1. business and industrial

Document o f
The World Bank
FOR OFFICIAL USE ONLY
Report No: 29354-KE
PROJECT APPRAISAL DOCUMENT
ONA
PROPOSED CREDIT
IN THE AMOUNT OF SDR 15 M I L L I O N
(US$22 M I L L I O N EQUIVALENT)
TO THE
REPUBLIC OF K E N Y A
FOR A
MICRO, SMALL, AND MEDIUM ENTERPRISE COMPETITIVENESS PROJECT
June 15,2004
Private Sector and Finance
Africa Regional Office
This document has a restricted distribution and may be used by recipients only in the
performance o f their official duties. I t s contents may not otherwise be disclosed without World
Bank authorization.
CURRENCY EQUIVALENTS
(Exchange Rate Effective April 30, 2004)
Currency Unit =
Kenya Shilling (Ksh)
78Ksh = US$1
US1.4705 = SDR 1
FISCAL YEAR
January 1
- December 31
ABBREVIATIONS AND ACRONYMS
AFD
Agence Franqaise de Ddveloppement
KERUSSO
AGOA
African Growth and Opportunities Act
KIPPRA
APDF
BDS
Africa Project Development Facility
Business Development Services
KRA
KUSCCO
BPC
DFID
Business Plan Competition
UK Department for International
Development
Directorate of Industrial Training
MFI
MIS
MOT1
MSE
EU
Economic Rate Return
Economic Recovery Strategy for Wealth
and Employment Creation
European Union
FIAS
Foreign Investment Advisory Service
MSME
FKE
FPSI
NARC
NITA
NITC
PDO
PIM
National Industrial Training Council
Project Development Objectives
Project Implementation Manual
GBSN
GOK
ICA
Federation of Kenya Employers
Finance, Private Sector, and Infrastructure
Network
Financial Sector Assessment Credit
Financial Sector Assessment Project
Finance and Legal Sector Technical
Assistance Credit
Global Business School Network
Government o f the Republic of Kenya
Investment Climate Assessment
Micro and Small Enterprise Training
and Technology Project
Micro, Small, and Medium Sized
Enterprise
The National Rainbow Coalition
National Industrial Training Authority
PMC
PSD
WED
ICR
IDA
IFC
IRR
Implementation Completion Report
InternationalDevelopment Association
International Finance Corporation
Internal Rate o f Return
SACCO
SME
SWAP
TVET
KAM
KEPSA
Kenya Association of Manufacturers
Kenya Private Sector Alliance
UNDP
USAID
Project Management Contractor
Private Sector Development
Regional Program on Enterprise
Development
Savings and Credit Cooperative
Small and Medium Enterprise
Sector-Wide Approach
Technical, Vocational, and
Educational Training
United Nations Development Program
United States Agency for International
Development
DIT
ERR
ERS
FSAC
FSAP
FSLTAC
Vice President:
Country Managermirector:
Sector Manager:
IDNIFC MSME Africa Program Manager:
Task Team Leader:
MLHRD
MSETTP
Kenya Rural Savings and Credit
Societies Union
Kenya Institute for Public Policy
Researchand Analysis
Kenya Revenue Authority
Kenya Union o f Savings and Credit
Cooperatives
Micro Finance Institution
Management Information System
Ministry o f Labor and Human
Resource Development
Ministry of Trade and Industry
Micro and Small Sized Enterprise
Callisto Madavo
Makhtar Diop
Demba B a
Max Aitken
Vyjayanti Desai
FOR OFFICIAL USE ONLY
KENYA
MSME CompetitivenessProject
CONTENTS
A
.
STRATEGIC CONTEXT AND RATIONALE
Country and sector issues ....................................................................................................
1.
2.
3.
.
B
1.
Higher level objectives to which the project contributes
6
....................................................
6
Lending instrument .............................................................................................................. 6
Project development objective and key indicators ..............................................................
Project components..............................................................................................................
4.
Lessons learned and reflected in the project design ............................................................
Alternatives considered and reasons for rejection .............................................................
5.
1.
1
5
..................................................................................................
3.
.
1
Rationale for Bank involvement ..........................................................................................
PROJECT DESCRIPTION
2.
C
..................................................................
Page
IMPLEMENTATION
2.
3.
4.
5.
6.
.
D
1.
.........................................................................................................
Partnership arrangements ..................................................................................................
Institutional and implementation arrangements ................................................................
Monitoring and evaluation o f outcomes/results ................................................................
Sustainability .....................................................................................................................
Critical risks and possible controversial aspects ...............................................................
Loadcredit conditions and covenants ...............................................................................
APPRAISAL SUMMARY
..................................................................................................
Economic and financial analyses.......................................................................................
6
6
9
11
12
12
12
14
15
15
16
16
16
2.
Technical ...........................................................................................................................
16
4.
Social ..................................................................................................................................
17
3.
5.
6.
7.
Fiduciary ............................................................................................................................ 16
Environment ......................................................................................................................
..
Safeguard policies ..............................................................................................................
Policy Exceptions and Readiness ......................................................................................
17
17
17
This document has a restricted distribution and m a y be used by recipients only in
the performance o f their official duties I t s contents may n o t be otherwise disclosed
without W o r l d B a n k authorization .
.
__
.......................................................... 18
Annex 2: Major Related Projects Financed by the Bank and/or other Agencies ..................20
Annex 3: Results Framework and Monitoring.........................................................................
23
Annex 4: Detailed Project Description ...................................................................................... 27
Annex 6: Implementation Arrangements..................................................................................
44
Annex 7: Financial Management and DisbursementArrangements .....................................
47
Annex 8: Procurement ................................................................................................................
55
Annex 9: Economic and Financial Analysis..............................................................................
60
Annex 10: Safeguard Policy Issues.............................................................................................
65
Annex 11: Project Preparation and Supervision...................................................................... 66
Annex 12: Documents in the Project File .................................................................................. 68
Annex 13: Statement o f Loans and Credits (as of M a y 1, 2004) .............................................
69
Annex 14: Country at a Glance..................................................................................................
71
Annex 1: Country and Sector o r Program Background
MAP
IBRD 26150-R
KENYA
Micro, Small, and Medium Enterprise Competitiveness Project
PROJECT APPRAISAL DOCUMENT
Africa Regional Office
AFTPS
Date: June 15,2004
Country Director: Makhtar Diop
Sector MangerDirector: Demba Ba
,
Project ID: PO85007
I Lending Instrument: Specific Investment Loan
[ ] Loan
[ X I Credit
[
3 Grant
[
Team Leader: Vyjayanti Desai
Sectors: Micro- and SME finance (50%);0ther
domestic and international trade (50%)
Themes: Small and medium enterprise support (P)
Environmental screening category: C
Safeguard screening category: C
Project FinancingData
[ 3 Other:
3 Guarantee
For Loans/Credits/Others:
Total Bank financing (US$m.): 22.00
ASSOCIATION
22.50
Total:
Borrower: Government o f Kenya
Responsible Agency: Ministry o f Trade and Industry
Address: Teleposta Towers, P.O. Box 30430, Nairobi, Kenya
Contact Person: Isaac Kamande
Tel : (254) 20-331030
0.00
22.50
Project implementation period: Five years
Expected effectiveness date: November 1,2004
Expected closing date: December 3 1, 2009
Does the project depart from the CAS in content or other significant respects?Ref:
PAD A. 3
Does the project require any exceptions from Bank policies?
Re$ PAD D. 7
Have these been approved by Bank management?
I s approval for any policy exception sought from the Board?
Does the project include any critical risks rated “substantial” or “high”?
Refi PAD C.5
Does the project meet the Regional criteria for readiness for implementation? Ref:
PAD D. 7
[ ]Yes [XINO
[ ]Yes [XINO
[ ]Yes [XINO
[ ]Yes [XINO
[ ]Yes [XINO
[XIYes [ ] N o
Project development objective Re$ PAD B.2, TechnicalAnnex 3
The project aims to increase productivity and employment in participating MSMEs. This objective will
be achieved by strengthening financial and non-financial markets to meet the demand o f MSMEs,
strengtheninginstitutional support for employable skills and business management, and reducing critical
investment climate constraints on MSMEs. The project will focus on key value chains and on both
formal small and medium enterprises and informal microenterprises that have high potential for dynamic
growth, including ?graduation? from informal to formal status.
Project description [one-sentence summary of each component] Re$ PAD B.3.a, Technical Annex 4
Component One -- Access to Finance -- This component i s aimed at deepening and expanding the reach
o f financial services and products that are available to MSMEs, including new risk capital instruments.
This will be achieved through performance based matching grants to assist a range o f financial
institutions to build capacity to provide financial services to different segments o f the MSME sector.
Component Two -- Strengthening Enterprise Skills and Market Linkages -- This component addresses
market failures that limit the ability o f MSMEs to obtain the necessary skills and business services to
exploit opportunities and overcome bottlenecks. It integrates a set o f complementary and mutually
reinforcing activities to support a wide range o f enterprise needs, including a value-chain based subsector
matching grant fund, tools for business schools to better train managers, business plan competition to
catalyze innovation and entrepreneurship, and restructuring o f the national levy scheme to ensure
sustainability o f firm-level training.
Component Three -- Business Environment -- This component will aim to reduce cost o f compliance with
business regulations for the formal sector and create incentives for informal MSMEs to graduate to higher
levels o f formality, and thus facilitate their access to resources for growth. This component will assist the
Government in implementingthe simplified taxation regime for micro and small businesses and in
reducing the cost o f starting-up a business through a one-stop shop approach.
Which safeguard policies are triggered, if any? Re$ PAD 0.6, TechnicalAnnex 10
None
Significant, non-standard conditions, if any, for:
Re$ PAD C. 7
Board presentation:
NIA
Effectiveness Conditions include:
(1) The Borrower has adopted the project implementation plan (including annex with Matching Grants
Manual and Financial Sector Deepening Trust Manual) in form and substance satisfactory to IDA;
(2) The Borrower has established the Project Steering Committee satisfactory to IDA;
(3) The Borrower has established the Project Secretariat satisfactory to the Association;
(4) The Borrower has entered into the Management Services Agreement with a Project Management
Contractor in form and substance satisfactory to the Association;
(5) The Borrower has opened the Special Account;
(6) The Borrower has opened the Project Account and has deposited the Initial Deposit
(7) The selection o f a Fund Manager for Component One, Subcomponent Byhas been completed in
accordance with the criteria and procedures satisfactory to IDA.
Covenants applicable to project implementation:
The Project’s financial management and procurement functions will be carried out by a private Project
Management Contractor (PMC), the procurement o f which i s a condition o f credit effectiveness.
A. STRATEGIC CONTEXT AND RATIONALE
1. Country and sector issues
For the decade after independence in 1963, Kenya was considered one o f the most prosperous and
politically stable countries in East Africa. The following two decades o f economic mismanagement,
however, reversed this enviable position to a state o f extensive poverty (currently estimated at 56 percent
o f the population) and economic decline. Average GDP growth f e l l from approximately seven percent in
the 1970s to just over two percent in the 1990s. The resultant stagnation was accompanied by a decline in
the efficiency o f capital and factor productivity, negatively impacting Kenya’s competitiveness in the
world economy.
A new government was elected in December 2002 on a platform o f change. It i s committed to reversing
the past decades’ economic decline, mismanagement, contraction in per capita income and increase in the
numbers living below the poverty line. It has prepared the Economic Recovery Strategyfor Wealth and
Employment Creation, 2003-2007 (EM) which outlines a recovery centered on a reanimated private
sector. Reviving private sector activity and investment and specifically micro, small, and medium sized
enterprise (MSME) development, feature prominently in the Government’s strategy for raising incomes
and employment. The Government’s objectives, policies and strategy for MSME development are
articulated in three critical policy and strategy documents. The E M and the “Investment Program ”
translate the Government’s mandate into a prioritized program o f action for the next five years and
emphasize the importance o f the micro and small enterprise sector in j o b creation. Additionally, the
Micro and Small Enterprise Sessional Paper lays the policy framework and government vision for the
sector’s development.
Data on the MSME sector in Kenya i s scarce; although the National MSE Baseline Survey’ provides
comprehensive and reliable information, it has not been updated since 1999 and does not contain
information for medium-sized firms.2 The survey indicates that the contribution o f the MSE sector to
GDP increased from 13.8 percent in 1993 to 18.4 percent in 1999. Of the labor force in this segment (150 employees), 99 percent was concentrated in enterprises o f less than 10 workers, while only 1 percent
comprised firms with 10-50 employees.
The increasing role o f the MSME sector i s confirmed by the recently completed Kenya 2003 Economic
S ~ r v e y .According
~
to the survey, total employment recorded in the informal sector increased from 3.7
million employees in 1999 to 5.1 million in 2002, while the formal sector increased only from 1.74
million to 1.76 million employees during the same p e r i ~ d However,
.~
the growth o f the informal sector in
number o f employees does not necessarily reflect growth and high productivity o f the enterprise itself, as
the number o f informal sector companies grew largely because o f the depressed formal economy and
underemployment in the formal firms.
’ Central Bureau o f Statistics, InternationalCenter for Economic Growth, and K-Rep Holdings, National Micro and
Small Enterprise Baseline Survey, 1999.
The available surveys do not cite employment figures for medium-sizedfirms (50-99 employees per firm); this
proposed Project’s target group will, however, include not only micro (1-9 employees) and small (10-49
employees), but also medium-sizedfirms, as this segment plays a critical role in employment generation and market
linkages.
Central Bureau o f Statistics, Ministry o f Planning and National Development, Economic Survev, 2003.
The survey does not specifically categorize by size and number o f employees o f MSMEs. This definition o f the
informal sector includes domestic servants which are not considered as MSEs in Kenya. The sector as reported in
the Economic Survey i s therefore larger than the actual MSE sector.
1
Specific sector issues include:
Market failures have constrained MSME development in Kenya, as in many developing countries, by
limiting the necessary access to information, finance, labor skills, and business development services
(BDS) to increase competitiveness and productivity. Lack o f information and past experience with
transactions i s a common factor that limits the willingness o f small firms to pay for services and potential
suppliers to take risks (or calculate them reliably) or to adapt products to MSMEs. Past dependence on
government agencies for these services, often at highly subsidized rates, has blunted MSMEs’ orientation
toward seeking private providers, who in turn have been crowded out.
Nevertheless, Kenya, with i t s long private sector tradition, has significant potential to establish
sustainable financial, business and other service markets suitable for MSMEs. Recent experience with
demand-driven approaches within the Bank and other donor projects indicates that well-designed
subsidies can leverage potential demand and bring forth a sustainable supply response beyond the l i f e o f
the subsidy. The proposed project takes a strategic approach to overcoming market failures and raising
competitiveness through short-to-medium term support designed to leverage sustained willingness o f
MSMEs to pay for services, as well as to catalyze potential suppliers to consider product adaptation and
innovation for the MSME market.
Access to Finance: A significant gap remains between the small portion o f the informal economy served
by microfinance institutions (MFIs) and Savings and Credit Cooperatives (SACCOs), and the narrow
portion o f the formal economy served by commercial banks and licensed non-bank financial institutions.
On one end o f the spectrum, the financial market catering to the lower end o f the market i s comprised o f
over 5,000 institutions which provide microfinance products. Within this diverse group (which include
MFIs and SACCOs), the institutions target niche segments o f the population with different instruments,
cover different geographical areas, and are guided by different forms o f regulation and supervision.
These financial institutions have helped increase access for the lower end o f the market, particularly for
the entrepreneurial poor engaged in petty trade or other income-earning activities with rapid turnover.
However, their poverty focus and difficulty in achieving commercial licensed status (needed to mobilize
savings for scaling up) has limited their development o f products suitable for enterprise-based lending.
On the other end o f the spectrum i s the commercial banking sector, which in Kenya i s large (estimated at
Ksh 491 billion, or approximately US$6.5 billion equivalent, as o f November 2003) and fairly active.
However, banks have traditionally avoided lending to the MSME sector due to their relatively high
transaction costs, difficulties assessing and managing risk, and the inability o f most small firms to provide
the required financial documentation and collateral. This problem has been exacerbated by the ‘crowding
out’ effect o f Kenyan Government debt instruments, which effectively provided high risk-free returns for
the banks. The recent dramatic change in this situation, with yields o f government debt at record l o w
levels and very high liquidity in the banking sector, has greatly increased the interest o f commercial banks
in lending to MFIs and MSMEs. However, inroads have been limited by the above-mentioned market
constraints and imperfections.
To address the large gap in the middle, inroads can be made by assisting MFIs to move upmarket and
commercial financial institutions to move downmarket. Yet, the mid-range small and medium enterprise
(SME) segment remains very difficult to reach through either standard microfinance or commercial bank
methodologies. SME loan requirements tend to be large relative to microfinance character-based loan
sizes, but too small to justify the costs o f processing according to commercial bank requirements especially when their weak financial management systems may make data collection and loan monitoring
more onerous than for larger firms. The heavy collateral requirements that banks impose to help manage
risk, serves to screen out the vast majority o f SMEs. Hence, in addition to improving SME access to
2
commercial loans, it will be necessary to develop a range o f other commercially viable financial
instruments to help meet the various financing needs o f SMEs.
Labor Productivity and Management Skills: Labor productivity features prominently among the key
factors that drive economic competitiveness and growth. Recent analysis o f the manufacturing sector in
Kenya indicates that both labor and capital productivity have declined significantly when compared to the
mid-1990s. The overall median value-added per worker in Kenya i s slightly higher today (US$3,457)
than in 1999 (US$3,025), but current levels have s t i l l not recovered to that o f the mid-90’s (US$4,520).
Investment Climate Assessment (ICA) data also suggests that value-added per worker in small firms,
specifically, have consistently decreased over the last decade (US$3,099 in 1994; US$2,521 in 1999; and
US$2,439 in 2003).
Value added per worker (median US%,constant 2002)
7000
6000
5000
Overall
Micro
Small
Medium
Large
Source: RPED/ICA survey
Rising unit labor costs has been identified as a key factor in the erosion o f the competitiveness o f the
Kenyan manufacturing sector.6 Although unit labor cost in Kenya i s lower than other Sub-Saharan
African countries, it i s about 12 per cent higher than in India and 33 per cent higher than in Chinaa7
Given the higher rate o f literacy among the Kenyan workforce when compared to other sub-Saharan
countries, the labor productivity issues are associated more with the prevalence, level and quality o f skills
development and technical training.8
Labor market imperfections make it difficult to overcome this gap. Kenya’s formal technical, vocational
and educational training (WET) institutions have little orientation toward the practical needs o f the
enterprise sector. Despite the substantial assistance offered through the recently closed World Bank
MSETTP voucher training program, approximately 80 percent o f the training was provided from within
the MSME sector rather than from formal training institutions. While the Industrial Training Levy
scheme i s intended to overcome the tendency o f firms to underinvest in training, the current operation o f
the scheme does not adequately meet the expectations and requirements o f firms both in terms o f capacity
and quality o f skills delivery systems.
~
6
*
World Bank WED, Investment Climate Assessment, 2004
World Bank, Countrv Economic Memorandum, 2003
World Bank WED, Investment Climate Assessment, 2004
World Bank, Countrv Economic Memorandum, 2003
Weak market linkages: Collaboration as well as competition are required among enterprises in order to
assure that full growth potential i s realized within the MSME sector. The joint use o f assets, the
development o f external markets through business support services and the adoption o f trade standards
and protocols among trading partners are some o f the ways in which collaboration can reduce transaction
costs, improve market access and enhance competitiveness.
In the case o f Kenya, however, a value chain analysis o f four sub-sectors, completed as part o f project
preparation, demonstrates that mutual support systems and value chain linkages are extremely weak. A
small number o f large privately operated firms compensate for this weakness by internalizing value
adding activities along the entire value chain under the vertical control o f their own enterprises. This
“vertical internalization” o f entire farm-to-finished good value chains is a “second best” solution which
reduces the ability and competitive adaptability o f enterprises which adopt it. In any case, vertical
integration within a single enterprise is not an option for MSMEs. The value chain study also found that
participants within value chains are highly compartmentalized and that commercial links between
suppliers and buyers tend to be ad-hoc, one-time transactions and highly personalized. Moreover, high
levels o f distrust exist among companies within sub-sectors, and between farm level producers and farm
product processors/merchandisers. As a result, transaction costs tend to be extremely high and useful
information tends not to be distributed quickly and efficiently within chains.
Support institutions that ordinarily facilitate subcontracting relationships in developed markets are absent
in the Kenyan economy, and BDS providers are oriented mainly toward large f i r m s . These weaknesses
are compounded by ineffective or non-existent sub-sector membership associations, which in other
countries have assisted with the development o f supply chain linkages between key segments. This set o f
factors makes it extremely difficult for MSMEs to rely on vendors or customers as sources o f competitive
advantage or to depend on specialized BDS providers to assist with strategic enterprise development. As
a direct result, entire value chains remain frozen in early stages o f their strategic development constrained by management incompetencies, resources and technologies isolated from markets that tend
to be available only within individual enterprises.
Business and Regulatory Environment: The creation o f an enabling environment for private
investment, both local and foreign, i s a clearly stated government priority in the ERS. These promises
have generated high expectations among investors and the population at large. Although resolutions to
the myriad o f problems are complex and long-term, intermediate-term reforms demanded by the private
sector can be implemented within the next few years.
According to a survey conducted in 2003, firms that were registered at start-up are significantly more
likely to “graduate” (grow to a larger size category) than those that are unregistered. “Registration seems
to be an epoch in the lifecycle o f informal firms and i s crucial for firm graduation. This finding leads to
the conclusion that informality imposes major penalties on firms with uncertain legal status that reduces
access to credit and public services such as electricity, telephone and water, all o f which are important for
improved performance and g r a d ~ a t i o n . ” ~
To date, there have been a few successful attempts to reform the business environment in Kenya. Most
notably, the Government o f Kenya with technical assistance and funding from UK Department for
International Development (DFID), introduced in 2000 the single business permit which combined 16
individual locally issued business licenses into one. However, the process o f formalization s t i l l remains
complex - it i s regulated by different procedures and requires multiple trips to Nairobi. According to
Doing Business data, f i r m s who wish to register formally are required to perform 11 separate procedures,
African Centre for Economic Growth, “Growth and Transformation o f Small Manufacturing Firms in Africa:
Insights from Ghana, Kenya, and Zimbabwe,” 2003.
4
which takes on average about 60 days. Some informal industry estimates suggest the process i s even
more complex and time consuming. While the cost, time, and complexity are better than the Sub-Saharan
Africa average and in line with other low income countries, these numbers compare unfavorably with
high-income countries.
In most cases, MSMEs also need to deal with local authorities - municipalities -to obtain different types
o f permits to start their businesses. The impact of the regulatory environment on MSMEs are more
extensive than for larger firms as the time and cost o f registering a business and dealing with disputes
with regulatory agencies i s more expensive per unit o f production. The informal sector also bears high
costs from harassment for non-compliance and from risks o f permanently being closed.” These
constraints, coupled with the problems associated with tax and tax administration, serve as an incentive
for firms to operate informally.
2. Rationale for Bank involvement
The Bank’s Country Assistance Strategy, to be discussed at the Board on June 17,2004, i s a strategy o f
reengagement. The thrust o f the Bank’s program for FY 2004 to 2007 supports the goals set forth in the
Economic Recovery Strategy, stimulating growth with equity, reducing poverty, and consolidating
improvements in governance. This project addresses two o f these three main pillars -- stimulating
economic growth, while reducing poverty.
This project falls under the joint IDA/IFC Micro, Small, and Medium Enterprise Development Program
for Africa”, intended to achieve greater impact for the country by integrating the expertise, resources and
instruments o f the World Bank, International Finance Corporation (IFC), and other bilateral donors and
leveraging the comparative advantages o f these institutions. This approach will enable the World Bank
Group to respond more effectively to African client countries’ growing demands for assistance to put
MSMEs in the forefront o f private-led growth and employment generation for poverty reduction. The
first operation developed under this Program, for Nigeria (Report Number 272 13-UNI), demonstrated the
synergy o f combining International Development Association’s (IDA) ability to address policy and
regulatory issues and to provide technical assistance with IFC’s ability to assess market opportunities and
mobilize investment (e.g., for microfinance). The proposed project adopts a similar innovative approach
for addressing gaps in MSME development.
Other donors, particularly DFID, European Union (EU), U.S. Agency for International Development
(USAID), and United Nations Development Program (UNDP), have continued to actively support MSME
development, in some cases through an integrated program with similar pillars o f assistance (Access to
Finance, Business Services, and Business Environment). During project preparation, the joint BankAFC
team consulted with donors in both the Private Sector Development (PSD) donor technical working group
forum and bilaterally with those most active in private sector development. The PSD donor technical
working group provided feedback on the project design and welcomed new IDA funds into PSD work
which they felt was “long overdue.” They welcomed the World Bank Group’s interest in addressing
important gaps and i t s support in encouraging government not to relapse into direct service delivery, and
urged the Bank to utilize the project to leverage government’s focus on policies, priorities, and
institutional arrangements.
KIPPRA, “Review of Government Policies for the Promotion o f Micro and Smallscale Enterprises in Kenya,”
lo
2002
The “Program Framework Document for a Joint IDNIFC Micro, Small, and Medium Enterprise Development
Pilot Program for Africa” [IDNSecM2003-06141 was discussed with the Board in December 2003
5
3. Higher level objectives to which the project contributes
The higher level objective i s increased growth and competitiveness o f MSMEs. This higher level
objective i s aligned with the recently approved CAS and with the Government’s focus o n MSME
development as an important vehicle to raise incomes and employment.
B. PROJECT DESCRIPTION
1. Lending instrument
The project will be supported by a sector investment loan. This instrument i s appropriate as it will
provide direct financing for activities which have been identified by a wide range o f stakeholders to
achieve higher levels o f competitiveness.
2. Project development objective and key indicators
The project aims to increase productivity and employment in participating MSMEs. This objective will
be achieved by strengthening financial and non-financial markets to meet the demand o f MSMEs,
strengthening institutional support for employable skills and business management, and reducing critical
investment climate constraints on MSMEs. The project will focus on key value chains and on both
formal small and medium enterprises and informal microenterprises that have high potential for dynamic
growth, including “graduation” from informal to formal status.
3. Project components
The project supports the Government program to increase the competitiveness o f MSMEs through
access to finance, (ii)
strengtheningenterprise skills and market
mutually reinforcing components - (i)
improving the business environment.
linkages, and (iii)
Component One - Access to Finance
SubcomQonentA - Financial Sector Deepening (IDA US$4 mm and US$lO-I5mm fFom DFID)
This component will co-finance a Financial Sector Deepening Trust, aimed at deepening and expanding
the reach o f financial services and products that are available to MSMEs. This objective will be achieved
through performance based grants for a range o f financial institutions to build capacity to provide
financial services to different segments o f the MSME sector. This component will support the following:
MFI Strengthening, Outreach and Commercialization: Capacity building in existing MFIs and
a technical skills transfer program for well-performing
SACCOs, with three main areas o f focus: (i)
MFIs engaged primarily in group lending, designed to introduce new systems and lending
methodologies to enable them to add individual lending products that will facilitate the graduation o f
technical assistance and additional capacity building to existing
successful group-based clients; (ii)
MFIs and NGOs with limited geographical focus to leverage their ability to expand lending
skills transfer and technical assistance to highoperations and outreach in underservedareas; and (iii)
potential SACCOs and MFIs to improve their operations, management and governance structures for
greater commercial orientation and outreach o n a sustainable basis (as well as for eventual licensing
under the new MFI Bill).
Commercial Financial Institutions Moving Downmarket: Capacity building and product development
in commercial financial institutions - development and implementation o f a technical skills transfer
program for commercial financial institutions that are interested in new systems and lending
methodologies for the MSME market segments. The technical assistance will be provided on a costshared basis to commercial banks and non-bank financial institutions or subsidiaries that provide
strong evidence o f a management commitment to extend further into the MSME credit market.
6
Particular attention will be given to the introduction of new financial products appropriate for
MSMEs, such as leasing and discounting receivables.
Subcomponent B - SME Risk Capital and Technical Assistance Fund (IDA US$6..5mm: other private
investment US$ISmm)
There are several reasons why small and medium firms cannot access commercial bank financing, not
only in Kenya, but also in many developing countries around the world. Banks typically require well
secured collateral from applicants and are ill-suited to serve the needs o f young small and medium-sized
firms due to information asymmetries on project quality between bankers and entrepreneurs and the lack
o f adequate collateral. Risk capital funds, on the other hand, specialize in the financing o f start-up and
first expansion projects and provide close support and supervision, which can mitigate these asymmetries
and later provide comfort to banks for the financing o f such projects. By solving problems relating to
information asymmetries, risk capital funds can therefore bridge the gap between emerging entrepreneurs
and the banking system. However, while risk capital financing i s a potential solution to the difficulties
SMEs have accessing and servicing debt financing, this type o f financing instrument for SMEs in Africa
has suffered from obstacles related to limitations on growth potential, exit opportunities for equity
investors and high costs o f processing for relatively small investment amounts.
Consistent with the objectives o f subcomponent A, this subcomponent will help catalyze new risk capital
instruments (mix o f debt, equity and quasi-equity) tailored for SMEs by adapting methodologies that have
successfully reached a large number o f SMEs in other countries. I D A funds would be used to support the
introduction o f a risk capital SME fund in Kenya by sharing a portion o f the operating costs o f the fund
and through the establishment o f an associated technical assistance (TA) facility for the SME investees,
subject to fulfillment o f eligibility and performance requirements. The use o f IDA funds i s justified by
the ability to leverage relatively large amounts o f private investment funds designed to support significant
numbers o f SMEs.
I D A funds would additionally be used to create a Technical Assistance Fund for SME investees o f
existing or new Kenyan risk capital funds to promote and encourage additional investments in the SME
sector. Selection o f beneficiaries will be determined on the basis o f proposals received in response to
requests for expressions o f interest to potential investors and fund managers in accordance with
established eligibility and performance criteria.
Component Two - Strengthening Enterprise Skills and M a r k e t Linkages
This component addresses market failures that limit the ability o f MSMEs to obtain the necessary skills
and business services to exploit opportunities and overcome bottlenecks. I t integrates a set o f
complementary and mutually reinforcing activities to support a wide range o f enterprise needs, including
subsector specific BDS, tools for business schools to better train managers, activities to catalyze
innovation and entrepreneurship, and restructuring o f the national levy scheme to ensure sustainability o f
firm-level training beyond donor financing.
Subcomponent A -Pilot Value Chain Based Matchina Grant Program (IDA US$4 mm)
The objective o f this sub-component i s to strengthen competitiveness and raise value-added in supply
chains by enhancing access to business development services (BDS) and strengthening linkages (both
between firms and from MSMEs to markets). The core o f the subcomponent would be a matching grant
fund designed to stimulate increased demand by MSMEs for BDS and a supply response oriented toward
servicing specific markets on a sustainable basis. The fund would provide partial financing for eligible
training and other BDS, particularly ‘knowledge-based, services directed toward improving
competitiveness and performance at critical points in value chains. To fill the information gap and
strengthen the role o f intermediaries needed to make BDS markets function, access to the fund would be
7
based on the submission and approval o f a value chain based business plan draftedjointly by
representative companies and/or industry associationshetworks. For example, in the case o f the cottonto-apparel supply chain, companies or representatives from member-based organizations in the cotton,
ginning, spinnindweaving, knitting, and apparel industries would be expected to work together to
formulate a joint business plan that addresses key sub-sector issues, as well as to develop a
comprehensive chain strategy. The purpose o f the pilot would be to act as a demonstration model and
provide lessons and best practices that can be scaled up and applied across other value chains.
Subcomponent B - Restructuring of the Industrial Training Levv Scheme (IDA US$0.5 mm)
The objective o f this subcomponent i s to enhance the level and quality o f technical training and skills
development in order to increase labor productivity and competitiveness o f key economic sectors. Kenya
has a long-established Industrial Training Levy scheme under which employers pay a levy to a dedicated
industrial training fund which provides reimbursement o f total or partial expenses for pre-approved
training programs. Firms that contribute a mandatory levy to the fund (in principle, those with more than
five workers) have an incentive to train their workers, offsetting the tendency to under-invest in training
due to labor mobility. While the scheme i s broadly accepted by the Kenyan private sector and has been
useful in the past, there i s a need to modernize and restructure it to meet the evolving skills needs o f firms
in the growing sectors o f the economy. The expectation i s that increased training o f employees at all
levels in the appropriate set o f skills will lead to higher levels o f labor force productivity.
the development o f an
Under this subcomponent, a study will be carried out to address four key issues: (i)
industrial skills funding strategy that i s demand driven, based on the principles o f private-public
participation, and which i s consistent with on-going Government initiatives to establish a National Skills
Authority; (ii)
the development o f a new legal, regulatory and institutional framework to more effectively
design o f a future levy fund governance, management and
support the delivery o f industrial skills; (iii)
institutional arrangements to fit the Kenyan environment. The study will consider the merits o f adopting
a single levy mechanism (such as a payroll levy) and changing the levy collection mechanism. It will also
design a transparent and efficient system for firm registration, training approval, submission and approval
o f claims and reimbursements; and (iv) re-design o f the existing industrial training qualification structure,
supported by a new skills needs assessment and accreditation practices in consultation with the private
sector.
Subcomponent C - Global Business School Network: Improving opportunities and training for
Entrepreneurs and MSMEs (IDA US$2.0 mm)
This component will introduce a Business Plaflnnovation Competition (US$1.4 mm) through a
competitively selected firm of consortium o f firms/institutions, based upon best practice models to
encourage innovative business ideas. The competition would provide potential entrepreneurs with
screening, training, and mentoring. The business plan competition may adopt prizes on themes for
particular types o f enterprises such as jua kali, social enterprises, and rural-based enterprises. Aspects o f
this subcomponent will be modeled on the Development Marketplace. The IDA support will be phased
over five years, eventually supporting only 25 percent o f the costs o f the program in year five, in order to
ensure ownership and sustainability o f program.
Additionally, the component will scale up activities of Global Business School Network (GBSN) (US$0.6
mm), an initiative started by IFC in 2002, designed to strengthen the institutional capacity o f business
schools in developing countries through a non-profit entity called Global Business School Network
Center. The GBSN Center brings together top global business schools with business schools in
developing countries and creates, for the first time, a multilateral approach to managerial capacity
building. In Kenya, GBSN Center will be piloting i t s activities with at least three business schools. The
activities to be implemented at the business management schools in Kenya are twofold. First,
strengtheningthe curriculum and development/integration o f locally relevant cases to increase
8
effectiveness o f the training available for entrepreneurs and owners o f MSMEs. Second, schools will
develop short courses for managers o f MSMEs who do not have the time and/or resources to become full
time business students.
Component Three - Improving the Business Environment (IDA US$tmm)
This component will contribute to improvement o f the business environment by reducing the costs o f
investment and doing business. Specifically, it will reduce cost o f compliance with business regulations
for the formal sector and create incentives for informal MSMEs to graduate to higher levels o f formality,
and thus facilitate their access to resources for growth. This component will assist the Government in
implementing the simplified taxation regime for micro and small businesses and in reducing the cost o f
starting-up a business through a one-stop shop approach.
The informal sector has played an important role in employment generation in Kenya. However, the
transition from informal to formal i s critical both for the enterprise (for increased access to markets,
financial services, contracts, contract enforcement, security, and protection from the rent-seeking
behavior o f control agencies) and enterprise growth, as well as for the Government (through increased tax
revenue and environmentalhafety compliance). A prohibitive business environment -- high taxation,
cost and time o f business start-up and compliance with business regulations -- are among the main
reasons why firms prefer to operate informally.
This component w i l l use an integrated approach for addressing the above-mentioned issues. The primary
objective i s to enable prospective entrepreneurs to comply with business start-up regulations and tax
liabilities in a single interface with government institutions (One-Stop-Shop approach). The introduction
o f such a system will combine the current partial legalization (e.g. single business permit) with the other
necessary legal obligations (e.g. receiving PIN, trade license, business name registration) and tax liability.
Second, the component will support the design and the implementation, subject to parliamentary
approval, o f a simplified taxation system for micro and small businesses. This system will likely be in the
form o f a unified tax and will be applicable for businesses operating below the VAT threshold. The
proposed unifiedtax will substitute the existing numerous taxes and fees for which MSMEs are liable.
4. Lessons learned and reflected in the project design
The project has been designed drawing on the World Bank Group’s experience in Sub-Saharan Africa and
other regions, and has benefited from the inputs o f various World Bank Group networks and global
products groups, including Finance, Private and Infrastructure (FPSI) network, IFC Global Financial
Markets and IFC Africa Region, the SME Department, Africa Project Development Facility, Africa
Region Rural Development units, Foreign Investment Advisory Services (FIAS), and Investment Climate
Unit. The project was also prepared in consultation and with contributions from the PSD Donor
Technical working group in Kenya.
In addition, a variety o f economic and sector work influenced the design during project preparation
including several Government studies (Economic Recovery Strategy, Investment Program, M i c r o and
Small Enterprise Sessional Paper) and World Bank studies (Value Chain Analysis o f four sub-sectors,
Investment Climate Assessment, draft F I A S Administrative Barriers results, Financial Sector Assessment
Program, Survey o f Management Education in Africa, and the Kenya MSETTP World Bank project
completion report), as well as other donor-funded studies and evaluation reports.
This project falls under the joint I D N I F C Program for Micro, Small, and Medium Enterprise
Development, which i s intended to expand o n successful approaches already under way in the Bank
9
Group’s work in Africa and will provide innovative solutions to chronic difficulties in small enterprise
work in Africa.12 The project design reflects the following key lessons learned:
(a)
Integrated approach: A principal conclusion o f reviews o f past MSME projects was the need
for an integrated package o f interventions (access to financial services, business development services,
and improvements in the business environment for MSMEs) that address interrelated constraints and
enable MSMEs to access markets on a sustainable basis. This project i s built on these three
complementary pillars.
Performance grant agreements: In some components, the project will utilize performance
agreements with intermediary service providers in order to re-enforce a commercial and results focus to
project-funded activities. The performance based grants are designed to (1) leverage private funds and
offset up-front development costs in order to maximize market development effects and minimize price
distortions, as in the case o f the SME risk capital fund component or to (2) build the capacity and
products o f potential suppliers that are interested in serving the MSME market on a sustainable basis in
the future, as in the case o f the Financial Sector Deepening component. The risks o f possible marketfocusing on segments where the market i s very thin or nondistorting effects are minimized by (i)
targeting development costs and avoiding subsidies on product prices. Thus, the use o f
existent; and (ii)
IDA funds for these subsidies i s justified by the catalytic longer-term effects on sustained development o f
this market niche, as well as by the direct impact on the enterprises as a result o f the interventions.
(b)
Cost sharinglmatching grant: A few o f the components have a cost-sharing (matching grant)
(c)
approach. Based o n the many years o f lessons from matching grant schemes in Africa and elsewhere, the
demand-driven approach will be designed with attention to achieving a suitable balance between
incentives for potential demand to come forward and sufficient co-payment to ensure adequate
willingness to pay when assistance i s removed. While these matching grants will go to private entities
(for-profit as well as non-profit organizations), the products developed and the demonstration effects o f
success constitute public goods that are expected to facilitate subsequent further adoption, expansion and
innovation by other institutions.
(d)
Private sector service delivery and sustainability: The project places a heavy reliance on
private sector delivery channels in order to promote responsiveness to enterprise demand and commercial
sustainability. An evaluation o f the previous World Bank M i c r o and Small Enterprise Training and
Technology project (MSETTP) found evidence o f good prospects for sustainability o f the private BDS
market for MSMEs o n both the demand and supply sides. However, the evaluation noted that
sustainability could have been improved through better targeting and cost-sharing by users who were
likely to continue purchasing the services on their own. The project draws o n these lessons by targeting
growth-oriented value chains with effective coordinating mechanisms, where continued demand and
willingness to pay are likely.
Private procurement: One o f the lessons from the recently closed MSETTP project was the
need for procurement arrangements that do not involve the Government for matching granthowher type
instruments. In the case o f MSETTP, the dependence on Tender Board approvals and annual Ministerial
budgets caused major delays and inflexibility. Project managers should have signatory rights on project
accounts, subject to normal oversight procedures. The proposed project addresses this major
implementation lesson by using a private management contractor (with financial management and
procurement responsibilities) to have sole signatory rights.
(e)
Reference to World Bank Group, “Program Framework Document for Joint IDNIFC MSME Program for Africa,” for the
discussion of the Bank’s history o f lending to MSMEs and o f associated chronic difficulties.
(0
Industry and value-chain focus: The proposed project design for the integrated value-chain
based matching grant fund overcomes some o f the approaches previously taken by adopting an integrated
value chain approach, which enables assistance to be targeted on solving key bottlenecks that inhibit the
competitiveness and growth o f strategic high-potential sectors. Specifically, the matching grant would be
made available only when key players and their representative organizations along a supply chain are able
to develop a consensus to work together, and to form an alliance that responds to the needs o f an entire
supply chain. Experience with matching grants in other countries shows that well-designed incentives
can promote behavior change and sustainable market development.
(g)
Business Environment: The design o f the business environment component i s based on the
lessons learned from the previous experience in Kenya, particularly, from the DFID financed project,
which introduced the single business permit at the local level. It i s also based on the preliminary findings
o f the recent FIAS Administrative Barrier report, the Investment Climate Assessment and analytical work
o f other donors. The approach used in the project design has also been proven in number o f developing
countries.
(h)
Specialized financial products: There i s a growing body o f experience in providing small
business loans profitably - either through microfinance institutions entering the market or through
commercial bank downscaling. These experiences are drawn predominantly from experience in Latin
America and Eastern Europe. The critical factors underlying these success stories are often less to do
with the injection o f new liquidity and more to do with the application o f new technology, the
introduction o f new corporate incentives, the development o f new staff skill sets and the provision o f
institutional support to staff responsible for MSME lending portfolios. This proposed project will pay
particular attention to these capacity building considerations.
Management education: The 2003 survey o f management education in Africa highlights the
(i)
need for case studies that relate to the local economic environment, resources to support faculty
development, development o f stronger linkages between business schools and local business
communities, and partnerships between local and regional institutions to enhance information flow and to
sharing o f best practices. Consultations were held with Kenyan business schools and Global Business
School faculty and administrators to design the project to yield maximum benefits in a cost-effective
manner. The project also takes into account lessons learned from previous bilateral programs and
partnerships in business education.
5. Alternatives considered and reasons for rejection
The growth objectives articulated in the ERS critically depend on a reanimated private sector. Thus, the
World Bank Group support to the Government to help achieve this objective has been designed through a
series o f carefully sequenced activities.
Early consideration was given to incorporate these MSME pilot activities under a larger Privatization and
Private Sector Competitiveness Project which would comprise a more integrated program o f policy and
institutional reform. However, such a program would require longer preparatory time, especially as the
focus on the privatization agenda i s complex and requires that certain preconditions be met. Furthermore,
a substantial amount o f analytical work has already been undertaken that can form a basis for the design
o f specific interventions to achieve relatively quick results. In view o f the World Bank Group’s interest in
demonstrating early results through support to the private sector reform agenda o f the new Government,
the priority placed on micro, small, and medium enterprises in the Economic Recovery Strategy, and the
additional policy dialogue necessary in a larger, more complex program, it was decided that the MSME
project be prepared quickly as a first step. The future Privatization and Private Sector Competitiveness
11
Project (FY05-FY06) w i l l seek to facilitate the privatization process, while promoting private sector
development more broadly.
During the project concept review, a Sectorwide Approach (SWAP) was suggested as an instrument for
consideration. The SWAP approach was not pursued as an alternative due to two major concerns - (a) the
private sector delivery approach of the joint IDA/IFC initiative and o f this MSME project; and (b) the
absence o f the necessary conditions for the SWAP type o f instrument to be effective. The Government
recently commissioned a report, Coordination of Government, Donor, and Civil Society Interventions in
the MSE Sector in Kenya, which discusses the conditions required for a SWAP to be successful. The
main pre-conditions include: (1) political commitment and ownership o f the program; (2) issues o f
corruption, accountability, and bureaucratic red tape; and (3) coherent and realistic policy direction
regarding the MSE sector.13 The new Government i s working towards these goals, but w i l l need time to
achieve them. The SWAP could be considered during the mid-term review.
C. IMPLEMENTATION
1. Partnership arrangements
One o f the project’s core differences with that o f traditional World Bank projects i s the partnership with
IFC. The project was designed not only to leverage I F C investments and financial partners, it was also
prepared with a unique combination o f Bank and I F C expertise.
The project i s also collaborating closely with other donors; most notably with DFID on the “Financial
Deepening” subcomponent, which will use the same implementation structure for co-financing purposes.
2. Institutional and implementation arrangements
The ERS calls for redefining the role o f the state as a facilitator for private sector growth and investment.
The strategy entails strengthening the policy and regulatory functions o f the state and transferring
productive and service delivery activities to the private sector. The project implementation arrangements
w i l l adhere to this strategy, as well as build upon the lessons o f project implementation from other similar
private sector development projects throughout Sub-Saharan Africa and other regions. The overriding
principle guiding the institutional and implementation arrangements i s the Government’s delegation o f
maximum feasible operational responsibility to the private sector in managing implementation. The
Government’s role w i l l focus on facilitation, consultation, policy-making, and evaluation. Details o f
project implementation arrangements are given in Annex 6.
The project w i l l be overseen by a Steering Committee consisting o f approximately six to nine members,
half o f which will be from the private sector, with core Ministries represented at the Director level. It will
be supported on the Government side by a small Project Secretariat within the Ministry o f Trade and
Industry (MOTI) that will provide policy advice and be responsible for evaluation o f project progress and
provide information to the Steering Committee. Project management will be delegated to a private
Project Management Contractor (PMC), responsible for annual work programming, financial
management, procurement, public relations, monitoring, and reporting. A number o f subcomponents will
be contracted out to technical partners. The P M C will provide quantitative oversight o f contracts for
implementing subcomponents (e.g., procurement process, progress toward specified targets, financial
accounting), while the Project Secretariat will focus on qualitative aspects regarding achievement o f
results consistent with project objectives. The PMC and Project Secretariat will have shared responsibility
o n public relations. (See figure 1.)
~~
KIPPRA, “Coordination o f Government, Donor, and Civil Society Interventions in the MSE Sector in Kenya,”
l3
2004
12
0
A Public-Private Steering Committee, chaired by the Permanent Secretary (PS) o f MOTI, will be an
inter-ministerial committee with relevant Ministries as well as private sector representation.
Responsibilities include:
>
>
>
provide strategic guidance and oversight for the project;
approve annual workplan and budget; and
review quarterly progress reports and address any major problems affecting project
implementation;
The Steering Committee will establish a Technical Task Force to provide guidance on the Business
Environment and Labor Skills components - especially since it will be critical to involve additional
ministries to provide guidance, monitor the component implementation process, review and approve
reports, and advise the Steering Committee on issues related to the policy and legislation changes.
e
A Project Secretariat in MOTI will serve as a secretariat to the Steering Committee in terms o f
reviewing and analyzing reports from the PMC on behalf o f the Steering Committee, providing
guidance as requested on project issues, and filtering policy issues that arise from the project for the
Steering Committee to address. It will communicate policy guidance to the PMC and technical
partners. I t w i l l also assist in the coordination with other donor programs in areas addressed by the
project and will review regular progress reports submitted by the PMC.
The Project Management Contractor (PMC), competitively selected, will be primarily responsible for
the financial management and procurement aspects o f the Project and ensure that the Project i s
implemented in accordance with the Development Credit Agreement and the Project Implementation
Plan/Manual. The PMC will be a private firm to be recruited through competitive process in line with
IDA’SProcurement Guidelines: Selection and Employment o f Consultants. Contracting at the
subcomponent level will be carried out by the PMC in accordance with the operational guidelines set
out in the Implementation Manual. I t will retain sole signatory rights and manage the project account.
The selection and hiring o f the PMC will be a condition o f credit effectiveness.
For the interim period - in order to allow for more immediate start-up o f project effectiveness/activities the Project Secretariat will perform the PMC functions, until the PMC i s recruited and established. The
Project Secretariat will contract a short term procurement consultant to assist them during this interim
period.
Contracts with the PMC and technical implementing agents for subcomponents will be signed by the PS
of M O T I on behalf o f the Government; however, this does not apply to minor subcontracting by these
agents for specific aspects o f implementation. The specific subcomponents that will be contracted to
technical partners include:
0
0
The Financial Sector Deepening subcomponent will be contracted to a private technical manager
who will send out a call for proposals, screen and select potential recipients based on agreed
eligibility criteria, provide guidance on technical assistance partners, and monitor performance to
ensure performance milestones are being met. A procedures manual will guide the day to day
operations. The Project will use the same implementation arrangements that are being established
for donor pooling (initiated by DFID) to maximize donor coordination. However I D A funds will
not be used to pay for the operation o f this technical contractor.
The SME Risk Capital Fund subcomponent will follow eligibility criteria for selection. The
beneficiaries will respond to a call for Expressions o f Interest and will have to meet pre-established
eligibility criteria.
13
0
0
0
0
The pilot value-chain based BDS matching grant fund will be contracted to a competitively selected
private technical manager who will send out a call for proposals, screen and select potential business
plans, and monitor performance to ensure milestones are being met. The procedures manual will
guide day to day operations.
The technical and advisory work for the Industrial Training Levy subcomponent w i l l be contracted
to a competitively selected private consulting firm. The Skills Development Task Force will
oversee the implementation o f the component. The task force composition i s expected to include
Directorate o f Industrial Training, Ministry o f Trade and Industry, and Ministry o f Education.
The GBSN subcomponent will be contracted’to the GBSN Cetlter, while the Business Plan
Competition will be contracted to a competitively selected consortium o f institutions.
The technical and advisory work for the Business Environment component will be contracted to a
competitively selected private consulting firm. The Business Environment Task Force will oversee
the implementation o f the component. The task force composition i s expected to include
representatives o f the Kenya Revenue Authority, Ministry o f Local Government, MOTI, Ministry o f
Labor, and Office o f the Attorney General.
3. Monitoring and evaluation o f outcomes/results
Despite extensive enterprise support programs over the past three decades, there has been inadequate
attention to the development and application o f results-oriented impact measurement tools in the field.
Donors involved in microfinance assistance have developed good quantitative and qualitative indicators
o f outreach, sustainability, and poverty impact. However, the monitoring and impact measurement
framework for MSME assistance i s less well developed, especially for BDS and the business
environment. The lessons learned from microfinance impact assessment from donors active in this area,
such as USAID’s Assessing the Impact o f Microenterprise Services (AIMS) program and the Ford
Foundation’s Imp-Act program, have been leveraged in designing the M&E system for this project.
Annex 3 provides a detailed plan for monitoring and evaluating the project’s outcomes and results. T o
evaluate project outcomes, firm-level data will be collected from participating MSMEs. There i s a plan
for the 1999 MSE Baseline Survey to be updated in 2004 and will provide valuable baseline information.
Firm-level data on project outcomes w i l l be collected again after two years and after five years to assess
the project’s effectiveness in reaching the project development objective. The P M C will be expected to
contract an outside evaluation expert to collect and analyze the project outcome data.
Data for the project’s results indicators w i l l be drawn from several sources, including financial
intermediaries, supply chain experts, participating business schools, and national level business
environment assessments. Each data source corresponds to a specific project component. For results
indicators under component three, for example, information from the Doing Business database and
Investment Climate Assessments (ICAs) will be used to the extent feasible to provide both baseline and
follow-up data on changes in the business environment.
As specified in Annex 3, the M&E data will either be provided by project partners or will be collected by
expert consultants who are contracted by the PMC. Outside experts will be needed both to supplement
the evaluation capacity and to avoid conflicts o f interest in monitoring and evaluating project outcomes
and results. The arrangements for results monitoring includes mid-project evaluations, which can be used
to by managers and policy-makers to assess project effectiveness during implementation, as well as endof-project evaluation, which can be used to evaluate the effectiveness o f the project after it i s completed.
14
4. Sustainability
This project supports the ERS framework for micro, small, and medium enterprise development. Thus a
high degree o f stakeholder commitment i s expected in the implementation o f project activities. This i s
particularly important in the area of business environment, in that a participatory process must be
established to ensure continued consultation and pressure from the private sector on Government
authorities to implement and maintain the expected reforms.
5. Critical risks and possible controversial aspects
The major risks facing the MSME sector could include:
Government coordination: Overlapping roles between ministries may weigh o n the success, not only
for the proposed project, but also for national policies and other donor efforts in this sector. The
Department o f MSE Development i s currently housed within the Ministry o f Labor and Human
Resource Development (MLHRD), and has been the focal point o f the MSE Sessional Paper.
However, the Ministry o f Trade & Industry plays the major role in Private Sector Development. The
fragmented structure within two government bodies does not allow for effective integration o f
policies and institutions between the various strata within the MSME sector. This issue i s being
discussedaddressed within the Government and among donors.
Private-public partnership: The Government has recently demonstrated a commitment to
partnership/consultations with the private sector through the newly formed Kenya Private Sector
Alliance (KEPSA). KEPSA was actively involved in the preparation o f the Economic Recovery
Strategy and the Investment Program. However, as it i s s t i l l in its infancy, attention must be given to
ensure that the dialogue remains effective and grounded to enterprise needs. The proposed project
implementation arrangement has integrated a public-private Steering Committee.
Government role in the financial sector: The World Bank’s on-going dialogue with the Government
as part o f the recently completed, Financial Sector Assessment Program (FSAP), as well as the
upcoming Financial Sector Adjustment Credit (FSAC) and Finance and Legal Sector Technical
Assistance Credit (FSLTAC) aims to reduce the level o f direct Government intervention in the
financial sector and a divestment o f the Government’s stake in state-owned commercial banks with
the ultimate objective o f strengtheningcompetition. The access to finance component i s consistent
with this overarching objective o f utilizing private sector resources to secure sustainable access to
finance to the MSME sector. It i s critical that the government distinguish between IDA funds used
for capacity building and incentives to leverage private market development versus the existing use o f
government funds through development finance corporations (DFCs) and state-owned banks.
Donor coordination: Ineffective donor coordination could be damaging given scarce donor resources
and potentially overlapping efforts. In this context, donor coordination and support to send a singular
message to the government and to push for an integrated solution is considered a critical factor for the
success o f the proposed project. Efforts to date have been extremely promising, with a wellfunctioning and active PSD donor coordination group.
Ownership o f the training levy: the restructuring o f the l e v y requires consensus amongst various
Ministries, between the Government and private sector, within the private sector institutions
(Federation o f Kenyan Employers, Kenyan Association o f Manufactures and Kenya Private Sector
Alliance) and labor organizations o n the role o f the N I T C and DIT, the governance and management
o f the levy and a firm commitment from the Government for an expanded role for the private sector.
The implementation phase of the Business Environment component, particularly the Unified Tax i s
contingent on Parliamentary approval.
15
6. Loadcredit conditions and covenants
Effectiveness Conditions
0
0
0
0
0
0
0
The Borrower has adopted the project implementation plan (including annex with Matching Grants
Manual and Financial Sector Deepening Trust Manual) in form and substance satisfactory to IDA;
The Borrower has established the Project Steering Committee satisfactory to IDA;
The Borrower has established the Project Secretariat satisfactory to the Association;
The Borrower has entered into the Management Services Agreement with the P M C in form and
substance satisfactory to the Association;
The Borrower has opened the Special Account;
The Borrower has opened the Project Account and has deposited therein the Initial Deposit; and
The selection o f a Fund Manager for Component One, Subcomponent B, has been completed in
accordance with the criteria and procedures satisfactory to IDA.
D. APPRAISAL SUMMARY
1. Economic and financial analyses
The N e t Present Value (NPV), the relevant decision criteria for this type o f project, i s calculated using a
simple model. In the base case scenario, the project generates a N P V estimated at US$19.8 million. The
project i s expected to contribute to direct j o b creation driven by increased production. However, it i s
important t o note that j o b creation could be hindered by the relatively l o w capacity utilization rate o f 63
percent, the relatively high labor costs and l o w level o f demand. That said, during the lifetime o f the
project, a part from improving the enabling environment for M S M E development, a minimum o f 2750
jobs are expected to be created. All the sensitivity and scenario analyses conducted yield positive NPVs
which confirm the project robustness.
The project i s expected to generate fiscal revenues for the Government. Indeed, for the 12-year forecast
time frame (including the 5-year project implementation period), the project would generate US$13.5
million as the result o f incremental personal and corporate income taxes. This amount does not capture
the potential fiscal impact from the increased number o f registered MSMEs and the reduced tax evasion
which are difficult to reasonably estimate ex-ante. The detailed results are presented in annex 9.
2. Technical
The project will seek to ensure that appropriate technical standards are achieved in three ways: (i)
partnering with practitioners and technical experts with proven track records; (ii)
focusing o n commercial,
market-driven provision o f services that will limit grant dependency among beneficiaries and promote a
developing specialized financial services for the
demand responsiveness among service providers; (iii)
MSME market and targeting BDS to address specific industry needs that will increase quality, market
revise public policies and
relevance and uptake o f services. The public sector role would be to: (i)
regulations that produce high transaction costs and thus create a competitive disadvantage for MSMEs,
and (ii)
review government-sponsored programs to ensure efficiency and avoid crowding out o f private
initiatives. This approach represents a fundamental shift in the role o f the government, away from direct
provision o f services and towards facilitating the development o f private markets and networks.
3. Fiduciary
Although the Project does not currently satisfy minimum IDA financial management requirements, the
Project’s financial management function will be carried out by a private Project Management Contractor
(PMC), the procurement o f which i s a condition o f credit effectiveness (Paragraph C6). Completion o f an
16
assessment o f the project’s financial management capacity and orientation o f the PMC on IDA accounting
and reporting requirements will be carried out once the PMC i s in place, prior to credit effectiveness.
4. Social
There are no social issues triggered by this project. A number o f project components are expected to lead
to favorable social outcomes, including employment generation and poverty reduction.
Key stakeholders from both the public and private sector have been consulted throughout project design,
including several focus groups to refine project design.
5. Environment
Category C -Not required
6. Safeguard policies
Category C - Not required
Safeguard Policies Triggered by the Project
Environmental Assessment (OP/BP/GP 4.0 1)
Natural Habitats (OP/BP 4.04)
Pest Management (OP 4.09)
Cultural Property (OPN 11.03, being revised as OP 4.1 1)
Involuntary Resettlement (OP/BP 4.12)
Indigenous Peoples (OD 4.20, being revised as OP 4.10)
Forests (OP/BP 4.36)
Safety o f Dams (OP/BP 4.37)
Projects in Disputed Areas (OP/BP/GP 7.60)
Projects on International Waterways (OP/BP/GP 7.50)
Yes
[I
[I
[I
[I
[I
11
[I
11
[I
[I
No
[XI
[XI
[XI
[XI
[XI
[XI
[XI
[XI
[XI
[XI
7. Policy Exceptions and Readiness
The project does not require any exception from Bank policies. Assessments and preparation o f fiduciary
arrangements, staff & consultant mobilization, M & E systems, Procurement Plans, and Implementation
Plans are being undertaken in order to meet the Regional criteria for readiness for implementation.
17
Annex 1: Country and Sector o r Program Background
KENYA: MSME CompetitivenessProject
Kenya has traditionally had a vibrant private sector which enabled it to create, by the end o f the 1980s, a
strong and fairly diversified economy with a large manufacturing sector and dynamic tourist market. In
addition, Kenya’s strong financial sector built i t s position as the regional financial center and boasted the
second largest stock market in the continent.
The decade o f the 1990s, however, witnessed a sharp deterioration in the investment climate,
accompanied by a decline in quality o f physical infrastructure and institutions supporting the market.
Together, with uncertainties over the Government’s commitment to economic reform, the impact on
business confidence was significant. Kenya’s competitiveness and participation in the world economy
suffered and the country witnessed a sharp deterioration in income and living standards, with poverty
rates rising from 48 percent in 1990 to 55 percent in 2001.
Kenya has an estimated population o f 3 1 million with an annual population growth rate o f 2.1 percent and
an annual employment growth rate o f 1.8 percent. The average l i f e expectancy i s 46 years for males and
47 years for females. Between 1986 and 1996, the average growth rate in the total available labor force
was over 4 percent per year. Yet, employment only increased between 2 and 2.5 percent annually from
1986 to 1995. As a result, more than two million Kenyans were unemployed. Among those counted as
employed, a significant proportion was underemployed, particularly those working in small scale
agriculture and the informal sector. Average unemployment i s currently estimated at 23 percent.
While facing slow employment growth in the formal manufacturing sector (2 percent a year during the
1990s), the micro and small enterprise sector became the second largest (after small scale agriculture) and
fastest-growing source o f employment. In 1999, the national MSE baseline survey counted 1.3 million
MSEs employing 2.4 million workers, and consisting over 20 percent o f employment and 18 percent o f
GDP. This survey also showed that the majority o f Kenyan MSEs are in the trade, services, and
manufacturing sub-sectors and that an overwhelming percentage have less than five employees (table
below).
I
I
Trade
Services
Manufacturing
Bars. hotels. restaurants
Construction
Total
No of MSEs 50 or fewer employees
I
I
64.1
14.8
13.4
6.0
1.7
100.0
1,289,012
I
I
l4
Central Bureau of Statistics, International Center for Economic Growth, and K-Rep Holdings, National Micro and
Small Enterprise Baseline Survey, 1999.
18
I
Numbers o f non-farm MSEs by size, 1999
I
Percent o f total
1-5
6-10
11-15
I
96.7
2.6
0.5
10-L J
I
u. 1
Number o f
26-50
Total
-1
I
0.1
100.0
Looking Ahead: The year 2003 marked a point o f change in Kenya. After a confident beginning by the
new NARC government, there have been high expectations for private-sector led growth. Moreover, the
private sector i t s e l f has been able to demonstrate success in some key sectors o f the economy. Both tea
and horticulture products (including cut-flowers) reinforced their position in world markets during the
1990s, despite declining world prices in some markets and a highly competitive environment. With the
market-opening opportunities provided by the African Growth and Opportunities Act (AGOA), the
garments sector experienced spectacular growth, increasing exports from a mere US$l 0 million in 1999
to around US$220 million in 2003, accompanied by an increase in employment in the sector from 6,000
to over 40,000 workers. The challenge ahead i s to sustain the growth in these promising sectors, while
catalyzing the effective integration o f micro, small, and medium enterprise sector in higher value-added
activities.
19
Annex 2: Major Related Projects Financed by the Bank and/or other Agencies
KENYA: MSME Competitiveness Project
Nigeria Micro, Small, and Medium EnterpriseProject (joint IDNIFC): The MSME project in
Nigeria was the first project to be approved by the Board under this joint IDA/IFC Program for MSME
Development in Africa. The project in Nigeria aims to increase the performance and employment levels
o f MSMEs in selected non-oil industry subsectors and in three targeted states o f the country. To achieve
this objective, the Project will: (i)
develop and strengthen the capacity o f local intermediaries to deliver
reduce selected investment climate barriers that
financial and non-financial services to MSMEs; (ii)
mobilize increased private investments in MSMEs and
constrain MSME performance; and (iii)
intermediaries. The project was approved by the Board (Report 27213-UNI) in December 2003.
World Bank Kenya - Private Sector Development: The Africa Region Private Sector Development
Department i s carrying out economic and sector work to deepen the understanding o f the sources and key
obstacles to growth and much o f this analysis has informed the preparation o f this project. The
Investment Climate Assessment, recently completed, provides a greater understanding o f the factors that
determine investment and business activity in Kenya. The administrative barriers study being conducted
by the Bank Group’s Foreign Investment Advisory Service sheds light on the administrative and
regulatory costs o f doing business in Kenya. The analysis will identify measures needed to strengthen the
competitiveness o f the private sector, including actions to increase efficiencies in the supply chain, to
upgrade skills, and to reduce administrative and other impediments to private sector investment. The
upcoming Privatization and Private Sector Competitiveness Project (FY05-06) will seek to facilitate the
privatization process, while promoting private sector development. The project will strengthen the key
institutions responsible for implementation o f the privatization program, support training o n regulatory
and other issues, assist the preparation o f corporate restructuring plans, and strengthen the capacity and
design o f regulatory bodies.
-
World Bank Kenya Financial Sector Development: The Bank’s Financial Sector Development
program combines diagnostic work and financial assistance to implement reforms and to build
institutional capacity. The Bank jointly with the IMF recently completed a comprehensive assessment o f
the sector under the Financial Sector Assessment Program (FSAP). Based on the Bank’s ongoing
dialogue with the Kenyan authorities and the findings o f the FSAP the Bank i s designing two financial
sector operations. The Financial Sector Adjustment Credit (FSAC, FY05) supports policy and
institutional reforms, including divestiture o f the state’s remaining ownership stakes in the banks,
enhanced banking supervision, and design o f a policy to improve access to financial services. The
Financial and Legal Sector Technical Assistance Credit (FLSTAC, FY05) will support the building o f
capacity in the financial sector as well as in legal/judicial sector, thereby facilitating the implementation
of financial sector reforms.
World Bank Kenya- Rural Development: The Kenya Agricultural Productivity Project (KAPP)
supports new channels for technology generation and dissemination to farmers. These new channels
could entail the outsourcing o f agricultural extension services to the private sector. Hence, they may
benefit directly from the development o f private sector advisory services which are either commodity or
industry specific, also one o f the key objectives o f the proposed MSME project. With respect to policy
development, a strong synergy exists between the proposed MSME and the Kenya Agricultural
Productivity Project. The MSME project supports reforms on the demand side o f agricultural markets, by
adapting the marketindregulatory environment to increased private sector participation and to increased
marketing innovation and experimentation. This support neatly complements the Rural Development
Department’s ongoing institutional reform dialogue with Government which operates primarily on the
20
supply side o f these same markets. The combined effects of demand and supply side influences can be
quite significant on key sub-sectors such as coffee or pyrethrum which are stultified by government direct
intervention, indirect control and strict regulation. In addition, the analytic work which was undertaken
during project preparation will help to convince policy makers that tangible growth and substantial
development benefits can result from a combination o f market deregulation and private sector outreach.
IFC Kenya: IFC investment activity had lagged in recent years with lack o f progress on key issues in the
investment climate. IFC i s fully engaged with Kenyan private sector and working jointly with the Bank
on addressing some o f these longstanding issues in the investment climate and supporting new private
investment, particularly in private provision o f infrastructure. IFC’s committed portfolio in Kenya i s now
US$125 million, having increased with new projects in the past year from about US$90 million two years
ago. I t remains one o f IFC’s largest country portfolios in Africa.
In infrastructure, IFC has invested in the first project-financed IPP, Tsavo Power, and a private bulk grain
terminal in Mombasa. IFC has been working with the Government to improve the framework for
attracting private investment, both informally and formally through an advisory mandate on the
privatization o f Kenya Railways. In May 2004 IFC co-sponsored an Africa regional conference held in
Kenya focusing on infrastructure investment. IFC’s manufacturing and tourism portfolios are significant,
with a new investment in FY 04 in Magadi Soda Company, IFC’s largest industrial client. IFC also has
current and planned investments with Mabati Steel, the largest regional steel products producer, and in the
tourism industry with Tourism Promotion Services, a network o f hotels, and several smaller individual
projects.
In SME finance, IFC was one o f the founding investors in K-Rep Bank, the f i r s t commercial
microfinance bank in Kenya. More recently, IFC supported Equity Building Society - which provides
financial services to the low income population - with equity via the Africap Fund and a soft loan from
GEF. K-REP and IFC are structuring a linkage project with the leading Coca Cola bottler, an IFC client,
to establish a financing and technical assistance facility for the company’s network o f SME distributors
and retailers. In SME capacity building and technical assistance, Africa Project Development Facility
(APDF) and the SME Department have implemented a large program working with f i r m s in agribusiness,
manufacturing, and tourism. IFC/APDF are working on the expansion o f credit reporting services, and
with other aspects o f providing information and capacity building to providers o f finance to SMEs.
DFID Kenya: The purpose of DFID’s PSD program i s to generate sustainable increases in income and
employment through the growth and development of the private sector in Kenya, through the following
three areas o f focus: (a) Improved enabling environment for businesses through advocacy and policy
dialogue, capacity building within GOK departments and commercialjustice sector reforms; (b) Improved
capacity o f Kenya’s financial sector to meet the needs of poor rural and urban households, micro, small
and medium enterprise on a sustainable basis; and (c) Improved business services market to stimulate
business transactions involving poorer households in Kenya. These objectives are achieved through a series
o f strategically focused interventions that will pro-actively try to leverage market-basedsolutions to key
business constraints at the micro- or sectoral-level. The support aims to facilitate private sector actors to
respond to specific constraints as service opportunities.
USAID Kenya: The USAID’s Microenterprise program has three components: policy, microfinance and
business development services. The project involves strengthening the capacity o f relevant Government
departments responsible for policy implementation; developing a system for policy monitoring and
evaluation; and strengthening MSE associations and lobby groups to make them more effective in
dialogue with policy makers. The microfinance component strengthens the institutional capacity o f
microfinance institutions to become sustainable and expand outreach, and supports them to develop new
21
savings and loan products that are suitable for rural-based enterprises. The BDS component increases
outreach and sustainability o f BDS activities by removing the constraints that inhibit commercial
transactions o f private sector-based business services in the market.
In addition, the Kenya BDS project i s a five year MSE development program to increase access to
commercial BDS among rural MSEs within subsectors o f high growth potential. Specifically, the
program has selected three subsectors o f high growth potential for MSEs and has identified market
inefficiencies along the supply chain. Central to the project i s the Market Intervention Fund that finances
a combination o f supply- and demand-side interventions, as well as information dissemination techniques
to stimulate commercial transactions.
Agence Francaise de Developpement (AFD) Kenya: AFD has two projects which address the financing
needs o f MFIs and SACCOs. For the top-tier MFIs, AFD i s providing a partial guarantee for MFIs
issuing bonds on the Nairobi Stock Exchange. AFD's AAA rating allows the participating M F I to lower
its cost o f borrowing in local currency. So far, AFD has been working with one MFI, Faulu Kenya, for a
2004 bond issue. The project was approved by their board in late December 2003. For the second and
third-tier MFIs, as well as for the SACCOs, AFD i s currently designing a project (at appraisal stage) with
an objective to develop banking relationships between regulated wholesalers and MFIs/SACCOs. In this
upcoming project, AFD would lend to GoK, who would on-lend to wholesalers (for the first tranche, KRep, EBS and Coop Bank were selected), who would in turn lend to MFIs. The aim i s to provide
resources and expertise to develop a market-basedrelationship between wholesalers and MFIs that will
enhance, but not distort, the existing market. In addition, a capacity building component will complement
the credit line, targeting the wholesalers (to develop their ability to assess MFIs), the MFIs and SACCOs
(to develop governance and credit worthiness), and possibly to the Ministry o f Finance (for policy making
in microfinance).
EU Kenya: After the first EC Micro and Small Enterprise Support project (MESP) expired in December
2002, an independent Kenyan MESP Trust was established under Kenyan Law to provide micro-credit,
and started to do so at the beginning o f 2004. A second EU Support project to micro and small
enterprises i s currently being designed. The project i s expected to start in 2005 and will run for three
years, with an envelope o f 6.5 Million e. After a broad consultation with stakeholders, a feasibility study
and a financing proposal has been drafted. The project, s t i l l a draft, proposes to concentrate on two
elements. The first component would focus on assistance to micro-finance, with development o f new
service models and new financial products (the project will not include direct credit). The second
component would target non-financial services (development o f BDS, strengthening o f the sector to make
it more commercially-oriented, strengthening of MSE representation (reinforce associations, increase
information flows, etc.)
22
Annex 3: Results Framework and Monitoring
KENYA: MSME Competitiveness Project
PDO
Increased productivity and
employment in participating
MSMEs
-
Intermediate Results
Outcome Indicators
At least 2,500 new jobs created in
participating MSMEs
Value added per worker increases by
20 percent in participating MSMEs
Results Indicators for Each
Component
Use of Outcome Information
YR2 Assess progress toward
achieving PDO and revise
:omponent strategies as needed
YR5 Evaluate project success;
m e s s relative effectiveness o f
various project components to
inform future programming
Component One:
Component One:
Component One:
Increase in commercially sustainable
delivery o f financial services to
MSMEs
At least 70 percent o f financial
institutions receiving grants from the
Financial Sector Deepening Trust
meet or exceed their business plan
targets for MSME outreach and
portfolio quality
YR1-YR2 Evaluate progress toward
targets and adjust project strategies
as needed
YR3-YR5 Monitor progress toward
targets
At least US$11.5 million in loans
and quasi-equity investments to
SMEs disbursed through SME Risk
Capital Fund, with loan loss rate
below 10 percent
Component Two :
Component Two:
Component Two:
Increase in specialized value adding
links in supply chains
A comprehensive supply chain
strategy, which responds to the
market, technical, human resource
and financial needs o f key players
along the entire supply chain, i s
created for at least three sectors
Increased subcontracting in
supported supply chains, providing
at least a 50 percent increase in the
level o f local sourcing
Technical, legal, and regulatory
framework for redesigning the
Industrial Training Levy Scheme i s
established
Agreement on a new training levy
scheme, legislation and an
implementation plan
Improved business management
education
100 new business cases produced
Case-based instruction i s routinely
used in at least one required course
23
YR1-YR2 Evaluate progress toward
targets and adjust project strategies
as needed
YR3-YR5 Monitor progress toward
targets
in each o f the three business schools
At least 200 eligible entrepreneurs
apply to business plan competition
in first year, with at least 5 percent
increase in number of eligible
applicants annually
Component Three:
Component Three:
Component Three:
Improved regulatory environment
for doing business in Kenya
Number of formally registered
MSMEs increases by at least 25
percent
YR1-YR4 Evaluate progress toward
targets and adjust component
activities as needed
Average cost o f complying with
business start-up regulations i s
reduced to no more than $100 and
time required i s reduced to no more
than two weeks
YR2 Evaluate output and
effectiveness of pilot one-stop shops
and adjust strategy as needed
Number o f MSMEs that participate
in the business tax system increases
by at least 15 percent
24
YR3 Evaluate impact of introduction
o f the unified tax regime
-
x
-;a
t
=i
;
.L
4
b
+C
.L
;
i
P
c
0
0
3
*
*
s2
e,
i?2
e,
8
a
Y
8
0
a
a
*
*
P
8
e 2
e,
b
0
a
4
+Ir
0
E
$
C
I
I
i
8
B
2 2
*
!
a
8
2g
8
2g
a
0
v1
0
*
8
2g
a
*
*
8
i?2
e,
l-4
a
a
*
0F k8!
e,
a
8
2 g
I
3
2 8
v g
a
l-4
8
Og
a
Annex 4: Detailed Project Description
KENYA: MSME CompetitivenessProject
COMPONENT ONE - ACCESS
TO FINANCE
Subcomponent A - Financial Sector Deeueninz
Issues: The Kenyan MSME credit market consists o f a large variety o f institutions providing micro and
SME financial services, ranging in size from those serving 25 clients (village self-help groups) to 85,000
(the largest SACCO). As o f December 2002, providers o f finance to the Kenyan MSME sector included:
0
0
0
Four commercial banks15offering a full range o f banking services
Two Building societies offering savings loans and money transfer services
2,668 SACCOs offering savings loans and money transfer services
Ten NGO MFIs offering loans only16
67 Community Self-help organizations offering savings and loan facilities
Three DFIs offering loans only.
O f the above providers o f finance only the commercial banks and building societies are supervised by the
Central Bank o f Kenya and are subject to prudential regulations. While the banking sector in Kenya i s
large and fairly active, banks have traditionally avoided lending to the MSME sector due to relatively
high costs per transaction, difficulties assessing and managing risk, and given the inability o f most MSEs
to provide the required financial documentation and collateral. This problem has been further
exacerbated by the ‘crowding out’ effect o f the Kenyan Government debt, which effectively provided
risk-free high returns for banks. Although the recent dramatic change in this situation, with yields o f
Government debt currently at record low levels and liquidity very high in the banking sector has greatly
increased the interest o f commercial banks in lending to MFIs and MSMEs, inroads have been limited by
market constraints and imperfections, as well as weak ability o f MSMEs to meet collateral and financial
documentation requirements.
Commercial banking methodology includes heavy reliance o n collateral. This in itself i s a huge barrier
for MSMEs as they have little or no tangible assets that can serve as acceptable collateral for the banks.
The exception i s a few large MFIs who hold members savings (which they are not permitted to
intermediate) and can offer these deposits as collateral. The absence o f an effective credit reporting
mechanism and the lack o f information sharing between institutions i s a sufficient deterrent t o noncollateral based lending.
The Kenyan microfinance sector i s also characterized by the high degree o f segmentation and the lack o f
linkages among different types o f finance providers. Providers o f microfinance operate in defined niches
which the individual institution has identified as best suited to i t s lending methodology, mission and
values. The lack o f a comprehensive legal and regulatory framework and a lack o f information sharing
contributes to the segmentation. This high degree o f segmentation affects the provision o f financial
prohibits the flow o f funds and often times makes it more
services to the MSME sector adversely as it (i)
expensive; (ii)limits the ability o f the borrower to graduate and transform into a larger enterprise; and
(iii)results in gaps in access to f i n a n ~ e ’ ~ .
O f forty-three commercial banks
based on group guarantees
” Too large for microfinance and too small for banks.
Is
l6Mainly
27
Another significant feature o f the Kenyan microfinance sector i s the important role o f the SACCOs,
particularly the 113 rural SACCOs which are the main source o f finance in the rural areas. SACCOs hold
an estimated Ksh 70 billion in assets and have over 1.7 million members. The SACCOs are covered by
two umbrella organizations Kenya Rural Savings and Credit Societies Union (KERUSSO) and Kenya
Union o f Savings and Credit Cooperatives (KUSSCO), but are also affected by segmentation and lack o f
information sharing as the umbrella organizations provide little in the way o f capacity building. Some o f
the large SACCOs are bigger than some o f the banks (in assets and loans) and many SACCOs operate
effectively as banks but are not supervised by any regulatory body. There are serious concerns about the
financial viability o f many o f the SACCOs as they are plagued with problems caused by poor governance,
lack o f qualified staff and lack o f standardized accounting systems.
Despite the variety of financial intermediaries, access to finance remains an issue for MSMEs. According
to the 1999 National Micro and Small Enterprise (MSE) Baseline Survey, 90 percent o f the 1.3 million
MSEs have never received credit and only 5.7 percent received such credit from a formal source
(including NGOS).'~Although the total proportion o f those with credit from any source i s about the same
as found in earlier baseline surveys, the proportion receiving credit from formal sources i s slightly higher
in 1999 relative to 1995. Among all firms surveyed for the ICA, cost o f finance was rated as the second
highest obstacle (after corruption), while small firms specifically rate cost o f finance as the highest
obstacle. Small firms also mention access to finance in general as a larger obstacle relative to other
groups o f firms. Micro enterprises are almost twice less likely to have overdrafts and almost four times
less likely to have loans relative to large enterprises. Interestingly, micro and small enterprises are almost
h a l f as likely to apply for a loan. Despite their higher demand for loans, they do not apply because they
expect to be rejected and therefore choose not to incur the costs o f applying.
Activities:
This subcomponent will use performance based matching grants to leverage private funds and offset upfront development costs in order to maximize market development effects and minimize price distortions.
The focus w i l l be on: .
0
0
0
Initial costs o f developing new products;
Incentives (e.g., to meet risk and security requirements) and start-up costs (e.g., training) for
commercial banks moving downmarket;
Capacity-building for MFIs to move toward financial self-sufficiency and transformation to
licensed status, as well as to develop individual loan (and other) products;
While these subsidies will go to private entities (for-profit as well as non-profit organizations), the
products developed and the demonstration effects o f success in MSME finance constitute public goods
that are expected to facilitate subsequent further adoption, expansion and innovation by other institutions,
as well as those that qualify for the assistance o n the basis o f transparent, results-oriented criteria. The
focus i s on technical assistance and capacity-building, rather than direct provision o f credit, in order to
better leverage liquidity in the banking system, household savings that MFIs can mobilize, and potential
investment in financial institutions serving the MSME market. The risks o f possible market-distorting
focusing o n segments where the market i s very thin or non-existent; and (ii)
effects are minimized by (i)
targeting development costs and avoiding subsidies on product prices. Thus, the use o f IDA funds for
these subsidies i s justified by the catalytic longer-term effects o n sustained development o f this market
niche, as well as by the direct impact on the enterprises that receive financing as a result o f the
interventions.
''
Central Bureau o f Statistics, International Center for Economic Growth, and K-Rep Holdings, National Micro and
Small EnterDrise Baseline Survey, 1999.
28
The technical assistance w i l l be provided with performance based grants which w i l l be made available to
institutions satisfying the eligibility and performance criteria. The project will also benefit from the
creation o f a credit reference bureau or other information sharing mechanism and improvements in
leasing law both o f which are being promoted by IDA’SFLSTAC project, which i s in preparation.
The eligible activities through this subcomponent are, among others:
a. MFI Strengthening, Outreach and Moving Upmarket: Capacity-building o f MFIs based on sound
financial performance and potential for greater outreach to rural areas and the poor w i l l be focused on
three key areas that are important for increased access by MSMEs: addition o f individual lending
products in selected MFIs oriented toward group methodologies; greater outreach in rural and provincial
areas; and commercialization o f high-performing SACCOs and MFIs. Assistance under this
subcomponent will be aimed at improving the absorptive capacity which currently impedes the ability o f
apex MFIs and other financial institutions interested in wholesale lending to the MSME sector.
Product Development: The approach i s to support the transformation o f existing MFIs active in
the M S M E sector to move from primarily group lending methodology to the adoption o f
individual lending processes and systems that are more suited to successfully growing
microenterprises. Technical assistance would be provided in the form o f management and
operational staff training, preparation o f manuals, credit procedures, acquisition o f software, and
implementation o f MIS.
Regional Outreach: A large number o f MFIs and SACCOs have remained mainly
regional/provincial players, constrained by their reliance mainly o n internally generated
resources. This sub-activity i s designed to leverage the ability o f eligible MFIs to grow rapidly
beyond their traditional niche, increase competition and improve access to finance to the sector.
This activity w i l l be designed to assist existing MFIs and SACCOs, with a proven track record,
acceptable lending criteria and a high quality loan portfolio.
Commercialization: Skills transfer and technical assistance to high potential MFIs and SACCOs
to improve their operations, management and governance structures for greater commercial
orientation and outreach o n a sustainable basis (as well as for eventual licensing under the new
MFI Bill).
b. Commercial Finance Moving Downmarket: Support for capacity building and product development
would be made available to selected commercial financial institutions that are interested in new systems
and lending methodologies for the MSME market segment. This would permit banks to better understand
“cash flow-based” lending to the MSME sector and thus encourage non-collateralized lending to take
place. Non-bank financial institutions would also be supported to develop products such as leasing and
discounting receivables specifically for the MSME market. Selection o f commercial financial institutions
will be based o n the future sustainability o f the institution and a corporate commitment to enter the
MSME market or expand i t s existing MSME portfolio.
Subcomuonent B - SME Risk Cauital Fund and Technical Assistance
Issues: In developed countries most SMEs obtain formal financing from banks using assets and real
property as collateral against bank loans, and early-stage SMEs may also finance start-up costs with credit
card debt or soft loans from family and friends. However, few o f these sources o f debt are available to
most SMEs in developing countries, where SME investment relies predominantly o n equity from the
savings o f the owner and hisher family and reinvested profits. Providers o f finance to SMEs face some
important challenges in African countries, including:
Lack o f collateral. Even where bank lending i s available in principle, most SMEs are unable to
provide sufficient and satisfactory collateral to meet commercial bank requirements (often 150
29
0
0
0
percent o f loan amounts), and the weak enforceability o f property rights further discourages
banks even from collateralized lending other than to the largest concerns.
High cost of appraisal. Unable to obtain sufficient security for collateralized lending, lenders
must rely o n the strength o f a company’s projected cashflow to service debt. Cashflow-based
lending entails considerably more due diligence and therefore i s more costly than collateral-based
lending. This encourages banks again to focus on only the largest borrowers, so as to amortize
the costs o f due diligence over a larger investment amount.
High cost of investment. SMEs are often managed by an owner-operator who has a
sophisticated knowledge o f the technical and operational aspects o f the business, but who often
has limited financial management skills. In fact, limited financial skills i s often cited as the main
reason for SME failure. Consequently, a third-party investor in an SME must be prepared to be
involved in complementing the entrepreneur’s skill set, which i s expensive and usually associated
only with equity investments.
Limited upside. The majority o f SMEs are lifestyle business providing a steady income to the
owners, who have little interest in rapid growth or selling the company to a third-party.
Consequently, the smaller end o f the SME spectrum i s rarely o f interest to private equity fund
managers, who otherwise would have the resources to perform the due diligence necessary and
the ability to structure appropriate investment instruments. It i s only the larger end o f the SME
spectrum and the few high-growth potential smaller SMEs that attract any interest from private
equity financiers.
Limited exit potential. Related to the limited upside issue, the ‘lifestyle’ orientation o f many
SMEs makes an exit to a third-party a difficult proposition, since the entrepreneur i s unlikely to
agree to give up control o f the company that supports his or her lifestyle. In most cases, thirdparty buyers would be expected to seek a controlling position, particularly in a S M E where there
only other shareholder i s the owner-operator. Moreover, most SMEs are too small to qualify for
public offerings, which, especially in Africa, are reserved for only the largest concerns.
Furthermore, both equity and debt financing pose problems for SMEs. Owner-managers typically are
reluctant to give up a substantial share o f ownership to external investors for fear o f losing control o f the
business they have built up through years o f hard work. The burden o f debt service payments, especially
in the many African countries with persistently high real interest rates, can siphon o f f profits that SMEs
badly need to reinvest for rapid growth. While Subcomponent A will help fill some o f the SME financing
gap through increased lending to this segment by both MFIs and commercial banks, this i s likely to be
insufficient in meeting the needs o f many SMEs with growth potential that can be realized only with a
longer-term commitment and a well-designed package o f financing complemented by technical
assistance.
Rationale for World Bank Group Support through the MSME project: Equity funds generally have
not had good success in African countries, especially with respect to SMEs, for the reasons cited above, in
particular weaknesses at the enterprise level and lack o f exit opportunities. While there i s s t i l l a certain
amount o f interest among promoters of equity funds in the potential SME market, there i s not in Kenya
such a fund with a model that specifically addresses the special financing needs o f SMEs or that has a
track record o f success in reaching SMEs in significant numbers.
Activities: This subcomponent will help catalyze new risk capital instruments (mix o f debt and equity)
that can leverage private investment and will be tailored to reach substantial numbers o f SMEs, including
availability o f technical assistance financing to overcome enterprise-level shortcomings. While private
investors will finance the corpus o f the fund and cover the majority o f the start-up and operating costs,
IDA funds o f US$2.5 million would support an associated facility to finance TA for the S M E investees
30
and a share a portion o f the operating costs o f the fund, subject to fulfillment o f eligibility and
performance requirements.
The selection o f the fund will be determined on the basis o f proposals submitted in response to a Formal
Request for Proposals and the Risk Capital Fund will be chosen based on fulfillment o f criteria including,
but not limited to the following:
extensive experience financing SMEs in Africa;
a financing model that i s proven to be commercially viable and sustainable;
business model and financing instruments must be easily adapted for use in Kenya;
locally based management teams managing the day-to-day business o f the fund;
target mainly the SME sector with investments o f a maximum o f US$200,000;
demonstrated absorptive capacity (financial, managerial, operational - human and systems
resources, application o f best practice methodology) for executing the project;
commitment by all private investors and the Manager to the long term success o f the project;
fund size o f a minimum o f US$8 million;
submission o f a comprehensive 10 year business plan; and
experience, success record and reputation o f the major investors in the Fund and the Fund
Manager.
In addition, this subcomponent will provide for the creation o f a Technical Assistance Fund o f US$4
million for capacity building in SME investee companies o f existing or other new Kenyan funds.
Currently, in Kenya there are a few risk capital funds that are marginally engaged in investing in the SME
sector. The provision o f technical assistance to such SME investees will help remove some o f the
impediments to growth o f risk capital finance in this sector and should encourage the growth o f local
SME risk capital funds. Selection o f beneficiaries will also be done o n the basis o f responses to
expressions o f interest and eligibility criteria w i l l include:
experience financing SMEs in Kenya;
a financing model that is proven to be commercially viable and sustainable;
locally based management teams managing the day-to-day business o f the fund;
target mainly the SME sector with investments o f a maximum o f US$200,000;
demonstrated absorptive capacity (financial, managerial, operational - human and systems
resources, application o f best practice methodology) for executing the project;
commitment by a l l private investors and the Manager to the long term success o f the project;
fund size o f a minimum o f US$4 million;
submission of a comprehensive 10 year business plan; and
experience, success record and reputation o f the major investors in the Fund and the Fund
Manager.
COMPONENT T W O
- STRENGTHENING ENTERPRISE
SKILLS AND MARKET
LINKAGES
Subcomponent A - Pilot Value Chain Based Matching Grant Fund
Issues: Collaboration as well as competition are required among enterprises in order to assure that full
growth potential i s realized within the MSME sector. The joint use o f assets, the development o f external
markets for business support services and the adoption o f trade standards and protocols among trading
partners are some o f the ways in which collaboration can begin to reduce transaction costs, improve
market access and enhance competitiveness. In Kenya, however, supply chains are highly segmented,
with little systematic flow o f information between segments and no collaboration among subsector
associations representingdifferent levels o f the chain. Thus, potential demand for BDS that could raise
31
productivity or solve bottlenecks remains unarticulated for lack o f mechanisms to assess needs and
mobilize demand across groups of firms.
A value chain analysis o f four sub-sectors was completed as part o f project preparation. The analysis
highlighted that mutual support systems and value chain linkages are extremely weak in Kenya. A few
large private firms compensate for this weakness by internalizing value adding activities along the entire
value chain under their own vertical control. This “vertical internalization” o f entire farm-to-finished
good value chains i s a “second best” solution which reduces the flexibility o f enterprises which adopt it.
Vertical integration within a single enterprise i s not an option available to SME’s. The value chain study
also found that participants within value chains are highly compartmentalized and that commercial links
between suppliers and buyers tend to be ad hoc, one-time transactions and that commercial dealings are
highly personalized.
These weaknesses are compounded by ineffective or non-existent sub-sector membership associations
which in other cases have helped develop the supply chain linkages between key segments. Moreover,
high levels o f distrust exist among companies within sub-sectors and between farm level producers and
farm product processors/merchandisers. As a result, community goods that support entire value chains
tend to be under-invested, transaction costs tend to be extremely high and useful information tends not to
be distributed quickly and efficiently within chains. This set o f circumstances, makes it extremely
difficult for SMEs to rely on vendors or customers as sources o f competitive advantage or to depend on
specialized BDS providers to assist with strategic enterprise development. As a direct result, entire value
chains remain frozen in early stages o f their strategic development-constrained by the management
competencies, resources and technologies which happen to be available within individual enterprises.
Focus group meetings o f key players from each sector along an entire supply chain were conducted
during project preparation for a number o f strategic sectors. For example, in the cotton-to-garments, key
players and sector associations representing cotton growers, ginners, spinners, weavers, textile and
garment manufacturers were invited to consider a number o f key cross chain issues, which are inhibiting
competitive development. While the textile and garment sector i s a critical engine for the Kenyan
economy, no dialogue had taken place between cotton growers and producers o f finished garments before
the project preparation workshop. This i s all the more remarkable, considering that the sourcing o f local
inputs i s a pre-requisite for AGOA, and that AGOA will continue to be a catalyst for growth o f Kenya’s
textile and garment sector. This single example was duplicated in several value chain dialogues which
clearly revealed that promoting dialogue and stimulating collaboration along the entire supply chains i s a
critical missing ingredient in the growth and competitive development o f various sectors o f Kenya’s
economy.
Activities: The proposed project design overcomes some o f the isolated approaches previously taken to
support strategic sectors by taking an integrated value chain approach, which broadens the scope o f
assistance and considers some o f the key issues that inhibit the overall competitiveness o f these strategic
sectors.
Access to the matching grant fund will be based on a business plan to be draftedjointly by representative
organizations along the entire supply chain. For example, in the case o f cotton-to-apparel supply chain,
representatives from membership associations in the cotton, ginning, spinning/weaving, knitting, and
apparel will be required to work together to formulate a joint business plan which addresses a number o f
key sub-sector issues, as well as to develop a comprehensive chain strategy.
The business plan i s expected to articulate a number o f critical issues: training and capacity building
needs o f each sub-sector along a supply chain; linkage mechanisms which promotes the flow o f
32
information and know-how between sub-sectors; and the formulation and implementation o f a
comprehensive chain strategy.
Each private sector offeror will submit proposals for value chain strengthening, enhanced business service
delivery and critical skills development in response to a Formal Request for Proposals which will address
several key issues regarding competitiveness enhancement within the sub sector from which they come.
It i s anticipated that the Fund will be used solely for the purpose o f procuring ‘knowledge-based’ services
directed toward improving the competitiveness and performance o f out growers and suppliers.
Specifically, funds from the matching grant can be applied towards the purchase o f technical assistance to
train out growers/suppliers. For example, at the farming level, on-farm technical training, training in
quality control, standards, post-harvest handling and other activities that strengthen the backwards linkage
between the corporate intermediary and their growers/suppliers to better respond to demands o f the
market. Similarly, at the factory level, grant funds can be used to procure process specific technical
assistance, total quality management, and modern production and management techniques to help
improve the quality, cost and delivery o f companies in the sub-sector.
The amount o f funds available for the matching grant will be defined by the level o f capital investment
that the sector i s willing to make in its supply chain. It i s anticipated that the sector group proposing to
access the match grant will be requiredto make investments in capital equipment and inputs required to
develop its supply chain. In return, the proposed grant will match, dollar-for-dollar, the investment made
by the sector group with financing for ‘knowledge-based services’. In addition, the funds are expected to
be directed towards:
e
0
Strengthening sub-sector membership associations that act as a catalyst and focal point for
expanding out grower and vendor development activities. Such activities would include, but not
be limited to the identification o f training needs o f suppliers, and coordinate the delivery o f BDS
services and funding to their suppliers; and
Activities that stimulate collaboration across the entire supply chain with the objective o f
formulating and implementing a chain strategy which takes into consideration the needs o f each
sub-sector in the supply chain.
Subcomponent B - Restructuring.Industrial L e v y Scheme
Issues: According to the ICA, micro and small enterprises are significantly less likely to offer formal
training programs. None o f the sampled 10 micro enterprises offered formal training, while only 24
percent o f the small enterprises did so. However, most o f the medium (55 percent) and large enterprises
(70 percent) do offer training o f some kind, although the type and quality o f skills provided i s uncertain.
Kenya was amongst the few pioneers in Africa to establish a fairly successful industrial training levy,
which was subsequently viewed as a model for the region. The Industrial Training Levy i s managed by
the Directorate o f Industrial Training (DIT) o f the Ministry o f Labor and Human Resource Development
under the Industrial Training Act. The DIT functions as the Secretariat to the National Industrial Training
Council (NITC) which governs the overall operation o f the scheme. The current scheme operates
according to different training levies set for each o f the 11 industrial sub-sectors by the respective
Training Committees under the NITC. These range from KSH 150-300 per employee, per half year to
0.25 per cent o f the total contract price or quarterly turnover (for some sectors and subject to a ceiling on
the contract/turnover sum). Under the provisions o f the Industrial Training Act, all employers (with five
or more employees) are required to register with D I T and pay the levy every six months. Employers are
allowed to submit claims for reimbursement for pre-approved training programs at approved institutions.
There i s broad consensus within the Government and the private sector that the current training levy has
to be revamped, in the context o f the restructuring o f the national training system, to make it more
33
efficient and responsive to the needs o f industry and a sustainable source o f financing of skills
development. The current Industrial Training Levy scheme has a number of weaknesses: (i)
at present,
most of the training grants are for management and supervisory training (including overseas degree and
post-graduate qualifications) with fewer numbers for middle level vocational training and
the operation o f the scheme appears inconsistent with the rationale o f crossapprenticeships; (ii)
subsidization o f training firms by non-trainingfirms as firms that are actually training their workers
the total levy collection in
simply do not submit claims due to the cumbersome process involved; (iii)
recent years i s declining due to reduction in formal workforce (as nine o f the eleven sub-sector levies are
based on per employee basis); (iv) although participation i s mandatory, of the seven thousand registered
firms (about sixty per cent o f all eligible firms), an estimated thirty per cent are not contributing the levy
and not participating in training programs for their workers; (v) DIT has inadequate capacity to enforce
levy collection properly; (vi) there i s a perpetual risk o f depletion of funds by a few large claims, as firms
are at times submitting claims more than ten times their levy contribution; (vii) the Training Committees
decide on the level of reimbursement and often establish arbitrary mechanisms to set ceilings on claims
based on the total amount o f levy collected for each sub-sector in any year; (viii) there i s an accumulation
of funds as disbursements are made annually and these accumulated funds are currently being invested in
Treasury Bills; excess funds indicate a weakness in the levy disbursement system as these should have
been deployed for training; (ix) there are conflicting roles of DIT which i s both regulatingthe levy
scheme as well as managing its own training institutions which are approved training providers, (x) the
merits o f having a system o f eleven Training Committees managing different levies for different subsectors has to be compared against a standard payroll levy, (xii) while the scheme i s generally welcomed
by the private sector, participationo f firms can be improved through enhancing the level o f transparency
and efficiency in training approvals and claim reimbursements and (xiii) private sector representation and
participation in the management o f the scheme should be increased to widen the range o f stakeholders and
better reflect the interests o f various sub-sectors. Enhancing the efficacy and efficiency o f the operation of
the scheme i s expected to result in significant dividends in terms of the extent, quality and relevance of
skills development programs at enterprise level as well as through private and public providers.
Activities: This subcomponent will consist o f five activities:
Activity 1: Skills Needs Inventory
The scope o f this component i s to conduct a skills needs inventory to identify the priority sectors
(manufacturing industries and tourism) and skills development requirements to be targeted by the levy
scheme. This inventory will identify the skills shortages and the training needs of both large exporting
enterprises as well as domestic MSMEs. The skills needs inventory will provide inputs for the design of
the scheme in terms o f skills sets and industrial sectors to be targeted by the scheme (examining a wider
range o f sub-sectors including the existing l i s t o f eleven sub-sectors). The inventory will be carried out
through a firm-level survey using a standard survey instrument that will capture the current training
practices, needs and estimates of future demand as well as feedback from firms on the training levy,
public training systems and TVET policies and processes.
Activity 2: Governance and management of industrial skills development
The scope o f this component i s to develop policy proposals on governance and management arrangements
that will increase the responsiveness o f the DIT to workplace skill needs and improve the overall
performance o f the skills development system in close partnership with the private sector. Issues that will
be considered include the role of the Ministry of Labor and Human Resource Developmentand
specifically the DIT in governing, managing, financing and delivering industrial skills development. This
component will also evaluate the proposal to restructure the DIT into a National Industrial Training
Authority (NITA) and seek measures aimed at strengthening the public-private partnership in the
governance of industrial skills development by reviewing the size, composition, role, responsibilitiesand
functions of the existing NITC, assignment of specific roles and responsibilities to the Ministry of Labor
34
and Human Resource Development, the revamped NITC (including labor organizations) and the DIT. It
will also address issues pertaining to accountability, performance assurance and institutional and
instructional changes needed to enhance the performance o f the publicly supported skills training and
vocational training centers under the DIT. A strategy will be developed to improve the performance o f the
skills training and vocational training centers taking into consideration current initiatives by other donors.
The following issues could be considered: (i)the need for greater institutional autonomy; (ii)
new
governance and management arrangements, including new models o f public-private partnership and
improving the quality o f institutional level business and skills planning
funding modalities; and (iii)
Activity 3: Sources and level offinancing
The scope o f this component i s to develop proposals to support increasing access to and sustainable and
stable funding for industrial skills development; increasing returns to public funds invested in industrial
training; greater responsiveness o f training to current and future workplace skill needs; more efficient and
cost effective training delivery; apprenticeships; and adequate investments in training infrastructure,
systems and practitioners. This component comprises two parts. The first will explore options for
diversifying the current funding base and increasing cost sharing, while the second will recommend
collection and disbursement modalities that will enhance the performance o f the training levy system. The
key issues to be addressed are:
a) Review the current state o f financing for industrial training, including the levy fund, budgetary
appropriations from the Ministry o f Labor and Human Resource Development, donor funding, tuition
fees and fee-for-service activities.
b) Restructuring the training levy system, consider the feasibility o f introducing a single payroll levy
scheme, the rate and threshold to be applied, the impact and benefits o f the levy on business and
employment, the modalities o f privately managed l e v y collection and disbursement, the coverage o f
the scheme (public sector, apprenticeships, enterprise-basedtraining, private providers), addressing
the prospect o f levy funds being “raided” and the costs o f managing various options including
introduction o f IT-based (including web-based) systems.
c) Consider the efficacy o f the current disbursement o f public funds to industrial training. This involves
the funding o f the skills training and vocational training centers (but not the youth polytechnics).
d) Develop an industrial training funding strategy comprising disbursement options and modalities
considering issues such as incentive regimes and the manner in which skills development funds will
be governed and managed.
Activity 4: Legislationfor Restructuring the Training Levy
Review the present TVET regulatory environment and the current Industrial Training Act in the context
o f the proposals for a national W E T legislation and formulate a new Industrial Training Act based on the
proposals in the other components that will impact on the quality o f provision and the promotion o f
training provision. Important regulatory issues that need to be considered include the governance and
management o f industrial training, roles, responsibilities and functions o f the Ministry, NITC and DIT,
the management o f the levy system, the implications o f provider registration and accreditation policies
and access to the levy fund. The draft legislation to establish a National Industrial Training Authority/
National Skills Authority will need to be reviewed in the context o f the findings o f the other components
o f this study.
Activity 5: An industry-led apprenticeship scheme & skills qualifications structure
This component consists o f a review o f the existing apprenticeship arrangements and developing
proposals for the introduction o f an industry-led apprenticeship scheme (for the formal sector), review o f
the current qualifications, examinations and curricula arrangements for trade testing and
recommendations for establishing a national industrial training qualifications structure (in the context o f
proposals to establish a National TVET Qualifications Framework under a new National Skills Authority)
35
and proposals for a provider registrationand accreditation system. The proposalwill be based on a firm
level survey o f the apprenticeship scheme and a tracer study o f workers who have undergone training
through the scheme. The proposals for improving the existing apprenticeship system will include
addressing the supply o f training places in industry and enhancing industry confidence, support and
participation in the apprenticeship scheme. Proposals for the skills qualifications structure will include a
review of the current skills development curricula and the curriculum development process and develop
proposals for aligning these with the skills needs inventory. This component will also review the current
system o f examinations, trade testing and certificationundertaken by the DIT and make proposals to
strengthen these as well as the establishment of skills quality assurance mechanisms, in particular
provider registrationand accreditationmechanisms and where responsibility for quality assurance should
rest.
Subcomponent C - Global Business School Network: Improving Opportunities and Training for
Entrepreneurs and MSMEs
Issues: Economic development in Africa remains stymied by, among other things, lack o f innovation,
product development and growth-focusedentrepreneurship. Moreover, entrepreneurs frequently are cut
out from supporting networks. Universities, polytechnicsand technical institutes in Kenya have limited
courses on entrepreneurship and MSME management. Of the 2 million currently unemployed, youth
account for 45 percent o f the total. The project will help train the next generation of entrepreneurs and
business managers by developing the potential and capacity of Kenya’s management education
institutions and catalyzing innovation.
The Global Business School Network (GBSN) i s developing a number o f pilot programs to strengthen
business schools in sub-Saharan Africa. By linking global business schools with leading business schools
in African countries, these pilot programs will provide African business schools and faculty with
expertise and knowledge they can use to train and support Africa’s new entrepreneurs and managers.
Activities:
The activities are based on two concrete goals: (1) launching a business pladinnovation competition and
(2) the development of locally relevant case studies and their integration into the curriculum.
Activity One: Business Plaflnnovation Competition
This subcomponent will build upon proven models o f business plan competitions/entrepreneur mentoring
that encourage innovative business models. Additionally, the process o f the competition will result in the
entrepreneurs receiving increasingamounts o f training depending on their involvement in the
competition. The process will catalyze a community o f entrepreneurs, bankers, advisors, investors,
educators and organizers to improve the business environment for entrepreneurs in Kenya.
The process will include various phases: (1) screening for dynamic and innovative entrepreneurs; (2)
entrepreneurship and MSME training programs, workshops on business plan development, individual
mentoringto build their business plans, conferences on topics related to entrepreneurship and business
plan development, and expert pro bono assistance in the areas of marketing, finance, and law; (3) After
each competition(with cash prize awards provided by private sector donations), linkages are made to help
qualified entrepreneurs access financing and markets. An Alumni Network helps track progress and
results following the competition, and keeps graduates up-to-date on program developments, news of
interest and upcoming events.
The implementingagency for the Business Plan Competition (BPC) will be contracted out to a
competitively selected firm or consortium o f firdinstitutions. The BPC will have the following features:
36
Training o f related skills via existing partnerships with training institutions, extension campuses, a
large pool o f potential trainers (such as business school students) etc.
Private Sector Engagement. One o f the positive externalities o f a BPC i s the many ways in which
the private sector become involved. Participants gain access to investors and business advisors that
they would not have otherwise enjoyed. While the interest and involvement o f the private sector
naturally increases as the BPC evolves, they need to be engaged and invited from the beginning. At a
minimum the private sector should be representedthrough judgindevaluation and through donations
for prizes.
Public Relations. The name o f a BPC becomes a powerful brand that i s often associated with
entrepreneurship, creativity, success, and especially in developing countries, youth. The name and
brand o f the competition should be thoughtfully designed and strongly promoted through all forms o f
available media.
Alumni Tracking. Maintaining the contact information and progress o f everyone who submits a
business plan to the competition i s essential both to monitor the societal impact o f the competition
and to invite past participants to be involved in future competitions. Past participants, regardless o f if
they won or not, often go onto start businesses and support the BPC as judges or donors. People
should also be encouragedto participate again in subsequent competitions.
The Business Plan Competition in Kenya i s expected to attract at least 200 eligible entrants annually,
leading to 100 being trained and 50 business plans developed annually. The competition will be
conscious o f a number o f constituencies and opportunities. Each o f the following twin groups will be
given a chance to compete by increasingthe number o f private sector donations for prizes, allowing
“parallel competitions” to run along the same timeline but serving different groups or goals.
0
0
a
Formal vs. Informal. There will be parallel tracks for those working in, or intending to work in, the
formal sector and those who are working in the vibrant informal sector known as the Jua Kali.
Urban vs. Rural. The contest will start in Nairobi, but by the third year, it i s expected to have a
competition in each o f the seven provinces and Nairobi, with a National Final Round in Nairobi.
There will be prized at both the provincial and national levels.
New Venture vs. Innovation. In addition to supporting and encouraging the creation o f new
companies that are so critical for economic growth, the competition will also promote new and
innovative approaches among social entrepreneurs and MSMEs. Ideas can be generated from both
non-profit and for-profit organizations. I t will be modeled on Development Marketplace and used to
expose innovative approaches to nurturing growth o f the private sector.
Activity Two: Development of locally relevant cases integrated into the business education curriculum
The primary objective for this activity i s to train Kenyan faculty to enable them to prepare and teach
locally relevant case studies and curricula on an ongoing basis. This project will follow a multi-step
approach-involving international training programs and Global Business School mentors to developing
the capacity o f Kenyan faculty to write case studies and develop curricula to be used in their business
education programs as well as others in Africa.
1. International Training Programs - Participating faculty members who will lead the case writing
initiative will attend international case teaching training courses to learn the pedagogical principles
behind case teaching and case writing. Such exposure i s also expected to assist in the institutional
integration o f case-method teaching practices.
2. Case Proposal Development - Prior to the international training program, the participating faculty w i l l
develop case synopses in their respective subject areas.
37
3, In-Person Mentoring - In a few subject areas, mentors will be identified to conduct a local workshop
o n case writing and provide in-person mentoring to Kenyan faculty.
4. Local Workshop with Business Leaders - To generate better understanding among the local business
community o f the role o f cases in business education, the program will co-host one-day workshops, with
the Kenyan host school in Nairobi.
5. Electronic Mentoring - The mentors w i l l continue to work with their Kenyan partners to develop the
cases. Kenyan faculty w i l l be responsible for the remaining data gathering and writing but their mentors
will review drafts o f the cases and electronically andor telephonically make suggestions for improving
the cases.
6. Teaching and Distribution - The success o f the project will depend ultimately on how often these
cases get used in the classroom as teaching materials for African business school students. Once the cases
have been refined in the classroom, they will then be disseminated through personal and school-to-school
distribution channels to business schools in Kenya and the rest o f East Africa. The faculty will be given
incentives to keep track o f the usage o f their cases and to get feedback on their cases.
7. Distribution Plan for Africa - Appropriate distribution mechanisms will be identifiedto ensure that
case studies will be easily accessible to business schools throughout Africa, and the GBSNC will assist
the Kenyan schools in this effort.
Additionally, the African Virtual University (AVU) i s initiating a program to develop the capacity for
case writing at four institutions in East Africa. This project w i l l coordinate with the AVU by inviting
each other to training sessions by technical assistants, collaborating electronically and having an annual
meeting.
COMPONENT THREE- IMPROVING THE BUSINESSENVIRONMENT
This component will contribute to the overall improvement o f the business environment in Kenya.
Specifically, it w i l l reduce cost o f compliance with business regulations for formal sector firms and create
incentives for informal MSMEs to graduate to higher levels o f formality. This component will assist the
Government in simplifying the taxation regime and reducing the cost o f starting a business through a onestop shop approach,
Issues: The informal sector has played an important role in employment generation in Kenya. However,
the transition from informal to formal i s critical both for the enterprise (for increased access to markets,
financial services, contract enforcement and security) and enterprise growth, as well as for the
Government (through increased tax revenue and environmentalhafety compliance). A prohibitive
business environment -- formal and informal cost and time o f compliance with business start-up
regulations and discouraging taxation regime -- are among the main reasons why entrepreneurs prefer to
operate informally. In 1999-2000, IFC conducted a private sector survey covering 80 countries and
10,000 firms to find out if business obstacles are related to firm size. It found that size matters: the
smaller the firm, the greater the negative impacts. Globally, small firms face more problems with
financing, taxes, regulation, inflation, corruption, street crime, and anti-competitive practices than large
firms.
T o date, there have been few successful attempts to reform the business environment in Kenya; most
notably, the Government o f Kenya with technical assistance and funding from DFID, introduced in 2000
the single business permit, which combined 16 individual locally issued business licenses into one.
However, the process o f formalization remains complex, regulated by different procedures, and requires
38
multiple trips to Nairobi. In most cases, SMEs also need to deal with local authorities - municipalities to obtain different types o f permits to start their businesses. The complexity and costs pose barriers
especially for micro and small informal businesses to become legitimate.
c
Regulatory requirementsfor starting a business in Kenya, as o f January 200319
I
Procedures
Issuing agency
Pay stamp duty
Collector o f Stamp
Duty
not required
Company
(corporation Itd,
etc)
required
Reserve business
Company registrar at
Attorney General
Company registrar at
Attorney General
required
required
required
required
Kenya Revenue
Authority
required (income
tax ranges from 10
to 30 percent)
subject to
threshold
subject to
threshold
required annually
required (income
tax - 30 percent)
no threshold
subject to
threshold
subject to
threshold
required annually
Ksh 3 mil
r
/
File with registrar
I
Register as
Kenya Revenue
Authority
Ministly o f Labor???
I
Single business
Municipalities
File with NSSF
National Social
Security Fund
National Hosoital
Insurance Fund
Kenya Revenue
Authority
Authorized
companies
Investment
Promotion Center
~
Register with
Register as
Make a seal
Certificate o f
eneral authori
Sole trader,
partnership
required
required
not required
required
subject to
threshold
subject to
threshold
Time,
days
61.4 (depends on the
authorized capital - 1
percent o f the
authorized capital +
Ksh 2005)
0.6 (Ksh 50)
10
37.0 (Ksh 2,000 for
the first Ksh 100.000
o f the authorized
capital and Ksh 100
for any additional
Ksh 20,000)
30
3
__
__
1
1
__
more than 5
employees
3
8
63.4 (in Nairobi Ksh
200 for an application
form, and fee ranges
from Ksh 4,000 to
95,000 depending on
type and size o f
business assessed by
the municipal
officials)
__
required
required
Average cost, US%
1
1
I
I
Ksh 2 mil
__
__
31.7 (Ksh 2,5000)
1
I l l
__
2
14
Non-compliance with the full legalization and tax liabilities causes rent-seeking behavior in public
officials. I C A results show that when firms were faced with inspectors asking for informal payments - 30
percent o f firms reported that an informal payment was expected from the tax authorities, 27 percent
claimed that health inspectorates requested bribes, and 22 percent claimed that municipal authorities and
labor and social security (22 percent).
All Kenyan businesses are subject to income tax. The range o f income tax for individual businesses and
partnerships range from 10 percent to 30 percent. Companies are taxed at a standard 30 percent, with no
differentiation based on size. Tax rates are competitive with neighboring countries. However, I C A
survey cites that tax rates are the highest obstacle for microenterprises and rank among the top three
l9
World Bank, Doing Business, 2004
39
obstacles for small firms. In contrast, taxes are rated only as fourth and fifth highest in the large and
medium firms.
I t i s apparent that microenterprises are unable to comply with current tax regulations. Various existing
studies and assessments2o,findings o f the Bank missions and focus group meeting show that the most
important motivating factor for businesses in Kenya to remain informal i s the system o f taxation. It i s
designed for larger and more sophisticated businesses that can afford to either employ accountants or
outsource tax accountancy and reporting. A simplified, flat tax for microenterprises has been successful
in a number o f developing and transition countries. The main characteristics o f these simplified systems
include:
0
0
0
Introduction o f a unified or single tax schedule instead o f numerous national and local taxes for
SMEs, formulation o f simple and clear rules for calculating tax liability;
Significant reduction o f the requirements and simplification o f the procedures for the obligatory
reporting on business operations by S M E s subjects o f simplified taxation; and
Simplicity in filing tax returns.
The target group for this component would be: i)the current “informal” sector comprised o f businesses
that do not pay taxes and frequently do not comply with the full range o f registration requirements; ii)
entrepreneurs, who are planning to start their business. The proposed system w i l l mostly target the more
established side o f the spectrum. Reform efforts will concentrate not on minimizing the importance o f the
informal sector, but rather to create an enabling environment for the formalization and growth o f M S M E s .
Activities: Simplified taxation and start-up system should be introduced as simultaneous unified reform
initiative. The objective will be to build and expand o n the successful single business license project
financed by DFID, which combined 16 individual locally issued business licenses into one. The project
will take reforms a step further, by combining business name registration from the Registrar General
Office o f the Attorney General, Kenya Revenue Authority PIN registration, MOT1trade licenses, and the
local authorities permits (including the single business permit) into one interface. The component will
benefit from the work planned under the World Bank financed FLSTAC, which includes capacity
building o f the Registrar General. A more effective Registrar General would make operation o f the onestop shops for business start-up more efficient.
The component will also assist the Kenya Revenue Authority in developing and launching a simplified
taxation system for MSEs. Existing tax and accounting requirements in Kenya are the same for both
small and larger businesses. Small businesses have neither appropriate in-house skills to comply with
these requirements nor the resources to out-source this work. The activities under this project will apply
international best practice o f simplified taxation to the specific conditions in Kenya. It will include
identifying the right approach for such a regime - eligibility criteria, appropriate rates, collection and
administration mechanisms, revenue assessment, etc. Additionally, amendments to the current legislative
and normative acts will be drafted and presented to the Government. I t will also include training o f K R A
officials and an information campaign for targeted businesses. A simplified flat tax regime, which has
proven to be quite a successful vehicle for the S M E growth in other countries, would be one o f the
incentives for small businesses to move to the formal sector o f economy. This system i s supposed to be in
World Bank, Doing Business, 2003
World Bank RPED, Investment Climate Assessment, 2004
DFID Deregulationproject, Phase I1report, 2001
DFID, PSD and Regulation in Africa and Central Europe, 2002
KIPPRA, Review o f Government Policies for the Promotion o f MSEs in Kenya, 2002
2o
40
the form o f the unifiedtax (UT). The main characteristics o f the recommended U T approach are
presented below:
1. Criteria to be subject o f the Unified Tax for businesses should include only one variable, namely
annual turnover. This turnover threshold should be established at the level o f the VAT threshold.
The number o f employees should be not used as qualification criteria for Unified Tax due to the
high unemployment rate in Kenya and necessity to keep incentives for hiring additional
workforce and therefore individual business growth.
2. Unified Tax will replace for businesses below the V A T threshold such current taxes and fees as
Income tax, Single Business Permit, payroll taxes, fees for registration. The revenues will be
shared between central and local governments. A more in-depth survey and discussion should
also address the issue o f inclusion of other taxes and fees into UT.
3. Due to the different profitability o f operations in different sectors on the one hand, and necessity
for businesses to be dynamic and move from one sector to another on another hand, it i s proposed
to introduce three schedules o f the Unified Tax. The f i r s t schedule will cover least profitable,
albeit, socially important sectors; the second, more expensive schedule will cover these sectors
plus those that are more profitable, while the third, most expensive schedule will cover all the
sectors including the most profitable. The follow-up schedules should include the previous ones.
The rationale for this i s to encourage businesses to legalize their involvement in more profitable
activities, thus not punishing them by withdrawing an operational ability to operate in low-profit
sectors. Upon decision o f the Government o f Kenya there can be some sectors, even within the
threshold, excluded from the UnifiedTax system.
4. Like sectors, operations in different localities o f Kenya also will be reflected in the Unified Tax
schedules. The issue o f defining domicile o f business and to avoiding double taxation in cases
when a business has multi-regional operations must be addressed based on the feasibility study
findings. The option o f different U T rate for country-wide operation versus limited to specific
locality operation can be proposed based on the study.
5. Regressive add-on system for the Unified Tax based on the number o f employees should be
evaluated. Due to the phenomenon o f the wide usage of the sales representatives(hokas) and
coverage by the unified Tax o f the payroll taxes, it i s proposed to charge businesses add-ons to
the Unified Tax for hired labor. This add-on system should be regressive to motivate employment
growth.
6. Based on the study data, it can be recommendedthat businesses will be subjects o f keeping
simplified records for auditing purposes and in order to be able to prove their eligibility to apply
or to remain under the Unified Tax system. The simplified form for records shall be developed by
KRA and provided to a person admitted to a U T system.
7. All Unified Tax collection should be undertaken by KRA through i t s regional offices and/or One
Stop Shop (OSS). Businesses can select monthly, quarterly or annual installment plans. Option o f
the more frequent payments will enable businesses to pay less at the beginning o f their activities
and therefore invest more into their businesses, while less frequent option will enable businesses
to minimize necessity to visit government offices. Distribution o f collected revenues w i l l include
local government budgets, national budget and respective social funds.
41
The key activities to be implemented under this component will be:
1.
2.
3.
4.
5.
6.
In-depth diagnostics and initial design of the OSS and U T reform efforts;
Detailed design of these reform efforts;
Policy discussion framework with key stakeholders;
Contingent on Parliamentary approval, implementationof these reforms;
Public outreach and information campaign;
Capacity building for impact assessment and policy review.
42
Annex 5: Project Costs
KENYA: MSME Competitiveness Project
Local
Foreign
Total
U S $million U S $million U S $million
Project Cost B y Component and/or Activity
1.A) Commercial Products and Outreach for MSME providers
1.B (i)SME Risk Capital fund
2.600
1SO0
1.400
1.ooo
4.000
2.500
Technical Assistance Fund
1. B (ii)
3.000
1.000
4.000
2.A) Pilot Value Chain Based Matching Grant Fund
2.752
1.248
4.000
2.B) Restructuring Industrial Training Levy Scheme
2.C (i)
Business Plan Competition
.C (ii)GBSN
3. Improving the Business Environment
0.140
1.400
0.360
4. A) Institutional Capacity Building and M&E
0.500
0.500
1.400
.600
2.000
1.ooo
1SO0
7.639
21.500
0.3211
0.400
1.600
0.800
0.200
1.ooo
4. B) Private PMC
Total
13.871
I
$21.5 million
Total Project Cost
Interest during construction
Front-end Fee
$0.5 million
$0 million
$22 million
$0 million
$0 million
ITotal Baseline Cost
'Unallocated
Price Contingencies
,2791
I
]Total Financing Reauired
43
US$22 million
I
I
I
Annex 6: Implementation Arrangements
KENYA: MSME Competitiveness Project
Steering Committee
A Steering Committee o f six to nine members, with both inter-ministerial and private sector
representation, will:
0
provide strategic direction and ensure that the general patterns o f support are consistent with the
Project objectives;
0
approve annual work plan and budget;
0
coordinate across government departments in respect to multi-sectoral or interministerial
components o f the Project;
0
review the quarterly progress reports and address any major problems affecting project
implementation;
0
review reports including the audit, mid-term, and implementation completion report (ICR).
The Steering Committee will be chaired by the PS o f the Ministry o f Trade and Industry, MOTI, and
consist o f other core Ministries (represented at the Director level) with responsibilities directly related to
project activities (Finance, Agriculture, Labour and Human Resource Development), plus representatives
o f the private sector to be nominated by the Kenya Private Sector Alliance (KEPSA), an umbrella body
consisting o f apex bodies and associations representingthe full range o f private sector interests. KEPSA
will ensure that i t s nominees can represent private sector perspectives with respect to access to finance,
enterprise skills and linkages, and the investment climate. The first set o f representatives will serve terms
o f 1, 2 and 3 years, with subsequent replacements serving two-year terms to ensure both continuity and
rotation among KEPSA constituents.
The Steering Committee will establish two Task Forces to provide more specialized guidance on the
Business Environment and Labor Skills components. The Task Force on Business Environment will
mobilize support from other government Ministries and agencies involved (including Kenya Revenue
Authority, Ministry o f Local Government, Registrars General, and Ministry o f Trade and Industry), and to
include agencies with expertise in reform o f regulations and business licensing (e.g., Kenya Institute for
Policy Research and Analysis). The Task Force on Labor Skills (comprising Directorate o f Industrial
Training, Ministry o f Trade and Industry, Ministry o f Education, FKE, and KAM) will provide further
inter-Ministerial coordination and guidance.
Project Secretariat
A Project Secretariat in M O T I will serve as a secretariat to the Steering Committee in terms o f reviewing
and analyzing reports from the PMC on behalf o f the Steering Committee, providing guidance as
requested on project issues, and filtering policy issues that arise from the project for the Steering
Committee to address. I t will communicate policy guidance to the PMC and technical partners. I t will
assist in the coordination with other donor programs in areas addressed by the project and will review
regular progress reports submitted by the PMC.
T h e Project Management Contractor (PMC)
The Project Management Contractor (PMC) will be a private sector firm, competitively selected and
contracted to ensure that the operational, monitoring, reporting, procurement and outreach and
44
communications requirements o f the Project are implemented in accordance with the Credit Agreement
and the Project Implementation Manual (PIM). It w i l l subcontract out selected technical expertise.
The PMC’s roles and responsibilities are described below:
0
0
0
0
0
Serve as the Credit Administrator o f the Project and provide project administrative support to the
Steering Committee in accordance with the Project Implementation Manual (PIM).
Provide financial management, including management o f the project operating account and
handling o f disbursement for subcomponent contractors. It will have signatory rights on checks
issued. The P M C will be responsible for preparing and submitting replenishment requests to
IDA.
Manage the procurement process for any contracts and consultants not already in place by the
time the P M C i s contracted.
Maintain an Management Information System (MIS) for tracking progress in all project
subcomponents, both in terms o f financial performance and meeting implementation targets;
monitor the performance o f all contractors under the project; and provide quarterly reports to the
Steering Committee.
Prepare annual work programs and budgets, and if necessary, review in consultation with IDA
and the Steering Committee, the reallocation o f resources across the various components o f the
project as lessons emerge as to patterns o f demand and development impact
Subcomponent Technical Partners
Contracts with the P M C and technical implementingagents for subcomponents w i l l be contracted by PS
o f MOTI on behalf o f the government; however, this does not apply to minor subcontracting by these
agents for specific aspects o f implementation. The specific subcomponents that w i l l be contracted to
technical partners include:
The Financial Sector Deepening subcomponent will be contracted to a private technical manager who
will send out a call for proposals, screen and select potential recipients based on agreed eligibility
criteria, provide guidance on technical assistance partners, and monitor performance to ensure
performance milestones are being met. A procedures manual will guide the day to day operations.
The Project will use the same implementation arrangements that are being established for donor
pooling (initiated by DFID) to maximize donor coordination. However IDA funds will not be used to
pay for the operation o f this technical contractor.
The SME Risk Capital Fund and Technical Assistance fund subcomponent w i l l follow eligibility
criteria for selection.
The pilot value-chain based BDS matching grant fund will be contracted to a competitively selected
private technical manager who will send out a call for proposals, screen and select potential business
plans, and monitor performance to ensure milestones are being met. The procedures manual will
guide the day to day operations.
The technical and advisory work for the Industrial Training L e v y subcomponent will be contracted to
a competitively selected private consulting firm. The Skills Development Task Force will oversee the
implementation o f the component. The task force composition can include Directorate o f Industrial
Training, Ministry o f Trade and Industry, and Ministry o f Education.
The GBSN subcomponent will be contracted to the GBSN Center, while the Business Plan
Competition will be contracted to a competitively selected consortium o f institutions.
The technical and advisory work for the Business Environment component w i l l be contracted to a
competitively selected private consulting firm. The Business Environment Task Force w i l l oversee
the implementation of the component. The task force composition can include Kenya Revenue
Authority, Ministry of Local Government, MOTI, Ministry o f Labor, and Office o f the Attorney
General.
45
,
Figure 1: Summary Organizational Chart for Project Management
Public-Private Steering Committee
i
Project Secretariat:
(Technicaloversight;
Policy advice;
Consultation)
Project,Mgmt
Contractor: (Annual work
program; Fin. mgmt,
Procurement; Monitoring)
I
Financial
Deepening
Capital &
TA fund
Skills
1
r
Subsector
matching
grant fund
46
I
I
I
I
~
GBSN
Training
I
1
Business
Environment
Annex 7: Financial Management and DisbursementArrangements
KENYA: MSME Competitiveness Project
A.
FINANCIAL MANAGEMENT ARRANGEMENTS
Country issues
The results o f the latest Kenya Country Financial Accountability Assessment (CFAA) dated April, 2001
indicated that “...fiduciary risk in public spending is assessed as high. While a lack of compliance with
establishedfinancial and procurement regulations have completely rendered many initiatives aimed at
strengthening the control environment ineffective, issues of limited execution, inadequate monitoring,
insuficient capacity and lack of enforcement also need to be resolved.”
The assessment observed high levels o f financial management risk due to a weak control and low capacity
environment. Government accounts were regularly late and incomplete. Inter-agency reporting was slow
and sometimes difficult to achieve, where hierarchical lines were blurred or foreign to the day-to-day
structures and management o f the institution. Accountability chains were weak, and penalties for noncompliance extremely light or nonexistent.
Mitigating measures
A new government i s now in place with a commitment to ensuring compliance with legislation,
strengthening regulatory institutions and fighting corruption.
With the support o f a number o f donor assisted initiatives, including the IDA-funded Public Sector
Management Technical Assistance Project (PSMTAP), the Government i s enhancing the financial
accountability framework in order to:
0
0
0
0
mitigate fiduciary risk in public expenditure management;
achieve economy, efficiency and effectiveness in the use o f public funds;
enhance transparency and accountability; and
enhance staff capacity in public financial management.
Project Risks
Specific areas that need to be addressed include:
a)
Successful institution o f a sustainable private-public sector partnershipthat draws private sector
professionalism into Government project management.
b) Implementation o f a financial budgetary control system, accounting and internal control systems
and reporting mechanisms considered acceptable to IDA and Government; and sustainable
following completion o f project implementation.
c) The multiplicity o f implementing agencies resulting in complicated financial management and
reporting arrangements.
47
Mitigating measures
A number o f risk mitigation arrangements have been proposed to address identified concerns:
a) A proposed independent Public-Private Steering Committee established with membership
comprising stakeholders and interested parties from both the public and private sectors. The
Committee will be responsible for overall project policy direction and guidance, as well as
approval o f annual workplan and budget.
b) The proposed subcontracting o f financial management to a competitively procured private sector
Project Management Contractor (PMC) whose qualification and terms o f reference will be subject
to IDA approval.
c) The proposed appointment of independent auditors for the project’s annual financial statements.
d) The project will be subject to regular IDA supervision missions aimed at closely monitoring
performance and the timely resolution o f issues.
Financial management system
The project proposes the outsourcing o f the financial management function to a PMC, a competitively
procured professional private sector firm who will be responsible for all the financial management
including the budgeting, accounting and reporting functions o f the project. The objectives o f the project’s
financial management system are:
0
0
0
0
0
to ensure that funds are used only for their intended purposes in an efficient and economical manner;
to ensure that funds are properly managed and flow smoothly, adequately, regularly and predictably
in order to meet the objectives o f the project;
to enable the preparation o f accurate and timely financial reports;
to enable project management to monitor the efficient implementation o f the project; and
to safeguard the project assets and resources.
Furthermore, the following are necessary features o f a strong financial management system:
the project implementing agencies should have an adequate number and mix o f skilled and
experienced staff;
the internal control system should ensure the conduct o f an orderly and efficient payment and
procurement process, and proper recording and safeguarding o f assets and resources;
the accounting system should support the project’s requests for funding and meet its reporting
obligations to the GOK and IDA;
the system should be capable o f providing financial data to measure performance when linked to the
output o f the project; and
an independent, qualified auditor should be appointed to periodically review the Project’s financial
statements and internal controls.
48
Institutional and implementationarrangements
The Steering Committee through the Project Secretariat will be responsible for the oversight o f the special
account as well as those financial management responsibilities which have been delegated to the PMC
(i.e., management o f project accounts, preparation o f FMR, annual financial statements, I D A credit
withdrawal applications), in accordance with sound and standard guidelines acceptable to IDA. They will
be responsible for the statutory audits o f project’s financial statements, ensuring that the process i s
carried out efficiently and in line with the terms o f funding and project agreements. They will also be
responsible for ensuring that matters arising from audits are dealt with expeditiously.
The project will be fully integrated into the activities o f Ministry o f Trade and Industry (MOTI),
including compatibility with Government budgeting and accounting systems.
Flow o f Funds
Special Account - Government will establish a U S dollar-denominated special account under the IDA
Credit, to be operated by M O T I through MOF, in line with existing practice. The special account will
receive dollar depositshransfers from the main IDA credit account.
Signatories to the special account will be as follows:
I
Signatories
Permanent Secretary (MOF), Director - ERD (MOF),
Desk Officer - World Bank, ERD (MOF), Accounts
Controller (MOF)
I
Comments
Signing by any 2 o f the
authorized officers.
Project Account - A local currency project account will be opened to be operated by the PMC. This will
form the primary source o f financing for project activities. Government counterpart contributions will be
deposited in the project account in line with the terms o f the Development Credit Agreement (DCA).
The PMC will be fully responsible for the management o f the project account, including signatories.
49
Funds flow arrangements for the project shall be as follows:
0
0
0
0
0
IDA will make an initial advance disbursement from the proceeds o f the Credit by depositing into the
Borrower-operated Special Accounts.
Actual expenditure w i l l be reimbursed through submission o f Withdrawal Applications together with
Financial Monitoring Reports (FMR).
Transfers from the Special Accounts (for payment o f transactions in local currency) will be deposited
in the MOTI Paymaster General (PMG) Account at the Central Bank o f Kenya. Such remittances
will normally be in local currency in accordance with G O K exchequer control and funding
arrangements. Immediately upon receipt o f proceeds, MOTI w i l l transfer funds to the project account
maintained by the PMC.
Counterpart funds w i l l be allocated through the normal central government budgetary process, and
deposited in the project account in accordance with D C A requirements.
P M C will be responsible for all payments out o f the project account, including remittances o n behalf
o f implementing agencies. It will also be responsible for requisitioning foreign currency payments out
o f the special account and from the IDA credit account using the Direct Payment method.
Accountability - P M C will coordinate with implementingagencies the utilization o f funds to meet the
eligible expenditures based on approved budget and work plans, following the accounting procedures to
be outlined in the Financial Management Manual. Quarterly accountabilities to IDA w i l l be made in the
form o f FMRs, including projected procurement plans and funding requirements for the ensuing 6
months. Monthly statements will be made to MOTI to enable monthly reporting and maintenance o f data
for the Government Integrated Financial Management Information System (IFMIS).
Staffing
P M C will assign a Finance Manager to be responsible for project financial management. The Finance
Manager will have accounting personnel reporting to himher and assigned various accounting
responsibilities as will be detailed in the Financial Management Manual. PMC’s key accounting
personnel will be expected to attend procurement, financial management and disbursement training
sessions conducted by IDA.
Description o f Financial Management Arrangements
Internal Controls and Financial Management Manual
The project’s accounting and internal control systems will be developed and documented in a Financial
Management Manual. The manual will encompass all project activities, including components to be
managed by implementing agencies and will be subject to review by the IDA Financial Management
Specialist.
The procedures to be used by the project to maintain its records will include the requirement for cross
references to supporting documentation in the FMR supporting schedules in order to facilitate the
inspection o f these schedules and improve the maintenance o f the project’s records.
Project Financial Management Manual
The Manual will describe the accounting system: the major transaction cycles o f the project; funds flow
processes; the accounting records, supporting documents, computer files and specific accounts in the
financial statements involved in the processing o f transactions; the list o f accounting codes used to group
transactions (chart o f accounts); the accounting processes from the initiation o f a transaction to i t s
inclusion in the financial statements; authorization procedures for transactions; the financial reporting
process used to prepare the financial statements, including significant accounting estimates and
disclosures; financial and accounting policies for the Project; budgeting procedures; financial forecasting
50
procedures; procurement and contract administration monitoringprocedures; procedures undertaken for
the replenishment of the Special Account; and auditing arrangements.
Planning and Budgeting
Budgetingfor the project will be undertaken by the PMC and approved by the Steering Committee. IDA
reporting guidelines provide for periodic activity, cash flow and procurement projection analysis and
review on an ongoing basis by way o f FMRs.
Books of accounts and list of accounting codes
The project’s accounting records will be maintainedon computerized accounting systems. A list o f
accounts codes (Chart o f Accounts) for the project will be integrated. This will match the classification o f
expenditures and sources and applicationof funds to be set out in the Development Credit Agreement.
The Chart of Accounts will be developed in a way that allows project costs to be directly related to
specific work activities and outputs of the project. This process i s required to be in place by Credit
Effectiveness, along with the Financial Management Manual.
Audit arrangements
External Audit
The Steering Committee will appoint professionally qualified independent auditors who should meet
IDA’Srequirements in terms o f independence, qualifications and experience. Separate Annual Audited
Financial Statements, taking into considerationthe new Audit Policy Guidelines o f the World Bank
Group should be submittedto IDA within six months after end o f each financial year. The appointment o f
auditors should be completed immediately following credit effectiveness.
Reporting and monitoring
Financial Monitoring Reports
Formats of quarterly Financial Monitoring Reports (FMR) to be generated from the financial management
system will be agreed prior to credit effectiveness. There will be clear linkages between the information
in these reports, the Chart o f Accounts and subsidiary accounting records to be maintainedby respective
implementing agencies. The financial reports will be designed to provide quality and timely information
to IDA, management, and various stakeholders on project performance. FMRs must be submitted to IDA
within 45 days following the end of the quarter to which they relate.
Primary contents o f FMRs comprise:-
’
Financial Reports:
o
o
Sources and Uses o f Funds by Funding Source
Uses of Funds by Project Activity/Component
Physical Progress (Output Monitoring) Report
Procurement Report
Financial Statements
Annual Financial Statements will be prepared in accordance with International Financial Reporting
Standards. The IDA DevelopmentCredit Agreement will require the submission o f audited financial
statements to IDA within six months after the year-end.
Project Financial Statements will comprise:
51
1. A Statement of Sources and Uses o f Funds/Cash Receipts and Payments for each funded
phase which recognizes all cash receipts, cash payments and cash balances controlled by the
entity; and separately identifies payments by third parties on behalf o f the entity.
2. The Accounting Policies Adopted and Explanatory Notes. The explanatory notes should be
presented in a systematic manner with items on the Statement o f Cash Receipts and Payments
being cross referenced to any related information in the notes for each funded phase. Examples o f
this information include a summary o f fixed assets by category o f assets, and a summary o f SOE
Withdrawal Schedule, listing individual withdrawal applications; and
3. A Management Assertion that Bank funds have been expended in accordance with the intended
purposes as specified in the relevant World Bank legal agreement for each funded phase.
Indicative formats o f these statements w i l l be developed in accordance with IDA requirements by Credit
Effectiveness.
Supervision plan
A Financial Management supervision mission w i l l be conducted at least every six months. The mission’s
objectives w i l l include that o f ensuring that strong financial management systems are maintained for the
project throughout i t s life. Reviews w i l l be carried out regularly, upon receipt o f quarterly FMRs to
ensure that expenditures incurred by the project remain eligible for I D A funding. The Project Status
Report (PSR) w i l l include a financial management rating for the component. This w i l l be arrived at by the
IDA FMS after an appropriate review.
8.
Overall Risk Assessment
Risk Assessment
*
**
***
These will be mitigated by completion o f the project implementation plan and adoption o f a
comprehensive Financial Management Manual
These items are considered non significant as long as mitigating factors, as described in the FM Action
Plan, are put in place.
The new Government i s currently implementing major reforms in corruption, governance and the
judiciary, with the expectation that these risks will be mitigated.
52
Overall Risk Assessment
The Project does n o t currently satisfy minimum W o r l d Bank financial management requirements. In
order t o establish a n acceptable control environment and t o mitigate financial management risks the
various measures should be taken by the due dates as indicated in the table below:
FinancialManagement Action Plan
Action
Due Date
Conditionality
Action Date
Nov 1,2004
2
The financial management manual prepared
by PMC and approved by Government and
IDA.
Prior to
Effectiveness
Condition o f
Effectiveness
Oct 1,2004
3
Special and Project accounts opened and
initial deposit o f counterpart funds made.
Prior to
Effectiveness
Condition o f
Effectiveness
Oct 15,2004
4
Complete training for Finance Managers and
accountants on World Bank F M and
Procurement procedures.
Prior to
Effectiveness
Condition o f
Effectiveness
Nov 1,2004
5
Financial management system installed at
the PMC. This includes:
0
Financial Management Manual
Procurement Manual
Information System
Staff orientation on project
financial management and reporting
requirements
Prior to
Effectiveness
Condition o f
Nov 1,2004
6
Ability o f PMC to prepare FMR and o f
implementing agencies to prepare FMR
input.
Effectiveness
Condition o f
Effectiveness
Nov 1,2004
7
Relevantly qualified external auditor for the
entire project identified appointed on
approved terms o f reference.
6 months after
Effectiveness
6 months after
Effectiveness
Procurement o f an appropriately qualified
and experienced PMC.
1
Prior to
Effectiveness
Condition o f
Effectiveness
Effectiveness
I
B
DISBURSEMENT ARRANGEMENTS
Requests f o r disbursement f r o m IDA will initially be made on the basis o f approved w o r k plans cash f l o w
projections for eligible expenditures (report-based disbursements). IDA will make advance disbursement
f r o m the proceeds o f the Credit by depositing into borrower-operated special accounts t o expedite project
implementation. The advance to the special accounts will be used by the borrower to finance IDA’s share
o f project expenditures under the proposed Credit. Another acceptable method o f withdrawing funds
f r o m the Credit i s the direct payment method, involving direct payments f r o m the Credit to a third party
for works, goods and services upon the borrower’s request. Payments m a y also be made to a commercial
bank for expenditures against IDA special commitments covering a commercial bank’s Letter o f Credit.
I D A ’ s Disbursement Letter stipulates a minimum application value for direct payment and special
commitment procedures.
53
Alternatively, upon credit effectiveness, PMC will be required to submit a withdrawal application for an
initial deposit to the special account, drawn from the IDA Credit, in an amount to be agreed to in the
Development Credit Agreement. Replenishment o f funds from IDA to the special account will be made
upon evidence of satisfactory utilization of the advance, reflected in SOEs and/or on full documentation
for payments above SOE thresholds. Replenishment applications would be requiredto be submitted
regularly on a monthly basis.
If ineligible expenditures are found to have been made from the special account, the borrower will be
obligated to refund the same. If the special account remains inactive for more than six months, the
borrower may be requested to refund to IDA amounts advanced to the special account.
IDA will have the right, as to be reflected in the Development Credit Agreement, to suspend disbursement
of the funds if reporting requirements are not complied with.
Expenditure Category
Goods
Consultant Services
Training and
Workshops
Grant (Access to
Finance and BDS)
PPF
Unallocated
Amount in US$ million
0.30
7.18
0.50
Financing Percentage
100% FE; 90% of LE
100% LE; 100% of local
individual; and 94% of local firm
100%
13.52
100%
0.10
0.50
54
Annex 8: Procurement
KENYA: MSME CompetitivenessProject
General
1. Procurement for the project would be carried out in accordance with the World Bank’s “Guidelines:
Procurement Under IBRD Loans and I D A Credits’’ dated May 2004; and “Guidelines: Selection and
Employment o f Consultants by World Bank Borrowers” dated May 2004, and the provisions stipulated in
the Legal Agreement. The general description o f various items under different expenditure category are
described below. For each contract to be financed by the Credit, the different procurement methods or
consultant selection methods, the need for prequalification, estimated costs, prior review requirements,
and time frame are agreed between the Borrower and the Bank project team in the Procurement Plan. The
Procurement Plan will be updated at least annually or as required to reflect the actual project
implementation needs and improvements in institutional capacity. To the extent practicable Bank’s
standard bidding documents for goods and Standard Requests for Proposals for consultants as well as a l l
standard evaluation forms would be used throughout project implementation.
Advertising
2. A General Procurement Notice (GPN) i s mandatory and would be published before Board
presentation in the Development Gateway, UN Development Business and in a national newspaper as
provided under the Guidelines. In addition, a Specific Procurement Notice (SPN) i s required for a l l
Expressions o f Interest (EOI) for consulting services with an estimated value in excess o f US$200,000.
There are no ICB procurement for goods and works under this Project.
Assessment of Agency’s Capacity to Implement Procurement
3. The Ministry o f Trade and Industry (MOTI) has a Supplies Management Division (SMD) run by a
team o f Supplies Officers and Supplies clerical staff under the direction o f a Principal Procurement
Officer (PPO). Hierarchically the PPO reports to the Permanent Secretary (PS) o f MOTI. The SMD staff
o f the Ministry are, like their counterparts in other central government ministries and departments, civil
servants who are organizationally employees o f and have been seconded by Ministry o f Finance to MOTI.
Supplies Officers posted to central government agencies are transferred from one institution to another
once every few years.
4. Supplies Officers in the civil service have been trained in supplies chain management which i s
confined to procurement and store-keeping o f common user items. With the exception o f those who may
have worked with Bank-funded projects, Supplies Officers have little or no experience in administering
procurement process of works, specialized goods or consultancy services. The Supplies staff, including
the PPO, currently working with M O T I have not been exposed to the Bank procurement procedures. The
overall project risk for procurement i s therefore high.
5. Because o f the limited experience o f the SMD staff o f M O T I in the selection o f consultants, M O T I
has agreed to hire a procurement consultant on a fixed-term contract under the PPF. The procurement
consultant will assist the SMD in administering the processes o f the selection o f some o f the initial major
consulting services envisaged under this Project (including the selection o f the Project Management
Contactor (PMC)). M O T I will, in consultation with IDA, draft the Terms o f Reference o f the procurement
consultant, and select a shortlist o f six individuals with proven experience in the preparation o f Request
for Proposals (RFPs) and evaluation o f proposals based on the Bank standard formats. Before starting
negotiations with the recommended procurement consultant, M O T I w i l l seek IDA’Sconcurrence o f the
CVs o f the shortlisted individuals, and terms and conditions o f the draft contract.
55
Procurement Implementation Arrangements
6. The overall coordination and implementation o f the project activities would be the Project Secretariat
in MOTI. Initial procurement activities will be handled by a procurement consultant to be appointed.
However, once the P M C has been contracted, the day to day monitoring will be entrusted to the PMC,
which will also be responsible for coordinating all outstanding and future procurement under the project.
The appointment o f the PMC i s a condition o f effectiveness.
Procurement Categories and Methods
General
7. Component 1 - Access to Finance i s aimed at increasing access and availability o f financial services
to M S M E s through the introduction o f new risk capital instruments, products and tools, and capacity
building. For subcomponent A, “Financial Sector Deepening”, the Trust w i l l be cofinanced by DFID.
The arrangements for establishment o f the Trust, the Technical Manager, the Deputy Technical Manager
and the Financial Administrator would not be subject to IDA procurement guidelines as the IDA funds
would not be used to pay for any o f the services to be provided by the Trust. This understanding will be
formalized in a letter from DFID to the Government and would be clearly outlined in the grant agreement
to be entered into between the Trust and the Government o f Kenya (the donor for the IDA portion o f the
funds). The Trust will submit quarterly work-plans to the PMC. The quarterly work-plan will be used to
disburse funds to the Trust account by the PMC. It will be the responsibility o f the Financial Manager o f
the Trust to provide monthly financial statements to the PMC. The P M C in turn would reconcile the
Project’s financial statements by considering the use o f the IDA funds advanced to the Trust.
8. For subcomponent B, “SME risk capital fund”, selection o f SME risk capital fund investors and
technical partners will be based on pre-specified criteria that respect best practice. Expressions o f interest
w i l l be called for from interested institutions through an open advertisement which will state the criteria
to determine the eligibility o f interested applicants. Expressions o f Interest (EOI) will be called for from
the interested SME risk capital investors and technical partners, and the EOIs will explicitly state the
criteria to determine the eligibility o f interested applicants. The eligible applicants will submit detailed
business plans which will include their portion o f the contribution (Le, matching grants) towards the
implementation o f the overall objective o f the component.
9. In the case o f both subcomponents under Access to Finance, as the selection o f beneficiaries w i l l be
based on specified criteria, business plan, performance indicators, the beneficiaries may use their own
procurement procedures to procure the goods and services required to fulfill their performance
obligations.
10. Component 2 A - Under the BDS matching grant scheme, in accordance with the procedures manual,
the selection o f beneficiaries will be based o n specified criteria, business plan, performance indicators,
and thus the beneficiaries may use their own procurement procedures to procure the goods and services
required to fulfill their performance obligations.
11. Component 2C - The Global Business School Network Center, Inc.(GBSN) will facilitate the
contracts between the “network” business schools and the Kenyan business schools (no IDA funding will
be used towards the cost o f GBSN Center). GBSN will carry out all the tasks under this component on
the basis o f a Memorandum o f Understanding (MoU) signed between the Government o f Kenya and
GBSN. Under this component, GBSN will call for Expressions o f Interest (EOI) from interested
beneficiary Kenyan business schools and the EOIs w i l l explicitly state the criteria to determine the
eligibility o f interested applicants. The business schools in the “network” which will provide the
56
technical assistance to the Kenyan business schools will be called for through Expressions o f Interest in
the D g Market and other internationalltechnical publications, to be initiated and managed by GBSN in
accordance with the MoU.
Goods
The Project will finance items such as office equipment, computers and accessories amounting to
12.
US$300,000 during the entire project period. To the extent practicable, goods and equipment would be
combined in packages worth at least US$150,000 and be procured using International Competitive
Bidding (ICB) procedures, using IDA Standard Bidding Documents (SBD).
13. Contracts for goods estimated to cost between US$30,000 and US$150,000 equivalent per contract
will be procured through National Competitive Bidding (NCB) using National procedures acceptable to
IDA.
14. Contracts for goods, equipment and services estimated to cost less than US$30,000 equivalent per
contract will be procured using the Shopping Procedures in accordance with paragraphs 3.5 and 3.6 o f the
Procurement Guidelines, and in accordance with the notes on Guidance on Shopping - the Guidance
Notes are available in this address:
http://web.worldbank.org/WBSITE/EXTEIZNAL/PROJECTS/PROCUREMENT/O,,contentMDK:2O105663-menup
K:93977-paaePK:84269-uiPK:6000 1558-theSitePK:84266,0O.html
Consulting Services
15. The following consulting assignments are planned to be contracted under this Project:
procurement process
commencement date by May 15,
Training and Workshops
16.
Training and workshops w i l l be carried out on the basis o f approved annual programs that would
identify the general framework of training activities for the year, including the nature o f
traininglworkshops, the names and number o f trainees, and cost estimates, to be reviewed and cleared by
IDA. Selection o f training institutions for workshopdtraining should be based on a competitive process
” Quality-and-Cost-based Selection (QCBS) method in accordance with the provisions o f Section 11, paragraph 3 o f Appendix 1
and Appendix 2 thereto, as per the Consultants’ Guidelines.
’’
Services o f Individual Consultants meeting the requirements of Section V o f the Consultant Guidelines will be selected under
the provisions for the Selection of Individual Consultants method. Individual Consultants (IC) will be selected through
comparison o f curriculum vitae against job description requirementso f those expressing interest in the assignment
23
The expected commencement date i s later than May 15,2004
57
using the Consultant’s Qualifications method o f selection. Prior to undertaking any training/workshop
activity, details should be submitted to I D A for its review and ‘no objection’.
IDA Prior Review
17.
Each contract for goods estimated to cost US$150,000 equivalent or more will be subject to I D A
prior review as per paragraph 2 o f appendix Io f the Guidelines. All consulting contracts costing
US$lOO,OOO equivalent or more for firms and US$50,000 and more for individuals will be subject to I D A
prior review. All single-source selection o f consultants and terms o f reference for consulting services will
be subject to IDA prior review. Any exceptional extensions to non-prior review contracts raising their
values to levels equivalent or above the prior review thresholds will be subject to IDA clearance. A l l
training/workshops contracts (including details as stated in the preceding paragraph ) will be subject to
IDA prior review. All other contracts will be subject to post review in accordance with paragraph 4 o f
Appendix Io f the Guidelines.
Procurement Planning
18. The Borrower, at appraisal, developed a preliminary Procurement Plan for all the major procurement
activities (mainly consulting assignments), which provides the basis for the procurement methods and the
expected contracting dates as stated in the paragraphs above. The preliminary plan has been agreed
between the Borrower and the Project Team. The final plan will be available in the Project’s database and
in the World Bank’s external website. The Procurement Plan will be updated in agreement with the
Project Team annually or as required to reflect the actual project implementation needs and improvements
in institutional capacity.
Table A: Project Costs by Procurement Arrangements
(US$ million equivalent)
Procurement Method
Expenditure Category
ICB
1. Works
2. Goods
3. Consultant Services
4. TrainingNVorkshops
5. Grants
6. Unallocated
0.00
0.00
0.00
0.00
0.00
0.00
0.00
NCB
0.00
Other‘
0.00
0.00
0.00
0.00
0.00
0.00
0.30
7.09
0.59
13.522
0.50
0.00
22.00
N.B.F.
0.00
0.00
0.00
0.00
0.00
0.00
(0.00)
Note: All costs include contingencies.
‘Includes goods to be procured through shopping procedures and consulting services
* Refer to Paragraphs 7 to 10 above.
58
Total Cost
0.00
0.30
7.09
0.59
13.52
0.00
22.00
Table A 1 : Consultant Selection Arrangements
(US$million equivalent)
Selection Method
Consultant Services
Expenditure Category
A. Firms
B. Individuals
Total
QCBS
QBS
SFB
LCS
CQ
Other
N.B.F.
6.53
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.56
0.00
0.56
0.00
0.00
0.00
0.00
0.00
6.53
Total
0.00
0.00
0.00
7.09
Table B: Thresholds for Procurement Methods and Prior Review’
Expenditure Category
1. Works
2. Goods
3. Consulting
Services: Firms
4. Consulting
Services: Individuals
Contract Value
ThreshoId
(US$)
Based on estimate in
the procurement plan
NIA
> or = 150,000
> or = 100,000
> or = 50,000
Procurement Method
Contracts Subject to
Prior Review
(us$
milions)
Estimated
NIA
ICB
QCBS
Individual Consultant
NIA
0.00
6.50
0.00
‘Thresholds generally differ by country and project. Consult OD 11.04 “Review o f Procurement Documentation”
and contact the Regional Procurement Adviser for guidance.
Total value o f contracts subject to prior review (estimated): U S $ 6.50 million
Overall Procurement Risk Assessment: High
Frequency o f procurement supervision missions proposed: One every four months (includes special
procurement supervision for post-reviewlaudits)
59
Annex 9: Economic and Financial Analysis
KENYA: MSME Competitiveness Project
Present Value of Flows
Economic Analysis
Benefits (US$ million)
Costs (US$ million)
Net Benefits (US$ million)
IRR (%)
44.8
25.0
19.8
26.7
Fiscal
Impact
Financial Analysis Taxes ($ million) Subsidies
13.5
Nla
Summary of Benefits and Costs:
Base Case Results
The cost-benefits analysis o f this project faces the same limitation in all economic analyses o f projects in
developing countries, namely, lack o f reliable time series data require for an appropriate calibration,
difficulty in finding the appropriate shadow prices, and difficulty in precisely quantifying the economic
benefits and welfare gains or losses especially resulting from capacity building and institutional
development. I t requires the use o f proxies suitable for the project based o n market assessments and,
when available, quantified development impacts from similar projects in comparable countries.
Nevertheless, a simple model has been built to calculate the N e t Present Value (NPV) and the Internal
Rate of Return (IRR)24based on a 12-year forecast timeframe. The project impact i s expected to start
materializing during project implementation. It i s important to note that the maximum impact will be
reached after project completion once the relevant capacity, institutions and the investment climate are
strengthened. To test the robustness o f the project, the sensitivities o f the N P V and the IRR to
assumptions and uncertain future values are diagnosed under worst-case, best-case, and intermediate-case
scenarios. A counterfactual case was used to derive the net effect o f the project.
risk capital fund, (ii)
value
The cost-benefit analysis was carried out for the following components: (i)
Entrepreneurship and business plan competition (BPC), and (iv) Investment
chaidmatching grant, (iii)
climate. For the purpose o f the analysis, the latter component also included the “Commercial Products
and Outreach to MSME Providers”, “Restructuring Industrial Training Levy Scheme” and “Capacity
Building o f Business Schools” components which are assumed to have the same incidence on the
numeraire used to estimate the development impacts. The numeraires are output and employment income,
increased access t o finance, (ii)
higher
which are positively affected by the project as the result o f (i)
productive investments, and (iii)
better synchronized value chains and access t o markets.
In the base case scenario, the project generates a N P V value estimated at about US$19.8 million
corresponding to an IRR of 26.7%. The project i s expected to contribute to direct j o b creation driven by
increased production. However, it i s important to note that j o b creation could be limited by the relatively
l o w capacity utilization rate o f 63 percent. That said, during the lifetime o f the project a minimum o f 2750
24
NPV i s positive when IRR i s greater than the assumed discount rate. The NPV is the decision criteria.
60
direct jobs are expected to be created. This number i s derived mainly from the Risk Capital Fund25for
which, given the more straightforward and direct relationsh.ip between investments and j o b creation
compared to the other project components, employment impact can be more reasonably quantified ex
ante. This number i s below the project's potential job creation not only because it does not account for
jobs generated as the result o f institutional development (microfinance, investment climate, etc) but also,
because it excludes indirect jobs to be created. The difficulty in estimating the number o f indirect jobs
created results from the lack o f information on the size o f the relevant j o b multipliers. If indirect job
creation was considered in the analysis, the N P V would have been higher. Finally, with the expected
sustainability o f the project activities, jobs w i l l likely continue to be created beyond the project lifetime.
In sum, overall, and given the innovative approach for some o f the project components, the results are
conservative.
The government fiscal position i s also positively affected. Indeed, for the 12-year forecast time frame, the
project would generate $US13.5 million as the result o f incremental personal income taxes, and corporate
income taxes.
For all the projects components, as shown in table 1 below, the NPVs are positive.
Risk CaDital
Fund
NPV (US$ million)
11.2
IRR (%)
28.1
Value Chain I
Matchina Grant
Business
Plan
Comoetition
Investment
Overall
3.1
23.4
1.7
35.3
3.9
24.6
19.8
26.7
Climate
The results obtained at the end of project implementation are presented in table 2. As expected, given the
lagged effects o f capacity/institutional building on positive development impacts, the N P V i s negative in
the short and medium terms. The break even point i s reached during the sixth year. The fiscal impact
remains positive with $6.7 million.
I
NPV (US$ million)
1
Risk CaDital
Fund
-
Value Chain I
Matchmakinq
0.3
-1.6
I
I
Cometition
0.4
I
I
-1.8
I
-6.2
?)The overall IRR i s weighed by the relative size o f each component.
Main Assumptions and key parameters used (base case):
1. It i s assumed that a minimum o f 100 companies will have access to the risk capital fund (RKF)
with an average amount o f $150,000 per investee. It i s assumed that, on average, at the end o f the
five year project implementation period, the investees would expand their outputhales at a
multiple o f 3 times the amount o f initial investment, consistent with a creation o f 24 jobs for each
$150,000 invested. This assumption i s made based on empirical evidence from the RKF scheme
in South Africa, where $150,000 directly facilitated 24 employment opportunities in 2002. I t i s
expected that the selection criteria, in terms o f growth potential o f the investees, will be similar to
25
The average yearly salary i s considered to be $3 120 in the RKF-supported investees.
61
that in South Africa; for that reason, the rate o f j o b creation in Kenya i s not discounted to take
into account the relatively smaller size o f the economy and level o f demand.
2. Four entire value chains w i l l be supported by the matching grant fund for an average amount o f
$750,000. For the purpose o f the cost benefit analysis, we assume that the total amount o f the
matching grant fund will go to the coffee sector. We assume that the strategy that would be
proposed and implemented by the representatives o f the coffee chain would allow an increase o f
the average yield o f the partner farmer cooperatives to the level o f the best farmer, i.e from 0.4 to
0.7 todha. This i s equivalent to an increase o f average revenue by $462/hectare from $616 to
$1078 given a price o f $1542 per ton. Finally, we assume that the partner farmer cooperative has
2085 farms with an average size o f land o f 1 hectare. The increase in revenue for the farmers will
not lead to j o b creation given the very low capacity utilization rate o f 20% at the farm level.
Finally, it i s also assumed that the institutional framework (set o f external factors that the
different players o f the value chain cannot control such as infrastructure quality, law enforcement,
etc) required to enhance the relationship between small and larger enterprises and enhance their
integration in the value chain remains unchanged if not improved.
3. For the j o b creating productive activities, the rates o f job creation have been calculated taking
into account a yearly value added per worker o f U S $2439 for small enterprises and $4000 for
medium enterprisesz6.The rate is discounted to take into account the relatively l o w average
capacity utilization rate and l o w level o f demand.
4. The average yearly salary in the private sector i s $3 120, and $1 149 in particular in the agriculture
sector27.
5. The average yearly minimum wage i s $US 1188 throughout the lifetime o f the project.
6. In the base case, the increase in firms' output i s discounted by a conservative two-third to take
into account the economic costs o f other resources in the economy that are diverted into the
project from other activities not directly supported by the project.
7. The investment climate, financial products and Business Development Services are responsive to
the MSMEs needs.
8. Macroeconomic stability (inflation, interest and exchange rates); government sustained
commitment to M S M E development and to facilitate private markets and networks; and no delay
in project implementation.
Sensitivity Analysis /Switching values of critical parameters:
Seven sensitivity tests were carried out by switching values o f critical parameters. The results are
presented in table 3 below.
1. The first test decreases the shadow discount rate from 14 to 10 percent: the NPV increased to
US$27.7 million with a corresponding IRR o f 24.1 percent. About 2750 jobs are expected to be
created during the 5-year lifetime o f the project. The j o b creation rate i s linked t o the RKF's
investment or matching grant from the project; it i s therefore not affected by the shadow discount
rate.
26
27
WED, ICA, 2004.
Economic Survey, 2003.
62
2. The second test increases the shadow discount rate from 14 to 20 percent, the N P V considerably
decreased to US$11.9 million while the IRR increased to 30.5 percent. The j o b creation rate i s not
affected by the shadow discount rate.
3. The third test assumes a higher increase in output for each investee benefiting from the RKF from
5 to 10; the results showed a NPV o f US$33.1 million and IRR o f 33.6%. About 4060 jobs are
expected to be created during the 5-year lifetime o f the project.
4. The fourth test assumes a lower increase in output for each investee (benefiting from the RKF) o f
2 compared to 5 in the basecase; the results showed a N P V o f US$10.4 million and IRR o f
21.1%. 1810 jobs are created during the 5-year lifetime o f the project.
5. The fifth test assumes a decrease in revenue per ton o f coffee by 50% for each value chain
benefiting; the results showed a NPV o f US$16.0 million and IRR o f 24.8%. Job creation i s not
affected given the very low capacity utilization rate which i s assumed to be at its lowest natural
level.
6. The sixth test assumes an increase in revenue per ton o f coffee by 50% for each value chain; the
results showed a N P V o f US$23.6 million and IRR o f 28.5%. Job creation i s not affected given
the very l o w capacity utilization rate.
7. The seventh test elongates the disbursement period by three years, the NPV decreased to US$13.2
million while the IRR came down to 23.0%. Although the rate o f j o b creation i s slower than in
the base case, the same number o f jobs i s created at the end o f the delayed project.
The fiscal impact i s positive in all the scenarios.
Table 3: Sensitivity Analysis Summary (12-year forecast timeframe)
Sensitivity Performed
Change in shadow
discount rates
Expected Change in
Output for each investee
Expected Change in
revenue for farmers in
the coffee
chain
Delayed Project
Implementation
Cases
Variable Amount
NPV
($million)
IRR
(%)
Fiscal
Impact
($million)
Jobs
created
(5-y~)
(a) Base
(a) 14% Reduction
19.8
26.7
13.5
2750
(b) Alternate
(b) 10% Reduction
27.7
24.1
16.7
2750
(d) Alternate
(c) 20% Reduction
11.9
30.5
10.0
2750
(a) Base
(a) 5 Times
19.8
26.7
13.5
2750
(b) Alternate
(b) 2 Times
10.4
21.1
10.6
1810
(c) Alternate
(c) 10 Times
33.1
33.6
17.4
4060
(a) Base
(a) 1542 per ton
19.8
26.7
13.5
2750
(b) Alternate
(b) base /2
16.0
24.8
12.3
2750
(c) Alternate
(c) base * 1.5
23.6
28.5
14.6
2750
(a) Base
(a) Regular Disbursement
19.8
26.7
13.5
2750
(b) Alternate
(b) Slow Disbursement
13.2
23.0
10.7
2750
63
Scenario Analysis /Switching values of critical group of factors:
T w o scenario analyses were carried out by simultaneously switching values o f group o f factors from the
basecase. The results are presented in table 4 below.
(i)The first analysis considers a case with 50% less investees and value chains supported. Both the N P V
and the IRR dropped to US$6.5 million and 20.3% respectively. The fiscal impact i s $7.3 million. Finally,
687 jobs are created.
(ii)
The second more optimistic analysis increases by 50% the number o f investees and value chains
supported. The N P V and the IRR increased to US$38.6 million and 32.2% respectively. The fiscal impact
improved to $21.2 million and 6185 jobs are generated.
In sum, the project robustness i s confirmed with a positive NPV in all the scenarios.
Cases
Base
Table 4: Scenario Analyses Summary (12-year forecast timeframe)
Variable Factors
Number o f investees
Number o f
partnershipshahe chains
Number o f BPC
participants
Alternate
Base * 0.5
Value
NPV
($million)
IRR
(%)
Fiscal
Impact
($million)
Jobs
created
19.8
26.7
6.5
20.3
7.3
687
38.6
32.2
21.2
6185
@-year)
100
4
13.5
2750
1000
50
2
Alternate
Base * 1.5
150
6
64
Annex 10: Safeguard Policy Issues
KENYA: MSME Competitiveness Project
This project i s Category C and has not triggered any safeguard policies.
65
Annex 11: Project Preparation and Supervision
KENYA: MSME CompetitivenessProject
PCN review
Initial PID to PIC
Initial ISDS to PIC
Appraisal
Negotiations
Board approval
Planned date o f effectiveness
Planned project end
Planned closing date
Planned
December 20,2003
Actual
January 15,2004
February 4,2004
April 2004
AprilMay 2004
June 15,2004
November 1,2004
December 3 1,2009
June 30,2010
March 30, 2004
April 30,2004
July 13,2004
Key institutions responsible for preparation o f the project:
The Ministry o f Trade and Industry i s the key government agency responsible for the project
preparation and supervision.
Bank staff and consultants who worked on the project included:
Name
Title
PSD Specialist
Vyjayanti Desai
Senior Advisor
William Steel
PSD Specialist
Ganesh Rasagam
Lead PSD Specialist
Ron Kopicki
Consultant
Amadou Dem
Principal Investment Officer
Sharmila Hardi
Business Development Officer
Ndiritu Muriithi
PSD
Specialist
Andrei Mikhnev
Projects Officer
Michael Graglia
Investment Officer
Kevin Njiraini
Consultant
Yasuo Konishi
Consultant
Andrii Palianytsia
Consultant
Jan Hendrik van Leeuwen
Program Assistant
Fatiha Amar
Program Assistant
Loise Wanjau
Lawyer
Hisham Abdo Kahim
Lawyer
Mohamad Nawaz
V.S. Krishnakumar
Lead Procurement Specialist
Procurement
Specialist
Dahir Warsame
Fin Mgmt Specialist
Moses Wasike
Quality Advisors:
Dileep Wagle
Saleem Karimjee
Michael Fuchs
Iradj Alikhani
Herminia Martinez
Lead PSD Specialist
Regional Manager
Lead FSD Specialist
CPC and lead PSD Specialist
Consultant
66
Unit
World Bank -- AFTPS
World Bank -- AFTPS
World Bank - AFTPS
World Bank - AFTPS
World Bank - AFTPS
IFC - Financial Markets
IFC - APDF
IFC - CSM
IFC - GBSN
IFC Nairobi
World Bank - AFTPSRS
IFC -Nairobi
World Bank - LEGAF
World Bank - LEGAF
World Bank - AFTPC
World Bank - AFTPC
World Bank - AFTFM
World Bank - AFTPS
IFC Nairobi
World Bank - AFTFS
World Bank - AFCSN
World Bank - AFTPS
Bank funds expended to date on project preparation:
1. Bank resources: US$200,000
2. IFC resources: US$80,000
3. IFC Trust funds: US$110,000
4. Total: US$400,000
Estimated Approval and Supervision costs:
1. Remaining costs to approval: US$lO,OOO
2. Estimated annual supervision cost: US$150,000
67
Annex 12: Documents in the Project File
KENYA: MSME Competitiveness Project
A. Bank Staff Assessments
e
e
e
e
e
e
e
e
Aide Memoires from project preparation missions
World Bank, Draft Growth and CompetitivenessStudy, 2004
Global Development Solutions, Draft Value Chain Analysis of Selected Strategic Sectors in Kenya,
2004
World Bank Country Economic Memorandum, A Policy Agenda to Restore Growth, 2003
Regional Program for Enterprise Development, Kenya Institute for Public Policy Research, and
Center for Study o f African Economies Oxford University, Draft Investment Climate Assessment,
2004
World Bank and IMF, Financial Sector Assessment Program, 2004
Implementation Completion Report (ICR) on the Micro and Small Enterprise Training and
Technology Project (MSETTP), Report # 26230, June 24,2003
World Bank Group, Program Framework for a Joint IDA/IFC Micro, Small and Medium Enterprise
Development Pilot Program for Africa, IDAlSecM2003-06 14, December 2,2003
B. Government Documents
e
e
e
e
Ministry o f Planning and National Development, Economic Recovery Strategyfor Wealth and
Employment Creation, 2003
Ministry o f Labor and Human Resource Development, Draft Sessional Paper of Development of
Micro and Small Enterprisesfor Employment Creation and Poverty Reduction, 2003
Central Bureau o f Statistics, International Centre for Economic Growth, and K-Rep Holdings, Ltd.,
MSE Baseline Survey, 1999
Central Bureau o f Statistics, Economic Survey 2003
C. Other Documents
e
e
Kenya Institute for Public Policy Research and Analysis (KIPPRA), Review of Government Policies
for the Promotion of Micro and Small-scale Enterprises in Kenya, 2002
Kenya Institute for Public Policy Research and Analysis (KIPPRA), Inventory of the Past and
Ongoing Interventions Within the Micro and Small Enterprise Sector by Donor Agencies and Various
Other Stakeholders Overtime, 2004
68
Annex 13: Statement o f Loans and Credits (as o f May 1,2004)
KENYA: MSME CompetitivenessProject
Difference between
expected and actual
disbursements
Original Amount in US$ Millions
Cancel.
Undisb.
PO78209
Project ID
2004
FY
Development Learning Centre - LIL
Purpose
IBRD
0.00
2.70
0.00
0.00
0.00
2.86
0.00
0.00
PO78058
2003
Kenya Arid Lands I1
0.00
60.00
0.00
0.00
0.00
56.99
-0.16
0.00
PO82378
2003
Free Primary Educ. Support
0.00
50.00
0.00
0.00
0.00
22.83
3.16
0.00
PO66490
2002
PUB.SEC.MGMT.TA
0.00
15.00
0.00
0.00
0.00
9.74
10.03
0.00
PO66486
200 1
Decentr. Reprod. Health & HIV/AIDS
0.00
50.00
0.00
0.00
0.00
37.78
19.70
4.56
PO707 18
200 1
0.00
25.00
0.00
0.00
0.00
14.78
3.02
0.00
PO70920
2001
HIV/AIDS Disaster Resp. (Umbrella)
0.00
50.00
0.00
0.00
0.00
29.18
11.48
0.00
PO46871
1997
LAKE VICTORIA ENV.
0.00
11.50
0.00
9.80
0.00
5.72
5.95
0.00
PO34180
1997
Early Childhood Dev.
0.00
27.80
0.00
0.00
0.00
9.15
10.37
9.33
PO01344
1997
KE ENERGY SECTOR REFORM
0.00
125.00
0.00
0.00
0.00
34.02
42.05
0.00
PO01319
1996
URBAN TRANSPORT
0.00
115.00
0.00
0.00
0.00
24.45
35.28
0.00
0.00
532.00
0.00
9.80
0.00
247.50
140.88
13.89
Regional Trade Fac. Proj. - Kenya
Total:
IDA
69
SF
GEF
Orig.
Frm. Rev’d
KENYA
STATEMENT OF IFC's
Held and DisbursedPortfolio
In Millions o f U S Dollars (as o f April 30,2004)
Committed
Disbursed
IFC
IFC
FY Approval
Company
Loan
Equity
Quasi
2000
AEF AAA
Growers
0.47
0.00
0.00
Partic.
Loan
Equity
Quasi
Partic.
0.00
0.47
0.00
0.00
0.00
1998
AEF AAR Clinic
0.00
0.50
0.00
0.00
0.00
0.50
0.00
0.00
1997
AEF Ceres
0.93
0.00
0.00
0.00
0.93
0.00
0.00
0.00
1997
AEF Deras Ltd.
1.00
0.00
0.00
0.00
1.00
0.00
0.00
0.00
1996
AEF Equitea
0.29
0.12
0.00
0.00
0.29
0.12
0.00
0.00
2000
AEF Lesiolo
2.50
0.00
0.00
0.00
2.50
0.00
0.00
0.00
1998
AEF Locland
0.23
0.00
0.00
0.00
0.23
0.00
0.00
0.00
1.13
0.00
0.00
0.00
2000
AEF Magana
1.13
0.00
0.00
0.00
1997
AEF Makini
0.18
0.00
0.00
0.00
0.18
0.00
0.00
0.00
1997
AEF Redhill Flrs
0.26
0.00
0.00
0.00
0.26
0.00
0.00
0.00
1999
"SPAR
1.41
0.67
0.00
0.00
1.41
0.67
0.00
0.00
1980183198
DBK
0.00
1.31
0.00
0.00
0.00
1.31
0.00
0.00
1982
Diamond Trust
0.00
0.80
0.00
0.00
0.00
0.80
0.00
0.00
1998
GBHL
2.30
0.00
3.00
0.00
2.30
0.00
3.00
0.00
200 1
Gapco Kenya
15.00
0.00
0.00
0.00
10.00
0.00
0.00
0.00
1986
IPS(K)-Allpack
0.00
0.36
0.00
0.00
0.00
0.36
0.00
0.00
0.06
0.00
0.00
1986
IPS(K)-Frigoken
0.00
0.06
0.00
0.00
0.00
1986
IPS(K)-Prem
Food
0.00
0.1 1
0.00
0.00
0.00
0.11
0.00
0.00
1994
Intl Hotels-Ken
3.43
0.00
0.00
0.00
3.43
0.00
0.00
0.00
1996199
K-Rep Bank
0.00
1.43
0.00
0.00
0.00
1.12
0.00
0.00
2003
Kenair
15.00
0.00
0.00
0.00
8.57
0.00
0.00
0.00
1983191
LIK
0.00
0.63
0.00
0.00
0.00
0.63
0.00
0.00
2000
Mabati
5.00
4.50
0.00
5.00
0.00
4.50
0.00
197017417717918 1188189194196199
Panafrican
21.21
0.00
0.00
0.00
0.00
21.21
0.00
0.00
0.00
0.04
0.00
0.00
0.00
0.04
0.00
0.00
1972
2000
TPS (Kenya)
0.00
Tsavo Power
12.35
0.83
1.17
19.25
12.35
0.83
1.17
19.25
Total portfolio:
104.73
6.37
12.67
19.25
71.30
6.06
8.67
19.25
70
Annex 14: Country at a Glance
KENYA: MSME CompetitivenessProject
POVERTY and S O C I A L
2002
Population, mid-year (millions)
GNI per capita (Atlas method, US$)
GNI (Atlas method, US8 billions)
Kenya
SubSaharan
Africa
313
360
113
666
450
306
2,495
430
1,072
2.3
2.9
2A
2.5
19
2.3
35
46
60
22
57
16
94
95
93
33
46
x35
30
59
81
50
37
66
92
80
76
37
95
x33
07
1992
2001
2002
8.0
114
P.8
26.0
4.2
9.6
Lowincome
I e v e l o p m e n t diamond'
Life expectancy
T
Average annual growth, 1996-02
Population (%)
Labor force (%)
M o s t recent e s t i m a t e ( l a t e s t year available, 1998-02)
P overly (%of population below nationalpo vertyline)
Urban population (%of totalpopulation)
Life expectancy at birth (years)
Infant mortality(per 1000live births)
Child malnutrition (%of chlldrenunder5)
Access to an improvedwatersource (%ofpopulation)
Iiiiteracy(%ofpopulation age a+)
Gross primaryenrollment (%of school-age population)
Male
Female
GNI
per
capita
Gross
primary
enrollment
Access to improved watersource
-Kenya
Lowincome gmup
KEY ECONOMIC RATIOS and LONG-TERM T R E N D S
1982
GD P (US8 billio ns)
Gross domestic investmentiGDP
Exports of goods and serviceslGDP
Gross domestic savingsiGDP
Gross national savingslGDP
6.4
8.2
25.0
14.5
11.6
u.7
26.9
u.7
9.7
Current account balancelGDP
Interest paymentslGDP
Total debtlGDP
Total debt serviceiexports
Present value of debtiGDP
Present value of debtlexports
-4.7
1.3
a.0
14.5
-2.3
2.5
86.2
311
(average annualgrowth)
GDP
GDP oercaoita
1982-92 1992-02
STRUCTURE o f t h e E C O N O M Y
(%of GDP)
Agriculture
Industry
Manufacturing
Services
Private consumption
General government consumption
Imports of goods and services
(average annualgrowth)
Agriculture
Industry
Manufacturing
Services
Private consumption
General government consumption
Gross domestic investment
Imports of goods and services
4A
1.0
2.1
-0.4
1982
2001
11
-10
-2.6
0.7
49.5
x3.9
30.7
146.6
0.1
14.8
25.5
6 .?
Trade
T
u.l
0.5
511
9 .8
Domestic
savings
Investment
Indebtedness
2002 2002-08
16
-0.2
3.5
1.8
lSs2 2o01
2o02
33.4
19.9
0.2
46.7
26.6
18.9
11.1
54.5
19.0
18.2
0.5
62.9
19.1
8.3
a.7
62.6
67.1
8.4
28.7
70.2
16.1
26.9
79.0
16.8
34.6
811
x3.2
31.6
1982-92 1992-02
E c o n o m i c ratios.
2o01
2o02
-Kenya
-L o w i n c o m e o m u ~
G r o w t h o f i n v e s t m e n t a n d G D P (%)
lo
-5
In
-GDi
[ G r o w t h o f e x p o r t s and i m p o r t s (%)
2.7
4.3
5.1
4.9
16
1.6
16
2.9
12
0.7
0.8
13
1.0
1.4
3.5
3.6
20
5.1
3.6
1.5
5.7
2.2
6.6
4.3
5.5
-4.4
4.3
2.3
-12
0.0
-I0
71
3.8
2.9
-GDP
I
1
10
I
Kenva
PRICES and GOVERNMENT FINANCE
Domestic prices
(%change)
Consumer prices
Implicit GDP deflator
Government finance
(%of GDP, includes current grants)
Current revenue
Current budget balance
Overall surplusldeficit
TRADE
(US$ millions)
Totalexports (fob)
Fuel
Coffee
Manufactures
Total imports (cif)
Food
Fuel and energy
Capital goods
Export price index(995=X)O)
Import price index(995=00j
Terms of trade (S95=t30)
BALANCE o f PAYMENTS
(US$ millions)
Exports of goods and services
Imports of goods and services
Resource balance
1982
1992
2001
2002
11.7
27.3
17.5
3.9
113
5.0
4.9
25.1
-1.5
4.2
27.5
1.3
-3.3
22.5
15
-0.9
22.4
2.4
-0.9
1992
2001
1982
1,OU
69
t28
144
1,666
156
4t?
411
1,732
115
88
274
3,182
290
813
756
1,742
131
97
313
3,U7
300
809
803
77
76
91
84
74
MO
74
74
04
71
69
1982
1992
2001
1,000
!
2002
0
96
Net income
Net current transfers
-254
83
-355
66
-80
761
-70
576
-2
Current account balance
-305
-180
-318
Financing items (net)
Changes in net reserves
U9
167
255
-75
509
-191
256
Memo:
Reserves including gold (US$ millions)
Conversion rate (DEC, locaVUS$)
248
10.9
182
32.2
1,097
76.6
1,74
78.7
1992
2001
6,698
656
1411
5,644
24
2,263
6,207
U
2.447
299
0
60
Composition of net resource flows
Official grants
Official creditors
Private creditors
Foreign direct investment
Portfolio equity
143
-15
-06
0
0
378
155
20
6
0
252
62
-133
5
0
0
0
0
l76
92
M4
93
16
58
World Bank program
Commitments
Disbursements
Principal repayments
72
98
99
00
olmports O1
O2
I
C u r r e n t a c c o u n t b a l a n c e t o G D P (%)
0
47
26
51
97
.Exports
3,001
3,850
-848
670
159
15
I
2,000
2,966
3,939
-973
258
1
0
01
-CPI
3,000
2,149
2,152
-3
Total debt service
IBRD
IDA
00
deflator
E x p o r t a n d i m p o r t levels (US$ mill.)
1,715
2,030
-315
E X T E R N A L D E B T a n d R E S O U R C E FLOWS
1982
(US$ millions)
Total debt outstanding and disbursed
641
IBRD
0
IDA
0
9s
98
-GDP
2002
894
223
227
137
1,415
83
523
250
la
97
1
-3
-4
2002
-5
,: C o m p o s i t i o n o f 2 0 0 2 d e b t (US$
i
I
G: 863
mill.)
A: 13
1
-18
I
2
66
54
D: 526
A - IBRD
B IDA
C-IMF
-
D Other multilateral
~
E - Bilataal
F Private
~
G - Short-ten