Export Processing Zone Faces Competitive Pressures

UNCLAS SECTION 01 OF 02 NAIROBI 004421

SIPDIS

SENSITIVE

DEPT FOR AF/E, AF/EPS
DEPT PASS USTR
DEPT PASS DEPT OF LABOR ATTN ILAB FOR KELLY BRYANT
USAID FOR AFR/EA JULIA ESCALONA
TREASURY FOR ANN ALIKONIS
LONDON AND PARIS FOR AFRICA WATCHERS

E.O. 12958: N/A
TAGS: EINV ECON ETRD EFIN KE
SUBJECT: Export Processing Zone Faces Competitive Pressures

REF: Nairobi 4238

Sensitive But Unclassified. Not for release outside USG
channels.


1. (SBU) Summary: Kenya's Export Processing Zones (EPZ) face
rising wage and energy costs, poor transportation
infrastructure, and constraining government regulations that
make it difficult to attract investors and compete with
Asian exporters. Nevertheless, the EPZ Authority (EPZA)
believes it could compete effectively to attract and retain
investors if only the Government of Kenya would follow up on
its own promises and actively address these constraints.
EPZ exports rose 67% in 2004 to $311.5 million, 92% of them
to the U.S. under the AGOA and GSP programs. But seven
garment plants have shut down since the end of the Multi-
Fiber Agreement (MFA) at the start of 2005. The EPZA
credits AGOA with its success to date, but is trying to
diversify its investor base beyond textiles and garments.
End summary.


2. (U) On October 18, Econoff visited the Athi River Export
Processing Zone, the largest of Kenya's 41 EPZs, together
with the Econ FSN and Sarah Abwoja of the Kenyan Textile
Workers Union to view investment and working conditions.
EPZA officials briefed on the status and prospects of the
EPZs, and arranged tours of a pharmaceuticals and a textile
plant.


3. (U) EPZA Public Relations Manager Jonathan Chifallu
explained that the Authority provides a one-stop shop to
help investors set up factories, facilitating and advising
on all permits, clearances, utility hookups, financing,
labor laws, etc. Although some GOK officials were initially
wary of the costs of offering foreign investors tax and
other incentives when the EPZs were established in 1990, the
GOK now sees the Zones' potential to create jobs, exports
and growth. In fact, Chifallu claimed that the EPZA now
advises GOK officials on how to make Kenya's laws more
investor-friendly. Chifallu noted the Athi River EPZ has
become a magnet for urban and industrial development in a
previously barren area south of Nairobi.


4. (SBU) Garment factories represent the large majority of
EPZ exports and workers. Although orders recovered somewhat
after the post-MFA dip, Chifallu said textile prices had
dropped to compete with China. Although seven garment
plants in Kenyan EPZs have closed down since the end of the
MFA on January 1, 2005, he thought Kenya's EPZ garment
factories could remain competitive, if the GOK acted to
reduce bureaucratic requirements and improved Kenya's
infrastructure. EPZ exports in 2004 of $311.5 million
represented 11.6% of Kenya's global exports. 94% of EPZ
exports in 2004 went to the U.S., and the AGOA/GSP exports
of $222 million represented 81% of Kenya's total exports to
the U.S. Chifallu said the EPZA is working to diversify by
attracting investors from other sectors.


5. (SBU) Chifallu noted that one of the key requirements for
global competitiveness is to maximize efficiency in the
logistical chain. He explained how GOK agencies' erratic
demands for inspections and certifications from which
investors should be exempt under the EPZ Act raise
production costs. He cited the sudden requirement that
duties on oil be paid up-front and the Kenya Revenue
Authority's (KRA) poor implementation of the electronic
clearance system, which created critical shortages of
imported inputs and made it difficult to meet buyers'
deadlines. KRA only recently stopped its two-year
requirement for verification of the contents of all
containers of inputs destined for the EPZ. The EPZA would
like the Kenya Port Authority to waive ship demurrage
charges for importers when delays are caused by the GOK.
Electricity is the most expensive input for EPZ investors,
who want the GOK and the Kenya Electricity Generating
Company (KenGen) to provide some relief from one of the
highest prices per kWh in Africa. Investors at Athi River
are even considering building their own power plant.


6. (SBU) Industrial Relations Executive Wanjiru Waweru
explained that the EPZA advises investors on Kenya's labor
laws and helps them deal with the Ministry of Labor and
Human Resource Development, the National Social Security
Fund, and other agencies. She claimed that the previous
perception by the Ministry of Labor, unions and others that
unions were barred in the EPZs was never correct, and was a
misinterpretation of the EPZ Act. (Comment: This claim
seems disingenuous at best. End comment.) The
misperception was corrected after the 2002 election.
However, the collective bargaining agreement (CBA) signed by
the union and seven garment plants in Athi River in 2003 is
the only one in a Kenyan EPZ. Only one other EPZ plant in
Mombasa has recognized the union, and CBA negotiations there
have been stalled since January. The CBA significantly
increased salaries and reduced sexual harassment complaints
in the Athi River plants, but has made it more difficult to
compete with garment factories in China, India and Sri
Lanka, which pay lower wages. Waweru called for the textile
union to recognize these pressures and educate its members
on the importance of productivity and quality, as well as
their rights. Waweru praised a recent initiative by shop
stewards to go to Mombasa and urge KRA officials at the port
to release containers of inputs.


7. (SBU) Chifallu claimed that the wage increases the GOK
has mandated every May Day for the last four years have
amounted to a cumulative 50% increase, contributing to
Kenya's high production costs. He urged that the GOK find
ways to reduce costs for both producers and workers, such as
encouraging low-cost housing to avoid the rent increases
landlords implemented after each wage increase. He wondered
why NGOs and others focused complaints about low wages
solely on the EPZ producers, when the GOK's own salaries for
the lowest grades of civil service workers were below the
minimum wage until a recent increase.


8. (SBU) Comment: The EPZA appears to understand clearly the
need to improve Kenya's competitiveness to attract and
retain investors, while trying to respect worker rights.
Chifallu believes senior GOK officials understand the need
to cut production costs and improve the investment
environment, but his despair about the likely lack of any
effective actions until after the November 21 referendum on
the proposed new Constitution is well-warranted (see
reftel.) Further, it is open to question whether the GOK
will focus better on needed economic reforms, even after the
referendum. End Comment.


9. (U) The EPZ 2004 annual report and other information is
available on the EPZA website, www.epzakenya.com. The
following are relevant statistics culled from the reports.
All 2003-04 figures below are in millions of Kenyan
shillings unless otherwise indicated.

Indicator 2003 2004
--------------
EPZ Exports .......... 13,812 ....... 23,047
Kenyan Exports ...... 174,900 ...... 198,400
EPZ Share of total
Kenyan exports ....... 7.9% ......... 11.6%
AGOA textile exports
($millions) ........... $146 ........ $222
change ............... +40.4% ....... +52.1%
AGOA share of total
Kenya-US exports ...... 74% ...........81%
Investment ........... 16,716 ....... 17,012
Kenyan employees ..... 38,199 ....... 37,723
Average annual Kenyan
wage (ksh) ........... 62,799 ....... 86,379

Bellamy