Why Konza is high on rhetoric and short on prudence

Two days ago, the leading news item in the print and electronic media was the formal launch of the Konza Technology City by President Kibaki.

To many, it was the beginning of the quest to establish the equivalent of Silicon Valley, hence the name Africa’s Silicon Savannah.

As a statement of ambition, it is difficult to dispute the profile that the launch and the details of the project will portray. On the other hand, it is less clear that this is sound as a policy matter that involves substantial public investment and foregone taxes.

This is not about pouring cold water on the efforts of a large number of professionals and neither is it a takedown on Vision 2030. Instead, it questions whether the project, and assumptions on its benefits, are defensible based on basic principles of economics and a history of similar projects throughout the world.

First, the project is understandably grand but still calls for caution because studies suggest that odds of the public sector leading the creation of an economic cluster and new industrial city from scratch are long.

Recalling that Konza city is a mixture of industrial, financial, and technology industries gives more reason to doubt that the convergence is possible through deliberate creation.

Each of these industries is sufficiently difficult to cultivate on its own, and so the quest to pull together a cluster of finance, manufacturing, and technology is several times more difficult. In short, this is a huge bet being taken by the government together with private sector partners.

Secondly, documents on the project’s website dated April 2011, state that it will cost up to $8.5 billion to complete the four phases of the 20-year project.

Later statements have suggested that the cost could be higher, but the figure that is mentioned is what is reflected in the summary documents available for public scrutiny.

The culmination of this investment of public and private funds is the creation of 200,000 direct jobs over 20 years. Even allowing for the fact that up to three additional jobs may be created indirectly from each of these high calibre jobs, it is questionable whether this is an appropriate cost relative to alternatives that exist.

In our rudimentary calculation, the net present value of the total private and public investment is about $32,000 for each job directly created by the project.
This cost is over 20 times higher than the average annual income per year and is not a cost effective mechanism for creating employment in a country with income still below $1500 per year.

Putting together the cost of the foregone taxes and the subsidy on land makes the economic case even less attractive.

Thirdly, the project website shows that most of the public funding for the project will be confined to the creation of infrastructure with the expectation that private sector firms will construct premises for high technology business, financial services, and high value manufacturing.

Successful clusters of technology are not only few and far between but have also tended to be situated around universities and centres of higher learning.

Successful technology clusters are in Silicon Valley, Boston’s Route 1028, and India’s Bangalore City. It is noteworthy that Bangalore is an exception because it rose organically from a country with a comparatively low income.

However, India is peculiar due to the fact that it has had a long tradition of higher education, with the proportion of students registered in universities being among the highest in Asia.

These universities and technology institutes formed a sound foundation for technology corporations due to a large proportion of professionals with engineering skills. Other nations on the continent have attempted to create such tech cities with very modest results.

The lesson here is that few nations with incomes of less than $6,000 per annum have created globally competitive, successful cities in the three industries that Kenya has chosen.

It is sensible to ask whether there are advantages in location, skills, economic structure, and timing that make us certain that this massive investment would be an exception. Successful creation of technology centres hardly comes from a convergence of three competitive industries.

Under the best-case scenario, Konza city is likely to create high-end employment. It is necessary to discuss the need for labour market reforms that create jobs in hundreds of thousands.

India, which has one of the most successful high technology business clusters, has not resolved massive unemployment through technology cities.

A successful city is much more than buildings and so far, that’s what I see of the plans for Konza Technology City. While it is a grand idea, it is the portion of Vision 2030 that is most difficult to pull off.

Mr Owino is the CEO, Institute of Economic Affairs (IEA-Kenya)