KENYA HOPES TO SAVE AGOA APPAREL GAINS

UNCLAS SECTION 01 OF 04 NAIROBI 003072

SIPDIS

SENSITIVE

DEPT FOR AF/E, AF/EPS, AF/PD AND DRL
DEPT PLEASE PASS USTR:WJACKSON
USAID FOR AFR/EA

E.O. 12958: N/A
TAGS: ETRD ECON EAID EINV ELAB PREL TBIO KE AGOA
SUBJECT: KENYA HOPES TO SAVE AGOA APPAREL GAINS

REF: NAIROBI 1321 (NOTAL)


1. (SBU) SUMMARY: Apparel and garment exports to the
United States under AGOA have been one of Kenya's few
economic bright spots in recent years. However, faced with
new competition stemming from the end of the Multi Fiber
Agreement, an estimated 11,000-plus jobs have already been
lost. The GOK is hoping that a more flexible wage policy
will help keep the factories competitive, but, to date, the
details of the new scheme are not clear. Kenyan
authorities are also hoping to reinvigorate Kenya's cotton
sector, and are looking at biotech as a possible
contributor. USAID/REDSO is engaged in a number of
regional activities that could benefit Kenya's textile and
apparel sector. Despite these efforts, the Gap's recent
decision to pull out of Kenya highlights deeper problems to
be overcome if Kenya is to be globally competitive. End
summary.

--------------
KENYA'S GARMENT AND APPAREL INDUSTRY AT RISK
--------------

2. (U) In the 1970s and 1980s Kenya enjoyed a flourishing
textile and clothing industry, but it collapsed in the late
1990s largely due to mismanagement and poor trade policies.
In 2000, the African Growth and Opportunity Act (AGOA)
paved the way for significant recovery. In 2004, AGOA
apparel exports were valued at $US261 million and supported
approximately 32,000 jobs. However, as reported in reftel,
Kenya's garment industry is fragile, with the vast majority
of investment coming from Asian companies that site
production facilities globally. The current pressure on
Kenya's garment production comes from both the huge
increases in Asian, mostly Chinese, textile exports, in
response to the end of the global Multi Fiber Agreement
(MFA) and also from the anticipated end of the "third
country" agreement under AGOA in 2007 which permits Kenyan
firms to used imported thread and fabric in garments for
the U.S. market.


3. (U) The USAID-sponsored East and Central Africa Global
Competitiveness Hub in Nairobi recently commissioned a
study on "The Impact of the End of MFA Quotas on COMESA's
Textile and Apparel Exports Under AGOA." The Kenya
analysis notes that the creation of a vibrant apparel
export sector in a relatively short time span to take
advantage of AGOA has been a remarkable achievement for
Kenya. With 40 existing companies, a "critical mass" has
been achieved and experienced entrepreneurs have been able
to put into place quality and compliance systems to satisfy
some of the most demanding buyers, including Wal-Mart and
JC Penney. The report also notes that the Export
Processing Zones Authorities (EPZ) have created a favorable
environment for exporting enterprises. However, Kenya
faces significant constraints including dependence on third
country fabric, relatively high labor costs and low
productivity, poor industrial relations, lack of long-term
funds, the lack of fiscal incentives to the textile and
apparel sectors, a long production cycle (90-120 days),and
a weak primary textile industry.


4. (U) The report recommends the following GOK actions: 1)
introduce fiscal incentives to encourage investment and
offset current significant infrastructure disadvantages,
particularly transport and energy costs; 2) establish a
textile fund to provide long-term financing; 3) strengthen
the transport infrastructure from the port of Mombasa to
the EPZs. In addition, the report recommends that labor
unions play a more constructive role, and that the private
sector become more proactive in marketing efforts to
identify niche markets and invest in programs to improve
labor productivity. The report is available at
http://www.ecatradehub.com/reports/rp.2005.01 .impact.end.mf
a.quotas01.asp.


5. (U) Kenya's Apparel Manufacturers Exporters Association
(KAMEA),the Kenya Association of Manufacturers (KAM),and
other sources report that at least seven textile companies
and over 11,000 jobs have been lost in the sector as since
the January end of the MFA. According KAMEA Chairman Jas
Bedi, there are few new orders for Kenyan factories beyond
July, but U.S. buyers remain interested in sourcing from
AGOA countries, especially after U.S. action to limit
Chinese imports on some categories of apparel. John Akala,
EPZA Operations Manager, says the problem has been
compounded by the introduction of new system of customs
clearance for both exports and imports. Textile exports
have recently been delayed up to two weeks at the Port of
Mombasa, causing further delays as these consignments miss
their shipping assignments.

--------------
THE SECTOR CAN BE SAVED -- MAYBE
--------------

6. (U) In May 2005, the German Development Agency (GTZ)
and the World Bank released a draft report "Export Strategy
Implementation Action Plan March 2005" outlining actions
the GOK should pursue in order to save Kenya's apparel
sector. The report noted that the sector needs to take
immediate action to reduce costs, "otherwise all benefits
accrued from AGOA will fade away." One key proposal from
the report is that the GOK should establish one or more
competitive textile mills to supply the garment export
sector with adequate quality fabric.

7. (U) Possibly of more immediate help, the FY05-06 budget
proposes changes in Kenya's wage policy to allow export-
oriented producers more flexibility in wages, a step long
sought by Kenya's garment industry. Finance Minister David
Mwiraria acknowledges that Kenya's labor productivity is
low, and has been declining since 2000, even as real wages
have been increasing. At present, Kenya's average cost for
unskilled workers is Ksh 3,420 (about US$45) a month, while
that of competing suppliers, China and India, is Ksh 2,660
(about US$35). Mwiraria's proposal would set a minimum
wage based on productivity for both private and public
sector workers, adjustable every two years. However, it is
not clear who would determine the revised wages.
Currently, the Productivity Center of Kenya (PCK) lacks the
capacity to develop appropriate sectoral productivity
indices. Rajeev Arora, General Manager of United Aryan, a
textile firm operating one of Kenya's EPZs, is concerned
that there is no clarity on who would determine the wages,
the industry or government.


8. (U) The other pillar of Mwiraria's plan is to revive
Kenya's moribund cotton sector. This year's budget
allocates KSh 250 million (about $US3.3 million) for
improving domestic cotton production and processing. The
GOK has already begun confined field trials of genetically
modified Bt Cotton, with a view to possible commercial
production, though no timeframe is assigned. The GOK is
drafting new biotechnology legislation, but does not yet
have the regulatory framework in place to allow the
commercial cultivation and use of biotech cotton.

--------------
USAID/REDSO IS HELPING
--------------

9. (U) In a project to support existing and new garment
manufacturing factories in East and Southern Africa,
USAID's Regional Economic Development and Support Office
(REDSO),in partnership with the US-Africa Trade and Aid
Link, is funding a feasibility study for a proposed Nairobi-
based textile training center, the Regional Model
Manufacturing and Training Center (RMMTC),which would
serve eight AGOA eligible countries: Kenya, Uganda,
Tanzania Rwanda, Ethiopia, Malawi, Zambia, and Madagascar.
At this time there is no commitment for funding the RMMTC
from either donors or African nations, but Kenya's Ministry
of Trade and Industry and the EPZA have donated land for
the future construction of this facility if it is funded.
The idea behind the RMMTC is to provide training and career
development for thousands of African workers in "best
manufacturing practices." The current project proposal
includes the possible establishment of 50 start-up
companies with an average of 2,000 RMMTC-trained employees
each.


10. (U) In April, the REDSO-funded Regional Agricultural
Trade Expansion Support (RATES) program held an inaugural
regional cotton and textile executive summit earlier this
year in Nairobi at which 150 representatives from 20
African countries attended. The major outcome of summit
was the unanimous agreement by industry executives to form
a regional African cotton and textile industry body, an
initiative that was endorsed by COMESA and the East African
Community (EAC). At a subsequent steering committee
meeting held in Johannesburg, industry executives agreed on
the formation of the "African Cotton & Textile Industries
Federation" (ACTIF),representing the full value chain from
cotton production to apparel. Its activities will focus on
global trade initiatives; investment and finance; inter-
regional trade and production; ginning and lint trade
issues. RATES is the interim secretariat. Additional
information can be found at www.cottonafrica.com.

--------------
THE GAP LEAVES KENYA BUT APPRECIATES AGOA
--------------

11. (SBU) Efforts to prop-up Kenya's apparel and garment
sector did not stop the U.S. retail giant, Gap, Inc., from
ending its relationship with contract producers in Kenya.
On July 19, Wayne Mann (please protect),Gap's Sub-Saharan
Africa Vendor Compliance Manager, informed Acting Economic
Counselor that Gap would no longer contract in Kenya,
where, according to Mann, the majority of garment factories
do not meet the company's standards for working conditions
and labor relations. Kenya's well-know infrastructure and
security problems, and the inefficient Port of Mombassa
also played a role in the company's decision. Employee
productivity was not a negative, according to Mann, who
viewed the workers' manual dexterity and work ethic to be
globally competitive. [Note: According to November 2004
report jointly by the World Bank and Kenya Institute of
Public Policy Research and Analysis (KIPPRA),a median
Kenyan worker turns over US$3,457 of manufactured value
added per annum compared to US$3,400 from India and
US$4,400 for China respectively. End note.] However, most
Kenyan apparel companies -- in fact the majority are recent
investments from India -- were using outdated equipment and
had very poor personnel management. Since 2003, Gap has
assessed 16 factories in Kenya, and only 7 met the
company's minimum requirements for productivity and
business practices. (Gap's global average for factory
approval is around 95 percent.) Gap has never contracted a
large portion of its production in Kenya, less than one
percent of its global contracts, and used only four or five
factories in total, and just one currently. The company
was surprised, however, that Kenya could not compete, given
its long history of garment manufacturing.


12. (SBU) Mann requested that any public discussion of the
Gap's decision should be limited to its official
explanation for its Kenya exit: "Gap has been carefully
evaluating the ability of our vendors and their sourcing
markets to meet our scale, speed and efficiency
requirements. Given that we have only had sporadic
production in Kenya over the past two years and currently
only have one approved factory in Kenya, we have come to
the conclusion that Kenya does not meet our long term
sourcing needs."


13. (SBU) Despite Gap's departure from Kenya, Mann is
optimistic about the apparel sector in parts of Africa,
particularly Lesotho, Madagascar, and South Africa. In
reaction to the end of the MFA, Gap is planning to pursue
"long-term," (that is, 4-5 year) partnerships with a select
group of suppliers. Gap believes that with AGOA
preferences, factories in Africa can compete globally as
long as they focus on sound business practices, including
progressive labor relations.

--------------
COMMENT
--------------

14. (SBU) It is unlikely that Kenya's feeble labor unions
will object much to any reasonable GOK plan on wage
flexibility, especially in the Export Processing Zones. As
the Gap case highlights, however, Kenya's biggest
difficulties as a globally-competitive apparel producer are
bigger than marginally reduced wages. As Ambassador
Bellamy and other Mission officials frequently point out to
GOK interlocutors, Kenya's problem is with the basics of
its business climate: poor roads, telecommunications, and
electricity, growing security concerns, and inefficient
import/export practices. Likewise, the Kibaki
administration's planned investments to revive the cotton
sector face a range of hurdles, including a history of
failure to be competitive in cotton growing and ginning.
It is not obvious that Kenya has a competitive or
comparative advantage in cotton production vis--vis other
countries in the region, particularly with high quality
cotton available from Ethiopia, Uganda and Tanzania.
Opening up to regional competencies in the cotton sector is
Kenya's best hope. As noted in the Trade Hub report Kenya
is likely better placed to focus its scarce resources on
processing and should rely on raw cotton imports from its
more efficient neighbours.
BELLAMY