Gearing up for industrial take-off

One of the most potent arguments in favour of the Kenyan government’s stance against the introduction of multiparty politics in Kenya is the undeniable economic progress, no doubt one of the most spectacular in black Africa, achieved by the country under one-party rule. A stable political climate, combined with a certain pragmatism in pursuance of a liberal economic policy, ensured that Kenya over the years remained relatively attractive to foreign investors even at the worst of times.

Achieving an average growth rate of 6% in the 1960s, 8% in the 1970s and 5% in the 1980s, Kenya has set its sights in the 1990s on breaking out of its predominantly agricultural economy to embrace one largely based on a broadly diversified export-oriented manufacturing. The aim is to create jobs and bring the fruits of economic progress to the majority of Kenyans for whom growth has so far meant nothing more than a pie in the sky.

This goal would appear timely for the government in the light of current pressures for political change. At about 3.8% per annum, Kenya has one of the highest population growth rates in the world. Unemployment, particularly among school leavers has risen sharply in recent years. So also has inflation in the wake of the Structural Adjustment Programme being pursued by the government. With price increases on basic commodities putting severe strains on the budget of the average Kenyan, the danger of social unrest lurks in the corner. But time is running out. With a workforce currently estimated at eight million, Kenya, according to some estimates, has to create six million new jobs by the year 2000 if it is to go anywhere near meeting demands for employment.

Although agriculture, which already occupies 80% of the working population and accounts for around 20% of wage employment, is slated for expansion (both cash and food crops), the focus is on manufacturing (the potential of which is belived to be far from realised), with the informal sector coming in for special attention.

Kenya, has had the good fortune of having laid a firm foundation for this move. It should be recalled that the country’s industrial sector developed very early because of the early presence in the country of high-income expatriates and as a result of demand for consumer goods in neighbouring Uganda and Tanzania. Thus geared, first and foremost, to import substitution and to the market of the new defunct East African Community, manufacturing grew rapidly, accounting today for 12% of the GDP.

Although the service and manufacturing industries are dominated by the private sector, the government has been very much involved, playing a crucial role not only in pioneering certain industries where there were serious gaps in import substitution but also in adopting policies designed to promote the sector. For example, it took measures to protect local manufacturers against cheap imports, ensured that local financial institutions were vibrant enough to provide credit to industry and set up the Kenya Industrial Estates (KIE) to assist in the industrialisation of the country.

Government policy in recent years has sought to encourage the spread of industry to the rural areas to provide employment and stop the drift of young people to the cities. That policy, according to officials of the Kenya Industrial Estates, has to some extent been successful in the sense that 80% of its 5000 or so assisted projects since 1972 have been located in the rural areas. These projects, which are mainly small and micro enterprises, according to KIE, support rural communities not only in employment but also in meeting demands for-such items as agricultural implements and equipment for food processing. That they failed, however, to stem the exodus from the rural areas or make a significant impact on the employment of Kenya would in itself justify a change in tactics. Although the widespread belief is that Kenya has largely achieved import substitution and that the time has come for it to produce for export, it has become clear in recent years that import substitution as a policy was no longer sustainable. ‘We were counselled quite rightly that we cannot substitute all imports and remain efficient’, explained Mrs Veronica Nyamodi, Director of KIE. Import substitution tends to encourage inefficiency. But that notwithstanding, Kenya’s export forays in recent years have been encouraging; its manufactured exports now include textiles, ceramics, furniture, metal products, wines and spirits not to mention the Tusker beer that is increasingly becoming popular in the United States. The country has also learned how to promote aggressively its exports.

So Kenya is switching to manufacturing for export with a two-pronged strategy: domestic export-oriented industries and Export Processing Zones (EPZs) with the entire world as its target market. But things will not be easy. Markets are not assured and there is the question of investment capital.

Investments

The Kenyan government has had for some years a number of schemes designed to encourage local investors to export. These include, the export compensation scheme, the duty exemption scheme and the manufacturing under bond scheme. They have not had the desired effect for a number of reasons: lack of resources to obtain the necessary technology to produce competitive goods, particularly for the PTA where Zimbabwe is giving Kenya a run for its money, shortage of foreign exchange and inflation which is eating away investment capital.

At the Kenyan National Chamber of Commerce and Industry in Nairobi, officials wear a gloomy face, complaining of lack of dialogue with the government, But it is dear there is no shortage of incentives. The trouble is, that there has been a marked decline in joint ventures and a slight decrease in private foreign investments over the past five years, and as such, the entire manufacturing sector has been robbed of the dynamism it requires.

The government, aware of that trend, took a number of measures, the most notable being the establishment in 1987 of the Investment Promotion Centre (IPC), which is charged with the responsibility of cutting red-tape and facilitating investment, ie a one-stop shop where new investment applications for permissions, registrations, licences and other approvals are treated speedily. ‘It used to take up to three years to get a project approved, but new it takes a maximum of four weeks to get everything processed,’ IPC Managing Director, Silas Ita, told The Courier. Over 229 projects, valued at $371 million, have been processed since 1987, of which 85 are already operational. ‘In my view that is quite satisfactory because, in a climate where the normal lead time for a project to take off is 36 months, we have been able to get 85 taking off within 24 months’, said Ita. The IPC boss says that the Centre receives an average of 100 enquiries every day and That about ten are processed every week - by processed he means the investors have been advised to register the company, discuss the composition of shate-holding arrangements, etc.

Mr Ita admits that the projects ate of small and medium size with capital varying KSh100 million to KSh400 million but adds: ‘You will find that they are mainly joint-ventures with quite heayy foreign investment components operating both urban and rural areas. They cut across all the nectars - tourism, agriculture, commerce and services’. If Mr Ita’s gleeful assertion is anything to go by, Kenya has found in the IPC? the formula for resolving its investment problems. The Centre has adopted high profile promotional activities, with visits to the United Kingdom, France, Belgium, Netherlands, the US, Japan and South Korea. Mr Ita claims there have been positive responses, particularly from Japan. South Africa, however, is a primary target as a source of investment. Now that that the country is emerging from its isolation, the Kenyan authorities have already begun assiduously to woo South African businessmen. Indeed, since the visit of President F.W. de Klerk to Kenya early this year, there have been a number of visits by South African businessmen to probe investment opportunities in the country.

There is certainly no denying Kenya’s attractiveness. There are more than 700 large firms operating in the country of which some 200 are multinationals. Payment of dividends to foreign factors of production in recent years have ranged from $120 million to $150 million annually. It is politically stable, has a well developed financial sector and a good infrastructure that is continuously being maintained and expanded: major projects are indeed underway to upgrade the Nairobi and Mombasa international c airports, and the Mombasa port container terminal is being extended and equipped with the latest technology. These are, of course, part of Kenya’s plan for industrial take-off in the 21st century.

Export Processing Zones

One cornerstone of that plan is the Export Processing Zone schemes. On the drawing board since the early 1970s, Kenya came to the conclusion two years ago there was no other way of realistically industrialising, creating jobs and earning substantial foreign exchange than establishing the EPZs. It has been particularly encouraged by the example of Mauritius which has gone from dependence on sugar to being an exporter of a variety of goods with dramatic improvements in its employment situation and standard of living.

Kenya feels it has one obvious advantage: an abundance of cheap labour. It also hopes to attract enterprises starved of quotas elsewhere. Three EPZs are currently planned. One, the Sameer Industrial Park, went into operation near Nairobi in November 1990. Privately owned, only two companies have so far gone into business there, although three units have actually been taken up. This represents 25% of the twelve available units. A spokesman for Sameer, however, told The Courier last August that 75% of the available spaces were in the process of being rented.

A second zone is being set up at Athi River also near Nairobi. Financed by the World Bank, the construction of sheds, roads and housing for workers will take 15 months and Mr James Magari, the Chief Executive of the Schemes, estimates it will be ready for occupation by February 1993. The third zone at Mombasa is still under study - a study being financed by the African Development Bank.

Early indications are that the industries so far most attracted are textiles and horticulture. It is expected that the EPZs will cream off a lot of skilled labour in the domestic industries. Although this will create job opportunities there, it may have a serious effect on the competitiveness of the export-oriented domestic industries.

There is, however, a danger that the enthusiasm over the EPZ is misplaced. Mauritius, which serves as a model for Kenya, launched its EPZ schemes in the early 1970s and did not begin realistically to reap the rewards for two decades. The rewards for Kenya may not be for the immediate future. Mr Magari though feels otherwise because, according to him, Kenya ‘can avoid the pitfalls that other countries had, by learning from their experiences. All we require is for one of those multinationals to start something in Kenya’. He places great hope on the quota bait. ‘As you very well know, most of those countries which started EPZs are now facing quotas in USA and EC markets, for example in textiles. The investors in those countries are now locking for a different export platform, and we in Kenya intend to take advantage of it’, he said.

A.O.