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Africa Trade Policy Notes: Can Kenya Become a Global Exporter of Business Services?

Policy Note No.20                                                       Download Note download icon 

 

by Nora Dihel, Ana Margarida Fernandes, Richard Gicho, John Kashangaki and Nicholas Strychacz

 

May, 2011

 

Kenya’s potential to export business services is vast: Business services are generally provided on a private sector basis and require a high level of skills that are usually certified. Business services include accounting, architectural, engineering, legal services, business process outsourcing (BPO), information communication technology (ICT), information communication technology enabled services (ITeS), and more.

Kenya is in a unique position to export business services throughout East Africa and to the rest of the world. Kenya’s recent “ICT revolution” epitomized by the success of Safaricom has expanded mobile phone and internet access to millions of people, and Kenya’s ICT services firms such as KenCall have had substantial success in the domestic as well as the international market. However, as described in the World Bank’s 2010 Kenya Economic Update, exports represent Kenya’s “weak engine”. Increasing exports of services, especially high value added business services, therefore represents an important opportunity to drive economic growth in Kenya.

Despite a moderate growth in Kenya’s services exports during the last decade (the compound annual growth rate for services exports between 1998 and 2008 was 3.3%) and a stronger revealed comparative advantage in transport, travel and communication services, anecdotal and empirical evidence show that Kenya has an important potential in exporting business services. While most developing countries tend to export basic business services such as back office tasks or low value offshoring, Kenya has several world class firms that provide and export higher value offshoring services such as product development, R&D business ventures and transformational sourcing. Therefore, there are substantial gains for Kenya’s economy from expanding the number of exporting firms and the number of firms that progress to the higher value offshoring and partnership segments.

This policy note describes the characteristics of the professional service exporters in Kenya based on an in-depth study of 52 exporters, including their export strategies. Second, it identifies the key challenges faced by current and potential exporters of professional services. Finally, it proposes policy recommendations to address those challenges that will help establish Kenya as a desirable offshoring destination for international clients.

Characteristics of Kenyan Service Exporters

Kenyan service exporters come in all sizes, but the majority employs less than 100 workers. Most of these workers are permanent, the exception being the BPO firms which tend to keep a reserve of 20% of non-permanent staff to enable them to respond quickly to sudden increases in export orders. The majority of service exporters are 100% Kenyan owned.

The majority of the surveyed Kenyan services exporters have less than 10 years of exporting experience. Only firms in the freight forwarding sector and Kenyan affiliates of large multinationals in accounting and legal services (such as Ernst and Young or Hamilton Harris and Matthews) have a longer experience in export markets.

The sub-sectors with greatest export turnover are insurance, accounting, non-banking financial and BPO services. However, for the majority of Kenyan service exporters, export turnover represents a small proportion of total turnover. The exceptions are freight forwarding and BPO, followed by accounting and ICT/ITES.

Modes of Delivery1 

Almost all Kenyan service exporters deliver some of their exports through cross-border supply (mode 1 in GATS), whereby the service crosses the border, for example by means of faxing, couriering or emailing of reports and other outputs.

Service exports delivered through the movement of natural persons (mode 4 in GATS) are also quite prevalent, occurring for 60% of the surveyed exporters in Kenya. Movement of professionals is used particularly within the East Africa region for architecture and engineering sectors. Kenyan engineering firms have projects in South Sudan, Rwanda, Uganda, and engineers travel regularly to work on those sites. Accountants must also travel to the destination country to conduct audits.

Commercial presence (mode 3 in GATS) is used by 44% of the surveyed Kenyan services exporters to deliver their services abroad. Firms in the freight forwarding sector have small satellite offices at main border points or major markets such as Uganda. Insurance companies must have affiliate presence in order to be able to sell their services in other countries. Firms in the BPO and ICT/ITES sectors have often sales subsidiary offices in foreign markets.

The least used mode of supply by Kenyan service exporters is consumption abroad (mode 2 in GATS). This mode is used by accounting, non-banking financial or legal service firms facilitating foreign client site visits for mergers and acquisitions work or during initial public offering (IPOs). Also, legal firms often represent foreign clients for example if a tourist has an accident in a hotel and sues the hotel, or in the case of family law related to adoption or marriage.

Export Clients and Destinations

The regional markets of the East African Community (EAC) tend to dominate the export flows of Kenyan professional service firms. More than half of Kenyan service exporters have clients in Tanzania and/or in Uganda whereas about a third has clients in Rwanda. Almost a quarter of firms have clients in Sudan and in European countries (other than the U.K.) and a fifth of firms export services to South Africa. Due to language barriers, Kenyan legal firms tend to restrict themselves to English-speaking export destinations. Interestingly, during the recent global financial crisis, it became apparent that Kenyan service exporters need to be diversified, serving clients not only in developed countries but also in African markets as the latter were less affected by the global financial crisis and actually saw growth in business.

Multinational and private corporations are the main clients for more than half of Kenyan exporters. Multinational organizations, NGOs, and embassies are the key clients for a fifth of Kenyan exporters particularly in accounting and engineering sectors. Governments or quasi-government institutions are key clients for firms in architectural, engineering, and ICT sectors due to presence of large government-funded infrastructure works in the region.

In general, BPO, ICT, financial advisory, and logistics services are the services that are typically exported outside Africa. The other business services are typically exported to other East African countries. The strength of regional markets is crucial for exports of accounting, architecture, engineering, insurance, and legal services. However, the U.K. and the U.S. are the most important markets for Kenyan exporters in the BPO sector. In freight forwarding, ICT/ITES, and non-banking financial sectors, Kenyan firms export to a combination of regional markets and international markets outside of Africa.

Exported Services and Customization

Exported services: In accounting, Kenyan firms export accounting services, tax services, consulting services, and auditing services. For the latter, they are supplied mostly to organizations with branches in the East Africa Community or worldwide. In architecture, Kenyan firms provide architectural consulting services such as master planning, urban planning, land use planning, site planning, but also interior planning, and project management. In the legal sector, Kenyan firms export essentially services related to intellectual property, licensing requirements, commercial law and conveyancing.

In BPO, Kenyan firms export an array of services ranging from inbound/outbound customer voice, email, or SMS support, inbound and outbound sales via phones, customer satisfaction surveys, and back-office support, to database management such as updating changes to information portals or live updates of stock markets, safe data storage and back-up facilities, transcription from voice to text or video sub-titling, to entertainment or professional service chat support. In ICT/ITES, Kenyan firms export design services such as animations of web-advertising, user interface systems, icon and banner advertisements, but also high-end corporate and technology solutions such as hardware and disaster recovery.

Customization: The services exported by Kenyan firms are subject to some degree of customization relative to the services sold domestically in order to suit client demands. However, the degree of customization is minimal. In architectural services, an example of customization is the provision of highly detailed drawings to foreign clients that are generally not required by Kenyan clients2.

In engineering services customization occurs through the use of the appropriate Computer Aided Design (CAD) system, as some foreign clients use MicroStation whereas others use AutoCAD. In insurance services, Kenyan firms exporting to Sudan changed their focus from private vehicles for which insurance is not mandatory in that country to public service vehicles for which insurance is mandatory and that constitute a much larger market. In non-banking financial services (stock broking and investment banking services), some of the changes made to exported services are to adapt to foreign clients’ reporting structures (e.g., the need for daily reports). Box 1 provides more details on the exported business services by Kenyan firms and the necessary modifications to the domestic services to make them exportable.

The Process of Exporting: Starting to Export and Sustaining Exports

The majority of Kenyan exporters of services do not set specific or conscious objectives to enter foreign markets but rather start exporting because they follow their clients as they enter foreign markets or due to referrals whereby foreign clients contact them directly. An example of the first type is when a major client of a service firm in the Kenyan market expands its services to Tanzania and the Kenyan service firm continues to provide services for that client in the new country. An example of the second type is when an existing U.K. client of a Kenyan service exporter refers a potential U.K. client with some need for work in East Africa work to the Kenyan exporter.

In the BPO and the ICT/ITES sectors, firms often make use of commission-paid agents in foreign markets to source work. Marketing and advertising efforts along with personal client visits are another way for Kenyan service firms to obtain foreign business. However, these efforts are prohibited for firms in the accounting, legal, architecture, and engineering sectors.

Tendering in competitive bidding processes for government and donor work is another important way for accounting, architecture, and engineering Kenyan firms to obtain foreign contracts. Very rarely do Kenyan services firms receive their foreign clients from the head office or the parent company. Hence, subsidiaries in Kenya operate in a fairly autonomous mode and are required to develop their own markets and client base.

In some cases, new niche areas and underserved markets are identified in foreign countries by Kenyan service firms after some time of exporting to those countries. Often the service provided is complementary to the services originally exported by the firm to foreign countries: for example, a Kenyan architectural firm in Rwanda originally offered architectural services but recently ventured into project management and property development due to limited supply in these fields in that country.

box1

In certain professional service sectors, small to medium-sized Kenyan firms need to partner with larger firms to engage in exports. For example in the engineering sector smaller firms are often used as consultants by large firms to be able to participate in large projects since they do not have the capital or capacity to do those on their own.

Service Exports – Kenyan Success Stories

Accounting is one sector that provides important export opportunities for Kenyan firms. As a result of a widespread adoption of International Financial Reporting Standards (IFRS) across developed and developing countries, there has been a growing demand for accountants proficient in IFRS. Kenya was among the first countries to adopt IFRS and thus has a set of accountants with expertise and experience in IFRS (World Bank, 2010a). Through mode 4, Kenyan accountants travel often to provide services in countries that have recently adopted IFRS and have a deficit in skilled and experienced IFRS professionals.

Kenya has also developed a reputation and specialist expertise in the market niche of marine and underwater consulting engineering services which shows the diversity of services that can emerge as potential exports. Kenyan firms with premium pricing strategies have been able to offer specialized or niche services such as the provision of CAD drawings by architecture and engineering firms, and the development of new ways of providing existing services such as recurrent online job advertising sites that replace traditional newspaper job seeking advertisements by ICT/ITES firms.

At the regional level, Kenyan firms are premium quality service providers especially in countries lacking skilled professionals. Kenyan firms have a competitive advantage in understanding target markets in the East Africa region due to their knowledge of soft or cultural issues such as the slow pace of conducting business or the insistence on face to face meetings. South African and developed countries’ service firms that do not possess such skills have failed in penetrating those markets. At the international level, Kenyan firms are value service providers, that is, they are able to provide quality services at lower cost than local service providers in the foreign market. Competitive pricing has been a key factor in the growth of Kenyan services exports.

Challenges for Kenyan Services Exporters

The factor that constrains most service providers from exporting is a widespread lack of knowledge about exporting opportunities, markets, and processes, and a lack of awareness as to how to acquire such knowledge. This dynamic is demonstrated by our surveys that show that 48% of Kenyan service exporters do not have a plan for exporting, and 54% of exporters do not conduct any market research before exporting. This indicates that, while Kenyan services firms may be innovative and successful domestically, many do not engage in any systematic attempt to export their services.

Very often Kenyan service providers - especially smaller ones - lack international networks and find it very difficult to obtain market intelligence on foreign markets. Obtaining information on the largest firms in each sector and key contacts in foreign markets is crucial to identify export opportunities. Kenyan service firms are also not aware of what trade support services are available from the government, which institutions support trade and the services they offer. For example, surveyed exporters were unclear about the activities and role of the Kenya Chamber of Commerce.

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.

Another important constraint identified by the surveyed firms is the difficulty in penetrating foreign markets. Partially this is due to the trade and domestic regulatory restrictions faced by Kenyan firms in local and in foreign markets. Taxation-related restrictions, excessive procedures and licensing requirements to operate in Kenya, outdated sector-specific regulatory measures and sectoral restrictions such as advertising prohibitions in accounting, architectural, engineering, and legal services are several examples mentioned by the surveyed firms. Also, burdensome requirements on academic and professional qualifications and licensing requirements of individuals providing the service abroad can restrict entry into foreign markets.

Kenya has low international brand equity as a business service provider. The Kenyan government, in contrast to its Indian or South African counterparts for example, does not sponsor international conventions or events to showcase the BPO services available in Kenya. The foreign perception of Kenya’s government as unstable also plays a negative role and is likely to deter foreign companies from outsourcing work to Kenyan BPOs. However, Kenya does have high visibility as a business service provider in the EAC region.

Skills mismatches and skills shortages pose a significant challenge to many Kenyan exporters. Although Kenya is relatively well endowed with graduates who could work in various business services firms, including in the BPO sector, fresh graduates need to receive a substantial amount of training to catch up with market requirements. Such training costs take up a substantial part of BPO contact centre costs. Similarly, in the ICT/ITES sector, Kenyan graduates in programming are of good quality, but they lack skills in terms of the practicality of exporting their services, the exposure to a foreign environment and the promotional expertise.

In the engineering sector there is an acute shortage of professionals relative to local demand, particularly in mechanical engineering. In the insurance sector, training in technical skills is very low. It is so difficult to find individuals with the necessary skills that firms spend considerable time with in-house training and sponsoring staff to attend courses. In the legal sector, the grasp of the law for most graduates is very theoretical and few lawyers are qualified to export legal services. In small law firms in particular, skills needed for exporting services such as experience in other jurisdictions and work experience with multinational organizations is very rare. Another frequently mentioned constraint by the surveyed firms is a lack of ICT infrastructure. This constraint is being overcome, however, by the two undersea fiber optic cables that have recently given Kenya access to a high-speed Internet connection.

Policy recommendations

Develop a Services Export Strategy: Going forward, the Government of Kenya can, through its trade supporting institutions and in collaboration with business and professional associations and the private sector, develop a Services Export Strategy and play an important role in helping reduce the barriers that Kenyan service firms face in their export development efforts3.

Most Kenyan service exporters feel that direct incentives to exports, such as tax incentives for example are unnecessary. Rather, what they consider to be crucial is that the government facilitates the access to foreign markets. Such facilitation would lead to an increase in employment, upgrades in the technology used and improvements in the quality of services delivered to meet high international standards.

Address lack of knowledge about export opportunities: The Export Promotion Council (EPC) could collect and disseminate to Kenyan service firms market research information (e.g., country profiles, sector rules and regulations, tax issues, and general working conditions in foreign markets) and highlight available opportunities for services exports. The EPC can establish links with other international trade support institutions to create a greater pool of information on businesses opportunities available in other countries as well as profile companies that can deliver those services.

The EPC, with the collaboration of business and professional associations, could develop trade directories of Kenyan service firms including detailed provider profiles, supply capacities, and key contacts. Such directories should be readily available on their website and should be used by foreign missions in Kenyan embassies to market Kenyan services internationally. The EPC and business and professional associations could also establish physical or virtual business exchanges to increase the marketing of services.

Business and professional associations should be more active in hosting international seminars to educate the industry and increase networking opportunities for local experts. For this purpose, some capacity building for associations is necessary - possibly through a government supported program - so that they can prepare marketing materials, organize conventions and forums, or participate in international events to create awareness of the available skills in Kenya.

The EPC could assist financially Kenyan service firms - especially small firms - in their incursion in international markets for example through participation in international fairs and expositions (perhaps through a co-shared effort). The EPC should also be able to assist individual Kenyan service exporters or potential exporters with marketing and branding efforts when participating in international expositions (e.g., ensure that Kenyan delegations have top of the line display stands).

The Government of Kenya could allow for tax exemptions in market development costs: i.e., business trips for marketing purposes or for business people coming into Kenya to explore the local potential.

Address regulatory and branding issues: The liberalization of advertizing in various professional services sectors would enable current and future exporters in Kenya to use an important channel for targeting foreign clients. Given the likelihood of strong informational asymmetries, allowing advertizing that is relevant, truthful and not misleading - as is currently done in accounting in South Africa, Malawi, and Zambia - would be the best combination to protect domestic and foreign clients.

The opening up of regional boundaries to allow free movement of EAC nationals without work permit requirements would be of great help to increase business opportunities within the region and boost service exports.

The establishment of mutual recognition agreements (MRAs) of professional qualifications and licensing requirements within the EAC in the areas of accounting, architecture, engineering, and legal services would likely benefit Kenyan service firms (as well as firms in neighboring countries) in their exports of services to the region. There have been ongoing talks about such MRAs and they have been in principle agreed to. For example, a draft MRA in accounting was signed in 2010 and is expected to be finalized in 2011.

The creation of standards at the EAC level for the services delivered in the accounting, architecture, engineering, and even legal sectors could potentially benefit consumers in the EAC.

Domestic business and professional associations could play a stronger role in lobbying the Government of Kenya to push the EAC on the issues that affect their members with respect to cross-border practices, mutual recognition of qualifications, and elimination of work permit requirements for EAC members.

The Government of Kenya should lead the positioning and marketing of the country brand and key services globally showcasing professional services next to tourism, sports, horticulture, and other Kenyan products. Trade support institutions should conduct concerted marketing efforts with professional associations and government agencies such as the Kenya ICT board, the Kenya Tourism board, the Communication Commission of Kenya, to promote Kenyan services and build Kenya‘s reputation as an exporter of professional services.

Address skills mismatches and skills shortages: The availability of scholarships or partial funding for BPO agents to be able to access formal training in courses not readily available in Kenyan universities and colleges would improve the skills and thus the marketability of Kenya‘s BPO sector. The same reasoning would apply to professionals employed in the ICT/ITES sector whose needs for training in specialized technology areas cannot be met by local learning institutions.

The provision of rebates or the development of incentives for firms to conduct training – especially specialized training such as a certified fraud examiners course in the accounting sector – would help increase the quality and degree of specialization of the services offered by Kenyan firms.

References

Export Promotion Council (EPC) & World Bank (2009). Services Exports Study: Assessment of Kenya‘s Export Potential and Supply Capacities in Selected Professional Service Sectors.

Government of Kenya (GOK) & Export Promotion Council (EPC) (2008). Strategy for Export Promotion of Professional Services in Kenya.

Sudan, R., Ayers, S., Dongier, P., Muente-Kunigami, A., and C. Qiang (2010). The Global Opportunity in IT-Based Services. World Bank infoDev.

World Bank (2010a). Reform and Regional Integration of Professional Services in East Africa: Time for Action.

World Bank (2010b). Towards a Regional Integration of Professional Services in Southern Africa.

World Bank (2010c). Kenya Economic Update.

About the Authors

Nora Dihel is a Trade Specialist in the Africa Poverty Reduction and Economic Management unit. Ana Margarida Fernandes is a Senior Economist with the Development Research Group. Richard Gicho, John Kashangaki and Nicholas Strychacz are consultants. This work is funded by the Multi-Donor Trust Fund for Trade and Development supported by the governments of the United Kingdom, Finland, Sweden and Norway. The views expressed in this paper reflect solely those of the authors and not necessarily the views of the funders, the World Bank Group or its Executive Directors.

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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 Kenyan clients do not see the value of such drawings nor the benefit of having an architect oversee a project. Often they receive the drawings and then engage a contractor to build without consulting the architect.

3 A Complementary view on policy changes that can make Kenya a more attractive destination for offshore of IT and ITES sectors is provided by the examination of a location readiness index described in Sudan et al. (2010)

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