It’s demoralizing to be young, energetic, educated and skilled, but have no opportunity to earn a decent living. Yet this is the current reality for many of the youth in Kenya today—a cohort the size of which has surpassed the country’s working age population for the first time in its history. Faced with this dire situation, many youth have found productive opportunities through entrepreneurship, and, as a result, most small- and medium-size enterprises (SMEs) in Kenya are owned by young people.
Cognizant of the youth unemployment problem, the Kenyan government has instituted policies to procure goods and services from youth-owned businesses. This market is a sizeable one: The Kenyan government spends an estimated 70 percent of its budget on these expenses, or roughly 1 billion Kenyan shillings ($11.7 million), if one uses figures from this fiscal year. The government’s “preferential procurement policy” has reserved 30 percent of these expenses to be paid to enterprises owned by youth, women and the disabled.
Will this new procurement policy help Kenya’s youth find much-needed employment opportunities? On its own, probably not, unless broader measures are taken. Lessons from the country’s history underscore this opinion. The strategy for promoting a preferential procurement policy is not new. In 2005, 25 percent of Kenya’s public procurement was reserved for SMEs. However, this policy lacked regulations to aid in its implementation and, consequently, there was an abysmal uptake of the quota by its intended beneficiaries. The new 30 percent policy is backed by new regulations that should help redress this problem. However, the policy’s success still remains to be seen.
Economic theory, specifically the principal-agent dilemma, also provides some important lessons. The principal—in this case, the small informal enterprises—must deal with enormous transactions costs in supplying their wares to the agent—the government agencies and departments. These costs include registering as a government supplier, which requires paying a fee without receiving any guarantee of successful registration. The process itself is complex, time-consuming and expensive, which are perfect conditions for rent-seeking behavior.
There are also costs associated with financing goods and services until the government agency pays its dues. A recent study from the Kenya Institute for Public Policy Research and Analysis (KIPPRA) finds that more than 30 percent of public sector contractors in Kenya consider the government to be slow in honoring its payments. Redressing the problem by litigating against the public entities is often too strenuous for SMEs to bear. Furthermore, these delays can be prohibitive for some contractors. For example, 26 percent of those surveyed indicated they can participate in the procurement process only if payments are prompt.
There are also disincentives for government agencies to contract with SMEs. For example, from the government’s perspective, the costs of evaluating many bids from small, informal enterprises are much higher than the costs of evaluating a few bids from large, formal companies.
All of this makes it unlikely that Kenya’s 30 percent preferential procurement policy will be fully utilized and, in turn, create substantial new employment opportunities for youth. What is needed is a more comprehensive approach, and there are a number of measures that the Kenyan government can take in order to support the procurement policy without compromising its integrity. It can switch to a system of automatic e-payments and/or stipulate penalties for public entities that fail to pay their bills on time. It can scrap the fees for registration or waive some process requirements for youth-owned enterprises. It can encourage the youth that belong to existing chama associations (informal micro-savings groups) to bid in collectives and help set up avenues for subcontracting within these groups. It could create a single-point registration system that would catalog small enterprises with all public entities at national and county levels simultaneously. And it could publicize the performance of government agencies with respect to how closely they come to fulfilling the 30 percent quota, introducing a degree of accountability in the policy’s implementation.
These are some of the options that the Kenyan government has at its disposal. If these are implemented, they could help ensure the successful uptake of procurement projects by youth enterprises, and the benefits in terms of creating employment opportunities could be substantial. Arguably, the very success or failure of the policy hinges on whether or not these supporting measures are put in place. It is up to the Kenyan government now to decide whether to implement them or not.
Peter Njiraini and Hannah Wangombe are policy analysts at the Kenya Institute for Public Policy Research and Analysis (KIPPRA) based in Nairobi. KIPPRA is one of the Brookings Africa Growth Initiative’s six local think tank partners based in Africa.