US embassy cable - 05NAIROBI3072

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. 
 
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KENYA'S GARMENT AND APPAREL INDUSTRY AT RISK 
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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. 
 
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THE SECTOR CAN BE SAVED -- MAYBE 
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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. 
 
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USAID/REDSO IS HELPING 
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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. 
 
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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. 
 
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COMMENT 
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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