19th February 2003

Oiling the wheels of industrial growth

As the new government settles down to work, key sectors of the economy are lobbying and positioning to reap from the investor friendly policies the government is expected to put in place. From the perspective of cement dealers, a lot needs to be done to encourage the industry to compete in the regional markets, and even sell more products at affordable rates to local consumers.

While it is a know fact that high energy costs in the country compound the production costs of most industries, the cement industry in particular is heavily affected. Cement production requires three forms of energy – electricity, fuel oil and coal.

Bamburi Cement Limited, the leading cement producer in the country, with more than 60 percent market share, paid Sh630 million for electricity last year, with another Sh603 million going to fuel oil and coal. The pricing of electricity is such that Kenyan companies operating in Mombasa pat 7.43 US cents per Kilowatt hour, while those in Nairobi pay 6.6 US cents. These figures compare very poorly with what obtains in South Africa where the rate is 2.4, Uganda 4.5 and Egypt where it is even much less.
Energy costs amount to about 32 percent of our total production cost of cement. This makes it very difficult for cement produced locally to compete effectively with those from Comesa countries that enjoy better tax regimes. Although the tax on generation of electricity was reduced by 50 percent in the current Finance Bill, the government should consider scrapping the tax completely and recover it from the corporate tax.
Taxing from the outset unwittingly gives unfair advantage to importers who do not produce locally. Taxing the profit makes more sense. Meanwhile the government does not loose any revenue, it only widens its tax dragnet.

The same should apply to Coal, which attracts an excise duty of 15 percent upon importation, mainly from South Africa. Perhaps, as the starting point to address the high power cost in Kenya, the government needs to reform the power generation company, KenGen and transmission entity Kenya Power and Lightning Company – with the overriding objective of making them more efficient.

The government needs to give a tax waiver on all equipment imported by KenGen for purposes of power generation to enable Kenyan goods, especially cement whose production is heavily reliant on power to compete alongside those from Egyptian and South African markets – where there is government subsidy for industrial equipment used to generate power. Such measures would ensure that price benefits are passed on to the consumer.

The other avenue to bring down the cost of power is for Energy Minister Ochillo Ayacko to forge ahead with his move to have the Independent Power Producers (IPPs) renegotiate the rates at which they sell power to KPLC, with a view to making them in tandem with international pricing.

The forex and fuel adjustment levies that the government has guaranteed KPLC in my view, appears to diffuse the motivation by the corporation to operate more efficiently.
There should be no guarantees on costs that the power company would eventually recover until the appropriate safeguards are put in place. The government needs to give tax incentives to potential investors and those already in business.

The obtaining scenario is such that investment deduction and capital allowance are accelerated. What needs to happen is for the government to give a sort of “one-off” tax break so that the deductions and incentives do not become a cash flow headache to firms.

The Customs Department at the Port of Mombasa would also make its work easy by doing away with bureaucratic system of import declaration. The authority should instead inspect the imports at the premises of the importers to avoid the clogging at the port and save importers extra expenditures.

The cement industry, like most others, would woo a lot of investment into the country if the government benchmarks it with the investment-hungry countries like South Africa and Egypt. This can be done by looking at their policies and rationalizing those that inhibit foreign investment in ours. Contrary to what many are to believe, the industry does not need protection, but a level playing field.

Lastly, the government would do the industry a great boost by encouraging the use of cement on road construction instead of asphalt.

Although Kenya Railways Corporation has improved its services lately, it can certainly do better. Business would be guaranteed if it improves its network and operational efficiency.