Potholes in the Private Sector

Published on 28th March 2006

The African Executive was privileged to talk to former Minister of Planning and Development in Kenya, Prof. Peter Anyang Nyong’o and Caroline Kariuki of the Kenya Private Sector Alliance. The conversation spanned a number of issues ranging from poverty to the role of the private sector in development.

Q. What is your view on “poverty”?

Carole: The definition of poverty varies from one individual to another and the existing environment. In the general sense however, it is more than the absence of cash but rather the lack of real choice in life’s options. A poor person has no means to meet his basics of life hence being denied the opportunity to contribute to the well being of society. Kenya, for example, is one of the poorest countries in the world whose population of the poor has risen from 4 million (1972-73) to 15 million currently. The coast and Western parts of the country bear the most brunt.

Q. What are the causes of poverty?

Carole: Poverty is mostly attributed to the huge imbalance in power relations between the elite and the majority poor. The rich, through corruption, may buy their way out while the political elite plunder the wealth of a country. Little equity in ownership and control of productive resources such as denial of property rights for the women and children may lead to poverty. Other triggers include discrimination of the marginalized groups such as pastoralists and HIV/AIDs victims;  and poor international prices for goods.

Anyang Nyong’o: Good institutions of governance are a fundamental pillar in investment. Weak institutions are the breeding grounds for corruption, which is costly not only to business, but also to the government.

Q. Do external policies have any bearing on African poverty?

Carole: Yes. Macro economic policies such as western models prescribed by development partners and the cost of repaying debt all breed poverty. The debt budget for instance takes 40% of the National budget and CDF about 2.5%.

Q. What in your view are the constraints to business?

Carole: High costs of doing business on electricity, telecommunications, fuel, taxes, inputs and infrastructure.

Anyang Nyong’o: Security is very crucial in creating an enabling environment for private sector-led growth and development. Research findings in Kenya indicate that indeed insecurity has been associated with deteriorating performance in leading sectors such as tourism. Kenyan firms spend an average of 4 percent of their operating income on security, a figure that is fairly high and therefore erodes the profit margins of businesses. In addition, most Kenyan businesses are forced to operate for fewer hours. These factors limit the ability to create wealth and employment. The situation may not be any better in our sister states within the East African Community.

Carole: Another constraint to business is cumbersome license procedures. Kenya has about 1335 licenses currently under review. In addition, subsidies and tariffs by rich countries make African goods uncompetitive.

Q. What should be done?

Carole: There should be capacity building and training of the Private Sector to effectively negotiate with the government.

Anyang Nyong’o: I think the biggest challenge of the Kenyan private sector is to respond to opportunities offered by government. There is lack of capacity of the existing private sector to invest in large projects like roads as well as lack of risk mitigation strategies. There is an underlying weak private sector advocacy or distortions in such advocacy. Apart from being a little fragmented, the private sector may have little in common thus denying them a common voice. Success of this advocacy needs to spring from strong within-private partnerships. The emergence of the Kenya Private Sector Alliance is important in this respect. A unified voice among different interest groups is useful not only in engaging government but also in providing a self-regulating mechanism. The partnership could also foster more useful involvement of the private sector in policy formulation process and in writing laws and regulations.

Carole: MSEs should be integrated into the mainstream economy. MSEs employ about 70% of the population and contribute to about 17% of the GDP. They offer opportunities for skilled entrepreneurs and foster forward and backward linkages with other economic sectors. Despite their crucial role however, they face challenges like inadequate resources, technology lag, high infrastructure costs and unconducive institutional environment.

Anyang Nyong’o: For the private sector to play its role in wealth creation, the costs of doing business must be reduced for firms to be competitive. For the last two decades, the business community in Kenya has faced hostile environments characterized by high cost of capital (interest rates) occasioned by high domestic borrowing. This made it very difficult for the private sector, including micro and small enterprises to access credit.

Q. Can you cite any success story of the private – public sector partnerships? 

Anyang Nyong’o:  There are some outstanding examples of private-public sector partnership in Kenya today, which are worth emulating. The Kenya Airways is a classic example of a success in provision of a service. Here the government sold some of its stake in the company to the private sector as part of its privatization programme. In such a company the government’s role is quite important in that it is able to bail out such a strategic company in times of emergency like the one occasioned by the September 11 terrorist attacks in the United States. The private sector management of the enterprise on its part eliminates government bureaucracy, which can lead to inefficiencies in operations.

Q. Any other? 

Anyang Nyong’o:  Other private-public investments that followed liberalization of the Kenyan economy and legislative and regulatory amendments include those in the mobile telephone providers, investments in telecommunications and in the energy sectors, where the government is either in partnership or is in close supervision of the provision of such services. In the roads sector in particular, there are plans for concessioning of some parts of the road network. A good example is the planned Mombasa-Malaba highway, which is earmarked for conversion into a dual-carriage-way.

Q. Is there room for private – public partnerships in other sectors?

Anyang Nyong’o:  Private-public partnerships can be explored in other sectors, such as water provision, railway transport, marine transport and security among others. The private sector should explore opportunities for profit making in agriculture, trade, manufacturing, and in the social sectors. Public-private partnerships in education provision and in health could also be explored without jeopardizing quality and access to these services. For example, Kenyatta National Hospital is a case where the government also provides a private doctors’ section to encourage public-private sector partnership. (But such partnerships can only perform well if both partners are committed to an honest delivery of services and maximization of efficiency for decently making profits).

Q. What would be your final remarks on the private sector in East Africa? 

Anyang Nyong’o: The goals of economic growth and employment creation cannot be achieved without the full participation of the private sector. Thus, the private sector is the engine of growth, wealth creation, employment generation and poverty reduction. The level of interaction between the private sector and the public sector also determines the strides, which our countries can make, not only in improving economic governance but also in nurturing democratic ideals.

The issues of concern in my opinion are for example: can the private sector engage the government in a clean and mutually beneficial business? Does the private sector also have the capacity to check its members who may not know fair play? Further, will the private sector muster the courage to invest in low return projects like roads or railways, without soiling itself in graft?

Interaction within the private sector should also be guided by principles of self-help, self-responsibility, equity and solidarity. For example, though the private sector complains about high domestic borrowing pushing up the interest rates, some sections of the private sector do not pay up taxes, which would seal the fiscal deficits thereby having positive effect on the interest rates. The private sector should establish corporate values that can make it lead in good governance at all levels.

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