Friday, 27 April 2018

How Creative destruction drove Kenya’s economic growth

How the Mobile Phone evolved
 Simply defined, creative destruction is innovation.  Innovation is introducing new and efficient technologies of production and also paradigm shifts in management thinking.  It is called creative destruction because innovation essentially causes adaptations that kill the old technologies or management styles.  Some products are consigned to the graveyard while new ones take their place.

 Kenya’s has experienced 20 years of creative destruction which has resulted in a rapid economic expansion.  The innovation was multipronged including technological advances, Paradigm shifts, Kenyans’ enterprise, and a shift in government policy focus.  The result; Kenya is the financial, ICT and transport hub of the eastern Africa region.

 Liberalization of the Kenyan economy in the 1980s and 1990s spawned a generation of aggressive entrepreneurs who brought to prominence the “Kadogo economy.” This is a paradigm shift in management thinking that embraced the low-income Kenyans as part of the market for their products.  
In a bid to break into a market that was firmly in the hands of branches of Multi-National Corporations, the Kadogos targeted the low-income groups with low priced, quality goods.  They produced the lowest quantity of their products aimed at the low-income consumer.

Even MNCS had to adopt 
Kadogo Economy
 Soon there were, in the market, low priced washing detergents and similar products and cheap but safe alcoholic drinks. Others followed suit and now we have 1.6 grams instant Coffee Sachets, 50 gram blue Band Sachets, 50-gram cooking fat packets and the like. Bottled then water was an imported novelty, available only in five- star hotels. The only natural fruit Juice we knew then, was South Africa’s CERES brand. Today local brands dominate the shelves and are available in 100 ML packages.  All are available at the local kiosks and are affordable.  
Woe to any Manufacturer or service provider who still looks at the low-income Kenyan as outside their market bracket. Fortunately, many local manufacturers and service providers have embraced this line of thinking and are smiling all the way to the bank.
This targeting of the low-income groups has enabled the local manufacturers and service providers to stand their ground against the onslaught by large Multinational corporations on the local market. In fact, local operators are even expanding where MNCs are shrinking or even abandoning the market altogether.
 This paradigm shift has catapulted Equity Bank into the largest bank in Africa in terms of accounts controlled. It is the thinking that catapulted Safaricom into the behemoth it is today.  Thanks to Kadogo Economy banking services are now available on the street corners and Keroche can compete with Kenya Breweries.

Versatility and adaptability is an innovation. Asked how they managed to grab a share of their Fast Moving Consumer Goods market in just about 10 years, the then BIDCO CEO, Vimal Shah, told this writer that the local firms made their decisions on their feet while the MNCs had to hold board meetings to decide.
The opening of the telecommunications market and the entry of the mobile telephony is the best thing that happened to this country.
SmartPhones: Powerful tools
Coupled with the entry of undersea fibre optic cables which raised internet speeds and lowered the cost of connectivity, it unleashed creativity among Kenyans, spawning new products that put Kenya on the World Map. The first off the blocks was MPESA, which enabled person to person money transfers. Soon traveling up-country to take money to relatives was so yesterday. One could transfer money relatives in a matter of seconds.
 Apart from ease of access-no application forms, no survey. Just walk into a kiosk, buy a handset and PIN card and initially, within a few hours you were connected- a proud phone owner. No frills. No bribes! And what’s more, they came in cheap.
The Mobile phone has mutated from just voice calls and SMS to internet connectivity that enables many more functions.  
 Then Banks followed; you could open a bank account from the streets, in a short while banking became a street affair as banks opened agencies in Kiosks. Those fancy banking halls were yesterday-ish. I visited my branch last a year ago to renew my visa card. Since then, I do my regular banking activities at a Kiosk in my neigbourhood or on my phone.  I guess long queues in banks at the end of the month are now history.
Equity Bank led in innovation in this sector. Apart from leading in hawking accounts on the streets, the bank, which mutated from an NBFI, in 2005 also led in setting up agencies among M-PESA agents perform withdrawals and receive cash deposits. This enabled Equity Bank to elbow Barclays and Standard Chartered out of the top perch. This was an innovation which brought many poorer sections of the population into the financial system.  Equity also led in the innovation setting up agencies along the Streets among M-Pesa agents to carry out banking services.
Do you have this at home?
 M-Pesa itself, developed by Safaricom, revolutionized money transfer and banking services.  MPESA, a first in the world, enabled Kenyans to transfer money among individuals, then save money, then it enabled person to business transactions, then Business to business.  We can also transfer money from our bank accounts to our Mobile Phones. And it is still developing.

More people can now save money on their Mobile phones which has increased the number of people with access to banking services. According to the communications authority, More than 90 percent of Kenyans are now banked, thanks to M- Pesa. The Authority reported that a total of Shs.1.659 trillion was transacted through M-PESA in the three months to September 2017. Of these Business transactions took Kshs 714 billion.

A KPT&C Phone booth. 
This is a Museum piece
 Do you remember when you last used a fixed line phone handset? It must have been decades ago in my case. How about those days of good old landline and telephone booths?  We could spend hours queuing in a telephone booth waiting for our turn to make a call.
 A telephone line on your desk in those days announced to all and sundry who was senior. Not anymore! These have been replaced by the all ubiquitous mobile telephone.  And that archaic fixed phone is no longer relevant in our lives.
Today, according to the Communications Commission of Kenya, mobile telephony has a 90 percent penetration rate while fixed lines reach only 0.16 percent of the population.

 These changes have seen Kenya’s GDP rise six-fold from US$12 billion in 1998 to US$75 billion at the end of 2017. Per capita income has risen from U$$400 in 1998 to $1,512 at the end of 2017.  This level of growth means that the Supply curve, economists say, was constantly shifting outwards, meaning that the basket of goods and services available to Kenyans was constantly growing larger as more goods were introduced.
The birth of M-Pesa has spawned the growth of financial techies that are offering small loans to customers through the Mobile phone. Kenyans now borrow small money from creditors through their mobile phones. And going by the number of lenders using this technology to lend, the banking industry is facing a major competition. Equity grew to where it is by targeting the unbankable- small savers and borrowers.
Old Thika Road:Era of 
Traffic Jams dissipating
In addition to Technological and Management paradigm shifts, is also the massive investment in business-enabling infrastructure. This also involves a paradigm shift from investing in political infrastructure to investing in production supporting infrastructure.

Infrastructure- roads, seaports, airports, and railway has assumed new importance in government thinking. Billions of shillings have been sunk into infrastructure developing improving efficiencies in product distribution and raw material imports.   There are more paved roads, more power generating capacity, larger airports, deeper seaports fast railway line. All these have helped improve the lives of Kenyans.

Monday, 9 April 2018

Kenya gearing for economic take-off


Dogo Kundu By-pass
Dogo Kundu by-pass phase 2&3, Lamu-Isiolo Highway, Second Runway at JKIA, the phase 2 Standard\gauge Railway, Thwake Dam…all gearing for construction this year and the next. At this rate, Kenya will soon look like a big Construction site. 
 Kenya is gearing for economic take-off “into a newly industrializing middle-income country providing quality life to all its citizens by 2030” says the long-term development strategy, Vision 2030.

 The construction of a string of mega-projects in key sectors of the economy worth billions of US dollars across the country will soon begin. Some are on-going and are nearing completion. Some are Greenfield, others are extensions of existing infrastructure. And some compliment already completed projects, improving their operational efficiency.  The projects are well distributed among such key sectors as transport, energy, ICT, and water. All have one thing in common, they are transformative in nature.
 Transformative infrastructure serves more than just its immediate functions.  They spark off productivity in existing sectors or enable new ones to come on board, shifting the production curve outwards.
For instance, the Second runway at Jomo Kenyatta International airport, will not only increase parking space, and increase the frequency of landings and take-offs from 25 to 45 aircrafts an hour, it will enable exporting sectors to reach a wider market.
Newly paved roads will not only cut the cost of travel and increase speed, they also open up new markets for both local produce and imports, lower, distribution costs and increase the speed of distribution of local products thus lowering consumer prices. They also cut down health costs and improve the balance of payments.
The US$ 620 million Lamu- Isiolo highway, for example, whose construction begins in the second half of this year, will traverse 10 towns in four counties. It is the first indication that Kenya is determined to implement LAPSSET, the US$23 billion project opening Northern Kenya which forms two-thirds of the country’s land mass, for exploitation to contribute to the nation’s wealth creation. Read http://eaers.blogspot.co.ke/2012/07/lapsset-biggest-business-venture-in.html
Both Isiolo and Lamu are also planning to develop resort cities as part of the Lapsset development but they, together with Turkana, are expected to grow into major energy cities. Several energy sources, including Oil and wind power, have been discovered in this region.  Read http://eaers.blogspot.co.ke/2012/04/awaiting-birth-energy-cities-in-kenyas.html
Also in the transport sector, the construction of the second phase of the Standard Gauge Railway from Nairobi- to Naivasha will be completed in September 2019, three months ahead of schedule. This follows the completion of Mombasa –Nairobi section which was completed 18 months ahead of schedule. A Special Economic Zone is also expected to be up and running by the same time in Naivasha.
The completion and lengthening of the SGR, coupled with the completion of investment in the ICD in Nairobi compliments the expansion and deepening of the Mombasa port that is nearing completion.  For more read: http://eaers.blogspot.co.ke/2013/07/kenya-ports-post-panamax-project-ahead.html
 The tender for the construction of the $350 million second runway at the Jomo Kenyatta International airport has been advertised. The runway will increase the movement of aircraft from 25 to 45 per hour and accommodate wide-bodied aircraft.  It will “enable direct intercontinental flights to North America and Australia. This is expected to increase access for Kenyan floricultural produce to new markets,” says the Africa Development Bank.
Ol Karia Geothermal station
 The construction of the runway will support the creation of an estimated 1.5 million jobs across the sectors and expansion of the economy by an additional $22.7 billion a year, the bank concludes. This is 30 percent of the current GDP estimated at US$75 billion.
Investment in green and renewable sources of energy generation increase power supply and lower costs of power. They also increase productivity in the economy as more manual activities are electrified. Among the sources is wind power, the largest of which is Lake Turkana wind project.
The Project is complete and awaiting the completion of Loiyangalan– Suswa 440KV power transmission in August to evacuate power from Lake Turkana Wind power farm. The 330 Mw facility, arguably the largest in Africa, will raise electricity supply by 20 percent of the current generating capacity and begin to lower costs of electricity as more Thermal generators are decommissioned.
 In the water sector, some 57 small and Mega-dams are at various stages of implementation across the country.  All are expected to be operational by the end of the current national development strategy, vision 2030.  Thirty of these will be completed by 2019 says the Water Ministry. “The idea is to increase the volume of water for irrigation and correct the blunders made in previous schemes, including the Galana-Kulalu Food Security Project. Its failure was blamed on inadequate water,” it said in an interview with a local daily.
Silicon savannah
Apart from enabling food production through irrigation, the larger dams will also generate power and introduce more economic activities in the project areas. Among the dams whose construction should start this year is the 27 story- high- 22 kilometres long Thwake Dam in Makueni and Kitui counties border. The project, the largest Multi-purpose dam in east Africa will transform an arid area into a bread basket.
In addition, the dam will support the growth of Konza ICT city and its environs. The city, arguably the first of its kind in Africa is located just 60Km Southwest of Nairobi, at Konza in Makueni country.
Dubbed the silicon Savannah of Africa, Konza ICT City is a greenfield project that will spearhead Africa's entry into the world of ICT-something similar to Silicon Valley in the US.  The city will be served by a high-speed Railway which is already complete. It is also fronted by the Mombasa –Highway which is being expanded to a six-lane expressway.   For more Read: http://eaers.blogspot.co.ke/2012/02/kenya-rearing-to-launch-ict-city.html
Generally, Kenya is gearing for take-off into the higher echelons of Middle-income country thus increasing not only the number
of goods and services available but also increase employment.
The construction of the projects is itself generating employment and increasing incomes across the country and among the drivers of the country’s robust economic growth.

The economy, the most diversified in the East African region has been robust over the last 16 years posting a GDP growth rate of 5 percent a year. In fact, the country has entered the lower ranks of Middle-income
country during this period. The country has become the Financial, Logistics, and ICT hub of the region.  The robust growth creates the right foundation for economic take-off.