African worker with red gloves cutting with a torch corner metal in a steel factory.
A special tax window for companies doing business with the government, and which secured a Thika-based company Sh27.3 billion tax relief last year alone, has rattled the steel manufacturing industry, with the players crying foul.
Blue Nile Rolling Mills, which has a 10-year tax exemption deal under the Special Operating Framework Agreement (SOFA), is at the centre of a storm industry players say the playing field is skewed. The SOFA exemptions could be aiding loss of billions in tax revenue each year, as some firms raise concerns over loopholes giving their competitors an edge.
Section 13 of the SOFA Act outlines the eligibility criteria for companies to be considered for exemptions. These include those specifically incorporated for the purpose of manufacturing human vaccines, and companies with a capital investment of Sh10 billion.
In a statement to Sunday Nation, Blue Nile Rolling Mills Limited, through one of their directors Kotni Rao Kumar, explains that they had applied for the SOFA on September 28, 2019 and that the agreement was entered in January, 2020 pursuant to Finance Bill 2018, with timebound longevity.
The company, Mr Rao said, put Sh2.43 billion in investment in the high-speed galvanizing factory, with an annual capacity of 30,000 tonnes, local value addition and resulting in foreign exchanges the company said hit Sh1.93 billion.
“As to validity of the agreement, the Attorney General has informed our advocates in writing that he has issued a comprehensive advisory to the relevant ministries for their necessary action. Thus, there is nothing untoward about the agreement,” the company said in a statement.
Through the agreement, the company said, 3,000 people have been employed through its eco-system, 100 small medium enterprises for the manufacturing of fencing products such as chain link and barbed wire, and that Kenya has now been approved to export GI Wire to the United States.
Currently, it said, the company exports 40 per cent of its products, with a 100 per cent import substitution ensuring that “we are completely self-reliant” on barbed wire.
In 2020, Ukur Yatani, the then Cabinet Secretary, National Treasury and Planning went approved Blue Nile Rolling Mills Limited SOFA tax exemptions for a period of 10 years. This means the deal expires in 2031.
This saw the remission of customs duty, value added tax (VAT), import declaration levy (IDF), railway development levy (RDL), and export and investment promotion levy Export and (IPL) in respect of raw materials being imported for the manufacture of galvanizing wire at their factory in Thika, Kiambu County. Similar status quo has been retained in the current government.
In the most recent tax exemption the Nation has seen, Blue Nile Rolling Mills Ltd was considered for tax exemptions totaling Sh27.3 billion.
Nation is in possession of the contents of a letter dated September 22, 2023 written by Dr Juma Mukhwana the principal secretary at the Ministry of Investments, Trade and Industry (MITI) to the principal secretary of the national treasury Dr Chris Kiptoo, and copied to the then MITI CS, Moses Kuria, asking the national treasury to consider the exemption to Blue Nile.
Pursuant to this, on November 29, 2023 Rebecca Miano, the then MITI CS who had just taken over from Moses Kuria, in October, wrote to Prof Njuguna Ndung’u, the then National Treasury CS expressing that MITI was “in support of the fact companies that have signed a SOFA agreement with the government of Kenya continue to enjoy tax incentives as set out in their respective agreements.”
The former CS also withdrew a letter she had previously written to the National Treasury asking for the SOFA agreements to be discontinued.
Ms Miano wrote, “Accordingly, our letter Ref. MITI/SDI/7/18 dated 23rd October 2023 is hereby withdrawn and nullified. We request that companies that have SOFA agreements continue to enjoy tax incentives as set out in their agreements.”
When contacted, Dr Mukhwana explains that when he got into office there was a push by the ministry to cancel the SOFA tax remissions contract with Blue Rolling Mills Limited, because “some government officials felt that it was a political move.
“When we came in we sought to do due diligence and legal audit on the project before we could proceed. We sought the opinion of the Attorney General and the National Treasury – the two signatories to the project. They both approved it in written. The project was also approved for continuation by the then Cabinet Secretary for MITI, Rebecca Miano based on the two advisories. With this, we continued with it.”
“We are implementing an agreement that was signed long before this government came into power. SOFA is provided for in Kenyan laws. It serves a very specific purpose. Not even the provisions in the Finance Bill 2022, that manufacturing companies applying for SOFA must meet the Sh10 billion capital investment mark, bring in new technologies and produce 40 per cent for export markets can render the contract invalid,” said the principal secretary.
“This is an ongoing contract. How can it be affected by the finance bill 2022? It was signed. It is already in force.” Dr Mukhwana further explains that by the time Blue Nile Rolling Mills applied for the SOFA consideration they were applying for funding from the International Finance Corporation (IFC) and that, they requested for that support.
The fact that they had a SOFA was factored in as that is how they were to break even to sell competitively outside Kenya, he points out.
“If we wake up and say that we have to terminate it, then we have to pay the losses that they make. We asked the AG for legal opinion he warned that it could not be vacated since it is a law abiding contract that there are liabilities to be paid if it were terminated.”
Asked why other local manufacturing were not being accorded for the same, Dr Mukhwana said that considering firms for SOFA exemptions is a rigorous process.
“The capital requirement, Sh10 billion is huge. For the two years I have been the PS, no company has applied to be considered for SOFA.” The SOFA, Dr Mukhwana went on, was signed on Jan 2020 pursuant to introduction of SOFA provision in Finance Bill 2018 with few companies.
“This SOFA agreement was entered way before the new government came into power. In the Finance Bill 2018, there was no investment limitation clause. The capital limitation clause was introduced in the finance bill 2022. The exemptions are given to raw material used in their production line. By the time of signing the agreement there was no import duty and export levy on the raw material. These were introduced later. Blue Nile rolling was under sofa for their production GI wire, which was imported into the country to make products mostly for export,” said Dr Mukhwana. It was later agreed that the only way to stop the project was to amend the law, Dr Mukhwana says.
However, the matter was canvassed through parliament without success.
