Whenever there is a debate on how to revive the economy in Kenya, it inevitably pivots to the fact that it is impossible to achieve this without Micro, Small and Medium Enterprises (MSMEs).
Small businesses contribute about 34 percent of the country’s Gross Domestic Product and employ approximately 15 million people. Unfortunately, a fifth of these small firms fail in their first year, and just a third survive past their tenth birthday.
This low survival rate is attributed to the hurdles disproportionately facing MSMEs, such as unfair competition practices, including incidences where buyer firms with superior bargaining power delay payments, impose unfair contract terms, or transfer costs when dealing with suppliers.
Additionally, unfair exclusive agreements imposed by big players foreclose the value chain by creating barriers to entry and expansion, while price fixing contraventions render certain services inaccessible and unaffordable for MSMEs.
Governments may also affect the operations of these firms through their regulatory regimes, such as unfavourable licensing policies, which increase transactional costs and affect supply chains. For instance, investors require multiple licenses to open a small retail outlet in the country. These costs add to the financing strain facing MSMEs purchasing equipment for expansion, thereby stalling their growth. This is mainly due to the lack of credit history and collateral to support the application process.
The Competition Authority of Kenya (CAK), which aims to do away with these challenges facing MSMEs, advises the national and county governments to promulgate regulatory regimes that are supportive of a conducive investment climate.
Agreements with buyers
In executing its mandate, the CAK has intervened in various sectors, which support MSMEs, including agriculture and manufacturing. Additionally, interventions against big businesses disenfranchising their smaller supplier partners has led to release of over Sh2.5 billion to MSMEs operating in the retail and insurance space. Further to this, CAK has supported the bargaining position of MSMEs entering into agreements with buyers by developing template contracts to guide the process.
Further, the authority has developed a Regulatory Impact Assessment Framework to guide the national and county governments when promulgating regulatory regimes.
Such guidance led to the removal of barriers to entry in the growing and processing of specialty tea, leading to establishment of five factories directly and indirectly employing over 2,000 Kenyans.
In addition, the intervention led to an increase in inclusivity since producer prices of specialty tea stands at Sh600 per kilo compared to traditional tea’s going rate of about Sh70 per kilo.
In the telecommunications sector, pursuant to CAK’s order extinguishing exclusive agreements in the mobile money agents’ contracts with Mobile Network Operators, the agents’ network has increased by over 150 percent.
This is coupled with increased commissions for the agents. CAK also approved a merger relating to a major beverage-bottling firm on condition that they reserve at least 20 percent of their refrigerator space for competitor brands distributed by MSMEs. This was informed by the need to facilitate new entrants' access to the market and exert positive competitive pressure on incumbents.
Such interventions resonate with the theme of this year’s World Competition Day - Competition Policy for an Inclusive and Resilient Economy. The commemoration is marked annually on December 5 to enhance awareness about competition enforcement and the benefits to consumers.
MSME turnover tax
In line with this, the government supported businesses that have been negatively affected by the Covid-19 pandemic. These interventions include expedient payment of pending bills and VAT refunds, reduction of MSME turnover tax, and operationalisation of the credit guarantee scheme.
These interventions can be buttressed further, with the aim of creating linkages and driving efficiencies. This may be attained through developing e-repositories linking MSMEs to new markets, suppliers, and funding opportunities. Such a platform should be developed through partnerships between the government, private sector players and MSMEs.
To reduce regulatory obstacles at county level, the National Treasury may create a competition yardstick by pegging disbursements to interventions deployed to support MSMEs. Further, development and operationalisation of the leasing framework envisaged under the Medium Term Plan (MTP) III shall facilitate MSMEs to acquire the requisite capital to penetrate markets.
Lastly and most importantly, cognisant of the fact that high mortality rate of MSMEs could be attributed to internal governance weaknesses and controls, there is need for capacity building to create a resilient sector. Institutions of higher learning may take this opportunity to develop curricula to attend to this need.
Ninette Mwarania is the manager, Policy and Research at the Competition Authority of Kenya.