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State favours big businesses even as Jua Kali wheels economy

By Otiato Guguyu and Dominic Omondi | March 26th 2019
The informal sector offers businesses an environment where they can pay low rent or no rent at all, dodging taxes and avoiding the many red tapes put around formal companies by the State.

A black Sedan making rounds in Nairobi early morning looking for parking space finds an empty lot along Muindi Mbingu Street and eases into it. For Sh200 the car will be parked on the plot guarded for a whole day.

What the motorist did not know was that just a week ago, a makeshift stall stood where his car was parked.

Together with other 24 stalls, they created a vibrant market dealing in an assortment of commodities — from sweets to cheap leather belts from China. The plot owner was happy. In a week, he made from each of the tarpaulin stalls Sh10,000 — 10 times what the ‘rich’ motorist will pay him in parking fees.

His expenses were also minimal. Besides paying annual land rates to the county, he never incurred other expenses. This lot form the engine that silently wheels the economy.

Official figures show that of the around 800,000 jobs created every year, more than 80 per cent are in the informal sector. Indeed, of the 19.3 per cent in the labour force, 13.4 per cent or 2.6 million Kenyans have a wage employment, or are assured of some payment on a daily, weekly or monthly basis for their work.

To the plot owner, Nairobi County Government killed the proverbial goose that lays the golden eggs when he ordered all such make-shift stalls that had already started sprouting in every corner of the Central Business District (CBD) be brought down.

Nairobi County’s pronouncement against the erection of temporary stalls in CBD — as well as its never-ending cat-and-mouse game between its askaris and the raucous peddlers and hawkers, is just one example of the country’s attempt to grow the economy by making it orderly.

Last week, the Kenya Dairy Board (KDB) published regulations that sought to criminalise hawking of raw milk as the Government moves to protect consumers of milk by formalising the entire value chain.

Kenyans have read mischief in the guidelines, which they fear is a scheme aimed at crippling the small dairy farmers and vendors.

“Sale of raw milk to consumers is prohibited,” reads part of the Dairy Produce Regulations 2018. If these guidelines are approved, smallholder milk producers will only sell to other big producers or co-operative societies.

“Raw milk shall only be sold in bulk through organised groups such as but not limited to cooperatives or registered companies licensed by the board.”

But formalisation in Kenya has not come easy. Although the intentions of the milk regulations are noble they have touched a sensitive sector. The informal sector is where the majority of poor Kenyans, over 80 per cent, eke a living.

XN Iraki, a lecturer at the University of Nairobi, says that formality has its costs including yearly returns. “Formality demands you disclose lots of information, which reduces your competitiveness,” says Iraki.  “It is also difficult to enforce formality from regulators perspective,” he adds.

Shopping malls and supermarkets, some of the hallmarks of formalisation in retail, have failed to pick up with Kenyans still preferring to deal directly with Dukas and mama mboga.

Kenya’s transport has in particular bucked the trend, refusing aggressive campaigns for it to adopt cashless payment system. So much is cash king in public transport that Uber was forced to retreat from its erstwhile policy of accepting only credit cards for payment when it came to Nairobi. 

The informal sector is lucrative. A quick calculation showed that while the plot owner on Muindi Mbingu Street raked in Sh240,000 from the stalls, he could only earn Sh30,000 by providing parking space to about 20 cars in a week.

For most Kenyans, the surest way to minimise costs and maximise their returns is by going informal: they can pay low rents, dodge taxes and avoid red tapes.

Unlike before, informality today is being perpetuated by technology. For example, following the capping of interest rates banks, using technology, dived headlong into shadowy banking - where they have been charging exorbitant fees and fines.

In the CBD, where Sonko is trying to bring order by mowing down temporary structures, landlords are creating their own informal economy curving out spaces into five by ten-foot rooms which are fetching more compared to leasing wide spaces to a big client such as a supermarket.

A number of buildings along Tom Mboya and Moi Avenue have been sliced up this way.

On the other end, large formal establishments are making way for small stalls. In 2017, Tuskys Supermarket surprised everyone by announcing that it would vacate the 11-year-old Beba Beba branch in Nairobi’s Central Business District.

Tusky’s had just closed Sheikh Karume branch earlier pushed out by a new landlord who was adamant they would make more money off stalls.

They wanted to renovate the building after acquiring it from the Bank of Baroda. They did this by splitting the floor space into tiny stalls.

It looks like small is big, and big is small. What is supposed to be Kenya’s large productive firms in the formal sector - those which are expected to be more competitive and create more jobs - are not creating more employment, according to a World Bank report.

In its 13th edition of Kenya Economic Update, the World Bank noted that rather than being job creators, large firms are job destructors.

 “In a well-functioning market economy, more productive firms should be more competitive. As such, they are able to gain market shares over time. However, more productive manufacturing sector firms do not create more employment in Kenya,” said the World Bank in its economic review.

The Bretton Woods institution found a negative correlation between firm size and productivity, especially in the food and textile sectors which are the major players in the manufacturing sector.

No wonder, listed companies in Kenya have been issuing profit warnings; and a good number of them have been closing shops or shipping out.

Part of the reason lies in the fact that entry into Kenya’s formal sector is limited. In the manufacturing sector, for example, only 19 per cent of the firms are young - created less than five years ago. This compares badly with 35 per cent for the US and Ethiopia. “The low entry rate of formal firms points to a lack of dynamism,” said the World Bank, the dynamism of entry and exit is even worse in the service sector.

“A majority of firms are “old,” and have been in business for more than ten years. Again, this compares unfavourably with the structure of firms in The Organisation for Economic Co-operation and Development countries.”

The lack of young firms in Kenya, said the World Bank, may be evidence of a lack of potential for job creation in the formal sector.

The mall culture has refused to catch on, with malls resorting to desperate strategies of offering free parking and tenancy.

The increase in the number of retail stores across the country, including foreign ones such as South-Africa’s, Game, and French’s Carrefour, is a response to what some have seen as heightened consumerism.

Despite increased overtures by supermarkets and other formal retail stores, ‘Mama Mboga’ still enjoys a stranglehold on Kenya’s retail market.

Global information and measurement company, Nielsen, in its report: How to Navigate the Retail Distribution Labyrinth in Africa, says the most common shopping channel in Africa is a simple tabletop, which it describes as “...a stand set up on the side of the road or in a local market to capture passing trade.”

Institute of Economic Affairs (IEA) Chief Executive Kwame Owino says the trend is an indication of the structure of the Kenya economy as more small businesses tend to crop up than larger established brands.

“I think what it is telling us that the informal sector is growing to ask for its space in the economy and it is upon the city planners and county administration to respond to that strong growth of informal sector firms,” Mr Owino said.

The IEA boss said there is nothing that says the best part of the CBD should be occupied with big stores rather the spaces are open for demand and supply driven contribution with the smaller players triumphing. “For the landlords, if those small enterprises are able to make profits for them because productivity is higher, then that is what it means.”

Mr Owino thinks that rents in the CBD might also have gone up without infrastructure improving - making big businesses in the city centre weigh their options. “So if you have an alternative in being able to place your bank branch somewhere else outside the CBD, then you can do it, on the other side the small stalls are chasing retail traffic,” he said.

The ‘Great Migration’ saw Ecobank relocated from Muindi Mbingu Street to Westlands, putting the city building under the hammer.

Jamii Bora moved to Argwings Kodhek while Coca Cola moved from Upper Hill to its regional offices on 90 James Gichuru building.

This followed the exit of the European Union delegation in Kenya which moved its Nairobi’s Upper Hill headquarters, to Dunhill Towers in Westlands.

Mr Owino said that as the big boys leave, small players are finding space to take over and fill the vacuum.

“It is basically what works for the businesses, so they are responding to the incentives and pressures of the price. So if the floors are expensive then part of the reason that you will see is that a lot new capacity in terms of floor space for offices has been going outside the CBD,” said Owino. “Many institutions constructed their office headquarters outside the CBD, so that was always going to lead to something. Maybe the market is having to respond by allowing for smaller stalls to take space.”

However, stalls are not the only informality that the City in the sun has to deal with.

Further down, the food chain is a new strain of middle class ‘entrepreneurs’ selling grocery out of their car trunks.

There has been an increase in this phenomenon where the mobile phone farmers harvest and sell anything from eggs, onions, tomatoes, cabbages, and fruits in season out of the trunk of their cars.

This may partly be pushed by lack of access to markets which are controlled by brutal cartels and as a way of avoiding the taxman’s net.

If you have an established shop, one would have to pay a business license setting yourself up for a visit by the Kenya Revenue Authority officials.

Starting the current financial year, traders with businesses that have an annual turnover of below Sh5 million will be expected to pay a new presumptive tax computed at the rate of 15 per cent of their annual permit fee.

Tough times

What is undeniable is that Kenyan’s have the propensity to create businesses even during tough times though, the Government seemingly ignores the lower end of the pyramid which has immense potential to scale up.

According to the survey by research firm Trends and Insights for Africa (Tifa), 44 per cent of Kenyans plan to set up their own businesses, part of their resolutions for 2019.

“In 2019, four out 10 Kenyans (44 per cent) intend to set up a business. This is followed by getting a new job (33 per cent) and achieving work-life balance (28 per cent),” said Tifa in the report.

The researchers did a comparison on the number of people who had resolved to venture into business last year and those that were able to actualise the plans.

It found out that though 52 per cent of the people that were surveyed towards the end of 2017 said they would set up businesses in the course of 2018, only 28 per cent had succeeded.

According to the World Bank, transformation into more formal, higher productivity jobs will require a better-trained labour force.”

“A flexible skills development system that fosters basic generic skills and provides opportunities for acquiring labour market relevant technical skills is needed, as are labour markets that reward skills above degrees, personal connections, and other distortions.”

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