Create favorable conditions for increased value add in manufacturing
FIGURES: Historically, manufacturing sector's contribution to the economy in Kenya has stagnated at around 10% of the gross domestic product (GDP) and was about 8.4% in 2017. There is renewed interest in the manufacturing sector through the Big 4 Agenda which seeks to increase the GDP contribution of the sector to 15% by 2022.
By Rajul Malde
Manufacturing is the second biggest driver of Kenya’s economy at 10 per cent of Gross Domestic Product after agriculture at 30 per cent. Manufacturing generates significant economic value.
According to the Kenya Economic Survey 2020, the value added by the manufacturing sector to the country’s economy grew consistently over the five-year period (2015-2019) from Ksh 588 billion to Ksh 734 billion, a 24.8 per cent increase.
Manufacturing value is also evident in intermediate consumption – the goods and services utilized as inputs in the manufacturing process – calculated at Ksh 1.8 trillion in 2019. In terms of job creation, formal average annual wages per person paid by private manufacturers in Kenya also grew from Ksh 370,925 in 2015 to Ksh 529,968 in 2019.
Why do these numbers matter? Because they amply demonstrate that the industrial sector’s significance to the economy goes beyond just production of goods. And apart from being a large consumer of goods and services, manufacturing also supports key sectors like agriculture, the source of raw materials.
In order for manufacturing to effectively play its value addition role in the economy, the sector requires an enabling environment. Industrialists cannot invest in technology, knowledge and other essential value addition inputs if the right conditions do not exist.
By the right conditions I mean policies and other interventions geared to reducing the cost of production, providing the appropriate infrastructure, as well as minimizing the burden of taxes and administrative costs like permits and fees levied by national and county authorities.
Realigning the manufacturing sector to the emerging environment created by the pandemic requires increased emphasis on value addition as a key recovery strategy. By raising the net value of output (total output minus intermediate consumption), the target of 15 per cent as the sector’s contribution to GDP is attainable.
Prioritizing investment in increasing value added by industries to Kenya’s economy will not only spur the sector’s recovery but also create additional jobs and promote innovation. How?
By providing incentives for manufacturers to invest in scaling up added value component in the production process. Promoting technological development through research and innovation is key to generating more value out of factories.
Tax allowances on capital expenditure are one such incentive that would promote investment in the latest plant technology. Waiver of fees and provision of essential infrastructure like roads, water and sanitation systems by local authorities would go a long way in attracting direct investments in innovative processing technology.
But no investor wants to put their money where the high cost of production cancels out the benefits of innovation, the most important of which is quality products at reduced cost. A sustainable and competitive industry requires affordable, reliable energy as a basic input.
The cost of power at an average of Ksh 17 per kilowatt hour in Kenya is not competitive by global standards. In China the cost is equivalent to Ksh 3, in India Ksh 9 and Ksh 11 in Egypt, making goods made in these countries essentially cheaper than Kenyan products.
In creating a conducive environment, government should also work closely with industry to craft the right policy execution strategies. For instance, the ongoing process of reducing the cost of electricity, while timely and welcome, needs to be simplified to allow manufacturers to pass on the benefits to consumers without delay.
More value is added to the economy by way of additional taxes paid and improved wages for workers, not to mention, reduced dependence on imported goods thus saving the country much-needed foreign exchange.
Ultimately, investing in value add in manufacturing contributes to responsible consumption of scarce natural resources since less of these resources goes to waste. This is crucial in achieving a more resource-efficient economy in line with Sustainable Development Goal No. 12 underlining Responsible Consumption and Production for a better world.
Mr. Malde is Commercial Director, Pwani Oil Products