A Blueprint for Kenya’s Industrialisation

A new industrialization blueprint for Kenya outlines a five-point strategy that aims to make the country a manufacturing and industrial export centre in the coming years. Officially named Kenya’s Industrial Transformation Programme (KITP), the blueprint attempts to expand Kenya’s economy from an export-led and import-substitution policy regime to one that has developed industries. It aims to grow a strong manufacturing sector in Kenya and an economy that will make Kenya Africa’s next industrial power.

The blueprint was released in late 2015 by the Ministry of Industrialization and Enterprise Development in partnership with the Kenya Private Sector Alliance (KEPSA). Kenya’s blueprint will be put into action in June 2016 with the creation of a local processing hub at Mombasa’s Dongo Kundu special economic zone (SEZ). Following this, another hub will be created at the one million-acre Galana-Kulalu irrigation scheme.

The Blueprint’s Five Pillars

The blueprint receives inspiration from the Economic Pillar, one of three pillars central to goals outlined in Kenya’s Vision 2030. Vision 2030 aims to create a robust, diversified, competitive and industrialized Kenya within 15 years and will be driven through the application of five key pillars that focus on building Kenya’s significant strengths.

1.   Pillar one calls for the growth of Kenya’s export engines and focuses on tea, coffee, agro-processing, horticulture, textiles and leather. It is hoped that a focus on these crucial sectors will increase Kenya’s manufacturing to over 15 per cent of GDP, per annum.

2.    Pillar two focuses on Kenya’s development as a food processing hub through growing Kenya’s ability to agro-process imports. It also calls for expansion in fish processing, particularly on Kenya’s coast.  By doing so, the blueprint aims to create over 1 million jobs.

3.    Pillar three will attempt to build local content for resource and infrastructure investments, thereby increasing foreign direct investment (FDI) five times from its current level. It will do so primarily by focusing on the oil and gas sector as well as the construction and materials services sectors in Kenya.

4.    Pillar four will assist in the implementation of policies that will increase the ease of doing business in Kenya, thereby enhancing the non-industrial jobs sector (IT, tourism, wholesale and retail sectors).

5.    Lastly, pillar five calls for the development of Kenyan small and medium enterprise (SME) sector through supporting rising stars and capacity-building through the establishment of model factories.

Capitalizing on Kenya’s Advantages and Addressing Weaknesses

There is no doubt that Kenya sits in an enviable position. It is the fifth-largest economy in sub-Saharan Africa and it has a well-educated labour force.  Kenya is the most industrialised country in East and Central Africa. Kenya’s financial services, banks and mobile money services are robust and developed. Its information technology capabilities are the envy of not only East Africa but the world. Kenya’s infrastructure is also the most advanced in the region. Lastly, Kenya is rich in agricultural resources and is called home by some of the most innovative entrepreneurs globally. By mapping out the vision and classifying specific sectors, Kenya’s government hopes to capitalize on Kenya’s natural advantages and build capacity in key areas, sectors and regions of the country.

A crucial recommendation of the blueprint is for Kenya to leverage its reputation for positive effects. Globally, Kenya is known as the regional hub for trade and finance in East Africa and the natural entry point to the region. The country has a market-based economy with a liberalized foreign trade policy and a good track record when it comes to property rights and attracting foreign direct investment (FDI). Kenya should also use its competitive cost structure (70 per cent cost advantage over the United Kingdom and 50 per cent over South Africa), strong English speaking population, advanced IT and communications infrastructure and proximity to outsourcing markets to gain a vital edge over its competitors. These steps are projected to earn Kenya US$ 200 million in GDP and create an additional 45,000 jobs.

Yet Kenya also has systemic problems that the blueprint attempts to address. For example, despite Kenya’s enviable position in the region, its manufacturing sector has remained stagnant at 11 per cent of GDP for the past decade. As a result, the number of formal jobs in manufacturing has grown at just 7 per cent, per annum from 2010-2014. Kenya’s exports have remained at a mere 15 per cent of GDP, while imports have risen to 40 per cent of GDP. This has created an unenviable situation leading to trade imbalances, a weaker Kenyan shilling and pressure for increased inflation. As Kenya’s blueprint repeatedly highlights, these issues can only be solved by energizing the industrial sector and making Kenya a destination industrial hub for the region, Africa and the wider Indian Ocean basin.

Financial Incentives

In order to achieve its goals, the blueprint calls for sector-specific flagship projects that build on Kenya’s comparative advantages. Given Kenya’s relative wealth and access to capital, and in order to jumpstart public-private partnerships, funds will be allocated by the government as part of Kenya’s blueprint. With the primary aim of fast-tracking industrial investment – especially among financially challenged firms – investors can access Government of Kenya-backed KES 10.5 billion (US$ 100 million) in funds.

A high degree of oversight is also essential to success, and the implementation and results of the industrialisation blueprint will be driven and monitored by the newly-formed Ministerial Delivery Unit with direct oversight from the Presidency.

The Blueprint by Sector

Thanks to its more advanced human capital base, its more diversified economy, and its role as a leader in the information communication revolution in the region, Kenya’s economy is expected to remain strong in the coming years. By focusing on the following sectors, the industrialisation blueprint should multiply and help sustain efforts already in place to increase exports and invest in transport and energy infrastructure. These will help accelerate Kenya’s economic growth and strengthen its position externally.

Information and Technology

Realizing its important place in Kenya’s continued growth, the blueprint places special emphasis on Kenya’s Information and Technology (IT) sectors. There is no doubt that a strong IT market is a critical component of competitiveness in a global market and often enables growth in other industrial sectors. Not only are technologies such as business IT services or mobile communication important for reducing costs, but they also provide efficiency of operations that allows Kenyan industries to keep up with and even surpass the rest of the world.

Kenya’s Ministry of Industrialization and Enterprise Development noted in a press release that the sub-Saharan IT market in Africa is expected to be worth approximately US$ 128 billion by end of 2015. The blueprint highlights that branding, investor attraction, infrastructure and talent are all critical factors in increasing Kenya’s share of the market and continued growth regionally and globally.

Construction and Related Materials Sector

Construction contributes a whopping 5 per cent to Kenya’s GDP, employs 6 per cent of Kenyans and is growing fast, at 7 per cent over the past decade. But local firms are missing out on valuable transportation projects because of a lack of expertise and scale, according to the Ministry of Industrialisation and Enterprise Development. In order to address this glaring deficiency, Kenya’s blueprint calls for an increase in government and business support to local firms so they can effectively compete for contracts on new types of projects, such as complex road building or larger projects with high project values.

Addressing Kenya’s housing shortfall is also a crucial component of the blueprint, which hopes to develop a low-cost housing ecosystem with an accessible and affordable environment to support social housing. Doing so could contribute US$ 200 million in the short term to Kenya’s economy and over 30,000 jobs.

Relatedly, Kenya could begin the development of local content requirements. The idea behind this is to use locally-produced, basic, processed steel in the form of beams, angles, sections and structures rather than foreign steel. By using Kenyan steel, the country could cut down on current steel imports that cost over US$ 485 million. Kenya could also increase its GDP by US$ 80 million and create upwards of 28,000 jobs.

Textiles and Leather
Kenya is uniquely positioned to expand its textile sector on account of relatively cheap labour costs. By branding Kenya as a source of quality, inexpensive textiles, the market could grow exponentially and displace rivals such as Bangladesh which controls 6 per cent of the lucrative American textiles market valued at US$ 84 billion. By contrast, Kenya accounts for only 0.4 per cent of this market, despite figures showing Kenya is 9 per cent less expensive than Bangladesh when it comes to producing textiles. Kenya’s blueprint calls for the development of an integrated textile cluster in Naivasha as a way of boosting Kenya’s textile exports.

When it comes to leather, Kenya again has sizeable advantages. It has one of the largest livestock herds in Africa (60 million head) and an established leather sector. But the sector is underutilized, with 90 per cent of Kenya’s US$ 94 million leather being exported unfinished.

Efforts by other ministries to address this deficiency have been made in the recent past. Industrialization Cabinet Secretary Adan Mohammed travelled with a delegation to Turkey in early 2015. There he held meetings with Turkish investors as well government officials and attempted to market existing and new opportunities in Kenya, particularly its leather industry. Increasing exports of unfinished and finished Kenyan leather to Turkey – which employs nearly 1.5 million people both directly and indirectly in its own leather industry – would likely translate into the expansion of Kenya’s leather industry and more jobs.

Other measures are also needed. Capacity building in the processing of finished leather and leather goods, as outlined in the blueprint, may create an additional 35,000 jobs in Kenya and US$ 150 to 250 million in profits. In order to make this a reality, the blueprint calls for the launching of a leather cluster in Machakos and two further clusters at still to-be-identified locations.

Tourism

Tourism is vital to Kenya. It plays an outsized role in Kenya’s economic growth and directly or indirectly affects the livelihoods of millions of Kenyans. Estimates put tourism at over 4.8 per cent of Kenya’s GDP and employs 4.1 per cent of the country’s population. Recent insecurity, to include terrorist attacks in Garissa and Mpeketoni, have crippled the industry, resulting in displacement, unemployment and the closure of hotels. The ripple effects of this slowdown have been felt across the country, adversely affecting Kenyans who are only indirectly tied to the tourism sector.

Kenya’s government must do more to address insecurity and promote tourism in Kenya. Kenya also needs to revamp its country profile and image – badly damaged by insecurity. This will result in an uptick in the number of tourists visiting Kenya’s pristine game reserves and stunning beaches. If successful, the Ministry of Industrialisation and Enterprise assesses that Kenya could receive many more than the 1.5 million tourists who visit annually. The Ministry cites figures that compare Kenya’s number of tourists to Malaysia, a country with similar natural attractions (beaches, mountains, climate), which receives 25 million visitors, per year. Malaysia does not have any lions, elephants or other charismatic megafauna. As such, Kenya arguably occupies a more enviable position and can attract larger numbers of tourists through rebranding addressing insecurity.

Fisheries

Kenya exports large amounts of fish, mainly Nile perch (for export) and tilapia (for local consumption) from Lake Victoria. Yet overfishing has resulted in the need for sustainable fishing practices in the Lake and the need to properly exploit the fish resources available in Kenya’s Indian Ocean waters.
Kenya’s blueprint focuses heavily on the lucrative tuna catch in the Indian Ocean, estimated at almost one million tonnes. However, only 30 of the 8,600 fishing vessels off the East African coast process their tuna in Kenya. The blueprint calls for the establishment of a fishing port and developing a fish processing zone in Lamu. The Ministry estimates that by doing so, Kenya could create an additional 12,000 jobs and add US$ 150 to 200 million to Kenya’s GDP.

Oil and Gas
The recent discoveries of oil, gas and mineral resources in Kenya are substantial. In order to capitalize on these lucrative resources, Kenya’s industrialisation blueprint argues that it should work on building a “hub” to attract international oil and gas and mining service firms. This services hub would potentially woo industry players to locate in Kenya and thereby build local capabilities.

Government estimates show that capital expenditures in the mining industry are growing at roughly 10 per cent, per year in East Africa. A well-positioned hub in the region could offer up to 70 per cent of mining services to neighbouring countries, with an estimated value of US$ 1 billion annually. The blueprint estimates that at least 35 per cent of this money could be captured locally.

Small & Medium Enterprises
Small and medium enterprises (SMEs) contribute close to 25 per cent of Kenya’s GDP. According to the Ministry of Industrialisation and Enterprise, SMEs are the fastest growing business segment in the economy and employ the approximately 11 million Kenyans, or 50 per cent of the workforce.

The blueprint calls for the selection of fifty of the highest potential SMEs annually in key sectors and then supporting them with access to credit, training and networking assistance. It also hopes to create model factories to provide world-class manufacturing expertise to SMEs. Lastly, it calls for the strengthening of Kenya’s subcontracting policy in order to improve links between large and small players.

Retail and Wholesale
Wholesale and retail trade is one of the key sub-sectors in the industrialisation blueprint of Kenya. There exists high potential and a vibrant wholesale and retail business in Kenya, with wholesale and retail trade accounting 15.2 per cent of the overall growth in the country, after agriculture and ahead of transport and communication. In order to build on this growth, Kenya’s blueprint calls for new capacity-building measure for formal retail establishments and the formalization of SMEs, informal sector workers and craftsmen.

Agro-Processing
More than half of Kenya’s exports are related to agriculture. Increasing Kenya’s exports is essential to the industrialisation of the country. Accordingly, the blueprint has identified key opportunities in agro-processing that will build on Kenya’s significant agricultural potential.

Not surprisingly, the blueprint focuses on Kenya’s all-important tea exports, worth US$ 1 billion annually. Yet almost 97 per cent of Kenya’s tea is exported in bulk form. The blueprint highlights that Kenya can attract a 50 to 100 per cent price premium by promoting “Made in Kenya” brands internationally – including high-quality Kenyan tea – thereby attracting US$ 200 million in value addition and creating over 10,000 jobs. The blueprint also highlights the need for reform in Kenya’s highly regulated tea market that constrains value addition efforts.

Another area that requires addressing is agriculture. Only 16 per cent of Kenya’s exported agricultural output is processed; the rest is exported in raw form. In contrast to Kenya, Tanzania processes 27 per cent, Uganda 34 per cent and Ivory Coast 32 per cent of their respective agricultural outputs.

The industrialisation blueprint calls for doubling the amount of Kenya’s processed agricultural exports. This would directly boost agriculture, create an additional 110,000 jobs and earn upwards of US$ 600 million for Kenya. In order to accomplish this, agro-processing zones will be established in places such as Kisumu, Meru, Galana, Nakuru, Kwale and elsewhere in order to process local commodities like avocadoes, mangoes, cassava, peas, passion fruit and potatoes.

Kenya’s blueprint hopes to take the lead in food processing of imports to the region, which total over US$ 3.8 billion annually. These imports from outside region are in the form of raw and processed commodities such as wheat, palm oil and rice for local consumption. The blueprint calls for taking advantage one of Kenya’s key strengths: the strategic location of the Port of Mombasa. By utilizing this key entry port for imports to the region and establishing a “food hub,” Kenya can import raw commodities in bulk and process and export consumer goods to serve the growing regional market. Estimates show that doing so could earn Kenya an additional US$ 300 million in GDP and create 60,000 jobs.

References
Kenya’s industrial Transformation Programme. (2015, July).  Ministry of Industrialization and Enterprise Development. Retrieved from http://www.industrialization.go.ke/index.php/downloads/282-kenya-s-industrial-transformation-programme
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