Earlier this month I was interviewed by The African Investor on Kenya’s Informal Economy.
The Kenya National Bureau of Statistics (KNBS) released the Economic Survey 2017 which presents an analysis of the key sectors in the Kenyan economy. In relation to the informal economy, the survey only focused on the employment angle of the sector. The rest of data on the informal sector was extracted from the MSME 2016 Survey. Getting comprehensive up to date data on the informal economy is still a big challenge.
The 2017 survey indicates that the total number of new jobs created in the economy was 832.9 thousand. Of these, 85.6 thousand were in the formal sector while 747.3 thousand were created in the informal sector. The share of new jobs created in the informal economy represents a 5.9 per cent growth from 83 per cent to 89.7 per cent or 13.3 million people. Wholesale and retail trade, hotels and restaurants industries continued to absorb the highest number of employees, accounting for 59.7 per cent of total employment, while the manufacturing industry had a share of 20.4 per cent in informal sector employment.
A continual growth of the informal sector can be attributed to factors such as the shrinking availability of formal employment opportunities as well as the resilience of the Kenyan citizens. Informal sector growth in the country is however a problem due to the fact that most jobs in the sector are of substandard quality. This is because most are characterised by low wages, no social benefits as well as poor working conditions such as the lack of protective gear in most labour intensive businesses and operating in areas with insufficient social amenities such as access to water and toilets.
There were a number of statistics on the informal sector that were not highlighted such as an updated position on the key sub sectors. It would be useful to have information on the number of businesses that operate in the sector, as well as the overall contribution made to the Gross Domestic Product (GDP). This will paint a clearer picture of the sector in a way that can enable policy makers to adequately formulate strategies that would be beneficial in enhancing qualitative growth of this crucial component of the economy.
One of the suggestions on how this can be done is by starting out with a pilot project in one of the counties with a vibrant informal economy whereby data collection focuses beyond sifting through the records at county offices. This will allow for the concentration of efforts towards the conducting of a deeper statistical analysis of each of the sub sectors. Once this has been achieved, it can then be used as a benchmark for conducting a similar program countrywide. The gathered data would provide a clearer way forward when it comes to making informed decisions on how to channel the efforts towards implementing a sustainable plan that deals with the informal sector.
Informal Economy Analyst
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
The informal sector has grown in leaps and bounds over the last decade. This growth has mainly been propelled by the shrinking availability of formal employment opportunities, with most of these businesses in the sector being micro enterprises. The quality of employment in the sector is poor as most usually work without access to medical insurance and no terminal benefits. In a bid to formalise these informal businesses to a level where they can provide quality employment, a few factors have to be considered.
The sort of training that usually takes place is traditional apprenticeship. This is whereby various skill sets are acquired via on the job training. In the Jua Kali sector for example, improved technical skills are of prime importance for enhancing their productivity as well as the quality of the goods and services they produce. These however, have to be regularly updated so that they will be at per with modern technological practices in a liberalised and globalised market.
Institutions that offer technical training still base their curricula on the needs for wage-employment, while requirements for self-employment such as basic management skills are not emphasised on as key pillars to these programs. While interviewing a majority of businesses in the informal sector, this is an aspect that has come out strongly. Basic financial literacy skills such as book keeping are side lined which leaves these businesses at a disadvantage as they do not have a platform from which they can engage with financial institutions that they approach for assistance.
The design of the current curriculum in the institutions that offer courses that are suitable for those that are engaged in the informal sector is tailored for individuals who would like to gain entry into its various sub sectors while ignoring the importance of upskilling. Those that earn a living from informal businesses often do not have the luxury of leaving their work places unattended as this is often the only way that they can afford to put food on their tables. The sort of curriculum that would work for them is one that is flexible enough to allow them to attend classes after working hours as well as properly structured short courses.
The Kenya Industrial Transformation Program (KITP) states that manufacturing is expected to increase its contribution to the national GDP by at least 10% per year. One of the focus areas that are spelled out include the strengthening of the capacity and local content of domestically manufactured goods. Some of the ways in which it plans to achieve this goal is through the development of Small and Medium Enterprise Parks as well as Industrial and Technology Parks, upgrading of products from small and medium enterprises and most importantly, the development of skills for the Technical Human Resource for the Manufacturing Sector.
It is with this in mind that the curriculum that is developed for the skills required to achieve this ambition be based on the science, technology, engineering and mathematics (STEM) approach. This will ensure that the labour force will be adequately equipped to handle the challenge of developing products that are competitive in regional and international markets and relevant to the growing needs of the country.
Informal Economy Analyst
One of the key areas of focus when setting up a business is knowing who your customers are. Targeting the right type of clientele is one of the pillars upon which the success of a business is based. With this in mind, it is important for a start-up business to know beforehand what their niche market is so as to channel its resources in the right manner. Aspects like getting the right location as well as having the right information on the profiles of customers within ones area of operation are key factors that dictate whether a business will succeed or fail. This is no different for informal businesses.
This aspect came out clearly during a recent visit to Nanyuki, a town in Laikipia County – Kenya, while interviewing different businesses in the informal sector. Victor Gaita, the chairman of the Nanyuki Municipality Jua Kali Association which has a membership of 150 businesses, pointed out some factors that determined the levels to which businesses within the association generated income. The first was that despite the fact that some of the craftsmen had the requisite skills to make high quality furniture like beds that would cost Kshs 35,000, they seldom did because these sold much slower than those that cost Kshs 4,000. The latter cost appealed to the low income clientele who frequent their premises.
Another factor that determined the level to which members generated income was their location. Those that operated from residential areas had higher returns than those that are located in the market places. This is due to two factors. The first is that those in the residential areas were not frequently visited by the county officials, which reduced the amount of bribes that they had to pay. This angle has a downside to it, in that due to the fact that the county officials do not frequent the residential areas, these businesses get away with not having to pay most taxes that are required of them, which gives them an unfair competitive advantage.
The other factor is that the cleanliness of the environment under which they operate determines the type of clientele that will visit their business premises. Those that are located in the market places often have to deal with the inefficient service provision by the county government when it comes to garbage collection. They are also congested in their working spaces, something that doesn’t encourage clients to visit their premises. Those in the residential areas operate in clean and spacious environments hence end up attracting higher end clients.
Phyllis Micheni is the chair of Jambo Kenya Women Group which is an association that is comprised of 15 members. Their core business is the manufacturing and selling of curios that include wood crafts, jewellery, hand woven carpets and African themed clothing. She noted that most of their clients were mainly tourists and locals that have a higher income dispensation due to the quality of their products and costs of production. Their prices were too high for the local clientele. Their main challenge was marketing their products and are thus looking into ways in which they can upscale their vending points in areas frequented by tourists.
Informal Economy Analyst
Insights from the Jua Kali Sector
I recently held a meeting with the Chairman of The Jua kali Association (Kamukunji), Mr Eliud Mbiyu in Nairobi to find out what growth opportunities lie in their way and the challenges they face when trying to achieve these. The association is a non-profit umbrella body that consists of 4,000 members from micro and small businesses predominantly dealing in metal works, blacksmiths, welders and fabricators.
Their greatest strength was the Sacco they had formed which provides its members with loans to further their business activities. The Sacco encourages its members to save money as a means of building and encouraging a savings culture. Most of its members are drawn from poor backgrounds who basically live from hand to mouth. A huge advantage of coming together is that they are able to source and service big orders which they achieve through a system of division of labour to its members. The challenge in this is that most of the work done is usually not of the same standard.
He added that the setting up of the Micro and Small Enterprise Authority (MSEA), which operates under the Ministry of Industrialisation has gone a long way in assisting them to achieve their goals which include sourcing of business, mediation of disputes that require government intervention and interacting with various government institutions such as the National Hospital Insurance Fund (NHIF), the National Social Security Fund (NSSF) as well as the County government of Nairobi. MSEA has for example, played a major role in assisting the association to attain the title deed for the two acre piece of land on which they operate.
The main form of training undertaken by businesses in this field is apprenticeship, as most of those joining this field of work have not attained basic education qualifications. This manual handcrafted labour needs to be improved through the introduction of new technologies such as mechanisation, as the former makes them underproductive and as mentioned earlier, leads to the production of unstandardized products. In this sense, due to the investment required in terms of machinery, there will be need to train the artisans on how to use the machines.
Another challenge that the association faces is the sourcing of finances from financial institutions. This is in part due to the lack of financial skills by the businesses they represent as most do not keep records of their day to day operations. Their main source of revenue is the membership fee paid by its members and proceeds that they get from leasing out a hall on their premises for meetings. He pointed out that due to the fact that they are an underfinanced organisation, they have a problem attracting and maintaining quality employees.
Moving forward, Mr Mbiyu pointed out that some of the key areas that the association needs to focus on include offering financial training for the businesses under their umbrella, upskilling for the artisans so as to improve the quality of their products, exchange programs that will equip the artisans with modern technologies and a stern approach by government when it comes to dealing with unfavourable competition from cheap imports. Despite the challenges they face, he was optimistic of the future of the sector due to the positive feedback that they have gotten from the national government in projects that they are undertaking which include plans to build a business complex. “There is a great need for a change in perception of the Jua Kali sector from one that produces inferior quality products to one that can be seen as a key instrument to achieving Kenya’s Vision 2030 Industrialisation plan”
Informal Economy Analyst