Columnists

State’s dialogue with SMEs timely

smes

The MSMEs sector is critical to economic development. FILE PHOTO | NMG

Last week’s Small and Medium Enterprises (SME) Expo was exceptional. The government engaged with the private sector to dialogue on ways of growing the sector.

Although the promotion of the expo focused on the SMEs, the discussions largely encompassed Micro, Small and Medium Enterprises (MSMEs). The 2016 MSMEs survey shows that the bulk of these enterprises are micro (92 percent and the remaining 8 percent are small (7.1 percent) and Medium (.7 percent).

The survey notes that rarely do micro become small or small become medium enterprises.

MSMEs play a key role in the socio-economic development of Kenya. Although several policy pronouncements are meant to stimulate the growth of MSMEs, there still exist challenges including lack of: effective supply chains, finances, marketing support and inability to scale.

The latest of the challenges is the devolution of governance, which is making it impossible for MSMEs to thrive.

The survey estimated that there are close to 7.5 million MSMEs in Kenya, of which 1.5 million are licensed (formal) with the rest being unlicensed (informal).

These firms contribute 40 percent to GDP. They employ over 14.9 million Kenyans or 81.1 percent of employment opportunities in the country. Over 75 percent of these MSMEs are in the wholesale and retail trade, manufacturing, accommodation and food services sectors. Research tells us that these enterprises are constrained by size, a situation that is often referred to as “size induced market failures.”

These enterprises find it difficult to recruit well trained staff, they often can’t access technology or resources to conduct research and development, credit is sometimes unaffordable or inaccessible, finding markets is difficult and getting into export markets is impossible.

There are also other constraints that relate to government regulations that hinder SME competitiveness. A good example is the recent closure of medium manufacturing enterprises for failure to comply with the National Environment Management Authority (Nema) requirements in a similar manner as large enterprises.

The policy did not consider the balance between clean environment and creation of jobs by creating an enabling regulatory framework to achieve both objectives.

Such regulatory requirements for similar compliance of small enterprises as large ones, makes compliance cost proportionately higher for small enterprises and eventually undermines competitiveness. In other countries, the government meets the cost of infrastructure like waste water disposal, sewerage systems and solid waste disposal. It is never the role of the investor to do so unless they are big enough to absorb the cost.

More often than not, regulators and other actors undermine enterprises below a certain size from accessing support programs.

Sometimes, there are highly innovative micro enterprises especially in Kariobangi Light Industries that can scale but are always discriminated against for being too small to access some support programs such as training levy to skill up their workers.

Such counterintuitive arguments lead to the promotion of enterprises that will never scale.

In bid to assist MSMEs, President Uhuru Kenyatta announced last April that the government would create a credit guarantee scheme, which provides a guarantee on bank lending to MSMEs. This is a common form of government intervention to unlock finance for the sector. Almost one year since its announcement, not much is reported. In order for MSMEs to scale, innovation must be at the centre.

The government should not just fund skills training by providing schools and colleges but also utilise the training levy to conduct on the job training. To help MSMEs access both local and international markets will require a deliberate effort in dealing with information asymmetries through creation of networks and collaborations. Creation of specific clusters will enhance sharing of information to exploit opportunities.

The MSMEs sector is critical to economic development. It is incumbent upon the government to make deliberate efforts to deal with issues that hold back the sector. These include access to markets, financing, lack of skilled workers and poor regulatory environment.