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The paper conversion industry faces yet another barrier in July after the East African Community (EAC) begins treating Kenyan sales in the region as domestic.
The paper conversion industry faces yet another barrier in July after the East African Community (EAC) begins treating Kenyan sales in the region as domestic.

Industry players say with 51.6 per cent of Kenya’s African exports ending up in the bloc, compensation accorded under the TREO (Tax Remission for Exports Office) programme is set to disappear even as converters grapple with the huge raw paper import duty imposed to prop up the tottering Pan African Paper Mills (PPM).

Packaging material for exports ranging from tea to cement sacks will be affected. Attempts to recoup the cost could push players out of business while increasing the cost of Kenyan goods.

Still applies

Thankfully for them, the TREO still applies for packaging material used for exporting outside the bloc.

Kenya has historically maintained high import duty on intermediate paper imports under the guise of propping up the 36-year-old Webuye-based firm.

The plant, crippled by a more than Sh8 billion debt burden, was closed at the beginning of 2009 and only resumed limited production in the last three weeks. The fate of the receivers hangs in the balance as the Cabinet crafts a revival plan that has been met with skepticism by the industry.

Of immediate concern to the converters who have been seeking a meeting with Finance minister Uhuru Kenyatta is the implication of the TREO expiry for exports to Uganda, the largest single market for domestic exports, Tanzania, Rwanda and Burundi.

Under the arrangement, firms are reimbursed the 25 per cent slapped on paper imports into the country.

What galls the Sh25 billion industry most is the fact that they have had to pay duty even as the government, which owns 34 per cent of PPM, explored means of reviving the largely political project that maintains the rural town of Webuye in Western Kenya.

Over and above that, the blanket duty regime applies to products that the plant has no desire or technical capacity to produce.

Those in the latter category include labels, books and calendars which are now entering duty free.

Convince state

Efforts by industrialists over the years to convince the State that paper is not finished product have fallen on deaf ears largely due to fear of a political fallout from Western Kenya.

They have been pushing for 10 per cent duty, applicable in the Common Market for Eastern and Southern Africa (Comesa), arguing that the imported paper and paperboard are intermediate products.

“At present there is no differentiation between converters’ raw materials and their finished products both of which are at 25 per cent duty. In some cases the differential is negative with raw materials at 25 and finished goods at zero to 10 per cent (e.g books, skillets),” says a paper presented by the Kenya Association of Manufacturers Paper and Board Sector to the government.

However, the argument has become an annual ritual with successive Treasury and Industry ministers burying their heads in the sand over the matter.

Most ironically, Tanzanian and Ugandan importers are not faced with any duty. The result is that beer labels are now being sourced from Tanzania at the expense of Kenya.

Special problem

Tanzania does indeed pose a special problem for Kenyan industry. It imports intermediate paper products from South Africa under the Southern African Development Community (Sadc) at zero duty and processes them for onward transmission to Kenya - at zero! Uganda equally levies no duty on raw materials, as paper is categorised there.

“The direction of trade in packaging has already started to reverse with Uganda and Tanzania exporting to Kenya in recent times while it was the other way only a few years back,” says the industry paper.

The situation for all paper products can only deteriorate in July as Kenyan paper industries try to compete with the products of the less-taxed neighbours and translocation is an appealing option.

The conversion industry at one point directly employed over 13,000 people and 50,000 indirectly. It is estimated to contribute Sh15 billion in government revenue.

But the numbers are understood to be falling sharply - by over 3,000 employees in recent years - as consumers of, for instance, calendars, labels, exercise and textbooks chose to bring in the goods duty free from as near as Mauritius or as far as Hong Kong.

Have failed

Policy makers have failed to harmonise domestic tax policies with the EAC reality so far (not only for the paper industry) eroding the advantage of the relatively advanced manufacturing sector in Kenya.

Before PPM went under last year, its runaway officials, under the management of Orient Paper of India who hold 54.3 per cent of the firm, were seeking 35 per cent duty for imports to the chagrin of other players.

The industry is quick to point out that even Mufindi, the Tanzanian paper mill exporting tonnes of paper to Kenya, has not asked for import duty protection.

Ironically, PPM cited a 33 per cent energy cost component as a factor in its failure, and it remains to be seen how it is going to survive. The Kenya Forest Service has also been opposed to its tree harvesting and particularly moves to reduce tree royalties seen by converters as one way out.

They advise that power subsidies and the reduction of the variety of paper products manufactured be tried out. Nevertheless, they point out the firm is competing with plants 10 times its size and has no economies of scale.

In the meantime, they say they are using 45 per cent of their capacity, down from 55 per cent three years ago. Cement sack makers, for instance, lament the fact that of eight million bags required by local cement makers, only a million are sourced locally with the balance being imported bought from Sharjah, one of the seven United Arab Emirates.