Kenyan industry feels heat of energy costs

Sep 30, 2008 02:00 AM

The grim picture of what Kenyans face in the wake of the energy crisis is now emerging. On the list are massive job losses, lower revenues to the Government and economic slump and stagnation.
Also at stake is Vision 2030, the country's new development blueprint, aiming to transform Kenya into a newly industrialising, middle-income country providing a high quality life to all its citizens by the year 2030.

None other than the manufacturing sector, a key player in realisation of the 2030 plans, doubted its implementation and warned of thousands of Kenyans being retrenched. The industry warned that many factories may shut down or relocate to countries with lower production costs of which electricity is a key input.
The industry also proposed a number of ways to deal with the rising electricity costs including the Government reviewing its revenue policies, and providing relief to consumers, by absorbing some of the additional power production costs, like rental charges for emergency power generation.

"If the Government fails to address the issue, I know a number of our members are considering physical relocation to countries where the cost of doing business is cheaper," Kenya Association of Manufacturers (KAM) Chairman, Mr Vimal Shah who spoke for industrialists said.
Kenya Private Sector Alliance (KEPSA) Chairman, Mr Steve Smith added that already a number of local firms were increasing their production capacity in Uganda and Tanzania, while scaling down their Kenya operations. The power tariff increase affects all sectors, including horticulture, Jua Kali, tourism and manufacturing. In the short term, the industry players contended, they do not have a choice but to increase commodity prices, which would add to the already very high cost of living, further fuelling inflation.

The manufacturers proposed the Government addresses the high electricity costs, by lowering or suspending rental charges for the emergency power generators, and the fuel used, where it goes above $ 70 (Sh 4,900) a barrel.
"Government revenue makes up a significant portion of the fuel price, at 35 %, and with a high thermal content in electricity, Government should cap its revenue collections from fuel used for generation to ease the price consumers pay," they proposed.

They also want the Government to review financing models used by the utility companies. This, the sector players said, is important, because one of the arguments made by the Energy Regulatory Commission (ERC) when announcing the new tariffs in June, was that it would help Kenya Power and Lighting Company (KPLC) and KenGen meet the cost of new capital expenditure on systems improvement.
"We urge that this model used is revised, to reduce initial burden on consumers and spread payout over a longer time span," KAM said in the proposals. KAM members also say the Government should review the many programmes for demand expansion.

The Government, manufacturers said, should introduce tax incentives and for energy conservation, and credits for installation of power saving devices at household level and industry.
"Relying on State provision of electricity by KenGen alone is insufficient. Government should actively encourage other investors from the private sector to participate and explore other sources of thermal energy besides fuel based for example coal," they said.

Renewable energy
They noted that there are investors that have expressed interest to Government in this regard, but there has been slow response. The State also needs to encourage industries or large consumers to generate power for their own use and sell excess to national grid, like Mumias Sugar is doing.
The manufacturers also want the Government to promote renewable energy. They observed that the Government has stated severally its commitment to expansion and adoption of renewable energy generation for example solar and wind.

Addressing KAM board of directors earlier, Shah said electricity prices had increased by approximately 600 % over the last one year. Kenyan manufacturers are paying between Sh 10 and Sh 15 per kWh) of electricity, while their competitors in China and India pay the equivalent of between Sh 2.50 and Sh 3.80 per kWh of electricity, making their products much cheaper than Kenya.
According to Shah, the fuel cost adjustment in power bills is expected to go up again, from Sh 7.69 to Sh 7.78 per unit this month. In January, the charge was Sh 1.77 per unit, compared to January last year, when it was Sh 1.12 per unit. Shah disclosed that over the last two months, KAM had received strong protests from members regarding the increase in electricity costs.

KAM Chief Executive, Betty Maina, warned that an estimated 72,000 to 80,000 jobs were likely to be lost due to the energy crisis in the manufacturing sector this year. The director of Alloys Steel Castings Sagoo Tejwany said his factory might be forced to close down within the next one-and-a-half months, if the current state continued. This, he said, would result in about 800 workers losing their jobs.
During the power rationing which devastated the economy in 1999 and 2000, several major companies moved production to other Common Market for Eastern and Southern Africa (COMESA) states from where they re-exported their products back to Kenya, without paying duty. Within the COMESA block, Egypt and South Africa have low power costs compared to Kenya.

Reckitt Benckiser East Africa, which closed its Nairobi factory last year, cited the increased cost of production as the main reason.

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