TRALAC - Trade Law Centre

Energy-Related Exports Continue to Dominate AGOA

Tuesday, 18 November 2003

Source: The Nation (Nairobi)

Kenya is now ranked third in terms of apparel and textile exports to the United States.

In April, the country overtook Mauritius to get behind Lesotho and South Africa, side by side with a 38 per cent increase in Africa's share of the US textile and apparel market - from 1.55 per cent of the total in first half of 2002, to 1.86 per cent between January and June.

Kenya accounted for 13.2 per cent of the total square metres equivalent of the products sent to the US. The upsurge in the activity follows the accreditation of the country in 2000 under the African Growth and Opportunity Act, a duty-free arrangement which gave a fresh impetus to textile products.

Kenya's textile industry had collapsed after the US shut out several products over alleged transshipment of Asian goods in 1994.

Of the 54 firms operating from the export processing zones last year, textile firms were the majority at 31 if not the most influential. They had ploughed in investment of Sh7 billion out of the total Sh12.7 billion. The investment was followed by printing (Sh3.3 billion) and chemical oils with Sh1.3 billion.

Textile firms employed 25,288 people, trailed by agro-processing with 514, according to the newly released Export Processing Zones Authority annual report.

Other sub-sectors at the zones include computer and electrical, pharmaceutical, service and gemstone concerns.

Separate statistics show that the three sub-Saharan countries, and the fourth, fifth and sixth placed - Mauritius, Swaziland and Madagascar respectfully - accounted for 94.9 per cent of the exports. Some 76 per cent of the apparel exports qualified for preferential treatment.

Despite threats of ending the Agoa arrangement in 2004 over foreign sourcing of garments, the local industry has moved to take full advantage. In the first year of the arrangement (2001), goods worth $58 million were exported to the US from the export processing zones (EPZ). The figure last year rose to $129 million and could be better this year, if the newest statistics are anything to go by.

Previously the zones' contribution to the economy was at best unimpressive. In 1997, they employed a paltry 2,824 people moving on to 3,645 in 1998 and 5,077 in 1999. In 2000 the figure was 6,487 drifting to 13,444 in 2001. Last year the total figure stood at 26,447.

All said and done, the September 2004 deadline for using local fabric - most firms buy from Asia - ominously beckons. The EPZA is blunt in its assessment of the situation: "The capacity for Kenya to produce fabric for use by export firms to the US by September 24 is becoming infeasible. The remaining time is insufficient for the chain to be complete."

The alternative is to buy the goods from this region which would limit value-adding in the economy. A recent World Bank country report on Kenya, and the latest World Investment Report, have expressed similar fears. The authority now advises that Kenya develop capacity to attract investors in this sector. Importantly, the ending of the multi-fibre agreement, barring any other remedial measures, will let in countries like China into the US market on equal terms with sub-Saharan Africa. Whereas the last government and the private sector worked hard o to line Kenya ahead of most countries in ascending to Agoa, little has been seen to be done to cushion the country against the possible fall-out. Kenya's capacity collapsed in the 1980s when fabric industries were mismanaged and went under, along with cotton production. Today, although the few farmers who resumed cotton production are celebrating the rise of prices in some areas from Sh18 to Sh26 a bale, industries are finding Kenyan cotton too expensive. Most farmers, steeled by long-term neglect, have so far stayed put.

Uganda and Tanzania, where the activity has been relatively sustained, are far better off. Kenya's problem can be attributed to lack of economies of scale and the collapse of the supportive regulator, Cotton Seed, Lint & Marketing Board. Issuance of free seeds by the government is just seen as tinkering with the problem. Kenya continues to produce an estimated 30,000 bales yearly against demand of 90,000. Danger looms that this could act as a push factor for firms operating in Kenya.

Processing companies complain that the available cotton is of low quality.

Despite the grim picture, there is a glimmer of hope. The EPZA announced that Alltex EPZ is to put a mill to produce fabric for the domestic players. EPZA says this should start operating by the September deadline, but hoped it will use local ginneries for supplies.

Another medium-term problem has been utilities. Irregular water supply is a unique Mombasa problem for instance. The port town has four zones and has become a hot favourite due to its proximity to the sea. Of the 21 operational zones, eleven are in Nairobi. Other zones are in Athi River (two), while Voi, Kilifi, Malindi and Kerio Valley has one each.

A common thread throughout the zones is electric power. Despite value-added tax concession, firms have to make do with power costing 7 US cents per kilowatt hour, compared to their Agoa competitor South Africa with 1.6, according to the authority. The latter country, together with Egypt and European countries, count power as a 15 per cent variable cost component in their manufacturers, with Kenya chalking up double that rate.

It is clear that recent directives by Energy minister Achilo Ayacko that Kenya Power & Lighting Company work towards lowering its retail price is little cause for optimism as the firm is still stuck in red ink. At the port itself, firms complain of lengthy procedures involving a multiplicity of institutions like the Kenya Ports Authority, Customs & Excise and Kenya Railways. On the bright side, KPA has developed a one-stop shop for all the functions.

The zones lack expertise which has necessitated importation from Asia. However, the EPZA has been emphasising on imparting skills to locals. Disconcertingly, Kenyan firms are only 11 per cent of the total after falling from 13 per cent the previous year.

Bottlenecks aside, the zones have excelled compared to the rest of the export manufacturing sector. From just 4.9 per cent in 1997, they now account for 30 per cent of exports. And from an employment share of 1.6 per cent in the sector in 2002, it made up 11.5 per cent of the total.