What SGR means to manufacturing sector

Hailed by the government as Kenya’s most transformative project with the potential to increase GDP by almost Sh100 billion upon completion, the Standard Gauge Railway (SGR) promises to promote growth of towns and urban centres along the corridor.

This will be in addition having huge impact on the manufacturing industry.

Ironically, the ease of moving goods in and out of the port of Mombasa to the hinterland has the potential to also increase dumping of imported products into the local market.

With such a world class transport system, importers will find it cheaper to move goods and items to various areas, opening the floodgate to competition from industrialised nations.

Transport, Infrastructure Housing and Urban Development James Macharia says the project will reduce the number of hours it takes to move cargo and passengers from Mombasa to Nairobi. “We anticipate it to escalate the country’s GDP by 1.5 per cent,” he explained 

“We’ll be able to move 22 million tonnes of freight on an annual basis,” explained former transport permanent secretary Irungu Nyakera, who has since been moved to a similar portfolio in the ministry of Planning and Devolution. “That removes a significant number of trucks from the road while lowering the cost of transportation by 60 per cent.”

According to the World Bank, falling transport costs lead to more trading among countries, further reduction leading to business among neighbouring countries. It is expected that if production sectors get the right incentives, counties such as Nairobi, Mombasa and Busia among others along the SGR corridor could expand into much larger commercial hubs.

The World Bank however declined to comment on the impact of the railway. “The World Bank has not been engaged in the SGR initiative and therefore not able to comment on its economic impact,” stated Vera Rosauer, communication head at the Bretton Woods institution.

“I would encourage you to reach out to the relevant Ministry as well as the financing party to comment on this based on their involvement.” To evaluate the overall impact that the SGR will have on Kenya’s economy, it is essential to look at the project in the larger context of China’s One Road and One Belt mega project.

The project is viewed by economists as China’s strategy to expand it’s economic and political clout across the globe by re-creating the country’s ancient trade routes across Europe, Africa, and Southeast Asia that saw Chinese dynasties lead in global trade and exploration more than 15 centuries ago.

Chinese state media reports that during the first eight months of 2016, China signed nearly 4,000 engineering contracts in 61 countries along the Belt and Road route valued at over $70 billion (Sh7 trillion).

This is expected to help export the country’s construction sector currently in a rut domestically and create a pipeline for China to connect with and explore new markets for her goods. The World Bank states that Kenya’s contribution to the global manufacturing output has declined drastically by 900 per cent in the last three decades as irregular tariffs and high production costs dampen the country’s objective of becoming a regional manufacturing powerhouse.

In 2015, the World Bank says the average Kenyan exporter exported just Sh15 million worth of goods annually — compared to other African economies such as Egypt (Sh58 million), South Africa (26 million) and even Tanzania (Sh16 million).

EPZ complex

Imports from China and India have flooded the local market while Kenyan manufacturing output has stagnated at an average of 12 per cent of the GDP for more than 20 years.

Mr Rudolf Isinga, is the managing director of NewWide Garments Kenya that operates out of Athi River’s EPZ complex which is part of China’s giant manufacturer New Wide Group.

The firm operates textile factories in several countries around the world including Cambodia, Vietnam and Ethiopia’s equivalent of the Kenya’s EPZ where according to Mr Isinga, manufacturing is in a whole different level than in Kenya.

“In most of these countries, several aspects of the production process including electricity, transport and sometimes food are subsidised and this reduces the cost of production on the part of the producers,” he explains.

“This means while you can afford to pay wages of around $70 (Sh7,000) in such markets, the same amount of labour will cost you $150 (Sh15, 000) in Kenya,” he explains.

Rudolf explains that this year for example, his wage bill has increased by Sh18 million in salary increments to the firm’s over 7,000 workers. “It becomes difficult to compete because if you increase the cost of your goods the buyers will just move to get supplies from Bangladesh, Cambodia, Vietnam etc.”

It is for this reason that imports from Asian countries like India and China have cut the market share of Kenya’s manufacturing goods to the East African Community, Kenya’s largest market for manufacturing goods, from 9 to 7 per cent in just four years.

In the last five years alone, Chinese imports to Kenya have more than doubled from Sh167 billion per year to Sh337 billion recorded last year according to figures from the Kenya National Bureau of Statistics.

With the completion of SGR and integration of the railway into China’s larger regional infrastructure pipeline, Kenya is likely to see an nflux of more imports as Chinese producers and SMEs send their products through the silk road.

This is spelt out in China’s five-year master plan launched last year. “We will move faster to make our export-intensive industries more internationally competitive,” reads the plan in part. Local manufacturing sector is likely to sink deeper into slump as the SGR eases inflow of imports.