Silicon Savannah: The Kenya ICT

Services Cluster
Microeconomics of Competitiveness – Spring 2016
Prof. Alfaro
Last update 4/5/2016

Clare Akamanzi
Peter Deutscher
Bernhard Guerich
Amandine Lobelle
Amandla Ooko-Ombaka

1
AGENDA FOR TODAY

I East Africa & Kenya Context

II Competitiveness Analysis

III ICT Cluster Profile


IV Key Competitiveness Issues in the ICT Cluster

V Recommendations

2 2
I SITUATED IN THE HEART OF EAST AFRICA, KENYA IS THE 9TH LARGEST
ECONOMY IN AFRICA, AND THE MOST STABLE DEMOCRACY IN THE REGION
Demographics & Geography History & Politics

• Home to over 44 million people – 60% below 24 years • Kenya’s India Ocean coast hosted traders from around
- and 42 different ethnicities. Largest ethnic groups the world since the 1st century AD including the
include the Kikuyu (21%), Luhya (14%) and the Luo Portuguese and Arabs. Today, Kenya has 536 km of
(11%). Each tribe has their own language, food and coastline and the busiest port in region serving
culture several neighboring land locked countries
• Secular republic, with the official languages of • Kenya gained independence from British in1963
English and Kiswahili • Most stable democracy in region, but issues of tribal
• 580,367 km sq land mass, 48.1% is arable. politics. Since 2010, country undergoing rapid political
• Climate is largely equatorial, and tropical savannah change to constitutionally redistribute resources by
with some arid and semi-arid areas decentralizing power from 8 provinces to 47 counties
Source: Team Analysis, Image courtesy of the BBC 3 3
I DESPITE BEING THE MOST DIVERSIFIED ECONOMY IN EAST AFRICA, KENYA’S
ECONOMY IS DOMINATED BY AGRICULTURE, WITH A SMALL BUT GROWING
SERVICES SECTOR
Kenya is the largest and most diversified …but national income and export revenue is dominated
Economy in East Africa, when we measure by agriculture. Services form a small, albeit fast growing
diversification as ratio agriculture: other… sector of the economy
60% 30.0%
Regional GDP by Sector (%), 2013 25.0% Kenya GDP by Sector (%), 2013
X Total GDP (USD B)
20.0%
50% 15.0%
10.0%
5.0%
0.0%
40%

30%

*Other svcs = Health, Education, ICT | **Other: Public, administration, electricity. Numbers do not fully match
graph on left. World Bank uses slightly differently classification of sub-sectors than the Kenya Bureau of Stats
20%

Export Revenue by Industry (%), 2013 Service Sector Growth (%), 2013
10% Health Overall economy
growth rate
Education
0% Fin Svcs
Kenya Tanzania Uganda Ethiopia Rwanda Retail
54.9 44.4 24.6 47.7 7.5 ICT
Agriculture Industry Other incl. Services
Sector Breakdown from World Bank, 2013. Nominal GDP from EA Trade Hub

Source: Team Analysis, Kenya National Bureau of Statistics Economic Survey 2014 p22-23, Atlas of Economic Complexity,
World Bank 2013 4 4
I SINCE 2000, GROWTH IS ON AN UPWARDS TRAJECTORY, BUT HAS
BEEN DRIVEN BY FACTOR ACCUMULATION; SO PER CAPITA AND
POVERTY PERFORMANCE IS WEAK
Real GDP growth driven by capital and labor GDP per capita growth is sluggish and more volatile
accumulation; peaked just before the 2007 post than peers, and national poverty rate remains at
election conflict, but is back on the rise 43.4%

Kenya GDP Growth Decomposition (%), 2000-2012 Regional GDP per capita Growth Rates (%), 2006-2014
8% 12.00%
X Kenya poverty incidence, national poverty lines (%)
10.00%
6%

8.00%

4% 6.00%

4.00%
2%
2.00%

0% 0.00%
200 200 200 200 200 201 201
2006 2007 2008 2009 2010 2011 2012 2013 2014
-2.00%
-2%
46.6 45.2 43.4
-4.00%

-4% Real GDP Labor Capital TFP Kenya Ethiopia Rwanda Tanzania Uganda

Source: Penn Tables, World Bank. (2014). World Development Indicators 5 5

I WHILE RELATIVE PRODUCTIVITY IS STRONG COMPARED TO PEERS, IT
HAS DECLINED IN ABSOLUTE TERMS SINCE THE 1980’S
Kenya’s relative labor productivity is above many …but is declining in absolute terms; this is
competitors including Vietnam and Ethiopia particularly acute for services and manufacturing
Total Economy Labor Productivity Benchmarking, Value Added per Worker
(2009) – Select Countries Value Added per Worker by Sector - Kenya only
25000 6,000.00

5,000.00
20000

4,000.00

USD - Costant 2005$

15000
3,000.00
USD ($)

10000 2,000.00

1,000.00
5000

-
0 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20

Manufacturing Agriculture Services Total

Source: World Bank 2015 (here), De Vries, Tinver and de Vries 2013; Author’s Calculations,
WDI 2013, Kenya Economic Survey – KNBS (pg 291) 6 6
AGENDA FOR TODAY

I East Africa & Kenya Context

II Competitiveness Analysis

III ICT Cluster Profile


IV Key Competitiveness Issues in the ICT Cluster

V Recommendations

7 7
II BASED ON OUR ANALYSIS INCLUDING THE GCI RANKINGS, KENYA HAS
STRONG ENDOWMENTS, BUT ROOM TO IMPROVE BOTH MACRO AND MICRO
COMPETITIVENESS
MICROECONOMIC COMPETITIVENESS Green = strong, Yellow = moderate, Red = Weak

QUALITY OF BUSINESS ENV.

Moderate: The local business COMPANY OPERATIONS &
STATE OF CLUSTER DEVELOPMENT
environment is characterized by strong SOPHISTICATION OF FIRMS
Moderate: The majority of Kenya’s
demand and factor inputs, with the 3rd Moderate: The private sector in Kenya
exports are concentrated in agriculture
highest ease of doing business rank in contributes 68% to GDP, but is
and agro-processing, with a fast growing
East Africa, and 9th in Sub-Saharan dominated by SMEs that struggle to
ICT and logistics clusters
Africa. But low competition and poor scale, in part due to expensive financing
infrastructure

MACROECONOMIC COMPETITIVENESS

MONETARY & FISCAL POLICIES HUMAN DEVELOPMENT & PUBLIC INSTITUTIONS

Strong: Macro economic fundamentals are strong, but Weak: Pockets of excellence in social infrastructure and
running a twin deficit since 2004, and concerns about rise in political institutions, but deteriorating rule of law, increases in
foreign denominated debt terrorist activity, and corruption are worrying

ENDOWMENTS: Strong: Kenya is endowed with many natural resources and a geographically strategic location, but continues to rely
heavily on agriculture – low complexity goods

Source: Team Analysis; Delgado, Mercedes, Christian Ketels, Michael E. Porter, and Scott Stern. "The Determinants of National 8 8
Competitiveness." NBER, No. 18249, July 2012.
II KENYA IS ENDOWED WITH MANY NATURAL RESOURCES AND A
ENDOWMENTS

GEOGRAPHICALLY STRATEGIC LOCATION, BUT CONTINUES TO RELY

HEAVILY ON AGRICULTURE
…but economy is heavily dependent on small-holder
+ Kenya is blessed with many natural resources…
- agriculture

• Heart of East Africa on the Indian Ocean Coast • Agriculture contributes 25% of GDP but employs 75%
• Very fertile soil with average rainfall over 1,975mm/yr of the work force; low complexity goods
in agriculture rich areas • 80% of Kenyan landholdings belong to low-
• 8th largest global geothermal producer ahead of productivity and subsistence small holder farmers
Japan, China & Germany practicing mixed farming on an average ¾ acres
• Water reserves estimated at 70 years worth • Current industrial plan (KITP) focused on agro-
• Oil fields commercially viable from 2017/18; processing and trying to add much needed value to
potential reserves equivalent to Brazil today the sector
Source: Grow Africa (2014); Image on left is from Ngamia Oil rig in Turkana, Kenya (Reuters), Image on right taken by
authors (2013); Author’s analysis 9 9
II MACROECONOMIC FUNDAMENTALS ARE STRONG, BUT RUNNING A
MONETARY & FISCAL POLICY

TWIN DEFICIT SINCE 2004, AND CONCERNS ABOUT RISE IN FOREIGN

DENOMINATED PUBLIC DEBT
Inflation has declined since peaking at 14% in 2011 as a Traditionally run CA deficit, but declined to 10% in 2014,
+ result of disciplined monetary policy - financed by volatile ST capital
20%
Kenya Capital Account Components
16% 6.0
12% 4.0

US$ Billions
2.0
8%
0.0
4% 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4
-2.099 99 99 99 00 00 00 00 00 00 00 00 00 00 01 01 01 01 01
1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2
0%
2009 2010 2011 2012 2013
Net FDI Flows Net Portfolio Flows Other Capital Flows Change in Reserves
CBK rate Inflation

+ $2.7B Eurobond yield issued in 2014 was largest in SSA - Average budget deficit of 5.2%, and debt: GDP ratio
history; yields hit record highs in 2015 ~50%. 80% of debt is foreign denominated
Levels of Debt
90.0
80.0
70.0

Percentage of GDP
60.0
50.0
40.0
30.0
20.0
10.0
0.0
2000 2002 2004 2006 2008 2010 2012 2014
Public Debt Private Debt Total

Source: Penn Tables, World Bank. (2014). World Development Indicators, KNBS (pg 90) 10 10
II POCKETS OF EXCELLENCE IN SOCIAL INFRASTRUCTURE AND
HUMAN DEVELOPMENT & PUBLIC INSTITUTIONS

POLITICAL INSTITUTIONS, BUT DETERIORATING RULE OF LAW AND

CORRUPTION WORRYING
Access to health and education top in region, but Rule of law has regressed btwn 2000-2010, with sharp
+ -

In c o m e p e r c a p ita , lo g s
outcomes have room to grow increase in terrorism (e.g., Al Shabaab)
• Highest adult literacy and education spend in East

7 8 9 10 11
Rule of Law vs. GDP per capita, 2000 and 2010
Africa region (87% and 17.7%)
• High returns to education, but quality wanting after
start of universal primary educ (2008)
• At 61.8 years, life expectancy low in global ranks KEN

6
-2 -1 0 1 2
wbgi_rle

(164), but top 20 in Africa Source : W DI

Trend 2000 Trend 2010

2010 Constitution demands one of most ambitious Corruption and informal sector practices remain a top
+ decentralizations of power in world - constraint to doing business
Percentage of firms listing factor as major obstacle (2013)
25.0
20.0
15.0
10.0
5.0
0.0
s ss e in s n r ty gs s e ty s
ur
t
ne rc nd on tio de il i re on te nc ci ce
si o la dm ati ta
r pti ra na ri ti
Co kf o so ta
b de x t ac
u or t xA ul or di ns ra r u
Ta Fi ec r
gb w ss Ta eg sp i t or o El cp
n
ed ce r r
an e & l s/ C st se
ar
ti
at Ac bo Tr im ca m es al
St uc La Cr o l iti sto Ac
c
m
d P Cu or
ne I nf
U

Source: The Economist Intelligence Unit. (2015).,Economist Intelligence Unit database; World Bank. (2014). World Development 11 11
Indicators, World Bank BES 2013
II THE LOCAL BUSINESS ENVIRONMENT IS CHARACTERIZED BY STRONG
QUALITY OF BUSINESS ENVIRONMENT

DEMAND AND FACTOR INPUTS, BUT LOW COMPETITION AND POOR

INFRASTRUCTURE
KENYA DIAMOND MODEL Context for Firm Strategy
and Rivalry
+
+ Strong intensity of local competition
Factor (Input) Conditions ~
± Moderate pay and productivity
Demand Conditions
± FDI rules problematic, but improving fast. Strong for
~
the region.
+
+ Strong natural endowments of geography, oil reserves, ~
± Somewhat problematic impact of taxes ++ Solid government procurement of advanced
soil, rainfall, water reserves & climate. - Weak IP and investor protection
- technology products
+
+ Fairly good level of financial market development, very - Very high business costs to crime
- ++ Fairly good value chain breadth
strong for the region. - Poor cooperation in labor relations
- ++ Emerging middle class with more buying power,
~
± Average Ease of doing business rank, but also among especially in the cities of Nairobi and Mombasa
top 10 improving countries. ~± Some degree of customer orientation
~
± Good quality education system, but complaints of high Related and ~± Moderate domestic market size
skilled worker shortages Supporting Industries -- Very poor buyer sophistication
~
± Poor mobile penetration, though liable to change with -- Outside of the large cities, the Kenya’s people are
strong recent investment +
+ Strong supplier quantity ranking distributed and difficult to reach (74%)
-
- Frequent irregular payments & bribes +
+ Fairly good availability of latest technologies, quite
strong for the region
-
- Poor logistical infrastructure (particularly roads,
railroads, power) +
+ Strong state of cluster development
+
+ Good industry-university R&D collaboration
~
+ Moderate supplier quality ranking Ease of Doing Business (2016): 108/189
Global Competitiveness Index (2016): 99/140
-
- Heavy dependence on imports for product inputs
E&Y Africa Investment Attractiveness (2014): 3/54

Sources: WEF (2016), Global Competitiveness Report; Growth Diagnostic: Kenya (2015), Ooko-Ombaka, A., Waardenburg, M., 12 12
Nyamumbo, M., Deutscher, P.; World Bank (2016), Ease of doing business Index; U.S. Dept of State (2014)
 STATE OF CLUSTER DEVELOPMENT
II THE MAJORITY OF KENYA’S EXPORTS ARE CONCENTRATED IN AGRICUL-
TURE & AGRO-PROCESSING WITH FAST GROWING ICT & LOGISTICS CLUSTERS
Average Change in Kenya’s Overall World
0.36 Export Share: 0.011% 9/9/20
0.34
NATIONAL
0.32
CLUSTER PORTFOLIO (2000-2014) ICT
0.30 Services
0.28
0.26 9/9/20 9/9/20
0.24
9/9/20
0.22 9/9/20
%
0.20
Share of 9/9/20 9/9/20 9/9/20
0.18 9/9/20 = $400
World million
Exports, 0.16 9/9/20 9/9/20 9/9/20
2014 0.14 9/9/20 9/9/20 9/9/20
0.12 = $100
9/9/20 9/9/20 million
9/9/20
0.10 9/9/20 9/9/20
9/9/20
0.08
9/9/20 9/9/20 Kenya’s Average
0.06 9/9/20 World Export Share: 0.046%
9/9/20 9/9/20
0.04 9/9/20
9/9/20
9/9/20 9/9/20
0.02 9/9/20
9/9/20
0.00 9/9/20
9/9/20 9/9/20
-0.02 9/9/20 9/9/20
9/9/20 9/9/20
9/9/20 9/9/20 9/9/20
-0.04
-0.12 -0.11 -0.10 -0.09 -0.08 -0.07 -0.06 -0.05 -0.04 -0.03 -0.02 -0.01 0.00 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.10 0.11 0.12 0.13 0.14 0.15 0.16 0.17

% Change in Share of World Exports, 2000 – 2014

13
II THE PRIVATE SECTOR IN KENYA CONTRIBUTES 68% TO GDP, BUT IS
SOPHISTICATION OF COMPANY OPERATIONS AND STRATEGY

DOMINATED
BY SMES THAT STRUGGLE TO SCALE
+ R&D spend and PE investor confidence - important indicators of
operational effectiveness and internationalization - are rapidly
- “The incentives for the big guys to innovate
are low given crony capitalism. Academic
growing in Kenya institutions, think tanks, SMEs are where
Gross Domestic Expenditure on Research & Experimental Development , $PPP M 2011
innovation is coming from. We need to
X % of GDP
600 better support them to grow…” – Leading
500
0.98 0.24 0.50 0.38
Macroeconomist
400
300
200 “Our venture / angel financing network is
100 very nascent but exciting for SMEs in theory.
0
Kenya Ethiopia Uganda Ghana
We’ve seen early stage financing in the US be
a major driver of scaling business” – CEO,
Gov Non-profit Business Public
Business Association
PE firms expect to invest in the following countries in the next 12 months (2015)
Other

South Sudan Investors come with a Wall Street approach –

Rwanda but most of these businesses don’t keep
Ethiopia books, let alone proper financial statements.
Uganda We need investors that can work with local
Tanzania companies with a lower level of
Kenya sophistication” – Former CEO, microfinance
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
provider

Source: Interviews, Deloitte Private Equity Confidence Survey 2015, n=117 General & Limited Partners, State of Kenya’s Private Sector (AFDB, 2011),
Africa Innovation Outlook II = NEPAD 14 14
AGENDA FOR TODAY

I East Africa & Kenya Context

II Competitiveness Analysis

III ICT Cluster Profile

IV Key Competitiveness Issues in the ICT Cluster

V Recommendations

15 15
III GLOBALLY, KENYA HAS THE POTENTIAL TO BECOME AN ICT SERVICES HUB;
PUNCHES ABOVE ITS WEIGHT IN iGDP AND HAS A GROWING REPUTATION FOR
INNOVATION
While the internet's contribution to Africa’s overall GDP is Kenya is known as the “Silicon Savannah”, a pioneer in
low, Kenya is a pack leader despite being the 8th largest the global mobile technology economy
economy on the continent
iGDP by country, 2012
0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00%
Sweden
Taiwan
Malaysia
Hungary
USA Example: Tablets using the revolutionary Kenyan BRCK
Senegal (“The Backup Generator for the Internet”)
Germany AVERAGES:
India Africa: 1.1%
France
Emerging countries: 1.9%
Kenya
Developed countries: 3.7%
Canada
China
Brazil
South Africa
Tanzania
Turkey
Russia
Nigeria
Ethiopia
iGDP has been adjusted for oil revenues in resource rich countries (e.g., Nigeria)

Source: Team Analysis, Mail & Guardian Africa, McKinsey – Lions go digital: The Internet’s transformation potential in Africa (2013)
16 16
III DOMESTICALLY, KENYA HAS BEEN EXPERIENCING AN ICT
REVOLUTION SINCE 2000, WITH ICT SECTOR GROWTH
OUTPERFORMING ALL OTHER SECTORS OF THE ECONOMY
Tri-factor technology transformation driven by
The ICT sector has outperformed all other
mobile phone, mobile money and internet
sectors of the Kenyan economy
connectivity
Annual Average Growth (%), 2000-2009

-5% 0% 5% 10% 15% 20% 25%

ICT

Hotels & Rest

Construc.

Transport

Retail/Wholesale

Manufacturing

Healthcare

Education

Financial Services

Agriculture Overall GDP growth rate = 3.7%

Source: World Bank Kenya Economic Update – ICT Revolution (2010), KNBS 17 17
III PROFILE OF KENYA’S DIGITAL INFRASTRUCTURE SPACE: KENYA
BOASTS HIGH MOBILE PENETRATION WHICH IS A CATALYST FOR
GROWTH

Metric Kenya’s Position Relevance

Fixed Line 87,000 subscriptions • Internet has contributed more than 10% of
total GDP growth over past 5 years in China,
India, Brazil
• Can be seen as a catalyst for economic
Internet penetration 57.1% of population (23.2m)1
growth

80.5% of population (32.8m) • Innovative SMS technology has revolutionized

how individuals act, how SMEs, farmers,
• Highly concentrated market informal traders operate and provided a
Mobile phone
(Safaricom 66.7%, Airtel 16.5%, source of finance for those previously
penetration
Essar 7.6%) excluded
• 2G penetration >86%, 3G • Registered mobile money accounts 1,018 per
penetration <15%, 4G 1,000 adults (Ksh 2.4trn transfers in 2014)
launched in 2014

1. 99% of internet connections are mobile

Source: McKinsey Lions Go Digital (2013), Oxford Business Group, GSMA 2015 Report 18 18
III CURRENT STATE AND SEGMENTATION OF THE KENYAN ICT SERVICES
CLUSTER

Examples Related Industries & ICT Value Creation

• Education: access to education, teacher training, learning

Business to outcomes, standardization through tablets / e-books
Business • Healthcare: facilitates remote diagnostics, telemedicine,
(B2B) automation and centralization of patient admissions, health
records and supply chains (e.g., cert of authenticity)

• Financial services: accelerator for financial inclusion1, lowers

transaction costs, non ATM based financial services Retail: cost
Business to savings, strengthened supply chains, digitized payment collection,
Consumer larger customer base from e-commerce, facilitates “last-mile”
(B2C) * logistics, easier to scale
• Agriculture: connect farmers with information (weather patterns,
pest control, crop selection) and markets to drive productivity gain

Business to Selling bandwidth (regionally)

• Government services: Improves transparency, provides access to
Gov’t
information and automates revenue collection
(B2G)

1. Share of adults using financial services increased from 41% in 2009 to 67% in 2013 due to mobile money solutions
Source: McKinsey Lions Go Digital (2013) 19 19
III
TIMELINE OF KENYA ICT CLUSTER – PAST 15 YEARS

Private sector Public sector

2009-2012: 4
1998: Kenya 2008: ICT becomes 2013: National Broadband Strategy
submarine fiber
Communications Act one of the key introduced to help transform Kenya
2004: First call center optic cables
(introduced competition into development pillars into a knowledge-based society driven
introduced implemented
cellular mobile industry / in government’s by a high capacity, nationwide
(including TEAMS
broke up Telkom monopoly) Vision 2030 plan broadband network
cable in Mombasa)

Late 1990s 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013+

2004: Over 70 internet 2007-2010: Introduction of mobile money 2008: Konza Technology City
solution providers (ISPs) Safaricom M-PESA (2007) (“Silicon Savannah”) 2014: 4G
1999: Telkom Kenya established
licensed in Kenya (Telkom Zain Kenya / Airtel Money (2009) announced as flagship Vision coverage
subsidiary, Safaricom
Kenya monopoly came to an Essar / YuMobile & YuCash (2009) 2030 project for BPO and IT rolled out
end) Telcom Kenya / Organ Money (2010) enabled services

Source: Websearch 20 20
III
KENYA’S ICT SERVICES CLUSTER MAP

Downstream Actors Principle Actors Upstream Actors

Data Centres Think Tanks

(e.g. IBM Africa Agriculture
Business to Consumer Research Lab)
Business to Business (B2B)
(B2C)
e.g. KenCall, Elimu,
e.g. M-PESA, M-Farm,
mPedigree
Internet Service Providers (ISPs) Jumia
Transportation
Consumer / Retail
(e.g. TIMS1)

Business to Government (B2G)

Physical Infrastructure (e.g. e.g. e-Citizen, Konza
telecommunications networks,
fibre optic undersea cables – Finance Security
SEACOM, TEAMS, EASSY, LION)

Government Agencies (e.g. ICT Education Healthcare

Authority, National Educational Institutions
IFCs
Communication Secretariat, (e.g. KENET, University of Regulator –
(e.g. Computer Society of
KENIA – Kenya Innovation Nairobi C4DLab, Pasha Communication Authority
Kenya, Kenya ICT Action
Agency, KICTB – Kenya ICT Centres – rural training of Kenya Related government
Network
Board, county level development programs) Tourism services
governments) (e.g. e-govt services)

Support activities & enabling environment

1. ICT-enabled Transport Integrated Management System to enhance road safety in Kenya

Sources: http://www.icta.go.ke/transport-integrated-management-systems-tims/; http://www.cskonline.org/; http://www.icta.go.ke/; Kenya National 21 21

ICT Masterplan (2014)
AGENDA FOR TODAY

I East Africa & Kenya Context

II Competitiveness Analysis

III ICT Cluster Profile

IV Key Competitiveness Issues in the ICT Cluster

V Recommendations

22 22
IV KENYA’S ICT SERVICES CLUSTER IS SUCCESSFULLY FILLING
INSTITUTIONAL VOIDS, BUT MISSING FOUR KEY DRIVERS OF
COMPETITIVENESS
KENYAN ICT SERVICES DIAMOND Context for Firm Strategy Detailed in subsequent
slides
and Rivalry
+
+ Entrepreneurial spirit – “Silicon Savannah”
+ Strong/visible political ICT support (e.g., support of
+
Factor (Input) Conditions incubators, such as iHub & @iBiz Africa) Demand Conditions
~
± Largely fractured market, with many small players
and no industry leaders except SafariCom’s M-PESA
+ Increased fibre optic cable development
+ money transfer service ++ Presence of large institutional gaps (e.g., secure P2P
+ High current broadband capacity redundancy
+ ~
± Common regulatory ICT agency, but problems persist cash transfers) which ICT services can fill
+ Decreasing connectivity costs
+ with implementation ++ Farmers are willing to pay for information (mostly
+ Regional leader in global e-infrastructure index
+
-
- Regulatory deficiencies: weak data protection, around prices) that assists with planning
±
~ Computer ownership comparatively low (23%) missing quality focus & cross-border recognition ~+ Decent firm adoption of technology
-
- TelCo market dominated by 1 firm (90% MS) ~± Kenya’s demand is mostly due to private consumption
- Difficult access to finance for SME
-
Related and
(87%), but little public expenditure, private
- Untapped potential in low frequency bands, low
- investment, and trade balance.
network bandwidth in remote areas Supporting Industries ~± Government has progressive ICT stance, but has not
-
- Severe shortage of high-skilled labor, needing to
+
+ Computer & phone unit costs (and associated taxes)
yet become consumer of ICT services itself
import at a high premium
are plummeting, increasing access ~± Business Process Outsourcing is currently small, but
-
- Tertiary ICT programs not guided by common policy,
+
+ Fast growing services sector
trade surplus positions Kenya well for growth
and disconnected from industry needs - Private consumption is currently concentrated around
~
± ICT sophistication of retail, agriculture, and finance
- broadband revenue and smartphone sales, not on
sector is low, but growing
dedicated ICT services
~
± Few privately organized IFCs for ICT services
-
- Limited collaboration on ICT services and R&D
-
- Limited specialised ICT training for industry
Source: McKinsey Global Institute (2013) Lions go digital: the Internet’s transformative potential in Africa; Evidence for ICT Policy Action 23 23
2012 – Policy Paper; ICT Masterplan 2014
IV KEY COMPETITIVE ADVANTAGES IN CONNECTIVITY, A CULTURE
OF ENTREPRENEURSHIP, AND GAPS THAT TECHNOLOGY CAN FILL
Diamond Corner + Key Competitive Advantages Implications
1 Increasing connectivity… …opening up large domestic market with new needs
• Kenya’s gov’t has ‘one laptop per child’ policy • Within a few years, Nairobi has developed a voracious
• Internet penetration has surged from 14% (2010) appetite for all things tech
Factor input to 43% (2014) • As connectivity increases, more Kenyans in hard-to-reach
conditions • 95% of urban Kenyans have internet enabled places can be tapped
phones, and 31% have smartphones • Benefits from increased connectivity are being emulated
• Government is rolling out fiber-optic cable in East Africa, expanding market reach
• 2008 regulatory changes have slashed prices

2 Entrepreneurial Spirit… …can drive demand for further investment of capital,

• Known as the “Silicon Savannah” talent, and coordination
Context for firm • Companies are generally quite willing to adopt • Kenya is hope to several non-government backed
strategy & rivalry new technologies into their practice incubator programmes
• Visible government support on infrastructure, • Agglomeration gains from talent coming into Nairobi,
support of incubators, and policy reform esp. in new Technology City under dev.

3 Customers show willingness to pay for services that …creates opportunities for local Kenyans to claim that
fill institutional voids…. external ICT hubs are unlikely to fill
• Kenyans rapidly adopted technology (M-PESA, M- • Plenty of ‘low-hanging fruit’ for Kenyan entrepreneurs to
Demand
Conditions Farm) which overcome significant con-straints (e.g. fill that can make a real impact
secure cash transfer, price info) • The growth of Kenya’s nascent services sector can be
• Kenya has many institutional problems (e.g. accelerated through adoption of ICT services
security & property rights) that tech can fill

Source: Team Analysis 24 24

IV KEY COMPETITIVE ISSUES (1/2): SHORTAGES OF HIGH-SKILL TALENT
AND LIMITED ACCESS TO FINANCE FOR SME SLOW DOWN CLUSTER
GROWTH
Diamond Corner - Key Competitiveness Issues Implications
1 Difficulty to Access High-skill Talent… …drives up labor costs and slows down growth
• Low high-end research funding • Lack of hands-on experience
• Outdated lab equipment, lack of experienced • Companies forced to import highly-skilled professionals
teaching faculty form other countries at high cost
• Lack of PhD holders and advanced degree • Post-graduate ICT professional training by ICT industry
candidates in ICT related programs takes a long time
• Firms’ on-the-job training underdeveloped and not • Skillsets highly dependent on quality of company training
commonly structured programs
• Missing public-private cooperation due to
“The Kenyan ICT industry view of fresh ICT graduates is that
absence of a guiding policy framework
of low quality (…) in terms of technical content(…)
Factor input communications, analytical and critical thinking skills”
conditions
2 Limited Access to Finance for SMEs… …inhibits scaling up of services
• Risk of SME’s in the ICT sector considered high • SME’s funds unpredictable and with little scope for risk
due to small scale of the sector sharing because of regional focus
• Limited access to deposits, credit facilities and • Existing (micro-)finance facilities insufficient to follow
other financial services by formal financial services expansion
institutions; high collateral requirements • Main sources of capital (retained earnings, informal
• Larger companies shy away from providing VC due savings) provide little cushioning during expansion
to high risk perception
• Micro-credit institutions focused on agriculture, “SME in Kenya have difficulties in growth due to lack of
lack ICT specific expertise and resources finance. They hardly grow beyond startup stage”
Source: Access to Finance in Kenya – Report; World Bank Group (2013): Enterprise Surveys: Kenya; Evidence for ICT Policy Action
2012 – Policy Paper; ICT Masterplan 2014; International Journal of Business and Social Science (2012): Venture Capital (VC): Its 25 25
impact on Growth of SME in Kenya
IV KEY COMPETITIVE ISSUES (2/2): REGULATORY FRAMEWORK AND R&D
COORDINATION AMONG THE STRONGEST CLUSTER CONSTRAINTS
Diamond Corner Key Competitiveness Issues Implications
3 Regulatory Deficiencies…. ...inhibit service development nd FDI
• Spread out regulation between states • Lengthy procurement and licensing processes, higher
• Weak data protection regulations than necessary transaction costs
• Absence of cross-border recognition and • Software privacy and other cyber crimes are not
Context for firm enforcement broadly enforced, deter investment
strategy & rivalry • Parts of the regulatory framework are unaligned • Anti-competitive practices are rated ineffective
with international standards • Access to markets across boarders is difficult
• Quality of Service (QoS) is largely unregulated • Lack of industry awareness and missing incentives for for
• Frequent interference through government and focus on improved service quality
high influence of large industry players
“Dominant players (…) have undue regulatory influence”

4 University-Firm Coordination failures… …result in insufficient R&D activity

• Weak linkages between gov’t agencies (KENET, • High cost for private firms to conduct basic research
Commission of Higher Education, Kenya • High mutual barriers to access to public and private
Innovation Agency), local universities, and large research facilities
Related & companies • Weak transmission of university research into market
Supporting • Lack of coordination between university research relevant developments (commercialization)
Industries and ICT sector due to absence of clear coordinating • Barriers for SME to access intl. knowledge base
institution
• Private firms without industry association
• Insufficient level of geographical clustering “There are opportunities to increase (…) collaboration
around campuses between universities and industry”

Source: McKinsey Global Institute (2013) Lions go digital: the Internet’s transformative potential in Africa; Evidence for ICT Policy Action 26 26
2012 – Policy Paper; ICT Masterplan 2014
IV WITHIN EAC, KENYA FACES COMPETITION FROM RWANDA, WHICH
HAS A STRONG GOVERNMENT-LED STRATEGY TO DEVELOP THE ICT
SECTOR

Strong Macro Indicators

• High growth at 7%
• Easiest place to do business in EAC
• Least corrupt country in EAC.
• Tax incentives: 50% reduction for ICT ICT Plan and Policies
Infrastructure
• Vision 2020: ICT is priority
ICT Regional Hub Positioning • 3rd ICT 5 year national plan
• Built national fiber backbone • ICT is 3% of GDP
• National data center • Highest E-gov services
• 4G access network
• IT laptop assembly
• IT security Skills (Human Capital) • Wholesale international bandwidth cut
cost from $700 to 1$25
• Carnegie Mellon University, Africa
campus
• Vocational IT training
• Kigali University of science and
technology

Source: World Bank Kenya Economic Update – ICT Revolution (2010) 27 27

IV
BEYOND EAC: IS KENYA COMPETITIVE RELATIVE TO AFRICAN PEERS?

South Africa Mauritius

• Best developed ICT technology • Strong ICT vision and Government focus
• Far ahead in infrastructure and • BPO exports, bilingual country
Innovation • Strong ICT infrastructure
• Widespread ICT use culture

Nigeria
Egypt

• UN ICT pioneer. • Rapidly growing ICT sector

• Outsourcing and offshoring • Large market for business scale up
• Smart societies and technology parks • Nigerians business savvy
• 50,000 jobs • MTN Nigeria most profitable
• 3,000 Govt entities automated

Source: World Bank Kenya Economic Update – ICT Revolution (2010) 28 28

AGENDA FOR TODAY

I East Africa & Kenya Context

II Competitiveness Analysis

III ICT Cluster Profile

IV Key Competitiveness Issues in the ICT Cluster

V Recommendations

29 29
V KENYA SHOULD RE-POSITION AS REGIONAL ICT SERVICES HUB, USING
MOBILE TECH INNOVATIONS TO ‘LEAPFROG’ CONVENTIONAL
PATHWAYS FOR ALL CUSTOMERS
…to mobile tech inspired services that leapfrog traditional
From Kenyan based pockets of excellence derived from ICT pathways, and use Kenya’s competitive advantage in
mobile technology innovations (i.e. M-everything)… value chain breadth to build regional footprint for all
customers

• …collaboration between private and public sectors for

• …innovative ideas that struggle to convert to businesses
early stage ventures that show promise
(e.g., bike taxi kinetic energy to charge phones)
• …strong focus on local ICT talent pipeline; both in
• …nimble but fragmented SME B2C firms that struggle to
management and engineering
scale and diversify
• …regionally streamlined regulation and locally housed
• …lack of competition and complex regulations that
infrastructure for B2B and B2G services (e.g., local data
constrain growth of B2B and B2G providers
centers, partnerships with Rwanda)
Source: Team Analysis. Photos – McKinsey – Lions go Digital (2013), Websearch
30 30
 WORK IN PROGRESS – WE CONTINUE TO REFINE THESE WITH INTERVIEWS
V
OVERVIEW OF PRIORITY ICT CLUSTER RECOMMENDATIONS
Level of action and accountability
National Cluster
See subsequent pages for more detail; alpha-numeric number is not sequential for this reason

Current state [Primary actor] Recommendation Implemtn. Seq

A• [Gov] Partner with locally based MNCs (e.g., Microsoft, Intel) to: i) source diaspora talent from global offices, ii) • 1
provide structured on job training for local firm employees as well as broader industry (e.g., ICT extension
services), iii) Increase scholarships for PhD and advanced ICT degrees exchanges; iv) co-invest in research
Factor input
facilities that require scale (e.g., local data centers)
conditions
C• [IFCs] Use networks and resources of bigger firms to facilitate introduction of smaller firms to venture capital • 2
sources in regional and abroad (e.g., VC/PE roadshows to Kenya)

Demand E• [Gov] Create Regulation Taskforce to use National Broadband Strategy as anchor to streamline and • 3
remove competing regulation in sector, and clarify roles of overlapping policy and regulator institutions
conditions

G• Change competitive frame for Kenya’s ICT sector from East African Community to broader Sub-Saharan Africa • 6
Context for firm
to include Mauritius and South Africa (e.g., set ICT sector targets relative to these economies)
strategy & rivalry

I• [Gov] Lay ground work to create “East Africa ICT cluster” with Kenya at the center; rather than waiting to build
• 7
capabilities within Kenya, leverage government support and research facilities from Rwanda (e.g, Carnegie
State of Cluster Mellon Research Facility), capital market sophistication from Mauritius to attract investment to the region as a
Development & whole
Related Industries
J• [IFCs] Increase linkages between universities and firms through IFC led events to bridge gaps in • 5
company spending on R&D (e.g., hackathons as above, talent pipelines)
Company Ops & L• [IFCs, Gov] Work with start-up accelerators like Endeavor, 88Mph, Savannah Fund, NailLab to codify and distribute • 4
Strategy the ‘how-to’ business knowledge from resident entrepreneurs
Source: Team Analysis; Delgado, Mercedes, Christian Ketels, Michael E. Porter, and Scott Stern. "Determinants of National
Competitiveness." NBER Working Paper Series, No. 18249, July 2012. 31 31
V DETAILED CLUSTER RECOMMENDATIONS: MICRO-COMPETITIVENESS,
WORK IN PROGRESS – WE CONTINUE TO REFINE THESE WITH INTERVIEWS
Level of action and accountability
National Cluster

QUALITY OF THE BUSINESS ENVIRONMENT (1/3) Bold blue = priority recommendation

Current state Key competitiveness issue Recommendations for government Seq

• Lack of top technical and A• Partner with locally based MNCs (e.g., Microsoft, Intel) to: • 1
managerial talent, high cost to ‒ source diaspora talent from global offices
import foreign talent ‒ Provide structured on job training, for local firm employees as well
as broader industry (e.g., ICT extension services
‒ Increase scholarships for PhD and advanced ICT degree exchanges
(e.g., short-term loan of foreign lecturers)
‒ Co-invest in research facilities that require scale that no single
MNC can invest in solo (e.g., local data centers)
B• Provide local universities and tertiary college ICT programs with “Common • 10
Factor input Development Policy” aligned with aspirations of cluster, particularly for
conditions technical scientists and engineers
• Access to finance good for large C• IFCs to use networks and resources of bigger firms and government to • 2
companies, but SMEs struggle facilitate intros of smaller firms to venture capital sources in regional
to get seed funds and abroad (e.g., VC/PE roadshows to Kenya)

• Harder to start a business and D• Dedicate specific ICT Services resource (e.g., add workstream) to the • 11
resolve insolvency when existing Business Environment Delivery Unit team at Ministry of
compared to top African ICT Investment and Trade (MOIIT) that is targeting Top 50 rank in WB Ease of
countries (e.g., Mauritius) Doing Business. Will identify specific recommendations that affect ICT
disproportionately (e.g., IP Protection, dominance of large business
groups)
Source: Team Analysis; Delgado, Mercedes, Christian Ketels, Michael E. Porter, and Scott Stern. "Determinants of National
Competitiveness." NBER Working Paper Series, No. 18249, July 2012. 32 32
V DETAILED CLUSTER RECOMMENDATIONS: MICRO-COMPETITIVENESS,
WORK IN PROGRESS – WE CONTINUE TO REFINE THESE WITH INTERVIEWS
Level of action and accountability
National Cluster

QUALITY OF BUSINESS ENVIRONMENT & STATE OF CLUSTER (2/3)

Bold blue = priority recommendation

Current state Key competitiveness issue Recommendations for government Seq

• Overlaps and conflicting •E Create Regulation Taskforce to use National Broadband Strategy as • 3
regulations (e.g., terrestrial to anchor to:
digital migration) and gaps in ‒ streamline and remove competing regulation in sector
Demand key areas (e.g., data protect.) ‒ clarify roles of overlapping policy and regulator institutions
conditions •F Extend existing national “Buy Kenyan, build Kenya” campaign to ICT • 15
• Buyer bias towards importing
services sector to reduce the perception tax of made-in-Africa technology
complex tech services
products
• Kenya leader in East African •G Change competitive frame for Kenya’s ICT sector from East African • 6
Community (EAC) but region as Community to broader Sub-Saharan Africa to include Mauritius and
a whole is low-performing with South Africa (e.g., set ICT sector targets relative to these economies)
Context for firm
strategy & rivalry low levels of local competition in
ICT •H Use taskforce outlined above to align data & IP protection policy with • 9
international best practices
• Global ICT clusters are rapidly •I Lay ground work to create “East Africa ICT cluster” with Kenya at the • 7
developing, accelerated by pace center; rather than waiting to build capabilities within Kenya, leverage
Related & of technology development government support and research facilities from Rwanda (e.g, Carnegie
supporting Mellon Research Facility), capital market sophisti-cation from Mauritius to
industries AND attract investment to the region as a whole
State of Cluster •J [IFCs] Increase linkages between universities and firms through • 5
Development IFC led events to bridge gaps in company spending on R&D (e.g.,
hackathons as above, talent pipelines)
Source: Team Analysis; Delgado, Mercedes, Christian Ketels, Michael E. Porter, and Scott Stern. "Determinants of National
Competitiveness." NBER Working Paper Series, No. 18249, July 2012. 33 33
 WORK IN PROGRESS – WE CONTINUE TO REFINE THESE WITH INTERVIEWS
V DETAILED RECOMMENDATIONS: MICRO-COMPETITIVENESS,
Level of action and accountability

COMPANY OPERATIONS & FIRM SOPHISTICATION (3/3) National Cluster

Bold blue = priority recommendation

Current state Key competitiveness issue [Primary actor] Recommendation Seq

• Flat industry value proposition K• [IFCs, Gov] Encourage industry to move from over-reliance on • 12
(i.e. mobile technology, high B2C mobile and digital payments infrastructure (e.g., Government to
focus); and lack of business host hackathons for B2G services like eGov, IFCs to host hackathons
knowledge to convert for B2B innovations)
innovations into SMEs
L• [IFCs, Gov] Work with start-up accelerators like Endeavor, 88Mph, • 4
Savannah Fund, NailLab to codify and distribute the ‘how-to’
business knowledge from resident entrepreneurs

• Highly fragmented industry, L• [IFCs, Individual Firms] Seek profitable opportunities to merge and • 13
Company difficult for companies to gain reduce fragmentation
Operations & increase operational
Strategy effectiveness (e.g., company
Sophistication spend on R&D)

• High volatility in several metrics •

N [Individual firms] Invest in building local data storage capabilities • 8
in “internationaliz-ation of that leverage Kenya’s strong fibre optics network, and reduce
firms” including control of reliance on foreign infrastructure that limits local company access;
international distribution, and government to offer incentives for this investment (e.g., tax breaks)
breadth of international
markets
•
O [Individual Firms] Invest in lower-frequency infrastructure, currently • 14
underserved
Source: Team Analysis; Delgado, Mercedes, Christian Ketels, Michael E. Porter, and Scott Stern. "Determinants of National
Competitiveness." NBER Working Paper Series, No. 18249, July 2012. 34 34