Enhancing MSEs Through Vouchers: Developing Business Markets in Kenya

1. Using Vouchers to Develop Business Development Service Markets for Kenya’s Micro & Small Enterprises Presentation to CWSA Workshop by William F. Steel Senior Adviser, Private Sector Africa Region, World Bank 28 January 2003

2. Why Business Development Services (BDS) for MSEs? MSEs play an important role in: • Poverty reduction and economic growth by generating employment and incomes • Empowerment of low-income workers • Development of entrepreneurship & skills BDS can raise MSE productivity by addressing key constraints: • Low skill levels • Weak management, financial accounts, marketing • Low level of technology • Weak linkages and support systems W. Steel: BDS Markets

3. Shortcomings of Previous Approach to MSE Assistance Old Supply-driven approach: • Intervene with services provided or contracted directly by donor project or government agency • Train x number of people in z years Shortcomings: • Potential private providers are crowded out • Services not adapted to real needs of clients • No sustainability when subsidies run out W. Steel: BDS Markets

4. Rationale for New Approach to Developing BDS Markets Vision: Diverse services adapted to meet demands of large share of MSEs affordably Under market development approach: • Increased demand & willingness to pay • Providers have to adapt methods & content to targeted clients • Sustained & expanding provision of services W. Steel: BDS Markets

5. Old Supply-driven Approach Provider looks to government/donor BDS providers (public agency; donor program) Government/ Donor $$$ Beneficiaries Private BDS providers Most private providers left out W. Steel: BDS Markets

6. New Demand-led Approach Provider has to market to clients Government/ Donor Training providers $$$ $$$ Clients (MSEs) W. Steel: BDS Markets

7. New Demand-led Approach Facilitation of both demand and supply Gov’t/ Donor Upgrading Funds Facil-itator Training providers Information Subsidy (voucher) $$$ Clients (MSEs) W. Steel: BDS Markets

8. Some Examples of BDS W. Steel: BDS Markets

9. Why Demand-driven Approach? Supplying pre-determined packages of services doesn’t work well because: • MSEs vary widely in capabilities and what business services can benefit them • Needs assessment cannot fully capture what will work for which MSEs, nor anticipate changes in market • Each MSE may want different combination of BDS W. Steel: BDS Markets

10. Why Vouchers? • Demand-driven • Trainee chooses and pays with voucher • Encourages private sector to respond • Fills information gap • Directory of providers and services • Incentives • Reduces cost to clients • Reduces risks and raises profits to providers • Transparent way of delivering subsidy to jump-start market development W. Steel: BDS Markets

11. Drawbacks of Vouchers • Complex, costly to set up • Can distort true market by subsidizing the transactions • Subsidies can become addictive, hard to phase out W. Steel: BDS Markets

12. Kenya Voucher Program • Started just for training delivery: • Upgrade skills & productivity in existing micro & small enterprises (MSEs) • Give women technical skills to start up • Shifted to market development approach • Introduced upgrading for training providers (vouchers for training of trainers) • Extended to other, more individualized BDS aimed at SMEs (small & medium-scale enterprises) W. Steel: BDS Markets

13. Training, Technology/BDS, & Microfinance Vouchers: Micro & Small Market Segments Basic technical skills Voucher Training Programme Technology & BDS Voucher Programme Specialised technical skills STANDARDIZED TRAINING Training Institutions Skilled Craftworkers Consulting Firms TECHNICAL ASSISTANCE & SPECIALIZED TRAINING Technology institutions Large firms Entrepreneurship & management skills Self- employed Product improvement Micro Small BUSINESS DEVELOPMENT SERVICES Consulting firms Service providers Jua Kali Assoc. SACCOs Mobilize & manage own savings/credit Problem-solving Business planning & development FINANCIAL SUPPORT INSTITUTIONS Microfinance Inst’ns Coop & other banks MicroFinance Voucher Training Programme Access external funds W. Steel: BDS Markets

14. Implemented Mainly through Private & Non-gov’t Agencies W. Steel: BDS Markets

15. Kenya Voucher Programme:Performance 1997-2001 • 37,606 training vouchers issued, about 32,606 trained(60% women) • BDS to 608 clients; microfinance to 65 • US$8.7m disbursed ($2m being processed) • Impaired by frequent changes of Ministry & “Permanent” Secretary (6 in 4 years) • Retarded by slow, delayed flow of budgeted funds • Severe delays paying service providers • Trainers won’t offer new courses (in programme) till paid for previous ones W. Steel: BDS Markets

16. Demand Response, 1997-2001 *Subject to final verification W. Steel: BDS Markets

17. Supply Response, 1997-2001 W. Steel: BDS Markets

18. Kenya Voucher Programme:Impact • Very positive for those trained • Significant increases in employment, assets and income for enterprises • Increased willingness to pay cash directly to providers for subsequent training (40% have done so) W. Steel: BDS Markets

19. Kenya Voucher Programme:Unanticipated Benefits • Skilled craftworkers emerged as leading training providers (TPs): • Most-demanded by voucher clients • Adapted apprenticeship system to a more convenient format • Some have added training as a business line • Formed Assoc. of Tech. Transfer & Enterprise • Jua Kali Associations empowered • Provide members with useful information & vouchers • Many have formed SACCOs to help address financing needs from own resources W. Steel: BDS Markets

20. Lessons Learned • Administer in private sector, not through Government Ministry • Provide training-of-trainers and other support to upgrade TPs, especially those from SME sector • Market development works, but takes time • Demonstration effect: Clients willing to pay for further training (=> need to reduce subsidies) • Need exit strategy: • Providers may become oriented toward vouchers rather than developing better products for mass market • Slow payment in Kenya forced TPs to cater more to the market, not subsidies W. Steel: BDS Markets