Why Kenya is graveyard for industries and big companies

While no sector has been spared by the exit of major players and the death of others, especially of local companies that have no option of relocating, the manufacturing and agriculture sectors are the worst hit.

The manufacturing sector's contribution to Kenya's Gross Domestic Product - which is the sum of goods and services produced in the country - has slid from 11.8 per cent in 2011 to 7.8 percent in 2022. This has been due to failure to attract enough investors to put up industries in the country and at the same time seen numerous major players relocate their manufacturing plants to other countries over the years.

Kenya's agriculture sector has for years played a key role in the country's economic growth and poverty reduction in Kenya, thanks to its pivotal role in employment creation, food security, exports, and sustainable development.

However, the collapse of various industries in parts of the country means its potential as a source of employment has stagnated over the years.

Since the 1990s, most agricultural sub-sectors such as sugar, pyrethrum and cotton have been in crisis and efforts to revive them are yet to succeed.

According to the Agriculture and Food Authority, the sugar sub-sector provides employment to 500,000 workers along the entire value chain yet it has the potential of employing millions more.

While liberalisation of the economy is cited as the main factor in the collapse of sugar millers as it allowed unregulated importation of sugar, there are other factors that have made their resuscitation an uphill task for successive governments.

The cotton industry was also at one time the second biggest employer after the public sector. From a high of about 500,000 employees, statistics indicate that this number has reduced to barely 20,000 due to factory closures and relocations, resulting in massive loss of jobs.

Economists note that a mix of factors that include high tax rates, poor infrastructure and high cost of power are among factors that have seen companies shun Kenya while those that had already invested in the country scale down their investments or leave. Other factors, they noted, include a few firms that have become dominant in their respective sectors that have frustrated efforts by prospective investors to get into these sectors.

"Companies are saying that the business environment in the country is not friendly for business. Probably they would be referring to policies that have been implemented over time and made the environment harsh," says Dr Patrick Muinde, an economist, adding that the current administration may have upped the ante in putting in place measures that repel more businesses than they are attracting.

Tax compliance

"If you look at policies that have come up recently, particularly the tax policies, one thing that is emerging for both local and foreign investors are the tax compliance requirements. When you are required to comply within 24 hours or five days, it makes it difficult to do business.

"This would mean that you are required to pay tax on goods that have just left the warehouse... as a business, you are waiting for distributors to take the goods to the market and customers to buy the product but you are required to pay the tax before this happens. This means that every day, they have to be worried about running capital.

"Nobody in manufacturing wants this kind of environment... you want to move your goods, to find the best source of materials and monitor how your market is performing and not to be preoccupied about tax compliance. This is very toxic for manufacturing," says Muinde. He noted a key factor, especially for manufacturing, a sector seen as critical for any economy in creating jobs and wealth, is the cost of energy. Kenya has over the years promised the industry lower electricity costs but this has remained elusive, with power costs consistently going up.

Over the last decade, power costs have risen from about Sh20 per unit (kilowatt hour or token) in early 2014 to Sh33.5 per unit this month. This is in comparison to other investment destinations that compete with Kenya for investors and where industries pay half of what Kenyans pay for electricity.

"Data is telling us that Kenya has one of the highest electricity tariffs. It is also because of the taxes and levies imposed on energy," says Muinde.

"For manufacturers, energy can be anything between 30 and 40 per cent of the production cost. That is quite expensive," he adds.

Other factors include the high cost of credit in the country that has seen many firms slow down their plans to expand as they cannot afford to take loans due to current high interest rates.

"Each company has had its own unique path, but what has been common to all of them is the challenging operating environment caused by a series of tax measures that have made the costs of inputs go up while the customers base shrinks," says Ken Gichinga, chief economist at Mentoria Economics.

"To turn this around, we need to create a competitive business environment anchored on low interest rates and lower taxes. This will boost both the production and consumption side of the economy," he says.

Karimi Warui, head of Investment Banking at Renaissance Capital, says the continued decline especially in the manufacturing industry has been a combination of long-term effects of various economic decisions that have had a domino effect.

"Due to higher costs of living mainly due to inflation, consumers have less disposable income, therefore there is less demand leading to lower production," she says. "This is coupled with a higher tax regime that has increased the costs of production as well as a high-interest rate environment, both in the private and public markets, which has made access to financing expensive."

Denis Kabaara, a management consultant, says in addition to the factors that make Kenya uncompetitive when compared to other investment destinations, productivity is low and lacks interlinked value chains.

"We should start by figuring out what we are competitive at. I do not think we have this out. We need to think more about agriculture and agro-processing and building this up. We must also make agriculture productive because, at the moment, it is not productive enough.

"If we want to get to the next level of manufacturing, we have to look at the big things that people complain about. These are things like tax predictability, regulatory hurdles, electricity costs, labour costs and corruption," he says.

Kabaara also notes that failure to attract investors has partly been due to the structure of the economy that has supported few firms that have grown to being monopolies or duopolies in their respective sectors. In trying to protect their turf, the large firms have over time used their muscle to frustrate new entrants into the market.

He adds that due to the big returns that some of the big players are making, they have resisted the attempts to restructure the economy by lobbying and mostly getting their way when it comes to policymaking.

"We need to change the mindset. I think this is something that Kenya Kwanza is trying to do... trying to restructure the economy but not telling us how they are doing. They are trying to grow the economy from a pro-business to a pro-market economy... this is what India has been trying to do. I think it is the same for the Hustler strategy... they are supporting production to create a new base of consumers," he says, adding that in its bid to reform certain sectors, the State has been getting it wrong by not having alternatives to replace the old systems.

"The government is not getting the sequencing right by trying to bring in something new before they have cleaned up the mess in place," he says.

Muinde notes that the Kenya Kwanza regime has not inspired confidence among investors, noting that the administration's plans appear not to have put emphasis on manufacturing despite its potential to create jobs and grow the economy.

"The decision by the companies to come to Kenya may have been due to friendly policies, good tax environment and even tax exemptions but due to these other factors that push up the cost of doing business, the country may no longer be a comparative advantage," he says, adding that the administration's much hyped Bottom Up Economic Transformation Agenda (Beta) has failed to demonstrate the government's commitment to manufacturing.