Earlier this month I was interviewed by The African Investor on Kenya’s Informal Economy.
The Kenya Industrial Transformation Programme (KITP) is an effort by the government to create an industrial hub in the country through sector specific initiatives in agro processing, textiles and apparel, leather, fisheries, services and SMEs (small and medium enterprises). With the SMEs sector being the fastest growing business segment of the economy accounting for 83% of the total employment demographic, I will highlight some of the strategies that have been proposed to make it more productive.
Some of the challenges that the sector faces include a lack of understanding of basic business practices such as book keeping and marketing. These limit their growth when it comes to accessing finance to expand their operations for they are seen to be high risk clients by financial institutions. The recent interest rate cap has negatively affected them as fewer can access loans from banks. Their level of human capital is also low due to a lack of formal education amongst most of the workers engaged in the sector. Most SMEs also have little knowledge of other markets which puts them at a disadvantage when it comes to approaching the export market.
Proposed initiatives in KITP aimed at uplifting the sector include the setting up of a fund to provide low cost financing to SMEs. The fund is to be set up as a credit guarantee system or as an investment in private equity funds with contribution from both government and development finance institutions. It is targeted at those SMEs with promising business plans as well as those that demonstrate potential for growth.
The strategy also plans on establishing communication and training between large companies and SMEs so as to facilitate subcontracting. This move is meant to increase the share of large corporations in the country sourcing from local SMEs to 30%, while building the capacity of SMEs to meet these needs. This will also look into ways of improving the capacity of the large companies to identify and manage suitable SMEs.
Another intervention is that of enhancing MSE’s (Micro and Small Enterprises) competitiveness. This will be done through a competition in every county where 5 products from entrepreneurs engaged in the manufacturing and agribusiness sub sectors will be selected to have their products available on supermarket shelves. The process will involve conducting quality, packaging and branding training to get their products certified by the Kenya Bureau of Standards (KEBS). The winner of this competition will receive a prize of Kshs 1 million aimed at improving their operations.
Further, there are plans to establish a metal fabrication centre of excellence in Kariobangi, Nairobi, aimed at upgrading the existing Jua Kali metal fabricators by providing common user facilities, training programmes and incubation facilities. This will improve the quality and quantity of the products that these artisans produce, as well as equip them with technical skills which will include knowledge on how to operate modern machinery.
The KITP should not be one of those policy documents that are drafted, launched and eventually gather dust on the shelves of libraries and institutions. It is a noble initiative that needs to be fast tracked and implemented as it will translate to the improvement of the lives of the millions of Kenyans that are engaged in micro, small and medium sized economic activities.
Informal Economy Analyst
During this past week, the Ministry of Industrialisation and Enterprise Development organised an exhibition in Nairobi which was aimed at bolstering the sales of apparels that are manufactured at the Export Processing Zones (EPZ). Cabinet Secretary, Adan Mohamed announced that government had decided to avail up to 20% of goods and apparels manufactured by companies at the EPZ to the local market at affordable prices but for the same export quality. He added that some outlets will be opened around the country by small and medium sized enterprises where Kenyans can access the items after the exhibition.
This is an interesting development considering that EPZs were set up with the initial intention of producing goods for export only. The government also intends to set up Special Economic Zones (SEZs) in key urban centres in the country whose main goal is to diversify manufacturing activities and create employment. Pilot programs for this project are currently ongoing in Mombasa, Lamu and Kisumu. As a means to fast track the establishment and growth of SEZs, the government exempted all supplies of goods and services to companies and developers in the zones from VAT and reduced the corporate tax rate for enterprises, developers and operators to 10 per cent for the first 10 years and 15 per cent for the next 10 years.
Considering the fact that sustained poverty coupled with subpar economic growth has continued to inhibit growth in the demand of locally manufactured goods, effective demand continues to shift more in favour of relatively cheaper imported manufactured items. In addition, the high cost of inputs informed by poor infrastructure which leads to high transport costs has led to high prices of locally manufactured products thereby limiting their competitiveness in the local and regional markets.
This is a move that if properly executed, will be an avenue for sustainable business growth and development for micro enterprises that operate in the agriculture, manufacturing and tourism sectors. This is the right time to look at value addition strategies that target the micro and small businesses that will be suppliers of products and services to the SEZs. In its strategy on decent work in the informal economy, the International Labour organization (ILO) suggests that one way to improve the sustainability of these informal enterprises may be to link them in cooperative structures where jointly owned input supply, credit and marketing services can be organized without compromising the autonomy of the individual entrepreneur.
It will be interesting to see the extent to which informal enterprises will benefit from SEZs. Deliberate thinking on how to link informal manufacturers with the SEZ initiatives is important. Strategies need to be developed to enhance the capacity of informal manufacturers to better service the formal enterprises that will be operating from the industrial parks. Such measures should include, but not limited to training, business mentoring and organizational development projects to better position the informal sector and their ability to meet orders by the established formal organisations. Doing so would improve their capacity to deliver quality products and thus better integrate them into the value chain.
Informal Economy Analyst
Farming has long been the main economic activity in most rural settings. It is the backbone that provides most households with a source of livelihood. This is one of the reasons why most African communities see land as a major asset for it provides a form of stability when it comes to providing basic essentials for survival and existence. The Economic Review of Agriculture (ERA) 2015 states that the agriculture sector is the backbone of Kenya’s economy and the source of livelihood for majority of the rural population. The sector contributes about 26 percent of the country’s GDP and employs about 75 percent of the population.
Most rural small scale farmers still have to contend with unpredictable weather patterns, inadequate access to technical expertise, outdated farming tools and techniques that tends to reduce their productivity as well as the high cost of farm inputs. In the long run, this pushes their costs of production to levels that make their ventures unprofitable and unsustainable. They also have to contend with poor infrastructure networks that make it difficult for them to access the markets that they serve in instances of heavy rains that make roads practically impassable.
The Food and Agriculture Organization states that the potential contribution of the agricultural sector to poverty reduction, improved livelihoods of rural households and greater food security in Sub Saharan Africa is undisputed. Yet growth in the sector remains challenged by an uncertain policy environment and poor infrastructural development that limit market access, increase post-harvest losses and raise the cost of trade. Thus food prices in the region remain high, which impacts negatively on food security, particularly given that most small scale producers are still net buyers of food products.
According to Juhudi Kilimo, the average smallholder farmer in Kenya owns 1 -5 acres of land and mainly produces for subsistence or sales in informal markets to earn USD 2-4 per day. They are a micro finance institution that provides loans to rural small holder farmers and small-medium agribusinesses to enable them acquire high quality agricultural assets that enhance their productivity. The CEO, Nat Robinson has pointed out that one of the major obstacles rural small holder farmers face in their quest to become productive is that they lack the collateral assets required for financing. This is due to the fact that small businesses based in agriculture are perceived as too risky by commercial and micro finance institutions as well as being simply too far away or too expensive in invest in.
He reiterates that rural small-scale farmers cannot compete with larger producers because they lack the capital to transport and market their produce to more lucrative urban markets. This limits smallholder farmers to supplying informal markets where they are often forced to sell their produce to local brokers, or in open-air markets and kiosks. In this sense, they end up being paid at rates that are below market prices for their produce.
It is thus imperative to ensure that the agricultural sector and the small scale farmers in particular get the support that will enable them to become more productive. This will in turn positively contribute to poverty eradication by creating sustainable revenue streams through the creation of quality employment avenues.
Informal Economy Analyst