Gerrishon K. Ikiara | Kenya’s institutional structure behind industrialisation

Gerrishon K. Ikiara (University of Nairobi, former- Permanent Secretary, Ministry of Transport, Kenya)

03 February 2017

Industrialisation of the Kenyan economy has remained an important goal for Kenyan policy-makers since independence and especially since the mid-1970s. This was when the country started facing more socioeconomic challenges, partly associated with a slowdown in the country’s economic performance following the global oil crisis. It has become clear over the years, however, that, for the country’s industrialisation process to experience a truly transformative phase, there is a need for a conducive institutional framework that encompasses the following areas: industrial policy-making; trade facilitation; clustering; investment promotion; building local capability; infrastructure modernisation; a more focused public–private sector dialogue and coordination; and building financing capability.

This discussion focuses on what is required in three key areas: 1) the provision and regulation of special economic zones (SEZs) and industrial clusters/hubs; 2) investment facilitation, with a focus on economic processing zones (EPZs) and KenInvest; and 3) supportive infrastructure planning.

Provision and regulation of special economic zones and industrial clusters/hubs

For more than two decades, Kenya’s industrialisation programme has attempted to support Kenya Industrial Estates (KIE) and Kenyan EPZs with facilities in various parts of the country. KIE was aimed at encouraging industrial enterprises and entrepreneurs across the country to participate more effectively, through state provision of essential facilities in government-built industrial estates. These mainly targeted small-scale enterprises, which were expected to grow gradually and graduate into domestically owned medium- and large-scale industrial enterprises.

To date, the KIE strategy has had limited success. A limited number of enterprises have grown into medium-sized entities that operate outside the KIE sheds. But the scheme has not had the expected impact of a major explosion of locally owned enterprises that play a highly significant role in the Kenyan economy in terms of employment and export earnings.

The more organised EPZ programme, managed under the government’s Kenya Export Processing Zones Authority (KEPZA), has also achieved only moderate success in terms of increasing the country’s exports of manufactured products and generating employment opportunities. This has been in part because the country has not been able over the years to attract a large number of foreign and domestic investors to the programme, unlike many countries in other parts of the world. One of the causes of Kenya’s low competitiveness in this area has been the existence of relatively militant trade unions pushing for higher wages and improved working conditions in the country’s EPZ structures, which has had the effect of making the country less attractive for most of the period to date.

In addition, policy restrictions on EPZ firms have reduced the attractiveness of Kenya’s EPZ programme to foreign investments. In particular, the requirement that EPZ firms not sell more than 20% of their products within the markets of the East African Community (EAC) has made it difficult for EPZ investors to take advantage of this market of about 130 million people.

One of the recent successes of Kenya’s EPZ programme has been its relatively effectively use of the Africa Growth and Opportunity Act (AGOA) to substantially increase Kenyan exports to the US. This has led the country to emerge as one of the leading AGOA-eligible countries in Africa with regard to exports of manufactured products to the US within the AGOA framework.

One lessons learnt is that advanced countries in Europe, North America and Asia could use properly targeted trade support programmes and policies to help push forward Africa’s industrialisation. The aim here would be to enable the continent to reduce its trade deficit with the rest of the world, diversify its economic structure and reduce its over-reliance on agricultural and other primary exports.

Special economic zones

The newly introduced SEZ programme in Kenya aims to sidestep the limitations of the EPZ programme in terms of incentives to investors. It is also expected to use the experiences of other countries, such as Singapore and China, which have used SEZ programmes effectively to implement their agenda of rapid industrialisation using private sector investments, public–private partnership programmes and government-to-government initiatives.

One of the highly innovative measures of Kenya’s SEZ programme is the government’s deliberate effort to identify priority areas through its Transformative Industrialisation Programme in order to bring in the focus needed to facilitate implementation of the programme. Many observers of Kenya’s industrialisation and economic development programme are largely supportive of the priorities identified, which currently include development of the leather, textiles and agro-processing industries.

The SEZ framework has introduced a number of incentives in the hope of attracting a high volume of diverse foreign direct investments as well as high-quality international, regional and domestic investment. This package of incentives is expected to provide a large dose of energy and resources into the country’s efforts to establish an industrial sector that will represent a visible transformative element in Kenya’s industrialisation and overall development agenda.

The package of incentives includes a concessional annual corporate tax of 10% for the initial 10 years of an investors operations, upped to 15% for the subsequent 10 years (Kenya’s current corporate tax is pegged at 30%). In addition to this concessional corporate tax rate, SEZ investors are allowed to import equipment and raw materials duty- and VAT-free, as well as to bring up to 20% of their overseas employees into the country where skilled personnel are not available domestically. To allow participation of local private sector investors, the programme extends the same incentives to those whose projects meet the minimum SEZ requirements in terms of size and scope. There are also ongoing discussions around allowing SEZ firms to sell a larger proportion of their products within the East African Community (EAC) markets than is allowed to EPZ investors.

Effective investment facilitation

While significant steps have been taken in the past 15 years to improve Kenya’s ranking on the ease of doing business index, the country still lies behind Mauritius and Rwanda, among many others, in this regard. There is a need to make the necessary adjustments to address this situation. One of the measures needed is to empower the institutions whose mandate it is to facilitate foreign investment and to provide essential aftercare, in terms of sorting out teething problems and improving investor confidence in interactions with key relevant government institutions to help deal with issues that could cause delay in the implementation of the SEZ or EPZ programmes. A number of countries, such as Ethiopia, Rwanda and Uganda, have handled such issues by placing facilitating institutions such as investment authorities under the office of the president or other power ministries or institutions. This gives such institutions more influence and clout and reduces the delays and bureaucracies that often frustrate providers of the foreign direct investment needed in various industrialisation programmes.

Supportive infrastructure planning

During former-President Moi’s 24-year regime that covered the period 1978–2002, Kenya’s key infrastructural facilities, including energy, roads, railways and ports and airports, were largely neglected. This had heavy consequences in terms of reduced competitiveness for Kenyan products in global markets and stunted many parts of the country in terms of attracting investment, given their inadequate and disruptive power supply and other related shortcomings.

This situation has changed radically since 2003, with infrastructural development emerging as a leading budgetary item, often second only to education. Former-President Mwai Kibaki, Kenya’s third president, is credited with leading the country’s focus towards infrastructure as the gateway to its transformation. Another innovation Mwai Kibaki brought about was the introduction of performance contracting in the country’s public sector. Since 2005, Kenya’s public sector officials at all levels have been expected to sign a negotiated contract indicating targets to be achieved in each government institution and by senior officials. These contracts are evaluated and announced in public each year.

By means of collaboration with new development partners such as China and Japan, Kenya has embarked on ambitious infrastructural development programmes that have been or are in the process of being undertaken. Such programmes are especially evident in road infrastructure, covering most of Kenya’s counties; port modernisation and expansion, with Mombasa Port elevated to fifth position in Africa in a recent global ranking of container ports[1]; railway transport, in the form of the Chinese Exim Bank-supported Standard Gauge Railway line from Mombasa to Malaba (whose first phase Mombasa–Nairobi is expected to be operational by mid-2017); airport expansion and modernisation; irrigation schemes; an information and communication technology-facilitated national security system; and energy expansion.

The impact of the country’s massive infrastructural development programme is already visible in terms of the inflow of foreign direct investment into many sectors of the Kenyan economy, such as energy exploration and production, real estate, wholesale and retail trade facilities, tourism and hospitality, agriculture and others. Investment in Mombasa Port and the Northern Corridor transport network has reduced the time it takes to transport a container from Mombasa Port to Kampala in Uganda from 22 days to five or six, lowering the regional cost of exporting and importing significantly. The past three years have also seen the country emerge from a deficit in energy supply to a surplus, which is expected to stabilise the electric power supply system and enable the country to support more industries in the coming years.

[1] Container Management magazine (2016) Global Ranking of the World’s Top Container Ports.

Photo credit: USAID/Riccardo Gangale