Trade and Regulation in Services in Africa: Kenya’s Experiences – Export of Professional Services & Education Services

Richard Gicho, Economic Consultant – Karia Capital Ltd.

Addis Ababa, 5-6 June 2013

The Service Elevator?

The Service Elevator: Can Poor Countries Leapfrog Manufacturing and Grow Rich on Services? (The

Economist, 05.19.2011)

Conventional Industrial Modernization Wisdom: Countries move from agriculture (unskilled labour), to manufacturing (semi-skilled labour) and later to services (skilled labour). E.g. Japan, South Korea

Traditional manufacturing exports build specialization (skilled workers), exploit economies of scale and are exportable. Just like modern services! E.g. call centres, data transcription, software development etc in India

India’s IT software & services revenue ($88bn, 2011) is 2 times Kenya’s GDP ($34bn, 2011)!

Agenda

Examine the link between National Development Strategies, Education Services and Professional Services

Education Services in Kenya“Strategy for Export Promotion of Professional Services in Kenya”Conclusion

EXPORT IN EDUCATION SERVICES KENYA

Where do Professionals Come From?

National Visions for Education

To achieve national development strategies and attain middle income country levels countries in the EAC require more investment in education services

Uganda Vision 2040, Kenya Vision 2030, Tanzania Vision 2025, Rwanda Vision 2020,

Less developed nations abound with unskilled workers but modern services require skilled workersKenya: Main Sectors Agriculture Manufacturing Services

Required Level of EducationUnskilled Labour

Semi-skilled Labour

Skilled Labour

Sector Contribution to GDP (est.) 25% 15% 60%

% of Labour Force 75% 25%

Rise of the “paper engineer”

Imbalances in skills shortages and skills mismatching prevalent in the EAC region.

“Political Economy Issues: ad-hoc regional centres of excellence (60s to early 80s); Gov’t Civil works & The Paper Engineer”

Intuitively development of Services Sector is inexorably linked to education services sector

“Professionals are crafted, not born that way”

Structure of Education Services in Kenya

• Adult Basic Education and Training (ABET)/NFE (6 years; +18)

Increased government spend has with Free Education policies has seen an increase in enrollments in Primary and Secondary Levels, 30% and 89% respectively (2005-2011)

There has also been an increase in the number of public secondary and private university education institutions, 47% and 59% respectively (2005-2011)

Educational Institutions

No. of Years Age

No. of Educatio

nal Institutio

ns

No of Students Enrolled

Pre-PrimaryNot formally integrated

-39,500 2,370,049

Primary Schools 8 years 6 – 13+ 28,567 9,857,900Secondary

Schools4 years 14 – 17+

7,297 1,767,720

Technical Institutions

Flexible and Variable. Formally

integrated

Flexible and

Variable629 104,173

Universities 4 years 18- 21+ 34 198,200Total 76,027 14,298,042

Education the Great Equalizer: drivers of cross border trade Population demographics: ages 0-24 account

for 64% of total population Kenya government education sector reforms &

increased expenditure Perceived low quality of education Ability to select course of choice (in private

university institutions) High cost of private education Lower regional university entry requirements Introduction of Broadband!

Education the Great Equalizer: drivers of cross border trade Limited Enrolment Capacity

Number of Students Total (%)

Total KSCSE Students 2011 410,586 100%

Did NOT Attain Entry Qualification to University (C+) 290,928 70.86%

Attained Entry Qualification to University (C+) 119,658 29.14%Available Public University Spaces 32,600 27.24%Attained Entry Qualification to University (C+) but no space available 87,058 72.76%

Attained Entry Qualification to University (C-) in Tanzania & Uganda 108,810 26.50%

Total Seeking Alternative Higher Education Channels 195,868 47.70%

Trade in Education Services

Mode of Trade in Services Education Services Sector Kenya's Example

Mode 1 Cross-border supply: distance education, virtual educational institutions, education software and corporate training through ICT delivery

-21 universities with distance learning programs- Kenyans with access to distance learning programs from international universities- Multinational institutions e.g. UNEP, conduct continuous training of international staff through ICT- International entry examinations e.g. TOFEL, GMAT

Mode 2 Consumption abroad: students studying abroad

- Catholic University of East Africa (CUEA) Masters Education 2006/7 foreign students 41.4%, 2007/8 foreign students 34.8%- Strathmore University CPA 2002-2007 had 18 Ugandan students, ACCA commenced 2007, 70 Tanzanian students.- There is a large Kenyan Diaspora population in US and UK that grew largely out of migration due for education purposes rather than labour migration.

Trade in Education ServicesMode of Trade in Services Education Services Sector Kenya's Example

Mode 3Commercial presence or programme or institutional mobility: local university or satellite campus, language training companies, private training companies

-Australian Studies Institute (AUSI) based in Kenya since 2000 offer degrees from Edith Cowen University, Perth and Perth Institute of Business and Technology- International schools providing international curriculum e.g. French School, German School, International School of Kenya- International language institutes: e.g. Alliance Francis- international research institute that are part of The Consultative Group on International Agricultural Research (CGIAR), namely International Livestock Research Institute (ILRI), and World Agroforestry Centre (ICRAF).

Mode 4Presence of natural persons: professors, teachers, researchers working temporarily abroad

-University exchanges and Joint research e.g. UoN & MIT JoinAfrica Project, HBS professors lecturing at Strathmore Business School-Research exchanges e.g. ILRI, ICRAF, Primate Research Centre, KARI etc- Short Course held by international experts

Cross-cutting Constraints/ Opportunities

Cross-cutting Challenges

• Regional differences in education system (8.4.4 and 7.4.2.3)

• Poorly maintained infrastructure especially in public institutions

• Recognition of qualifications – bridging courses required

• Access to Finance

Cross-Cutting Opportunities

• Growth in demand for regional education services

• Potential to increase human capacity skills base

• Potential to reduce / eliminate current barriers (with EAC Common Market Protocol & MRAs)

• Potential for governments to drive demand of education services (e.g. government sponsored study abroad programs for civil servants)

EXPORT OF PROFESSIONAL SERVICES IN KENYA

Kenya’s Trade in Professional Services

Kenya’s Population is 41m with a GDP in 2011 of $34bn.

60% is accounted for by the services sector including: Government (civil servants; education; health)Travel & tourism (airline seats; hotels)Transportation (movement of goods)Telecoms (provision of calls / post)Manual semi-skilled work (examples include: restaurant work; construction, road building, retail and cleaning).

Professional Services accounts for less than $2bn (est. 2010) Included are those services provided on a private sector basis where a high level of skills (usually certified) are required. (excluding Tourism and Remittances)

Exports in Professional Services account for less than 3% (est. 2010) of total sector size

Kenya Service Sector Market Structure“Strategy for Export Promotion of Professional Services in Kenya” was

completed in 2008, with the aim of diversifying Kenya’s exports. Some findings

included:

Modest size for a country the size of Kenya, accounting for approximately 10% of the GDPKenyan professional service providers are considered to be the key players in East African regionGenerally dominated by a few large players, particularly in banking, accounting, insurance and advertising sub-sectors. Many small local players in the other sub-sectorsBased upon the UK model, with many UK influencesHighly fragmented many specialist trade bodiesNairobi centric, followed to a much lesser extent by Mombasa. Increased Services Exports driven by introduction of Broadband!Exports of services private sector led

Selected Service Sub-sectors for Exports FocusFive sub-sectors were initially selected as areas of focus (Accounting; Insurance; Non Banking financial services, BPO, & ICT/ ITES) and three thematic areas identified. i) Professional services, ii.) Financial services and iii.) IT & IT Enabled Services.

Cross-cutting Constraints/ Opportunities

Cross-cutting Challenges

• Scale

• Infrastructure

• Regional Non-Trade Barriers

• Brand Recognition

• Access to Finance

• Skills Base (shortages & mismatch)

• Low levels of FDI

• Access to Opportunities

• IPR / Data Protection Laws

Cross-Cutting Opportunities

• Growth in demand for professional services (regional skills shortages & mismatches)

• Potential to reduce infrastructure & transaction costs

• Potential to reduce / eliminate current barriers (with EAC Common Market Protocol)

• Potential for governments to drive demand of professional services (e.g. engineering services)

Are Services “the new boat” for development? Services Matter for Development

Provide inputs to other sectors: Important inputs for other sectors that are key for national development Engineering services contribute to the development of infrastructure

and are essential to the productivity of economic activities

High skill base of professional services sectors contributes to expansion of human capital which is a crucial pillar in growth strategy of most African countries (e.g. education services)

Reduce Transaction Costs: Accounting and legal services can help reduce transaction costs which are a significant impediment to growth in Africa

Increase Firm-level Productivity: Average labor productivity of Southern African firms that use (accounting, legal and engineering) professional services is 10-45% higher than of firms that do not.

Professional services can become an important source for export diversification in EAC

Services: The wind beneath my wings!

Services may not enable Kenya to leapfrog manufacturing but tandem investment in both sectors will enable faster development growth

“Build the Concrete Engineer” Investment is required in regional trade in education services, professional education (especially mid-level training),

Kenya’s demographics show there will be continued pressure on the education system to produce more professionals capable of meeting its national developmental goals

Thank you!

Richard GichoDirector, Consulting & Research

*Karia Capital Limited*Suite No B12, Branton Court,Ndemi Lane, Nairobi, Kenya

Email:    <gicho@karia-capital.com>Tel:        +254 723 996 628