THE REASONS FOR THE DECLINE IN THE VALUE OF KENYA’S EXPORTS TO THE EAST AFRICAN COMMUNITY MEMBER COUNTRIES

REPORT BY POLICY AND RESEARCH UNIT MINISTRY OF THE EAST AFRICAN COMMUNITY COMMERCE AND TOURISM

A RESEARCH PROJECT SUBMITTED TO THE PERMANENT SECRETARY MINISTRY OF THE EAST AFRICAN COMMUNITY COMMERCE AND TOURISM

NOVEMBER, 2014

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LIST OF TABLES ........................................................................................................ 6 LIST OF FIGURES ...................................................................................................... 7 LIST OF ABBREVIATIONS ...................................................................................... 8 DEFINITION OF KEY TERMS ............................................................................... 10 ABSTRACT ................................................................................................................. 11 CHAPTER ONE ......................................................................................................... 12 INTRODUCTION....................................................................................................... 12 1.1 Background of the study ...................................................................................... 12 1.2 Statement of the Problem. .................................................................................... 13 1.3 The research objective .......................................................................................... 15 1.4 The research Questions ........................................................................................ 15 1.5 Importance of the Study ....................................................................................... 15 CHAPTER TWO ........................................................................................................ 17 EMPIRICAL REVIEW.............................................................................................. 17 2.1 Introduction ........................................................................................................... 17 2.2 Theoretical Perspectives ....................................................................................... 17 CHAPTER THREE .................................................................................................... 19 RESEARCH METHODOLOGY .............................................................................. 19 3.1 Introduction ........................................................................................................... 19 3.2 Research design ..................................................................................................... 19 2

3.2.1 The Conceptual and the Analytical Model ...................................................... 19 3.3 Target Population ................................................................................................. 20 3.4 Sample design ........................................................................................................ 20 3.5 Data collection method ......................................................................................... 20 3.6 Data Analysis and Presentation ........................................................................... 21 CHAPTER FOUR ....................................................................................................... 22 DATA ANALYSIS, PRESENTATION AND INTERPRETATION........................ 22 4.1 Introduction............................................................................................................ 22 4.2 Respondents’ demographic characteristics .......................................................... 22 4.2.1 Response Rate ..................................................................................................... 22 4.2.2 Industrial Section of the Firm ............................................................................ 23 4.3 Reasons for the decline of Kenya’s Export to the EAC countries .................... 24 4.3.2 Regression analysis of findings ......................................................................... 30 4.4 Discussion of the findings ..................................................................................... 33 CHAPTER FIVE ......................................................................................................... 35 SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS ...... 35 5.1 Introduction............................................................................................................ 35 5.2 Summary of the Findings ...................................................................................... 35 5.3 Conclusions ............................................................................................................ 44 5.4 Recommendations for policy ................................................................................ 44 3

5.5 limitations of the study ......................................................................................... 50 5.6 Areas for Future Research ................................................................................... 50 APPENDIX I: INTRODUCTION LETTER ............................................................ 51 APPENDIX II:QUESTIONNAIRE .......................................................................... 52

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LIST OF TABLES Table 4.1: Response Rate ………………………………………………………… Error! Bookmark not defined. Table 4.2: Reason for the decline of Kenya’s Exports to the EAC countries….

Error!

Bookmark not defined. Table 4.3: Recommended Solutions to Challenges Affecting Exporters

………Error!

Bookmark not defined. Table 4.4: Model Summary……………………………………………………..

Error!

Bookmark not defined. Table 4.5: Coefficients Results………………………………………………….Error! Bookmark not defined.

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LIST OF FIGURES Figure 1.1: Kenya’s Exports and imports to the EAC member countries for the Period 2009-2013……………….…………………………………….. Error! Bookmark not defined. Figure 1.2: Kenya’s Exports to the EAC member countries for the period 2009-2013……………………………………………………....…..Error! Bookmark not defined. Figure 4.1: Industrial Section of the Declining Exporters Bookmark not defined.

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……………………...Error!

LIST OF ABBREVIATIONS BBN-Burundi Bureau of Standards and Quality Control CET-Common External Tariff COMESA-Common Market for Eastern and Southern Africa CM-Common Market CU-Customs Union EAC-East African Community EPC-Export Promotion Council EPPO-Export Promotion Programmers Office EPZ-Export Processing Zone ERC-Energy Regulatory Commission GDP-Gross Domestic Product IDF-Import Declaration Fee IGAD-Intergovernmental Authority on Development KAM-Kenya Association of Manufacturers

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KEBS-Kenya Bureau of Standards KENTRADE-Kenya Trade Network Agency KNBS-Kenya National Bureau of Statistics KPC-Kenya Pipeline Company KRA-Kenya Revenue Authority MEAC-Ministry of East African Community NTBs-Non-Tariff Barriers RDF-Railway Development Fee RBS- Rwanda Bureau of Statistics RRA-Rwanda Revenue Authority SADC- Southern African Development Community SWT-Single Window Territory TBS-Tanzania Bureau of Standards TFDA-Tanzania Food & Drug Association TMEA-Trademark East Africa UNBS-Uganda National Bureau of Statistics URA-Uganda Revenue Authority VAT-Value Added Tax

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DEFINITION OF KEY TERMS Single Window Territory-The Single Window is a trade facilitation tool that seeks to promote both national and intra regional trade by removing the trade barrier of the goods moving across borders, reduces the cost of doing business and thus enhancing competitiveness. Duty Remission Scheme-Trade scheme that enables duty free import of inputs required for export production. Companies in the duty remission scheme were required to sell 20% of their produce locally and 80% to the East African countries. Customs Union- A type of trade bloc which is composed of a free trade area with a common external tariff. The participant countries set up common external trade policy, but in some cases they use different import quotas. Common Market-Group formed by countries within a geographical area to promote duty free trade and free movement of labor and capital among its members. Common markets impose common external tariff (CET) on imports from non-member countries.

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ABSTRACT According to Kenya’s Vision 2030 Economic Pillar; trade is identified as a key driver of Kenya’s economic growth. The development blueprint emphasizes on Kenya’s commitment to be the lead manufacturing point for the regional market and the provider of choice for basic manufactured goods in Eastern and Central Africa; However the long term sustainability of Kenya’s competitiveness in the region in terms of being a regional leader in exports is currently in question after Kenya registered a significant decline in Exports to the EAC countries for the past three years .This study sought to establish the reasons for the decline of Kenya’s exports to the EAC countries and recommended policy intervention. The research was a survey study in with a target population of 663 manufactures whose exports have had an average annual decline of 28,019,810.76.A sample size of 105 respondents was used to conduct the survey. Structured questionnaires were administered to export managers and/or a chief executive officer of the sample companies using direct interviews .the study had a response rate of 76%. The research findings indicate that the reason for the decline is because of a combination of six key factors.1.unfair competitions from cheap Chinese goods accounting for 25% of the decline, 2.challenges associated with the implementation of single window system accounting for 13% of the decline, 4.The adoption of the east African duty remission and non adherence to the customs union protocol accounting for 10% of the decline. 4. Unfaviurable tax regimes in Kenya accounting for 10% of the decline 5.high cost of energy accounting for 9% of the decline and 6.limited pipeline capacity for oil distribution accounting for 8% of the decline .

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CHAPTER ONE INTRODUCTION 1.1 Background of the study Kenya is a member of several trading blocs such as COMESA, IGAD and the EAC. These blocs are key components of Kenya’s trade volumes (Economy Watch, 2010).Of notable importance is Kenya’s role in the re-establishment of the East African community and the adoption of the customs union and the common market protocol; a move which has consistently been informed by Kenya’s desire to pursue export-led growth. Following such commitments to enhance exports growth; the Kenya government through the Ministry of East Africa Commerce &Tourism established a number of institutions to promote Kenya’s exports that include the Export Processing Zones (EPZs), the Green Channel, Export Guarantee and Credit Scheme, Kenya Export Trade Authority (KETA), the Export Promotion Council and the Export Promotion Programmers Office (EPPO). According to Kenya’s Vision 2030 Economic Pillar; trade is identified as a key driver of Kenya’s economic growth. The development blueprint emphasizes on Kenya’s commitment to be the lead manufacturing point for the regional market and the provider of choice for basic manufactured goods in Eastern and Central Africa; by enhancing improved efficiency and competitiveness at firm level. However the long term sustainability of Kenya’s competitiveness in the region in terms of being a regional leader in exports is currently in question after Kenya registered a significant decline in Exports to the EAC countries and particularly to Uganda for the past three years. See below figure showing value of Kenya’s Exports and Imports to and from the EAC countries for the period of 2009-2013.

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Figure 1.1Kenya’s Exports and imports to the EAC member countries for the periods 2009-2013

Data source: KNBS Economic Survey 2014 The Figure 1.1 above shows cumulative values of Kenya’s exports to the EAC countries and the subsequent imports from the said countries. The histogram chart shows how Kenya’s exports experienced a growth stage, maturity and then a decline stage. Consequently imports from the EAC countries have registered a steady increment over the years. The steady inverse relationship has become a worrying trend as it provides a clear indication of underlying problems facing the Kenyan economy and exporters as a whole and hence the knowledge gap that this study seeks to fill.

1.2 Statement of the Problem. A number of research institutions and international development organizations have published reports that indicate Kenya’s exports to the EAC countries have declined for the past there years. According to the (KNBS Economic survey, 2014 ) exports to the EAC partner states decreased by 7.4%

for the period (2012-2013) .Consequently

According to the( KIPPRA economic survey ,2013) Kenya’s exports to the EAC member countries declined from Kshs.137.2 billion to Kshs.134.9 billion in the year (201113

2012).The report further stated that following the implementation of the EAC Customs Union in 2005, it was expected that Kenya would dominate regional trade by diversifying its exports to the EAC market, given its comparative advantage especially in the manufacturing sector but this was however not the case .Below is a graphical representation of the problem statement on Kenya’s declining exports to the region. Figure 1.2 Kenya’s Exports to the EAC member countries for the periods 2009-2013

Data source: KNBS Economic Survey 2014 Figure 1.2 illustrates Kenyan exports to the EAC countries from the period 2009-2013. The trend is an indication that Kenya’s exports have been declining particularly to Uganda and Tanzania. The situation is made worse by the fact that exports to Burundi have not experienced any growth in the past four years and that exports to Rwanda have also started to indicate a declining trend .The decline and stagnation shows inverse expectation of Kenyan exports despite the depreciation of the Kenyan shilling. According to the projections of the (World Bank Kenya State of the Economy Report, 2011) ,strong economic growth of EAC countries combined with the depreciated Kenya shilling should translate into higher regional exports of manufactured goods that will allow Kenya to expand its exports within the region. The (KNBS Economic Survey,2014) report shows economic results contrary to the World Bank 2011 projections; an indication that despite the economic growth in EAC countries Kenya still registered significant decline and stagnation in its export value hence the research question that this study seeks to fulfill.

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Additionally, in recent years, growth in imports has outstripped exports, thus leading to deterioration in external trade balance and current account. Given Kenya’s size, geographical location and diversity of its commodity trade flows, it is the EAC’s leading trading hub. Kenya’s largest and most important trade partner is Uganda. The(East African Community report , 2012) attributed to the country’s lengthy licensing and customs procedures, red-tape, corruption and sluggish commercial dispute settlement process to reduction in Kenya’s competitiveness in the region . Consequently the (KIPPRA economic survey, 2013) noted that growth in Kenya’s manufacturing sectors had stagnated at around 10% since independence resulting in slow export growth despite Kenya being the leader in the region. The shortcoming of these reports is that no independent research specifically intended to find out the reasons for the decline of Kenya’s exports in the region despite the growing importance of the problem to the Kenya government and hence the knowledge gap that this study will be seeking to fill. 1.3 The research objective The objectives of this study are: i)

To identify the reasons for the decline of Kenya’s Exports to the EAC countries

ii)

To identity solutions to Kenya’s declining exports to the EAC countries for purposes of policy intervention.

1.4The research Questions The research objectives lead to following research questions:i)

What are the reasons for the decline of Kenya’s Exports to the EAC countries?

ii)

What are the solutions to Kenya’s declining exports to the EAC countries?

1.5 Importance of the Study The rationale behind this study is to enhance an understanding of the problems faced by Kenyan exporters in the region. This study also attempts to identify the recommendations and the suggestions of the said manufacturers/exporters for purposes of informing policy 15

and towards enhancing long term sustainability and competitiveness of Kenya’s manufacturing industry. According to Kenya’s Vision 2030 Economic Pillar and the Medium Term plans; trade is identified as a key driver of Kenya’s economic growth. The Vision emphasizes Kenya’s intentions to be the lead manufacturing point for the regional market and the provider of choice for basic manufactured goods in Eastern and Central Africa. This research will therefore ensure that the threats to the achievement of Kenya’s vision 2030 economic pillar such as the decline in exports are addressed in a timely manner to enhance sustainable economic development and improvement of living standards of Kenyans. The research will also provide a platform to monitor and evaluate the extent of the adoption of the customs union and the common market protocol by EAC member countries and how possible disparities on the extent of adoption is likely to affect businesses operating within the region. The research will therefore be particularly useful to regional integration institutions and their development partners in Kenya such as the MEAC and TMEA. The findings of this study will therefore provide important guidelines on policy interventions and negotiations by member countries in order to achieve the five pillars of regional integration in the long-run and to ensure that the full benefits of integration are realized by member countries. Direct interviews with some of the leading exporters and manufacturers in Kenya will provide firsthand information on the experience in regional trade since the adoption of the common market protocol. The research will also portray the Kenya government and MEAC in particular in good light within the business community in Kenya as being sensitive to the plight of businesses. The research will provide practical assurance to the business community in Kenya of the government’s commitment to ensuring business success by continually monitoring the operating business environment both locally and internationally and ensuring its conduciveness for doing business. Future researchers will use this study as a basis for their literature review in establishing knowledge gaps for future researches on regional integration. Through this study, policy makers in Kenya will be able to make informed 16

decisions on approaches to matters of regional interrogation and how such policy decisions will affect Kenya’s economy in general.

CHAPTER TWO EMPIRICAL REVIEW 2.1 Introduction This chapter is concerned with the review of literature related to the study. It covers the theoretical framework on the international trade forces of demand and supply and the empirical review. The literature is a review of the regional integration trade agreements relevant to this study as well as the findings of other studies on international trade challenges. 2.2 Theoretical Perspectives There are several theories that attempt to explain consumer choices and preferences and supplier preferences that influence the forces of demand and supply in both local and international trade. A review of such theories will guide the researchers understanding of international trade challenges as it guides the conceptual framework and structuring of research instruments. The theoretical foundation of this study is the theory of demand and supply.

2.2.1. Theory of Demand and Supply According to the theory of and supply; the Demand for a commodity depends upon a number of factors .The demand function can be symbolically expressed as: Q= f (PN PR I T E O) Where: QdN = Quantity demanded for the commodity PN = Price of the commodity 17

PR = Price of related commodity I = Income of consumers T = Taste & preferences of the consumers E = Expectations about the future prices O = Other factors With a decrease in the price of a commodity, the demand for the commodity increases and with a rise in the price of a commodity the demand decreases. Complimentary goods are goods used together for example, the demand for petrol increases when prices of automobiles fall. Substitute goods are those goods which can be used in place of one another. For example: tea and coffee, scooter and motorcycle, etc. The existence of alternative goods (substitutes) to satisfy a given demand divides the total demand among the many different goods. The larger the number of substitutes, the smaller the demand for any of them. Demand for commodity is directly related to the price of its substitute. A fall in price of a commodity results in lowered demand for its substitute, and an increase in the price of a commodity results in increase in the demand of its substitute. The demand for goods also depends upon the income of consumers. With an increase in income, the consumer's purchasing power increases, demand for a commodity depends upon the taste and preferences of a consumer. A change in taste and preferences affects the level of demand for various goods. Consumer's preferences may change because of changes in fashion, habits, and so on. Future prices of goods also affect their demand particularly for consumer durable goods. Since purchase of durables can be postponed more easily than those of non-durables. If for some reason consumers expect prices of certain goods to rise in near future, they tend to demand more for it, in the present even at increasing prices. On the other hand, if they expect prices to fall in the near future, they will demand less of it in the present. A rise in population leads to an increase in the number of consumers. As a result, demand increases. The greater the number of consumers, the greater the market demand for a commodity. Therefore, demand for a commodity is directly related to the size of the population. Equitable distribution of income leads to increase in demand and unequal 18

distribution of income leads to decrease in demand. Higher taxes imposed on a commodity will lower the demand for that commodity, and vice versa. Technical progress (inventions and innovations) leads to production of new attractive quality products at fair prices. Preferences of customers can be affected by advertisement and publicity, leading to greater demand for a product CHAPTER THREE

RESEARCH METHODOLOGY 3.1 Introduction This section outlines the methodology to be used to carry out the research. The study determine the reasons for the decline of the value of Kenya’s exports to the EAC countries and recommended solutions by applying directly, a policy based measure of international trade challenges. The methodology will be explained under the major headings of research design, study area, population definition, survey approach, data types and data collection, data collection instrument, data analysis and presentation framework for data of the entire research.

3.2 Research design Research design refers to the method used to carry out a research. It outlines the methodology used for data collection (Robson, 1993).The study utilized descriptive approach in which both primary and secondary data were used to fully meet the requirements of the problem statement. The research was a survey study of 105 exporters in Kenya whose exports had decline since 2009-2013 for purposes of establishing the reasons for the decline of Kenya’s exports to the EAC countries. The list of the respondents was generated by analyzing annual export values of all exporting companies for the period 2009-2013 for purposes of establishing the declining trends and hence identifying the declining exporters. Structured questionnaires were used as primary data collection instruments and administered to the export managers of the companies were identified as declining using the below stated analytical model

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3.2.1 The Conceptual and the Analytical Model The study used the conceptual model where individual company export decline was established by subtracting current year value of exports from the value of previous year exports for the period (2009-2013) for individual commodities as stated below:

Decline formula: Annual Individual company export decline =current year export value-previous year export value Average annual individual company export decline =sum of annual export decline Number of years of study

3.3 Target Population Target population in statistics is the specific population about which information is desired. According to (Ngechu ,2004) a population is a well-defined or set of people, services, elements, and events, group of things or households that are being investigated. The population of study includes all Kenyan exporters to the EAC Countries whose exports registered an average decline from the period (2009-2013).According to KRA export data there are 2,391Kenyan exporters to the EAC markets. However approximately 663 exporters registered an average annual decline of Shs. 28,019,810.76 between periods (2009-2013); hence the population of study is 663 Kenyan exporters whose exports registered average annual decline in their total exports between periods 2009and 2013.

3.4 Sample design The sampling plan describes the sampling unit, sampling frame, sampling procedures and the sample size for the study. Out of the targeted population of 663 exporters; the study sample size of 16% of the targeted population was used resulting in a sample size of 105

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respondents. The 105 sample of the respondents was selected using value ranking technique where the top 105 declining exporters were selected as a sample of the study.

3.5 Data collection method The second phase of the study involve use of primary data, collected using questionnaires containing both structured and unstructured questions through direct interviews with the chief executives officers and or export managers of the sampled companies. The questionnaires were divided into 3 sections. Section A featured the demographic information of the respondents. Section B dealt with reasons for the decline of Company exports to the EAC countries. Section C featured investor recommendations for policy intervention. The basic data collection method employed was use of direct visits. Responses are sought from company chief executive officers and/or export managers who have been in the industry for at least five years.

3.6 Data Analysis and Presentation The data was then collected, edited, coded, ranked, classified and tabulated following the variables in the study. Data classification reduced data into homogeneous attributes that enabled establishment of meaningful relationships between variables. Two statistical methods; descriptive and inferential analysis were applied to measure and determine the relationship that exists among the collected data. Linker scale, mean, standard deviation, Regression analysis and correlation analysis tools were used to test the relationship between the variables over time. The general information statistics of the analysed data was presented by use of tables and graphs .Variance analysis using standard deviation and spearman’s coefficient of correlation were used to understand strength of the relationships between the variables of study. The research findings were presented using frequency tables, percentages and bar graphs as appropriate. Inferential statistics with a confidence interval of 95% interval was used to test the margin of error and the applicability of the research findings.

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CHAPTER FOUR DATA ANALYSIS, PRESENTATION AND INTERPRETATION

4.1 Introduction This chapter involves data analysis, interpretations, discussions and presentation of the research findings drawn from the research instrument. This

chapter

presents

the

analysis and findings of the study as set out in the research methodology. The research data was gathered exclusively through use of structured questionnaires as the primary research instrument. The questionnaire was designed in line with the research objectives of the study.

4.2 Respondents’ demographic characteristics This section is an analysis of the demographic information of the individual respondent organizations involved in the study. The general understanding of the respondent characteristics provides a guideline towards interpreting the research findings and also increases the reliability of the research findings.

4.2.1 Response Rate The study targeted 105 respondent companies whose exports declined from the period 2009 to 2013. The researchers managed to collect data from 80 out of the 105 targeted respondents. The export managers and or the chief executive officers of the 80 companies; fully answered the questions mentioned in the research instruments resulting in a 76% response rate. This response rate is considered adequate since according to (Mugenda and Mugenda, 1999) a response rate of 70% and over is excellent and adequate for analysis and reporting. Table 4.1 Response Rate TAREGET POPULATION

105

REPONSES

80 22

RESPONSE RATE

76%

4.2.2 Industrial Section of the Firm The study sought to establish the industrial section of the individual companies for purposes of identifying the extent of the decline in exports in different sectors and the level of impact in those sectors. This is particularly important in indentifying industries most affected by the decline and it also enables the researcher to draw conclusions based on the demographic information of the respondents. The companies affected were mostly in manufacturing and oil distribution. Manufacturing was further subdivided into several sub sectors. These industrial sectors were grouped into Cement and construction industry, Electrical equipment manufacturers, Export recessing zone ,Animal feeds farm inputs and chemicals industry, Food processing industry, general consumer products manufacturers , General suppliers, Glass manufacturing, Industrial chemicals, Telecommunications and technology, Automobiles and accessories, Energy and petroleum ,paper and plastic packaging, Pharmaceutical products ,Print industry, Steel fabrications and metal related products ,Textile industry and Wood products industry. The findings are shown in Table 4.2 below Figure 4.1 Industrial Section of the Declining Exporters

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The findings in Table 4.2 indicate that the most affected industry are those in the food processing industry ,steel fabrications and metal related products which accounts for 36% of the respondents each with a rate of 18%. Other sectors of manufacturing affected by the decline in exports include the cement and construction industry at 6%, electrical equipment manufacturers at 1%, manufacturing companies at the Export processing zone at 1% ,animal feeds , farm inputs and chemicals industry at

3% ,

general consumer products at 6% ,general suppliers at 9% glass manufacturing at 4%, industrial chemicals at 5%, telecommunications and technology at 3%, automobiles and accessories at 5% , energy and petroleum at 10% ,paper and plastic packaging at 5%, pharmaceutical products at 1%,print industry at1%, textile industry at 3% and wood products industry1%. The findings above indicate that the decline in Kenyan exports to the EAC countries has been witnessed in various industries in Kenya’s economy especially in the manufacturing sectors: food process and metal fabrication. Other sectors are also represented as shown in table 4.2.This therefore indicates that the challenges facing these manufacturers are spread out in various sectors manufacturing and that the only other sector not in manufacturing is the oil and gas distribution. The demographic statistics also indicate that the international trade challenges have significantly affected the manufacturing sector in Kenya and are currently in need of immediate policy intervention. 24

4.3 Reasons for the decline of Kenya’s Export to the EAC countries The main objective of the study was to determine the reasons for the decline of Kenya’s exports to the EAC countries. Respondents who had consistently registered a decline in their exports since 2009 to 2013 were asked through direct interviews and use of structured questionnaires to indentify the reasons for the decline of their company exports to the EAC countries. Using the initial pilot study the researchers were able to identify the list of all possible challenges that guided in the structuring of the questionnaire. The respondents consequently were asked to state the percentage contribution of each of the mentioned challenges to their total exports decline. This was particularly important as it adequately informed the regression model. The findings on the reasons for the decline are shown in table 4.3 Table 4.2 Reason for the decline of Kenya’s Exports to the EAC countries REASON FOR THE DECLINE Unfavorable Tax Regimes and practices in Kenya ;VAT ,IDF,RDL Unfair competition from imports from china to the EAC Countries Challenges associated with the implementation of the single window system High cost of electricity and alternative energy sources Lengthy and inconsistent customs procedures in TZ and UG Confusion surrounding the implementation of EAC DRM and EAC CU

F

%

SD

MEAN CNT

35 17% 0.158

4.1

10%

32 15% 0.180

5.0

25%

31 15% 0.188

5.0

13%

28 13% 0.211

3.5

9%

18

8% 0.300

3.9

10%

16

8% 0.320

3.9

10%

Competition from established local industry Discrimination ,harassment ,Corruption and protectionist activities The limited pipeline capacity due to limited infrastructure

10

5% 0.383

2.0

5%

10

5% 0.383

1.0

2%

7

3% 0.416

3.5

8%

The effect of devolution and county levies

7

3% 0.416

0.4

1%

Competition from COMESSA imports Underdeveloped and General industry decline in Kenya The south Sudan crisis affected Uganda’s

4

2% 0.451

0.5

1%

4

2% 0.451 1%

0.4 0.4

1% 1%

25

Distribution channels

3

0.463

Subsidiary establishment Government bureaucracy and corruption in Kenya

2

1% 0.475

0.4

1%

1

0% 0.488

1.0

2%

Exchange rate volatility

1

0% 0.488

0.2

0%

Increased local demand Kenya’s products being considered substandard Perception that foreign brands are more superior

1

0% 0.488

0.2

0%

1

0% 0.488

0.1

0%

1

0% 0.488

0.1

0%

The findings in table 4.3 above indicates that the respondents strongly agreed to a very great extent that unfair competition from cheap imports from China to EAC countries have significantly contributed to the decline of Kenya’s exports to the EAC countries.15% of the respondents mentioned unfair competition from cheap imports from china to the EAC countries as contributing to the decline with a mean of 5 and a standard deviation of 0.18 .A mean of 5 according to the likert scale indicates that the challenge has affected exporters to a very great extent and small standard deviation of 0.18 is an indication that the challenge cuts across all the industries . The respondents further categorized imports from China to the EAC Countries as either ‘‘intelligent counterfeits”, substandard goods or goods whose cost insurance and Freight(CIF) is undeclared so that the import duty paid is significantly small or are declared as intermediate goods whose import duty charged is only 10% other than the ideal 25%.The respondents stated that the above classification of Chinese goods is what makes it very difficult to compete fairly in combination of other challenges discussed in subsequent paragraphs that make Chinese goods even more attractive to low income earners in the EAC countries. The second challenge identified by the respondents is the challenges associated with the implementation of the Single window customs territory .15% of the respondents stated having been affected by the challenges associated with the implementation of the single 26

window territory .The challenge had an average mean of 5 meaning it has significantly affected exporters to a very great extent with as standard deviation of 0.188 an indication that the challenge is cut across various sectors in the manufacturing industry. The third most significant challenge identified by the respondents is unfavorable tax regimes and practices in Kenya associated with pending VAT refunds ,industrial development fund levy( IDF) at 2.5% and the railway development fee at 1.5% as having contributed significantly to a great extent to the decline of Kenya’s exports to the EAC countries with 17% of the respondents indicating to having been affected by the unfavorable tax regimes in Kenya that is associated with increased cost of maintaining financial liquidity and additional costs of production. Despite its frequency percentage being slightly higher than that of unfair competition from cheap Chinese goods and the challenges associated with the single window territory; its severity on the impact on exports decline is slightly smaller compared to the two hence the average likert scale mean of 4.1 an indication that it has affected exporters to a great extent and with the lowest standard deviation of 0.158 an indication of a widely accepted view by the respondents. The respondents also identified the confusion surrounding the implementation of EAC Duty Remission scheme and the Implementation of the Customs union protocol. This was one of the factors causing the decline in Kenya’s exports to the EAC with 18% of the respondents indicating having been affected to a great extent by the challenge with a mean of 3.9 likert scale rating and a standard deviation of 0.32 an indication that the challenge is of a widely accepted view by the respondents. The challenge accounts for an average of over 8% in total export decline. The respondents mostly affected by this challenge are those who were previously in the Kenya duty remission scheme. Another challenge identified by the respondents is the existence of lengthy and inconsistent customs procedures particularly in Tanzania. With 8% of the respondents affected by the challenge to a great extent with a mean of 3.9 on the likert scale rating and a standard deviation of 0.3 an indication that it is a significant challenge and that view is widely accepted by the respondents. High cost of electricity and alternative 27

energy sources in Kenya was also identified as another challenge that has contributed to the decline of Kenyan exports to the EAC countries to a great extent by 13% of the respondents with a mean of 3.5 on the likert scale rating and a standard deviation of 0.211 an indication that it’s a widely accepted view. The respondents in the oil and gas distribution who account for 3% of the respondents, indicated that the reason for the decline in their exports was due the limited pipeline capacity associated with limited infrastructure in the pipeline distribution network as a result of using same infrastructure despite the consistent increase in local consumption of petroleum products in Kenya for the past ten years. The challenge was identified as having affected the sectors to a great extent and accounts for over 10% total decline in exports. The challenge however has a slightly higher standard deviation of 0.416 due to the fact that the challenge was unique to the oil distribution sector. 5% of the respondents identified competition from established local industry in Uganda as the reason for the decline in their exports with a mean of 2 on the likert scale rating,an indication that it affected the respondents to a little extent with a standard deviation of 0.38, an indication that the challenge does not cut across all the sectors as compared to the already discussed challenges. On average the respondents indicated that the challenge accounts for 2% of total decline in exports. Competition from COMESA imports particularly from Egypt was also identified as a reason for the decline of Kenya’s exports to the EAC countries by 2% of the respondents with a mean of 0.5 and a standard deviation 0.451, an indication that it affected the respondents to a little extent .This challenge accounts for 2% decline in Kenya’s exports Other challenges mention by 10% of the respondents that have affected them to a little extent and which account for 7% decline in Kenya’s exports to the EAC countries include government bureaucracy and corruption in Kenya, subsidiary establishment in EAC countries by Kenyan firms ,underdevelopment and general industry decline in Kenya ,the effect of devolution and the introduction of county levies ,the South Sudan crisis, exchange rate volatility ,increased local demand, the perception of Kenya’s products as being substandard and the perception that foreign brands are superior. 28

4.3.1 Recommended Responses /solutions to the Challenges The second objective of the study was to identify recommended solutions to the challenges identified as causing the decline of Kenya’s Exports to the EAC countries. The purpose of this section was to guide and inform the researchers in their recommendations for policy in chapter five. The respondents were asked to state the recommended policy interventions to the challenges they mentioned as having contributed to the decline of their exports to the EAC countries. Table 4.4 below is a summary of all recommended policy interventions

Table 4.3 Recommended Solutions to Challenges Affecting Exporters

RESPONSE STRATEGIES Additional user training, feedback surveys and support programs for SWCT

MEAN SD 5 0.181

Monitoring of the implementation of the CU protocol Affirmative action in protection of local industry from cheap Chinese goods

5.0 0.189

Review of the east African duty remission scheme act Benchmarking cost of electricity with competing countries &energy planning

4.8 0.322

Timely vat refunds and elimination of ,IDF,RDL Establishment of clear communication channels between government and private sector Enhancement of the peace process and inclusion of south Sudan into the EAC Sensitization and capacity building in Tanzania on removal of trade barriers

4.5 0.213

Adoption of monetary union

3.2 0.491

Adoption of import substitution policies

3.0 0.528

Harmonization of central and county government levies Expansion of pipeline distribution network and storage capacity enhancement Joint EAC anti-corruption strategies and policies

2.8 0.555

29

5.0 0.159

4.7 0.302

4.3 0.418 3.8 0.385 3.4 0.423

2.6 0.531 2.2

0.543

The respondents strongly recommended to a very great extent additional user training and support programs on the use of Single window territory as well monitoring and evaluation of the program performance through feedback surveys. Other response strategies strongly recommended to a very great extent include monitoring of the implementation of the Customs Union protocol, affirmative action in protection of local industry from cheap Chinese goods review of the East African duty remission scheme Act, benchmarking cost of electricity with competing countries &energy planning, timely VAT refunds and elimination of IDF, RDL. The respondents stated that there was need for establishment of clear communication channels between government and private sector so that complaints relating to regional trade can be acted upon immediately. The respondents recommended to a very great extent the need to enhance the peace process in South Sudan and inclusion of South Sudan to the EAC. Other recommendations include sensitization and capacity building in Tanzania on removal of trade barriers, adoption of monetary union protocol, adoption of import substitution policies, harmonization of central and county government levies, expansion of pipeline distribution network and storage capacity and joint EAC anticorruption strategies 4.3.2 Regression analysis of findings A multivariate regression model was applied to identify the extent to which each of the indemnified challenges has contributed to the decline of Kenya’s exports to the EAC countries in order to establish the predictor values. The logistic regression used in this model was: Y = α + β1X1 + β1X2+ β1X3+ β1X4+ β1X5+ β1X6+ β1X7 β1X8 + β1X9+ β1X10+ β1X11+ β1X12+ β1X13+ β1X14 + β1X15+ β1X16 + β1X17+ β1X18+ β1X19+ β1X20 + β1X21 +ẹ Where Y=the total decline of Kenya’s exports to the EAC countries 30

α = Constant Term β1= Beta coefficients X1= unfair competition from imports from china to the EAC Countries X2= challenges associated with the implementation of the single window system X3= unfavorable Tax Regimes and practices in Kenya; VAT, IDF, RDL X4= confusion surrounding the implementation of EAC, DRM EAC and CU X5= lengthy and inconsistent customs procedures in TZ and UG X7= high cost of electricity and alternative energy sources X8= the limited pipeline capacity due to limited infrastructure X9= competition from established local industry X10= discrimination, harassment, Corruption and protectionist activates X11= competition from COMESA imports X12= Government bureaucracy and corruption in Kenya X13= subsidiary establishment X14= underdeveloped and General industry decline in Kenya X15= the effect of devolution and county levies X16 = underdeveloped and General industry decline in Kenya X17= the south Sudan crisis X18= Exchange rate volatility X19= increased local demand X20= Kenya’s products being considered substandard X21= Perception that foreign brands are more superior ẹ = Error Table 4.4 Model Summary Model 1

R 0.98

R Square 0. 9604

Adjusted Square 0.96

R Standard Error of the Estimate 0.4216

a) Predictors: (Constant): unfair competition from imports from china to the EAC Countries, challenges associated with the implementation of the single window territory, unfavorable tax regimes and practices in Kenya, confusion surrounding the 31

implementation of EAC duty remission scheme and the EAC Customs Union, lengthy and inconsistent customs procedures ,high cost of electricity and alternative energy sources, limited pipeline capacity ,competition from established local industry, discrimination ,harassment ,corruption and protectionist activities, competition from COMESA imports, government bureaucracy and corruption in Kenya, subsidiary establishment, underdeveloped and general industry decline in Kenya, the effect of devolution and county levies, South Sudan crisis, Exchange rate volatility, increased local demand, Kenya’s products being considered substandard and perception that foreign brands are more superior b) Dependent variable: Total decline in Kenya’s Exports to the EAC countries The R Square is called the coefficient of determination and tells us how the challenges facing exporters in Kenya relates to decline in Kenya’s Exports to the EAC countries.The independent variables that were studied explain 94% of the factors leading to the decline of Kenya’s exports to the EAC countries as represented by R Squared (Coefficient of determination). This therefore means that other factors not studied in this research contribute 4% to the total decline of Kenya’s exports to the EAC countries. Table 4.6 Coefficients Results Coefficientsa

Model

(Constant) unfair competition from imports from china challenges associated with the implementation of the single window system unfavorable Tax Regimes and practices in Kenya confusion surrounding the implementation of EAC DRM and EAC CU lengthy and inconsistent customs procedures in TZ and UG high cost of electricity and alternative energy sources The limited pipeline capacity due to limited infrastructure competition from established local industry discrimination ,harassment ,Corruption and protectionist 32

standardized coefficient Std. B Error 0 0 0.2469 0.1800 0.1276 0.1033

0.1876 0.1582

0.0982 0.0970 0.0884 0.0793 0.0504 0.0246

0.3200 0.3003 0.2113 0.4163 0.3828 0.3828

activities Government bureaucracy and corruption in Kenya competition from COMESSA imports subsidiary establishment industry decline in Kenya The effect of devolution and county levies The south Sudan crisis Exchange rate volatility increased local demand Kenya’s products being considered substandard Perception that foreign brands are more superior

0.0126 0.0239 0.0101 0.0101 0.0088 0.0088 0.0038 0.0038 0.0013 0.0013

0.4513 0.4876 0.4753 0.4513 0.4163 0.4632 0.4876 0.4876 0.4876 0.4876

The study used ANOVA to establish the significance of the regression model from which an F-significance value of less than 0.05 was established. The model is statistically significant in predicting how the identified challenges account for the decline of Kenya’s exports to the EAC countries. This means that the regression model has a confidence level of above 95% hence high reliability of the results. The established regression equation was; Y = 0 + 0.25X1 + 0.13X2+ 0.10X3+ 0.10X4+ 0.10X5+ 0.09X6+ 0.08

X7+0.05X8+0.02X9+

0.01X10+ 0.02X11+ 0.01X12+ 0.01X13+ 0.01X14 +ẹ 4.4 Discussion of the findings The regression analysis above established that holding all factors constant, a unit increase in imports from China to the EAC countries lead to 0.2469 decreases in Kenya exports to the EAC countries. A unit increase in the challenges associated with the implementation of the single window territory leads to 0.1276 decreases in Kenya’s exports to the EAC countries. A unit increase in unfavorable tax regimes in Kenya has lead to a 0.1033 decrease in Kenya’s exports to the EAC countries. A unit increase in confusion surrounding the implementation of EAC duty remission scheme and the EAC Customs Union has lead to a 0.0982 decreases in Kenya’s exports to the EAC countries. A unit increase in lengthy and inconsistent customs procedures lead to 0.0970 decreases in Kenya’s exports to the EAC countries. 33

A unit increase in the cost of electricity and alternative energy sources has led to a 0.0884 decreases in Kenya’s exports to the EAC countries. A unit increase in the limited pipeline capacity led to 0.0793 decreases in Kenya’s exports to the EAC countries, a unit increase in competition from established local industry has led to a 0.0504 decrease in Kenya’s exports to the EAC countries. A unit increase in discrimination, harassment, Corruption and protectionist activities led to a 0.0246 decrease in Kenya’s exports to the EAC countries. A unit increase in competition from COMESA imports led to a 0.0126 decrease in Kenya’s exports to the EAC countries; A unit increase in Government bureaucracy and corruption in Kenya has led to a 0.0239 decrease in Kenya’s exports to the EAC countries. A unit increase in subsidiary establishment led to a 0.0101 decrease in Kenya’s exports to the EAC countries .A unit increase in industry decline in Kenya has led to a 0.0101 decrease in Kenya’s exports to the EAC countries. A unit increase in county government levies has led to a 0.0088 decrease in Kenya’s exports to the EAC countries .A unit increase in the South Sudan crisis has led to 0.0088 decrease in Kenya’s exports to the EAC countries. A unit increase in exchange rate volatility has led to 0.0038 decrease in Kenya’s exports to the EAC. A unit increase in increased local demand has led to 0.0038 decreases in Kenya’s exports to the EAC .A unit increase in Kenya’s products being considered substandard has led to a 0.0013 decrease in Kenya’s exports to the EAC. A unit increase in perception that foreign brands are more superior led to a 0.0013 decrease in Kenya’s exports to the EAC.

34

CHAPTER FIVE SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS 5.1 Introduction This chapter presents a summary, conclusions and recommendations of the study. Section 5.2 summarizes the key results found, while section 5.3 draws the conclusions. Section 5.4 notes the recommendations from the findings of the study. Section 5.5 outlines the limitations of the study while section 5.6 gives suggestions for further research.

5.2 Summary of the Findings The main objective of the study aimed at establishing the reasons for the decline of Kenya’s exports to the EAC countries. The findings on the demographic information of the respondent’s greatly enhanced the reliability of the research findings. The study found out that majority of the respondents was in the manufacturing industry and oil distribution business. The respondents in the manufacturing industry were widely distributed from food processing to metal fabrication. This is an indication that the decline in exports in Kenya mainly affected all the sectors in the manufacturing industry. The study also found out that the major challenge leading to decline in Kenya’s exports to the EAC countries is unfair competition from cheap Chinese imports to the EAC countries with the challenge accounting for over 25% of the total decline in Kenya’s exports to the EAC countries. China’s trade with Africa has tremendously grown over the past 14 years. This growth has been on a steady increase making China Africa’s single largest trading partner, surpassing both the European Union (EU) and the United States (Daly, J., March 2, 2014). In 2014 Chinese-African trade surpass $200 billion.) China has become a key player in trade, investment and development co-operation in Kenya. Although mainly in the construction and manufacturing sectors, Chinese investments in Kenya have attracted praise and condemnation in equal proportion from various quarters. In particular, their efficiency in completing projects contrasts with the low quality of Chinese products sold in Kenya and unfair market practices adopted by Chinese firms. Whereas according to the Chinese, their economic relation with Kenya is 35

built on the principles of sincere friendship, equality, reciprocal benefit and win-win cooperation, trade figures tell a different story. Respondents interviewed expressed a huge concern over the proliferation of Chinese goods into the East African markets. Exporters across the board: ranging from exporters of aluminum, steel products, textile to computers and accessories all echoed the above sentiments. According to the respondents, importation of Chinese goods has a detrimental multiplier effect on Kenyan exports. Because Chinese firms enjoy much lower costs of production, their goods are much cheaper than Kenyan goods hence lowering the competitive advantage previously enjoyed by Kenyan products in the EAC. Likewise, the respondents classified Chinese exports to the EAC countries as either sub-standard goods, counterfeits or goods whose cost insurance and freight is under declared so that the cost of import duty paid is low. Respondents in the steel, aluminum, textile and metal works sector lamented that even if they sell at cost, the Chinese products still offer much lower unit prices making it impossible to compete favorably. A respondent company manufacturing poly-propylene woven bags has lost its entire Tanzanian market due to cheaper Chinese products. Some respondents lamented over the tax discrepancies imposed on Chinese goods. They said that some of those goods are declared as intermediary goods yet they are finished goods. Therefore, only subject to 10% import duty as opposed to 25% import duty. This has given the Chinese goods another upper hand over locally manufactured goods. Many of these respondents felt helpless when competing with goods imported from China. Many felt that the EAC governments needed to do more to protect them against this competition which they term unfair. One of the respondents in the hair additions industry decried that there had been several cases of interception of products already in the market, whose source was China, but the goods were passed off as the manufacturer’s products. This occurred mainly in Uganda and Tanzania where the measures to protect local industry seem not to apply when they affect Kenyan manufacturers. According to an article in the Business Daily (Business Daily, 2013) trade in counterfeits has grown into a Kshs70 billion annual businesses rivaling key foreign exchange earners 36

like tourism, tea and horticulture. Several respondents noted that counterfeits imported into East African markets from China are slowly killing local industries. They highlighted that counterfeiting has taken an intelligent twist where it constitutes only a slight variation in the brand name and logo. This makes it difficult for the consumer to distinguish between the genuine product and the counterfeit. One of the Respondents has taken a beating from cheap imported counterfeits that saw the plant operate at about 25% of its capacity. Due to unrelenting competition from these low cost imports, it had to shut down its manufacturing plant letting go of 99% of employees. They have also had to change their business model from manufacturing to a more commercial-oriented outfit. They now import their commodities from their affiliate in Egypt to sell locally. The Venn diagram below is respondents classification of Chinese goods imported to the EAC markets.

Respondents commented on the immense institutional incapacity by the standardization body. They noted that the standardization body does not seem to have capacity to handle the current plethora of counterfeit goods nor do they have adequate measures to avoid their entry in the first place. Respondents noted that importation of cheap Chinese goods is not only a Kenyan problem but more so an East African problem as well. The threat of cheap goods and their detrimental effect to local industries cuts across the region. The effect is even worse in other EAC countries whose industries are in their infancy stage. 37

Therefore, there should be a joint regional effort to protect local industries. May 2014 saw the launch of the single window system by the East African heads of state. The Single window system aims at promoting both national and intra regional trade by removing the trade barrier of the goods moving across borders, reduce the cost of doing business and thus enhance competitiveness. However despite the potential benefits, just like any other project in its implementation stages; there have been a number of obstacles particularly in regard to the understanding of the system itself, the complexity associated the compliance requirements, project support requirements and overall change management programs. Consensus among the Respondents interviewed is that the Single Window System is indeed a good system. In fact respondents in the oil and gas industry were full of praises for the single window territory as it was good for their business. This could be attributed to the fact that some of the players in the oil and gas industry were part of the pilot project and had therefore had the opportunity to master the new system. However 15% of the respondents indicated that they were experiencing challenges with the system and this has added to the list of the problems already affecting exporters in Kenya. The respondents indicated that there was inadequate user training and capacity building on how to use the system effectively for business. The respondents indicated in most occasions when KENTRADE invited them for training their efforts were usually frustrated by system downtimes and hence not learning much from the KENTRADE training program. In fact one of the biggest impediments to the implementation of the SWT was frequent system downtimes that significantly delayed the export process. The respondents indicated that frustrated importers who find the new system too complex to learn or too expensive to comply with and is not adequately supported by the institutions enforcing it have opted to import from China and Dubai, something they are quickly learning and appreciating given that imported goods from outside EAC countries seem not to be subjected to the same system requirement making such transactions more appealing to the importers who are resistant to change. The issue of Institutional incapacity to adequately carry out their mandate such as user 38

training, follow up support ,communications and lack of expertise even by the institutions themselves came out strongly . They noted that usually when they have challenges when using the system they do not know whom to contact for direction. The institutions mentioned were KRA and KENTRADE. The respondents indicated that even the institutions enforcing the new law did not understand the new system very well. A phone call to KRA and KENTRADE would lead to several call transfers that usually do not yield much as there was no particular person known to the exporters as being an expert in that field. With the new system the export starts with sending an invoice to the importer. The importer then pays the taxes on the goods to be imported .Once taxes are paid the importer sends the document online to the seller in Kenya indicating the goods to be imported, the quantity and the truck to be used and most importantly the sealing pin code; the sealing pin is used by the SGS agents to securely lock and unlock each truck. Once documentation is complete the goods are loaded and the truck is then sealed by the SGS representatives after verification of the goods by the KRA agent, URA agent for goods going to Uganda and of course the clearing agent. This therefore means that a single transaction requires the presence of all the four representatives of the mentioned agencies. The problem with this process is that goods can be invoiced but the importer can take several days to pay for taxes partly due to not understanding the process and partly due to insufficient cash at the time, making the manufacturer /exporter incur additional storage costs and delays. The system also complicates the financial reporting as an invoice is considered a sale when in many cases the goods have not left the manufacturers premises, there were cases where goods invoiced had not been dispatched for more than a month. The respondents also wondered if the system allowed credit sale transactions. The system gets even more complicated when one truck is being used to transport goods purchased differently from different manufacturers a phenomenon which is common with many Ugandan trucks; many importers prefer to load goods from different manufacturers in one truck for purposes of attaining efficiency, resource utilization and cut down on 39

transport costs. However the problem of sealing and unsealing using different sealing codes from different transactions in different selling points coupled with the need to have the various agents present for verification before sealing makes the whole process complicated, time wasting and business unfriendly. The process of coordinating all these elements and coupled with challenges of inadequate personnel from the government authorities, corruption ,system downtimes ,delay in payments ,client confusion ,lack of trust of the new system and inadequate support from the implementing authorities make the whole process so complex. Importers have had to transport goods in trucks which are half filled due to delays leading to capacity wastage hence financial losses .The respondents noted that the electronic tracking device is very costly and that importers who have not had the capital to install the devices have temporarily had to do with hired transport vehicles that have been fitted with device. Delays in transaction processing lead to demurrage charges. On the other hand, failure to utilize the hired trucks to full capacity leads to losses. Another scenario is when goods ordered do not fit into the one truck it was assigned to transport; in this scenario the respondents do not know how to handle such a situation. One would rather be surprised on how a program that is so new accounts for the decline in Kenya’s exports to the EAC Countries particularly since the research was commissioned just a few months after it was launched. But yes, in this short period of time the respondents had a lot of complaints concerning the SWT something that the research team did not anticipate. This explains the reason for the further decline in Kenya exports particularly to Uganda in 2014.

17% of the respondents indicated that the Tax Regime in Kenya was unfavorable for business and it accounts for 10% of the decline in total exports to the EAC countries. Kenya’s VAT Act strongly came out as an impediment to export business. Others are the Industrial development fee (IDF fee) as well as the railway development fund (RDF). The respondents stated that the RDF and IDF make Kenyan manufactured goods 5% more expensive than imports from other COMESA and SADC countries. The VAT charged on goods in theory should not have any impact on business as those in a refund position 40

(where input vat is greater than output vat) get refunds; while those in a paying position (where output vat is greater than input VAT) make payments to KRA by the 20th of the following month.

The respondents mainly complained of pending VAT returns running into years. They stated that delayed returns affected their cash flows prompting them to secure loans from financial institutions at very high interest rates of between 18%-25%.The interest expense reduces their profit margins prompting them to increase selling prices ,an effort that usually translates into their goods becoming uncompetitive in an already competitive environment. Most of the middle sized exporters who experienced cash flow problems exited from the export business. Respondents from the Oil and Petroleum Industries have noted a sharp increase in their unit prices. Prior to the enactment of the VAT Act the KPC Tariff stood at US $56 per 1000 liters. It now stands at 116% ×US $56 per 1000 liters. Oil vendors in Dare salaam for instance enjoy much lower rates as their products are loaded directly from the port therefore they do not incur the KPC tariff. It is important to note that even large manufacturing firms can suffer serious liquidity problems as profitability is not an indication of liquidity. 8% of the respondents indicated that confusion surrounding the implementation of EAC Duty Remission scheme and EAC Customs Union protocol accounts for an average of 10% of total decline of Kenya’s exports to the EAC countries. The EAC Customs management Act provides for duty remission which is administered through EAC Customs Management Regulations. 100% of products manufactured under any export promotion scheme are expected to be sold outside EAC but in case they are sold in the EAC region then only 20% of the annual production be allowed provided full duties, levies and other charges are paid (East African Business Council Paper on the Status of the Implementation of EAC Duty Remission Scheme Within the Framework of EAC Market, August, 2013).

The respondents affected by this challenge are those who were previously in the Kenya duty remission scheme. The change on the description on what constitute an export market as not inclusive of the EAC countries resulted in massive reduction in exports for 41

manufacturers including those in the EPZ who had previously considered the EAC markets as exports .As a result most of the manufacturers in the scheme were advised to exit from it in anticipation for them to take advantage of the customs union protocol in which Kenyan exports would not be subjected to CET.

However Uganda and Tanzanian authorities were accused of charging CET of 25% on Kenyan goods of manufacturers who had since exited from the duty remission scheme. This therefore implies that for a substantial period of time between 2009 and 2012 the manufacturers were subjected to both the import duty in Kenya as well as the export destination country. This made the goods from the Kenyan manufacturers significantly expensive, hence exiting from the market. The innequlibrium in the market was resolved by the availability of cheap substitutes from China and Egypt. Egypt being a country with subsidized electricity; their goods tend to be relatively cheaper. The good news is some respondents who remained adamant despite the challenges have reported that Ugandan authorities through intense lobbying have since adhered to the customs union protocol. Tanzania however is accused of charging CET to date on Kenyan goods destined to Malawi and other non EAC member countries leading to the collapse of Kenyan exports particularly to Malawi.

Another challenge identified by the respondents is the existence of lengthy and inconsistent customs procedures particularly in Tanzania. Tanzanian authorities were accused of coming up with random legislations that significantly affected trade. Tanzania customs procedures were considered to be extremely tedious and time consuming with the documentation process being extremely manual .For example in Tanzania importers need to seek the pre –initial import declaration form, then go to the Tanzania Revenue Authority in Dar-Es-salaam for entry booking, duty payment and issuance of the release document indicating the barcode used as an authorization document for import. This process makes trading in Tanzania very difficult. The Tanzania Food and Drug Association has also made it increasingly difficult for exporters especially in the food processing industry to gain permits to export to Tanzania. The Respondents assert that the compliance requirements keep shifting leaving them in a precarious situation. 42

High cost of electricity and alternative energy sources in Kenya was also identified as another challenge that has contributed to the decline of Kenyan exports to the EAC countries .A majority of the respondents said the high cost of energy increased their cost of production and hindered their ability to compete in the region. Many of the respondents cited made comparison with Egypt where she cost of electricity was many times lower and its reliability largely assured compared to Kenya. This made glass and steel products manufactured in Egypt cheaper and more competitive for importers in the EAC. Where electricity is unreliable, manufacturers were forced to rely on alternative sources of energy which were more expensive. The prices of the products hence increased making them uncompetitive in the region. One of the respondents made a decision to set up manufacturing plants in Tanzania and Uganda where the cost of electricity is considerably lower than Kenya. Though not a member of the EAC, political volatility in South Sudan over the past one year has dealt a serious blow on export numbers of some of the Respondents interviewed. Through Uganda, some of our Respondents’ particularly in the cement industry exported their goods to South Sudan. A quick glance on a map shows two routes to South Sudan. The first route through Uganda and the second route through the North of Kenya (Lokichoggio). Due to poor infrastructure and insecurity presented by the second route, it is a no brainer why the first route would be more feasible. Following the political volatility, the Respondents lost all their South Sudan market which dealt a serious blow to their export numbers. According to the Respondents, stability in the country has not been attained therefore their exports to South Sudan have not been resuscitated. There is evidently a strong link between political instability and declining exports. Many respondents mentioned that as a result of newly imposed county levies, they not only pay levies in their county of manufacture but also in every other county they pass through as they transport their produce. One respondent company that has a segment of its operations in Eldoret said that at the sight of their branded vehicle, they are required to pay county levies in each of the counties they pass through on their way to their 43

manufacturing plant in Nairobi. These levies have raised the fixed costs which in turn have raised the cost of production. This cost is later passed on to the consumer who purchases the commodity for a much higher cost than before.

5.3 Conclusions The study concludes that the reason for the decline of Kenya’s exports is as a result of Kenya’s inability to remain competitive and strategic in its trade negotiations, tax administration, investor support programs and local industry that have all combined and created room for influx of cheap substitutes from china to the East African markets.

5.4 Recommendations for policy As noted earlier ;the application of general prescriptions to the developmental problems of an individual country like Kenya seem not to address the unique challenges that affect the Kenyan economy and in particular the manufacturing sector whose growth has stagnated for the past decade. The Kenyan economy has witnessed increase in imports and recently a decline in exports to the EAC countries; it is therefore pertinent that effective policies tailor- made for the Kenyan economy are formulated and implemented. For this to happen there should be an understanding of the international trade problems ailing the manufacturing sector which will then inform the formulation of appropriate policies aimed at enhancing export led growth and consequently a reduction in import reliance. As is evident in the findings of the study the threat of cheap Chinese goods on the long term survival of the Local manufacturing industry in Kenya is unmistakable. The study therefore strongly recommends taking of affirmative action in protection of local industry from cheap Chinese goods by providing investors with incentives to manufacture locally instead of outsourcing to China. China has great manufacturing advantages of efficient technology, large, skilled, efficient and cheap labor force, weak currency, cheap energy sources, readily available raw materials and a political government actively involved in the elimination of its international trade barriers; all this put together and it almost

44

becomes almost impossible e for a developing country to compete fairly with such as technologically advanced nation. The growth of the manufacturing sector is the only way Kenya’s unemployment problems can be solved. As population increases there is need for expansion of job opportunities available for the youth in Kenya. Outsourced manufacturing only allows companies to continue being in business as distributors but the job losses associated with the close down of factories means that the gap between the rich and the poor in Kenyan will continue to increase hence creating social problems of instability and inequality in Kenya. It’s therefore pertinent that there should be a combination of investor incentives as well as protectionist policies aimed at growing and protecting the local industry respectively. How then do we achieve development without ruining the good business relations that Kenya enjoys with china particularly with the much needed funding for infrastructural development projects that has seen massive upgrade of both urban and rural roads?.The secret lies in making manufacturers choose to invest in Kenya despite the diseconomies of doing so. This can be done by reviewing of the East African duty remission scheme ACT to allow duty free imports on raw materials not locally available in Kenya for local manufacturing and value addition without imposing restrictions on where they can sell the finished product and not imposing any duty on sales on the EAC markets. This therefore calls for prudent diplomatic relations between the EAC countries for them to realize that with the current CET being imposed on goods produced under the duty remission; EAC countries are losing their local markets to cheap imports from china To curb the challenge associated with the substandard and counterfeit goods there is need to ensure that there is upgrading and harmonization of quality control standards between the EAC countries standardization authorities such as KEBS, TBS, UNBS, RBS, and BBN. These institutions should ensure that their quality procedures and regulations are in harmony to eliminate the need for repetitive tests. They should also set a uniform bar/benchmark by consulting with KAM on the quality of new products imported from the Middle East to curb entry of substandard goods into the EAC markets. To achieve 45

this, anti dumping laws should be reviewed so that transacting in substandard goods should be considered as dumping and hence contravening of the antidumping regulations. Additionally consumer protection oversight authorities should be engaged with the standards authorities to ensure effectiveness in policy implementation. The Single window system can actually be used to counter the problem of counterfeiting if imports from China are also subject to the system .This is because with single window system goods are subject to quality checks at source and the anti-counterfeit and standards authorities will be able to trace back the goods to the original manufacturers and their distributors to effect legal action against them. These Institutions should be empowered with the human resource and financial resources needed to effectively meet their mandate so as to avoid further proliferation of Chinese goods into the market. On would argue that even with these systems and controls in place corrupt individuals employed by these entities would still allow substandard goods, counterfeits, underdeclaration of CIF, weighbridge discrimination and overloading to take place at the presentation of a bribe. to curb this its highly recommended that anti-corruption authorities in East Africa jointly source highly reputable audit firms to continually audit the assets and generate capital statements for individuals facilitating trade such as KRA clearing agents, KEBS officials and weighbridge officials all across east Africa . Asset declaration and consequent generation of capital statements are accounting tools used by tax authorities to identify tax evaders, the same system can be used to identify those who have illegally acquired wealth and improved lifestyles through corruption. Individuals who cannot justify their asset sources should be terminated immediately. This might sound like a long shot but it’s the only effective way of fighting corruption in East Africa. Consensus among the Respondents interviewed is that the Single Window System is indeed a good system but is definitely took-off on a rocky start. Proper implementation of the system is important if the benefits of implementing the systems are to be enjoyed by the stakeholders affected by its implementation. There is need for additional and continuous user training on use of the systems as currently the level of stakeholder capacity and awareness is extremely low. Institutional capacity enhancement for 46

enforcing authorities such as KRA and Kentrade to train their employees and create expertise se in this area should be done for them to adequately handle the challenges associated with the implementation of the project. There should be monitoring and evaluation of the performance of the single window system in form of feedback surveys so that challenges can be addressed in time to enhance system improved. The enforcing authorities need to immediately increase the number of personnel involved in the clearing and verification checks of exports because currently the available agents cannot adequately meet the efficiency needs of the manufacturers. Consequently, the SWS, should be reviewed so that the process can accommodate the unique nature of export business in East Africa such as use of pro-forma invoices instead of invoices, use of credit sale transactions instead of cash only and a review of the system to eliminate current inefficiencies mentioned in the discussion of challenges. Further, the single window system’s requirement for the electronic cargo tracking system which pushes small exporters to consolidate cargo and have it containerized should be made be more sensitive towards the smaller exporters who comprise of the majority of exporters to the region. It is important to note that the lengthy export procures in Kenya complicate the SWS. The export procedure should therefore be reviewed so that need for excess verification personnel and repetitive practices are eliminated. Despite the adoption of the customs union protocol, it is evident that Kenyan goods are still being subjected to CET. It is important to note that as a result of the adoption of EAC duty remission scheme; most Kenyan manufacturers have exited from the scheme and are paying duty and VAT on their imported raw materials; being subjected to CET after exiting from the remission results in a pure case of double taxation a reason for the massive decline of Kenya’s exports to the EAC. The study recommends that this should be addressed by ensuring immediate adherence to the customs union protocol by EAC countries as this is a case of unfair trade practice. With this approach, the Kenyan government will begin to see positive results of improved exports in less than six months. An Export Processing Zone (EPZ) is a Customs area where one is allowed to import 47

plant, machinery, equipment and material for the manufacture of export goods under security, without payment of duty. The East African duty remission act limits the market size of companies that are in the scheme such that these companies can only export 20% of their exports to the EAC countries and the remaining 80% to outside EAC. Companies in the EPZ lost over 80%of their exports markets due to the adoption of the east African duty remission scheme. To resolve this there should new negations with the East African countries on the treatment of companies in the EPZ because failure to do so will make these regions redundant in less than 3 years. The companies can be allowed to manufacture in Kenya duty free but pay duty in their export destinations including EAC countries without imposing percentage restrictions on the volume of sales. On the other hand the companies can be advised to set up factories outside the EPZ such as in industrial area and take advantage of the customs union protocol which eliminates the need to pay duty in EAC countries subject to strict adherence to the customs protocol something that is currently not happening fully. Africa is growing fast-and so are its power needs. Over the 5 year period from 2005-2010 in Ethiopia, Kenya and Tanzania, GDP grew an astounding 13.4% per annum and electricity demand grew a little more than half as fast at 7.1% per annum. If a 7% growth rate continues for another two decades, electricity needs in the region will quadruple. Therefore, there is need for the government to undertake in energy planning to meet future growing needs of the manufacturing sector. Respondents recommended the urgent need for the introduction of an electricity tariff from 11pm-5am to utilize the low demand. Further, there is need to benchmark the cost of electricity with competing countries such as Egypt whose energy costs are so low it makes Kenyan products unable to compete with Egyptian products. Power outages that push manufacturers to use fuel to sustain production have rendered the production processes very expensive. The government should ensure that industrial areas do not suffer from power outages at all. Since the Revenue Authority has a responsibility to give VAT refunds as provided for in Part VIII of the VAT Act 2013, it should ensure that these refunds are done in time for manufacturers to invest further into their industries and forestall the inconveniences and actual losses incurred from having to seek further financing from banks to sustain their 48

businesses. IDF fee and RDL have contributed to Kenyan goods being 5% more expensive than COMESA and SADDC imports. The Respondents strongly recommended their elimination. Exporters to South Sudan faced a slump in their export numbers following the disruption of war early this year. It is therefore in our best interest to ensure that there are successful negotiations leading to political stability in the region. Most of the exporters identified South Sudan as a potential market and is likely to compensate for their loss of markets in the EAC countries. They also believe that South Sudan being part of the EAC will enhance the peace process and improve certainty and reduce the risks of business. The Respondents believe that being a member of EAC will enhance the peace process, an element key to their business success. Kenyan exporters are subject to central and county levies. Having established that county governments are now imposing county levies increasingly becoming an impediment to the ability of manufacturers to export to the region, it is recommended that the central government and other stakeholders need to encourage a harmonization of levies imposed and also importantly building the capacity of county governments on why such levies may eventually do more harm than good if they prove an impediment to local industry’s export activities.

Limited pipeline capacity is a factor that accounts for over 90% decline of exports in the oil and gas sector. This is attributed to inadequate pipeline distribution network which has become inadequate with increased local demand for oil products and the closure of the inefficient Mombasa refinery. Currently there is an ongoing expansion of the pipeline network which once completed shall resolve the problem. The refinery is recommended to be used as fuel storage facility due to its capacity as this will address the limited capacity issues .Kenya has experienced competition from established local industry in Uganda due to the effectiveness of its import substitution policy .This study recommends that Kenya should learn and adopt the same policy as this will reduce reliance on imports. Monetary union should be adopted do address the problem of exchange rate volatility .the

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ministry of agriculture should look into improving the quality of milk production in Kenya as this was identified as a reason for the decline in the dairy sector.

5.5 limitations of the study Every study inevitably encounters certain levels of limitations due to a variety of factors. The study targeted companies whose exports to the EAC countries have been declining. Some of the targeted respondents had since closed business and could not be traced. The study therefore did not feature the opinions of such respondents. Some respondents could not give the researchers much information due to the restrictive nature of their company policies this was particularly true with multinational firms. 5.6 Areas for Future Research The study focused on the reasons for the decline of Kenya’s exports to the EAC countries. Future research should review the performance of Kenya exports to other non EAC sub-Saharan African countries. Further researchers should review the disparities in tax practices in the EAC countries and its impact on investment decisions for purposes of informing harmonization framework of EAC tax regimes. There should also be an evaluation of the performance of the private in Kenya’s alone as this study excluded Kenya in study of EAC markets

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1.1 1.2 1.3 APPENDIX I: INTRODUCTION LETTER COMMISSIONER OF CUSTOMS SERVICES KENYA REVENUE AUTHORITY CUSTOMS SERVICES DEPARTMENT 12TH FLOOR, TIMES TOWER BUILDING HAILE SELASSIE AVENUE P. O. BOX 48240 -00100 Nairobi, KENYA

Dear Sir/Madam, RE: LIST OF KENYAN EXPORTERS TO THE EAST AFRICAN COMMUNITY Based on the KNBS Economic Survey 2014 there is a clear indication that Kenya’s Exports to the EAC have been declining for the past five years. As a result of this the EAC is undertaking research to identify the causes of the steady decline and possible solutions to inform policy. Our intended research methodology entails direct interviews with Kenyan exporters to the region as they are better placed at articulating the problems encountered and possible solutions. In this regard we write to request for a list of Kenyan exporters to the EAC Countries i.e. Uganda, Tanzania, Rwanda and Burundi and if possible the value of their exports. Table :Format for the requested data Name of contact Exporter details

country exported to

commodity exported

quantity exported

value of export

Your assistance will significantly add to the value of the research and will be beneficial to Kenya’s economy. 51

Yours sincerely , 1.4

APPENDIX II:QUESTIONNAIRE SECTION A: General information

Name of the company:……………………………….. In what category of industry does your organization fall into for example Manufacturing: ……………………….. For how long has your company been exporting to the EAC Countries previously Uganda, Tanzania, Rwanda? Less than 5 years

6-10 years

10-15Years

Over15 year

Which countries in the EAC do you export your products to?

You can tick more than

one Uganda

Tanzania

Rwanda

Burundi

7. Has your organization established any subsidiaries in any of the EAC countries YES

NO

If yes state which county/countries highlight the year of establishment Uganda, year____

Tanzania Year______

Rwanda, year____

Burundi

year _

To what extent did the following policy initiatives inform your decision to establish subsidiaries in the EAC countries Use a five point scale where 1=Not at all, 2=little extent, 3=Moderate extent, 4= Great extent, 5=Very great extent. Tick below accordingly. 1.

52

Reason for establishing subsidiaries in the EAC Countries

1

2

3

Lower rate of domestic taxes in EAC countries compared to Kenya.( please specify comparing Kenya to EAC countries)___________

High transport and freight costs that necessitated subsidiary development Low energy and electricity costs in EAC countries (give example comparing Kenya to EAC countries )_________

There is cheap labour in EAC countries compared to Kenya Your decision was informed by good political government and political stability Ease of doing business in those countries is better than in Kenya Your decision was inevitable as the governments in those countries made it impossible to do business as a non resident company(please indicate what tactics were employed to frustrate your non resident status)______________ Your decision was informed by good infrastructure in EAC countries

OTHER PLEASE SPECIFY ……………………………………………………………………………………………… ……………………………………………………………………………………………… ……………… 9 .how would you compare business climate in Kenya with EAC Countries ……………………………………………………………………………………………… ……....

What is the annual value of the production in that subsidiary and/or subsidiaries? ____________ Would you say that your organizational exports to the EAC have been declining? YES

NO

If yes what is the average annual value of the decline __________ 53

4

5

If no indicate the approximate annual percentage growth__________

SECTION B: Possible reasons for the decline of exports to EAC /Challenges affecting exports to the EAC Countries To what extend do you consider the below stated international trade challenges to be the reason for the decline of Kenya’s /your company’s Exports to the EAC countries .Use a five point scale where 1=Not at all, 2=little extent, 3=Moderate extent, 4= Great extent, 5=Very great extent. Tick below accordingly. Reasons for the decline of Kenya’s Exports values to the EAC Countries There is a sense of protectionism of local companies by EAC countries governments hence not able to compete effectively(please state protectionist tactics employed )___________________________________

Decline in unit price of commodities exported (specify reason for decline )___________

Increased local demand Kenya hence reducing amount exported (give reason why you have not expanded your production to suit local demand __________

Your company meets its profit targets even with the decline in export hence no pressure to sustain exports growth. Cost of doing business and exporting to the EAC countries have become unsustainable hence rendering the markets unattractive (specify the costs)________________________________________

Lengthy licensing and customs procedures in Kenya ( give example comparing Kenya to EAC countries )_________

Unfavorable tax policy in Kenya ( give example comparing Kenya to EAC )_________ 54

1

2

3

4

5

Under developed infrastructure in Kenya that render Kenyan Goods non competitive (describe nature of infrastructure)_________

Competition

from

importation

of

goods

from

other

trading

blocs/countries(please state the country that is your competitor in the regional market

and

give

reason

why

cannot

compete

effectively

with

them__________________

High cost of production in Kenya (specify industry)___________

Competition from local resident companies in EAC countries

(specify

industry) _______________

Tedious

and

costly

tax

compliance

requirements

in

kenya

(specify)_______________

Length and tedious licensing processes in Kenya ( give example comparing Kenya to EAC countries )_________ corrupt government tendering process in Kenya

Case of protectionism in EAC countries( specify nature of protectionist policies and country ) _____________

Kenyan goods have increasingly become expensive due to stronger Kenyan shilling The VAT act in Kenya has increased the cost of production making Kenyan goods expensive Increased business risks associated with exchange rate volatility The drawbacks of duty remission scheme

55

OTHERS:The list above might not be exhaustive or is not applicable to your case. Kindly PLEASE SPECIFY any other reason for the decline of Kenyas /Your organizations exports to the EAC Countries ……………………………………………………………………………………………… ……………………………………………………………………………………………… ……………………………………………………………………………………………… ……………………………………………………………………………………………… …………………………………………………………………………………………… SECTION C: Response strategies What strategies and policy interventions would you advice the Government to implement in order to reverse the worrying trend of Kenya’s declining export to the EAC countries. Using a five point scale where 1=Not at all, 2=little extent, 3=Moderate extend, 4 to= Great extent, 5=Very great extent. Tick below accordingly. Recommendation for Kenya government policy 1

interventions

2

3

4

5

The adoption of a single currency in EAC to reduce exchange rate volatility and exchange losses Monitoring of The customs union protocol adoption in all countries to ensure adherence to the set regulations development of modern market distribution challenges across the east African markets partnering with financial institutions to modernize financial systems in The EAC markets Recommendation

for

Speedy

infrastructure

development in Kenya

OTHERS: PLEASE SPECIFY ……………………………………………………………………………………………. 56

……………………………………………………………………………………………. ……………………………………………………………………………………………

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