1. Pro-poor Development of BDS Markets for Micro/small Enterprise: Kenya Voucher Program Experience Presentation to Pro-poor Market Development Seminar Series Social Capital Thematic Group by William F. Steel Senior Adviser, Private Sector Africa Region, World Bank May 14, 2002

2. W. Steel: Pro-poor Market Devt2 Outline I. Demand-driven Approach to Business Development Services (BDS) for Micro/Small Enterprises (MSEs) II. Kenya Voucher Program; Performance III. Impact and Lessons Learned

3. W. Steel: Pro-poor Market Devt3 I. Why Business Development Services (BDS) for Micro/Small Enterprise (MSE)? MSEs play 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

4. W. Steel: Pro-poor Market Devt4 Some Examples of BDS TrainingTechnologies InformationConsultancy AdviceCommunications LinkagesNetworking Non-production inputs from external supplier:

5. W. Steel: Pro-poor Market Devt5 What Is Market Development? “ Market ” refers to transactions between willing demanders and suppliers Demand: What do targeted clients really want and are willing to pay for? Supply: More service providers & products focused on target group Information readily available (needs assessment, services offered, quality)

6. W. Steel: Pro-poor Market Devt6 Vision for Demand-Driven Approach to Developing BDS Markets Diverse range of services adapted to meet demands of large share of MSEs affordably Decentralized, sustainable provision, largely by private service providers

7. W. Steel: Pro-poor Market Devt7 Old Supply-driven Approach Provider looks to government/donor Government/ Donor BDS providers (public agency; donor program) $$$ Beneficiaries Most private providers left out Private BDS providers

8. W. Steel: Pro-poor Market Devt8 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

9. W. Steel: Pro-poor Market Devt9 New Demand-led Approach Facilitation of both demand and supply Gov ’ t/ Donor Training providers $$$ Clients (MSEs) Facil- itator Funds Subsidy (voucher) Upgrading Information

10. W. Steel: Pro-poor Market Devt10 Advantages of Demand-Driven Market Development Approach Increased willingness to pay Better leverage for subsidies Providers have to adapt methods & content to targeted clients Make services affordable Services can be sustained and expanded with minimal subsidies

11. W. Steel: Pro-poor Market Devt11 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

12. W. Steel: Pro-poor Market Devt12 II. Kenya Voucher Program for Jua Kali (MSE) Sector Started just for training in manufacturing: Upgrade skills & productivity in existing micro- enterprises; mainly self-employed Also: Give women technical skills to start up Shifted to market development approach Introduced upgrading for training providers (vouchers for training of trainers) Added vouchers for BDS (mainly small ent ’ s) MSEs ’ own Jua Kali Associations acted as voucher agents, received capacity-building and training to start savings & credit co-ops

13. W. Steel: Pro-poor Market Devt13 Implemented Mainly through Private & Non-gov ’ t Agencies

14. W. Steel: Pro-poor Market Devt14 Kenya Training Voucher Program: Performance 1997-2001 37,606 training vouchers issued, about 32,606 trained (60% women) [total MSE market in manufacturing estimated at 172,000] Retarded by slow, delayed flow of budgeted funds, partly due to frequent changes of Ministry & Permanent Secretary (6 in 4 years) Severe delays paying service providers Trainers won ’ t offer new courses (in program) till paid for previous ones

15. W. Steel: Pro-poor Market Devt15 Demand Response, 1997-2001 Appli- cation forms issued Applica- tions received Vouchers issued Training/ services provided Training programme 85,83565,00037,60632,606 Technology / BDS programme 2,0001,100638608

16. W. Steel: Pro-poor Market Devt16 Supply Response, 1997-2001 Allocating Agencies Number of Applicants Number Selected - Training VP1007212 - Technology/BDS40077 Service Providers - Training3400745 - Technology/BDS1200306

17. W. Steel: Pro-poor Market Devt17 III. Kenya Voucher Programme: Impact Very positive for those trained Significant increases in employment, assets and income for enterprises 80% grew their business (13% control group) 61% added business assets (21% control) 59% of women seeking to enter had started a business Increased willingness to pay cash directly to providers for subsequent training

18. W. Steel: Pro-poor Market Devt18 Kenya Voucher Programme: Unanticipated Benefits Skilled craftworkers (themselves Jua Kali) emerged as leading training providers: Most-demanded by voucher clients Adapted apprenticeship system to a more convenient format Some have added training as a business line Already conducting training outside voucher program

19. W. Steel: Pro-poor Market Devt19 Kenya Voucher Programme: Benefits to Private Sector Jua Kali Associations empowered Provide members with useful information & vouchers Many have formed SACCOs to help address financing needs from own resources MSEs recognized as market for BDS BDS providers in program have formed National Association for Technology Transfer and Enterprise Training

20. W. Steel: Pro-poor Market Devt20 Drawbacks of Vouchers Complex, costly to set up SME Dept. has assisted in preparing operational & training manuals for easier replication in other countries Can distort true market by subsidizing the transactions Better to subsidize needs assessment, market information, monitoring Subsidies can be used to jump-start market, but need exit strategy to phase out; however: Subsidies addictive, hard to phase out

21. W. Steel: Pro-poor Market Devt21 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