InnovationAfrica

Shaping the Future Today


Tech In Kenya: Growth and What Gov’t Can do

When media reported that Craft Silicon, a Nairobi based financial software was moving to Singapore, many were not surprised.

However, this optimism is under threat as , a major player in software development in announced plans to relocate its operations to Asia citing harsh operating environment and unfavourable tax regimes.

The firm that sells software to financial institutions across Africa, Asia, Eastern Europe and South America – said it was finding it difficult to continue having all its operations manned from Kenya because of high cost of doing business, which it said was not suited for a software firm.

The story was not true, as it turns out. Kamal Budhabatti, CEO Craft Silicon has since confirmed that the firm is NOT moving to Singapore in an email to us:

 It is true that we have many clients now in far-east Asia and we are in the process of opening an office in Singapore. But we can’t move. We love Africa and Kenya, and also love all the people here … So we are here to stay, Kamal, CraftSilicon.

But the debate that the story spurred did get the community mulling over some of the reasons that technology companies just aren’t growing in Kenya.

So, let’s examine that for a minute.

At the moment, access to seed capital, Internet connections and operational cost are extremely high; local and international visibility, credible references to allow private and government’s contracts, and the lack of business development or overall marketing strategy knowledge. Marieme Jamme, on BBC FUTURE

What conditions then are suitable for a technology firm to survive and thrive in Kenya?

According to Benjamin Joffe in Eco-system 101: The Six Necessary Categories to Build the Next Silicon Market there are six necessary elements for a suitable environment in which a tech company can thrive:

1. Market

2. Capital

3. People

4. Culture

5. Infrastructure

6. Regulations

 

Let’s examine each of these in a local context.
Market:

The technologically savvy Kenyans have put the country on the global map for all things technology, thanks in part to international media coverage, such as this one in Times magazine, that branded Kenya as the Silicon Savanna. Furthermore, Kenyan industries have adopted technology, giving rise to all sorts of tech-startups which have seen the potential that technology has in filling the gaps that developing countries face –access to water, security and other issues.

Even then, local investors are still not investing in technology as an industry.

Kenya’s market is said to be immature.

“Presently, the Kenyan market is largely unsophisticated, and major enterprise users of IT are limited in the country” (Julisha Report, 2011, Kenya ICT Board).

Perhaps it will take longer for technology to be recognized as an actual industry – equal to real estate or manufacturing – just not yet. For now, the firms coming up are in new territory, and they (the tech community) should recognize that they are in an enviable position right now, that of possessing the ability to lobby for the kind of conditions that their companies can thrive in.

 Capital:

Capital is about the availability of funding at different stages, from angels, VCs, government. Investment also requires potential for exits in the form of IPO or M&As.”

As Phares Kariuki says in his guest post here, Who Owns Your Startup: 

There are two ‘general’ ways one can get equity in a firm, either through capital injection or sweat; the former is the ‘accepted’ way in Kenya, the latter, not really.

As of February 2012, Kshs14,617,720 ($174,020) has been given out in tech competitions in Africa. (Mobile Apps Bubble, Will it Burst, July 2012)

Accelerator hubs such as 88mph are investing in startups that target the African market, injecting capital about $200k. Still others, such as Pivot East and DEMO are giving techpreneurs a platform to pitch to potential investors. The Kenya ICT Board has given out a series of grants to companies in the ICT sector.

So Capital, right now when most firms are at startup stage, is not a limiting factor in Kenya.

The problem in capital will arise when companies that have sprung up in the last three years have grown. Funding from donors and other organizations does not last forever – and only when the companies start to feel the pinch of an increasingly smaller and smaller funding pool – will the need for creating sustainable companies become real. For now, there’s loads of money going around, but in five years or so, the funders will begin asking for results.

There is a need then for local investors to start investing in local technology companies. Now, investors here only invest in real estate, which is perceived to be more ‘tangible’ and offers attractive returns. It is far easier for an entrepreneur here to get local investment to open a restaurant or a bar, than it is to convince one to invest in your tech Startup.

People and Culture

Kenya has a lot of talented folks – and not just athletes.

Nearly 10,000 IT professionals are expected to join the IT market between 2011 and 2013.

There is a vibrant culture in Kenya – Kenyans are entrepreneurial by nature. The ICT Hubs are providing the necessary support and guidance entrepreneurs in tech need.

We may have several faults against us right now:-

  • corruption in even the provision of basic services,
  • lack of access to information, mostly because it’s withheld by companies that have this data,
  • terrible service delivery where we do the bare minimum on things,
  • and the media just isn’t asking the right questions anymore,

BUT, but – we do have a great work ethic; we are risk takers and determined.

Question is, are we harnessing these to achieve long-term goals in this industry?

No one summarizes this better than Meriemme Jamme, in this piece written for BBC’s Future:  http://www.bbc.com/future/story/20120810-reinventing-technology-in-africa/1

Infrastructure and Regulations:

These remain some of the bigger challenges to handle now if we are to create an environment that will be truly sustainable and thriving, 30, 40 years from now.

An industry is not build in a few years, neither is the surrounding infrastructure to support it. What we must understand however, is that there must be steps taken towards this direction – lest we, the technology industry become like the cotton industry, prone to too much politics and no real direction, leading to the eventual collapse of an industry that I well believe could have been one of Kenya’s main export earners right now. (RE: Why do we have to wear second hand (mitumba) clothes yet we had our own clothing industries?)

And this is where the Government comes in:

Good quality infrastructure, low administrative costs of setting up and running businesses, political stability and predictable macro-economic policy are theirs to provide.

This is true of any industry, but not more than in the tech industry where flexibility, adaptability and a robust system that allows for fast fails are important. Good infrastructure gets things done faster.

@Roomthinker raises this on Twitter:

Despite generous tax incentives, Kenya has in recent years attracted very low levels of Foreign Direct Investment – largely due to recent political violence and instability… The key isn’t the exemptions, but reducing the cost of doing business.  – Tax Incentives and Revenue Losses in Kenya, May 2011.

The authors make a good case:

 In any case, fiscal incentives imposed in one country can lead to tax competition among countries and a ‘race to the bottom’ – tax competition occurs when firms are able to relocate to where tax rates are lowest, thereby encouraging other countries to lower their tax rates in order to retain and attract dynamic firms and able workers. Once these tax incentives are spent, and therefore there are few long-term benefits for the country from such ‘mobile investments’.

So, tax incentives do not help – and it is not what we should be focusing on either – it is the administrative burdens that come along with taxes.

According to the World Bank, firms have to make 41 different tax payments a year (compared to an average of 37 in sub-Saharan Africa and 13 in the OCED), spending 393 hours a year compiling and paying tax returns (compared to 318 in sub-Saharan Africa and 186 in the OECD). These administrative burdens should be reduced alongside the country’s generous tax incentives.

Just in case you’re an investor looking to invest in Kenya, here’s a great break down of some of the tax incentives available to you.

Rwanda’s Cost of Doing Business

Rwanda’s government has recognized the potential that technology has in accelerating its growth and development. It has turned to technology to maximize what little the country has, focusing on its use for mass efficiency.

According to Rwanda’s official government country information site, www.gove.rw/Infrastructure-ICT, the government has invested in developing ICT infrastructure to enable improved service delivery in both public and private sectors. The best example from this is business registration time – it only takes six hours to register your business because the whole process has been digitized.

In Kenya, it takes 33 days. See Doing Business In Kenya, 2012. No surprises then that ranked at No. 109, out of 183 countries, Kenya is almost at the bottom.

#140Friday – The Tech Lobby Group

The technology community through an intiaitive called #140Friday (A Nailab and KICTB initiative) is lobbying the government to see some of these infrastructure and policies put in place.

“We are lobbying to build better infrastructure better policies, better tax incentives for startups, protecting local companies from MNCs,” says Sam Gichuru, NaiLab.

Though #140Friday is still at its initial stages, the tech community is hopeful that there will be some positive changes.

“The idea behind #140friday is to move the conversation away from twitter and increase industry engagements,” adds Sam.

The group features local tech leaders – Paul Kukubo, CEO  , Kenya ICT Board, Mike Macharia, Founder and CEO SevenSeas Technologies, Mbugua Njihia, CEO Symbiotic, and David Ndung’u and Brian Longwe. 

What the Government Can Do To Help Me
 

The other industries didn’t have that chance to lobby, things just sort of happened. Look at the kinds of environments they are in now, and the contribution to the run-down state of some of these once thriving industries. This was largely because there weren’t any champions or the freedom to necessarily vie for conditions to suit the industries – you simply adapted to the political and economic situation  – it kind of was already set for them.

Let us see then, if the tech community will be aggressive enough in pushing for some of these incentives, policies and infrastructure, they so desire.

 

 

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