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JOH-KYA001-20070204-JvW-P1 Delivering on Vision 2030 By Wahome Gakuru (PhD)- NESC March 2007 This report is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from McKinsey & Company. This material was used by McKinsey & Company during an oral presentation; it is not a complete record of the discussion. Contents •Background •National Visioning •Kenya Vision 2030 Project Approach •Sector Selection Process 1 Historical context • Kenya has in the past had two long-term policies and several 5 Years Development Plans that have guided planning and investment: The first was Sessional Paper No 10 of 1965: African Socialism and Its Application to Planning in Kenya, and the second was Sessional Paper No 1 of 1986: Economic Management for Renewed Growth. • These plans attempted to confront the country’s most entrenched problems – by charting a vision of how development would tackle them. • Whereas the economy grew by an average of 6 per cent over 1964-1980 and 4.1 per cent over 1980-1990, the period 1990-2002 was a period of declining per capita income with GDP growth of 1.9 per cent against a population growth of 2.9 per cent. • However, since, 2003, We have made tremendous effort to get the economy back on track through the ERS with the GDP growth rate shooting back to 5.8 percent by 2005. 2 Taking stock of National Development under the ERS to date Revenue Growth by over Kshs 140 B – from Year 2001/ 02. Primary school enrolment 7.6 Million - Year 2005. Health Facilities 4,557 –Year 2003 -4,912 – Year 2005 CDF & LATF, etc Percentage of Roads in poor state fell to 32% -Year 2005. Oversubscription of the KenGen and ScanGroup IPOs earlier this year is an example of the confidence which the Kenyan economy enjoys among local and foreign investors. The most dramatic change in our economy in the past year has been in the telecommunications sector. The mobile telephone subscription base in Kenya went up by 57 percent in 2005, connecting 5.6 million subscribers Some 400 million SMS were exchanged by Kenyans in 2005 3 After Economic Recovery What Next? • These highlights of our economic performance simply demonstrate that we have reached and exceeded the stage of economic recovery that the ERS targeted. • But the ERS is coming to an end in December 2007. • The question then is “What Next?” And this is where the Kenya Vision 2030 comes in. • Please note that the Kenya Vision 2030 is a strategic plan, which will in turn be implemented in 5 year development plans/phases to coincide with the electoral cycles. • Therefore, every succeeding government will be evaluated by Kenyans on the basis of the targets and milestones in the Vision 2030 document. • For this reason, the Kenya Vision 2030 is a National Project and not a government-of-the-day-project. 4 Present Challenges: What challenges must we as a Nation overcome through the Vision? 1. Unemployment Especially In Youth- Most Jobs In Informal Sector. 2. Income Redistribution – Inequality 3. Low Saving Ratio (16%) Compared To Need 4. Rapid Urbanization – 6 % Annually Year 2001- 33% Year 2030- 60% 5 Composition of our Economy over time: An underlying structural Problem Se ctoral Share s in Re al GDP - 1964 - 1995 70 60 Percentage Share 50 40 Agriculture Manufacturing 30 Services 20 10 0 1964-73 1974-79 1980-89 1990-95 2004 Ye ars • This figure shows that there has not been those expected structural changes in the sectoral shares of real GDP since independence. • The right picture for economic take-off would be that the share (percentage) of Agricultural sector contribution should be significantly going down while that of Services and Manufacturing should be going up. 6 GDP Growth Rates Trends 1965-2003 24 22 20 18 16 14 Rate (%) 12 10 GDP Growth Rates 8 6 4 2 0 -2 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 -4 -6 -8 Year 7 Future Challenges Projected Population Growth 60 Population (Million) 50 40 Series1 30 20 10 0 1969 1979 1989 1999 2025 2045 Years Therefore: the Economy must grow to cater for this ! 8 Future Challenges cont … • Globalization- Increasing international competition • Climate change- Global warming, ETC., We must start to tackle these challenges now!! 9 Contents •Background •National Visioning •Kenya Vision 2030 Project Approach •Sector Selection Process 10 THE ROADMAP BEING DEVELOPED FOR KENYA’S ECONOMIC TRANSFORMATION JOURNEY HINGES ON THREE KEY ELEMENTS • Overarching goal toward which Kenya aspires over a the next 25 years Vision • Tangible approach which Kenya will follow to Strategy achieve the vision (e.g., which sectors to prioritise, which projects to launch, which specific skills to develop) • Concrete plans to execute and deliver on the Plans and implementation Source: Team analysis strategy (e.g., activities, roles and responsibilities, milestones, timing, tracking mechanism) 11 MANY COUNTRIES HAVE GONE THROUGH THE FIRST STEP OF DEVELOPING A COUNTRY VISION Country Vision Central theme of the vision Malaysia • Vision 2020 • Malaysia to be a fully developed country by 2020 Singapore • New Singapore • To turn Singapore into a “globapolis”, a global city Nigeria • Vision 2010 • To build and sustain a democratic society and to become Africa’s leading economy India • Vision 2020 • India to be counted as a developed nation by 2020 China • Three Step • Build a moderately well-off society in an all-round Development Strategy South Africa • Programme of Action Russia • Social and way that benefits over one billion people • To achieve higher rates of economic growth and development, improve the quality of life and consolidate social cohesion • Boost the competitiveness of the country Economic Program 12 HOWEVER, A COMPELLING VISION ON ITS OWN IS NOT ENOUGH 1 Developing an aspirational, directional, and inspiring vision around which all stakeholders can rally is a critical first step Vision – 5 yrs Destination A Today 3 The strategy must be supported by a realistic and concrete action plan that will ensure that the strategy is delivered Vision – 10 yrs Destination B 2 Vision – 15 yrs Destination C This vision must absolutely be complemented by a robust and integrated strategy that will help achieve the vision 13 Contents •Background •National Visioning •Kenya Vision 2030 Project Approach •Sector Selection Process 14 KENYA VISION 2030 Overarching vision A globally competitive and prosperous nation with a high quality of life by 2030 Vision Strategy Plans and implementation Economic To maintain a sustained economic growth of 10% p.a. over the next 25 years Source: NESC Vision workshop, January 13–14, Naivasha, Kenya Social A just and cohesive society enjoying equitable social development in a clean and secure environment Political An issue-based, people-centered, result-oriented, and accountable democratic political system 15 THE SIZE OF THE PRIZE FROM ACHIEVING THIS VISION IS SIGNIFICANT ECONOMICALLY… High-growth countries Real GDP growth rates % CAGR Potential Kenya GDP Nominal, $b Singapore (1986–1996) 9.3 Dubai (1992–2002) 8.4 Hong Kong (1978–1988) 8.2 Chile (1988–1998) 7.6 15.6 7.0 Malaysia (1990–2000) 2005 Medium growth countries India (1995–2005) 6.0 Singapore (1995–2005) 4.7 Malaysia (1995–2005) 4.6 Nigeria (1995–2005) 2030 Potential Kenya GDP/capita* $ 3,065 660% 4.4 464 3.1 South Africa (1995–2005) Kenya today Kenya (1995–2005) 169 153.4 2005 2.0 10.0% * Assuming 2% population growth rate similar to 1990–2005 period Source: McKinsey; Global Insight 2030 Opportunity for Kenya to join the ranks of Middleincome countries by 2030 16 …AND THIS GROWTH IN GDP WILL BE DEPENDENT ON PROPER STRATEGIES AND TARGETING OF THE SOCIAL AND POLITICAL GOVERNANCE PILLARS, IMPLYING •Better access to affordable and high quality health care •Affordable and high quality education at all levels •A just and cohesive society •A more equitable society •Secure and clean environment •An issue-based, people-centered, result-oriented, and accountable democratic political system, among others 17 THE VISION HAS SO FAR RECEIVED BROAD SUPPORT FROM VARIOUS STAKEHOLDER GROUPS ACROSS THE COUNTRY Process was launched by H.E. President Kibaki, 30 Oct 2006 . . . . . . and there has been broad support for the vision so far This is a good follow-up to the ERS and will break the cycle of promises made and not delivered in the past — National Aids Control Council Vision 2030 should energise Kenyans to slay the dragon of implementation — World Bank The Vision will create higher quality of jobs for Kenyans and could even double the GDP of Kenya in 3 years — Ministry of Information and communication “Vision 2030” is a call to all Kenyans to make it possible to wipe out our land from absolute poverty — H.E. President Kibaki Source: Kenya Vision 2030 launch; interviews In the past we have been too individualistic, the Vision gives Kenyans a collective dream, which now needs to be implemented or else it will remain as a dream — Central Bank of Kenya 18 THE FOCUS OF THE VISION 2030 PROJECT IS TO DEVELOP CONCRETE STRATEGIES AND A ROBUST ACTION PLAN TO MAKE THIS VISION A REALITY Overarching vision A globally competitive and prosperous nation with a high quality of life by 2030 Vision Strategy Economic To maintain a sustained economic growth of 10% p.a. over the next 25 years Social A just and cohesive society enjoying equitable social development in a clean and secure environment Political An issue-based, people-centered, result-oriented, and accountable democratic political system Plans and implementation Current focus of project Source: NESC Vision workshop, January 13–14 2006, Naivasha, Kenya Concurrently outlining key social and political pre-requisites to achieve economic aspirations 19 INITIAL FOCUS ON THE ECONOMIC PILLAR IS PART OF A BROADER AND LONGER PROCESS TO START REALISING THE VISION Current focus Drive successful implementation of the Vision Phase I High-level diagnostic & benchmarking Phase II High-level strategies Phase III Master plan and communication Roll out sector strategies to other sectors of the economy Finalise concrete strategies and action plans to deliver on social and political pillars Communicate, Communicate, Communicate 4 months Source: Team analysis 12–18 months 20 PROJECT APPROACH AND TIMELINE MX Module X We are here Portfolio Phase I – High-level diagnostic and benchmarking M1 Phase III – Master plan and communication/ syndication Phase II – High-level strategies Implications of vision M5 Master plan and M8 management approach Portfolio objectives and priorities Monitoring and M9 implementation dashboard High level M2 portfolio diagnostic M10 Resources Sectors High-level M3 diagnostic of key sectors Contours of sector M6 strategy – 4 key sectors Diagnostic M4 of quick win projects M7 Strategy and plans to deliver quick wins M11 Communication plan M12 Launch of quickwin projects 6 29/11 Source: McKinsey 7 weeks* 09/02 12/02 week s 23/03 26/03 3 weeks 13/04 21 THE PORTFOLIO DIAGNOSTIC SHOWS SIGNIFICANT OPPORTUNITY TO BUILD ON THE MACRO-ECONOMIC STABILITY ACHIEVED IN KENYA Focus areas Summary of key messages from diagnostic • Kenya’s economic recovery strategy has created a stable Kenyan economic context macroeconomic environment and produced robust GDP growth over the past few years • Growth has been fairly broad-based across all sectors, in + particular in communications, energy, manufacturing and tourism • While on the up-tick, Kenya still has significant opportunity to High growth country benchmarks + improve across several key dimensions – Investment levels are relatively low and widespread across sectors – Development spending has been low and overly focussed on administration and social services – Employment remains highly informal with low levels of productivity • Vision 2030 is aspirational and Kenya will be the 3rd country in the Implications for the Vision Source: Team analysis world to achieve such growth – The first step is to identify key (sub) sectors with significant potential which can be unleashed in the short-term – Strong need to focus investments on a few key ‘growth’ engines to promote growth initially – These are likely to change overtime to sustain the growth 22 BREAKDOWN OF THE KENYAN ECONOMY BY SECTORS* Vertical sectors (57, 47) • Industrial • Agriculture (24, 18) • • • Food – Tea – Coffee – Sugar cane – Cotton – Tobacco – Sisal Horticulture – Fruit Manu– Vegetables facturing – Flowers (12, 14) – Nuts – Spices Food crops – Cereals – Legumes – Tubers Livestock & Fishing • • • • • • • • processing, Beverages and Tobacco Refined Petroleum Textiles, Apparel & Leather Goods Forest products Chemicals Equipment & Machinery Fabricated Metals Rubber and Plastics Other (~10 other ISIC codes) (% formal GDP, % format jobs) • Wholesale • • • • Services (21, 15) • Oil & gas • Minerals & Retail Financial Tourism Business services Others – – – – – Soda ash Flousphor Salt Limestone Titanium Extractive (<1, <1) Enabling sectors (43, 53) • • • • • * Not exhaustive ** Roads railroads, ports and airports Source: Team analysis Transportation** (8, 3) Energy (1,1) Telecommunications (2,3) Social services (19, 42) Construction (4,4) 23 AT THE SECTOR LEVEL THE KEY SUB-SECTORS OF THE KENYAN Focus of diagnostic ECONOMY HAVE BEEN ASSESSED… % of Kenyan GDP1 Agriculture Manufacturing Services Extractive Enabling Sectors Horticulture4 Food Crops Industrial Agriculture Livestock & Fish Food Processing, Beverages, Tobacco Refined petroleum products Textiles, apparel and leather goods5 Forest products Chemicals Equipment Fabricated metals Rubber and plastic products Publishing & Printing Furniture Other manufacturing6 Retail Real Estate7 Financial Services Hotels and Restaurants Business Services Oil & Gas (Refinery) Mining & Quarrying Chemical & fertilizer mineral Transport and storage Education Public administration and defence Construction Other Social Services Health and social work Post and telecommunications Electricity supply Water supply 8.8 8.6 % of Kenyan formal employment3 33.0 0 0.6 0 0 5.3 0 -0.8 3.4 1.0 0.8 0.7 1.1 0.6 0.5 0.5 0.9 2.2 0.7 0 0.6 0 2.4 0 0 0 0 0 0 1.0 -3.6 1.7 3.7 2.3 2.5 0.1 -4.9 8.4 3.5 7.1 2.3 7.0 1.5 6.8 30.0 9.3 8.1 10.7 4.7 15.2 11.9 4.4 3.7 1.0 0 0 0 0 0 0 0 0 0 0 91% GDP 86% exports 1 Accounts for 91% of total economy covered in covered in 2 Accounts for 86% of total exports diagnostic diagnostic 3 Accounts for 96% of total formal employment 4 Do not yet have horticulture employment data 5 Textiles includes textile portion of EPZ for GDP but not in exports or formal employment 6 Other manufacturing includes fragmented production of various mineral products, non-textile EPZ, 7 Addressed a part of construction sector Source: Central Bureau of Statistics 12.1 2.3 3.6 7.8 4.5 3.8 2.3 3.0 3.4 1.5 3.1 GDP Growth 2001-05 % (real) 0 23.3 0.3 4.4 3.7 3.3 1.3 0.9 0.6 0.6 0.5 0.5 0.4 0.3 0.2 3.0 5.0 4.4 4.1 2.8 2.7 1.4 0.8 % of Kenyan exports2 0.2 1.9 2.9 2.7 0 0.1 0.1 3.3 0 2.7 0 4.1 3.7 18.2 7.9 4.3 8.7 5.8 3.1 0.6 0.6 -0.2 2.5 4.4 3.3 14.5 11.2 4.3 96% employment covered in diagnostic and small scale production 24 …AND THESE SUBSECTORS ARE BOTH EXPORT & DOMESTIC ORIENTED ALL NEEDED TO GROW & MODERNISE THE KENYAN ECONOMY Export-oriented sectors Domestic-oriented sectors On the Export-oriented sectors: On Domestic Oriented Sectors: • The primary focus will be Growth of GDP, Improvement of trade balance, Attracting FDI, technology and knowhow. • The primary focus will be Growth of GDP and job creation, Improvement in labour and investment productivity, Migrating informal economy towards formal economy • Example of selection criteria include absolute size and growth of exports, level of global competitiveness and ability to improve, and ability to attract FDI • Example of selection criteria include absolute size and growth of GDP and jobs, level of productivity gaps and ability to improve, and impact on informal economy 25 AN IN-DEPTH DIAGNOSTIC WAS CONDUCTED FOR EACH KEY (SUB)SECTOR 1 Size and growth 2 Structure 3 Challenges 4 Key areas to explore during deep dive Agri Agriculture is the pillar of the Kenyan economy • Largest sector overall with 24% of GDP (KSh 342 billion) • >5 million people earning incomes from this sector, >90% of which are ‘active’ in the informal economy • Contributes 65% of Kenya’s exports (KS126 Billion) with 36% of total production exported Small holder farmers make up Manufacturing the vast majority has held of those a steady involved shareinofthe Kenya’s agricultural economy sector, (~10%) while since the the 1970s rest are estate or plantation•farmers, Contributes processors, 11% of and Kenya’s marketers GDP (KSh 148 bn) – same level of contribution over past 15 years • Over 5 million small holders • across Formally theemploys spectrum~250 of agriculture 000 people, withabout various 13%levels of total of organisation formal employment; there are also ~1.3 million 1 Sizeon and depending particular crop small scale manufacturers that constitute the informal side of the industry • Estatesgrowth also range in size; estates 25% currently facing exports difficult times all with listed33% tea of companies • largest Contributes of Kenya’s (KS49(e.g., Billion) total production exported either operating at a loss or barely breaking even in last 18 months) • The financial services sector plays a critical enabling role in the economy and has a lot of room Orientation of current agricultural economy towards exportstooffurther unfinished raw materials and production develop Manufacturing is a fragmented sector for domestic consumption of lower value produce – various While ownership financial services accounts for only ~4% of GDP, plays a critical enabling role in the • manufacturing units with structures producing goods across 10+itgeneral 1>2,000 • Productivity and value to small holder farmers high costby of providing inputs, limited Size and minimized througheconomy capitalextension equivalent to ~40% of GDP categories 2 services, low value placed on domestic oriented products, –dependence on rain, and lack of visibility into growth Kenya’s are underdeveloped when compared to other • Long tradition of manufacturing dating back banking to Worldand Warcapital II but market with losssectors of momentum in past decade market Structure opportunities countries like Malaysia (e.g., domestic credit/GDP is ~40% for Kenya vs ~140% for Malaysia) • 50% of firms have less than 50 employees • Estate production focused on raw material export that fails–to capture full value coupled with high ishave And informal while Kenya’s markets growingmajor rapidlyeconomic with current market of contributor to foreign •capital Tourism onebeen of Kenya’s pillars andcapitalization is the largest • 12% of output produced by small scale manufacturers production costs (e.g., labour, taxes, energy, infrastructure) making Kenya’s ~KSh 800 bncommodity or ~50% ofproducers GDP, thereearnings, is still a lot of is room to further develop when (e.g., compared Malaysia sittoatother top tourist exchange but far underdeveloped unprofitable 151% of GDP) destinations • Dependence on a few export tea to Pakistan, to EU) Overallmarkets lack of(e.g., competitiveness makes itSize difficult for manufacturing to thrive –1 horticulture Moreover, savings and investment levels in Kenya are relatively low (i.e., 11% savings and 17% – Tourism currently accounts for ~5 of GDP and has been mainly driven by beach and eco and • Land ownership issues • Unfriendly labour laws (e.g., annualinvestments increase minimum related like to market forces, illegality of ~30% inwage othernot countries Malaysia) tourism growth in vs • Environmental issues (soil acidity, rainfallcasual patterns, deforestation) Kenya’s long viability employing labour, illegality of jeopardizing matching compensation individual performance) – toterm Tourism contributes significantly to employment and is the largest earner of foreign exchange 3 as agricultural producer• • energy Banking the largest in sub-sector within Financial Services and is very concentrated, but also Unreliable and expensive (e.g.,is$0.15c/Kwh Kenya vs $0.07c in China and $0.04c in South (~$800m in 2006) • What can be done to increaseAfrica) small holder productivity? has many small and inefficient banks Challenges – While number of•tourists has been and increasing at ~13% year, other top tourist destinations Wholesale retail trade is aper major part of the economy, but largely informal – Consolidation (gets ownership issues) – The bankingregimes industry(e.g., consists ~40 banks with the Egypt top 10attract accounting 70% of trade assets and • at 2land Disjointed taxation (import, export, corporate) total of tax rate ~75% of gross like South Africa and ~4-6xfor more tourists than Kenyafor (e.g., in Kenya 8.2m –profits) Wholesale and retail accounts 12%1.3m of formal GDPvsand 7% of formal employment but up – Access to cheap •credit Heavy to afford better inputs Structure foreign banks playing a key rolein(5Egypt out ofand the7.5m top 10 banks are foreign)of GDP and ~50% of employment regulation in South Africa) to ~30% – Improved extension services 1 – The bottom ~30 banks are inefficient with an–average return on assets ofand ~1.8% vsother 3.5% – Over 1 300 business related licenses in Kenya – relatively Average in Kenya is employment also much lower than destinations has is been ~97% of ~70% of the value in theand sector informal Size and spend per tourist – Better understanding of– market to transition from peasant producers to entrepreneurs for the top 10 banks and investment Complex (and sometimes overlapping) business registration declining at ~2% over the pastThe fewformal years segment (e.g., tourists spend ~70% more in Egypt) – of the sector is ~10x more productive than the informal segments, making growth • What is driving the poor• economic of agricultural firms? Moreover, Kenya has far more than othermarket countries like Morocco,and South Africa and Nigeria Cheapperformance (in quality and price) – imports that are hard to compete with banks in the domestic organized formal retail much more attractive – Costs or revenues? (i.e., ~40 vs 21, 33• and 25 respectively) – Second hand goods (primarily clothing) The tourism industry structure is made up of hundreds of firms with a primary focus on the – Government or internal–inefficiencies? • 5 major challenges ‘Smuggled’ or informally imported goods (CPG and processed mass market foods) as opposed to the high end • The wholesale and retail sector is extremely fragmented with thousands of small informal • In what ways can stronger made to other sectors (e.g., foodSmall and beverages, tourism, –2management Scale: bank sizes – making itbiodifficult compete especially regionally – as well supply ashotels raisechains • linkages Rising be costs of environmental There are 3totypes of players – Airlines (concentrated), (fragmented) operators players and very inefficient acrossand all tour major product categories fuels) to provide additional for domestic producers? 37% ofopportunities significant Structurecapital locally2 • income formal employees HIV positive (fragmented) Theretailers BPO sector in Kenya(~20 is anstores extremely and nascent part of isthe economy, but there is an – While a few•national have emerged each),small the majority of the market • How can Kenya strategically protect (and expand) their export markets? – Legal environment: Difficult banks~18% to getofresolution on judicial (e.g., 2while yrs toother repossess – for Only hotels in Kenya are 4issues andof5millions starsopportunity countries likesmall South has(market-based to gain share of enterprises a Africa very fast growing and large global market made up of hawkers and micro vendors and BPO kiosks) Challenges Structure • What strategic opportunities for value addition are there? collateral) ~38% of their hotels as–4 and While 5 stars~70% of retailers – Kenya’s BPO sector only accounts ~0.01% of GDP with areas ~450 seats and ~800 agents are in rural areas, the majority of thefor value still lies in urban • What is the size of the manufacturing opportunity barriers: for KenyaDifficult – how to bigopen can itupget? 1have (eg, – Administrative bank accounts min account balances too high) – Various organisations been created to promote tourism, maintain and build facilities, train – However, the global offshore market is expected to grow from $11bn in 2005 to ~$100bn by 2008 – Formal Size andprices are much higher than informal prices, which is one of the drivers of informality Key areas • How to improve Kenya’s manufacturing competitiveness – Infrastructure: Lack of infrastructure makes it difficult to penetrate and serve the low end talent and preserve wildlife presenting a significant forretailers Kenya todirectly, gain a especially meaningfulinfoothold – Supply chains have several small producers whoopportunity supply small food growth to explore – Which categories can Kenya truly be competitive in – domestic and export? 4 – Africa as a whole has only managed to capture only ~1-2% of the offshore BPO opportunity categories during – How to improve• key drivers, energy costs,dive labour costs, tax regime, regulate? Prioritye.g., areas for deep • needs Thetoextractive industry is a very small part (~500,000 total globally) – within Organized retail results in additionalseats costsinand be compared to additional revenues and of Kenya’s economy and despite future deep dive • investment Challenges • How can domestic and foreign in manufacturing – both andconsolidation) KeyKenya areasencourage more – Overall: Understanding how to strengthen the banking sector (eg, and Tier balance growth potential, the future size of the sector expected to be small – I players will be unable to meet all the demand (total of ~2m workers byis2008 and gap of 200other benefits Greater in key tourist areas outsidetoofexplore Nairobi? between stronger sector –and access to security credit especially for low income and rural (e.g., Nigeria The extractive currently accounts for ~0.5% of GDP, has been growing at 500k workers), presenting –an opportunity for tierindustry II players like Kenya 4How can – international Poor quality or non-existent roads between existing and 3 partnerships • Kenya attract strategic firms? during case study)with competitive 1 potential tourist sites Size and – Ensure top management and preservation of “tourism assets” (beaches and wildlife) ~3% per year and despite projected strong future growth, is expected to be relatively deep dive – Retail: Increasing bank account penetration and deposits (e.g., lessons learned from Equity Bank) Challenges small in size in the near term growth bed (e.g., capacity • best Urban retailers very different challenges than rural retailers with lack of real estate •finance Kenya’s BPO sector currently consists ~450 the seats with KenCall the clear leader at 250with seats andAsh and Flourspar – Microfinance: Lending to–MSEsLack and of SMEs practices in microface globally) – Theofindustry is mainly made up of a few basic minerals Soda topping severalcountry others with 10-20 seats each accounting for the majority of the value as well as other related commodities such as – Corporate: Increasing long term financing and larger loan sizesthe (eg,list other successful 2– The major challenges urban retailers are as theKenya’s lack of real estate, high of andout unreliable – forKenCall stands out BPO with cost 250 seats a market of ~450 seats cases) 3 gold,leader limestone, titanium, oil &ofgas and coal Structure • Priority Areas for Deep Dive VC/PE power as well from authorities –as bond Overall, Kenya is one of the lowest cost competitors today (e.g., ~$17 000/seat in Kenya vs ~$17 000 exports of – Capital markets: Growing the capital market, developing market as as wellinterference market Key areas – The industry is largely domestic oriented with the exception of strong Challenges – Increasing # of understand needs by segment, determine how – Segment The customers, major challenges forinrural retailers are in lack of infrastructure andopportunity poor access to water even more competitive by reducing India, ~$30 000 South Africa) with to an to become (capital markets maybe potential solution to LTtourists: financing problem) to explore limestone (~30–40%) and gold (~80–90%) • Production is presently nil, with significant growth potential attractcost various segments andbydevelop case studies eliminating of telecom other successful tourist destinations costs –4 Cross-cutting challenges: Reducing of doing business improving judiciary, during • 5 key areas for deep dive – focus on addressing informality – Two plants capable of producing bio-ethanol, but lack of market has led them to produce – critical Increasing length of stay: Determine key drivers to length of stay, potential to increase traffic to admin infrastructure deepbarriers dive and building – of Case studies: Understand lessons learned other countries with informality problemspirit (e.g., alcohol and chemicals instead; total capacity of 10 million litres small by international existing sites and potential new sites (i.e., Kenya,faces Nairobi, beachesfrom south of1 Lamu) Key areas • Mt.Kenya challenges in 3 major areas Size makeup and Poland, India) standards • a distinctive A few (e.g., firms the majority of the industry, however there are ~200 licenses that – Increasing opportunities to increase spend to explore average spend/tourist: Identify and assess – Front end: Developing value proposition beyond just low cost and penetrating key growth Customer segmentation: Segment customers by income and understand needs group have given out for various exploration activities 4 higher as well as how to leverage all the things that make Kenyabeen great –of each With favourable fuel prices, a single 100 million gallon plant could add KSh 3 billion to GDP 3– duringend items and pricing geographic markets and sectors – Product categories: Identify which product categories be easiest formalize (e.g., lowest – will The mining to industry is very concentrated with 0.2% Magadi Soda like coffee marathon– museum) 2 Infrastructure: year (about GDP) andofKenya Fluorspar deep dive and tea tours, international Reducing telecom costs, which are ~30% of totalper operating costs (e.g.,of potential Challenges formal price premium) and keyStructure barriers to formalizing these categories accounting for ~70–80% with a number of smaller firms mining various other minerals reducing it to ~10% of costs) – Supply chain: Understand supply chains across key product categories such as gold and impact to supply – Back end: Focussing on the right incentives (e.g.,•infrastructure, land, training) to encourage capability and 1,000s of potential bio-stock producers Two small plants with bio-ethanol chains by product category from formalizing – Other related commodity industries like limestone, oil & gas, titanium and coal are development of the BPO sector in Kenya – Two plants are Spectre International (private) and Agrochemicals and Food Company – Formats: Determine range of format options and which formats makeconcentrated sense for which locations also highly (parastatal) 2 • Key areas to explore • Greatest challenges – Potential bio-stock inputs include: Key areas Structure – Front end: Develop Kenya’s distinctive value proposition, identify keyas sectors andfor to focus – Lack of long term financing as• well highcane cost ofprocesses capital making it difficult to pursue to explore Sugar bio-ethanol currently being produced by 200,000 smallholders on 4 3 on, develop list of potential clientslarge and exploration best way toprojects market Kenya as about an attractive during 145,000BPO ha. destination (e.g., Challenges case studies, role of –new industry association) drives up the cost of exploration activities (e.g., high energy and Poor infrastructure deep dive • Wheat, maize, and cotton seed also potential bio-stocks, but more expensive to – Infrastructure: Understand current cost structure transport costs) and quality, assess competitiveness, understand process infrastructure needed and –compare to issues what infrastructure is being developed Land and unclear exploration rights Jatropha currently being piloted in semi-arid areas by about 1,000 farmers as – Back end: Assess quality and depth of labour pools by location• and decide on iswhich government potential feed stock for bio-diesel incentives are best to develop the sector (e.g., case studies) Manuf Finance Tourism Retail BPO 4 Key areas to explore during deep dive • Potential priority areas going forward – Exports of nonferrous minerals as soda bio-fuels ash, flourspar andand limestone • Lack of such government policy shortage of feed stock availability likely to be – High value added mining (e.g., value addition to gemstones, manufacturing around limiting factors minerals) – To make bio-fuel production attractive for domestic market, government needs to mandate 3 – Large scale mineral development (e.g., and metals) a 5 or 10%titanium bio-ethanol component in petrol as well as provide subsidies to producers (can Challenges be in the form of tax waivers) to ensure competitiveness – Mining 4 Key areas to explore during deep dive • • • • Majority of feed stock would need to come from new agricultural production so as not to undermine internal food security What is current government appetite for creating necessary enabling environment? How can bio-fuels fit into an overarching domestic energy strategy? What oil and/or energy companies would be interested in investing in a bio-fuels plant in Kenya? What opportunities exist for new production of potential feed stock? (e.g., additional sugar cane production in the Tana River delta) Biofuels Source: Team analysis 26 EXAMPLE: HIGH-LEVEL DIAGNOSTIC OF THE AGRICULTURAL SECTOR 1 2 Size and growth Structure 3 Challenges 4 Key areas to explore during deep dive Agriculture is the pillar of the Kenyan economy • Largest sector overall with 24% of GDP (KSh 342 billion) • >5 million people earning incomes from this sector, >90% of which are ‘active’ in the informal economy • Contributes 65% of Kenya’s exports (KS126 Billion) with 36% of total production exported Small holder farmers make up the vast majority of those involved in the agricultural sector, while the rest are estate or plantation farmers, processors, and marketers • Over 5 million small holders across the spectrum of agriculture with various levels of organisation depending on particular crop • Estates also range in size; largest estates currently facing difficult times (e.g., all listed tea companies either operating at a loss or barely breaking even in last 18 months) Orientation of current agricultural economy towards exports of unfinished raw materials and production for domestic consumption of lower value produce • Productivity and value to small holder farmers minimized through high cost of inputs, limited extension services, low value placed on domestic oriented products, dependence on rain, and lack of visibility into market opportunities • Estate production focused on raw material export that fails to capture full value coupled with high production costs (e.g., labour, taxes, energy, infrastructure) making Kenya’s commodity producers unprofitable • Dependence on a few export markets (e.g., tea to Pakistan, horticulture to EU) • Land ownership issues • Environmental issues (soil acidity, rainfall patterns, deforestation) jeopardizing Kenya’s long term viability as agricultural producer • What can be done to increase small holder productivity? • • • • – Consolidation (gets at land ownership issues) – Access to cheap credit to afford better inputs – Improved extension services – Better understanding of market to transition from peasant producers to entrepreneurs What is driving the poor economic performance of agricultural firms? – Costs or revenues? – Government or internal inefficiencies? In what ways can stronger linkages be made to other sectors (e.g., food and beverages, tourism, bio-fuels) to provide additional income opportunities for domestic producers? How can Kenya strategically protect (and expand) their export markets? What strategic opportunities for value addition are there? Source: Central Bureau of Statistics; Economic Survey 2006; Ministry of Agriculture 27 TWO KEY DIMENSIONS WERE CONSIDERED IN SELECTING FOCUS VERTICAL SUB-SECTORS FOR KENYA… Validated with technical committee Description • Assessed based on diagnosing sub- Overall approach Attractiveness Attractiveness Bubble size indicating current size of the sector • Assessed based on diagnosing sub- 1 Feasibility 2 Feasibility Given the level of complexity these two dimensions, assessment relied on a combination of both quantitative analysis and qualitative assessment Source: Team analysis sectors in order to understand – Current size and growth potential (e.g. GDP, Jobs, employment) – Interdependencies with other sectors (including informal sector) – Level of competitiveness/ productivity and ability to improve – Momentum in each sub-sector (e.g. ongoing projects etc) sectors in order to understand – Potential of public policy to impact sub-sector – Level of resources required – Number of stakeholders involved – Requirement for external partners – Complexity and potential risks of intervention – Existence of local know-how, technology and capital vs need for external partners 28 …LEADING TO 6 PRIORITY VERTICAL SECTORS BEING IDENTIFIED AS CRITICAL FOCUS AREAS FOR KENYA + FOR DISCUSSION Current size of GDP Proposed deep dive sectors for phase 2 Retail Financial services Key message Tourism • 6 key sectors BPO Agriculture 1 Attractiveness proposed for deep dive analysis in phase 2 to develop high level strategies for each of them Manufacturing Petroleum • Implications on Bio-fuels enabling sectors (e.g., energy, telecoms, education) also be analysed Mining Although not a priority in the short term, these and other nonprioritised (sub)-sectors are still important for the Kenyan economy 2 Feasibility Source: Team analysis + 29 …AND UNDERSTANDING HOW KEY ENABLERS NEED TO BE IMPROVED AS KENYA’S CURRENT COMPETITIVENESS NEEDS TO BE STRENGTHENED Kenya’s weaknesses compared to these countries + Cost of labour F1 F1.1 F1.2 Literacy level F1.3 Labour F1.4 FDI as % of GDP F2 • Kenya is generally, not F2.1 F2.2 F2.3 F2.4 Capital more competitive than countries with similar level of development – It is typically at par or less competitive across the various factors Cost of diesel F3 Energy F3.3 F3.2 F3.1 F4.1 F4 Cost of electricity Agricultural resources F4.2 F4.3 F5 F6 Information and telecommunications Kenya’s strengths compared to these countries Cost of ADSL F5.4 F6.2 Roads Logistics F5.2 • Key strengths include high F5.1 F5.3 Airport traffic literacy levels and high utilisation of airport infrastructure F6.4 F6.1 F6.3 • Primary weaknesses F7.1 F7 Tax F8 General Services F9 Business Climate include: – Higher labour, electricity, and communications costs – Poorer road infrastructure – Business climate linked to ease of doing business and government F7.2 Postal services F8.1 F8.2 Ease of doing business F9.1 F9.2 F10 Government F10.1 Constraints to business -0.6 Source: Team analysis -0.4 -0.2 +0.2 Peer Average +0.4 +0.6 30 PHASE II “DEEP DIVES’ ARE NOW FOCUSSED ON DEVELOPING HIGH LEVEL STRATEGIES FOR THESE PRIORITY SECTORS Areas Size potential to unlock sector growth Activities End products • Perform gap analysis for ‘deep-dive’ sectors – • Identify key levers, What is the overall size of the opportunity? • Formulate strategy in ‘deep-dive’ sectors in impact, and priority actions for ‘deep-dive’ sectors order to close gaps (e.g., key levers, impact of each lever, priority actions) based on international experience and best practices Strategy and plans to deliver quick wins • Perform in-depth analysis of selected quick win projects to identify actions required to accelerate projects • Develop robust strategy and concrete implementation plan to ensure successful delivery of project in the short term • Robust strategy and concrete plans to successfully deliver on quick win projects • Align all key stakeholders behind recommended strategy and plan Source: Team analysis 31 THE NEXT PHASE WILL FOCUS ON DEVELOPING A ROBUST MASTERPLAN TO ENSURE SUCCESSFUL IMPLEMENTATION Key next steps Master plan and management approach Monitoring and implementation dashboard Activities • Develop a detailed master project plan, including activity list, roles and responsibilities, and milestones • Create tools to track progress of implementation, with initial focus on quick win projects • Monitor results versus targets for quick win projects • Analyse required human and financial resources Resources to deliver on the vision • Develop options to source required resources • Ensure alignment of all key stakeholders behind Communication Launch of quick win projects strategy and action plans • Launch communication effort • Provide in-depth support to champions of selected quick win projects • Robust Master plan • Monitor implementation • Deploy required skills and funding • Communicate strategy and plans • Drive quick win projects 32 God Bless His Nation Kenya 33