What hurts Kenya's industrial takeoff

While President William Ruto was slamming Western institutions for being outdated and failing to live up to today’s global realities, his administration was being called out for presiding over the country's deteriorating business environment.

Kenya’s shaky energy supply and its high cost once again became a topic of discussion internationally when the Vietnamese tycoon Doanh Chau critiqued Kenyan leaders for talking big but falling short on delivery. 

During his visit to China, President Ruto called for the overhaul of institutions such as the World Bank, International Monetary Fund and the UN Security Council, terming them as historical relics that have failed to address the challenges the world is grappling with currently.

But Chau appeared to tell Kenyans that their leaders have failed them, noting they are smooth talkers but fail to move their grand plans to execution. 

Chau was perhaps telling Kenya’s leadership what the local industry has been trying to tell the government, albeit in more diplomatic and cautious terms.

He also has the benefit of being a business leader at a time when his country has ="https://www.standardmedia.co.ke/national/article/2001507416/mps-want-energy-sector-bosses-probed-over-high-cost-of-power">transitioned from a poor nation< to a relatively prosperous one.

He cited the unstable power supply in the country as well as other missed opportunities, such as tourism, where despite the potential, visitors are turned off by lengthy wait times when they are visiting local parks and other areas, where investors are “scared off by petty corruption, and legal instability”.

In a LinkedIn post, Chau said he had met with Kenya’s leadership, including Prime Cabinet Secretary Musalia Mudavadi and President Ruto in Nairobi. 

“They spoke with energy about Kenya’s future— investment, infrastructure, and public housing. But behind the polished language was a painful truth: there is no serious execution culture,” he said, adding that the country’s major challenge is not the lack of money or talent but the absence of long-term vision.

“Leaders talk big, but systems don’t move. They wait for outsiders to bring business, rather than build an environment for it.”

One of the biggest failings, according to Chau, who is the President of Vietnam Gas, is a lack of adequate energy to spur thriving industries and with it jobs and high export earnings.

He contrasted his country, Vietnam, which with a population of 100 million has an electricity generating capacity of 70,000MW, with Kenya that has an installed capacity of 4,000MW serving 50 million people.

“This (electricity) is not a side issue, it’s the foundation of economic development. No investor will build a factory where the lights flicker every day. Vietnam knew this. It built power generation before free trade zones, and now it’s a global export hub,” he said in the post titled Why Africa waits while Asia builds: a hard look at Kenya. 

“The global window is closing. Asia isn’t waiting. If Kenya and much of Africa want a real economic future, they must turn off the microphone—and turn on the power.”

Businesses operating in Kenya have for years cited different challenges that have resulted in many of them exiting the country or significantly scaling down operations.  

This exodus has been seen across different sectors, including manufacturing, consumer goods and other key industries.

The departure of multinational giants such as Procter & Gamble, Reckitt Benckiser, Colgate-Palmolive, Nestle, Cadbury and GlaxoSmithKline, which have either relocated manufacturing operations or adopted distribution models, underscores the gravity of the situation. 

The firms cited issues such as high tax burden, high production costs, regulatory hurdles and an ="https://www.standardmedia.co.ke/business/business/article/2001508879/high-cost-of-living-dampens-brand-loyalty-survey">uncompetitive business environment< as among the factors that led them to exiting Kenya or scaling down operations.

This has resulted in thousands of Kenyans losing their jobs. 

The Federation of Kenya Employers (FKE) in January said 5,567 Kenyans have been declared redundant over the past three years, with the manufacturing sector bearing the brunt of the job losses.

FKE urged the government to adopt a “stable, predictable, and progressive tax regime” to foster business planning and long-term investment.

Electricity supply has been among the factors cited as driving up the cost of doing business. It is an issue that has been discussed at length, with industries giving a wide range of recommendations on how to improve supply and cut power costs. 

Kenyan firms and, to some extent, independent offices have always complained about the high cost and unstable supply of power in the country.

They have pointed out the areas that need to be acted on to improve power provision that range from strengthening the grid to relooking at Power Purchase Agreements (PPAs) between Kenya Power and power producers, and reducing electricity system losses and downward review of taxes and levies.

These recommendations are, however, rarely followed up on. In a March report, the Parliamentary Budget Office said Kenya has the most expensive electricity regime in the region.

This has eroded the impact of the high connectivity rates in the country, which, despite high cost, has the highest connectivity rates at over 70 per cent.

Over 90 per cent of the electricity consumed in the country is also from renewable sources. “Despite these efforts, the cost of energy remains significantly high for the majority of Kenyans and also in comparison to the region,” said BPO in its report.

“For instance, the average residential electricity price per kWh (kilowatt hour) in Kenya is $0.26 (Sh33.8), Uganda is $0.17 (Sh22.1), Tanzania is $0.09 (Sh11.7), South Africa is $0.12 (Sh15.6), and Ethiopia is $0.06 (Sh7.8).”

“High energy costs can be a burden on households and businesses, affecting their overall economic well-being. Addressing these costs requires innovative approaches, including modernising power infrastructure, improving energy efficiency, and increasing renewable energy sources.”

The cost of electricity has since January 2024 been on the decline, dropping from a high of Sh36 per unit to about Sh29.39 in April this year.

Compared to other countries in the region, which compete with Kenya in attracting industries, the cost is still high.

It is also significantly higher when compared to the Sh21 per unit that households were paying in 2021 after the government instituted a subsidised tariff that was however done away with when Kenya Kwanza came to power.

Parliament too has been pushing for lowering the cost of power. In a November report, the National Assembly’s Committee on Energy noted that Kenya's power costs were the most expensive in Africa, a turn-off for investors.

“The committee noted that the cost of power in the country is one of the highest in Africa, and this accounts for the high cost of production, which acts as a disincentive to investment, affecting Kenya’s competitiveness to attract investment,” reads the Committee’s report that was presented in Parliament last November. 

The Committee had since April 2023 been probing the factors that are responsible for the high cost of power in the country. It is one of the many inquiries into the high cost of power in Kenya, with little having been achieved from past inquiries.

In their latest report, the MPs recommended the probing of some of the power sector institutions, including the Energy Ministry, Kenya Power and some of the IPPs as well as former senior officials at the State-run agencies, accusing them of having a hand in the high cost of energy.

This was through overseeing the signing of PPAs that were skewed in favour of power producers. It said the Ethics and Anti-Corruption Commission (EACC) and the Directorate of Criminal Investigations (DCI) should investigate the institutions and officials, but more than six months after the report was tabled in parliament, nothing has moved.

In probing the high cost of power, the MPs invited power sector stakeholders and Kenyans to give their take on what needs to happen to lower the cost of power in the country. 

During the public participation phase, sector players, large and small electricity consumers, gave their take on why power costs are high in Kenya and what can be done to lower them.

Their sentiments, which are captured in the report, demonstrated that it is possible to reduce the cost of electricity through initiatives such as cutting waste and reducing taxes.

The Kenya Association of Manufacturers (KAM) told the committee that if Kenya Power, together with other electricity sector agencies, can reduce system losses to 14.5 per cent from the current over 23.47 per cent, it would save the customers on average Sh68 billion annually, that is from Sh19.33 billion to Sh13.11 billion monthly.

KAM also noted that another way to lower costs for industries would be to let them buy power directly from producers and be billed at the generation site.

They would then pay for the transmission cost to Ketraco, which would transport the electricity to their premises

Manufacturers can currently buy electricity directly from power producers following enactment of the Energy Act 2019 but so far, this is only seen as being applicable when they set up industries near power plants. Such a scenario is envisaged with KenGen’s industrial park at Olkaria.

KAM also said there should be a legal provision to put a margin or mark-up over and above the aggregated generation tariff, with the sole objective of driving operational and administrative efficiencies among power sector agencies.

The association noted that by implementing the different recommendations industries have made, including taming system losses, billing industries a generational tariff and requiring power producers and state-run agencies to run efficiently, the customer burden will reduce by about Sh31 billion, translating to a reduction of Sh3 per unit.

While the National Assembly has been pushing for lower power costs, players note that it has the power to play part in lowering costs. This includes passing laws that can reduce taxes and even subsidise the cost of power.

In a presentation to the Committee, the office of the Auditor General noted that levies have contributed greatly in pricing of electricity. Among the levies that push up the cost of power are the rural electrification project levy, which accounts for 3.2 per cent of cost of a unit of power as well as Value-Added Tax (VAT) of 16 per cent.

There are also the pass-through costs – the Fuel Cost Charge and the Foreign Exchange Adjustment – that vary every month and currently account for about 14 per cent of the power bill.

Other levies are the Epra levy and the Water Resources Management Authority charges.

The Energy and Petroleum Regulatory Authority (Epra) observed that taxes and levies impact the overall cost of power and noted that mechanisms should be put in place to offer relief to consumers.

The energy industry regulator appeared to suggest that for power prices to come down, MPs have to act, noting that various ="https://www.standardmedia.co.ke/national/article/2001511027/development-budget-to-be-slashed-funds-to-be-directed-to-essential-programs-says-mbadi">taxes levied on electricity< are anchored on various statutes which are passed by Parliament.

As the regulator, it noted that it implements policies in place and as such, whenever taxes are approved, it has to implement and pass the cost to consumers when developing the tariff.

Epra said managing and offering relief to consumers from the impact of these taxes and levies on the cost of power can be achieved through strategies such as subsidies and tax exemptions, which are to an extent within the mandate of MPs who need to pass laws to effect such measures.