Sorting out our Energy and Policies Will Help Grow the Manufacturing Sector.
There is nothing that worries a businessman or an entrepreneur the world over like unpredictable policies. It is something which if it were possible, someone would wish to be ahead of them. In Kenya and largely Africa as a whole, there is something that worries business people quite a lot as well, and that is energy.
For a manufacturer, energy is a critical component of production. Anything that touches on energy touches virtually on every part of the business. Well, speaking of energy, I mean both the power (electric) and the fuel (Oil).
If there were to be anything that would be sorted and in turn accelerate the growth of the manufacturing sector in Kenya, that thing would be energy. To be more specific, sorting the issues around unpredictability in our policies will go a long way to help the sector.
In the course of last week, I went into a supermarket to purchase a few items. As I skimmed through the shelves, I noted an increase in prices of some key basic items. For instance, an increase in the price of cooking oil means an increase in the price of soap since these two are complementary products.
The same could be said of power and the manufacturing sector. Take the cement industry for example, it is a very heavy consumer of power. If the cost of power goes up, the utility payment on electricity goes up and this means an increase in the cost of producing that cement. The simple business logic, now that the objective is to make a profit is to spread the high cost to the consumer.
Additionally, increasing the cost of fuel (to mean diesel or petrol) adds more costs into producing a product. Fact about the manufacturing sector is that it is more about value addition than anything else. Taking a raw material and transforming into something of value.
Take my initial example of cement still. At the manufacturing site, there is need for the raw materials to be processed. There is the calcium carbonate, then the iron ore and then silica as well as alumina. Suppose these materials are not processed at site, they will need to be transported from the mine to the processing site.
An increase in the price of diesel or petrol means an increase in the cost of transportation. Once these materials are at site, they have to be crushed and combined before they can be heated in the kiln to about 2700 degrees Fahrenheit.
To achieve such high temperatures takes quite a hefty power consumption. At the end of the day, the business has to try and balance its metrics in terms of cost of production and the final price of the product in order to remain in business.
It is either the business passes over those costs to the consumer or be rigid to the change and be driven out of business. Yet at the end of the day, it is the price that rules supreme and if the small business cannot compete then it gets out of business. Competing here means avoid over pricing and lose customers and again manage the costs of production and avoid losses.
It is at this point then, that the stability of policies comes into play for the manufacturing sector. Amid the additional taxes that get imposed on the sector irrespective of the size of the business, it is prevalent that its growth needs very serious considerations.
Over the years, the sector’s contribution to GDP has plummeted at 10% and last year saw it go slightly lower as it was in the year 2017. Given the fac that we going into another electioneering year, it may mean a lengthened period of time before it can pick up.
Given the reigning government’s projected growth of the manufacturing sector to 15 % by 2022 under the big 4 agenda, I am tempted to call it a case of the man who goes eating the antelope while he is still hunting it.
It can also be equated to the man who starts climbing the tree from the top. How he gets there first is another issue all together. In other words, the growth of the sector needs first to be built on proper grounds. And lowering the costs of energy is the key one followed by friendly tax coupons for the sector.
I am sure the high energy costs has pushed most organizations to produce their own power. And the ripple effect is that the small business owner who has to begin with the grid power first gets beaten at the point of starting now that he/she may not compete with the guy who has leveraged on the greatest headache in the production chain; the guy producing his own power.
The fact that the government wakes up one morning and increases tariffs such as the fuel cost charge and expects things to remain the same is interesting. And another wakes up the next day and increases taxes levied on oil in general and all of a sudden petrol and diesel costs are high on the roof means we should shelve the whole idea of growing the manufacturing sector.
The taxman comes in with unfriendly tax policies as well and on the extreme closes an eye on the SMEs and then sits waiting for them to grow but unluckily, they die along the way. In other words, the young teenage cow gets milked to death and the owner (government) starts finding the best scientist in the world to come and start researching on why the cow died.
Harmonization on policies must be done to ensure that at the end of the day they are geared towards a common agenda should it be the big four agenda or any other. Let the foundation of growth be strengthened upon a strong policy framework that seeks to root out the pain points as opposed to deepening them.
Should we get it right at this point, even technology items can be manufactured right here in Kenya. Interesting enough, we are trying in the goods and commodities sector but in ICT technology manufacturing, where there is a far greater potential, we are seriously struggling.
We can grow the manufacturing sector immensely is still believe, but first, let us take a step back and begin with weeding out the very components that are hampering its growth key of them being unstable policies, and high energy costs.