Unshackling the Growth of Kenyan SMEs€¦ · Unshackling the Growth of Kenyan SMEs David Ong’olo Consultant & Adviser, CUTS Nairobi Samson Awino Programme Officer, CUTS Nairobi

Unshackling theGrowth of Kenyan SMEs

Unshackling theGrowth of Kenyan SMEs

David Ong'oloConsultant & Adviser, CUTS Nairobi

Samson AwinoProgramme Officer, CUTS Nairobi

CUTS NairobiYaya Court 2nd Floor, No.5, Ring Road Kilimani

P.O. Box 8188-00200, Nairobi, KenyaPh: +254.20.3862149, 3862150, 20.2329112,Fax: +254.20.3862149, Email: [email protected]

Web site: www.cuts-international.org/arc

CitationOng�olo David and Samson Awino (2013),

Unshackling the Growth of Kenyan SMEs, CUTS.

With the support of

© CUTS, 2013

First published: December 2013

Cover Photo: http://ifad-un.blogspot.in

This report has been produced under a project entitled, �Assessment ofthe Regulatory and Institutional Challenges Affecting SMEs Developmentin Kenya� supported by Investment Climate and Business EnvironmentResearch Fund (ICBE-RF) of Trust Africa, and implemented by CUTSNairobi. However, the views expressed in this report are those of the

authors and do not necessarily reflect the position of the CUTS or ICBE.Accordingly, any views and comments on the report may be addressed to

the authors.

ISBN: 978-81-8257-209-6

Printed in India by Jaipur Printers Private Limited, Jaipur

#1402

Unshackling the Growth of Kenyan SMEs

Published by

Contents

Abbreviations i

Acknowledgement v

Foreword vii

Preface xi

Executive Summary xv

Chapter 1: Introduction 1

Context of the Study 1

Definition, Classification and Composition ofSMEs in Kenya 4

Statement of the Problem/Motivation of the Study 5

Objectives of the Study 6

Significance of the Study 7

Scope andMethodology 8

Chapter 2: Literature Review 17

Evolution of SMEs Policies and Laws in Kenya 17

The Institutional Framework for SMEs in Kenya 20

Appraisal of the Proposed SMEs Policy in Kenya 21

Proposed Role and Functions of the County Government 24

Overview of Specific Sector Policies 27

Chapter 3: Approaches and Key Lessons on RegulatoryFramework for SMEs: A Case of South Africa and India 36

Regulatory and Institutional Framework in India 36

Regulatory and Institutional Framework in South Africa 41

Possible Lessons from South Africa and India 45

Chapter 4: Key Study Findings 48

Fishing 48

Irish Potatoes 55

Dairy 60

Pineapples 65

Orange 68

Chapter 5: Findings, Conclusions and PolicyRecommendations 71

Key Findings 71

Conclusions and Policy Recommendations 75

Policy Recommendations 75

Annexure 1: General Comparative Analysis of the Key Findings 81

References 83

List of Boxes

Box 1: Terms of Reference (in brief) 7

Box 2: Design and Process of the PACA Framework 11

Box 3: Objectives of the PSD 19

Box 4: Objectives of the SME Act 2012 20

Box 5: Functions of theNPCK 30

Box 6: Fishermen Demand Fish Prices Increased 49

List of Tables

Table 1: Classification of MSEs by the MSE Act, 2012 5

Table 2: Geographic and Sector Scope 9

Table 3: Key Features of SME Sector in South Africa 46

Table 4: Mechanisms for Enhancing Private-Public Dialogue 77

List of Figures

Figure 1: Conceptual Framework 15

Figure 2: Proposed Structure of the County GovernmentSystem 26

Figure 3: A Case of Institutional Linkages for CooperativeSociety 61

Figure 4: Case of Kiambu 64

Figure 5: Case of Bomet 64

Abbreviations

ADC Agricultural Development Corporation

BMUs Beach Management Units

CPPP Community Public Private PartnershipProgramme

CSPs Central Sliver PlantsCSIR Council for Scientific and Industrial

ResearchCUTS Consumer Unity & Trust Society

DTI Department of Trade and Industry

EPC Export Promotion CouncilEU European Union

FGDs Focus Group Discussions

GDP Gross Domestic Product

HCDA Horticultural Crops DevelopmentAuthority

IDC Industrial Development CorporationIIE Indian Institute of Entrepreneurship

ILO International Labour Organization reportIPC International Potato Centre

KARI Kenya Agricultural Research InstituteKDB Kenya Dairy BoardKEBS Kenya Bureau of StandardsKEMRI Kenya Marine Research InstituteKENAPOFA Kenya National Potato Farmers AssociationKEPHIS Kenya Plant Health Inspectorate ServicesKIPI Kenya Industrial Property InstituteKIRDI Kenya Industrial Research and

Development InstituteKMFRI Kenya Marine and Fisheries Research

InstituteKPGMA Kenya Potato Growers and Marketing

AssociationKVIC Khadi and Village Industries Commission

LBSC Local Business Service CentreLED Local Economic Development

MOA Ministry of AgricultureMSMEs Micro, Small and Medium Enterprises

NAMAC National Manufacturing Advisory CentreNCMSE National Council for Micro and Small

EnterpriseNEF National Empowerment FundNIESBUD National Institute for Entrepreneurship

and Small Business DevelopmentNIMSME National Institute of Micro, Small and

Medium EnterprisesNPCK National Potato Council of Kenya

ii Unshackling the Growth of Kenyan SMEs

NSA Non State ActorsNSIC National Small Industries Corporation

PACA Participatory Appraisal CompetitiveAdvantage

PCPB Pest Control Products BoardPFMA Public Finance Management ActPPP Public Private PartnershipPSD Private Sector Development

SACCOS Savings and Credit Cooperative SocietiesSAMAF South African Micro-Finance Apex FundSBDC Small Business Development CooperationSEDA Small Enterprise Development AgencySIDBI Small Industries Development Bank of IndiaSIDO Small Industries Development OrganisationSMEs Small and Medium EnterprisesSSIs Small Scale IndustriesSTP SEDA Technology Programme

TWIB Technology for Women in Business

VCDC Value Chain Development Committee

WIFIP Women in the Fishing Industry Programme

Unshackling the Growth of Kenyan SMEs iii

Acknowledgement

This report has been made possible through the efforts ofseveral people and institutions and whose contribution cannotbe gainsaid. This has been through direct inputs, ideas,encouragement, reviews and guidance throughout itsdevelopment. Many thanks go to the Investment Climate andBusiness Environment (ICBE) and especially Dr. Sunday Khanfor giving us the opportunity and providing necessary financialsupport to undertake this exercise.

We would also like to thank various institutions, such as theMinistry of Agriculture, Ministry of Fisheries Development,Ministry of Livestock, Ministry of Labour, Ministry of Trade,Ministry of Commerce, Tourism and East African Affairs,Kenya National Potato Farmers Association (KENAPOFA),Export Promotion Council (EPC), Kenya Small Scale FarmersForum (KESSFF) and individualswho provided uswith valuableinformation during the survey without which it would nothave been possible to have this work done. In this respect wewould like to express special thanks to Patrick Njogu ofKENAPOFA,Moses Shaha of KESSFF, David Yamina of EPCand Geoffrey Kimani of the Ministry of Commerce Tourismand East African Affairs for their invalueable insights andsuggestions for the success of the project.

This report is equally made possible by contribution madepossible by CUTS Nairobi team led by Clement Onyango and

SamsonAwinoOdhiambo through theirmonitoring in ensuringthe project was a success, this publication is testimony of theirefforts as well as the research contributions provided by DavidOngolo.

Finally we want to thank Cornelius Dube and Rijit Senguptafrom CUTS for their advice and assistance. We are gratefulfor the continuous guidance we received from Pradeep SMehta, Secretary General, CUTS. A special thanks toRajkumar Trivedi for his help in publishing the report, thesupport received from Madhuri Vasnani in editing the sameand Daniel Asher, Victor Ogalo ad Fredrick Njehu forcollecting the primary research data.

vi Unshackling the Growth of Kenyan SMEs

Foreword

The Micro, Small and Medium Enterprises (MSMEs) sectorhas over the years provided a prolific source of employmentand a pivot for economic growth. As a result, the governmenthas continued to give the sector the necessary impetus to playits rightful role effectively, as reflected in various policydocuments and institutional framework supporting the growthof the sector.

The sector has great potential to contribute to Kenya�seconomic and social development. It forms the breedingground for industries and thus it is critical towards sparkingan industrial revolution and wealth creation in the country�sstrive for the achievement of Vision 2030, the nationaldevelopment blueprint. The contribution of the MSME sectorto the Gross Domestic Product (GDP) has, however, remainedlow relative to the number of the Kenyan workforce that itemploys.

The agri-business sub-sector is one of the dominant areas inwhich MSMEs are having a foothold in Kenya. This areatherefore requires close attention by regulators and policymakers as well asMSME related institutions.Well coordinatedMSME development initiatives especially in the agriculturalsector are expected to yield greater potential for thedevelopment of the MSME sector.

viii Unshackling the Growth of Kenyan SMEs

With the adoption of the new Kenyan Constitution in 2010,the way was paved for the establishment of a devolvedgovernment system, which is aimed at fostering socio-economicdevelopment based on county-led local development initiatives.This new constitutional framework is expected to enhancethe performance of MSMEs by addressing locally relevantchallenges to business performance more effectively andholistically based on each county�s unique characteristics,economic and agricultural conditions.

Nevertheless, a critical factor forMSME growth is appropriateMSME regulation and institutional structures for successfulsectoral growth. It is therefore of important to regularlyevaluate the effectiveness of the current regulatory andinstitutional framework in supporting development ofMSMEsat the county level under the devolved government system aswell as the coordination of the same at the national level.

It is in this respect that CUTS undertook a study to gaugeproduction; marketing and value addition; and regulatory andinstitutional challenges that agri-business entrepreneurs arefacing in the counties of Kiambu, Bomet, Homabay and Kwalein order to assess the various challenges thatMSMEs in Kenyaare facing. The study resulted in policy recommendations forthe national and county governments. Through the highlightedpolicy recommendations in this study, key stakeholders willbe provided with a valuable overview of the most pressingissues agri-business focused MSMEs are facing in Kenya andhow these could be addressed through newly adoptedlegislation and governance structures.

Only through appropriate support to MSMEs; well-coordinated national and local governance structures as wellas needs-based policy design will the full potential of the sector

in wealth and employment creation be achieved in line withKenya�s development objectives. I am glad to note that CUTShas created new inroads into MSME development research inthe face of the changing governance structure in Kenya andthereby contributed to a MSME focused governancetransformation.

Patrick MwangiChief Executive Officer

The Micro and Small Enterprises Authority, Kenya

Unshackling the Growth of Kenyan SMEs ix

Preface

In an effort to improve the Kenyan economy, the nation hasembarked on a journey to transform Kenya into anindustrialised, middle-income country, with a high quality oflife for her people and make her globally competitive by theyear 2030. To achieve this, the country adopted the KenyaVision 2030 as its long-term development blueprint with itslaunch in June 2008. In the vision�s economic pillar, Kenyaaims atmaintaining sustained growth of 10 percent per annum.Among the six sectors identified as having the potential tofacilitate the achievement this goal is the agricultural sector,specifically by increasing the value of national agriculturalproduction and processing.

In 2010, first steps were taken into the right direction, whenKenya�s new Constitution was promulgated. The newconstitution initiated a new governance system of a devolvedgovernment, thus decentralising some functions of the Centralgovernment to the county level in an effort to reach thegrassroots producers and consumers in all its functioning, thuschanging many aspects of the institutional frameworks for theagricultural sector as were known historically.

Given that agriculture accounts for about 75 percent ofemployment in Kenya but only contributes to 29 percent ofthe gross domestic product (GDP), there was need to assesshow the newly introduced governance systems can be used to

xii Unshackling the Growth of Kenyan SMEs

achieve Kenya�s long-term development plans specifically forthe agricultural sector. These systems should take intoconsideration that in the past most of the development policiesin the sector have favoured the big players as opposed to themajoritymicro, small andmedium entrepreneurs in agriculturalproduction and processing.

In efforts of taking forward the Kenyan agenda in support ofKenya�s vision, CUTS Nairobi implemented a study on SMEdevelopment in the devolved governance system, which wasintended to bring forth policy options for institutional andregulatory reforms in Kenya so as to develop SMEs throughthe new devolved system.

The report gives an understanding of the current and pastregulatory and institutional framework inclined to SMEs andevaluates their effectiveness in supporting local developmentof SMEs at the county level. It also provides evidence for thedevelopment of policy choices to support the development ofan SME strategy for county governments and gives someunderstanding on the mechanisms through which the devolvedgovernment systems will contribute to innovation and valueaddition activities at the county level.

The study considered the sub-sectors with the most significanteconomic activity in one county per region in Kenya, andanalysed economic activities that are comparable across anytwo counties.

Subsectors & countiesCounty Sub-sectorKiambu & Bomet Dairy and Irish PotatoesHomabay Pineapples and FishingKwale Oranges and fishing

Unshackling the Growth of Kenyan SMEs xiii

The study adopted the Participatory Appraisal CompetitiveAdvantage (PACA) methodology to collect primary data toinform the analysis. Case studies of Irish potatoes, dairy,fishing, pineapples and oranges sub-sectors were used tounderstand the various institutional and regulatory challengesfaced by agriculture-based SMEs in Kenya.

Given the success in carrying out the study, we would like toappreciate the financial support from Trust Africa in carryingout the study; and the various government and non-governmentorganisations for providing ideas and support in the processof implementing this initiative. Further, we would like toappreciate the farmers who cooperated with CUTS indiscussing their concerns, which have formed the basis of thisreport.

The project team led by Clement Onyango and the CUTSNairobi team has tirelessly compiled the report and I amoptimistic that the a document is disseminated widely amongstakeholders and stirs a discourse in developing this sectorwiththe ultimate goal of achieving the Kenyan vision 2030.

Pradeep S MehtaSecretary General

CUTS International

Executive Summary

IntroductionThere is little disagreement now about the capacity of SMEsto achieve rapid economic growth in developing countries,while also contributing substantially to employmentopportunities in them. The importance of SMEs in Kenya wasfirst recognised by the International LabourOrganisation (ILO)in its report on �Employment, Income and Equity in Kenya� in1972. While the subsector constitutes close to 85 percent ofemployment, it only contributes about 20 percent of the totalGDP. This implies dismal performance of the subsector. Thereis an urgent need therefore to review the existing conditionsin the subsector for promoting SMEs development, and makethe necessary refinements where needed.

The current constitutional framework and the newMicro andSmall Enterprise Act 2012 (MSEAct, 2012) provides a windowof opportunity through which the evolution of SMEs can berealised through the devolution framework. However, theimpact of devolution on SMEs development depends on thearchitecture of the regulatory and institutional frameworkinclined to support SMEs in an economy. It is thus imperativeto appraise the regulatory and institutional framework forSMEs given the existing devolved government system in Kenya.It is against this background that this study was undertakenby CUTS Nairobi, to assess the regulatory and institutionalframework in the SMEs subsector in Kenya vis-a-vis theemerging devolved governance.

Project FindingsThe study was conducted in Homabay, Kwale, Kiambu andBomet counties. Case studies of Irish potatoes, dairy, fishing,pineapples and oranges were used to understand the variousinstitutional and regulatory challenges facing the SMEssubsector in Kenya. The analysis involved assessment of theexisting environment and other conditions in the SMEssubsector, and identification of possible areas for futureinterventions. Discussions with key stakeholders andpractitioners were also held in these counties to get the �real�flavour of issues on the ground that need to be taken intoconsideration while designing some of these interventions.

Production ChallengesComparative analysis across the five markets (stated above)confirmed common production challenges like inadequateinputs and lack of production technology for better crop andlivestock production. Production challenges were mainlyattributed to limited access to finance for SMEs, despite theexistence of various financial institutions. This was primarilydue to stringent conditions set by the financial institutions.

Marketing & Value Addition ChallengesThe implication of limited access to finance was also affirmedby various participants to have negative implications onmarketing and value addition. It was felt that most SMEsplayers do not have the relevant skills to facilitate valueaddition, thus promoting exploitation by middlemen.

Regulatory & Institutional Challenges� Existence of multiple institutions and departments handling

SMEs issues in Kenya. For instance, the Ministry of Trade,theMinistry of Industrialisation and theMinistry of Labour

xvi Unshackling the Growth of Kenyan SMEs

have departments related to SMEs. There seems to be lackof coordinated strategies and approaches to stimulate SMEsdevelopment in Kenya.

� Even though the private-public dialogue has beenemphasised at the central level, through the Kenya PrivateSector Alliance (KEPSA), most stakeholders cited limitedconsultation at the ground-level during policy makingprocesses.

� The findings affirm limited coordination in theimplementation of the SMEs-related regulatory legislationsand related activities/programmes in Kenya.

� The extent to which the new county system contributes toSMEs development depends on how best theoperationalisation of the current MSE Act, 2012 factors inthe necessary administrative changes as outlined in thecurrent Constitution of Kenya.

Implications and Policy RecommendationsThe challenges require a strategy that would promote easyaccess to credit and farm inputs, promote value addition andestablish a well-coordinated and effective institutional andregulatory framework. There is also a gap in terms ofinformation available regarding the operationalisation ofcertain institutions/agencies at the country level.

Other key policy issues arising from the research findings arepegged on the fact that there is lack of a formal institutionalframework both at the national and local level, dedicated toSMEs development. The institutional deficiency hascontributed to unclear consultation mechanism at the locallevel between the private sector and the government. This isexpected to change with the adoption of the MSE Act, 2012.

Unshackling the Growth of Kenyan SMEs xvii

In the context of Kenya, SME development requires a cross-cutting strategy that touches uponmany areas, which can helpthe sector to improve and create a niche for itself in the Kenyaneconomy. A suggested set of measures in this regard has beenprovided below:� Establish an inclusive Private-Public dialogue:A formal and

organised SMEs structure would provide direction on howthe county government should establish a formalcoordination structure.

� Support establishment of strong SMEs associations (countylevel): The overall and county specific government policiesfor SMEs should emphasise on building alliances in thevarious SMEs subsectors. The government should providesupport to enhance legitimate representative organisationsat the county level.

� Formulate specific county led SMEs policies andprogrammes: There is need for each county to evolve itsown policies and packages of incentives based on thecounty�s economic competitiveness. Such policies shouldbe informed by diagnostic studies undertaken to identifythe �competitive advantage� of a particular county in theSMEs sector.

� Establish tailored training Institutes for SMEs (in Counties):Even though there are government institutions providingcourses on SMEs issues, it would be important for thegovernment to establish SMEs specific training institutesespecially in each county based on the county�scompetitiveness and its production output.

� Establish SMEs oriented financial institutions (Countylevel): There is need for specific SMEs oriented banks tofacilitate the promotion, financing and development of thesmall scale industries.

� Establish an Import-Export Bank for SMEs: Thegovernment should consider establishing an import and

xviii Unshackling the Growth of Kenyan SMEs

export bank for SMEs. The bank should focus on SMEexporters as its target beneficiaries.

� Central coordinating institution:The (proposed)Micro andSmall Enterprises Authority under the MSE Act, 2012should focus on policy articulation, promotion,development and protection of SMEs. It should alsomonitorthe execution of the formulated policies and theeffectiveness in their implementation.

� Establishing a single window for SMEs: The governmentshould develop requirements and criteria for SMEsoperations where strict regulations for SMEs entry and exitshould be established.

ConclusionThis study has shown that there are differences in countyspecific and sectoral needs of SMEs in Kenya. These supportiveneeds across the different value chains should be extractedand well-understood. Even though the new institutionalstructure of the county government is a reality, it is generallyagreed that its full operationalisation will take some time.

It is only by recognising the key (sectoral) requirements forSMEs growth and including them in the institutionaldevelopment mechanism under the new MSE regime in thecountry, will SMEs be able to efficiently provide employmentand income formillions of Kenyans, that they have the potentialfor.

Unshackling the Growth of Kenyan SMEs xix

Context of the StudyVarious countries have embarked on pursuing devolution

as mechanisms for enhancing inclusive development(Rodriguez-Pose and Gill, 2004). Devolution is considered asan extensive form of decentralisation involving the transfer ofauthority and resources to sub national tiers of government(Rodriguez-Pose and Bwire 1998). The Central Governmentunder the devolution framework transfers authority fordecision-making, finance management and service delivery toquasi-autonomous units of local government that elect theirown councils, raise their own revenues, and have independentauthority to make investment decisions (Litvack et al. 1998).

A certain degree of autonomy for investment andexpenditure decisions allows sub national units to pursuepolicies for economic development tailored to their own localneeds and endowments (Gil et. al., 2004). Devolution is thusexpected to make public expenditure more efficient (Martinez-Vasquez and McNab, 2005), create opportunities for localregimes to mobilise around sustainable development(Benneworth and Roberts, 2002) and contribute to bettercoordination among various local actors (e.g. local government,businesses and civil society). Devolution enhances amechanism through which locally oriented activities can be

1Introduction

2 Unshackling the Growth of Kenyan SMEs

rejuvenated to contribute to sustainable economicdevelopment.

A well formulated devolved system of governance isexpected to promote favorable macro-economic environmentfor activities, which benefits various key sectors. This hasconsiderable multiplier effects on local economic development,where Small and Medium Enterprises (SMEs) are known toconstitute larger percentage of economic activities. SMEs havethe capacity to achieve rapid economic growth, therebygenerating employment opportunities at the local level (Reddy,1991:2).

SMEs have been recognised as engines through whichgrowth objectives of developing countries can bewell achieved.They are potential sources of employment and income inmanycountries. SMEs seem to have advantages over their large-scale competitors in that they are able to adapt more easily tomarket conditions. SMEs are able to withstand adverseeconomic conditions because of their flexible nature (Kayanulaand Quartey, 2000).

They are also more labour intensive than larger firms andtherefore have lower capital costs associated with job creation(Anheier and Seibel, 1987; Liedholm andMead, 1987; Schmitz,1995). SMEs also improve efficiency of domestic markets andmake productive use of scarce resources, thus facilitating long-term economic growth (Kayanula and Quartey, 2000).

The importance of the subsector in Kenya was firstrecognised in the International Labour Organization report(ILO) in 1972 on 'Employment, Income and Equity in Kenya'(ILO, 1972). The report underscored the sector's critical rolein promoting growth in incomes and employment. Theimportance of the sector has also been affirmed in the AfricanEconomic Outlook, 2011 Report.2 According to the report,

2 See www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/Kenya%20Full%20PDF%20Country%20Note.pdf

Unshackling the Growth of Kenyan SMEs 3

the SME subsector plays a significant role in Kenya's economicstructure, where the sector employed close to 80 percent ofKenya's total workforce in 2011.

While the SMEs subsector constitute close to 80 percentof employment, it only contributes to about 20 percent of thegross domestic product (GDP). This implies bad subsectorperformance despite its potential to employment, income andequity. Such performance of the SMEs sector in Kenya islinked to several constraints among which regulatory andinstitutional framework is felt to be one.

The attempts to address the growth of SMEs in Kenya canbe mirrored in the current constitution of Kenya enacted in2010, where devolution has been embedded as a keyinstrument in fostering Local Economic Development (LED)initiatives. The devolution instruments is expected to affectthe key drivers of the economy related to the SMEs, whichrequires a locally driven SMEs policy embedded on thedevolution structure.

However, the policy framework to promote the LED ofSMEs has been pegged on wider national policies for a longtime, with limited emphasis on locally-led developmentstrategies. As such, there is need to develop policies whichseek to realign the overall SMEs development agenda withthe envisaged devolution framework as outlined in the currentConstitution. A window of opportunity has been openedthrough the county system of government with its focus on localeconomic development opportunities based on local resources.

It is in this regard that this study by CUTS analyses theinstitutional and regulatory challenges for SMEs vis-a-vis thedevolved governance system. The study aims to understandthe possible existing institutional and regulatory challengesthat need refinements to unleash SMEs in Kenya. Policy andrecommendations have been based on case study findingsgathered from a few key SME sub-sectors.


Definition, Classification and Composition ofSMEs in Kenya

Numerous efforts have been explored to define the conceptof SMEs in different economies. Various attempts haveresulted in various different approaches in understanding theconcept of SMEs. The concept of SMEs varies from onecountry to another depending on the indicators used (Visser,1997).� The first criteria, based on the number of employees, defines

SMEs as those enterprises below a certain number ofworkers (i.e. can range from less than 10 to less than 50employees).

� The second criterion defines the SMEs as the degree oflegal formality, and has been used to distinguish betweenthe formal and informal sectors. Here, Micro, Small andMedium Enterprises (MSMEs) are considered asenterprises which are not registered and do not complywith the legal obligations concerning safety, taxes andlabour laws.

� The third criterion defines SMEs as based on the limitedamounts of capital and skills per worker.

Regulatory and institutional framework for Kenya has beenbased on the number of employees and the company's annualturnover (MSMEs Act, 2012). For instance, the microenterprises have been defined as those employing less than 10workers with annual turnovers of less than KES500,000 andcapital formation of less than KES5mn for services or lessthan KES10mn for enterprises doing manufacturing. Smallenterprises are defined as those that employ between 10 and50 workers with annual turnovers between KES500,000 andKES5mn and capital formation between KES5mn andKES20mn for services or between KES5mon and KES50mnfor enterprises doing manufacturing (see Table 1).


Generally, the SMEs sector in the country comprises ofmanufacturing and trade (wholesale and retail) sub-sectors,with substantial engagement in agro-based activities, which,directly affects a larger population in the society. The SMEssubsector are businesses in both formal and informal sectorsaccounting to more than 74 percent of the total personsengaged in employment per year and contributing more than18.4 percent of the country's GDP.

Statement of the Problem/Motivation of theStudy

ILO, 1972 report underscored the importance of the SMEssub sectors in promoting growth in incomes and employmentin Kenya. However, various economic policies and strategieswhich have been pursued to support the development of SMEshave not significantly contributed to local economicdevelopment. Such policies have been centered on thedevelopment of larger enterprises and have been biasedtowards urban areas despite the realities that majority of theKenyans are in the rural areas; and that the overwhelmingmajority of Kenyan enterprises are SMEs.

Table 1: Classification of MSEs by the MSE Act, 2012

Entity (Trade No of Employees Annual Investment Equipmentservice, industry /People Turnover Limit in Plant and Investmentor business Machinery +Registeredactivity +Registered Capital

Capital

Micro Less than 10 Not exceeding Not exceeding Not exceedingEnterprise people KES 500,000 KES 10M KES 5M

Small More than 10 Between KES More than More than 5mEnterprise but less than 50 500,000 to 5M 10m but less but less than

than 50M 20M

Source: Government of Kenya, 2010


There are also indications that most SMEs are scattered,with no formal institutional framework to address theirconcerns. Furthermore, over 80 percent of the SMEs in Kenyaare agro-based with limited technological innovation. It is inthis regard that this study seeks to answer the following keyquestions;� What has been the regulatory and institutional challenges

facing the development of the SMEs sector?� Does the current devolved governance structure mitigate

such challenges to enhance the local development of SMEs?� If not, what governance structure/SMEs strategy should

the government adopt to support the development of SMEsat the county level?

� What are the channels through which devolution cancontribute to innovative and value addition activities at thecounty level?

Objectives of the StudyThe overall objective of this study is to analyse institutional

and regulatory framework for SMEs vis-a-vis the devolvedgovernment system. The specific objective include:(a) To understand and analyse current and past regulatory

and institutional framework inclined to SMEs;(b) To analyse institutional and regulatory challenges facing

the SMEs at county levels;(c) To find out the mechanisms or channels through which

the new devolved government will contribute to innovativeand value addition activities at the county level; and

(d) To provide evidence for the development of policy choicesto support the development of SMEs strategy for thecounty governments.


Significance of the StudyThe Constitution of Kenya emphasises on devolution as a

key instrument for enhancing locally-led sustainabledevelopment at the 'county' level. The output of the study isexpected to provide evidence and inputs for developing policychoices aimed at improving the regulatory and institutionalgovernance for SMEs at the county levels. The improvedframework is expected to contribute to a conducive businessenvironment for SMEs, hence supporting the growth of theenterprises at the local level.

This will further contribute to the improvement oflivelihood, resulting into poverty reduction, hence contributingto socio-economic development through multiplier effects.The output of the study is thus expected to contribute to theimplementation of the county system, given that the devolutionprocess is yet to pick up.

Box 1: Terms of Reference (in brief)

a) Understanding the current and past regulatory andinstitutional framework inclined to SMEs,

b) Evaluating the effectiveness of the current regulatory/institutional framework in supporting local developmentof the SMEs at the county level under the devolvedgovernment system,

c) Analysing the institutional and regulatory challengesfacing the SMEs at county levels,

d) Understanding the mechanisms or channels throughwhich the new devolved government will contribute toinnovative and value addition activities at the countylevel, and

e) Providing evidence for the development of policy choicesto support the development of SMEs strategy for thecounty governments.


Scope and MethodologySector and Geographical Scope

To understand the landscape of the SMEs structure in termsof the institutional, regulatory and value addition activities,the study considered four counties and five subsectors. Severalcriterions were used to select various case sectors and countiesfor analysis which included the following factors/indicators;

(a) The study considered the sub sectors with the mostimportant economic activity (in terms of majorityemployment and potential to develop a more vibrantSME value chain industry) in each region. Hence,fishing and fish trade was identified in both Nyanzaand Coast; while dairy was identified in both Centraland Rift Valley.

(b) The study considered one county per region in whichthe above identified activities were most vibrant. Inthis context, the fishery was considered to beconcentrated in both Homa- Bay and Kwale; whileDairy was seen to be concentrated in Bomet andKiambu counties.

(c) The study also considered economic activities that arecomparable across any two counties. Based on thiscriterion, Irish potato farming was identified asimportant to both Bomet and Kiambu while fruits,generally (and specifically, pineapples and oranges)were identified as important to Homa-Bay and Kwalecounties.

It is against these background that this study was conductedin western; Rift Valley; Central; and Coastal regions of Kenya.

The following summarises the scope of the study in termsof the chosen sub sectors and geographical coverage.


The sectors and the geographical locations selected wereaimed at collating inputs to be used in understanding theregulatory and institutional policy challenges facing theSMEs.The inputs collated would provide the benchmark forpolicy formulation.

Data Collection

Secondary DataThe research team examined relevant documentation which

included reports and various policy documents. The purposeof the documentary review was to collect published data andinformation on institutional and regulatory challenges facingthe SMEs, the current and the past regulatory and institutionalframework inclined to SMEs.

The key documents were obtained from the Ministry ofIndustrialisation,Ministry of Labour,Ministry of Agriculture,Ministry of Livestock and Fisheries Development and sectorspecific associations like Kenya National Potatoes FarmersAssociations (KENAPOFA). The review also included acomparative analysis on the regulatory and institutionalpractices for a more advanced economies in terms ofdevelopment in SMEs structure like India and South Africa.Other secondary sources of data used in this study included

Table 2: Geographic and Sector Scope

Sample County Study Sample Sub Sector Study

Kiambu Dairy Sector, Irish Potatoes

Bomet Dairy, Irish Potatoes

Homabay Fishing, Pineapples

Kwale Fishing, Oranges

Source: CUTS Research Team


previous study reports and publications on SMEs issues likethe SMEs hand Book, the SMEs Act, 2012 among others.

Primary Data CollectionThe study adopted the Participatory Appraisal Competitive

Advantage (PACA) methodology to collect the primary data.The PACA methodology is a consolidation of various keyelements which are the integral components of PACA. TheKey elements are defined as follows:(a) Participatory: This implies that the PACA methodology

is premised on the fact that a successful local economicdevelopment should be based on the active involvementof stakeholders who are relevant for economicdevelopment. The PACA methodology seeks to enhancea constructive relationship between the public and privatesector in an economy. Hence this study involved the localstakeholders to collate and deduce relevantrecommendations.

(b) Appraisal: The core of PACA is a methodology whichpermits a rapid appraisal of local economy not only ofeconomic potentials but also political factors. This impliesthat PACA framework assess the local led potential interms of economic and political factors.

(c) Competitive Advantage: The main thrust of PACA is notto elaborate endless lists of problems, deficiencies andbottle necks, but to look for opportunities which improvethe local business environment within a short period oftime.

The PACA methodology was preferred in this study, givenits framework to directly engage various stakeholders at thelocal level to come upwith demand driven solutions to enhanceconducive environment for SMEs development. The PACA


Box 2: Design and Process of the PACA Framework

The PACA process began by undertaking preparatoryExercise. During this process, available data and informationwere gathered from Bomet, Kiambu, Homabay and Kwalecounties. Additional data were also gathered from the keystakeholders who were at the same time informed aboutthe PACA exercise. The key stakeholders who were alsothe nodal persons in the respective counties provided thelist of participants to be engaged during theMini workshops.Recruitment of PACA Team and Organisation of miniWorkshops were also undertaken at this stage. The PACAteam was composed of two facilitators from each county.

The preparatory exercise was followed by PACA FieldWork: The PACA fieldwork process involved conductingmini workshops in the four counties to gather in-depthinformation on the specific issues affecting the SMEsassociations, individual entrepreneurs, DDO, DLO, DAO;the producer groups like the KENAPOFA, Dairy Farmergroups, regulatory authorities at the local level. Each MiniWorkshop had 30 participants divided into two equalgroups, where 15 participants were from each of thesubsectors in each county. The participants from eachsubsector were grouped together to consolidate differentideas from each of the sub sectors.

For instance, the participants from Irish Potatoes andDairy Industry in Bomet were grouped and engage separatelyin a focus group discussion. The mini workshops werefollowed by key informant's field work interviews, wherethe key stakeholders were engaged during the process. Thepredetermined questionnaires, (with particular domain)were administered to the key policy makers in (Bomet,

Contd...


framework provided a platform which facilitated theengagement among the various stakeholders. Themethodologyprovided an opportunity for SMEs association to develop aconstructive relationship for policy advocacy. The PACAmethodology also integrates emphasis on bottom up proposalswhich aim at removing bureaucratic obstacles to doingbusiness. The PACA exercise was conducted through thefollowing processes:

Theoretical FrameworkDecentralisation involves the delegation of powers to lower

levels in territorial hierarchy whether the hierarchy is one ofthe governments with a state or offices with a large scaleorganisation (Smith 1985:1). Decentralisation thus involvescreation of smaller territories establishment of political andadministrative institutions. There are four forms of devolution.Devolution as a formof decentralisation implies that the Centralgovernment gives up certain functions and creates new unitsof government outside control (Rondinelli and Cheema (1983).

Homabay; Kiambu and Kwale). The key informantsincluded officials from theMinistry of Agriculture,Ministryof Livestock and Fisheries, Business Associations and farmergroups, Local authorities to provide information on howthe new devolved system of governance can provide aneffective institutional and regulatory framework to supportthe development of SMEs at the county level. A diverse anda common position on regulatory and the mechanisms orchannels through which the new devolved system ofgovernance will contribute to innovative and value additionactivities at the county levels for the SMEs were developedbased on deliberations from the focus group discussions.

Source: Deduction by the Research Team


Heywood 2007 further asserts that devolution establishesthe best measure of decentralisation within the unitary systemof government. In terms of economic, devolution frameworkimproves efficiency (Shepard, 1975), where stakeholders havethe opportunity to directly contribute to the policy makingprocess. The ability to enhance inclusive public participationin the governance process exist when devolution systemcontributes to sustainable development in terms of promotingparticipatory policy formulation process, and the formulationof policies which are adapted to local needs (Sharma, 2000).

An effective devolved system is expected to increase theincentives and the capacity of the poor to actively participatein the decision-making, to decide and lobby for their interests(Manor, 1999), bringing about their 'empowerment' as wellas contributing to pro poor policies.

Devolution can equally bring about efficiency gains,especially in service delivery, given that the local officials aresupposed to have a better knowledge of local needs andpreferences (Hayek in Ostrom et al., 1993). Thus, devolutionprocess requires a participatory process to enhance inclusivepolicy development to enhance LED.

Decentralisation which is a form of devolution, reducescosts, improves outputs and utilises human resources moreeffectively (Hart, 1972). Decentralisation is believed toimprove access to administrative agencies (De Mello, 1981).

Rationale for decentralisation explicated by Rondinelli andCheema (1983) includes overcoming limitation of centralcontrolled tailoring of development plans in accordance withthe local needs heterogeneous groups, reduced red tapes,sensitivity to local problems, close contact between officialsand people, institutionalisation of participation, flexibleinnovative and creative administration. The capacity of localgovernment to decide and implement pro-poor policies largelydepends on the design of the decentralisation process and it is


related to factors such as local governments' human and fiscalresources and type of functions devolved (Bardhan andMookherjee, 2000). The pro-poor policies are related to thedevelopment strategies which seek to enhance inclusivedevelopment.

Despite the positive relationship between devolution andLED, the impact of devolution process initiatives depends upona number of internal and external factors, like age, size, natureof tasks, technology, internal management, regulatory andadministrative capacity, and sociopolitical and economicfactors (Kiggundu, 2000).

Hence, there is no automatic relationship betweendevolution and LED under the county system. There is needfor a demand-driven county regulatory and institutionalframework, to support the development of various locally-ledeconomic activities like those related to SMEs at the countylevel. Such framework would promote increased mechanismsfor public participation and increased linkages betweengovernment and non state actors (Boyle andHumphreys, 2001,p. 80).

Conceptual FrameworkFor devolution and SMEs to contribute to LED at the county

level, there are core institutional and regulatory elements tobe considered. According to the existing theory on governance,devolution is expected to promote participatory developmentthrough pro-poor led policies; increased LED activities (likethose related to value addition activities); increase the capacityof the SMEs to actively participate in decision-making.

However, the socio-economic impact of devolution processon economic activities depends on the design and effectivenessof the existing institutional and regulatory framework for SMEsat the county level. To enhance LED through SMEs growth,the local development strategy for SMEs should emphasise on


the importance of an enabling policy and institutionalenvironment etc to support the contribution of devolution onSMEs related growth. The relationship between the elementsassociatedwith the linkage between devolution and sustainableeconomic development can be summarised in the followingframework.

The conceptual framework implies that a well formulateddevolved framework in an economic system should enhancelocally-led economic activities. Such framework should besupported by an effective institutional and regulatoryframework for SMEs in the various regions of Kenya.Devolution is underscored as an important tool for enhancingsuch linkages. However, the rebirth of the devolution in Kenyaafter the 1963 has been initiated by the newConstitutionwhichwas enacted in 2010.

Figure 1: Conceptual Framework

Source: Research Teams' deduction based on the Theoretical Framework


At the same time, the SMEs have been in existence formany decades in Kenya under the non devolved governmentsystem. It would thus be important to analyse the architectureof the regulatory and institutional framework for SMEs inKenya. This would be important in delineating the currentand the past regulatory framework inclined to the SMEs inKenya.

2Literature Review

Evolution of SMEs Policies and Laws in KenyaThe evolution of government strategies on SMEs can be

traced back after the ILO report of 1972 on Employment,income and equity in Kenya which recognised SMEs asimportant sector for creating income and employment for theKenyan population. The sector's importance in economicdevelopment was singled out in Sessional Paper No.1 of 1986,Economic Management for Renewed Growth (GOK,1986),which set out mechanisms for enhancing an enablingenvironment for SMEs. The governments� commitment inSessional Paper 1 of 1986 was reinforced in the 1989 GOKreport, the strategy for small Enterprises, which delineatedthe mechanisms for removing the constraints to growth anddevelopment of the SME sector.

A further effort by the government formulation of a policyframework on SMEs was recognised in Sessional Paper No.2of 1992, Micro Small and Medium Enterprises (MSMEs) andJua kali Development in Kenya. The Sessional paperrecommended that the relevant ministries in consultation withthe Attorney general's office address the legal and regulatoryframework to support the creation of an enabling businessenvironment for SMEs .The Sessional paper specificallyrecommended the need to undertake a comprehensive review


and analysis of acts and licences that pertain to SMEs, especiallythose that negatively impacted on the growth and developmentof the SMEs. The paper also advocated for the formation ofassociation to provide easy access to information to variousenterprises in the country.

There are other policy documents which also declared thegovernment's intention to create an enabling legal andregulatory environment. For instance, the Development Planfor 1989-1993 implied that the government would speed upthe already initiated review of the local authorities by lawsand regulations that have proved restrictive to the developmentof SMEs.

Moreover, the Small Enterprise Policy ImplementationProgramme Mission Report of 1994 was also identified thefailure to address some key issues such as legislative reform,land allocation and poor infrastructure as the main weaknessinhibiting the development of the SMEs. The government alsopledged to harmonise the licensing regime and simplifyrequirements so as to encourage commercial and industrialinvestment (Development Plan 1994-1996).

Another Sessional paper No.2 on the development of SMEsfor wealth and employment creation for poverty reductionwas formulated and published in 2005. The Sessional paperspelt out some of the key measures to address businessregistration, business licensing and the tax regime.

Another policy regime which attempted to address theSMEs issues integrated the SMEs issues in the Private SectorDevelopment Strategy (2006-2010). The strategy consideredSMEs as a central link between the private sector and povertyreduction. The Private Sector Development (PSD) strategy wasdeveloped by the Government of Kenya. The PSD outlinedthe specific policies and strategies that needed to be pursuedin order to enhance private sector growth and competitiveness.The PSDS had five key goals (see Box 3).


The PSD strategy recognises the SMEs to be more labourintensive and promote equitable distribution of income sincethey are owned by poorer entrepreneurs', a significant of whoare women. The strategy also identified the SME sector to begenerally constrained by lack of access to markets, limitedaccess to capital, limited skills and firm-of effectiverepresentation in sector-specific and umbrella businessassociations that would provide a forum to articulate theirissues for further redress.

To address the aforementioned constraints, 'Goal 5' of PSDstrategy aimed at facilitating the SMEs competitiveness bysupporting the development of new enterprises, improvingaccess to capital, facilitating the graduation and evolution ofenterprises, promoting firm to firm linkages and promotingbroader MSMEs representation in business associations. Theothermilestones by the government regarding the revitalisationof the SMEs in Kenya include the enactment of the Micro-finance Act and the Savings and Credit Cooperative Societies(SACCOS) Act.

It is evident that several attempts have been made toformulate policies to support the SMEs sectors in Kenya.However, the existing policies have been nationwide oriented,

Box 3: Objectives of the PSD

Goal 1: Improving Kenya's business environmentGoal 2: Accelerating Institutional transformation within thepublic sectorGoal 3: Facilitating growth through greater expansion oftradeGoal 4: Improving the productivity of enterprisesGoal 5: Supporting entrepreneurship and indigenousenterprise development

Source: PSD Strategy, 2006-2010


with limited focus on addressing region specific SMEs issuesin Kenya. Such regulatory framework also requires a wellestablished institution to oversee the implementation of therespective legislations. It would thus be vital to understandthe landscape and architecture of the existing institutionalframework established to address possible constraints affectingthe SMEs in Kenya.

The Institutional Framework for SMEs in KenyaSeveral efforts have been made to revitalise the SMEs

subsector in Kenya through various policy reforms. Some ofthe policies have focused on the SMEs subsector, while otherpolicies have partially integrated SMEs issues in variousNational development plans (Development Plan 1994-1996).Despite the reforms, the policies are inadequate in providingguidance on the establishment of the various SMEs relatedinstitutions and regulations. Such condition has been confirmedby poor coordination and existence of various departments indifferent ministries handling SMEs issues.

For instance, the Ministry of Trade, Ministry of Labourand Industrialisation, each have a department dealing withthe SMEs. Other institutions which are directly involved inthe SMEs include the Kenya Industrial Estates, KenyaIndustrial Research andDevelopment Institute (KIRDI); Kenya

Box 5: Objectives of the SME Act 2012

(a) To promote an enabling business environment(b) To facilitate access to business development services(c) To facilitate informal sector formalisation and

upgrading(d) To promote an entrepreneurial culture(e) To promote representative

Source: Government of Kenya, 2012, SME Act 2012


Bureau of Standards (KBS), Kenya Industrial Property Institute(KIPI), among others.

The poor coordination has been agitated by lack of directivepointer to support the overall management of the SMEs inKenya. The inadequacy in the policy pointer has motivatedthe development of the new policy regime. The policy regimemotivated the formulation of the new SMEs Act. It ischaracterised by important features aimed at contributing tothe development of the SMEs in the country. An analysis onthe extent at which the proposed Act is aligned to the structuresof the county system as proposed in the current Constitutionof Kenya is thus important given that the Act was formulatedbefore the current Constitution was promulgated by theGovernment of Kenya in 2010.

Appraisal of the Proposed SMEs Policy in KenyaThe Ministry of Labour in collaboration with the SMEs

stakeholders developed a Parliamentary Act for SMEs in 2012.The Act is expected to oversee the regulation and thedevelopment of the sector. The SMEs Act 2012was formulatedas a proposed strategy to revitalise the SMEs sub sector. Theenactment of the SME Act is part of the policy interventionswhich was envisaged by the Sessional Paper number 2 of 2005(SP No. 2 of 2005) on the Development of SMEs in Kenya.

The objective and purpose of the Act is to consolidate theoverall legal and institutional framework. Such frameworkshould promote, develop and regulate Micro and SmallEnterprises to achieve certain objectives. The Act focuses onkey concerns that directly affect the development of SMEs.The SME Act seeks to consolidate various institutionalframeworks for SMEs in a one policy document. The proposedAct, therefore, seeks to consolidate policy formulation,administration and implementation, and regulation in three


institutions namely, Department of Micro and SmallEnterprises, National Council for Micro and Small Enterprise(NCMSE) and Registrar of Micro and Small EnterprisesAssociations and Umbrella bodies. The specific institutionsas discussed in the proposed SMEs Act are as follows:(a) Department of Micro and Small Enterprises: The

Department of Micro and Small Enterprises incollaboration with the other relevant ministries andstakeholders is envisaged to perform functions likeformulating and reviewing policies and programmes formicro and small enterprises; developing infrastructure formicro and small enterprises; promoting market access andprovision of marketing services; promoting productdevelopment and innovation; capacity buildingprogrammes for micro and small enterprises; facilitatetechnology development, acquisition and transfer;acquisition of land for micro and small enterprises use;developmechanisms, tools and programmes for collectionof comprehensive data disaggregated by sex, region andage among others in collaboration with key stakeholdersto enable proper planning for micro and small enterprisesector.

(b) National Council for Micro and Small Enterprises(NCMSE): The Council is envisioned to improve thecoordination of the sector and other sectors. Specifically,the council is expected to perform functions likecoordinating, harmonising and facilitating the integrationof various public and private sector activities, programmesand development plans relating to Micro and SmallEnterprise sector; monitoring and evaluating theimplementation of existing policies and programmesrelated to or affecting micro and small enterprises andadvise the government on appropriate policies and courseof action to be taken; mobilising the resources for the


development of micro and small enterprises and naturalenvironment and opportunities for the development of themicro and small enterprises; and managing theMicro andSmall Enterprises Development Fund.

(c) Micro and Small Enterprises Development Fund: Theproposed Act provides for the establishment of a Microand Small Enterprises Development Fund. The purposeof the fund will be to finance the promotion anddevelopment of Micro and Small Enterprises inaccordancewith this Act; provide affordable and accessiblecredit toMicro and Small Enterprises; and finance capacitybuilding of Micro and Small Enterprises; and research,development, innovation and transfer of technology.

(d) The SME Act further provides prominence to Micro andSmall Enterprise Associations in policy formulation andmanagement of the MSME sector by providing forRegistrar of MSE associations who will be responsiblefor the registration and regulation of theMSE associations,and thereby enhance stakeholder dialogue andrepresentation.

The SMEs Act is the first attempt to increase legitimateparticipation of micro and small enterprises in the policyformulation by providing a fully fledged department dealingwith the SME sector through the NCMSE, a corporate body,with functions of policy formulation and sector developmentalongside other functions that is expected to benefit the sector.Even though the proposed Act provides comprehensiveapproach to SMEs development in terms of relevantinstitutions, various institutions envisaged in the SMEs Actare nationwide oriented with no clear framework on how theproposed institutions will link up with various county specificinstitutions as proposed in the current constitution.


Proposed Role and Functions of the CountyGovernment

Effective governance entails promotion of institutionalframeworks that facilitate efficient governance. This will ensureimproved central and local government relations. In particular,distribution and exercise of powers or functions, based onsubsidiarity is a key element. Other aspects include:cooperation between public and private sectors, includinginformal sector and communities; cooperation betweengovernment and non state actors (NSA). While these globalattributes of governance have been applied in Kenya, they havenot been domesticated and translated into local policies andlaws.

The current constitution provides for the establishment ofcounties and by, Extension County led institutions andregulations. The county systemwill be governed by the currentCounty Government Act enacted in 2012.The Act is expectedto oversee the operation of the county system like enactingrespective county legislations related to SMEs developmentthrough the county assemblies.

The county assembly (as outlined in the CountyGovernment Act) is expected to approve the budget andexpenditure of the county government in accordance withArticle 207 of the Constitution, and the legislationcontemplated in Article 220 (2) of the Constitution, guidedby Articles 201 and 203 of the Constitution; approve theborrowing by the county government in accordance withArticle 212 of the Constitution; and approve countydevelopment planning.

One of the key functions of the county governments is topromote trade development and regulation, includingmarkets;trade licences (excluding regulation of professions); fair tradingpractices; local tourism; and cooperative societies which imply


that county system will be instrumental in resource allocationand planning for the development of SMEs in Kenya.

The County Government Act will also be supported by theUrban Areas And Cities Act, No. 13 of 2011.This is an Act ofParliament which is expected to provide for the, classification,governance and management of urban areas and cities. TheAct is expected to provide for the criteria of establishing urbanareas, to provide for the principle of governance andparticipation of residents and for connected purposes.

The legislation is important to the county development asit provides for the establishment of the citizens� foras. Theforas are expected to monitor and evaluate the developmentin the respective counties. Such mechanisms will provide forthe enactment of the local led legislations and policies in therespective counties in Kenya as it provides constructivemechanisms for stakeholder engagement and participation inthe policy making process in Kenya. However, it should beunderscored that the county government will not beindependent in terms of its operation.

Article 6(2) of the current Constitution describes thegovernments to exist at two levels as being distinct andinterdependent and which should conduct their mutualrelations on the basis of consultation and cooperation. Thisimplies that the devolution is not based on the principle ofabsolute autonomy but instead, on that of inter-dependenceand cooperation where there should be intergovernmentalrelationships between and among governments. Suchrelationships should be based on and informed by the principlesof cooperative governance where there should be mutualconsultation between the county and Central Government.

The county led legislations imply that the participation ofcitizens in the respective counties shall be mandatory. TheCounty representatives will provide an oversight provision ofservices, deliberate on proposed annual budget estimates and


development plans, monitor development activities and receivepresentations, including feedback on issues raised by Countycitizens. In urban areas and cities, both cities andmunicipalitieswill provide similar services depending on their capacity, whiletowns shall provide services as delegated by respective Countygovernments. Figure 2 summaries the linkage between thevarious county structures and how such structure would linkup with SMEs subsector through the various county servicedepartments;

Figure 2: Proposed Structure of theCounty Government System

Source: Government of Kenya

Given the new structure of governance, the county led SMEspolicies in the proposed SMEs legislation should be aligned tothe trade, industrial department and regulation servicedepartments. At the same time, the subsector committeeshould interface with the other service departments in thecounty system. It is in this context that there have been variousefforts to align operation to the county system, though much


more preparation is still needed to establish requisiteregulatory and promotional institutions to catalyse localeconomic development by up scaling the SMEs activities.

The extent at which the new county system contributes toSMEs development in the respective counties depends on howbest the current SMEs Act, 2012 is restructured to factor inthe administrative changes as outlined in the currentadministrative structure.

There is thus need for each county to develop its SMEspolicies based on the local needs and such policies shouldindicate how the institutional and regulatory framework willlink up with the governance structure at the county level underthe current constitution. The SMEs Act should thus indicatehow the central government, (through the department ofMSME) will work with the Trade, industrial Department andregulation service departments at the county level to promoteand develop the SMEs.

Given that this study has been based on the selectedsubsectors (i.e. Dairy, Fishing, Irish potatoes and Oranges) inKenya, It would also be important to understand the regulatoryand institutional frameworks for the selected sub sectors inquestion.

Overview of Specific Sector PoliciesPolicy and Institutional Framework (Dairy Sub Sector)

The regulatory framework for the dairy industry consistsof various laws enacted in a number of legal documents. Forinstance, the Dairy Industry Act (CAP 336, Laws of Kenya)was first enacted in 1958 .The act established the Kenya DairyBoard (KDB) to regulate the industry. The main functions ofthe KDB include:(i) licencing of retailers,(ii) controlling of milk movement and quality, and


(iii) appointment of dairy inspectors. Despite the regulatoryrole in the industry, information from the literature depictsthat the KDB has inadequate resources in terms ofpersonnel, laboratories and operational funds to effectivelyimplement its mandates (Muriuki et al, 2011).

Another important regulation is the Co-operativeDevelopment Act (Cap 390, Laws of Kenya), which governsall dairy marketing co-operatives. The Act was revised in 1997to ensure greater farmer control, and less governmentintervention. In early 2004, the Act was revised to promotethe contribution of co-operatives to economic recovery anddevelopment. Despite good performance in many cases, mostdairy co-operatives have not allowed sufficient farmerparticipation in their management. The Companies Act (Cap486, Laws of Kenya) is another important legal and policyframework that provides for registration of companies engagedin various business transactions in themilk supply chain. Theseinclude:(i) registration and licencing of milk processors,(ii) licensing of retailers,(iii) regulations of milk transportation, and(iv) inspectors' regulations (by KDB). Violation of these

regulations is liable to prosecution.

In terms of institutions in the industry, the Kenya Bureauof Standards (KEBS) promotes adherence to standards inindustry and commerce, and to undertake educational workin connection with the standards. The KEBS was establishedunder the Standards Act (CAP 496, Laws of Kenya). Thesestandards are intended to safeguard both consumers andproducers for product quality and for fair commercial dealings.KEBS has specified the methods of analysis to be followed forvarious products (including dairy products) and has powersto enforce these standards even by prosecution.


There are also other few agricultural credit institutions,which help in the financing the dairy subsector. The mainsources of credit include commercial banks, whose credit isusually unsuitable for farming, andmicro-finance institutions,which are more popular with SMEs, including smallholderdairy farmers. However, the use of credit by small holderfarmers has been constrained by stringent collateralrequirements which do not favour the SMEs in the dairysubsector.

Other relevant institutions which work on dairy issuesinclude NGOs such as Land O'Lake, Heifer ProjectInternational, Techno Serve, Action Aid and church-basedorganisations. Land O'Lake, Heifer Project International andTechno Serve have become very active in dairy developmentin East Africa.

Policy and Institutional Framework (Irish Potato Sub sector)The Irish potato industry is supported by theNational Potato

Industry Policy of 2005.The objective of this policy is to raiseproductivity in the industry through the provision ofappropriate technology and services; develop and implementprocesses that will lead to increased empowerment of growersand other stakeholders; develop and promote the use ofstandard packaging and weight measures which was put at100 kgs per bag. The industry is also regulated by the adaptiveby law legal Notice No 44 of 2007. The legal notice stipulatesthat all the local authorities should enforce a maximum size(110 kgs) standard bag for potatoes.

However, the effective implementation of this law has beenhampered by poor coordination among the Ministry ofAgriculture (MOA), the police, and the local authorities.According to theNational Potato Policy, theMOA is the nodalinstitution which coordinates the implementation of theagricultural policies. The specific functions of the ministry


include developing and overseeing the implementation of theagricultural policy ,crop production and marketing ,land usepolicy, pests and diseases control; agricultural research,information management for agricultural sectors amongothers. The MOA has regional branches which supervises theimplementation of the government policies at the grass rootlevel.

The Kenya Agricultural Research Institute (KARI); is alsomandated to carry out research activities covering agriculturewhere Potato research is done mainly in KARI Tigoni centre.However, other stations and substations are also highlyinvolved including the International Potato Centre (IPC). These

Box 5: Functions of the NPCK

(a) To create an enabling environment for effective andefficient potato value chains for growth anddevelopment of a self-regulating potato industry

(b) To build a cohesive potato industry in order to promotesynergies and minimise duplication for efficient use ofresources through enhanced public private partnerships

(c) To promote best practices for quality standards,improved yields and enhanced value addition in orderto thrive in local, regional and global markets.

(d) To create a platform for information management andcapacity building for the various potato value chainactors

(e) To mobilise and effectively manage resources for thegrowth and stability of the organisations and theprosperity of the industry

(f) To identify and mainstream crosscutting and emergingissues within the potato industry

Source: http://npck.org /


institutions develop, promote and avail quality seed potato toseed growers.

The sub sector is also regulated by the Horticultural CropsDevelopment Authority (HCDA).The HCDA is in charge ofregulatory and advisory in policy making, production,marketing, post harvest, processing and consumption. Theauthority is expected to collaborate with other organisationsinvolved directly or indirectly with the potato industry. It isalso expected to develop, promote and facilitate potentials ofmarketing strategy, production strategy and post harvest chainsby exploitation of national, regional and international potentialof farmers, exporters, importers and consumers.

The Kenya Plant Health Inspectorate Services (KEPHIS)also coordinates all matters related to pests and disease control;monitor the quality and levels of toxic residue in plants; soilsand products; administer plant breeder's rights, undertakeinspection, testing, certification, quarantine control, varietytesting and description of seeds and planting materials amongothers. Agricultural Development Corporation (ADC) wasalso established under the agricultural DevelopmentCorporation Act, Cap.444 to be in charge of germplasm forcrop seed and livestock.

The KEBS is also important in promoting standardisationin commerce and industry through development of standards,quality control, certification and metrology. KEBS has themandate of establishing and enforcing quality standards of allproducts on the Kenyan market whether locally produced andimported.

The Kenya Industrial Research and Development Institute(KIRDI) is also mandated to undertake research anddevelopment in industrial and allied technologies. KIRDI isexpected to collaborate with theMOA and other stakeholdersin technology development and transfer in processing of


horticultural produce. Such technological development couldinclude enhancement of value addition processes.

The Local Authorities, on the other hand, are involved inthe development of markets and market infrastructure forproduce in their areas of jurisdiction. They collect fees andcharges from agricultural produce and are expected to ploughback some of these revenues in the maintenance of rural accessroads and in the maintenance and development of newmarkets. The operations of the local authorities are governedby the local Authorities Act, Cap 265.

Another key institution is the National Potato Council ofKenya (NPCK). The Council was formed as a result of atransformation of the Potato Value Chain DevelopmentCommittee (VCDC) which had been formed through theinitiatives of PSDA and MOA. The NPCK was registered inAugust 2010 and launched on 25th November 2010. TheNPCK is envisioned to move potato industry forward anddevelop it through organising its social, political, economicand agronomic environments; building synergies andcoordination of all stakeholders' efforts. The Council intendsto use pragmatic approaches of interrogating the processes inthe subsector to revamp and develop the subsector into a self-regulating and robust industry.

There are also farmer groups and association which arekey in revitalising the subsectors' performance. The potatoeindusty have been under the auspice of the key farmer groupslike the Kenya National Potatoes Farmers Association(KENAPOFA), which is a member based organisation formedin 2003 and registered as Kenya Potato Growers andMarketing Association (KPGMA). The main mandate ofKENAPOFA is to spearhead lobbying and advocacy activitiesfor the strengthening of national potato industry to competitiveinternational levels. KENAPOFA is expected to voice out theconcerns of farmers in various areas. However, the extent at


which KENAPOFA delivers its expected mandate dependson the strength of its presence on the ground.

Policy and Institutional Framework (Orange and PineappleSub sectors)

The Horticulture Industry is governed by various publicand private institutions with legal and institutional mandates.The Ministry of Agriculture provides overall policy direction,regulation and operational direction. The industry which isregulated by the Horticultural Crops Development Authority(HCDA) was established under the Agriculture Act, (Cap.318) through the HCDA order, 1967 (Legal Notice No. 229/1967). HCDA has the mandate to facilitate the development,promotion, coordination and regulation of the horticultureindustry in Kenya.

Other institutions include the KEPHIS which wasestablished by the KEPHIS Order, 1996, under the StateCorporations Act (Cap 446). KEPHIS has the responsibilityof regulating plant health issues relating to phytosanitary andseed matters; the KARI with the national mandate of carryingout research the fields of agriculture; the Pest Control ProductsBoard (PCPB) which was established under the pest controlproducts Act (Cap 346). The key functions of the PCPB are toregulate the importation, exportation, manufacturing,distribution and usage of pesticides. The KIRDI wasestablished under the Science and Technology Act (Cap 250).It is mandated to undertake research and development inindustrial and allied technologies; and the KEBS which wasestablished under the Standards Act (Cap 496).


Policy and Institutional Framework (Fishing Industry)The fishing industry is regulated by the Fisheries Act (Cap.

378).The Act sets up the basic principles for the development,management, exploitation, utilisation and conservation offisheries. The industry is also controlled by the fisheries (BeachManagement Units) regulations, 2007 (L.N.No.402 of 2007)whichmake provision for the establishment and administrationof beach management units. The beach management units areexpected to strengthen the management of fish-landingstations, fishery resources and the aquatic environment; thesupport of sustainable development of the fisheries sector;ensuring the achievement of high quality standards with regardto fish and fishery products; and the prevention or reductionof conflicts in the fisheries sector. The regulations also requireauthorised fisheries officer to draft plans setting fisheriesmanagement and conservation measures.

Another key regulation in the industry is the Prawn fisherymanagement plan 2010 (L.N.20 of 2011), adopted underSection 5 of the Fisheries Act. The regulation empowers theDirector of Fisheries to prescribe measures with respect tothe prawn fishery in the geographical marine area covered inthe plan. The principle objective of the plan is to ensure abiologically sustainable and economically viable prawn fishery.Other regulations in the fishery sector include the WildlifeAct of 2002; Kenya Forests Act, 2005; The Maritime ZonesAct; EnvironmentalManagement Act of 1999; Local Authorityand Planning Act; Water Act; Maritime Authority Act andthe Kenya Ports Authority Act.

The Fisheries Department is the primary agency responsiblefor fisheries management and development in Kenya. Thedepartment is responsible for the development andenforcement of fish handling standards that minimise postharvest losses. However, lack of enforcement capacity withinthe Fisheries Department limits the effectiveness of expected


interventions within the industry. Another key institution isthe Kenya Marine and Fisheries Research Institute (KMFRI),which is a State Corporation in the Ministry of FisheriesDevelopment of the Government of Kenya. The Institute ismandated to conduct aquatic research covering all the Kenyanwaters and the corresponding riparian areas including theKenyan's EEZ in the Indian Ocean waters. Such research isaimed at generating information and data to guide the countryin undertaking sustainable exploitation management andconservation of its fisheries and aquatic resources as a meansto achieving food security.

3Approaches and KeyLessons on RegulatoryFramework for SMEs:A Case of South Africaand India

Regulatory and Institutional Framework in IndiaUnlike in Kenya, the overall regulatory framework for the

SMEs in India is driven by specific SMEs Act which specifiesthe key institutional linkages for effective coordination. TheMicro, Small and Medium Enterprise Development Act No.27 of 2006 is the overall SMEs strategy which has beeninstrumental in revitalising the performance of the SMEs subsector in India.The Act generally aims at enhancing andpromoting competitiveness of micro, small and mediumenterprises. The Act establishes the necessary structure foroverseeing and regulating the development of the SMEs inIndia. The implementation of the Act is supported by severalpublic institutions and agencies. At the national level, the SMEssector is coordinated by the Ministry of Micro, Small andMedium Enterprises. The Ministry is the nodal institution


responsible for policy formulation, promotion, developmentand protection of small scale industries. It also monitors theexecution of the formulated policies to ensure their effectiveimplementation.

The Ministry of Micro Small and Medium Enterprisesdesigns and implements relevant policies through its fieldorganisations for the promotion and growth of the small andtiny enterprises and village industries in India. The Ministryalso performs policy advocacy on behalf of the Small ScaleIndustries (SSI) sector with other stakeholder ministries/departments such as Finance, Commerce, Law, Labour andEnvironment so as to ensure due consideration for SMEs intheir respective policies. The implementation of policies andvarious programmes/schemes for providing infrastructure andsupport services to small enterprises is supported andundertaken through Central and state governmentdepartments, agencies and autonomous institutes. TheMinistry ofMicro and Small Enterprise is supported by variousinstitutions. The institutions assist in the implementation ofthe SMEs Development Act. The key institutions/stategovernments which support the implementation of the SMEsdevelopment Act include:

� The Small Scale Industries (SSI) Board: This is an apex orprincipal advisory body constituted by the government tofacilitate co-ordination and inter-institutional linkages forthe development of the sector, and to provide advice on allissues pertaining to the SSI sector. The Minister is theChairman of the Board which comprises of State industriesministers, MPs, Central Government DepartmentSecretaries, and heads of financial institutions, industryassociations and eminent experts in the SSI field.


� The Small Industries Development Organisation (SIDO):SIDO is an organisation which assists the Ministry in theformulation and implementation of policies andprogrammes for the promotion and development of thesmall scale sector. It liaises with central and stategovernment departments and agencies, financial institutionsand other key small scale sector intermediaries, encouragescapital and technology flows, and provides a comprehensiverange of common facilities, technology and competitivenesssupport services, and marketing assistance through anetwork of Production Centre and Field Testing Stations.

It also supervises Tool Rooms, Product and ProcessDevelopment Centres and Training Institutes which runas autonomous bodies. At the regional level, commissionersand directors of industries implement policies for thepromotion and development of small scale, cottage, mediumand large-scale industries. Other regional level agenciesinclude state infrastructure development corporations, statecooperative banks, regional rural banks, state exportcorporations, agro industries corporations and handloomand handicrafts corporations. At the grassroot level, NGOsplay an important role for the development of tiny andcottage units.

� The National Small Industries Corporation (NSIC): This isa public sector undertaking of Small Scale Industries (SSI)responsible for promoting, assisting and fostering thegrowth of small scale industries. It helps small scaleindustries through its various schemes such as: equipmentpurchase and leasing; domestic and export marketing; singlepoint registration; procuring and supplying raw materialsat concessional rates; conducting technical training andentrepreneurship development programmes in its varioustechnical service centres; and assisting competent small


businesses in participating in government procurementprogrammes. It has also established software technologyparks for small scale businesses and facilitates softwareexports. It provides loans on concessional terms for thedevelopment of rural and backward areas and fordisadvantaged smaller businesses.

� The Small Industries Development Bank of India (SIDBI)serves as an apex financial institution for promotion,financing and development of Indian industry in the smallscale industries sector where individual business investmentin plant and machinery and tourism sectors and also to theprofessional and self-employed persons setting up small-sized professional ventures. It focuses on plugging gaps inthe financialmarketplace and offers awide range of financialproducts either directly or indirectly and state level financialinstitutions.

� Three training institutes have also been established bygovernment to develop and provide training, research andconsulting services for small-scale entrepreneurs. Thesetraining institutes includeNational Institute ofMicro, Smalland Medium Enterprises (NIMSME), Hyderabad; IndianInstitute of Entrepreneurship (IIE), Guwahati & NationalInstitute for Entrepreneurship and Small BusinessDevelopment (NIESBUD), NOIDA.

Though the Central government undertakes many SSI-related initiatives, most states also have their own SSIdepartments and provide entrepreneurial, financial,developmental and infrastructure support to SSIs. Industryassociations provide important operational and institutionalsupport to the SSI sector and offer a common platform toraise industry-related issues.


� Business Associations: The government policies havestressed the increasing role of industry associations in thesetting up of common facilities and other ventures in thearea of technology, marketing and other support services.Some of the major broad-based associations include: theConfederation of Indian Industry; the Federation of IndianChamber of Commerce and Industry; the PHD Chamberof Commerce and Industry; the Associated Chamber ofCommerce& Industry of India; and the Federation of IndianExporters Organisation. Associations which are moreclosely focused on small business issues include the WorldAssociation for Small & Medium Enterprises; theFederation of Associations of Small Industries of India; theConsortium of Women Entrepreneurs of India; LaghuUdyog Bharati; and the Indian Council of Small Industries.

� Public-Private Dialogue:TheCentral government has placedparticular emphasis on involving all key stakeholders in thedevelopment of its policies and programming for small scalebusinesses and village industries. This is exemplified in theSSIs Board which is a principal advisory body responsiblefor providing advice to the Central government on all issuesrelated to the SSI sector and comprises representatives ofall key stakeholders as well as eminent experts in the SSIfield.

� Khadi and Village Industries Commission (KVIC): This isa statutory organisation responsible for planning,promoting, organising and assisting in the implementationof programmes for the development of Khadi (handloom)and village industries including those based on minerals,forestry, agricultural, polymers and chemicals, textiles,services, engineering and non-conventional energy. Toachieve this it finances eligible businesses and institutions,


trains personnel, acquires and supplies rawmaterials, assistsin product R&D, and encourages industrial cooperation.It operates through a huge network of State/UTKVI boards,registered institutions and cooperatives, departmental unitsand sales outlets. KVIC undertakes training activitiesthrough its departmental and non departmental trainingcenters.Marketing is taken up through its 9 departmentally-runKhadi Gramodyog Bhavans located in urban areas and7,050 institutional/retail sales outlets located at differentparts of the country. KVIC also makes available qualityraw material to khadi institutions through its six CentralSliver Plants (CSPs). The Union Government through theMinistry ofMicro, Small andMedium Enterprises (MSME)provides funds to KVIC for undertaking its various activitiesunder Plan and Non-Plan heads.

Regulatory and Institutional Framework in SouthAfrica

The Government of South Africa has formulated variouspolicy regimes to streamline the SMEs sector. Thedevelopment of the SMEs sector can be traced back from theNational Small Business Act, No. 102 enacted in 1996. TheAct provided for the establishment of the National SmallBusiness Council and theNtsika Enterprise Promotion Agency.The Act also provided guidelines for organs of state in orderto promote small business in the Republic.

The National Small Business Amendment Act, 1996, waslater amended in 2004 to repeal all the provisions pertainingto Ntsika Enterprise Promotion Agency and to provide forthe establishment of the Small Enterprise Development Agency;to make provision for the incorporation of the NtsikaEnterprise Promotion Agency, the National ManufacturingAdvisory Centre and any other designated institution into the


Agency to be established. There were further developmentspelt out in 2005 where the White Paper on National Strategyfor the Development and Promotion of Small Business in SouthAfrica, was published. The paper encouraged theestablishment of a support framework, in form of enablinglegislation, institutional reform, leveraging financial and otherforms of assistance, for small business development. Theenactment of the legislations facilitated the establishment ofvarious institutions to oversee the implementation of the SMEsrelated legislations. The key institutions responsible for theimplementation of the National Small Business AmendmentAct include:

� Department of Trade and Industry: The Department ofTrade and Industry (DTI) has the primary responsibility toformulate, coordinate and monitor the national policiesrelated to small and micro businesses. The DTI is thecoordinating body for all policies related to small businesssector and for all SME-support programmes directly orindirectly assisted by the government. It is also responsiblefor the co-ordination of small business strategies pursuedby the provincial governments within the national policyframework. DTI directly administers some specificprogrammes targeted to smaller businesses such as the SMEdevelopment programmewhich provides investment grantsto qualifying businesses and a wide variety of technologyand export assistance services.

� Small Enterprise Development Agency (SEDA): SEDA wasestablished with 80 percent focus on the small and microbusiness sector. SEDA was established in December 2004as an agency under the DTI. The establishment was doneby merging three organisations; Ntsika EnterprisePromotion Agency, National Manufacturing Advisory


Centre (NAMAC) and the Community Public PrivatePartnership Programme (CPPP). The GODISA Trust andthe technology programmes were integrated into SEDA inApril 2006, becoming SEDATechnology Programme (STP).SEDA provides business development and support servicesfor small enterprises through its national network inpartnership with other role players in the small enterprisesupport. SEDA also implements programmes targeted tobusiness development in areas prioritised by the government.

� South African Micro-Finance Apex Fund (SAMAF): TheSouth African Micro-Finance Apex Fund (SAMAF) wasset up to act as a catalyst for the development of an effectivemicro-finance sector SAMAF's strategic goals includeincrease access to finance; enhance capacity andsustainability of finance institutions; and to increase micro-finance networks and partnerships.

� Khula Enterprise Finance Limited (Khula): The companyis a wholesale finance institution which operates acrossthe public and private sectors, through a network ofchannels to supply much-needed funding to small business.

� National Empowerment Fund (NEF): It was established bytheNational Empowerment FundActNo 105 of 1998 (NEFAct). NEF is a driver and thought-leader in promoting andfacilitating black economic participation by providingfinancial and non-financial support to black empoweredbusinesses, and by promoting a culture of savings andinvestment among black people. The operations of the NEFare governed by the Public Finance Management Act No 1of 1991 (PFMA), including the National TreasuryRegulations, the King III Report on Governance for SouthAfrica and the Protocol on Corporate Governance in thePublic Sector, 2002.


� Industrial Development Corporation (IDC): It was set upto promote economic growth and industrial development.The IDC's primary objectives are to contribute to thecreation of balanced, sustainable economic growth in SouthAfrica and to the rest of the continent.

� Business Partners Limited: Business Partners Limited wasformed in 1998 from the Small Business DevelopmentCorporation (SBDC) to focus on small and mediumenterprises with funding needs from R150 000 to R15million (South Africa Business Guidebook, 2002-2003).They provide finances for start-ups, expansions, take-overs,management buyouts, management buy-ins and leveragedbuyouts. They are one of the more successful SMMEsupport organisations.

� Local Business Service Centre (LBSC): It is a partnershipbetween government, local communities and the privatesector. At national level, it is focusing on job creation,wealth creation and transformation and empowerment. Itscore services are information, training, counseling andadvisory services and networking and linkage. At local level,it focuses on increasing access of locals to SME supportservices and opportunities for participation in localdevelopment and increasing the flow of resources (moneyand expertise) into the local community.

� Technology for Women in Business (TWIB): It is aninitiative aimed at women in the market sectors such as:information and communication technology, textile,clothing and crafts, agriculture, food and agro-processing;construction and infrastructure; tourism; mining andenergy. This programme is under the auspices of the Centrefor Scientific and Industrial Research (CSIR) that act as an


agent for the DTI and assist women in all their needs tostart the business, whether independently or in apartnership (www.thedti.gov.za).

Possible Lessons from South Africa and IndiaIt is evident from the above two case studies on institutional

structure that the governments of India and South Africa havedeveloped a clear and formal institutional structure tospearhead SMEs development. The mechanisms spell outformalised systemwhich provides avenue for private and publicdialogue for SMEs consultation, framework for stronger SMEsassociation and stronger institutional linkages andcoordination. The structural framework on SMEs regulatoryand institutional system is summarised by the following keyfeatures:

Table 3 also confirms existence of stronger institutionalcoordination among various government institutions andagencies, both at the national and regional level. For instance,a country like India has a direct forum for Public PrivatePartnership (PPP) where fundamental constrains inhibiting theperformance of the SMEs can be discussed directly with therelevant authorities. This implies that there is formal bottomup approach in addressing the challenges facing SMEs in India.A further comparative analysis also confirms the existence ofstrong business associations at the grass root level. Suchassociations are important in advocating for policy reforms atthe local level. There are further indications of institutionaldistribution at the local level in different states. Further,evidence also affirms the existence of SMEs related specificfinancial institutions.


Indicator

SME Act

Private-PublicDialogueMechanism

CoordinatingInstitution

SMEFinancingMechanism

Frameworkfor SMEsAssociation

South Africa

Existence of NationalSmall BusinessAmendment Act,1996

There is recognisedmechanism which linksthe SMEs to theDepartment of InternalTrade

Department of InternalTrade and Industry incollaboration with theSmall EnterpriseDevelopment Agency(SEDA)

There is South AfricaMicro Finance ApexFund to enhanceincrease in access tofinance

There is recognisedSMEs association,SEDA under theDepartment of InternalTrade and Industry

India

The Sector is guided by theMicro, Small and MediumEnterprise DevelopmentAct, 2006

Occurs through the SSIBoard; an apex or principaladvisory body constitutedby the government tofacilitate co-ordination andinter-institutional linkagesfor the development of thesector, and to provideadvice on all issuespertaining to the SSI sector

Ministry of Micro, Smalland Medium Enterprisesand the Small ScaleIndustries Board

The Small IndustriesDevelopment Bank of India(SIDBI)

The Small IndustriesDevelopment Organisation(SIDO) is an organisationwhich assists the Ministryin the formulation andimplementation of policiesand programmes for thepromotion anddevelopment of the SmallScale Sector

Table 3: Key Features of SME Sector in South Africa

Contd...


Indicator South Africa India

Mechanismfor ValueAdditionRegionalDistributionof Institutions

Technology for womenin Business forenhancing valueaddition activities at thelocal level. It act as agentfor DTI

There is also localBusiness service Centrewhich is a partnershipbetween thegovernment, localcommunities and theprivate sector

There is local presenceof all the institutions tosupport thedevelopment of theSMEs at the local level

Occurs through varioustraining Institutes and TheKhadi and VillageIndustries Commission(KVIC)

There is local presence ofall institutions to supportthe development of theSMEs at the local level

Source: Authors Deduction

4Key Study Findings

Fishing IndustryFocus group discussions (FGDs) were conducted in both

Kwale and Homabay counties to understand the existingchallenges facing the fishing industry in the two countries.The FGDs were composed of stakeholders from thegovernment ministries, the fish farmers both for aquicultureand sea farming. The field visits confirmed the potentialcontribution of the industry to the welfare of the population.Even though there are potential contribution of fishing industryto the welfare of the population within the Kwale andHomabay counties, a comparative analysis based on thefindings reveals key common challenges from the two counties.The existing challenges are linked to production; marketingand institutional framework.

Production and Marketing Issues

Exploitation by MiddlemenComparative analysis reveals that the fishermen in

Homabay and Kwale counties experience high exploitationby middlemen. Fishermen are forced to take up prices offeredby middlemen who often come up with excuses on poormarket situation and in most cases buy fish on credit from thefishermen. For instance, during the research period in


Homabay, the prices for 1kg of fish dropped to Sh80/kg, fromSh350/kg.The quantity is sold for Ksh 1800 in other marketsby middlemen. This can also be confirmed by the protest fromfishermen farmers which occurred two weeks after the fieldwork discussion in Homabay (see Box 6).

Box 6: Fishermen Demand Fish Price Increase

Over 800 fishermen in Homa Bay County have stoppedfishing to protest at low prices offered by merchants andmiddlemen. The fishermen operating at all beaches in thecounty held a demonstration in Mbita town to protest atwhat they termed reduction of fish prices by manufacturingcompanies. They said prices have dropped over the last onemonth with a kilo of fish going for Sh80, from Sh350. Ledby Homa Bay County Beach Management Unit chairmanEdward Oremo and area Nile Perch Traders NetworkAbisalom Odira, the fishermen accused manufacturingcompanies of disregarding them by lowering prices.

"We appealed to the companies several times to hikethe prices but they have not heeded our pleas. There is nobusiness where buyers can sit on their own to decide pricesthey want without consulting sellers. We have now optedto hold the demonstration to enable our voices to be heard,"Oremo said. The fishermen vowed not to fish until thegovernment holds a consultative meeting with them toaddress their grievances. They accused the government ofallowing the companies to import fish from neighbouringUganda and Tanzania, a situation that culminated inreduction of fish prices.

"It is sad that the government has declined to cushion usfrom unscrupulous importation of fish, which now makesbuyers feel that they can control prices," Odira commented.

Contd...


Inadequate processing and storage facilities: Inadequateprocessing and storage facility was asserted to be a keychallenge to enhancing effective performance of fishingindustry in both Kwale and Homabay counties. There is alsoinadequate fish processing plant /technology for aquacultureproducts which could enable the farmers to undertake valueaddition to their produce. Such condition has contributed toexploitation by farmers where fishermen are forced to selltheir produce at lower prices to the middlemen due inadequatestorage and processing facilities at the county level.

Poor road network and sanitation facilities: There are noproper access roads linking to the beaches. In many cases, thefishermen have to carry their catch for a long distance to themain roads either by motor bikes or bicycles which end upescalating the production cost. Inadequate sanitation facilitiesalso affect the productivity of fishing industry where fishermenare faced with the scarcity of sanitation facilities. In addition,the conditions at the landing sites are poor, lacking potablewater supply, clean auction areas and toilet facilities whichare a key challenge to value addition of the fish products.

The fishermen said the fish bought at Sh80 is sold atover Sh1,800."The cost of living has escalated and we areforced to purchase fishing equipment at very high pricesyet prices of our products keep going down," said SamwelOsewe, chairman of the Homa Bay County Lobby andAdvocacy Committee. The fishermen said they must selltheir fish for not less than Sh400.

See http://www.standardmedia.co.ke/?articleID=2000060656&story_title=Fishermen-demand-fish-prices-increased


High cost of inputs: The ability to improve the productivityof the fishing industry is affected by high cost of accessingfingerlings. The fish farmers are not able to easily accessfingerlings at a reasonable cost. This is attributed to the highcost involved in accessing the fingerlings hence some farmersare forced to re-use fingerlings within their pond as a way ofmitigating the cost involved in getting certified seeds.

Inadequate finance: The problem of inadequate capital wascited by the stakeholders as a hindrance to the establishmentof larger ponds as they rely on small fish ponds which hindertheir productivity potential. The inadequate finance isattributed to the complex requirement in the process ofaccessing finance where some financial institutions requirethe farmers to form SACCO's or registered groups beforethey can access credit facilities from the financial institutions.However, this has been a challenge as those with interest infish farming are few in some areas like in the case of KwaleCounty and had not yet bought the idea of forming SACCO's.

Weak extension services: Views from stakeholders alsoconfirmed that the ability to enhance information sharingamong farmers and government officers is inhibited by theexistence of the weak extension officers. The discussions fromthe field work findings also revealed that the services of theextension officers are never inadequate to attend to their needsin cases of invasion by pest in their ponds. In many cases,farmers have to meet the cost for fuel to access the service ofextension officers when urgently needed.

Absence of quality fishing materials: Most fishermenexperience low catch from the sea. This was attributed to thecontinued use of poor fishing gears. Fishermen evidently use


old tattered fishing nets and small canoes which could noteffectively catch fish and withstand large tides.

Limited market information: Field work findings alsoaffirmed inadequate market information for fishermen as akey hindrance to the development of the fishing industry inthe respective counties. This is a big challenge to fishermen asthey are deprived of better opportunities where they can makebetter sale on their catch.

Regulatory and Institutional IssuesWeaker cooperative societies/association: Most fishermen

experience limited awareness on the potential benefits offorming cooperatives as a way of enhancing their opportunityto access credit facilities to facilitate the expansion of theirfishing potential and purchase of processing equipments andmarketing of their products. The large scale oriented privatesector is organised under the Kenya Fish Processors andExporters Association. The Association has helped in selfregulation, marketing and interfacing with the government.However, there are no national organisations for local artisanfishermen and/or SMEs traders.

Poor enforcement of legislations in the fishing industry:Even though the Beach Management Units (BMUs) areintended to regulate the fishing industry, the field workfindings affirmed limited buy in on the concept of the BMUs.Most stakeholders felt that there is limited recognition of theBMU concept as a mechanism for regulating the fishingactivities. Such perception has affected the overall regulationof the SMEs at the beach level. It was also felt that the FisheryAct is lenient on enforcing penalties to offenders.


Mechanisms for Value Addition and InnovationGenerally, the fieldwork findings depict limited value

addition activities in the fishing industry from the respectivecounties. There are potential channels for value addition whichcould be explored by the county governments. The potentialvalue addition channels/mechanisms include using air bladderto make fish leather; animal feed from ground bones, localfillet production as most of the farmers sell unprocessed fishto themiddlemen, using fish scales to producemanure /fertiliserand chicken feeds, making biogas produced from fish productswaste, and, fishing picnic for tourism attraction.

The information collated from the field confirmed existenceof various efforts to enhance value addition activities in thefishing subsector.

For instance, the fieldwork findings indicate that manyresearchers have been employed to work on the componentso that fishers can fetch good value from their produce in theHomabay County.

The Lake Victoria Research (VicRes) Initiative (a regionalcollaborative-multidisciplinary research programme of theInter-University Council for East Africa) has undertaken valueaddition studies on "dagaa" to enhance returns from thefisheries. Among the value addition process identified throughthis initiative include grinding dagaa to powder as a way tomake children food, porridge and ingredient to bring someflavor, deep frying to bring out some delicacy.

Drying racks have also been placed in fish landing stationsand bandas in many beaches. There are demonstration unitsof solar tent drying racks in some beaches including LuandaRombo and Litare in Rusinga Island being implemented byWomen in the Fishing Industry Programme (WIFIP) with thesupport from the European Union (EU).

In addition to the pioneering the solar tent drying racks fordagaa, WIFIP is also undertaking capacity building to women


on hygiene processing of dagaa within two beaches inHomabay County through seminars to women fisher folk.They also undertake an on-going radio lesson in vernacularon the processing of dagaa every Tuesday at 7.00pm. Theprocess involves washing dagaa with water guard to maintainits whiteness for six months followed by drying in the solartents for six hours and then either frying or directly undertakingpackaging with Kenya Bureau of Standards quality markpackets.

Under the Vision 2030 programme, the Ministry ofFisheries Development is also supporting the establishmentof more solar tent drying racks along the beaches within theHomabay County. The objective of this initiative is to improveon the quality through high hygiene standards of handling fishproduct to avoid contamination and enhance taste so as toincrease demand and fetch better prices within the local supermarkets across the county. There are also efforts to establishmore fish landing 'Bandas' sites and to re-instate the old onesthrough the BMUs as a way to facilitate grading, storage andmarketing of Nile perch and tilapia and to get rid of undersize.

The Ministry has also initiated the Mbita Ice plant andinstalled machines for filleting. The process of establishingcomplete fish processing centre in Nyandiwa (over 98 percentcomplete) is also under way. The initiative was put up by thesupport from the EU and the Government of Kenya. This is tofacilitate the processing of ice, filleting, packaging, cold storageand chill rooms.

On the other hand, in the case of the Kwale County, theMinistry of Fisheries Development is yet to fund theconstruction of 300 fish ponds in Kwale County coveringMsambweni, Kwale and Kinango districts in a bid to improvethe income of the area residents. The electrification has alreadybeen done in the villages which can easily be extended to coverthe beaches. Provision of electricity along the beaches will


not only enhance security but will also provide avenue for iceproduction needed for the preservation of fish to minimise ontheir perishability, creating window for establishment ofprocessing units of fish products along the beaches which willopen upmore job opportunity to the locals. Presence of KenyaMarine Research Institute (KEMRI) in the county and withinthe GAZI beach locality and the proximity of fisheries officersthrough BMU is also an opportunity for the fishermen to learnon best practices and more so in engaging in value additionprocesses including the use of fish processing facilities toimprove on their outputs.

The above expose affirms the existence of the ongoing valueaddition initiatives being implemented to enhance valueaddition in the respective counties. Even though there areefforts to enhance value addition activities in the two counties,the existing potential have not been fully exploited in therespective counties. The Homabay County does not havetraining institute to impart skills on value addition techniquesat the county level.Most of the farmers are selling unprocessedfish to middlemen based in Nairobi and potential byproductshave not been utilised to enhance value addition activities inthe respective counties. This implies that county-led SMEpolices should be streamlined to integrate regulations andinstitutional framework. Such frameworks should be aimedat exploiting the underutilised and potential value additionactivities in the respective counties.

Irish PotatoesAn assessment of the potato production and discussions

with various stakeholders in Bomet and Kiambu countiesrevealed that most farmers have not embraced potato growingas a business enterprise. This perception was prevalent inKiambu County where most farmers in the region have


preferred dairy farming to Irish potato farming. The growingtrend have contributed to the neglect of the subsector despiteits potential contribution to the county's socio-economicdevelopment. However, the two counties had common crosscutting experiences ranging from production, marketing,regulatory and institutional challenges. The following are thecommon challenges facing the two subsectors in the respectivecounties:

Production and Marketing IssuesLack of institutionalised system for seed development,

multiplication and distribution to farmers: Limited seeds forfarmers were raised by most farmers as a key bottleneck tothe development of the Irish potato industry. In some instances,farmers use seed varieties not suited to market needs. Mostfarmers rely on two seed multiplication centers in KARI Njoroand Tigoni which are not adequate in supplying certified seedssince KARI centre is only able to meet four percent of thetotal seed demand.

Poor road infrastructure: Another key constraint cited bythe farmers during the FGD include poor rural access roadswhich limits their ability to access markets. This hascontributed to low farm gate prices, high transportation costand reduced margins. In order to facilitate access andtransportation of produce to the markets, it is important toimprove and maintain conditions of the access roads in smallholder producing areas within the counties.

Inadequate extension officers: The number and technicalknowledge on the part of the MoA extension staff remainslimited. This has contributed to poor information access andtransfer. The delivery of extension services could best becomplimented through partnerships with private sector


services providers including NGOs and farmer organisationsin the respective counties.

Low returns from farms produce: The return on the Irishsubsector from the respective counties is also affected by Poorproduce quality. The poor produce quality is attributed toinadequate technical knowledge on good agricultural practiceson the part of smallholder farmers. The produce quality isalso affected by the high incidence of pest and diseases on thecrop. In addition, most farmers lack the knowhow on how toidentify and manage pests and diseases leading to high postharvest losses. Besides, still many farmers do not practice croprotation on their farms to reduce the spread and prevalenceof the pests and diseases.

Inadequate access to finance: Interviews with variousstakeholders and information collated from the FGDsconfirmed inadequate access to credit to enhance theproduction activity as one of the key constraint to thedevelopment of the fishing industry. The limited access tofinance is attributed to stringent requirements imposed by thefinancial institutions, which requires collateral, formation ofbusiness groups and reluctance on their part on account ofperceived risk associated with smallholder farmers.

Regulatory and Institutional IssuesWeak producer associations: Even though KENAPOFA haspresence in both Kiambu and Bomet counties; concerns fromvarious stakeholders from the Irish potato industry depictsthat the organisation is still nascent and need to be strengthenedto take up its role in assisting the farmers. Discussions alsoconfirmed that most farmers are registered in various farmergroups but such groups do not address their interest. Forinstance, farmers are not informed or engaged in the activities


of KENAPOFA despite of the annual fee subscriptions madeby the farmers to the association. However, field visits anddiscussions with various stakeholders confirmed that theproducers in Bomet County are more organised in terms ofassociation as compared to those of the Kiambu County.

Inadequate formal Private-Public Dialogue consultativemechanism:Discussions with various stakeholders confirmedthat there is limited formal mechanism for stakeholderconsultation. This is due to lack of well organised producergroups to mobilise producers in a formal producer associationespecially in Kiambu. Even though there is business stakeholderforum in Bomet County; most stakeholders felt that there islimited stakeholder consultation during the policy makingprocess in the County. This implies limited approach regardingbottom-up mechanism in policy making process.

Poor enforcement of agriculture legislations: The legal noticeNo 44 on Standard Bags (110kg) has not been effective as wasenvisioned to regulate the standardisation in the Irish potatoindustry. The farmers have been left to sell bulky produce atlower prices. Such weakness in Law enforcement is attributedto poor coordination between the local authorities and theMinistry of Agriculture from the respective counties.

Mechanisms of Value Addition and InnovationGenerally, potatoes can be used for a variety of purposes.

Fresh potatoes can be baked, boiled, or fried and used in astaggering range of recipes. These include smashed potatoes,potato pancakes, potato dumplings, twice-baked potatoes,potato soup, potato salad and potatoes au gratin. However,potato as food is shifting from fresh potatoes to added-value,processed food products.


One of the main items in that category is French fries.Another processed product for potato is the potato crisp.Dehydrated potato flakes can also be used in retail mashedpotato products, as ingredients in snacks. Potato flour, anotherdehydrated product, can also be used by the food industry tobind meat mixtures and thicken gravies and soups. Potatostarch can also be used by the pharmaceutical, textile, wood,and paper industries as an adhesive, binder, texture agent,and filler, and by oil drilling firms to wash boreholes. Potatopeel and other "zero value" wastes from potato processingare rich in starch that can be liquefied and fermented to producefuel-grade ethanol. Potato harvest can also be used as farmanimal feed, where Cattle can be fed up to 20 kg of rawpotatoes a day, while pigs fatten quickly on a daily diet of 6 kgof boiled potatoes.

The aforementioned cases imply that there are variedmechanisms for Irish potato value addition. However, theefforts to use Irish potatoes to improve the livelihood of thelocals through the value addition process are inhibited by theLow level of processing at the local, and the inadequate skills.The field visits and discussions with farmers confirmed thatmost farmers sell unprocessed and less value added productsto the middlemen, who directly sell the products in Nairobi.This is said to fetch relatively little in terms of farm outputreturns as compared to the overall returns realised by vendorsinNairobi who substantially engage in value addition activities.This is attributed to high costs of processing equipments andlimited technical Knowhow on value addition activities. There

Possible Key Irish Potato Products

� French Fries� Potato Crips� Potato Flour


is also limited training on farm production and practicalentrepreneurship skills.

It would thus be important for the county government toformulate soft and hard infrastructure policies to increaseproduction and to enhance the realisation of the value additionactivities given the aforementioned challenges.

DairyProduction and Marketing IssuesHigh health maintenance cost: The cost of taking care of thedairy cow's in terms of provision of animal feeds, artificialinsemination services were indicated by most farmers asexorbitant and constraint to the dairy productivity. High costof these services erodes the profit margin. Farmers also pointedout lack of technical knowhow on dairy maintenance andhuman diseases like HIV/AIDS. There is also inadequatetechnology to handle glut conditions which have resulted intofrequent milk wastage.

Limited access to credit: The discussions with stakeholdersalso confirmed limited /inadequate access to credit facilitiesas key challenge to expanding their business as most farmersin some areas in Bomet County are not members of thecooperative societies.

Inadequate extension officers: The extension services in mostareas were asserted to be inadequate, thus affecting thedelivery of dairy advisory services. In some cases the farmerhas to provide transport for the officer to be able to deliverthe required services.


Regulatory and Institutional IssuesDairy farming is a potential socio-economic contributor to

Bomet and Kiambu counties. The dairy farmers in bothcounties are mainly smallholder producers. The farmers areorganised in farmer groups and cooperatives. Even thoughmost farmers have appreciated the significance of cooperativesocieties in both the counties, comparative analysis revealsthat the institutional framework in terms of cooperativeframeworks is more organised in Kiambu County than BometCounty. A case study on the dairy institutional structure forone of the dairy cooperatives (SOIT) in Bomet confirms thatthe cooperative is a registered farmer owned organisation.The cooperative society has a management agreement withthe East Africa Dairy Development. The SOIT dairy is ownedby SET Kobor Women Group, Bomet central dairies andindividual shareholders (see Figure 3).

Figure 3: A Case of InstitutionalLinkages for Cooperative Society


The current core business of the cooperative organisationis bulking and selling fresh, high quality chilled milk. Thecompany's primary product is fresh chilled milk sold to a wellestablished milk processor. The milk is collected in wellorganised groups called dairy management groups throughmotorcycles and pickups. The system meets the farmers� needthrough reliable and organised milk marketing system thatensures sustainable income streams and spurs furtherdevelopment in the dairy sub sector. The company also offerfarmers training services through the extension department,artificial insemination services, animal health services, milkpayment advances and linking farmers to friendly andrecognised financial institutions. The services are offered tofarmers on a check off system whereby they pay at the end ofthe month when milk payment is done.

A visit to the cooling plant confirmed that most of the milkare collected and directly sold to the Brookside CompanyLimited in Nairobi. A similar institutional structure also existsin Kiambu County where the Githunguri Cooperative Societyis the dominant dairy farmers� institution. The dairy farmingin Kiambu is more advanced as compared to the BometCounty. This is attributed to the fact that dairy farming isundertaken in Kiambu as a business and they have high qualitybreeds than those breeds reared from Bomet County. The dairyfarming in Kiambu County has more advanced institutionalframework facilitated by the Githunguri Cooperative Society.The FGDs with various farmers from the respective countiesconfirmed the following common challenges.

Inadequate enforcement of the regulations: Despite theexistence of the farmer-driven cooperative societies in therespective counties, there were concerns that the Kenya DairyBoard (an overall regulator board) for the Industry has notbeen effective in regulating the operations of the small milk


traders. The deficiency in the regulatory framework isattributed to the fact that the Kenya Dairy Board is mainlylocated in the main centres in Bomet and Kiambu counties.However, their operations are not effectively enforced at thegrassroot level, where the majority of the smallholder exists.

Unequal distribution of cooperatives in the respectivecounties: The findings from the FGDs also confirmed limitedpresence of cooperatives in some areas where some specificregions do not have such farmer cooperative associations. Theabsence of cooperatives in some areas affect the returns of thefarmers as hawkers take advantage of these areas, given thefact that the unorganised farmers do not have a strongerbargaining power in terms of prices for their raw milk.

Mechanisms for Value Addition and InnovationDiscussions with stakeholders from Homabay and Kwale

counties confirmed various mechanisms for value addition inthe dairy subsector. Comparative analysis in terms of valueaddition reveals that the Kiambu County has a moresophisticated processing system where the degree of valueaddition is more developed than the Bomet County. Forinstance, the Githunguri Cooperative society in Kiambu playsa key role in the processing of its raw milk into fresh milk,yoghurt, maziwa lala (fermentedmilk), butter, ghee and cream(see Figures 4 and 5 on page 64). On the other hand, most ofthe farmers from Bomet County take their milk to the dairyfarmer groups.

The farmer groups further sell the raw milk to the coolingplants within the county. The raw milk is then sold directly tothe processing plants like the Kenya Brookside based inNairobi(see Figure 3 on page 61). This implies that there is limited orno value addition activities for milk in the Bomet County. Theinadequacy in value addition activities limits the possibility of


employment creation and by extension, the enhancement ofsocio-economic development at the county level. The effortsto add value to the milk products in Bomet County areconstrained by the high cost of production in acquiring thecooling plants and undertaking the processing and packagingactivities. There is also lack of expertise/knowledge in thevarious fields along the value chains attributed to limitedtraining facilities on milk production and processing.

Given the aforementioned challenges, the devolvedgovernment system should formulate county-specific policiesto support value-addition at the county level. The SMEs policyshould catalyse the promotion of the hard and soft

Figure 4: Case of Kiambu Figure 5: Case of Bomet

Source: Deduction by the Research Team


infrastructure that will facilitate the establishment of therelevant processing facilities: good roads, animal productionand entrepreneurship skills.

PineapplesPineapples farming in Homabay were initiated as a

household farming activity by an individual in Kokwanyovillage which later spread to commercial level as demandimproved. Pineapple farming in the region is grown in anaverage land acre of ½ acres - 4 acres. Even though thepineapple farming has a growth potential in the HomabayCounty, field visits and consultations within the countyconfirmed the following production, institutional andmarketingchallenges.


Geographical challenges: The existing geographical naturemakes it costly to undertake irrigation as the soil cannot holdwater, while the land topography within the potential areas issteepy. Some of the areas often lack permanent sources ofwater which can sustain irrigation and the small rivers aroundare also seasonal.

Limited awareness on the importance of fertiliser: Theinterview findings also confirmed that farmers have notembraced the use of fertilisers in the region due to wrongperception by them on the fertility of land. This limits theyields from the farms.

Inadequate certified seeds: Most farmers also face thechallenge of getting certified pineapple seeds and often relyon recycling suckers which often bear low yields. The suckers


are also not easily available and farmers have to go longdistances before they can access the seed which comes at highcost.

Inadequate storage facilities: The nature of pineapplesdemand larger storage and transport facilities to the markets.However, in many cases, farmers are not able to afford, thuscontributing to spoilage.

Poor road network: The pineapple farmers also face thechallenges of inaccessibility of pineapple farm due to poorroad network which hinder farmer's efforts to take theirproduce to themarkets.Most roads became inaccessible duringrainy season which coincides with the harvesting period. Poorroads have also hindered farmer's access to other market asthey are only able to carry head loads to markets since theycannot afford means of transport.

Lack of ready markets and exploitation by middlemen:Discussions with stakeholders also confirmed lack of readymarkets for pineapple which forces farmers to sell directly tomiddlemen on credits out of which the middlemen oftendefault payment or excuse themselves of poor markets andlow prices leading to small returns to farmers.

Limited access to farm inputs and extension services is alsoa hindrance to the performance of the subsector where; mostpineapple farmers have no easy access to farming inputsincluding fertilisers. Sometimes they fail to receive the servicesof extension officers owing to either lack of fuel orinaccessibility of their farms for advisory services in cases ofpests and disease to the crops. At times they have to meet thetransport cost (fueling for motorbikes) for extension officersto tend to their farms. This adds to production cost burden toalready vulnerable farmers


Lack of farmer association/cooperative: The pineapple subsector also experience limited efforts towards policyformulation and development due to lack of farmers�association. The deficiency is attributed to farmer groups orcooperative societies to advance the interest of the farmers inHomabay County. This has also inhibited their ability to easilyaccess credit from the financial institutions.

Mechanisms for Enhancing Value AdditionThere are potential mechanisms for enhancing value

addition in the pineapples industry. Some of the mechanismincludes processing the raw pineapple to pineapple juice,canned pineapples, dried pineapples and wine. Even thoughvalue addition is important for sustainable economicdevelopment; lack of processing facility was cited to be themain bottleneck to value addition activities in the HomabayCounty. TheCounty has engaged in rudimentary value additionmethods since the variety of pineapple available is only bestfor drying due to its high sugar level. Such preservation modelimits the chances for value addition. Furthermore, there is noestablished processing unit for pineapple and its products inthe county. This is attributed to the high capital requirementfor establishing pineapple processing unit and Farmers are notorganised in formidable societies to access loans to facilitateestablishment of processing units.

Despite the existence of the structural value additionchallenges in the region, there are plans to build a pineapplefactory in Homabay district by Kenya Industrial ResearchInstitute (KIRDI) to streamline marketing of the crop inSouthern Nyanza. The initiative will involve installation ofequipment to process the pineapples into products with bettercommercial value. KIRDI also has plans to engage in themarketing of both raw and processed pineapple and otherfruits so that they are sold in retail shops, supermarkets, urban


outlets and other factories all over the country to address overproduction.

OrangeOrange subsector is one of the key sub sectors in Kwale

County in terms of its potentiality in enhancing sustainableeconomic development. Most of the farmers are small scalefarmers who are engaged in the farming activities, wheremajority of them are women and youths. As in the case ofother sectors, the FGDs identified various challenges. Theseinclude:


Lack of disease resistant varieties: Farmers face the problemof dealing with crop diseases which interferes with the qualityand quantity of the fruits. For those farmers who have shiftedfrom the indigenous oranges which takes six years to exoticones that last two-three years to mature still faces the diseasemenace. The exotic breed of oranges are also not the sweetesthence not very marketable as compared to the indigenousbreed.

Inadequate knowledge on good crop husbandry: Inadequateknowledge, resources and expertise which have hinderedfarmers from engaging in good crop husbandry. This hascontributed to the maintenance of the old and aging orangetrees in their farms, limited application of fertiliser andmodernproduction techniques like use of irrigation system.

Poor market information system: It was also confirmed byvarious stakeholders during the FGDs. The farmers only relyon local markets and middlemen who often buy on credit onlyto complain later on poor prevailing market and spoilages


hence farmers get a raw deal on prices for their oranges. Thereis also poor market information on alternative best prices inother available markets.

High cost of transportation: There were concerns ofexperiencing high costs wherever they want to seek othermarket opportunities due to poor road infrastructure. Hencefarmers who cannot access transport facility for their produceto external markets only rely on middlemen.

Regulatory and Institutional Issues

Difficulty in forming farmer groups: Efforts to enhance thebargaining power for farmers has been inhibited by difficultyin forming Farmers� Cooperative Society in the sector. This isattributed to lack of trust among orange farmers in LukoreLocation which weaken the progress of Lukore Fruits Farmers�Cooperative Society. Given the lack of the cooperative society,farmers are not able to undertake collective loan applicationto better their farming by either collectively purchasingtransport facility for their fruits and for the purchase ofprocessing unit and storage facility and collective marketingfor their oranges.

Low returns from the produce: Farmers experience low priceswhich are often dictated by the buyer despite the crop takingas long as six years to produce. They indicated that one kg ofof orange sells at an average of kshs.2. The low prices areattributed to limited bargaining power due to lack of strongerbusiness associations to represent the interest of farmers.

Mechanisms for Enhancing Value AdditionThe value addition activities are also limited in Kwale

County. This is attributed to lack of technical knowhow andequipments for value addition procedures in oranges. Farmers


often rely on rudimentary preservation methods and fail toundertake packaging of the oranges to fetch better prices.There are no proper processing equipments as farmers relyonly on a small capacity machine that uses petrol to squeezeorange juice. This has remained to be an impediment torealising better returns from the orange farming activities.

5Findings, Conclusions andPolicy Recommendations

Key FindingsThe case analysis from India and South Africa affirms the

need for a formal institutional structure for SMEs development.The existing regulatory structure depicts institutionalisedsystem for private and public dialogue for SMEs consultation,framework for stronger SMEs association and institutionallinkages and coordination.

For instance, a country like India has a direct forum forPPP where constrains inhibiting the performance of the SMEscan directly be discussed with the relevant authorities. Afurther comparative analysis also confirms the existence ofstrong business associations at the grassroot level to enhancepolicy advocacy for the SMEs. Such associations are importantin advocating for policy reforms at the local level.

There are further indications of institutional distributionat the local level in different states. Further evidence alsoaffirms the existence of SMEs-related specific financialinstitutions. For instance, there is South Africa Micro FinanceFund in South Africa to enhance increase in access to financeand also the Small Industries Development Bank in India. The


Indian government has also established the Export-ImportBank. The Bank proactively assists SME units in establishingtheir products in international markets.

A similar analysis in Kenya based on the key study findingsand literature review confirms that the general architectureof the institutional framework for SMEs involve multipleinstitutions which regulate the subsectors, with poorcoordination among themselves. This can be confirmed byseveral government institutions working on SMEs relatedissues with conflicting interests. For instance, the Ministry ofTrade, The Ministry of Industrialisation and Labour havedepartments working on similar SMEs related issues withoutproper coordination of their activities. This is contrary to theframework in India and South Africa, where the SME issuesare coordinated by a central institution.

Another key policy issue arising from the research findingsis related to inadequate private and public dialogue. Eventhough the private-public dialogue has been emphasised at thecentral level, through the Kenya Private Sector Alliance, theviews from various stakeholders depicts limited consultationon the ground in the policy making process, which implies theexistence of top bottom approach in the policymaking process.

Despite the existence and emphasis on strong businessassociations in India and South Africa, analysis from theKenyan system confirmed limited institutional framework,associated with lack of sector specific associations at the locallevel, which could be one of the key causes of the weakinstitutional structure. Some of the existing associations areweak and lack funding to advocate for the policy relatedreforms in the specific sectors.

The study findings also affirm that the existing SMEassociations are based in the capital, with limited presence onthe ground. Some of the existing farmer groups likeKENAPOFA do not have adequate skills for promoting the


envisioned agenda. Furthermore, some of the farmers (Irishpotato) also raised their fears of joining the existing farmergroups, given that the farmer groups have no clear strategiestowards addressing their interests.

The existence of the institutional deficiency has contributedto unclear consultation mechanism at the local level betweenthe private sector and the government. The condition mightaffect the positive socio-economic contribution of SMEsthrough the devolution as confirmed by Kiggundu, 2000whichstipulates that the impact of devolution on local economicdevelopment depends upon a number of internal and externalfactors, like age, size, nature of tasks, technology, internalmanagement, regulatory and administrative capacity, andsociopolitical and economic factors.

The research findings also affirm the existence of limitedaccess to finance by the SMEs despite the existence of thevarious potential financial institutions for SMEs in the country.This is attributed to the fact that the various financialinstitutions are not conditioned to specifically support theSMEs. For instance, the Kenya industrial estates (GovernmentAgency) established to provide loans to the SMEs has not upscaled the degree of access to finance since KIE only provideloans to SMEs registered associations or groups, despite ofthe weak or no associations in some subsectors. Furthermore,the SMEs led funds like the Kenya Youth Fund are channelledthrough financial institutions which, according to thestakeholders, do not provide pro SMEs-led lending conditions.

The findings also affirm limited coordination in theimplementation of the SMEs regulated policies in Kenya. Forinstance, the implementation of the Legal Notice No.44 in thepotato industry has been inadequate due to limitedcoordination between the Ministry of Agriculture and localauthorities in the respective counties. The same scenario isalso evident in the fishing industry where the implementation


of the regulation on the BMUs has not been realised as perthe intended objectives. There are also institutional challengesin regulation of the dairy industry, where the regulator (KenyaDairy Board) does not have intensive presence on the grounddue to other factors like limited funding. This scenario hascontributed to challenges in regulating the small milk tradersin Kenya.

Further evidence also affirms that the KIRDI has notrealised its expected role in enhancing value addition ledtechnologies in the sectors like those related to horticulture.Even though there are efforts to establish value additionactivities at the county level, the impacts of such initiativesare yet to be realised inmost of the counties in Kenya as farmersstill market raw produce at lower prices. It would thus beimportant for the government to establish relevant incubatorsin the respective counties to enhance technological transferto the locals.

Comparative analysis in terms of subsectors performance,for instance, dairy industry from the two counties confirmsthat the dairy sub sector in Kiambu is doing better than thedairy subsector in Bomet County. This implies that the SMEsdevelopment in various countries can be fostered by drawinglessons through cross-county experiences. In terms of howthe regulatory agents will relate to the county system ofgovernment, it was found that there is a very large gap inthinking on how and in what manner the national agencieswill relate and have a presence in the counties.

However, the extent at which the new county systemcontributes to SMEs development in the respective countiesdepends on how best the current SMEs Act, 2012 isrestructured to factor in the administrative changes as outlinedin the current constitution. There is thus need for each countyto develop its SMEs policies based on the local needs (througha transparent participatory process involving the county


assemblies and citizen foras) and such policies should indicatehow the institutional and regulatory framework will link upwith the governance structure at the county level under thecurrent constitution. The SMEs Act should thus indicate howthe Central government, through the department of MSMEwill workwith the Trade, Industrial department and regulationservice departments at the county level to promote and developthe SMEs sub sectors.

Conclusions and Policy RecommendationsThe research findings from the field affirm common

challenges facing the SMEs subsectors in the respectivecounties. The challenges exist at production; marketing,institutional and regulatory levels. The existing challengesexemplifies that most of the constraints to SMEs developmentfrom the respective counties are similar given that the subsectors are agro-based. The challenges require a strategy thatwould promote easy access to credit and farm inputs, promotevalue addition activities and hard infrastructure to enhancemarket access for SMEs.

Policy RecommendationsThe institutional framework and policy specifications are

important factors in helping the evolution and success ofSMEs. There is a wide range of programmes in diverse areasof SME development, viz., financing, technology, innovation,managerial ability, market information, and developmentalassistance, aimed at improving the working environment forSMEs.

In the context of Kenya, SME development requires a cross-cutting strategy that touches uponmany areas, which can helpthe sector to improve and create a niche for itself in the Kenyan


economy. In this regard, select features of institutional supportmechanism from the field and selected countries have beenanalysed. Gaining from the experiences of other countries likeIndia and South Africa, a set of measures has been suggested,in terms of approach, policies and programmes for SMEdevelopment in Kenya. The following are, therefore, some ofthe proposed policy recommendations that should be adoptedto address the SMEs related challenges in line with the keystudy findings:

Establish an inclusive Private-Public Dialogue: A formaland organised SMEs structure would provide direction on howthe county government should establish a formal coordinationstructure. For instance, a stronger institutions evidenced byan operational public private dialogue framework wouldprovide avenues through which the SMEs associations canpresent their interest at the county level through the countyassemblies. Such dialogues can be enhanced through themechanisms depicted in Table 4.

Support the establishment of stronger business associationsat the county level: Given the existing gap in the institutionalframework, the overall and county specific government policiesfor SMEs should emphasise on building alliances in variousSMEs sub sectors. The government should provide support toenhance legitimate representative organisations at the countylevel. Such networks/associations would assist in lobbying andpolicy advocacy through the county assembly and citizen forasto advance policy reforms and facilitate SMEs to easily accesscredit at the county level.

Formulate specific county led SMEs policies aligned withoverall SMEs policy: Even though the government is in theprocess of enacting an overall SMEs policy in Kenya, there is


Table 4: Mechanisms forEnhancing Private-Public Dialogue

ConsultativePanels

Regional andlocal panels.

Explicit and openpolicydevelopmentprocesses

Panels of various types are used bygovernments to identify issues, test ideas,consult on policy developments and review theimpact of policy. To be effective vehicles fordialogue they need to be conducted in a spiritof inquiry and exploration, rather than asopportunities for government to receivefeedback for marketing purposes. Thecomposition, selection processes anddiscussions of these panels need to beappropriately transparent in order to ensurepublic confidence in their value.

These panels should reflect regional and localstructures of devolved decision making andmade up of local or regional business leadersand representatives. They shouldmeet with thelocal or regional government representativesin order to provide geographical adaptationand relevance to national policy developmentand implementation. They should also providea platform for regional industrial clusters toinform policy development.

Should be a process for policy developmentwhich provides major promotion for dialogue.There is need for consultative requirements tobe built into a State's mechanism for policydevelopment. The administrative and/orlegislative structures should requireconsultation on new policy to take place. Suchvisible process would encourage the privatesector to believe that government is concernedwith their views, and consequently encouragesindividual businesses and representative

Contd...


need for each county to evolve its own policies and packagesof incentives based on the county's economic competitiveness.Such policies should be informed by diagnostic studiesundertaken to understand the respective countycompetitiveness. The revealed county competitive advantagewould indicate the SMEs sectors which the county governmentshould promote. For the sake of stronger coordination, theCentral government should remain to be the overall overseerof all the SMEs strategies in each county to assist in thepromotion of the SMEs activities.

Need to establish tailored training Institutes for SMEs atthe county level: Even though there are governmentinstitutions providing courses on SMEs issues, it would be

Opengovernmentactivities.

organisations to inform government of theirviews. The government can develop a SmallBusiness Administration Unit which reviewsall new policies for small businessimplications, and to act as a powerful �voiceof small business in government�. Theseinitiatives promote greater dialogue with theprivate sector through the presentation of atransparent and personified commitment todevelopment of the small business sector.

These include the use of a range of media toencourage participation in the process ofpolicy development. Websites can be usedto promote dialogue opportunities, requestthe submission of views, feedback summariesof consultations and publish policy papers.In addition to electronic media, the press andother print media can also be effectively usedto invite the submission of opinions andpromote the mechanisms of consultation.


important for the government to establish SMEs specifictraining institutes especially in each county based on thecounty's competitiveness and its production output. Suchtraining for SMEs should focus on developing and providingtraining, research and consulting services for small-scaleentrepreneurs to enhance production, value addition andentrepreneurship skills.

Need to establish SMEs oriented financial institutions ineach county: There is need for specific SMEs-oriented bankto facilitate the promotion, financing and development of theSSI sector where individual business investment in plant andmachinery and tourism sectors and also to the professionaland self-employed persons setting up small-sized professionalventures. The financial institutions should also offer a widerange of financial products either directly or indirectly. Thefinancial institutions for SMEs should be established in eachcounty to enhance easy access for potential and existing SMEs.

Establishing an Import and Export Bank for SMEs: Thegovernment should also consider establishing an Import andExport Bank for SMEs. Such banks should focus on SMEexporters as a significant target group of clients. The Bankshould proactively assist the SME units in establishing theirproducts in international markets and developing the marketswithin the value chain.

Need for a Central government to coordinate SMEs issuesin the country: Currently, the SMEs issues are handled bydifferent departments in different government ministries/departments which enhance duplication of SMEs orientedactivities. The government should develop a policy to harmonisethe institutions dealing with the SMEs issues to avoid conflictsin the implementation process. There should be a nodal


institution for policy formulation, promotion, development andprotection of SMEs. The institution should also monitor theexecution of the formulated policies to monitor theeffectiveness in their implementation. The proposedgovernment authority should directly work with the relevantdepartment at the county government. Such government shouldfacilitate the establishment of the SMEs one-stop centre whereall national issues regarding SMEs are addressed.

Establish an SMEs development organisation: There is needfor a SMEs development organisation to assist the Centralgovernment in the formulation and implementation of policiesand programme for the promotion and development of thesmall scale sector. Such development organisation should liaisewith the Central and county government departments andagencies, financial institutions and other key small scale sectorintermediaries. It should also encourage capital and technologyflows, and provide a comprehensive range of common facilities,technology and competitiveness support services, andmarketing assistance through a network of Production Centreand Field Testing Stations.

Establishing an entry level for SMEs groups:The governmentshould develop requirements and criteria for SMEs operationswhere strict regulations for entry and exit in the SMEs isestablished to ensure that that only the skill-based SMEs arepermitted to operate in the market.

Cross county knowledge sharing and field experiences: Thecomparative analysis on the study findings confirm diversityin terms of resources, experiences and sub sector performance.As there will be need to promote equitable regionalcompetitiveness through cross county collaboration by sharingexperiences, skills through field visits to understand crosscounty experiences.

Annexure 1: General ComparativeAnalysis of the Key Findings

SMEsChallenges

ProductionChallenges

Dairy Subsector(Bomet andKiambucounties)

High healthmaintenancecost

Limited accessto credit

Inadequateextensionofficers

Irish SubsectorBomet andKiambu counties

Inadequateinstitutionalisedseeddevelopmentsystem

Limitedtechnology onhow to use inputservices

Poor roadnetwork

Inadequateextensionservices Lowreturns

FishingIndustryHomabay andKwale

High cost ofinputs

Inadequatefinance

Inadequateextensionservices

Lack of qualityfishingmaterials

Oranges andPineapples

Geographicalchallenges

Limitedawareness onmodernproduction skills;limited access tofarm inputs andextension services

Inadequatecertified skills

Inadequatestorage facilities

Contd...


SMEsChallenges

Dairy Subsector(Bomet andKiambucounties)

Irish SubsectorBomet andKiambu counties

FishingIndustryHomabay andKwale

Oranges andPineapples

High cost ofacquiringcooling plants

High cost ofpackaging andprocessingactivities

Inadequateexpertise onpractical animalproductionmethods

Limited trainingfacilities on milkproduction andmarketing atcounty level

Inadequateenforcement oflegislations

Unequaldistribution ofcooperatives inthe respectivecounties

High cost ofprocessingequipments

Limited technicalknowhowonvalue additionactivities

Limited trainingfacilities on farmproductionactivities

Inadequateentrepreneurskills

Weak producerassociation

Lack of formalPrivate-PublicDialogueconsultativemechanism

Poor enforcementof agriculturelegislations

Exploitationby middlemen

Lack ofprocessingand storagefacilities

Poor roadnetwork andsanitationfacilities

Limitedmarketinformation

Lack of readymarkets andexploitation bymiddlemen

Lack of processingfacilities;inadequate knowhow on valueaddition

Limited technicalknowhowonprocessing

High cost oftransportation;poor marketinformationsystem

Difficulty informing farmergroups

MarketingChallenges/ValueAddition

RegulatoryandInstitutionalChallenges

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