63808 Can Kenya Become a Global Exporter of Africa Trade Policy Notes Business Services? Note #20 Nora Dihel, Ana Margarida Fernandes, Richard Gicho, John Kashangaki and Nicholas Strychacz May, 2011 Introduction Kenya’s potential to export business services is Despite a moderate growth in Kenya’s services vast. Business services are generally provided on exports during the last decade (the compound a private sector basis and require a high level of annual growth rate for services exports between skills that are usually certified. Business services 1998 and 2008 was 3.3%) and a stronger include accounting, architectural, engineering, revealed comparative advantage in transport, legal services, business process outsourcing travel and communication services, anecdotal (BPO), information communication technology and empirical evidence show that Kenya has an (ICT), information communication technology important potential in exporting business enabled services (ITeS), and more. services. While most developing countries tend to export basic business services such as back Kenya is in a unique position to export business office tasks or low value offshoring, Kenya has services throughout East Africa and to the rest of several world class firms that provide and export the world. Kenya’s recent “ICT revolution� higher value offshoring services such as product epitomized by the success of Safaricom has development, R&D business ventures and expanded mobile phone and internet access to transformational sourcing. Therefore, there are millions of people, and Kenya’s ICT services substantial gains for Kenya’s economy from firms such as KenCall have had substantial expanding the number of exporting firms and the success in the domestic as well as the number of firms that progress to the higher value international market. However, as described in offshoring and partnership segments. the World Bank’s 2010 Kenya Economic Update, exports represent Kenya’s “weak This policy note describes the characteristics of engine�. Increasing exports of services, the professional service exporters in Kenya especially high value added business services, based on an in-depth study of 52 exporters, therefore represents an important opportunity to including their export strategies. Second, it drive economic growth in Kenya. identifies the key challenges faced by current and potential exporters of professional services. 1 Finally, it proposes policy recommendations to Modes of Delivery1 address those challenges that will help establish Kenya as a desirable offshoring destination for Almost all Kenyan service exporters deliver international clients. some of their exports through cross-border supply (mode 1 in GATS), whereby the service Characteristics of Kenyan Service Exporters crosses the border, for example by means of faxing, couriering or emailing of reports and Kenyan service exporters come in all sizes, but other outputs. the majority employs less than 100 workers. Most of these workers are permanent, the Service exports delivered through the movement exception being the BPO firms which tend to of natural persons (mode 4 in GATS) are also keep a reserve of 20% of non-permanent staff to quite prevalent, occurring for 60% of the enable them to respond quickly to sudden surveyed exporters in Kenya. Movement of increases in export orders. The majority of professionals is used particularly within the East service exporters are 100% Kenyan owned. Africa region for architecture and engineering sectors. Kenyan engineering firms have projects The majority of the surveyed Kenyan services in South Sudan, Rwanda, Uganda, and engineers exporters have less than 10 years of exporting travel regularly to work on those sites. experience. Only firms in the freight forwarding Accountants must also travel to the destination sector and Kenyan affiliates of large country to conduct audits. multinationals in accounting and legal services (such as Ernst and Young or Hamilton Harris Commercial presence (mode 3 in GATS) is used and Matthews) have a longer experience in by 44% of the surveyed Kenyan services export markets. exporters to deliver their services abroad. Firms in the freight forwarding sector have small The sub-sectors with greatest export turnover are satellite offices at main border points or major insurance, accounting, non-banking financial markets such as Uganda. Insurance companies and BPO services. However, for the majority of must have affiliate presence in order to be able Kenyan service exporters, export turnover to sell their services in other countries. Firms in represents a small proportion of total turnover. the BPO and ICT/ITES sectors have often sales The exceptions are freight forwarding and BPO, subsidiary offices in foreign markets. followed by accounting and ICT/ITES. The least used mode of supply by Kenyan service exporters is consumption abroad (mode 2 in GATS). This mode is used by accounting, 1 The four modes of supply of services in the GATS terminology are: Mode 1 - Cross-border Supply: services supplied from the territory of one country into the territory of another country; Mode 2 - Consumption Abroad: services supplied in the territory of one country to the consumers of another country; Mode 3 - Commercial Presence: services supplied through any type of business or professional establishment of one country in the territory of another (i.e., FDI); and Mode 4 - Temporary Presence of Natural Persons: services supplied by nationals of one country in the territory of another. Mode 4 includes both independent service suppliers, and employees of the services supplier of another country. 2 non-banking financial or legal service firms East African countries. The strength of regional facilitating foreign client site visits for mergers markets is crucial for exports of accounting, and acquisitions work or during initial public architecture, engineering, insurance, and legal offering (IPOs). Also, legal firms often represent services. However, the U.K. and the U.S. are the foreign clients for example if a tourist has an most important markets for Kenyan exporters in accident in a hotel and sues the hotel, or in the the BPO sector. In freight forwarding, case of family law related to adoption or ICT/ITES, and non-banking financial sectors, marriage. Kenyan firms export to a combination of regional markets and international markets Export Clients and Destinations outside of Africa. The regional markets of the East African Exported Services and Customization Community (EAC) tend to dominate the export flows of Kenyan professional service firms. Exported services: In accounting, Kenyan firms More than half of Kenyan service exporters have export accounting services, tax services, clients in Tanzania and/or in Uganda whereas consulting services, and auditing services. For about a third has clients in Rwanda. Almost a the latter, they are supplied mostly to quarter of firms have clients in Sudan and in organizations with branches in the East Africa European countries (other than the U.K.) and a Community or worldwide. In architecture, fifth of firms export services to South Africa. Kenyan firms provide architectural consulting Due to language barriers, Kenyan legal firms services such as master planning, urban tend to restrict themselves to English-speaking planning, land use planning, site planning, but export destinations. Interestingly, during the also interior planning, and project management. recent global financial crisis, it became apparent In the legal sector, Kenyan firms export that Kenyan service exporters need to be essentially services related to intellectual diversified, serving clients not only in developed property, licensing requirements, commercial countries but also in African markets as the law and conveyancing. latter were less affected by the global financial crisis and actually saw growth in business. In BPO, Kenyan firms export an array of services ranging from inbound/outbound Multinational and private corporations are the customer voice, email, or SMS support, inbound main clients for more than half of Kenyan and outbound sales via phones, customer exporters. Multinational organizations, NGOs, satisfaction surveys, and back-office support, to and embassies are the key clients for a fifth of database management such as updating changes Kenyan exporters particularly in accounting and to information portals or live updates of stock engineering sectors. Governments or quasi- markets, safe data storage and back-up facilities, government institutions are key clients for firms transcription from voice to text or video sub- in architectural, engineering, and ICT sectors titling, to entertainment or professional service due to presence of large government-funded chat support. In ICT/ITES, Kenyan firms export infrastructure works in the region. design services such as animations of web- advertising, user interface systems, icon and In general, BPO, ICT, financial advisory, and banner advertisements, but also high-end logistics services are the services that are corporate and technology solutions such as typically exported outside Africa. The other hardware and disaster recovery. business services are typically exported to other 3 Customization: The services exported by firm continues to provide services for that client Kenyan firms are subject to some degree of in the new country. An example of the second customization relative to the services sold type is when an existing U.K. client of a Kenyan domestically in order to suit client demands. service exporter refers a potential U.K. client However, the degree of customization is with some need for work in East Africa work to minimal. In architectural services, an example of the Kenyan exporter. customization is the provision of highly detailed drawings to foreign clients that are generally not In the BPO and the ICT/ITES sectors, firms required by Kenyan clients2. In engineering often make use of commission-paid agents in services customization occurs through the use of foreign markets to source work. Marketing and the appropriate Computer Aided Design (CAD) advertising efforts along with personal client system, as some foreign clients use visits are another way for Kenyan service firms MicroStation whereas others use AutoCAD. In to obtain foreign business. However, these insurance services, Kenyan firms exporting to efforts are prohibited for firms in the accounting, Sudan changed their focus from private vehicles legal, architecture, and engineering sectors. for which insurance is not mandatory in that Tendering in competitive bidding processes for country to public service vehicles for which government and donor work is another insurance is mandatory and that constitute a important way for accounting, architecture, and much larger market. In non-banking financial engineering Kenyan firms to obtain foreign services (stock broking and investment banking contracts. Very rarely do Kenyan services firms services), some of the changes made to exported receive their foreign clients from the head office services are to adapt to foreign clients’ reporting or the parent company. Hence, subsidiaries in structures (e.g., the need for daily reports). Box Kenya operate in a fairly autonomous mode and 1 provides more details on the exported business are required to develop their own markets and services by Kenyan firms and the necessary client base. modifications to the domestic services to make them exportable. In some cases, new niche areas and underserved markets are identified in foreign countries by The Process of Exporting: Starting to Export Kenyan service firms after some time of and Sustaining Exports exporting to those countries. Often the service The majority of Kenyan exporters of services do provided is complementary to the services not set specific or conscious objectives to enter originally exported by the firm to foreign foreign markets but rather start exporting countries: for example, a Kenyan architectural because they follow their clients as they enter firm in Rwanda originally offered architectural foreign markets or due to referrals whereby services but recently ventured into project foreign clients contact them directly. An management and property development due to example of the first type is when a major client limited supply in these fields in that country. of a service firm in the Kenyan market expands The majority of Kenyan firms are able to its services to Tanzania and the Kenyan service negotiate some of the terms of their export contracts with foreign buyers, such as length of 2 Kenyan clients do not see the value of such drawings nor the assignment but generally not price. In the the benefit of having an architect oversee a project. Often they receive the drawings and then engage a contractor to BPO sector, however, firms have less supplier build without consulting the architect. power and thus the terms of the contracts are 4 Box 1: Exported Services by Sector Sub-sector Domestic Services Modifications to Domestic Services to Make Them Exportable Accounting Accounting services Modifications are made with respect to tax regulations in the foreign Audit & Assurance services country and the client firm's accounting program. For work on donor Tax services funded projects, Kenyan firms can conduct technical and social audits Consulting services that include project impact assessments. Architecture Urban planning Only slight modifications: foreign clients often want more detailed Land use planning designs than local clients; more work is done with emails; projects Site planning must adhere to regulations in the client's country. Project management BPO Inbound/outbound sales All services can be exported; delivery of exported services can be Customer satisfaction surveys fully conducted online (mode 1). However, employee training must Back office support be up to international standards. This includes developing strong Database management customer service skills, and learning how to speak with a "neutral" Transcription accent. Technology support Engineering Engineering consulting Specifications are changed for the client country; converting units in Environmental impact assessments drawings depending on whether measurements in the client country Construction materials testing are based on the imperial (feet and inches) or metric (meters and centimeters) systems. Drawing text must be translated if in a different language than the client's. Freight- Customs brokerage Small modifications are made when exporting, such as adapting to forwarding Documentation processing to changing regulatory requirements. An additional service that is Logistics planning (transportation, provided to foreign clients is to walk them through the numerous warehousing, material handling, Kenyan documentation processes and procedures. ships agency, cargo depot) ICT Digital design for web advertising ICT services are typically exported by telecommunications (mode 1). Advanced technical support Employees must be able to communicate effectively with email and Website solutions/design so must often receive computer training. Web-based marketing Insurance Insurance products (general, life Services are tailored to individual client countries and markets. For crop, health, micro-insurance) example, private vehicle insurance is not mandatory in Sudan whereas Pensions; asset management the public vehicle insurance market is quite large. These types of dynamics will alter the way in which firms market insurance products. Legal Corporate/commercial law All services can be exported as long as the lawyer is registered and Intellectual property admitted to the foreign bar association. Services pertaining to Kenyan Family law law do not require registration in the export country. Modifications to Criminal law services are small and generally have to do with the way documents Legal advisory services are presented, especially regarding court documents. Non-banking Private equity/venture capital Some clients have their own specific standards due to global regulations financial (investment, guidance & strategy) and oversight from headquarters, and services may be altered to adhere Investment banking to these factors. For mergers and acquisitions advisory services, Stock broking modifications are made on a case-by-case basis. 5 largely imposed by foreign buyers. Contracts At the regional level, Kenyan firms are premium tend to include penalty clauses for delays in quality service providers especially in countries delivery that are penalized particularly in the lacking skilled professionals. Kenyan firms have engineering and architectural sectors. a competitive advantage in understanding target markets in the East Africa region due to their In certain professional service sectors, small to knowledge of soft or cultural issues such as the medium-sized Kenyan firms need to partner slow pace of conducting business or the with larger firms to engage in exports. For insistence on face to face meetings. South example in the engineering sector smaller firms African and developed countries’ service firms are often used as consultants by large firms to be that do not possess such skills have failed in able to participate in large projects since they do penetrating those markets. At the international not have the capital or capacity to do those on level, Kenyan firms are value service providers, their own. that is, they are able to provide quality services at lower cost than local service providers in the Service Exports – Kenyan Success Stories foreign market. Competitive pricing has been a Accounting is one sector that provides important key factor in the growth of Kenyan services export opportunities for Kenyan firms. As a exports. result of a widespread adoption of International Challenges for Kenyan Services Exporters Financial Reporting Standards (IFRS) across developed and developing countries, there has The factor that constrains most service providers been a growing demand for accountants from exporting is a widespread lack of proficient in IFRS. Kenya was among the first knowledge about exporting opportunities, countries to adopt IFRS and thus has a set of markets, and processes, and a lack of awareness accountants with expertise and experience in as to how to acquire such knowledge. This IFRS (World Bank, 2010a). Through mode 4, dynamic is demonstrated by our surveys that Kenyan accountants travel often to provide show that 48% of Kenyan service exporters do services in countries that have recently adopted not have a plan for exporting, and 54% of IFRS and have a deficit in skilled and exporters do not conduct any market research experienced IFRS professionals. before exporting. This indicates that, while Kenyan services firms may be innovative and Kenya has also developed a reputation and successful domestically, many do not engage in specialist expertise in the market niche of marine and underwater consulting engineering services any systematic attempt to export their services. which shows the diversity of services that can Very often Kenyan service providers - especially emerge as potential exports. Kenyan firms with smaller ones - lack international networks and premium pricing strategies have been able to find it very difficult to obtain market intelligence offer specialized or niche services such as the on foreign markets. Obtaining information on provision of CAD drawings by architecture and the largest firms in each sector and key contacts engineering firms, and the development of new in foreign markets is crucial to identify export ways of providing existing services such as opportunities. Kenyan service firms are also not recurrent online job advertising sites that replace aware of what trade support services are traditional newspaper job seeking available from the government, which advertisements by ICT/ITES firms. institutions support trade and the services they offer. 6 Box 2. Kenyan Services Exports and Innovation Success Stories—KenCall, Ushahidi, and Safaricom KenCall: A Kenyan firm that has been very successful in exporting higher value-added BPO services to developed countries is KenCall. KenCall specializes in providing outbound and inbound voice and data services for large Western companies. The firm began with outbound voice services, such as developing sales leads and doing post- sales calls with customers, but now has added business in the more lucrative data and inbound voice services. The services that the firm offers include sales, billing, customer information, administrative and data management, and level 1 tech support. For its tech support business, KenCall’s employees are certified by Cisco and Microsoft, among other ICT providers. Due to its success in this range of services, KenCall has been able to export its services globally. As Kenya further increases the quality of its telecommunications infrastructure, in particular with fiber- optic cable connectivity, KenCall will likely be able to expand and grow its business further, and other Kenyan firms may be able to enter the BPO services sector. Ushahidi: Ushahidi developed an open source software platform through which anyone with a mobile phone or digital connection can collect, place, and visualize information on an online map in near-real time. The online map can then be viewed by anyone with an internet connection and computer, allowing for detailed information about geography and events to be shared and transferred. Ushahidi’s software has been used around the world in a diverse array of applications. It was used first to track violence after the 2008 Kenyan elections, and has since been used for observing wildlife patterns in Kenya, monitoring elections in India, tracking violence in Gaza and crime in Atlanta, avoiding hazards during the 2010 blizzard in Washington DC, and coordinating the cleanup of the U.S. Gulf Coast oil spill, among others. The success of Ushahidi in disseminating its software platform globally shows that Kenyan firms compare positively with larger firms around the world in terms of innovation, and will be able to compete more vigorously as Kenya’s potential for exporting higher value-added services becomes better known internationally. Safaricom: Safaricom is a groundbreaking mobile service provider that innovated and developed one of the largest mobile money systems in the world, called M-Pesa. The M-Pesa system has helped in greatly expanding access to finance in Kenya, especially among the previously unbanked. In 2010, M-Pesa accounted for a large proportion of the estimated US$7 billion (20% of GDP) transferred via mobile phones, and since its rollout in 2007 Safaricom has grown at a staggering pace, signing over 13.5 million customers in that time. Originally M-Pesa allowed money only to be transferred electronically using a mobile phone and an extensive network of agents around Kenya butM- Pesa has now expanded further from a transfer system to a direct payment system. In addition to transferring or remitting money to family living in rural areas of the country, subscribers can also use their mobile phones to make purchases from commercial partners, including supermarket chains and Kenya Airlines. More recently, Safaricom has developed a new mobile platform called M-Kesha in partnership with Equity Bank, which allows subscribers to access their Equity Bank saving accounts through their mobile phones. The success and influence of Safaricom and M-Pesa demonstrates that appropriate government regulations and strong business strategies geared towards growth can lead to success and international prestige for Kenyan companies. For example, surveyed exporters were unclear Kenyan firms in local and in foreign markets. about the activities and role of the Kenya Taxation-related restrictions, excessive Chamber of Commerce. procedures and licensing requirements to operate in Kenya, outdated sector-specific regulatory Another important constraint identified by the measures and sectoral restrictions such as surveyed firms is the difficulty in penetrating advertising prohibitions in accounting, foreign markets. Partially this is due to the trade architectural, engineering, and legal services are and domestic regulatory restrictions faced by several examples mentioned by the surveyed 7 firms. Also, burdensome requirements on qualified to export legal services. In small law academic and professional qualifications and firms in particular, skills needed for exporting licensing requirements of individuals providing services such as experience in other jurisdictions the service abroad can restrict entry into foreign and work experience with multinational markets. organizations is very rare. Another frequently mentioned constraint by the surveyed firms is a Kenya has low international brand equity as a lack of ICT infrastructure. This constraint is business service provider. The Kenyan being overcome, however, by the two undersea government, in contrast to its Indian or South fiber optic cables that have recently given Kenya African counterparts for example, does not access to a high-speed Internet connection. sponsor international conventions or events to showcase the BPO services available in Kenya. Policy recommendations The foreign perception of Kenya’s government as unstable also plays a negative role and is Develop a Services Export Strategy: going likely to deter foreign companies from forward, the Government of Kenya can, through outsourcing work to Kenyan BPOs. However, its trade supporting institutions and in Kenya does have high visibility as a business collaboration with business and professional service provider in the EAC region. associations and the private sector, develop a Services Export Strategy and play an important Skills mismatches and skills shortages pose a role in helping reduce the barriers that Kenyan significant challenge to many Kenyan exporters. service firms face in their export development Although Kenya is relatively well endowed with efforts3. graduates who could work in various business services firms, including in the BPO sector, Most Kenyan service exporters feel that direct fresh graduates need to receive a substantial incentives to exports, such as tax incentives for amount of training to catch up with market example are unnecessary. Rather, what they requirements. Such training costs take up a consider to be crucial is that the government substantial part of BPO contact centre costs. facilitates the access to foreign markets. Such Similarly, in the ICT/ITES sector, Kenyan facilitation would lead to an increase in graduates in programming are of good quality, employment, upgrades in the technology used but they lack skills in terms of the practicality of and improvements in the quality of services exporting their services, the exposure to a delivered to meet high international standards. foreign environment and the promotional Address lack of knowledge about export expertise. opportunities: the Export Promotion Council In the engineering sector there is an acute (EPC) could collect and disseminate to Kenyan shortage of professionals relative to local service firms market research information (e.g., demand, particularly in mechanical engineering. country profiles, sector rules and regulations, tax In the insurance sector, training in technical issues, and general working conditions in skills is very low. It is so difficult to find foreign markets) and highlight available individuals with the necessary skills that firms spend considerable time with in-house training 3 A complementary view on policy changes that can make and sponsoring staff to attend courses. In the Kenya a more attractive destination for offshore of IT and legal sector, the grasp of the law for most ITES sectors is provided by the examination of a location graduates is very theoretical and few lawyers are readiness index described in Sudan et al. (2010) 8 opportunities for services exports. The EPC can business trips for marketing purposes or for establish links with other international trade business people coming into Kenya to explore support institutions to create a greater pool of the local potential. information on businesses opportunities available in other countries as well as profile Address regulatory and branding issues: the companies that can deliver those services. liberalization of advertizing in various professional services sectors would enable The EPC, with the collaboration of business and current and future exporters in Kenya to use an professional associations, could develop trade important channel for targeting foreign clients. directories of Kenyan service firms including Given the likelihood of strong informational detailed provider profiles, supply capacities, and asymmetries, allowing advertizing that is key contacts. Such directories should be readily relevant, truthful and not misleading - as is available on their website and should be used by currently done in accounting in South Africa, foreign missions in Kenyan embassies to market Malawi, and Zambia - would be the best Kenyan services internationally. The EPC and combination to protect domestic and foreign business and professional associations could also clients. establish physical or virtual business exchanges to increase the marketing of services. The opening up of regional boundaries to allow free movement of EAC nationals without work Business and professional associations should be permit requirements would be of great help to more active in hosting international seminars to increase business opportunities within the region educate the industry and increase networking and boost service exports. opportunities for local experts. For this purpose, some capacity building for associations is The establishment of mutual recognition necessary - possibly through a government agreements (MRAs) of professional supported program - so that they can prepare qualifications and licensing requirements within marketing materials, organize conventions and the EAC in the areas of accounting, architecture, forums, or participate in international events to engineering, and legal services would likely create awareness of the available skills in benefit Kenyan service firms (as well as firms in Kenya. neighboring countries) in their exports of services to the region. There have been ongoing The EPC could assist financially Kenyan service talks about such MRAs and they have been in firms - especially small firms - in their incursion principle agreed to. For example, a draft MRA in international markets for example through in accounting was signed in 2010 and is participation in international fairs and expected to be finalized in 2011. expositions (perhaps through a co-shared effort). The EPC should also be able to assist individual The creation of standards at the EAC level for Kenyan service exporters or potential exporters the services delivered in the accounting, with marketing and branding efforts when architecture, engineering, and even legal sectors participating in international expositions (e.g., could potentially benefit consumers in the EAC. ensure that Kenyan delegations have top of the Domestic business and professional associations line display stands). could play a stronger role in lobbying the The Government of Kenya could allow for tax Government of Kenya to push the EAC on the exemptions in market development costs: i.e., issues that affect their members with respect to cross-border practices, mutual recognition of 9 qualifications, and elimination of work permit About the Authors requirements for EAC members. Nora Dihel is a Trade Specialist in the Africa The Government of Kenya should lead the Poverty Reduction and Economic Management positioning and marketing of the country brand unit. Ana Margarida Fernandes is a Senior Economist with the Development Research and key services globally showcasing Group. Richard Gicho, John Kashangaki and professional services next to tourism, sports, Nicholas Strychacz are consultants. This work is horticulture, and other Kenyan products. Trade funded by the Multi-Donor Trust Fund for Trade support institutions should conduct concerted and Development supported by the governments marketing efforts with professional associations of the United Kingdom, Finland, Sweden and and government agencies such as the Kenya ICT Norway. The views expressed in this paper board, the Kenya Tourism board, the reflect solely those of the authors and not necessarily the views of the funders, the World Communication Commission of Kenya, to Bank Group or its Executive Directors. promote Kenyan services and build Kenya‘s reputation as an exporter of professional References services. Export Promotion Council (EPC) & World Bank Address skills mismatches and skills shortages: (2009). Services Exports Study: Assessment of The availability of scholarships or partial Kenya‘s Export Potential and Supply Capacities funding for BPO agents to be able to access in Selected Professional Service Sectors. formal training in courses not readily available in Kenyan universities and Government of Kenya (GOK) & Export colleges would improve the skills and thus Promotion Council (EPC) (2008). Strategy for the marketability of Kenya‘s BPO sector. Export Promotion of Professional Services in The same reasoning would apply to Kenya. professionals employed in the ICT/ITES sector whose needs for training in Sudan, R., Ayers, S., Dongier, P., Muente- specialized technology areas cannot be met Kunigami, A., and C. Qiang (2010). The Global by local learning institutions. Opportunity in IT-Based Services. World Bank infoDev. The provision of rebates or the development of incentives for firms to conduct training – World Bank (2010a). Reform and Regional especially specialized training such as a certified Integration of Professional Services in East fraud examiners course in the accounting sector Africa: Time for Action. – would help increase the quality and degree of World Bank (2010b). Towards a Regional specialization of the services offered by Kenyan Integration of Professional Services in Southern firms. Africa. World Bank (2010c). Kenya Economic Update. 10