News

Manufacturers happy with budget plans but want more

rotich

Treasury Cabinet Secretary Henry Rotich. FILE PHOTO | NMG

Manufacturers have hailed the attention given to the sector in the recent past as a good start after “years of neglect”. However, they are quick to add that a lot still remains to be done to realise the huge potential of the sector.

Manufacturing sits at the heart of President Uhuru Kenyatta’s ambitious Big Four agenda, together with food security, affordable housing and universal healthcare.

The sector, whose contribution to national wealth has been stagnant at about 10 per cent for more than two decades but started declining in the past two years, is seen as the game-changer in reversing rising unemployment levels among the youth and propelling the country into a middle-income economy.

About 800,000 new decent jobs are expected to be generated in the struggling sector in four years to 2022 under the ambitious plan — 500,000 more than the 300,300 jobs recorded last year, according to official statistics in the 2018 Economic Survey.

The plan, under the manufacturing pillar, is to create an additional 1,000 small- and medium-sized (SMEs) factories in targeted sub-sectors, which will be facilitated in accessing affordable capital, skills and markets.

Modernisation and development of factories in sub-sectors such as agro-processing, leather, textiles and fish-processing have been prioritised in the plan that seeks to raise the sector’s contribution to gross domestic product (GDP) to 15 per cent from 8.4 per cent in 2017.

The manufacturing sector will have to add $2 billion to $3 billion (Sh201.52 to Sh302.28 billion) every year to GDP to attain the projected 15 per cent share of national wealth, Treasury Cabinet Secretary Henry Rotich says in the Budget Statement.

“This will be achieved through establishing leather parks and textile industries in various parts of the country, reviving and transforming industries such as the blue economy and manufacturing of construction materials, and re-establishing the automobile industry, which will make new vehicles more affordable,” Mr Rotich says.

“We will target investors that are ready to invest in specific areas by providing tailor-made incentives.”

Some of the targeted incentives extended to the manufacturing sector this financial year, which are in line with Vision 2030s third Medium Term Plan 2018-22, include reduction in electricity costs, higher duty on selected imports as well as remission of duty and exemption from Value Added Tax on key raw materials.

Manufacturers operating in select Special Economic Zones (SEZs) will enjoy a reduction in electricity costs from $0.16 (Sh16.12) per kilowatt-hour (kWh) to $0.09 (Sh9.07), putting them level with South Africa, Africa’s biggest advanced economy.

This is on top of the 30 per cent of electricity charges which they will now claim from corporate tax in proposed amendments to the Income Tax Act.

“That will marginally decrease the power cost, but the cost may still be higher than regional competitors such as South Africa, Egypt and Ethiopia,” the Kenya Association of Manufacturers (KAM), the sector’s lobby said via email. “However, charging VAT on petroleum products will definitely affect the cost of electricity negatively.”

Manufacturers have cited higher electricity prices compared with regional peers as one of the drivers of the high cost of production for the domestic industry, with Kenyan companies estimated to be at least 12 per cent less competitive than the global benchmark.

READ: Ambitious plan to rev up manufacturing

Available statistics show the cost of power in Kenya, at an average $0.16 (Sh16.12) per kWh, is higher than in Ethiopia, increasingly Kenya’s a major competitor for big-ticket investors, which has cut electricity tariffs at an average of $0.06 (Sh6.05) per unit. Uganda and Tanzania charge $0.11 (Sh11.84) on average per unit, while in South Africa the tariffs are $0.09 (Sh9.07) per kWh.

Mr Rotich has further sought to cushion domestic factories (which include those in other East African Community bloc members) from cheaper imports of paper and paperboard, textiles and footwear, timber products and vegetable oils by raising duty from 25 per cent to 35 per cent.

Raw materials and inputs in the processing of animal feeds, pesticides and acaricides, and assembly of clean-energy cooking stoves and computers have also been exempted from the standard 16 per cent VAT.

“The manufacturing sector has had a very long and structured relationship with the government. In this budget, there has been a bit of consideration, especially the decisions around power, labour, additional protection of manufacturers and cheaper access to materials,” Principal Secretary for Industry Betty Maina said in an interview.

“There have been great strides in this budget, but there will be more. Let’s take stock of what we have gained.”

The sector, however, lost out on a protracted push to scrap the Railway Development Levy, charged at 1.5 per cent of the value of imports, and the 2.5 per cent Import Declaration Fee.