November 25th, 2022

 

The Ngong Road, Kariobangi and Kamukunji wood and metal work clusters are three historically well-known centres of excellence in terms of quality of products and expertise.

Each cluster comprises thousands of entrepreneurs, labourers, artisans, business owners and suppliers, at various levels of specialty, size and formality.

These clusters are neither an aberration nor a minority. If one takes a macro view, statistics show that these artisans, labourers and entrepreneurs—across various industries—represent the core of livelihood in Kenya.

83 percent of total employment in Kenya is offered by Micro and Small Enterprises (MSEs). This represents approximately 15 million people,  accounting for approximately 40 percent of Kenya’s Gross Domestic Product (GDP).

In 2018, the SME Advisory Unit in the Office of the President met with representatives of these three clusters to explore their experience of entrepreneurship, their visions for their firms and their clusters, as well as what opportunities they saw for growth. This stemmed from an understanding that MSMEs are key to Kenyan livelihoods and constitute a crucial engine for growth.

One consistent piece of feedback raised by the clusters was inadequate access to markets. This meant that despite their deep expertise, they often experienced an inability to directly and meaningfully participate as suppliers or contractors for the many large construction projects they saw around them.

They often found themselves relegated to labourers or repair teams, after the fact, for tenants unhappy with substandard fixtures and fittings. This inadequate access to markets compounded their limitations, because a history of work and track record is needed to bid for future work.

The experience was self-evident and their ambition palpable, and what was clearly needed was opportunity.

Affordable housing: The prospect of take off

Chapter 4 of the Kenyan Constitution, the Bill of Rights, outlines the fundamental rights and freedoms of all Kenyans, including the right to accessible and adequate housing. The fulfilment of this fundamental socio-economic right was operationalised in the third medium term plan of Vision 2030 (the big 4 agenda).

The State Department of Housing and Urban Development, tasked with facilitating the construction of 500,000 homes under the affordable housing pillar, immediately saw the potential of what this could mean for MSMEs.

When just one home is disaggregated into its inputs: cement, nails, doors, frames, windows, etc., and multiplied by the number of units in question, there lies tremendous opportunity for an economic multiplier effect.

What might happen if these ambitious MSME wood and metal work clusters were presented with this volume of access to market? How might this translate into an opportunity not only for growth, but also as a trigger for the resolution of the systemic roadblocks that have so far precluded these MSME clusters from competing at this level?

The first batch of Affordable Housing Units—1,300 units at Park Road, Pangani—presented a fitting opportunity to begin to answer these questions. The State Department of Housing and Urban Development and the SME Advisory Unit initiated a pilot project whereby the wood and metal doors and door frames for these units would be sourced from the Ngong Road, Kariobangi and Kamukunji wood and metal work clusters.

To begin to realise this vision, the two government agencies set to work closely with the three clusters, seeking to design a preferential supply agreement with the requisite support to successfully meet the volume and quality standards expected.

The birth of Ngokamka

All the three clusters had previously organised themselves in the form of associations.

Business owners and labourers operating in the area were generally voluntary members of the association and would elect a leadership committee to represent them. The three clusters estimate they have the following number of individuals operating and trading in their areas: 4,000 in the Ngong Road cluster; 5,000 in Kamukunji; and 2,000 in Kariobangi.

Although the three clusters were aware of each other and individual entrepreneurs had informal engagements with them, they had no formal connections at the cluster level. To engage in a commercial contract, they needed to form a company.

As such, Ngokamka was born. The acronym Ngokamka, representing the first syllable each from the Ngong Road Jua Kali Association, the Kamukunji Jua Kali Association, and the Kariobangi Light Industries Association, would be the name of the newly registered company that the three clusters would trade as. It had 12 directors, with four members of the leadership committees of each association serving as directors.

The clusters sought legal support to go through the design and registration of Ngokamka. The final design was such that the directors, as elected leaders of their associations, held their directorship and accompanying shares in Ngokamka in trust on behalf of their association members.

Contracting and execution

SDHUD was committed to ensuring that MSMEs and the informal sector benefited from the affordable housing project. The State Department of Housing and Urban Development contracted the China State Construction Engineering Company (CSCEC) as the main contractor for the Park Road housing units, and CSCEC then agreed to subcontract from Ngokamka, aligning with them on the price, quality and delivery terms of the inputs.

This was somewhat a ‘forced union’ of sorts because the China State Construction Engineering Company, the largest construction company in the world by revenue, largely relies on existing supply chains to meet the volume and cost of its projects, many of which operate and export from China.

In addition, they were at times sceptical of dealing with a brand-new entity they were unfamiliar with and feared the potential risk to their delivery timelines and quality management in subcontracting to Ngokamka.

Additionally, the product and prices were already fixed and agreed on between the China State Construction Engineering Company and the Government of Kenya, thus leaving little room for negotiation on Ngokamka’s part.

Significant internal work was accordingly done by Ngokamka to negotiate pricing and sourcing of inputs, and design production and supply processes, all of which were navigated in an environment of short timelines, high pressure, language barriers and differences in cultural and business norms.

Significant support was provided by the SME Advisory Unit, the State Department of Housing and Urban Development and the National Construction Authority (NCA) to ensure that a memorandum of understanding (MOU) and contract was signed, a subcontracting relationship formalised, and mutually agreeable pricing arrived at.

Internally, despite operating in the same sector, the clusters represent thousands of members with differing levels of education, experience, formality, skill and access to information. This was a first-of-its-kind pilot, and as such, artisans, labourers and business owners within the various clusters all had varied expectations around process, involvement and financial return.

As a result, intra-cluster stakeholder management was a major issue in all three clusters. All leaders bore the brunt of working to meet the high expectations stipulated in the contractual arrangement, while simultaneously managing their own leadership teams and cluster members’ expectations.

Ngokamka structured its execution as follows:

• For wood and metal work, Ngokamka would buy the supplies at the company level (for standardisation and cost efficiency) and distribute them among the three clusters, which would subsequently distribute them at the internal cluster level. Fitting of doors was also split amongst the clusters.
• For woodwork, there was more engagement on site as it is mainly a two-step process with more on-site activities such as fitting the door frames, door leaves, locks/hinges, sanding the wood, painting, etc.

All clusters had periods where cluster-wide stakeholder management was urgently necessary due to intra-cluster tensions resulting from communication, governance, financial management, perceptions of fairness and project management.

Ngokamka was also responsible for its own quality management and had to privately organise its workspaces and access to machinery with limited support – a learning process that initially entailed the rejection of their early samples.

Additional challenges to navigate included a ban on logging that impacted Ngokamka’s ability to source quality inputs for door production and shortages of working capital; all which revealed the inherent entrepreneurial ability of Ngokamka to navigate these obstacles.

The Ngokamka leadership, with the support of key government agencies, overcame every internal shortcoming and external shock. They continuously improved on their execution, speed, supply chains, people and quality management; they managed internal and external relationships expertly; and worked tirelessly to consistently meet and exceed their contractual obligations.

Ngokamka was eventually able to successfully complete the production and fitting of 1,281 metal and 6,100 wooden doors in 3 out of 5 blocks at Park Road on budget and ahead of schedule.

Access to finance

To successfully meet the expectations of their contract with the China State Construction Engineering Company, Ngokamka needed access to working capital. However, access to finance for MSMEs is affected by numerous demand and supply side constraints.

While informal businesses can access low amounts of capital largely from informal sources like family and friends, chamas and digital credit, the amounts are usually small, short term and can be quite expensive (especially in the case of unsecured digital credit). This is far below the level of financing required for capital intensive projects. The lack of bankable data to ascertain business viability and the high perception of business risk makes MSME lending difficult and expensive to access.

On the road to access to finance, the registration of Ngokamka as a private company, with the requisite structure of management and accounting support, was an important first step.

However, despite this formalisation, and the securing of formal LPOs, the new entity was still viewed as risky by financiers who are risk-averse of new businesses requiring substantial investment.

Ngokamka was able to negotiate and access prefinancing from the main contractor, the China State Construction Engineering Company, as working capital. This buyer finance at 20% interest per annum was essential in enabling Ngokamka execute the project.

As they continued the project, they found one financial player, Housing Finance, which understood Ngokamka’s vision and provided an overdraft facility at 13.5 percent without requesting for collateral, or regarding the Ngokamka directors’ status on the credit reference bureau (which had been deal breakers with other potential financiers – see breakdown below).

In addition to the above, 34 percent of participating businesses in the clusters accessed some kind of credit (sources broken down below.)

Impact

An impact survey found that approximately half of the businesses that participated in the pilot project within the three Ngokamka clusters reported an increase in revenue. In addition, there were increased employment opportunities, with more than half the participating businesses having to employ more workers to meet their targets.

Beyond the above indicators however, it is clear from engaging with all the participants that the most significant form of impact was the experience.

Participants consistently highlighted coming away from the project with new production skills, learnings from other clusters’ methods, and increased productivity. Multiple businesses for instance reported increases in the number of doors they are now able to produce per week.

Participants further benefited from their interactions with the China State Construction Engineering Company. They mentioned a better understanding of the cultural differences, and gaining enhanced technical skills around the quality of output and production techniques. In one case, a workshop owner mentioned that he had been taught how to properly use a machine that he had purchased but was not using, and that going forward, he planned to train his labourers to make use of it as well.

The directors were able to increase their business prowess through coordinating the fabrication of doors right from production to installation. In the process they learned how formal businesses operate and their accounting requirements. They were also able to widen their networks and improve their negotiation skills through subcontracting, among other benefits. Being the leaders of their respective clusters, these skills and experiences will certainly benefit their entire clusters in the long term.

More importantly, businesses that participated in this venture are confident that they can bid for other opportunities. Many say they can broaden the number of businesses they serve due to increased productivity and new sources for cheaper raw materials.

All the clusters and their leaders were consistently placed on the national stage and continue to have direct access to government leadership, development partners and value chain actors. This increased their profile and ability to secure future markets and opportunities, which they continue to pursue at a company, cluster and business owner/artisan level.

Lessons learned

This pilot was centred on the belief that Kenyan MSMEs have the potential to execute large projects, provided they receive the opportunity and the necessary support.

The story of Ngokamka and its remarkable journey, together with the efforts of the forward-thinking government agencies and the partners who designed and executed the pilot, provides remarkable lessons that can inform future projects.

There are numerous lessons on the design and execution front. Future projects will have longer timelines to allow for negotiation, formation and planning. In addition, there are opportunities to re-design and bolster support structures around financing, quality assurance, business development, governance and management.

The opportunity for greater standardisation of all inputs for affordable housing has already been taken up. The forward thinking State Department of Housing and Urban Development has already designed and launched a guideline booklet with standard dimensions and specifications for these inputs and has partnered with the Kenya National Federation of Jua Kali Associations (KNFJKA) to roll this out nationwide.

Going forward, affordable housing remains a priority for Kenya. This pilot, in its design, execution, impact and lessons learned, provides an insightful foundation for the meaningful incorporation of informal sector MSMEs into large scale government projects as a trigger for their growth.

Ngokamka is the first of its kind, but it certainly will not be the last.

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In 2018, the Government of Kenya sought to integrate informal sector/jua kali Micro, Small and Medium Enterprises (MSMEs) into the ambitious Affordable Housing programme. This began with a pilot in which three Nairobi-based MSME clusters came together to supply doors and windows for over 1,000 housing units at Park Road in Pangani, Nairobi County.

The key implementing agencies—FSD Kenya, the Small and Medium Enterprises (SME) Advisory Unit in the Office of the President of Kenya and the State Department of Housing and Urban Development (SDHUD)—sought to document and study this pilot.

This blog summarises the inception, design and implementation of this project, touching on elements of governance, management, leadership and finance.

In addition, this documentary has reflections on the process, impact and lessons learned. A more detailed impact study was conducted and will be released soon.

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