Fiscal consolidation opportunity to address private sector issues

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This article first appeared in my weekly column with the Business Daily on May 6, 2018

The government seems intent on implementing a course of fiscal consolidation that will put Kenya on a more sustainable fiscal path. While fiscal consolidation is welcome and should be supported, it raises new challenges with which the country has to grapple. The intent of government is to ramp down spending, reduce borrowing, bring down the fiscal deficit and raise revenues. The combination of these factors translates to the reality that government will not be able to finance its new agenda, particularly the Big Four, as robustly as perhaps was initially intended.

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As a result, government has already began calls for the private sector to actively engage in the Big Four. The Budget Policy Statement has made it clear that Public Private Partnerships (PPPs) will be fast tracked in order to fully leverage private sector engagement. However, there are realities of which we ought to be aware as government makes the call to private sector to help realise and frankly, co-finance, the Big Four.

Firstly, over 90 percent of the Kenyan private sector consists of Micro, Small and Medium Enterprise (MSMEs). While the presence of the large companies is dominant and well publicised, the reality is that the engine of the economy is run by smaller businesses that sprawl across the formal and informal economy. MSMEs are thought to contribute at least 30 percent to GDP and employ over percent of employed Kenyans. However, MSMEs work in an environment, and have internal firm dynamics, that negatively inform their productivity and economic strength. The fact that they constitute over 90 percent of business in the country yet only contribute about 30 percent to GDP signals serious productivity problems.

Thus, while government intends to pull in the private sector to work on their agenda, they ought to be cognisant of the composition of private sector in the country. I am of the view that MSMEs can be engaged to deliver on government projects, but the nature of the engagement will likely be more involving than government initially envisioned.

Linked to the point above is the issue of the capacity and experience of indigenous firms. Given that foreign firms are angling for Big Four projects, the question of the competitiveness of domestic private sector becomes important. Will government deliberately reserve a portion of projects for indigenous private sector to ensure local participation? If not, does Kenya risk outsourcing the bulk of government projects to foreign companies, and what would be the implications?

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Linked to the point above is the issue of PPPs, where it has been widely noted that domestic firms do not have the financing, experience, and enablers that foreign firms do. For example, domestic firms get credit at 14 percent while this figure can be as low as 2 percent for foreign firms; this reduces the former’s competitiveness. Government seeks efficiency in the context of limited funds thus the question becomes how domestic private sector can secure contracts and competitively deliver on them in the context of international competition.

In truth, fiscal consolidation will shine a spotlight on the domestic private sector and the factors that inform their ability and competitiveness. Government and private sector ought to use this opportunity to address key issues decisively, such that the process strengthens the domestic private sector.

Anzetse Were is a development economist;


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