Introduction
Kenya’s manufacturing and industrial sector has been recording remarkable growth in the past few years due to general improvement in the economy and a campaign to rehabilitate the infrastructure and change the trading environment. Since the country’s economic mainstay is agriculture, most industrial and manufacturing plants basically process agricultural products, food, clothing and textile, dairy and beef.

There are also various industries that produce wood, steel and building materials. The manufacturing sector can be classified into two – small-scale and large-scale. The large-scale industries produce goods in large quantities and employ many people as opposed to the small-scale, which essentially produce goods in small quantities and employ few people. A number of the small-scale industries are family-owned or individual based outfits that produce goods on demands and serve a limited catchment area. The small-scale manufacturers, popularly referred to as Jua Kali (hot sun) dealers produce a variety of goods both for local use and export.

Manufacturing sector contributes about 13 per cent to the GDP. It provides employment to about 300,000 people in the formal sector and about two million in the informal sector. Granted, industry and manufacturing is core to the country’s economic recovery.

The growth of industry and manufacturing sector is determined by physical infrastructure, tax regime, security and availability of raw materials at affordable rates. Government’s efforts to rehabilitate the infrastructure, especially roads, water and power is beginning to expand opportunities for investment in industry and manufacturing. But the high tax levels and rising cases of insecurity continue to discourage investment. Importation of cheap commodities like electrical equipment and even processed foods are posing a serious challenge to local industries and eating into their profits.

Despite the fact that the government has been working on infrastructure rehabilitation, especially roads, the process has generally been slow such that many roads are still in poor condition, while the rail transport remains in poor shape. Due to this, transportation of raw materials and finished products is expensive, which is a disincentive to manufacturers and the industrialists.

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General trends and highlights of 2005
In 2004/05 financial year, the sector recorded a 2.7 per cent growth, rising from the previous 1.4 per cent. The percentage of revenue from sales of manufactured goods went up by 4.9 per cent, while the number of people employed in the sector increased marginally by about 3000. The Export Processing Zones (EPZ) were the main growth areas in terms of revenues and employment opportunities, which is explained by the fact that they have incentives like tax waivers that have generally lowered their costs of production.

Some of the reasons behind this performance are tax waivers on inputs for industries and promoting export of manufacturing items. The reduction of the value added tax from 18 to 16 per cent went a long way to minimising production and overhead costs and increasing incomes for the industries.
The African Growth Opportunity Act (AGOA) and the trading arrangements in the Common Markets for Eastern and Southern Africa (COMESA) continued to expand markets for processed Kenyan goods. The move towards creating a common market in East Africa with significant reduction in taxes among the member countries – Kenya, Uganda and Tanzania – also opened up more opportunities for trade.

In terms of the sub-sectoral performance, the agroprocessing industries did pretty well. Specifically, dairy production, fish processing, oils and fats, confectionary and chocolate realised high turnovers in 2004. Manufacturing of drugs, medicines, toiletries, petroleum and metallic products did well. The textile sub-sector that is currently benefiting from the AGOA markets continued to do well as so was paper and plastic products. It was noted, though, that the manufacture of key agriculture products such as sugar and grain recorded declines. Sugar sub-sector is itself reeling from low production levels attributed to infrastructural problems, poor pay to farmers and mismanagement of the sugar factories. The table below shows the overall performance of the various manufactured products.

Policies to improve industry and
manufacturing sector
The government has systematically moved to provide an enabling environment to promote industry and manufacturing. One, the reduction of the value added tax (VAT) from the previous 18 per cent to 16 per cent in 2004, which lowered the cost of production, had a positive impact on industry and manufacturing in 2005. The previous tax rate of 18 per cent was burdensome and given that manufacturers were required to pay other taxes, all combined to make doing business in Kenya an expensive undertaking.

The policy of reducing trade regulations and requirements continued in 2005, with the significant move to cancel 17 trade licences that business people were required to obtain in the past. This combined with the policy of limiting the number of paper works required for import and export transactions went a long way to promote manufacturing and industrial sector. Unlike in the past, now it far shorter time to clear goods at the port, hence ensure speedy delivery of goods and commodities. The export processing zone (EPZ) where manufacturers get tax waivers and rebates on other expenditures like water and electricity continued to expand to cash in on the AGOA market.
Efforts being made to rehabilitate and expand infrastructure, especially roads, railway, water and sanitation and electricity have also boosted the performance of industry and manufacturing sector. Significantly, increasing the number of goods trains and opening up new routes like one in Central Kenya have provided manufacturers with cheaper and convenient means of accessing the raw materials they need for their production and likewise offered them an easier way of transporting their finished commodities to markets.

Similarly, the government has been working on policies to build capacity and put in place institutions to monitor international trade to deal effectively with the problem of dumping of cheap imports that have strangled the market and pushed some local manufacturers out of business. A secretariat on counterfoil control has been set up and commercial courts are being expanded to handle commercial disputes and unethical practices in the sector. Stiffer penalties, including higher tax regimes, have been enforced on some cheap imports like second hand vehicles and sugar to discourage trading in them.

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Challenges
Despite efforts being made to rehabilitate and expand infrastructure, the process is rather slow. Most roads are still in poor condition, while the railway network is still unreliable, while water and power supply are still erratic. All these affect industry and manufacturing sector in a big way and making the cost of doing business quite expensive.

Tax regimes are still un-favourable and so are the trading regulations. Manufacturers continue spending a lot of time and money processing trade documents and that slows production and marketing processes.

The legal system has not been streamlined. Commercial disputes take so long to adjudicate due to shortage of magistrates and long processes of paper work. This does not inspire confidence in the manufacturers.

Policy changes like reduction of the number of trading licences as well as cutting down the number of days required to clear goods at the Mombasa port have not been fully implemented, hence their impact have not been felt.

Regional trade has not reached the desirable levels due to lack of harmony on the trading rules and regulations among the various countries. A number of countries, who are members of trading blocks like COMESA and East Africa Cooperation, continue to lock horns over some trading rules and systems and this denies the member states a chance to exploit the benefits of larger markets.

Conclusion
Industry and manufacturing sector hold the key to Kenya’s economic growth given the desire to diversify from agriculture to other sectors. Although the sector’s contribution to the national economy has not significantly increased, there is every reason to believe that with proper policies and investment incentives in place, industry and manufacturing sector is a growth area.

Like with the investment, boosting industry and manufacturing sector required radical and urgent radical changes in trade policies, infrastructure rehabilitation and expansion, tax reductions and opening up of new markets. Equally, there is need to move from the agribased industrial and manufacturing enterprises to steel and electronics, which have higher returns.

Efforts so far made in curbing insecurity must be intensified so that the country becomes a safe and conducive place for industrial and manufacturing investments.

Present Status of the Paper Industry
There are six firms in the paper industry with a total production capacity of 125,900 metric tonnes of paper per year. This is against the country total demand of 220,000 M/T a year. The first paper production in the country started in 1957 by Kenya Paper Mills at Thika. Thereafter other 5 firms have been established to meet the ever growing demand for pulp and paper this includes:
• Pan African Paper Mills.
• Madhupaper (K) Ltd.
• Highlands Paper Mills.
• Kisumu Paper Mills.
• Chandaria Industries Ltd.

Kenya Paper Mills at Thika which produces:
• Test liners.
• Fluting medium.
• M. G. libbed manilla paper.
• Cover pressings.

Pan African Paper Mills Ltd (PPM) which is a joint Venture project between the Kenya Government, I.F.C. and Birla Group of India. PPM produces the following grades of paper:
• Packaging materials.
• Writing paper.
• Printing and newsprint.

Madhupaper (K) Ltd which produces:
• Facial tissues.
• Napkin tissues.
• Bread wrap.
• Kraft liner.

Highlands Paper Mills which produces:
• Straw boards.
• Paper boards.
Kisumu Paper Mills Ltd produces:
• Kraft liner.
• Flute medium.
• Core paper.
• Wrapping paper.
• Envelope paper.
• Paper boards.

Chandaria Industries Ltd produces:
• Packaging and facial and napkin tissues.

Total production of pulp and paper of 125900 M/T is inadequate to meet the country’s demand of 220,000 M/T a year. The difference is met by importation. Below are the latest import statistics in K£ - value. (Currency conversion: 1US$=K£2.9).

Paper and Paper Product
1990 – K£40.95M
1991 – K£46.38M
1993 – K£48.03M
1994 – K£80.27M

Resource Base
Currently, only Pan Paper Mills is allowed to fell trees to produce virgin pulp for paper. The rest of paper manufacturers use waste paper as their raw material. For sustainable paper production, sound afforestation measures are required. At present, the country has 155,000 hectares of land under forests. Though this might look bright for the paper industry, it should be noted that forests have continued to dwindle due to pressure on them for settlement and farming. However, the Government has put in place all the necessary measures to increase acreage under forests by planting more trees itself and also by sensitising the local communities on afforestation programmes.

Opportunities for Investment
Considering the large amount of money the country uses to import pulp and paper, investment opportunities exist for more paper mills to close the local demand gap and also for export. With the liberalisation of the economy, production units can be set up using imported pulp and waste paper and later integrating backwards by planting own trees. Opportunities also exist for exploiting alternative sources of raw materials such as sisal waste, bamboo, rice straw, maize straw, wheat straw and spline liner bagasse. However, thorough research is needed in order to exploit the opportunities in these areas.

Potential projects that can be identified under this sector include the manufacture of:-
• Self-adhesive paper – PPM has already started manufacturing this product.
• Coated paper.

About Pan African Paper Mills
Panpaper was a project conceived by the government of Kenya in the late 1960s for socio – economic development of Western Region and achieve self sufficiency of paper and paper board, utilizing domestic forest plantations. The company commenced operations and production in 1974 with a rated capacity of 45,000 tons of paper per annum. Orient Paper & Industries Ltd (OPIL) which has a 30% shareholding provides the technical know – how and management services to Panpaper since its inception.

Panpaper is a large industrial undertaking catering to diverse domestic paper and board requirements. The industrial complex has chemical Pulp Mill, Mechanical Pulp Mill, Waste Paper Recycling and Deinking Plant, four Paper Machines, Chloro- Alkali Plant, Utilities including Power Generation plant and Workshop. With all these facilities the company has increased the capacity from 45,000 tpa to 120,000 tpa of paper and boards.

The company has the unique distinction of being the only pulp & paper mill in the sub Saharan Africa of having been accredited with ISO 9001 for maintaining product quality standards & ISO 14001 for ensuring environmental friendly operations.

Products
Panpaper products are of international quality. These products are exported, directly and indirectly, to East Africa, West Africa, Europe, Egypt, Middle East, India and other Countries. The company has established system of regularly monitoring and benchmarking its product quality with those of global competitors.

The Company has also been recycling waste paper, saving wood resources and improves the environment. Panpaper generates about 7.5 MWh of electric power in – house.

Panpaper has undertaken various management initiatives in an effort to raise its production. With a continuous provision of know – how and introduction of new pulp and paper making technologies that is backed up by research facilities overseas.

The company has been assisting the Government of Kenya in reforestation program by providing seedlings, transportation to planting sites, funds for planting and maintenance for at least 3 years. This is in an effort to ensure future availability of raw materials on a sustained basis. 6 million seedlings are raised every year the company’s nurseries at Webuye and Kaptagat.

Wood Supply
In terms of Wood requirement and availability the company has replanted over 41,000 ha against 23,000 ha clear felled since 1974. To conserve wood resources, the company has installed a de-inking plant for recycling waste paper collected locally. This has also created employment for many people used in waste paper collection.

Panpaper takes research seriously and currently the company has an international memorandum of understanding with Kenya Forestry Research Institute (KEFRI) for a collaborative research project to develop disease resistant pinus radiate varieties (resistant to needle blight disease). Project work is being expanded to include genetic improvement of Eucalyptus species and other Pines. Cloning of high quality Eucalyptus Saligna is undertaken to improve growth and yield of this species. The success of this Research project will result in improvement of pulp quality and higher yield per unit area. The company also plants indigenous species on ecologically fragile areas for biodiversity.

The company has recently launched a social farm forestry project. Under this scheme, farmers are being identified and encouraged to plant trees on a section of their farms. Seedlings of suitable species and technical support are being given to the farmers with a buy-back assurance.

This project will go along way in poverty alleviation program of the Government and will result into increased forest cover in the country. The project is also in line with the Government’s economic strategy for wealth and employment creation.