US embassy cable - 05NAIROBI4421

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, Export 
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