Delivering on Vision 2030 By Wahome Gakuru (PhD)- NESC March 2007 JOH-KYA001-20070204-JvW-P1 JOH-KYA001-20060204-JvW-P1 Delivering on Vision 2030 By Wahome Gakuru (PhD)- NESC March 2007 This report is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from McKinsey & Company. This material was used by McKinsey & Company during an oral presentation; it is not a complete record of the discussion.

Kenya Vision 2030 Project Approach Sector Selection Process JOH-KYA001-20060204-JvW-P1 Contents Background National Visioning Kenya Vision 2030 Project Approach Sector Selection Process

JOH-KYA001-20060204-JvW-P1 Historical context Kenya has in the past had two long-term policies and several 5 Years Development Plans that have guided planning and investment: The first was Sessional Paper No 10 of 1965: African Socialism and Its Application to Planning in Kenya, and the second was Sessional Paper No 1 of 1986: Economic Management for Renewed Growth. These plans attempted to confront the country’s most entrenched problems – by charting a vision of how development would tackle them. Whereas the economy grew by an average of 6 per cent over 1964-1980 and 4.1 per cent over 1980-1990, the period 1990-2002 was a period of declining per capita income with GDP growth of 1.9 per cent against a population growth of 2.9 per cent. However, since, 2003, We have made tremendous effort to get the economy back on track through the ERS with the GDP growth rate shooting back to 5.8 percent by 2005.

Taking stock of National Development under the ERS to date JOH-KYA001-20060204-JvW-P1 Revenue Growth by over Kshs 140 B – from Year 2001/ 02. Primary school enrolment 7.6 Million - Year 2005. Health Facilities 4,557 –Year 2003 -4,912 – Year 2005 CDF & LATF, etc Percentage of Roads in poor state fell to 32% -Year 2005. Oversubscription of the KenGen and ScanGroup IPOs earlier this year is an example of the confidence which the Kenyan economy enjoys among local and foreign investors. The most dramatic change in our economy in the past year has been in the telecommunications sector. The mobile telephone subscription base in Kenya went up by 57 percent in 2005, connecting 5.6 million subscribers Some 400 million SMS were exchanged by Kenyans in 2005

After Economic Recovery What Next? JOH-KYA001-20060204-JvW-P1 After Economic Recovery What Next? These highlights of our economic performance simply demonstrate that we have reached and exceeded the stage of economic recovery that the ERS targeted. But the ERS is coming to an end in December 2007. The question then is “What Next?” And this is where the Kenya Vision 2030 comes in. Please note that the Kenya Vision 2030 is a strategic plan, which will in turn be implemented in 5 year development plans/phases to coincide with the electoral cycles. Therefore, every succeeding government will be evaluated by Kenyans on the basis of the targets and milestones in the Vision 2030 document. For this reason, the Kenya Vision 2030 is a National Project and not a government-of-the-day-project.

Unemployment Especially In Youth- Most Jobs In Informal Sector. JOH-KYA001-20060204-JvW-P1 Present Challenges: What challenges must we as a Nation overcome through the Vision? Unemployment Especially In Youth- Most Jobs In Informal Sector. Income Redistribution – Inequality Low Saving Ratio (16%) Compared To Need Rapid Urbanization – 6 % Annually Year 2001- 33% Year 2030- 60%

Composition of our Economy over time: An underlying structural Problem JOH-KYA001-20060204-JvW-P1 Composition of our Economy over time: An underlying structural Problem This figure shows that there has not been those expected structural changes in the sectoral shares of real GDP since independence. The right picture for economic take-off would be that the share (percentage) of Agricultural sector contribution should be significantly going down while that of Services and Manufacturing should be going up.

JOH-KYA001-20060204-JvW-P1

Future Challenges Therefore: the Economy must grow to cater for this ! JOH-KYA001-20060204-JvW-P1 Future Challenges Therefore: the Economy must grow to cater for this !

Future Challenges cont … JOH-KYA001-20060204-JvW-P1 Future Challenges cont … Globalization- Increasing international competition Climate change- Global warming, ETC., We must start to tackle these challenges now!!

Kenya Vision 2030 Project Approach Sector Selection Process JOH-KYA001-20060204-JvW-P1 Contents Background National Visioning Kenya Vision 2030 Project Approach Sector Selection Process

Plans and implementation THE ROADMAP BEING DEVELOPED FOR KENYA’S ECONOMIC TRANSFORMATION JOURNEY HINGES ON THREE KEY ELEMENTS JOH-KYA001-20060204-JvW-P1 Vision Overarching goal toward which Kenya aspires over a the next 25 years Strategy Tangible approach which Kenya will follow to achieve the vision (e.g., which sectors to prioritise, which projects to launch, which specific skills to develop) Plans and implementation Concrete plans to execute and deliver on the strategy (e.g., activities, roles and responsibilities, milestones, timing, tracking mechanism) Source: Team analysis

MANY COUNTRIES HAVE GONE THROUGH THE FIRST STEP OF DEVELOPING A COUNTRY VISION JOH-KYA001-20060204-JvW-P1 Country Vision Central theme of the vision Malaysia Vision 2020 Malaysia to be a fully developed country by 2020 Singapore New Singapore To turn Singapore into a “globapolis”, a global city Nigeria Vision 2010 To build and sustain a democratic society and to become Africa’s leading economy India Vision 2020 India to be counted as a developed nation by 2020 China Three Step Development Strategy Build a moderately well-off society in an all-round way that benefits over one billion people South Africa Programme of Action To achieve higher rates of economic growth and development, improve the quality of life and consolidate social cohesion Russia Social and Economic Program Boost the competitiveness of the country

HOWEVER, A COMPELLING VISION ON ITS OWN IS NOT ENOUGH JOH-KYA001-20060204-JvW-P1 1 Developing an aspirational, directional, and inspiring vision around which all stakeholders can rally is a critical first step Today The strategy must be supported by a realistic and concrete action plan that will ensure that the strategy is delivered 3 Vision – 15 yrs Destination C Vision – 10 yrs Destination B Vision – 5 yrs Destination A This vision must absolutely be comple-mented by a robust and integrated strategy that will help achieve the vision 2

Kenya Vision 2030 Project Approach Sector Selection Process JOH-KYA001-20060204-JvW-P1 Contents Background National Visioning Kenya Vision 2030 Project Approach Sector Selection Process

Plans and implementation JOH-KYA001-20060204-JvW-P1 KENYA VISION 2030 Overarching vision A globally competitive and prosperous nation with a high quality of life by 2030 Vi- sion Economic To maintain a sustained economic growth of 10% p.a. over the next 25 years Social A just and cohesive society enjoying equitable social development in a clean and secure environment Political An issue-based, people-centered, result-oriented, and accountable democratic political system Strategy Plans and implementation Source: NESC Vision workshop, January 13–14, Naivasha, Kenya

THE SIZE OF THE PRIZE FROM ACHIEVING THIS VISION IS SIGNIFICANT ECONOMICALLY… JOH-KYA001-20060204-JvW-P1 Real GDP growth rates % CAGR High-growth countries Potential Kenya GDP Nominal, $b Singapore (1986–1996) 153.4 Dubai (1992–2002) Hong Kong (1978–1988) Chile (1988–1998) Malaysia (1990–2000) 2005 2030 Medium growth countries Potential Kenya GDP/capita* $ India (1995–2005) Singapore (1995–2005) As you well know, the prize is large, getting the Nigerian economy on a similar growth path as the best evolving countries across the world could get the economy to sustained growth rates of around 8%, realising an extra economic surplus of ~USD40 billion over the next 10 years, i.e. potentially doubling the GDP of the country. For Nigeria the numbers are staggering. Oil income represents 40% of GDP, 70% of government revenues and >90% of foreign receipts. Therefore getting economic growth going starts and finishes with productivity and revenue growth in the oil industry. 660% Malaysia (1995–2005) Nigeria (1995–2005) South Africa (1995–2005) Kenya today 2005 2030 Kenya (1995–2005) 10.0% Opportunity for Kenya to join the ranks of Middle-income countries by 2030 * Assuming 2% population growth rate similar to 1990–2005 period Source: McKinsey; Global Insight

Better access to affordable and high quality health care JOH-KYA001-20060204-JvW-P1 …AND THIS GROWTH IN GDP WILL BE DEPENDENT ON PROPER STRATEGIES AND TARGETING OF THE SOCIAL AND POLITICAL GOVERNANCE PILLARS, IMPLYING Better access to affordable and high quality health care Affordable and high quality education at all levels A just and cohesive society A more equitable society Secure and clean environment An issue-based, people-centered, result-oriented, and accountable democratic political system, among others

8.0 JOH-KYA001-20060204-JvW-P1 THE VISION HAS SO FAR RECEIVED BROAD SUPPORT FROM VARIOUS STAKEHOLDER GROUPS ACROSS THE COUNTRY Process was launched by H.E. President Kibaki, 30 Oct 2006 . . . . . . and there has been broad support for the vision so far This is a good follow-up to the ERS and will break the cycle of promises made and not delivered in the past — National Aids Control Council Vision 2030 should energise Kenyans to slay the dragon of implementation — World Bank The Vision will create higher quality of jobs for Kenyans and could even double the GDP of Kenya in 3 years — Ministry of Information and communication In the past we have been too individualistic, the Vision gives Kenyans a collective dream, which now needs to be implemented or else it will remain as a dream — Central Bank of Kenya “Vision 2030” is a call to all Kenyans to make it possible to wipe out our land from absolute poverty — H.E. President Kibaki Source: Kenya Vision 2030 launch; interviews

Plans and implementation Current focus of project THE FOCUS OF THE VISION 2030 PROJECT IS TO DEVELOP CONCRETE STRATEGIES AND A ROBUST ACTION PLAN TO MAKE THIS VISION A REALITY JOH-KYA001-20060204-JvW-P1 Overarching vision A globally competitive and prosperous nation with a high quality of life by 2030 Vi- sion Economic To maintain a sustained economic growth of 10% p.a. over the next 25 years Social A just and cohesive society enjoying equitable social development in a clean and secure environment Political An issue-based, people-centered, result-oriented, and accountable democratic political system Strategy Plans and implementation Current focus of project Concurrently outlining key social and political pre-requisites to achieve economic aspirations Source: NESC Vision workshop, January 13–14 2006, Naivasha, Kenya

INITIAL FOCUS ON THE ECONOMIC PILLAR IS PART OF A BROADER AND LONGER PROCESS TO START REALISING THE VISION JOH-KYA001-20060204-JvW-P1 Current focus Drive successful implementation of the Vision Roll out sector strategies to other sectors of the economy Phase I High-level diagnostic & benchmarking Phase II High-level strategies Phase III Master plan and comm-unication Finalise concrete strategies and action plans to deliver on social and political pillars Communicate, Communicate, Communicate 4 months 12–18 months Source: Team analysis

PROJECT APPROACH AND TIMELINE JOH-KYA001-20060204-JvW-P1 PROJECT APPROACH AND TIMELINE MX Module X We are here Phase I – High-level diagnostic and benchmarking Phase III – Master plan and communication/ syndication Phase II – High-level strategies Portfolio Master plan and management approach M8 M1 Implications of vision M5 Portfolio objectives and priorities Monitoring and implementation dashboard M9 High level portfolio diagnostic M2 Resources M10 Sectors High-level diagnostic of key sectors M3 Contours of sector strategy – 4 key sectors M6 Communication plan M11 Diagnostic of quick win projects M4 M7 Strategy and plans to deliver quick wins Launch of quick- win projects M12 29/11 7 weeks* 09/02 12/02 6 weeks 23/03 26/03 3 weeks 13/04 Source: McKinsey

JOH-KYA001-20060204-JvW-P1 THE PORTFOLIO DIAGNOSTIC SHOWS SIGNIFICANT OPPORTUNITY TO BUILD ON THE MACRO-ECONOMIC STABILITY ACHIEVED IN KENYA Focus areas Summary of key messages from diagnostic Kenya’s economic recovery strategy has created a stable macroeconomic environment and produced robust GDP growth over the past few years Growth has been fairly broad-based across all sectors, in particular in communications, energy, manufacturing and tourism Kenyan economic context + While on the up-tick, Kenya still has significant opportunity to improve across several key dimensions Investment levels are relatively low and widespread across sectors Development spending has been low and overly focussed on administration and social services Employment remains highly informal with low levels of productivity High growth country benchmarks + Vision 2030 is aspirational and Kenya will be the 3rd country in the world to achieve such growth The first step is to identify key (sub) sectors with significant potential which can be unleashed in the short-term Strong need to focus investments on a few key ‘growth’ engines to promote growth initially These are likely to change overtime to sustain the growth Implications for the Vision Source: Team analysis

BREAKDOWN OF THE KENYAN ECONOMY BY SECTORS* JOH-KYA001-20060204-JvW-P1 (% formal GDP, % format jobs) Vertical sectors (57, 47) Agriculture (24, 18) Industrial Tea Coffee Sugar cane Cotton Tobacco Sisal Horticulture Fruit Vegetables Flowers Nuts Spices Food crops Cereals Legumes Tubers Livestock & Fishing Manu- facturing (12, 14) Food processing, Beverages and Tobacco Refined Petroleum Textiles, Apparel & Leather Goods Forest products Chemicals Equipment & Machinery Fabricated Metals Rubber and Plastics Other (~10 other ISIC codes) Services (21, 15) Wholesale & Retail Financial Tourism Business services Others Extractive (<1, <1) Oil & gas Minerals Soda ash Flousphor Salt Limestone Titanium Enabling sectors (43, 53) Transportation** (8, 3) Energy (1,1) Telecommunications (2,3) Social services (19, 42) Construction (4,4) * Not exhaustive ** Roads railroads, ports and airports Source: Team analysis

1.5 AT THE SECTOR LEVEL THE KEY SUB-SECTORS OF THE KENYAN ECONOMY HAVE BEEN ASSESSED… JOH-KYA001-20060204-JvW-P1 Focus of diagnostic % of Kenyan exports2 % of Kenyan formal employment3 GDP Growth 2001-05 % (real) % of Kenyan GDP1 Agriculture Horticulture4 8.8 23.3 12.1 Food Crops 8.6 0.3 2.3 4.4 Industrial Agriculture 4.4 33.0 10.7 3.7 Livestock & Fish 3.7 3.6 1.0 Manu-facturing Food Processing, Beverages, Tobacco 3.3 7.8 4.7 5.3 Refined petroleum products 1.3 4.5 -0.8 Textiles, apparel and leather goods5 0.9 3.8 3.4 1.0 Forest products 0.6 2.3 1.0 -3.6 Chemicals 0.6 15.2 0.8 1.7 Equipment 0.5 2.2 0.7 3.7 Fabricated metals 0.5 0.7 1.1 2.3 Rubber and plastic products 0.4 0.6 2.5 Publishing & Printing 0.3 0.6 0.5 0.1 0.5 -4.9 Furniture 0.2 2.4 0.9 8.4 Other manufacturing6 3.0 6.8 3.5 Services Retail 11.9 0.2 7.1 Real Estate7 3.0 1.9 2.3 Financial Services 3.4 2.9 7.0 Hotels and Restaurants 1.5 2.7 1.5 Business Services 3.1 Oil & Gas (Refinery) 30.0 0.1 2.7 Extractive Mining & Quarrying 0.6 0.1 Chemical & fertilizer mineral 3.3 4.1 Enabling Sectors Transport and storage 9.3 18.2 3.7 Education 8.1 7.9 -0.2 Public administration and defence 5.0 4.3 2.5 Construction 4.4 8.7 4.4 Other Social Services 4.1 5.8 3.3 Health and social work 2.8 3.1 14.5 Post and telecommunications 2.7 0.6 11.2 Electricity supply 1.4 0.6 4.3 Water supply 0.8 91% GDP covered in diagnostic 86% exports covered in diagnostic 96% employment covered in diagnostic 1 Accounts for 91% of total economy 2 Accounts for 86% of total exports 3 Accounts for 96% of total formal employment 4 Do not yet have horticulture employment data 5 Textiles includes textile portion of EPZ for GDP but not in exports or formal employment 6 Other manufacturing includes fragmented production of various mineral products, non-textile EPZ, and small scale production 7 Addressed a part of construction sector Source: Central Bureau of Statistics

JOH-KYA001-20060204-JvW-P1 …AND THESE SUBSECTORS ARE BOTH EXPORT & DOMESTIC ORIENTED - ALL NEEDED TO GROW & MODERNISE THE KENYAN ECONOMY Export-oriented sectors Domestic-oriented sectors On the Export-oriented sectors: The primary focus will be Growth of GDP, Improvement of trade balance, Attracting FDI, technology and know-how. Example of selection criteria include absolute size and growth of exports, level of global competitiveness and ability to improve, and ability to attract FDI On Domestic Oriented Sectors: The primary focus will be Growth of GDP and job creation, Improvement in labour and investment productivity, Migrating informal economy towards formal economy Example of selection criteria include absolute size and growth of GDP and jobs, level of productivity gaps and ability to improve, and impact on informal economy

AN IN-DEPTH DIAGNOSTIC WAS CONDUCTED FOR EACH KEY (SUB)-SECTOR JOH-KYA001-20060204-JvW-P1 AN IN-DEPTH DIAGNOSTIC WAS CONDUCTED FOR EACH KEY (SUB)-SECTOR Agriculture is the pillar of the Kenyan economy Largest sector overall with 24% of GDP (KSh 342 billion) Contributes 65% of Kenya’s exports (KS126 Billion) with 36% of total production exported >5 million people earning incomes from this sector, >90% of which are ‘active’ in the informal economy 1 Size and growth Small holder farmers make up the vast majority of those involved in the agricultural sector, while the rest are estate or plantation farmers, processors, and marketers Over 5 million small holders across the spectrum of agriculture with various levels of organisation depending on particular crop Estates also range in size; largest estates currently facing difficult times (e.g., all listed tea companies either operating at a loss or barely breaking even in last 18 months) 2 Structure Orientation of current agricultural economy towards exports of unfinished raw materials and production for domestic consumption of lower value produce Productivity and value to small holder farmers minimized through high cost of inputs, limited extension services, low value placed on domestic oriented products, dependence on rain, and lack of visibility into market opportunities Estate production focused on raw material export that fails to capture full value coupled with high production costs (e.g., labour, taxes, energy, infrastructure) making Kenya’s commodity producers unprofitable Dependence on a few export markets (e.g., tea to Pakistan, horticulture to EU) Land ownership issues Environmental issues (soil acidity, rainfall patterns, deforestation) jeopardizing Kenya’s long term viability as agricultural producer 3 Challenges What can be done to increase small holder productivity? Consolidation (gets at land ownership issues) Access to cheap credit to afford better inputs Improved extension services What is driving the poor economic performance of agricultural firms? Better understanding of market to transition from peasant producers to entrepreneurs Costs or revenues? Government or internal inefficiencies? In what ways can stronger linkages be made to other sectors (e.g., food and beverages, tourism, bio-fuels) to provide additional income opportunities for domestic producers? How can Kenya strategically protect (and expand) their export markets? What strategic opportunities for value addition are there? 4 Key areas to explore during deep dive Overall lack of competitiveness makes it difficult for manufacturing to thrive Unfriendly labour laws (e.g., annual increase in minimum wage not related to market forces, illegality of employing casual labour, illegality of matching compensation to individual performance) Unreliable and expensive energy (e.g., $0.15c/Kwh in Kenya vs $0.07c in China and $0.04c in South Africa) Disjointed taxation (import, export, corporate) regimes (e.g., total tax rate ~75% of gross profits) Heavy regulation Over 1 300 business related licenses in Kenya Complex (and sometimes overlapping) business and investment registration Cheap (in quality and price) imports that are hard to compete with in the domestic market Second hand goods (primarily clothing) Rising costs of environmental management ‘Smuggled’ or informally imported goods (CPG and processed foods) 7% of formal employees HIV positive How to improve Kenya’s manufacturing competitiveness What is the size of the manufacturing opportunity for Kenya – how big can it get? Which categories can Kenya truly be competitive in – domestic and export? How to improve key drivers, e.g., energy costs, labour costs, tax regime, regulate? How can Kenya encourage more domestic and foreign investment in manufacturing – both within and outside of Nairobi? How can Kenya attract strategic partnerships with competitive international firms? Manufacturing has held a steady share of Kenya’s economy (~10%) since the 1970s Contributes 11% of Kenya’s GDP (KSh 148 bn) – same level of contribution over past 15 years Formally employs ~250 000 people, about 13% of total formal employment; there are also ~1.3 million small scale manufacturers that constitute the informal side of the industry Contributes 25% of Kenya’s exports (KS49 Billion) with 33% of total production exported Manufacturing is a fragmented sector >2,000 manufacturing units with various ownership structures producing goods across 10+ general categories 50% of firms have less than 50 employees Long tradition of manufacturing dating back to World War II but with loss of momentum in past decade 12% of output produced by small scale informal manufacturers The financial services sector plays a critical enabling role in the economy and has a lot of room to further develop While financial services accounts for only ~4% of GDP, it plays a critical enabling role in the economy by providing capital equivalent to ~40% of GDP Kenya’s banking and capital market sectors are underdeveloped when compared to other countries like Malaysia (e.g., domestic credit/GDP is ~40% for Kenya vs ~140% for Malaysia) And while Kenya’s capital markets have been growing rapidly with current market capitalization of ~KSh 800 bn or ~50% of GDP, there is still a lot of room to further develop (e.g., Malaysia sit at 151% of GDP) Moreover, savings and investment levels in Kenya are relatively low (i.e., 11% savings and 17% investments vs ~30% in other countries like Malaysia) Banking is the largest sub-sector within Financial Services and is very concentrated, but also has many small and inefficient banks The banking industry consists of ~40 banks with the top 10 accounting for 70% of assets and foreign banks playing a key role (5 out of the top 10 banks are foreign) The bottom ~30 banks are relatively inefficient with an average return on assets of ~1.8% vs 3.5% for the top 10 banks Moreover, Kenya has far more banks than other countries like Morocco, South Africa and Nigeria (i.e., ~40 vs 21, 33 and 25 respectively) 5 major challenges Scale: Small bank sizes making it difficult to compete especially regionally – as well as raise significant capital locally Legal environment: Difficult for banks to get resolution on judicial issues (e.g., 2 yrs to repossess collateral) Infrastructure: Lack of infrastructure makes it difficult to penetrate and serve the low end Administrative barriers: Difficult to open up bank accounts (eg, min account balances too high) Priority areas for deep dive Overall: Understanding how to strengthen the banking sector (eg, consolidation) and balance between stronger sector and access to credit especially for low income and rural (e.g., Nigeria case study) Microfinance: Lending to MSEs and SMEs (e.g., best practices in micro finance globally) Retail: Increasing bank account penetration and deposits (e.g., lessons learned from Equity Bank) Corporate: Increasing long term financing and larger loan sizes (eg, other successful country cases) Capital markets: Growing the capital market, developing VC/PE market as well as bond market (capital markets maybe potential solution to LT financing problem) Cross-cutting challenges: Reducing cost of doing business by improving judiciary, eliminating admin barriers and building critical infrastructure Tourism is one of Kenya’s major economic pillars and is the largest contributor to foreign exchange earnings, but is far underdeveloped when compared to other top tourist destinations Tourism currently accounts for ~5 of GDP and has been mainly driven by beach and eco tourism Tourism contributes significantly to employment and is the largest earner of foreign exchange (~$800m in 2006) While number of tourists has been increasing at ~13% per year, other top tourist destinations like South Africa and Egypt attract ~4-6x more tourists than Kenya (e.g., 1.3m in Kenya vs 8.2m in Egypt and 7.5m in South Africa) Average spend per tourist in Kenya is also much lower than other destinations and has been declining at ~2% over the past few years (e.g., tourists spend ~70% more in Egypt) The tourism industry structure is made up of hundreds of firms with a primary focus on the mass market as opposed to the high end There are 3 types of players – Airlines (concentrated), hotels (fragmented) and tour operators (fragmented) Only ~18% of hotels in Kenya are 4 and 5 stars while other countries like South Africa has ~38% of their hotels as 4 and 5 stars Various organisations have been created to promote tourism, maintain and build facilities, train talent and preserve wildlife Greater security in key tourist areas Poor quality or non-existent roads between existing and potential tourist sites Ensure top management and preservation of “tourism assets” (beaches and wildlife) Lack of bed capacity Priority Areas for Deep Dive Increasing # of tourists: Segment customers, understand needs by segment, determine how to attract various segments and develop case studies of other successful tourist destinations Increasing length of stay: Determine key drivers to length of stay, potential to increase traffic to existing sites and potential of new sites (i.e., Mt. Kenya, Nairobi, beaches south of Lamu) Increasing average spend/tourist: Identify and assess opportunities to increase spend (e.g., higher end items and pricing as well as how to leverage all the things that make Kenya great like coffee and tea tours, international marathon museum) Wholesale and retail trade is a major part of the economy, but largely informal Wholesale and retail trade accounts for 12% of formal GDP and 7% of formal employment but up to ~30% of GDP and ~50% of employment ~97% of employment and ~70% of the value in the sector is informal The formal segment of the sector is ~10x more productive than the informal segments, making organized and formal retail much more attractive The wholesale and retail sector is extremely fragmented with thousands of small informal players and very inefficient supply chains across all major product categories While a few national retailers have emerged (~20 stores each), the majority of the market is made up of millions of hawkers and micro small enterprises (market-based vendors and kiosks) While ~70% of retailers are in rural areas, the majority of the value still lies in urban areas Formal prices are much higher than informal prices, which is one of the drivers of informality Supply chains have several small producers who supply small retailers directly, especially in food categories Organized retail results in additional costs and needs to be compared to additional revenues and other benefits Urban retailers face very different challenges than rural retailers with the lack of real estate topping the list The major challenges for urban retailers are the lack of real estate, high cost of and unreliable power as well as interference from authorities The major challenges for rural retailers are lack of infrastructure and poor access to water 5 key areas for deep dive – focus on addressing informality Case studies: Understand lessons learned from other countries with informality problem (e.g., Poland, India) Customer segmentation: Segment customers by income and understand needs of each group Product categories: Identify which product categories will be easiest to formalize (e.g., lowest formal price premium) and key barriers to formalizing these categories Supply chain: Understand supply chains across key product categories and impact to supply chains by product category from formalizing Formats: Determine range of format options and which formats make sense for which locations Agri Manuf Finance Tourism Retail The BPO sector in Kenya is an extremely small and nascent part of the economy, but there is an opportunity to gain share of a very fast growing and large global BPO market Kenya’s BPO sector only accounts for ~0.01% of GDP with ~450 seats and ~800 agents However, the global offshore market is expected to grow from $11bn in 2005 to ~$100bn by 2008 presenting a significant opportunity for Kenya to gain a meaningful foothold Africa as a whole has only managed to capture only ~1-2% of the offshore BPO opportunity (~500,000 seats in total globally) Tier I players will be unable to meet all the demand (total of ~2m workers by 2008 and gap of 200-500k workers), presenting an opportunity for tier II players like Kenya Kenya’s BPO sector currently consists of ~450 seats with KenCall the clear leader at 250 seats and several others with 10-20 seats each KenCall stands out as Kenya’s BPO leader with 250 seats out of a market of ~450 seats Overall, Kenya is one of the lowest cost competitors today (e.g., ~$17 000/seat in Kenya vs ~$17 000 in India, ~$30 000 in South Africa) with an opportunity to become even more competitive by reducing telecom costs Kenya faces challenges in 3 major areas Front end: Developing a distinctive value proposition beyond just low cost and penetrating key geographic markets and sectors Infrastructure: Reducing telecom costs, which are ~30% of total operating costs (e.g., potential of reducing it to ~10% of costs) Back end: Focussing on the right incentives (e.g., infrastructure, land, training) to encourage development of the BPO sector in Kenya Key areas to explore Front end: Develop Kenya’s distinctive value proposition, identify key sectors and processes to focus on, develop list of potential clients and best way to market Kenya as an attractive BPO destination (e.g., case studies, role of new industry association) Infrastructure: Understand current cost structure and quality, assess competitiveness, understand infrastructure needed and compare to what infrastructure is being developed Back end: Assess quality and depth of labour pools by location and decide on which government incentives are best to develop the sector (e.g., case studies) BPO The extractive industry is a very small part of Kenya’s economy and despite future growth potential, the future size of the sector is expected to be small The extractive industry currently accounts for ~0.5% of GDP, has been growing at ~3% per year and despite projected strong future growth, is expected to be relatively small in size in the near term The industry is mainly made up of a few basic minerals with Soda Ash and Flourspar accounting for the majority of the value as well as other related commodities such as gold, limestone, titanium, oil & gas and coal The industry is largely domestic oriented with the exception of strong exports of limestone (~30–40%) and gold (~80–90%) A few firms makeup the majority of the industry, however there are ~200 licenses that have been given out for various exploration activities The mining industry is very concentrated with Magadi Soda and Kenya Fluorspar accounting for ~70–80% with a number of smaller firms mining various other minerals such as gold Other related commodity industries like limestone, oil & gas, titanium and coal are also highly concentrated Greatest challenges Lack of long term financing as well as high cost of capital making it difficult to pursue large exploration projects Poor infrastructure drives up the cost of exploration activities (e.g., high energy and transport costs) Land issues and unclear exploration rights Potential priority areas going forward High value added mining (e.g., value addition to gemstones, manufacturing around minerals) Exports of nonferrous minerals such as soda ash, flourspar and limestone Large scale mineral development (e.g., titanium and metals) Mining Biofuels Production is presently nil, with significant growth potential Two plants capable of producing bio-ethanol, but lack of market has led them to produce spirit alcohol and chemicals instead; total capacity of 10 million litres small by international standards With favourable fuel prices, a single 100 million gallon plant could add KSh 3 billion to GDP per year (about 0.2% of GDP) Two small plants with bio-ethanol capability and 1,000s of potential bio-stock producers Two plants are Spectre International (private) and Agrochemicals and Food Company (parastatal) Potential bio-stock inputs include: Sugar cane for bio-ethanol currently being produced by 200,000 smallholders on about 145,000 ha. Wheat, maize, and cotton seed also potential bio-stocks, but more expensive to process Jatropha is currently being piloted in semi-arid areas by about 1,000 farmers as potential feed stock for bio-diesel Lack of government bio-fuels policy and shortage of feed stock availability likely to be limiting factors To make bio-fuel production attractive for domestic market, government needs to mandate a 5 or 10% bio-ethanol component in petrol as well as provide subsidies to producers (can be in the form of tax waivers) to ensure competitiveness Majority of feed stock would need to come from new agricultural production so as not to undermine internal food security What is current government appetite for creating necessary enabling environment? How can bio-fuels fit into an overarching domestic energy strategy? What oil and/or energy companies would be interested in investing in a bio-fuels plant in Kenya? What opportunities exist for new production of potential feed stock? (e.g., additional sugar cane production in the Tana River delta) Source: Team analysis

EXAMPLE: HIGH-LEVEL DIAGNOSTIC OF THE AGRICULTURAL SECTOR JOH-KYA001-20060204-JvW-P1 EXAMPLE: HIGH-LEVEL DIAGNOSTIC OF THE AGRICULTURAL SECTOR 1 Agriculture is the pillar of the Kenyan economy Largest sector overall with 24% of GDP (KSh 342 billion) >5 million people earning incomes from this sector, >90% of which are ‘active’ in the informal economy Contributes 65% of Kenya’s exports (KS126 Billion) with 36% of total production exported Size and growth 2 Small holder farmers make up the vast majority of those involved in the agricultural sector, while the rest are estate or plantation farmers, processors, and marketers Over 5 million small holders across the spectrum of agriculture with various levels of organisation depending on particular crop Estates also range in size; largest estates currently facing difficult times (e.g., all listed tea companies either operating at a loss or barely breaking even in last 18 months) Structure 3 Orientation of current agricultural economy towards exports of unfinished raw materials and production for domestic consumption of lower value produce Productivity and value to small holder farmers minimized through high cost of inputs, limited extension services, low value placed on domestic oriented products, dependence on rain, and lack of visibility into market opportunities Estate production focused on raw material export that fails to capture full value coupled with high production costs (e.g., labour, taxes, energy, infrastructure) making Kenya’s commodity producers unprofitable Dependence on a few export markets (e.g., tea to Pakistan, horticulture to EU) Land ownership issues Environmental issues (soil acidity, rainfall patterns, deforestation) jeopardizing Kenya’s long term viability as agricultural producer Challenges 4 What can be done to increase small holder productivity? Consolidation (gets at land ownership issues) Access to cheap credit to afford better inputs Improved extension services Better understanding of market to transition from peasant producers to entrepreneurs What is driving the poor economic performance of agricultural firms? Costs or revenues? Government or internal inefficiencies? In what ways can stronger linkages be made to other sectors (e.g., food and beverages, tourism, bio-fuels) to provide additional income opportunities for domestic producers? How can Kenya strategically protect (and expand) their export markets? What strategic opportunities for value addition are there? Key areas to explore during deep dive Source: Central Bureau of Statistics; Economic Survey 2006; Ministry of Agriculture

Validated with technical committee TWO KEY DIMENSIONS WERE CONSIDERED IN SELECTING FOCUS VERTICAL SUB-SECTORS FOR KENYA… JOH-KYA001-20060204-JvW-P1 Validated with technical committee Description Overall approach Attractiveness Assessed based on diagnosing sub-sectors in order to understand Current size and growth potential (e.g. GDP, Jobs, employment) Interdependencies with other sectors (including informal sector) Level of competitiveness/ productivity and ability to improve Momentum in each sub-sector (e.g. ongoing projects etc) Bubble size indicating current size of the sector Attractiveness Feasibility Assessed based on diagnosing sub-sectors in order to understand Potential of public policy to impact sub-sector Level of resources required Number of stakeholders involved Requirement for external partners Complexity and potential risks of intervention Existence of local know-how, technology and capital vs need for external partners 1 2 Feasibility Given the level of complexity these two dimensions, assessment relied on a combination of both quantitative analysis and qualitative assessment Source: Team analysis

…LEADING TO 6 PRIORITY VERTICAL SECTORS BEING IDENTIFIED AS CRITICAL FOCUS AREAS FOR KENYA JOH-KYA001-20060204-JvW-P1 FOR DISCUSSION Current size of GDP Proposed deep dive sectors for phase 2 + Retail Financial services Tourism Key message 6 key sectors proposed for deep dive analysis in phase 2 to develop high level strategies for each of them Implications on enabling sectors (e.g., energy, telecoms, education) also be analysed BPO Manufact-uring Agri-culture 1 Attractive-ness Petroleum Bio-fuels Although not a priority in the short term, these and other non-prioritised (sub)-sectors are still important for the Kenyan economy Mining + 2 Feasibility Source: Team analysis

…AND UNDERSTANDING HOW KEY ENABLERS NEED TO BE IMPROVED AS KENYA’S CURRENT COMPETITIVENESS NEEDS TO BE STRENGTHENED JOH-KYA001-20060204-JvW-P1 Kenya’s weaknesses compared to these countries Kenya’s strengths compared to these countries + Cost of labour F1.1 Literacy level F1.2 F1.3 F1 Labour F2 Capital F3 Energy F4 Agricultural resources F5 Information and telecommunications F6 Logistics F7 Tax F8 General Services F9 Business Climate F10 Government FDI as % of GDP F1.4 Kenya is generally, not more competitive than countries with similar level of development It is typically at par or less competitive across the various factors Key strengths include high literacy levels and high utilisation of airport infrastructure Primary weaknesses include: Higher labour, electricity, and communications costs Poorer road infrastructure Business climate linked to ease of doing business and government F2.1 F2.4 F2.2 F2.3 Cost of diesel F3.3 F3.1 F3.2 F4.1 Cost of electricity F4.2 F4.3 Cost of ADSL F5.1 F5.3 Airport traffic F5.4 F5.2 Roads F6.2 F6.4 F6.1 F6.3 F7.1 F7.2 Postal services F8.1 F8.2 Ease of doing business F9.1 F9.2 F10.1 Constraints to business -0.6 -0.4 -0.2 Peer Average +0.2 +0.4 +0.6 Source: Team analysis

PHASE II “DEEP DIVES’ ARE NOW FOCUSSED ON DEVELOPING HIGH LEVEL STRATEGIES FOR THESE PRIORITY SECTORS JOH-KYA001-20060204-JvW-P1 Areas Activities End products Size potential to unlock sector growth Perform gap analysis for ‘deep-dive’ sectors – What is the overall size of the opportunity? Formulate strategy in ‘deep-dive’ sectors in order to close gaps (e.g., key levers, impact of each lever, priority actions) based on international experience and best practices Identify key levers, impact, and priority actions for ‘deep-dive’ sectors Strategy and plans to deliver quick wins Perform in-depth analysis of selected quick win projects to identify actions required to accelerate projects Develop robust strategy and concrete implementation plan to ensure successful delivery of project in the short term Align all key stakeholders behind recommended strategy and plan Robust strategy and concrete plans to successfully deliver on quick win projects Source: Team analysis

JOH-KYA001-20060204-JvW-P1 THE NEXT PHASE WILL FOCUS ON DEVELOPING A ROBUST MASTERPLAN TO ENSURE SUCCESSFUL IMPLEMENTATION Key next steps Activities Develop a detailed master project plan, including activity list, roles and responsibilities, and milestones Master plan and management approach Robust Master plan Create tools to track progress of implementation, with initial focus on quick win projects Monitor results versus targets for quick win projects Monitor implementation Monitoring and implementation dashboard Analyse required human and financial resources to deliver on the vision Develop options to source required resources Deploy required skills and funding Resources Ensure alignment of all key stakeholders behind strategy and action plans Launch communication effort Communicate strategy and plans Communication Provide in-depth support to champions of selected quick win projects Launch of quick win projects Drive quick win projects

God Bless His Nation Kenya JOH-KYA001-20060204-JvW-P1 God Bless His Nation Kenya