Why cement companies are kicking up dust over Savannah

The perception from East African Cement Producers Association was that Savannah was enjoying undue advantage over the rest of the industry: a raft of sugary tax waivers and much more. A letter by the EACPA chairman may have convinced Savannah that it needed to let go of its incentive-laden status. Photo/FILE  AFP

By WASHINGTON AKUMU The EastAfrican

In Summary

• The perception from East African Cement Producers Association was that Savannah was enjoying undue advantage over the rest of the industry: a raft of sugary tax waivers and much more.
• Frenetic lobbying by EACPA, may have eventually convinced Savannah that it needed to let go of its incentive-laden status as an EPZ firm. The EastAfrican has learnt that Savannah has indeed applied for de-gazettement of its EPZ status.
• It is easy to understand why Savannah’s entry into the Kenyan and East African cement market late last year has raised questions. Located on the Athi River-Namanga Road, an EAC infrastructural project, Savannah is an oddity in many ways. Having a cement firm within an EPZ, albeit legal, is still considered a novelty. 
• Savannah is also reputed to have more modern facilities than its peers. It is the biggest stand-alone cement factory in Kenya in capacity, with an annual production of 1.5 metric tonnes, and according to industry sources, there is room for further growth.

You have a strong hunch, even anecdotal evidence that your competitor could be cutting corners, but you have no hard evidence to prove it. Worse still, you are constrained in your abilities to assemble the same.

Such a pursuit would require you to work with bureaucratic state agencies in at least five countries. A large scale investigation is not your core business, and the resources required would be massive.

That is the place where the East African Cement Producers Association (EACPA), a powerful lobby that brings together cement makers in the region, finds itself regarding the sixth and youngest entrant to the industry, Savannah Cement (EPZ) Ltd.

So what do you do? You make noise, and if your core business is cement manufacturing, raising a little dust wouldn’t hurt the cause. And that is what the EACPA has been doing.

It was a December 4 letter written by EACPA chairman Kephar Tande, and frenetic lobbying by his organisation, that may have eventually convinced Savannah that it needed to let go of its incentive-laden status as an EPZ firm. The perception from EACPA was that Savannah was enjoying undue advantage over the rest of the industry: a raft of sugary tax waivers and much more.

Besides, there was the allegation that Savannah could be selling more than 20 per cent of the cement it produces to the local market.

The EPZ Act sets this as the local market sales’ ceiling for designated firms. Local market, according to the EPZ parlance, refers to all the EAC countries: Kenya, Uganda, Rwanda, Tanzania and Burundi.

The EastAfrican has learnt that Savannah has indeed applied for de-gazettement of its EPZ status.

“I confirm that as true. Savannah applied for de-gazettement of their EPZ status early this year and the EPZA (Export Processing Zones Authority) dully forwarded the same to the Ministry of Trade as provided for in the EPZ Act,” the CEO of EPZA, Cyrille Nabutola, said when contacted for comment.

On the delay in processing the application, Mr Nabutola intimated that it may have been affected by the “uncertainty following the elections and the subsequent transition” to a new government structure.

The slow implementation of the application for de-gazettement by Savannah is only heightening the ferment in the industry.

“We have received no official communication on the status of Savannah Cement, so we cannot speculate. At the EACPA, we would want to know whether Savannah is still an EPZ firm or not. Naturally, we would love a situation where all cement producers are treated the same way. We are all for competition, fair competition,” said Mr Tande, during an interview. He is also the CEO of cement maker East African Portland Cement Company (EAPCC).

Mr Tande said their concerns were based on increased activity by Savannah in the Kenyan market in the recent past.

But even as EACPA and other industry players await official word on Savannah’s fate, there is another issue that raises serious governance issues around our tax regime for exports. 

How do you ensure that Savannah sells only 20 per cent of its production locally (read EAC states)? Do the EAC’s national Customs’ bodies have the political will and the capacity to ensure that only 20 per cent of Savannah’s cement is sold in the region?

True, the Kenya Revenue Authority has an office at the Athi River EPZ, from which it administers firms operating within the facility to ensure that they play by the tax rules. But how do you ensure that the provisions of the EPZ Act are adhered to, even outside Kenya’s borders, and especially among its EAC peers?

KRA and Savannah did not respond to e-mails sent by the time we went to press. Neither did the Ministry of Trade, Tourism and East African Co-operation, which is handling Savannah’s application for de-gazettement.

Once, the de-gazettement is completed, Savannah is expected to retain its location within land belonging to the Athi River EPZ, but lose its coveted status.

“De-gazettement means that the land on which Savannah is located ceases to be a gazetted EPZ area, but remains the property of the EPZ Authority, leased out to Savannah, and for which Savannah will continue to pay the EPZ Authority.  If de-gazettement is granted, Savannah therefore operates as a domestic company paying taxes as per the tax laws applicable to non-EPZ firms,” explained Mr Nabutola.

It is easy to understand why Savannah’s entry into the Kenyan and East African cement market late last year has raised questions.

Located on the Athi River-Namanga Road, an EAC infrastructural project that was launched last year by the region’s heads of state, Savannah is an oddity in many ways. (See picture gallery)

In an industrial town that hosts no less than five cement factories within a five-kilometre radius, having a cement firm within an EPZ, albeit legal, is still considered a novelty — the site was the alternative after loud protests from residents of nearby Kitengela over a previous location.  Savannah is also reputed to have more modern facilities than its peers.

The other cement makers in the neighbourhood are Bamburi, EAPCC, National and Mombasa Cement. ARM Cement is the other major producer in Kenya. Both Bamburi and ARM are regional players. The former has plants in Tanzania and Uganda, while the latter is in Tanzania.

But perhaps its biggest marker is its claim that it is the biggest stand-alone cement factory in Kenya in capacity, with an annual production of 1.5 metric tonnes, and according to industry sources, there is room for further growth. Other major producers like Bamburi and ARM have more than one production unit in the country.

Back to the regional picture; Savannah is part of a recent wave of investments in the sector that have upped capacity in the region, heightening competition and more importantly, holding out potential benefits for consumers in terms of stable and lower prices and bankable supply.

READ: EA cement prices to fall with new entrants

Surplus

Unlike her EAC peers, Kenya with an installed capacity of eight million metric tonnes, and consumption of four million metric tonnes, is a cement surplus country.

What this means is that the EAC and other nearby regional markets such as DR Congo, South Sudan and the wider Comesa FTA have become a major theatre of competition for the country’s six cement manufacturers. Here, they come face to face with low cost producers from Egypt and Asia.

The only hope for cement manufacturers is an increase in demand, especially from the huge infrastructure projects that the region is lining up.

The Kenyan market is bound to become even more saturated with the planned entry of Cemtech, a subsidiary of Sanghi Industries, which plans to construct a $120 million, 1.2 million tonnes-a-year plant in West Pokot.

READ: Cemtech to produce 1.2m tonnes of cement in Pokot
Mombasa (which owns Uganda’s Tororo Cement) and National Cement are some of the latest entrants into the Kenyan market with production units in Athi River.

In Tanzania, the sector has attracted interest from Africa’s richest man, Aliko Dangote. His Dangote Group is constructing a $535-million plant in the southern part of the country that starts production next year.

READ: Dangote cement plant excites market

It will have a capacity of over two million metric tonnes a year. Another Tanzanian producer, Tanga Cement Company Ltd, recently increased its capacity from 750,000 metric tonnes to over 1.2 million metric tonnes, through the launch of a second mill.