bill in the

choice of State Officers.

e. Greater involvement of and collaboration with the businesses in the fight against corruption.

f. Automate Government- Deploy technology in public services to reduce rent seeking opportunities in

the pursuit of services.

g. Structural reforms be carried out in the operations of the port, customs, local authorities, government

procurement etc to reduce corruption risks and tendencies largely faced by the businesses as they seek

services from these government departments.

In Conclusion:This is not exhaustive but has been highlighted because of the burdens the place on Industry. KAM pledges its

continued support to Government in the search for solutions to these bottlenecks that affect our industrial

agenda.


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Notes:


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Notes:


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VISION

To be a world class business membership organization effectively delivering services to its

members wherever they operate.

MISSION

To promote competitive local manufacturing in a liberalized markets.

Kenya Association of Manufacturers

P. O. Box 30225 - 00100, Nairobi, Kenya

Tel: +254 (0)20 3746022, (0)722 201368, (0)706 612384Email: info@kam co ke

Documents

KAM’s Industrial Business Agenda – 2012