FILE CoPy FOR OFFICIAL USE ONLY. Report No KE Appraisal of Small Scale Industry Project Kenya

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Report No KE Appraisal of Small Scale Industry Project Kenya October 31, 1977 Eastern Africa Projects Department FOR OFFICIAL USE ONLY FILE CoPy Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 Currency Equivalents Shilling 1 = US$ 0.12 Shilling 1 million = US$ 120,000 DM I = 3.55 Shilling Acronyms DANIDA DFCK EADB ICDC IDB IPA ISPC KCB KfW KIE MTAC NORAD Danish International Development Agency Development Finance Company of Kenya East African Development Bank Industrial and Commercial Development Corporation Industrial Development Bank Industrial Promotion Area Industrial Survey and Promotion Center Kenya Commercial Bank Kreditanstalt fur Wiederaufbau Kenya Industrial Estates Management Training and Advisory Center Norwegian Agency for Development RIDC Rural Industrial Development Center RIDP Rural Industrial Development Program SIDA Swedish International Development Authority TSC Technical Services Center Fiscal Year KIE; July 1 - June 30

3 FOR OFFICIAL USE ONLY KENYA APPRAISAL OF A SMALL-SCALE INDUSTRY PROJECT TABLE OF CONTENTS Page No. * SUMMARY AND CONCLUSIONS i-1 Is INTRODUCTION II. SMALL-SCALE INDUSTRY IN KENYA A. Economic Setting B. Small Industries Sector... 2 C. Assistance to Small Scale Industry... 4 D. Government Policies E. Prospects III. KENYA INDUSTRIAL ESTATES... o o. 11 A. Organization and Procedures..11 B. Resources.. 14 CG Past Operations o 14 D. Financial Position and Results Eo Projections... ooo...f.... e.. o.ooo. 16 IVo THE PROJECT oooo.oooo...o...oo...oo.. 18 A. Objectives.. o...o.o. o.. oooo B. KIE Reorganization and Expansion 18 C. KIE Policies o.0 20 D. Investment and Technical Assistance 22 E. Project Cost and Financing F. IDA Credit.25 V. JUSTIFICATION AND RISKS VI. RECOMMENDATIONS.. o...o....o*....o o.* This report is based on the findings of an appraisal mission consisting of Messrs. Levitsky and Lewis and Ms. Barry and Ms. Insel, which visited Kenya in November/December, This document has a restricte distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

4 LIST OF ANNEXES 1. Policy Statement 2. Organization Chart and Functional Relationships 3. Staffing Plan 4. Resource Position 5. Analysis of KIE Loans Approved 6. Analysis of ICDC Machinery Loans 7. Financial Statements KIE Operational Plan 9. Assumptions for Financial Projections 10. Projected Balance Sheet Projected Income Statement Projected Cash Flow Actual and Projected Financial Ratios 14. Estimated Schedule of Disbursements 15. Eldoret Industrial Estate 16. Product Possibilities for Workshops and Small Industries 17. Marketing and Sales Promotion 18. Disbursement Percentages 19. Map Showing KIE Activities

5 KENYA APPRAISAL OF SMALL SCALE INDUSTRY PROJECT SUMMARY AND CONCLUSIONS i. This report provides an appraisal of a project to assist in the development of Kenyan small scale industry. The objective is to strengthen Kenya Industrial Estates (KIE) -- a Government-owned company establishing and managing industrial estates -- to enable it to assume principal responsibility for further development of small scale industry in Kenya. In order to carry out this increased responsibility, KIE needs to be reorganized and expanded to provide for a financial intermediation capability as well as to enhance its technical assistance capability. Moreover, its financial policies and structure need fundamental changes; the long-term objective is for KIE to become a self-sustaining financial intermediary capable of borrowing on its own. The project includes a $10.0 million IDA credit to provide financing for development of small scale industries and for technical assistance. ii. Manufacturing has been the leading growth sector in the Kenya economy in recent years, with a growth rate of 11% prior to the downturn in 1974 and 1975 which resulted from the sudden rise in import prices, worldwide economic recession, and a local drought. Moreover, industrial employment has increased to slightly over 100,000 with about 20% of the total employed in firms with less than 50 employees. These small firms, contributing about 17% of value added in manufacturing, have not been growing as rapidly as the larger firms. In addition, Kenya has a large and active "informal" sector with estimated total employment of the order of 500,000, and employment in manufacturing between 50,000 and 100,000. The Government is currently reformulating its strategy for the industrial sector because possibilities for import substitution are becoming limited. The new strategy will be based on promoting efficient industries, some of which may be import substitution oriented but most of which will be able to compete in export markets. In addition, the Government intends to encourage the use of local raw materials and labor intensive methods of production so as to create employment and achieve better balance in the geographical distribution of employment opportunities. Further development of small scale industry will play an important role in this strategy, since it serves to meet employment objectives better than medium and large industry. iii. The Bank is maintaining a continuous dialogue with the Government on industrial policy issues, which allows the Bank to monitor progress in policy implementation as a background to the Bank's expanding lending program to the industrial sector. KIE will make investments consistent with this strategy, and KIE's experience will contribute to further industrial policy formulation. The Bank Group has also been helping medium and large industries through loans to the Industrial Development Bank (IDB). A third loan of $20.0 million to IDB was approved on May The International Finance Corporation has assisted several ventures in Kenya as well. iv. Small scale industries face significant technical and financial problems in their development -- entrepreneurs are often unfamiliar with

6 - ii - machinery and its operation, inexperienced in marketing, and unable to qualify for commercial financing. The Kenyan Government and bilateral donors have provided considerable assistance to small industry development, and the stage has been reached for consolidation of the activities of the institutions providing this assistance. The proposed project would build on the substantial previous assistance and focus on KIE for further development of small industry. v. KIE's principal activity has been the construction and operation of industrial estates. As of June 1976, approximately 200,000 square feet of factory space had been occupied by approximately 70 industries on three industrial estates (Nairobi, Nakuru, and Kisumu). In addition KIE prepares and appraises small scale industry projects and has recently begun to provide financing for their implementation. As of June 1976, KIE had approved loans of Sh 8.6 million. KIE's investment plan for estates and loan financing shows total disbursements of Sh 215 million in FY vi. As part of the project, KIE would be reorganized to (a) establish a decentralized operation with regional centers assuming primary operating responsibility, (b) upgrade and expand financial staff and (c) provide for stronger management of technical services and project follow-up activities. In addition, KIE's financial policies and structure would be changed to meet two objectives: a) financial autonomy for KIE so that it can plan with full knowledge of resources available and so that financial discipline will be necessary for the success of its operations; and b) structuring the terms of financing and rents for small industries on an economic basis so that successful ones will expand and move off the estates and unsuccessful ones will be discontinued, in order to make room for new small enterprises. vii. As part of the project, IDA would provide financing for (1) construction of factories and workshop clusters, (2) industrial credit, and (3) technical services. The project would include construction by KIE of (1) 12 factory buildings for modern small scale industries at the Eldoret Estate, (2) about 150 workshops for small industries dispersed among 10 industrial promotion areas (workshop clusters) in rural towns, and (3) about 40 workshops in industrial promotion areas in Nairobi. The project would also include credit from KIE for the industries located in the factories and workshops constructed under the project. In addition, KIE would provide loans for approximately 30 modern small industries off the estates. Finally the project would include 6 expatriate advisors and training of KIE's Kenyan staff. The estimated total project cost is US$15.6 million, of which the foreign component ($10.0 million) would be financed by IDA. viii. The IDA funds for construction and industrial credit would be on-lent to KIE at 6% and KIE's lending rate would be increased from 8% to 11%, except to enterprises having total fixed assets including permanent working capital of up to Sh 1 million which would pay 10%. The loan to KIE would have a fixed amortization schedule with maturity of 15 years including three years grace, and the Government would carry the foreign exchange risk. All

7 - iii - subprojects would be submitted to IDA for review until IDA has notified KIE that its appraisal procedures are acceptable. Thereafter an individual subloan free limit of $125,000 would become effective. ix. The main justification of the project is institution building. In addition, the project would provide resources for substantial development of small industries. The direct employment aspects of the project would be significant with 2,600 jobs created. The fixed investment cost per job in 1977 prices would be $3,700 ($6,100 for modern small industries and $1,400 for workshops). These ratios are much lower than the DFC average for Africa of $17,000.

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9 KENYA APPRAISAL OF SMALL SCALE INDUSTRY PROJECT I. INTRODUCTION 1.01 Since independence the Kenya Government has been concerned with establishing and assisting small-scale enterprises owned and managed by Kenyans. Bilateral donors, the Federal Republic of Germany, Sweden, Denmark, and Norway, have provided substantial technical assistance and finance in this area. Since 1972, the Government has been reviewing progress in the field and has concluded that small enterprise development has reached the stage at which consolidation of the activities of the institutions assisting the sector is needed For several years, the Government and the World Bank have had discussions of possible assistance through a comprehensive project to accelerate the growth of the small-scale enterprise sector. A Bank mission visited Kenya in March/April 1976 to identify and prepare a project in this field. The mission concluded that the first step towards consolidation of small enterprise development should be a project for assisting small enterprises in the industrial sector because of the importance of this sector to Kenya's economic recovery and because institution building was needed most in this area. The project would be based on enhancing the responsibility of Kenya Industrial Estates (KIE) to serve as the primary implementing agency for nationwide small-scale industry development. A second Bank mission in November/December 1976 developed the details of the project proposed in this report The main objectives of the proposed credit are to: a. strengthen KIE to enable it to assume principal responsibility for further development of small scale industry in Kenya; b. provide financing for the establishment and expansion of small manufacturing enterprises; and c. provide technical assistance for the implementation of the project through KIE and for advice on Government policy in this field The proposed project would be the first nation-wide small industry project for the Bank in a major country in Eastern Africa. In addition, it would be the first small industry project in Africa in which both technical assistance and financial intermediation are combined in one implementing institution. Thus, the proposed project should serve to provide useful information about one possible model for assisting small industry This project comes while the Government is reformulating its industrial policy to improve its resource utilization and reduce its heavy import dependence in favor of more domestic resource-based production and

10 - 2 - exports. The Bank Group is also assisting medium and large industries through loans to the Industrial Development Bank (the latest of which was approved in May 1977 for $20.0 million) and investments by the International Finance Corporation. II. SMALL SCALE INDUSTRY IN KENYA A. Economic Setting 2.01 Kenya has a high population growth rate of 3.5% per year. The population was 13.4 million in 1975 compared to 11.2 million in 1970 and is projected to grow to between 15 and 16 million by The population growth rate is accompanied by a high rate of increase in the labor force, which grew from 5.1 million in 1970 to 6.2 million in The labor force is projected to increase to 7.4 million by These figures illustrate the major problem facing Kenya in providing employment opportunities Kenya's economy is primarily rural, with agriculture, the single most important sector, contributing 31% of GDP in 1975 and providing employment for 85% of the labor force. In contrast, the manufacturing sector contributed 14% to GDP in The Industrial Sector 2.03 While most large industrial enterprises belonging to the modern sector are located in urban areas, new enterprises are established more and more in smaller towns. Enterprises wholly-owned and managed by Kenyans are still few and more often found in small industries or even outside the modern sector. Between 1964 and 1973, manufacturing output increased at an annual rate of 8% (compared to 6% for GDP) and exports of industrial products totalled Sh 1,460 million (about US$177 million) in However, the sudden rise in petroleum and other import prices, the worldwide economic recession, and a local drought caused a significant drop in the rate of growth of industrial production to 5% in 1974 and 4% in Moreover, industrial employment which had grown from 73,000 in 1968 to 104,000 in 1974, actually declined to 102,000 in The industrial sector faces a particularly difficult adjustment period, since its heavy dependence on imported capital equipment, spare parts and raw materials means that it is strongly affected by the foreign exchange position of the country. (The current situation in Kenya is analyzed in the "Current Economic Position and Prospects of Kenya," report number 124 8a-KE of October 15, 1976.) B. Small Industries Sector 2.04 Reliable data on small industries in Kenya are not available. The Central Bureau of Statistics of the Ministry of Finance and Planning maintains a list of "registered" firms including data on the number of employees. However, artisans and craftsmen operating outside the formal sector are

11 -3- not included in the Government statistics. The following table shows the number of registered firms and total employment by size of firms for 1968, 1974 and 1975: Industrial Sector - Size Distribution and Employment Average Annual Rate of % Change Growth Employees No. of Firms ,020 4, % 3,340-25% Over % % Total 4,275 4, % 3,765-23% Total Employment ,071 20, % 19,251-5% Over 50 54,536 83, % 82,982-1% Total 72, , % 102,233-2% 2.05 The table shows that although 89% of the firms had 1-50 employees in 1975, their total employment was 19% of total industrial employment. Furthermore, small firms had a significantly lower growth rate between 1968 and 1974 than larger firms. Moreover, the decrease in firms and employment during the 1975 recession was relatively much more severe in the small firm segment. Small firms with 1-50 employees are heavily concentrated in footwear, clothing, and furniture, whereas large firms are concentrated in food and beverages, textiles, wood products, and transport equipment. About 60% of all industries are located in Nairobi and 15% in Mombasa Most of the firms employing 1-50 are very small -- the average number of employees is 6 -- and can be classified as "workshops" in which simple, locally procured tools are used to make everyday articles such as furniture or cooking ware. Only a few small firms are "modern". These firms generally employ more than 20 persons, use imported equipment, have semi-automated production processes, and produce goods approaching international quality standards. Most of the "modern" small firms owned and operated by Africans have developed on the industrial estates owned and managed by Kenyan Industrial Estates (KIE). Manufacturing Output 2.07 In 1972 the Central Bureau of Statistics estimated value added by size of firm. The results are shown in the following table:

12 -4- Manufacturing Production, 1972 (Sh million) Employees Per Firm 1-50 Over 50 Total Output 976 4,882 5,858 Input 704 3,562 4,266 Value Added 272 1,320 1,592 Percentage Distribution 17% 83% 100% Value Added Per Employee The table shows that small firms contributed 17% of total manufacturing value added in 1972 and that the value added per employee for these firms was 90% of the value added per employee for large firms. The wages per employee were considerably lower for small firms and profit as a percentage of sales was considerably higher. All these results except for the value added per employee follow the worldwide pattern. The value added per employee for small firms is much closer to the result for large firms than in most other countries and raises doubt about the validity of the data. The Informal Sector 2.09 In addition to registered firms, Kenya has a large informal sector engaged in non-agricultural activities. This group is called informal because enterprises usually do not pay company taxes, do not have a permanent location, and do not use written records in their business transactions. Reliable statistics on the informal sector are unavailable; however, surveys indicate that the informal sector employed about 500,000 persons in 1974, of which about 80% was in rural areas and from 10-20% percent was engaged in manufacturing Typical manufacturing activities of the informal sector consist of metal and woodworking shops, tailors, cobblers, repair shops, making of cooking implements, blacksmiths, and tinsmiths. The activities are generally carried out in the open or in temporary shelter without security or protection from weather. The principal market for the informal sector is within the sector itself and the rural subsistence farmers. The sector has received virtually no assistance in the form of credit or technical assistance, but offers considerable potential for growth through improved marketing and also represents a possible source of entrepreneurs for larger enterprises. C. Assistance to Small-Scale Industry 2.11 Industry in Kenya before Independence in 1963 consisted mainly of medium and large enterprises established by foreign investors. The few small

13 -5 - industries were also mostly owned by non-africans. Africans were limited to artisanal activities and rural crafts After independence, one of the main aims of Kenya's industrial strategy was to promote African ownership of industrial firms. Small scale industry provided the best opportunity for immediate progress towards this objective. The first program of assistance to small scale industry was a credit scheme established in the Industrial and Commercial Development Corporation (ICDC) in The beneficiaries of this program have primarily been traditional small-scale industrial operations such as saw mills, maize mills, vehicle repair shops, bakeries, print shops, and tailors. In 1967 the assistance to small industry was extended to the "modern" sector with the establishment of Kenya Industrial Estates (KIE) as a subsidiary of ICDC and the construction of the Nairobi estate with German and Indian assistance. The industrial estate program has been expanded with the development of estates in Nakuru in 1972 (with German assistance), Kisumu in 1974 (with Swedish assistance), Mombasa in 1975 (with German assistance), and Eldoret in 1977 (initially with Danish assistance). In addition, KIE established in 1972 with Danish assistance the Rural Industrial Development Program (RIDP) to provide credit and technical assistance for workshops in rural townships. This program is administered through Rural Industrial Development Centers (RIDCs) currently located at Machakos, Nyeri, Embu, and Kakamega In 1972, the Government of Kenya set up an interministerial committee to evaluate the adequacy of existing programs for the development of small business. The committee's report proposed that responsibility for small business development be vested in the Ministry of Commerce and Industry and that the Government establish a Small Business Development Agency for coordinating assistance to small-scale enterprises. The report recommended that this new Agency should direct all institutions working in the field, including the Kenya Industrial Estates (KIE), the Management Training and Advisory Center (MTAC) and the Kenya Industrial Training Institute (KITI). The report further concluded that the needs of small-scale traders and industrialists were similar and that there was no need to establish separate field services for each of these groups. Missions from Sweden and Denmark studied the report and concluded, contrary to the views of the committee, that traders and non-industrial businesses required a different type of extension service and assistance program from that needed by small-scale industries In April 1976, a Bank preparation mission found that virtually none of the major recommendations of the 1972 committee had been implemented. Moreover, the mission concluded that because of the lengthy and complicated process of creating a new institution, more could be achieved in the near-term (3-5 years) through upgrading, reorganizing and strengthening the major existing institutions providing assistance to the sector. This approach coupled with the establishment of a unit in the Ministry of Commerce and Industry with responsibility for small business policy, could gradually bring about consolidation of all efforts in the field, with a possible emergence later of

14 - 6 - a single organization for assistance to urban and rural small enterprises. Finally, the mission concluded that the first step should be a project for assisting small enterprises in the industrial sector because of the importance of this sector to Kenya's economic recovery and because institution building was needed most in this area. The project proposed in this report is based on this approach. Financing 2.15 The financial sector of Kenya is relatively well-developed with thirteen commercial banks, three industrial development banks, and the Industrial and Commercial Development Corporation (ICDC) and its wholly owned subsidiary, Kenya Industrial Estates (KIE). In addition, Nairobi has a stock exchange although it has not been a major source of financing. The three industrial development banks, Industrial Development Bank (IDB), Development Finance Company of Kenya (DFCK), and East African Development Bank (EADB) provide equity and loan financing primarily for medium and large industries. Both IDB and DFCK assist industries with total project costs as low as Sh 1.0 million ($120,000) but their activities in this area have been small. ICDC makes loans to industries with total project costs below Sh 1.0 million, but also provides substantial financing for medium and large industries in coordination with IDB. KIE's assistance has been to industries with total project cost below Sh 4.0 million Commercial banks charge an effective rate of 10%, the three industrial development banks charge 10-12%, and the ICDC and KIE provide industrial loans at 8-8-1/2% while the inflations rate is about 10%. The principal institution providing credit to small enterprises is ICDC (and its subsidiary KIE). In addition, the International Finance Corporation has approved a loan of $2 million to be channelled through the Kenya Commercial Bank (para 2.19) for assistance to small and medium industries. Industrial and Commercial Development Corporation 2.17 ICDC was established in 1955 to promote and assist commercial and industrial activities and since Independence has emphasised financing transfer of businesses from non-kenyans to Kenyans. Its activities have grown rapidly and its assets exceed Sh 480 million. Forty five percent of ICDC's assets are in its small loans portfolio; however, only 12% of its assets are in small loans for industry, which include equipment loans for firms on the Nairobi and Nakuru industrial estates. The remaining small loans are commercial and property loans. ICDC also lends to its subsidiary KIE for the construction of industrial estates. If the construction loans are combined with those to small industry, the resulting total is Sh 94 million or 20% of ICDC's assets ICDC's main emphasis has been the establishment of large enterprises, wholly or partially owned by ICDC, and only limited staff and funds

15 have been available to assist small industries. Project appraisal for small loans has not been rigorous and debt collection has not been actively pursued. As a result the small loan portfolio has a comparatively high level of arrears, although the arrears situation is somewhat better for the machinery loans on the Nairobi and Nakuru estates (Annex 6). As of June 1976, arrears totalled 26% of interest arrears plus principal outstanding for the entire small loan portfolio whereas the corresponding figures are 32% for small industry loans off the estates and 16% for firms on the estates. ICDC's staffing is inadequate for providing loan supervision or technical assistance to its small borrowers. Kenya Commercial Bank (KCB) 2.19 KCB is the largest commercial bank in Kenya and is wholly Government owned. KCB has provided financial assistance to small industries, through credits for working capital against collateral. The International Finance Corporation approved in 1976 a small and medium scale industries project for Kenya (Report IFC/P-238 of June 22, 1976). The loan of $2 million will be administered by KCB for assistance to small and medium industries who have been in existence for two or three years and have shown promise of growth, but whose further development is hampered by financial and technical constraints. KCB will contribute about $2 million of its own funds towards the financing packages. Maximum loans are expected to be $300,000. In order to provide appropriate on-going assistance to borrowers under the IFC project, KCB has undertaken to set up special procedures for credit appraisal and supervision, and provision of business advisory services. For project implementation, two advisors have been provided to KCB through the Commonwealth Fund for Technical Cooperation (U.K.). Technical Guidance and Services 2.20 Considerable efforts have been made since 1967 to help potential Kenyan entrepreneurs to establish and operate small-scale industries. Kenyan Africans in particular have had no previous tradition or experience in running industrial enterprises other than simple artisan workshops. Most entrepreneurs have some technical background but need help in the selection, installation, and operation of machinery. Record keeping and financial administration is weak. Since most entrepreneurs are production oriented, marketing is a serious problem; it is made more difficult in some cases by inadequate quality control and poor product design. Thus technical guidance is needed by practically all newly established African small-scale industries in Kenya. In addition, institutions working in this field need technical assistance in project identification, preparation and appraisal, new product development and management training The main technical services to date for small Kenyan industries has been provided through KIE. It has concentrated on the 70 industries operating on KIE's industrial estates (Nairobi, Nakuru and Kisumu) and the

16 -8 - small rural workshops which are part of a KIE program to assist industrial development in rural towns (Rural Industrial Development Program - RIDP). The technical services for firms on the estates has covered all areas from project preparation to production and marketing. For the small rural workshops, technical services have mostly been limited to the provision of common shop facilities and product development. All technical services of KIE have been associated with the provision of credit from ICDC or KIE itself. ICDC has established a Loan Supervision Department to provide assistance but the officers involved have had to concentrate on debt collection. All technical services provided through KIE have been without charge to the entrepreneur Most of the technical services to small Kenyan enterprises until now has been by expatriate advisers, and all Kenyan institutions have received such help. As of December 1976 nine German technical advisers, five Swedes, four Danes, and one Norwegian were working throughout the country as part of KIE. The number of Swedish advisers was reduced to three in 1977 and the Danish and Norwegian advisers left by mid Many advisers have worked outside KIE headquarters providing daily assistance on the industrial estates of Nairobi, Nakuru, Kisumu, and Mobasa as well as at the administrative centers for the Rural Industrial Development Program. Management Training and Advisory Center (MTAC) 2.23 The MTAC in Nairobi has been working for over 10 years in developing programs of management training for Kenyan industries. It has, since 1971, been making special efforts to provide training programs for Kenyans in smallscale business. Until 1976 it benefitted from a number of UNDP/ILO advisers, but the center is now working with only Kenyan staff. Although some Kenyan businessmen have received assistance from MTAC courses, the impact of the center's work on the indigenous small-scale industry sector has been small. Kenya Industrial Training Institute (KITI) 2.24 Another institution providing technical training for Kenyan entrepreneurs is the KITI in Nakuru created in 1965 by the Ministry of Commerce and Industry. KITI has received Japanese technical assistance and has produced more than 400 graduates in its first 10 years of operation. KITI estimates that 100 of its graduates have established their own enterprises, primarily repair shops or artisan operations in the metal working and woodworking fields. Industrial Survey and Promotion Center (ISPC) 2.25 The ISPC was established in 1970 as an agency of the Ministry of Commerce and Industry. Its role was to enable the Government to exert catalytic action on industrial development by identifying, developing and evaluating new projects. UNIDO has assisted ISPC since its establishment. The rather uneven quality of its reports led to a UNDP evaluation mission in 1975, which recommended intensification of ISPC's project work and

17 -9- addition of sector and area studies and the promotion of appropriate technology. The Government agreed with the recommendations and to underline the importance it attaches to ISPC, appointed a Kenyan director and authorized an expansion in the number of Kenyan professionals. UNDP/UNIDO continue to support ISPC. In practice, ISPC is gradually building up a competent Kenyan staff and is now working on a number of projects mainly for large scale industries and to some extent also for small scale industries. Appropriate technology in bread production is another ongoing activity. In addition, ISPC is participating in the general industrial policy formulation, for instance through the preparation of the next Development Plan The impact of the financial and technical assistance institutions on small industry development has been significant, especially in comparison with most other African countries. Substantial financial assistance has been provided through ICDC and the commercial banks and a large amount of technical assistance has been provided primarily through KIE. The institutions closest to implementation (ICDC and KIE) have been more effective than the training and promotion institutions. For this reason, as well as the inefficient fragmentation of effort among institutions, the project proposed here provides for the consolidation of financial and technical assistance through the strengthening of KIE. In addition KIE would enhance its project promotion and extension roles and take a more active part in the arrangement of training programs. D. Government Policies 2.27 Industrialization has been a principal objective of Kenyan Government economic policy since Independence, and in the Development Plan for 1974/78 a target of 10.2% per year growth was set for the manufacturing sector. However, as discussed in paragraph 2.03, the actual growth rate in the sector declined to 5% in 1974 and to 4% in A substantial recovery has occurred since, and the Government believes that in , the manufacturing sector will approach the target growth rate The Government is currently reformulating its strategy for the industrial sector, because Kenya has to reduce its import dependency and increase its exports, especially in view of the changes in world market prices including oil prices since 1973/74. Moreover, the scope for additional investment in import substitution industries has become limited. Thus, the Government intends to change the incentive system in order to give export industries the same encouragement as those for import substitution and to promote in particular industries based on local raw materials. Several steps have already been taken in recent years such as the introduction of import duties on raw materials and capital goods, an export compensation of 10% of export value, an 8% devaluation and the increase of sales taxes on imported and domestically produced non-essentials. But of late, progress in policy adjustment has slowed down somewhat because industrial problems related to the economic recession and break-up of the East African Community demanded immediate attention. The Government is now addressing the industrial policy issues as part of the preparations for the next Development Plan (FY79-83).

18 Measures under consideration include Government assistance in identifying domestic sources for parts and materials, providing foreign exchange and credit guidelines for channeling resources to the highest priority industries, a critical examination of the import licensing system and its support of inefficient monopolistic positions, and an export subsidy plan. In addition, the Government intends to use duties and sales taxes on capital goods to give preferences to labor intensive methods of production and to encourage use of idle capacity. Moreover, in order to stimulate local raw material use and labor intensive production, to achieve a better balance in the geographical distribution of employment opportunities, and to promote local ownership of industry, the Government plans to give more support to the development of small scale industry because it serves these objectives better than large industries Kenya has adopted a policy of free enterprise development and thus relies primarily on entrepreneurial initiative for industrial development. Within this context, Government policy has helped small scale industry considerably. Interest rates for small industries have been 2-3 points below those for medium and large industries and rents have been heavily subsidized on the KIE industrial estates. The shift towards domestic resource-based production is the most important policy change in support of small industries since these industries use local resources more than larger industries In the past, direct Government support for small firms has been provided primarily through financial assistance. Apart from guaranteeing substantial German loans for industrial estate construction and the equipping of factories in Nairobi, Nakuru and Mombasa, the Kenyan Government has provided Sh 36 million ($4.3 million) for construction of estates and equipment loans. In addition, the Government has provided an annual grant for administrative expenses of KIE; this grant reached Sh 6 million ($720,000) for These amounts are large by African standards The Ministry of Commerce and Industry is being reorganized to accommodate the policy changes being worked out in connection with the new Development Plan. A New Project Committee, which has existed for some time, has been given a new emphasis. This Committee, which draws its membership from several ministries and development institutions, is charged with the responsibility of reviewing all large scale industrial projects whether private or Government sponsored. During the project negotiations, the Government has confirmed that as part of its reorganization, the Ministry will also engage specialized staff to coordinate small scale industry programs. This net unit is expected to review and recommend Government budget support for the institutions servicing the small industry sector, and to help the Government in defining priority industries for small-scale development. The proposed project includes the funding of an expatriate technical advisor for this unit. In addition, the Government has agreed to promote cooperation between KIE and other institutions concerned with small scale industry, including MTAC (para 2.23), KITI (para 2.24), and the Rural Technology Centre at Nakuru which was established recently under the Ministry of Agriculture for testing new agricultural and rural transport equipment.

19 E. Prospects 2.33 The opportunity for small industry development appears good. The economy is recovering from the recession and just as small industries suffered most from the recession, they are expected to show the strongest recovery. Moreover, as indicated in paragraph 2.29 the shift in Government policy towards supporting domestic resource-based industries should benefit the small industry sector. In addition, many possibilities for new products based on local materials exist for small industries (Annex 16). Finally, the free enterprise climate provides entrepreneurs of small industries the possibility of expansion Past experience in Kenya shows that with sufficient financial and technical assistance, small industries have developed successfully. Seventy modern small industries have been established during the past ten years on KIE estates. Progress has been slower than the Government and bilateral donors had hoped, but the accomplishment is significant. Already some small industries that started on the estates have been able to expand to medium industries off the estates. A shoe factory now employing 115 persons has moved off the Nairobi estate. A second factory on the Nairobi estate manufacturing hinges is ready to make a similar move The principal constraint to progress for small industry appears to be the development of entrepreneurship. It is difficult to judge the rate at which new entrepreneurs can be found and trained. Moreover, the selection of potential entrepreneurs is difficult and is based to a great extent on trial and error. This problem will become less severe as entrepreneurial traditions become established in industry. Moreover, business development among Kenyans in certain regions of the country indicates that sufficient entrepreneurs are available. However, substantial financial and technical assistance will be necessary for providing potential entrepreneurs with the means for development. In view of the overall prospects for small industry, this support should be worthwhile. III. KENYA INDUSTRIAL ESTATES A. Organization and Procedures Objectives 3.01 Kenya Industrial Estates was established in 1967 as a wholly owned subsidiary of the Industrial and Commercial Development Corporation (ICDC), a Government corporation. Its main objective has been the development of Kenyan African entrepreneurship through the establishment of small scale industries and its main activity has been the development and management of industrial estates for these industries. KIE has two estates fully occupied (Nairobi and Nakuru), two estates partially occupied (Kisumu and Mombasa) and one estate almost ready for initial occupancy (Eldoret). In addition KIE manages a rural industrial development program to assist small industries outside towns. (See Annex 19 for map showing sites of KIE activities, as of December 1976).

20 Board of Directors 3.02 In the past, the Executive Director of ICDC was the Chairman of KIE'S Board. Other members of the board included the Permanent Secretaries of the Ministries of Commerce and Industry, and of Finance and Planning, and three representatives of the industrial and commercial community of Kenya. The Board of Directors has been making decisions on the establishment of new industrial estates and also approving projects and selecting entrepreneurs. In view of KIE's expanded role, the Government increased KIE's share capital from its nominal value to Sh. 50 million and became the direct owner of KIE in September In addition to the two Permanent Secretaries, the new Board now includes KIE's Managing Director and will be eventually completed with three representatives of the industrial community. It is chaired by the Permanent Secretary for Commerce and Industry. The daily management of KIE is handled by the Managing Director and his Deputy, who have been in their positions since KIE's senior management is capable of implementing the project proposed. Organization and Staff 3.03 As of December 1976, Kenya Industrial Estates had a staff of 200, of which 26 were Kenyan professionals. (In addition 19 expatriate advisors were assisting KIE). About 80 staff members were working at the administrative headquarters of KIE, located at the Nairobi Industrial Estate. In addition, KIE had 14 vacant professional positions. KIE had encountered considerable professional staffing difficulties, especially in recruiting Kenyan economists, engineers and accountants. In 1977, 8 of the expatriates left after termination of their contract but KIE has put in major efforts to strengthen its staff capability to cope with the projected operations. The number of Kenyan professionals was increased to 40 by September KIE's future staffing plan is analysed in para Finance 3.04 KIE headquarters has two principal departments, Finance and Projects. At the time of appraisal, the Finance Department was inadequately staffed to handle its responsibilities for the loan portfolio, the collection of rents from estate properties and accounting. Prior to the 1975 audit, KIE financial affairs involved a number of inconsistencies and errors in the accounts. In addition, inadequate attention was given to notifying borrowers and renters of payments due and to pursuing delinquent accounts. KIE hired a credit controller to handle the loan portfolio in 1976 and further strengthened the department during A senior accountant was recruited to serve as Rent Controller and an experienced professional from ICDC was appointed Senior Financial Officer. In addition, the proposed IDA project includes the provision of an expatriate advisor in the department. His responsibilities would include assistance in the design, implementation, and monitoring of satisfactory systems of portfolio management, rent collection, and accounting. Projects 3.05 The Projects Department at KIE headquarters consists of three economists and two engineers. In addition the estates outside Nairobi

21 have eight positions for one economist and one engineer each. By 1976, these estates only had one engineer and three economists, but in 1977 KIE has appointed three other engineers on the estates. The Projects Department at Headquarters and the economists and engineers at the estates are responsible for project identification, preparation and evaluation. In practice much of this work has been done by the eight foreign advisors on the estates, who are well qualified to provide this assistance. Loan Approvals 3.06 Loans for equipment for industries on the Nairobi and Nakuru estates have been processed through ICDC after approval of the-kie Board of Directors. Loans for enterprises on the Kisumu estate are processed directly by KIE after approval by a locally constituted loan committee; a similar agreement is now being reached for projects on the Mombasa estate. A loan fund for the Rural Industrial Development Program has also been handled directly by KIE after loans are approved by local loan committees The KIE project appraisal report follow a format that does not vary enough with project size. As a result, too much detail is developed for projects under Sh 100,000 ($12,000) and not enough analysis is provided for projects over Sh 1.0 million ($120,000). For projects under Sh 100,000 the assessment of the entrepreneur is by far the most important aspect of evaluation and should be emphasized more. For projects over Sh 1.0 million, the major weakness is in the financial appraisal and market analysis. For these projects KIE should calculate a financial and economic rate of return. In addition, the grace period and maturity should be tailored to the nature of the project rather than be uniform. Finally for projects over Sh 1.0 million, the appraisals should include a discussion of the adequacy of project management. The proposed project includes the provision of an expatriate advisor to assist KIE in establishing appropriate appraisal methods for projects of various sizes and in training the Kenyan staff in these methods. Technical Services Centers 3.08 As part of the operation of the Nairobi industrial estate, KIE has been operating a Technical Services Center (TSC), which is a central workshop. The T.S.C. employs 20 people and makes tools, jigs, fixtures and certain parts for client factories on the estate. Recently it has also produced such items for factories outside the estate. A similar T.S.C. has been installed on the Nakuru Industrial Estate but is not yet operational. T.S.C.s are also being set up at Kisumu and Mombasa. Rural Industrial Development Centers 3.09 Since 1971 KIE has also administered a rural industrial development program, which has operated through four Rural Industrial Development Centers (RIDCs) at Nyeri, Kakamega, Embu and Machakos. About a third of KIE's employees are at the RIDCs. In the National Development Plan for , it

22 was envisaged that 23 RIDCs would be established by However, only four new RIDCs are presently under implementation and the number will fall short of the development plan. As of June 30, 1976, 70 loans were outstanding to clients of RIDCs. B. Resources 3.10 As of June 1976 the Government and ICDC had committed a total of Sh. 36 million of their own funds to KIE for construction of estates and loans for equipment. However, most of KIE's resources had come from bilateral donors: KfW had committed Sh 32 million; SIDA, Sh 26 million; DANIDA, Sh 12 million; and NORAD, Sh 2 million. These resources were transferred to KIE over time as grants or loans, from the Government or through ICDC. At the time of appraisal, the terms of these transfers were not clear and the auditors noted in the 1976 report that it had not been determined whether Sh 8.2 million included in the report as an ICDC loan was a loan or a grant. After reviewing KIE's capital structure, the Government confirmed recently that KfW funds were loans and all other resources were grants to KIE, as per the original terms. In addition to these resources, the Government has been providing annual administration grants to cover KIE's operating deficit. These grants were included in operating income (Annex 7) and totalled Sh. 27 million through June KfW also provided Sh. 64 million for loans for equipment to be made by ICDC to firms on the Nairobi and Nakuru estates As of June 1976, KIE had Sh 15 million in foreign resources available for commitment and Sh 6 million in local resources (Annex 4). These resources will be used for the Kisumu and Mombasa estates and the rural industrial development program. In 1977, KIE has asked KfW for new loans of Sh. 32 million to finance the establishment of an estate in Kakamega. C. Past Operations 3.12 KIE's principal activities has been the construction and operation of industrial estates. As of June 1976, approximately 200,000 square feet of factory space had been occupied by 70 industries on industrial estates in Nairobi, Nakuru, and Kisumu. Seventy five percent of the total space occupied was at the Nairobi estate and 15% at Nakuru. Both the Nakuru and Kisumu estates has another 45,000 square feet each ready for occupancy, and approximately 80,000 square feet of factory space was under construction at Mombasa and 40,000 square feet at Eldoret. In addition, KIE had constructed 6,000 square feet for work sheds at rural industrial promotion areas in Kakamega, Embu, and Machakos. Annex 8 summarizes the results of the KIE construction program The loans for the equipment for the factories at the Nairobi and Nakuru estates were made by ICDC (Annex 6). KIE's lending activities began in 1973 with loans to clients of the Nyeri Rural Industrial Development Center. In 1974 loans were made to clients of the rural industrial development centers at Kakamega, Embu, and Machakos, and in 1975, KIE began financing equipment for the factories of the Kisumu estate.

23 KIE's loan approvals as of June 1976 totalled Sh 8.6 million, of which two-thirds was approved in (Annex 5). Eighty percent of the loans were for amounts less than Sh 50,000 ($6,000); however, 50% of the amount was for two loans over Sh 1 million each (a tannery and a sugar factory). Forty percent of the number of loans was for industries involving wood products but fifty percent of the total amount was for food (reflecting the large loan for sugar). The 70 operating factories on the Nairobi, Nakuru, and Kisumu estates have created approximately 1,100 jobs at a fixed asset cost per job in 1977 prices of $7,000, which is about average for modern small scale industry. D. Financial Position and Results Portfolio 3.15 As of June 1976 arrears of more than three months amounted to 5% of principal outstanding, and 13% of the loan portfolio was affected by such arrears. However, most KIE loans were still in their grace period and evaluation is premature. Eighty percent of the arrears are for loans made through the Nyeri Rural Industrial Development Center, and 98% of the principal outstanding at Nyeri is for loans more than three months in arrears. The manager has been changed at Nyeri, and the loan approval, disbursement, and collection system has improved. The Government now intends to transfer to KIE the equipment loans made by ICDC to firms on Nairobi and Nakuru estates. Until now, KIE has been renting its facilities and providing technical assistance to these firms without having a comprehensive view of their financial situation. Considering the high arrear rate in ICDC's portfolio, the Government agreed to insure that no doubtful debts will be passed on to KIE in the process. After deducting substantial provisions, the Government estimates the net portfolio to be transferred at about Sh 40 million. Rental Collection 3.16 Despite the fact that KIE's rental rates are only about 50% of market rates, rental collections in 1976 of Sh 0.89 million were only 84% of rent charged of Sh 1.06 million. Total rent due at the end of 1976 including rent receivables from previous years was Sh 0.71 million. The appointment of a Rent Controller (para 3.04) should now improve the collection of rents. As reflected in KIE's new Policy Statement (Annex 1), KIE and the Government have now agreed that KIE should set rent level so as to cover the long run cost of construction and maintenance. KIE already increased rents by 40% in May Financial Position 3.17 KIE's balance sheets for 1973 through 1976 are shown at Annex 7. KIE's total assets have grown from Sh 18.1 million in 1973 to Sh 80.6 million in 1976, an average annual increase of 64%. Total assets in 1976 were composed of fixed assets (51%), loan portfolio (10%), and current assets (39%). KIE's high liquidity results from the disbursement to KIE of donor funds

24 (primarily SIDA) prior to KIE's disbursement for construction and equipment loans. KIE's liabilities and equity at the end of 1976 consisted of Sh 70.0 million (87%) in Government and ICDC loans, Sh 7.4 million (9%) in grants, Sh 4.6 million (6%) in current liabilities, a capital reserve of Sh 5.1 million (6%), and an accumulated loss of Sh 6.5 million, which amounted to 8% of total liabilities and equity. Of the Sh 70 million provided by Government directly or through ICDC, Sh 23 million were in fact loans from KfW and all the remaining funds were grants (para. 3.10). In September 1977, the Government increased KIE's paid in capital from its nominal amount to Sh 50 million, by converting grants from various sources as shown in the estimated 1977 balance sheet (Annex 10). Income and Expenses 3.18 Income statements for (Annex 7) show that KIE's income and expenses have grown sharply. Administrative expenses (excluding expatriates paid directly by bilateral programs) were 10.5% of average total assets in This unusually high level results from (1) the large component of technical services necessary for the development of small industries, and (2) KIE's large administrative support staff, the growth of which leads the growth of assets since full complements of support staff need to be in place during the early phases of implementation of estates and RIDCs. KIE's income has principally come from an annual Government administration grant. This grant of Sh 6.0 million in 1976 provided 80% of KIE's income. It is so large mainly because (1) KIE's administrative expenses are relatively high and the financial return from the estates under implementation will not reach full potential until the estates were operational, (2) until 1977, KIE's rental charges were about one half the level indicated by the current value of factories, mortgage rates, and maintenance costs, (3) KIE's interest rate of 8% is two to three points below the market rate for medium and long term industrial financing, and (4) KIE did not aggressively pursue interest and rental collections. Even with the annual Government grant, KIE has experienced a loss in each of the past four years; the loss in 1976 was Sh 1.5 million. Audit of Accounts 3.19 KIE's auditors are Coopers and Lybrand, Nairobi, a well qualified firm. The auditors have been providing KIE with a "short form" report, but are familiar with the "long form" requirements of the Bank and are fully capable of providing such a report, which IDA will require beginning with E. Projections Forecast of Operations 3.20 In view of KIE's high recent rate of growth, the Government's interest in assisting small industry, and the significant potential for the development of small industry in Kenya, KIE's business prospects are good. Forecasts of disbursements shown in Annex 9 indicate that KIE's

25 operational area of emphasis will be the provision of credit, with the disbursement of approximately Sh 190 million in loans In addition, KIE is projected to disburse over the same period, approximately Sh 25 million for buildings and equipment at industrial estates and rural and urban industrial promotion areas. These operations would comprise (1) the completion of the industrial estates at Kisumu, Mombasa, and Eldoret and the first stages of the establishment of two new estates at Kakamega and Nyeri (2) approximately 17 rural and urban industrial promotion areas and (3) approximately 35 modern small industries located off the estates. Resource Needs 3.21 KIE has commitments from KfW, SIDA, and the Government to cover virtually all of the foreign and local costs for the completion of the construction and the provision of credit for the Kisumu and Mombasa estates (Sh 40 million). In addition approximately Sh 5 million remains to be disbursed from the NORAD grant and the Government's commitment for the Eldoret estate. The remaining resource gap through 1981 would be covered by internally generated funds (Sh 50 million), the part of the IDA credit loaned to KIE (Sh 76 million), an expected new loan of about Sh 32 million from KfW for the Kakamega Estate, and other borrowings of approximately Sh 10 million The operational forecasts and resulting resource gap are based on growth rates derived from consideration of (1) growth potential for small industry in Kenya, (2) expansion capacity of KIE, and (3) resources likely to be available. In view of the contributions of other donors to KIE, coordination of financing for KIE will continue to be necessary and operational forecasts and resource needs will be reviewed frequently during supervision. Financial Projections 3.23 The projections of KIE's financial position (Annexes 10, 11, and 12) assume substantial improvements in KIE's financial policies, including primarily (1) increase in KIE's interest rate to 10-11%, the current market rate for medium and long term industrial financing, (2) increase in rental charges to reflect the costs of construction and maintenance, (3) conversion to share capital of Sh 50 million of past grants from the Government and ICDC, and (4) significant improvement in procedures for debt and rental collection and tighter control of administrative expenses. The share capital increase took effect in September 1977, and the interest and rent policy improvement were agreed upon during negotiations and embodied in KIE's new Policy Statement which was approved by its Board in October Reflecting the forecast of operations, KIE's total assets would grow from Sh 80 million in 1976 to Sh 256 million in 1982, and KIE's loan portfolio would grow from Sh 8 million to Sh 166 million over the same period. Long term borrowings and equity would increase correspondingly from Sh 76 million in 1976 to Sh 253 million in KIE's debt/equity ratio falls from 11.8 in 1976 to 0.4 in 1977 after the conversion of Sh 50 million in debt

26 to share capital, and then, with the substantial borrowing of IDA funds, would increase to 2.7 in 1982, which is still satisfactory. (Selected past and projected financial ratios are provided in Annex 13) With the improved financial policies, the Government administration grant required for KIE to break even would decrease from Sh 8.32 million in 1978 to zero in KIE's administrative expenses as a percentage of total assets would decline from 10.5% in 1976 to 7.1% in These levels are high in relation to other DFC's but are acceptable in view of KIE's substantial technical assistance activities. Moreover, the decline in the ratio reflects tighter control of administrative expenses and the fact that the administrative support staff is adequate for all estates under implementation. KIE's cost of debt would increase from 1.3% in 1976 to 4.2% in 1982 as a result of the substantial borrowing from Government of IDA funds at 6%. KIE's projected debt service ratio would decline from 5.0 in 1979 to 1.6 in 1982 with the IDA borrowing, but the 1982 level is satisfactory. Overall, projections of KIE's financial position are subject to considerably more uncertainty than for most DFCs because of KIE's many administrative activities and lack of experience for loss rates on loans and rents. However, the projections indicate that KIE has a reasonable chance of achieving a sound financial position by IV. THE PROJECT A. Objectives 4.01 The objective of the project is to strengthen KIE to enable it to assume the principal responsibility for further development of small scale industry in Kenya. In order to carry out this expanded role, KIE will be reorganized and upgraded to improve its capability to act as the principal financial intermediary for the small-scale industry sector as well as to enhance its technical assistance capacity. Its financial policies and management are being changed to provide KIE with the autonomy necessary to borrow on its own. Apart from $1.0 million earmarked for technical assistance to KIE, the project includes $9.2 million for industrial estate construction and credit for small industrial firms. This amount would provide about 10% of the national investment in the small industry sector over the four year period B. KIE Reorganization and Expansion 4.02 The principal features of the proposed reorganization are:- (1) Establishment of 7 regional centers to be located at Nairobi, Nakuru, Mombasa, Kisumu, Eldoret and Nyeri and Kakamega. (2) Coordination of KIE's technical guidance to entrepreneurs and follow-up activities.

27 (3) Upgrading and expansion of financial management staff at headquarters and at the regional centers In view of the projected growth in portfolio and number of assisted enterprises, KIE will create a new Extension Services Department at headquarters to coordinate and promote technical assistance and follow-up activities throughout the organization. The project provides for an expatriate advisor to help in setting up the department. In the field, KIE will assign staff on a regular basis as specified in the Project Agreement, to advise entrepreneurs on new product development, marketing (Annex 18), financial management and production techniques, and bulk purchasing arrangements Because of increased size and responsibility, KIE would decentralize its operations to cover the entire country through regional centers. Each regional center would manage all KIE activities in that region including development of industries on and off the estates as well as rural and urban workshops within the region. The regional centers would be primarily responsible for project identification and preparation, selection of entrepreneurs, and implementation of small-scale industry projects as well as ongoing technical assistance The regional centers would prepare and appraise all projects requiring financial support of up to Sh 1 million. The regional loan committees 1/ would have authority to approve loans up to Sh 500,000. Furthermore, the regional centers would be responsible for the collection of loan and rents Headquarters project staff would identify, prepare and appraise projects requiring financing of over Sh 1.0 million, and the KIE Board would approve all loans of over Sh 500,000. The headquarters project staff would be responsible for the establishment of policies, standards and procedures for project work throughout the organization and for monitoring regional operations. Headquarters would also provide the regions with specialized staff from the Extension Services Department for assistance in marketing extension and training. The financial management staff at headquarters would establish systems and procedures for loan administration and rental collection throughout the country, for monitoring regional financial operations and for preparation of consolidated reports. The final organization chart at full operation would be as indicated in Annex In accordance with this reorganization, KIE has prepared the staffing plan presented in Annex 3. The total number of staff to be recruited through 1981 will be 65, including 18 senior professionals and the 5 expatriates funded under the project. Of the 60 Kenyans, 7 will be posted in the new Extension Services Department, 9 in other headquarters' positions, and 10 in senior technical positions at the regions (economists, engineers, accountants). The remaining 34 will be posted in the industrial promotion areas, 20 as technicians and 14 as managers. The IPA technicians will 1/ The Regional Loan Committee will consist of the Manager, the Economist, the Engineer and the Accountant of the region.

28 provide workshop entrepreneurs with basic day-to-day advice in production, marketing, finance and management. The regional economists would be responsible for project preparation and the engineers would be in charge of equipment selection, installation, ongoing technical and management assistance, and supervision of technical service centers. KIE will continue to rely on the existing eleven expatriate economists and engineers during the project period particularly for project follow-up and provision of technical assistance in the regions but the recruitment of local economists and engineers is included for replacement of the advisers through The additional administrative costs of the reorganization and expansion are included in the financial projections and amount to a 76% increase of administrative expenses in real terms over the period (Annex 11) One of the most difficult aspects of KIE's expansion will be the hiring of suitable Kenyan technical personnel for the regional centers and the industrial promotion areas. KIE is preparing for its Kenyan staff a comprehensive on-the-job training program. In addition, the project includes funds for specialized training of KIE's staff. The appointment of the technical staff at Eldoret and on the industrial promotion areas is essential for the implementation of the IDA project. It was therefore agreed at the negotiations that suitably qualified and experienced technical staff would be appointed before IDA disburses funds for construction on each site. C. KIE Policies 4.09 KIE so far has not had a statement of policies to guide its operations in loan financing, technical services and estate management. Nor has it so far adopted financial policies which would impart financial, discipline to its operations or contribute to evolution of KIE's financial autonomy. In order to meet these objectives, IDA assisted KIE in drafting a suitable policy statement. An agreed version of the statement appears as Annex In the past KIE did not have a specific policy on the maximum size for projects to be assisted. In the early years a project size of Sh 2 million in fixed assets was considered to be the upper limit for KIE projects, but recently several projects having fixed assets of over Sh 2.5 million, and in some cases even above Sh 4.0 million, have been set up on the industrial estates. Moreover, the various bilateral donors have fixed different limits for financing under their respective lines of credit. SIDA had originally set an upper limit of Sh 1.5 million for projects on the Kisumu Estate, whereas KfW resources financed larger enterprises in Nairobi and Nakuru. KIE's investment policies now provide that it will not invest in any enterprise whose fixed assets, including permanent working capital, would exceed Sh 5 million after the investment. This upper limit is in line with the definition of Small-Scale Enterprises used in the draft new Development Plan, but it implies some overlapping with the operations of other financing institutions, namely IDB and DFCK, which finance projects having fixed assets of over Sh I million. However, not more than 5% of their financing has gone to enterprises whose assets are below Sh 5 million. IDB is contemplating to raise its floor limit to Sh 2-3 million. The Government agreed at the

29 negotiations that KIE will seek to co-finance the larger projects (Sh 3-5 million) with the other financial intermediaries which have the appraisal capacity to handle them, rather than attempt to build up its own capacity to appraise them at this stage In spite of the upper limit of Sh5 million fixed for projects to be assisted by KIE, it is expected that KIE would focus on financing projects of relatively smaller size. For instance, out of $8.7 million available for subloans under the Credit, only a maximum of $3 million could be on-lent to enterprises having fixed assets valued at over Sh I million. Furthermore, the maximum amount of sub-loan to an enterprise under IDA Credit has been set at Sh 2.4 million KIE's policy statement also lays down the proportion of its financing in enterprises of various sizes. KIE is authorized to invest up to 85% of the total costs in an enterprise whose fixed assets, including permanent working capital, do not exceed Sh 3.0 million in value whereas it can invest only up to 80% of the total costs in larger enterprises. In keeping with the national objectives and strategies KIE is required to give special consideration to enterprises which, among other things, emphasize the creation of employment in relation to the capital invested. In particular, KIE will endeavour, in its financing operations to maintain capital costs perjob created below Sh 40,000 in 1977 prices ($4,800). Financial Policies and Structure 4.13 In order to promote KIE's financial autonomy a number of agreements were reached at negotiations. These relate to higher interest rates, better structured rents, avoidance of exchange risk on foreign currency transactions, capitalization, subsidies and a debt covenant KIE agreed to increase the rate of interest on its loans from the present 8% per annum to 10% on loans for projects whose total cost does not exceed Sh I million, and to 11% on all other loans. KIE also agreed to fix the rent of factory and workshop premises at levels which would reflect the long-run marginal costs of the facilities. KIE's policy statement includes a provision whereby it will avoid exchange risk on foreign currency transactions. For the time being the Government will assume the exchange risk on all KIE's foreign currency subloans The Kenya Government has already decided to increase KIE's authorized and paid-in capital from the present Sh 40,000 to Sh 50 million in order to give KIE an adequate equity base which will enable it to borrow appropriate amounts to finance the projected five-year operations program. It is a condition of effectiveness of the proposed Credit that the paid-in capital shall have been actually raised to this level. The paid-in capital will be contributed by the Government out of existing grants from the Government as well as from the bilateral donors. Furthermore, in order to cover KIE's projected revenue deficits the Government will provide Sh million during

30 FY78-FY81 by way of grants. KIE has agreed to a debt equity ratio of 3:1 which should ensure an adequate financial structure. The overall improvement in KIE's financial position, resulting from a better capitalization and appropriate financial policies, is reflected in the projections provided in Annexes D. Investment and Technical Assistance 4.16 As part of the project, IDA would provide financing for: (1) construction of factories and workshop clusters, (2) industrial credit, and (3) technical assistance. The project would include construction by KIE of (1) 12 factory buildings for modern small scale industries for the second phase of the Eldoret Industrial Estate; (2) 150 workshops for small industries dispersed among 10 industrial promotion areas (workshop clusters) in rural areas; and (3) 40 workshops in industrial promotion areas in Nairobi. The project would also include KIE's financing equipment and permanent working capital for the small scale industries located in the factories and workshops contructed under the project. In addition, KIE would provide loans for equipment, permanent working capital, and building construction for approximately 30 modern small industries off the estates. Finally, the project would include training for KIE's Kenyan staff and the employment of qualified and experienced expatriates: staff to assist the Government in small-scale industry policies (para. 2.32) and six advisers to assist KIE in its reorganization and in the execution of this project. This staff would assist in the following areas: (i) financial management (para. 3.04), (ii) promotion, preparation and appraisal of projects (para. 3.07), (iii) promotion, training and development of entrepreneurs (para. 4.03), (iv) technical matters relating to Eldoret Estate and factories off the Estate, and (v) establishment and operation of rural workshops in the Eldoret Region (para. 4.23). Provision has been made in the IDA Credit for financing the estimated foreign exchange proportion of 80% of approximately 12 manyears of technical assistance (at about $67,000 per manyear in current prices), plus up to $200,000 for training programs. Howeveyr, UNDP and bilateral donors have expressed interest in providing financing for this purpose. If alternative financing is available, the technical assistance funds would be reallocated to other components. Rural and Urban Workshop Program 4.17 The program would provide funds for 10 industrial promotion areas (IPAs) in towns in rural areas and two IPAs in Nairobi. These IPAs would be the basic units in the expanded rural industrial development program (RIDP). Services in the IPAs would include sheds for rent, utilities, certain common production facilities, credit, material bulk purchase arrangements, and assistance in new product development, marketing, financial management, and production. Loans to industries on IPAs are expected to average Sh 100,000.

31 Eldoret Industrial Estate 4.18 The newest of the industrial estates is under construction at Eldoret. This estate is the fifth established by KIE and has been planned over the past three years with the assistance of two economists provided by DANIDA. DANIDA was to have financed this estate, but withdrew early in 1976 (Annex 15) Eldoret is a fast growing town with a population of over 20,000, and the center of a rich agricultural district with important forestry and livestock resources. The town is connected to the rest of the country by both rail and road. A number of small industries already operate there and there are also two large industrial enterprises -- a textile mill in its final stage of construction and a starch and glucose factory in operation. An extensive survey of the district shows that considerable scope exists for the development of a number of small industries either based on the resources of the region or catering for the agricultural sector. By early 1976, 15 satisfactory projects had been prepared for industries to be established on this estate Because of the withdrawal of DANIDA and the considerable interest of local entrepreneurs, the Government has provided Sh 6 million for initiation of the 12 factories for Phase I of the estate. The infrastructure for the estate and the first 12 factory buildings will be completed at the end of By December 1976, eight industrial projects had been approved, and entrepreneurs had been selected for half of these projects. Unit construction costs compare favorably with the estates built several years ago. Construction was started only after projects for most of the sheds had been approved. Moreover, Phase II of 12 factories (the part of Eldoret to be assisted by IDA) will be started only when further projects have been identified and approved. Industries Off the Estates 4.21 Government policy is changing with regard to using industrial estates as the prime instrument for promoting small-scale industries. Industrial estates require large investment in infrastructure and construction and are suitable for only a limited number of locations. After the completion of the Eldoret, Kakamega and Nyeri industrial estates, all the major cities would have estates. KIE does not plan to build any other new estate As part of KIE's enhanced responsibility it would therefore promote and implement small-scale industry projects throughout the country off industrial estates. Already KIE has been involved with a number of such projects, in particular a sugar refinery at Kakamega, a tannery at Embu, and a pencil factory being established at Thompson Falls. The sugar refinery and the tannery are examples of industries that need to be located close to the source of raw materials or which have effluent problems making them unsuitable for industrial estates.

32 External Technical Assistance 4.23 The restructuring of KIE will expand considerably its range of responsibilities. Despite gaining valuable experience over 10 years of operation, KIE staff needs additional assistance to carry through the expanded program for small-scale industry development on and off the estates. In particular, assistance is proposed for project preparation, financial management, development of entrepreneurship and coordination of extension services (paras. 3.04, 3.07, and 4.03). In addition, because of the withdrawal of the Danish technical assistance support for Eldoret, two advisers are needed to insure the effective continuation of the Eldoret estate and the Rural Industrial-Development Program in the district. Finally, for the project to be successful, it is important that the policy formulation capability at the Ministry of Commerce and Industry for small-scale industries be strengthened (para 2.32) and an advisor is proposed for the Ministry in this area. All the staff to be recruited to carry out these functions will have to be acceptable to IDA as to their qualifications and experience. E. Project Cost and Financing 4.24 The estimated total project cost is $15.6 million equivalent, of which $1.1 million is for construction, $13.5 million for industrial credit, and $1.0 million for technical assistance. The project's foreign exchange component would be $10.0 million (65% of total project cost) and financed by IDA. The local component of $5.6 million would be divided almost equally between KIE and sub-borrowers with each contributing 18% of total project cost The average KIE loan to modern small industry is estimated to be $200,000 and the average loan to workshops, $12,000. The sub-borrowers contribution would average 20% both for modern small industry loans and workshop loans. The modern small industry projects would have a foreign exchange component of 69% whereas the workshop projects would have 50%. On average IDA would finance 80% of KIE's loans which would approximately cover the estimated foreign exchange costs of the projects. The following table gives a breakdown of the major cost categories of the project and their financing.

33 Total Project Cost and Financing Foreign Foreign Local Exchange IDA KIE Subborrowers Total Component Sh mil. $ mil. Sh mil. $ mil. Sh mil. $ mil. Sh mil. $ mil. Construction /a Eldoret Factories Workshops Total Industrial Credit Modern Small Industries Workshops Total Technical Assistance IDA Government Total /a Includes 5% physical contingency, price contingencies of 9% and 8% thereafter, and tax of 6%. F. IDA Credit 4.26 The proposed credit would be made to the Government of Kenya and the funds for the construction and industrial credit components ($9.2 million) would be on-lent to KIE at 6%. This on-lending rate would result in an average cost of resources (including equity) of 3.0% in The return on portfolio and rental properties in the same year would be 11.0%. The resulting 8 point spread would allow KIE to finance its technical assistance program and phase out the Government administration grant. Because of the difficulty of adjusting the composite of the amortization schedules of the subloans in view of the large number of projects expected to be financed from the credit and the inclusion of a construction component, the loan to KIE would have a fixed amortization schedule with maturity of 15 years including three years grace. This repayment period would allow KIE to roll-over about

34 one time the IDA funds used for credit and thus provide needed local resources. Because of the complexity of foreign exchange risks for small borrowers, the Government would carry the foreign exchange risk Sub-loans would be made on the basis of KIE's appraisals of individual projects. IDA would approve all sub-loans from the IDA credit amounting to more than $125,000. Regarding free-limit sub-loans below this limit under the IDA Credit, it was agreed that KIE would not approve any sub-loans unless it has been notified that its appraisal procedures and methods are acceptable to IDA In developing subprojects for financing under the modern small industry as workshop programs, KIE would look into the possibilities of manufacturing local consumer-goods such as building materials, furniture, clothing and footwear, agricultural equipment, transport equipment and accessories. In addition, small to medium scale agro-processing industries such as sugar refining, tanning and kraft paper production would be supported. The manufacture and repair of agricultural and rural transport tools and equipment is another area with potential for growth. In this regard, the project will provide financing through KIE for the production of low or medium technology agricultural and transport equipment from prototypes declared suitable by the Rural Technology Center (RTC) in Nakuru. This center is in charge of developing and testing designs for "appropriate technology" equipment for rural Kenya, and would be a valuable source of ideas for new products, which could be made available to smallholder Kenyan farmers. Through other Bank/IDA financed projects such as the Integrated Agricultural Development Project (Cr. 650-KE and Ln KE), farmers may obtain agricultural credit for products that will assist the farmer in augmenting his production. An administrative link between KIE and the RTC and other institutions has been established Disbursement of IDA funds for construction, for sub-loans to workshop enterprises, enterprises at Eldoret and private factory enterprises, and for technical assistance and training will be up to the percentages indicated in Annex 18. In view of the large number of disbursements which will have to be made, it was agreed that KIE will claim reimbursement from IDA, from time to time, against appropriate documentation for agreed percentages of the disbursements made by it. Equipment procured under the IDA Credit would be too small for international competitive bidding and KIE would satisfy itself that goods and services purchased are competitive in quality and price. It has also been agreed that no disbursements for civil works will be made unless suitably qualified and experienced technical staff has been posted to the Industrial Promotion Areas and to the Eldoret Industrial Estate. V. JUSTIFICATION AND RISKS 5.01 The main justification of the project is institution building. KIE would assume primary responsibility for development of small scale industry in Kenya and would accordingly be reorganized and strengthened. KIE would become capable of providing small scale industry with the assistance required

35 and of advising the Government on the needs of the sector. As a result, capability for implementation of small scale industry development in all areas of the country would be consolidated within one institution. Project identification, preparation, and appraisal would also be improved and financial discipline would be increased. Moreover, technical assistance for rural and urban workshops would be established on a sustainable basis In addition, IDA funds would provide about 10% of the investment in the small industry sector KIE would establish appraisal procedures to ensure adequate financial and economic benefits of subprojects. In addition, IDA would monitor closely the appraisal of subprojects. Most subprojects would be based on local raw materials and some would provide inexpensive items, such as farm implements and transport equipment, which would benefit the rural and urban poor. In addition, a small number of industries may produce exportable items. The direct employment effects of the project would be significant with 2,600 jobs created. 1/ The fixed investment cost per job in 1977 prices would be $3,700 ($6,100 for the modern small industry component and $1,400 for the workshop component). These ratios are much lower than the DFC average for Africa of $17, The project would be the first national small scale industry project by the Bank in a major country in Eastern Africa and the first Bank small scale industry project in Africa to combine technical assistance and financing in the same institution. Thus, the project will provide experience for preparing future small scale industry projects in Africa The major risks of the project are that KIE would be unable to hire the large number of qualified professionals required for its expansion (para 4.08) and that KIE would be unable to achieve financial autonomy (paras 3.25, 4.13). With regard to staffing, KIE is reviewing its salary structure to enable it to attract qualified personnel and is developing training programs including on-the-job training to meet requirements. On the financial side, KIE has adopted a policy statement (Annex 1) including financial policies that would provide KIE with reasonable prospects for achieving a sound financial position by In addition, the large technical assistance component of the project should assist in keeping loan defaults to low levels and in establishing sound financial practices within KIE. IDA should support the project because of its long term institution building aspects as well as the significant employment and economic effect which would result from the investment of IDA funds in small scale industry. 1/ Seven jobs per workshop and 30 jobs per modern small firm.

36 VI. RECOMMENDATIONS 6.01 During credit negotiation, assurances were obtained: (i) that the foreign exchange risk for the Credit would be borne by the Government; (ii) that the funds for the construction and industrial credit components ($9.2 million) would be onlent from the Government to KIE at 6%; (iii) that staff to coordinate Small-Scale Industry Programs and to strengthen KIE would be engaged by June 30, 1978; (iv) that the initial subprojects to be financed out of IDA funds would be submitted to IDA for approval until such time as the appraisal techniques were found acceptable to the Association and that, thereafter, subloans from the IDA Credit amounting to more than $125,000 would be submitted to IDA for prior approval; (v) that an administrative link betwee KIE and the Rural Technology Center would be established The following conditions for disbursements were agreed upon: (i) construction on the industrial estate at Eldoret: that suitably qualified and experienced technical staff have been appointed ; and (ii) construction of workshop clusters: that suitably qualified and experienced staff have been posted to serve the industrial promotion area The proposed project is suitable for a credit of $10.0 million to be used as outlined above.

37 ANNEX 1 Page 1 of 4 KENYA INDUSTRIAL ESTATES LIMITED STATEMENT OF POLICY The KIE is a financial and technical service institution wholly owned by the Government of Kenya for the purpose of furthering the economic development of Kenya by assisting in the promotion, establishment and expansion of small scale industrial enterprises including mining, agro-industries, engineering, manufacturing, processing, assembling, consumer and service industries in accordance with the provisions and priorities of the successive National Development Plans. The KIE will promote the industrial development of Kenya through one, or a combination of the following methods: I. FINANCING (a) Provision of medium and long-term finance to small industries throughout the country; (b) Provision of technical services including, but not limited to, assistance in the preparation, implementation, and management of enterprises; (c) Establishment and management of (1) industrial estates, (2) rural industrial development centres, and (3) industrial promotion areas and workshop clusters in both urban and rural areas; (d) Participate in equity from time to time if such participation is necessary for the projects to come off the ground. The KIE will finance or otherwise assist enterprises creating new productive assets and will not normally engage in refinancing operations, unless the original financing had prior consent of the Company. The KIE financial operations shall be guided by sound banking principles. The Company's investment decisions shall be based on appropriate appraisal methods and will particularly take into account the total financial requirements of the project and the adequacy of the resulting financial structure for the enterprises. The Company shall finance only economically sound, financially viable, technically feasible projects and those which are competently managed either by the entrepreneurs themselves or by full-time qualified managers.

38 ANNEX 1 Page 2 of 4 The Company shall not invest in any enterprise in which the total cost of fixed assets, including permanent working capital, estimated after completion of the project is more than Shs. 5.0 million. For any enterprise in which the total cost of fixed assets, including permanent working capital, is (a) Shs. 3.0 million or less, the Company will not invest more than 85% of the total costs of the project and Cb) more than Shs.3.0 million, the Company will not invest more than 80% of the total costs of the project. These limits will be subject to review from time to time, according to changing economic situations. If an economically worthwhile project cannot take off without KIE's participation or in case an on-going project cannot continue production for the same reason, the Company may consider participation in equity subject to a maximum of 25% of the shares. The Company's total debts shall not at any time exceed three times the amount of its unimpaired subscribed share capital plus surplus and reserves. The Company shall seek to diversify its financing both geographically and by industrial sectors. The Company's investment in any one enterprise will be in keeping with the national objectives and strategies. The Company shall give special consideration to enterprises utilizing local materials and technologies which emphasize the creation of employment in relation to the capital invested. To the extent possible, the Company will also give special consideration to enterprises oriented towards exports. The Company will, from time to time, review and fix rates of interest bearing in mind the cost of borrowing, the necessity of making adequate provision for doubtful investments and the prevailing economic factors. The Company shall charge an interest rate of 10% per annum on projects whose total cost is Shs. 1.0 million or less and 11% per annum on projects whose total cost exceeds Shs. 1.0 million. The Company shall charge fees and commissions at rates to be determined from time to time. The Company shall take such security for its loans as it shall determine adequate and reasonable. The Company shall at all times seek to protect itself against exchange risks of foreign borrowings.

39 ANNEX 1 Page 3 of 4 II. TECHNICAL SERVICES The Company shall provide recipients and potential recipients of KIE loans with a range of services as needed to assist in the efficient establishment and operation of their industries. These services shall include, inter-alia: (a) identification of suitable items for manufacture, determination of viable scale of operations, and assistance in planning the financing, equipment, and manpower needed; (b) technical advice in selection, installation and maintenance of equipment; Cc) analysis of production problems impeding full utilization of capacity or resulting in inadequate quality standards; (d) assistance in the development of new products and preparation of tooling and design and fabrication of new equipment; (e) advice and training in management; (f) assistance in marketing; and (g) in collaboration with other institutions, investigate the most appropriate processes and technologies and develop equipment suitable for application in the country. III. ESTATE MANAGEMENT The provision of facilities and factory premises will continue to be an essential activity of the Company. In keeping with this role, the Company will manage and operate industrial estates in main population centers and will provide workshop facilities in industrial promotion areas. Factory and workshop premises will be constructed at minimum cost and only after a substantial fraction of the projects to occupy the premises have been identified and approved. The factory and workshop premises on the estate or in industrial promotion areas will either be rented or sold to the entrepreneurs. If the premises are rented, then the entreprenuer shall pay the standard rent for the premises, as determined from time to time, to reflect the long-run marginal costs of facilities. If the factory or workshop is located off the estate or off an industrial promotion area, then the entrepreneur shall be responsible for the construction of adequate facilities, and the construction cost shall be included in the total project cost. Such construction must conform to the approved standards.

40 ANNEX 1 Page 4 of 4 The Company shall establish and operate common technical service facilities at the estates and industrial promotion areas if there is adequate demand for such services. Charges shall be made for these services according to a fixed schedule, and these services shall progressively become financially self supporting. General The Board shall conduct the business of the Company in accordance with the Company's Act, and other relevant laws and regulations in the country. The Company shall recruit qualified personnel for its operations and establish terms and conditions of service as will enable it to attract such personnel. This policy statement shall be subject to review from time to time in accordance with government policies and strategies. EAPID October 31, 1977

41 ANNEX 2 KRNYA INDUSTRIAL ESTATES Organization Chart and Functional Relationships KIE BOARD].Manaing Director/Deputy Managing Director Personnel, Public Rltos ea P_ c :e % _ Extension Services Man ar A s Senior Financial Officer radvian (Pr. ect preparatiort I,Follo -uo) and Apraisa)t.. Senior I Senior Senenio S en ir Credito * I Offiicer otc I Ott ice ff.a Controller Controlle Accotntan. a Technical P~~~~~~~~~~~~~~~~~~oilot-up] Maricet 4,ng T.C Senior Senior Assistance I Engineerj Economoist L I ~~~~Manager RegIonal I Regional Regionl Regional Regional l l Engineer Reion Et Technical Followa-up Marketing Tot Accountant Assstace gfiecofficer Officer OfficPAer Project Idustrial to 1 IU -aar TO Of icr Estate Maaerhii-a 1 Technicia P-4APID October 31, 1977

42 ANNEX 3 KENYA INDUSTRIAL ESTATES Staffing Plan Filled as of Recruitments Department Position September Managing Director 1 Deputy Managing Director 1 Administration Manager I Senior Officer 1 Officer 2 1 l Legal Senior Officer 1 Officer 1 1 Projects Manager 1 Senior Engineer 1 Engineer 1 Senior Economist 1 Economist 2 Finance Manager 1 Rent Controller 1 Credit Controller 1 Senior Accountant 1 1 Accountant Extension Services (ES) Manager 1 Senor TAM'?Officer 1 TA- Officer 1 Senior Follow-up Officer 1 Follow-up Officer 1 Senior TSC Officer 1 TSC Officer 1 Senior Marketing Officer 1 Marketing Officer 1 Regions Manager 7 Accountant Engineer Economist Technical Advisors 11 5 RIDC/IPA Manager RIDC/IPA Technician Of which: Expatriates 11 5 Senior Professionals Others / Technical Assistance EAPID October 31, 1977

43 ANNEX 4 KENYA INDUSTRIAL ESTATES Resource Position June 30, 1976 (Sh million) Foreign Local Sources Uses DANIDA 5.57 Government/ICDC NORAD 2.20 Donated Capital 5.05 KfW Depreciation 3.47 SIDA Provisions 2.16 Net Loss (6.55) a/ Fixed Assets Loans Undisbursed Commitments Available for Commitment a/ After annual administration grant from Government. EAPID October 31, 1977

44 ANNEX 5 page 1 of 2 KENYA INDUSTRIAL ESTATES Analysis of Loans Approved as of June 30, 1976 (Amounts in Sh) No. % Amount x A. YEAR OF APPROVAL , , ,453, ,482, Total x B. SIZE Under 10, , ,000-25, , ,000-50, ,187, , , , , , ,208, ,000-1 million , million 1 1 1,300, Above 2 million 1 1 3,290, Total C. MATURITY 2-3 years , years , years ,408, Total _ D. INTEREST RATE - 8% E. ECONOMIC ACTIVITY Textiles ,094 7 Transport ,700 1 Wood Products ,127, Metals ,199 4 Food 5 6 4,204, Leather 6 7 1,622, Chemicals Building Materials ,410 1 Other ,355 6 Total *

45 ANNEX 5 page 2 of 2 No. % Amount % F. LOCATION Kisumu ,188, Kakamega ,594, Machakos ,546 4 Nyeri , Embu ,618, Total JL EAPID October 31, 1977

46 ANNEX 6 page 1 of 2 ICDC Analysis of Machinery Loans Approved as of June 30, 1976 (Amounts in Sh) A. SIZE B. LOCATION No. % Amount-/ % Under 10, ,000-25, ,549 25,000-50, ,075 50, , , , , ,341, ,000-1 million ,348, million 7 9 9,005, Above 2 million ,759, Total _ 100 Nairobi I ,712, Nairobi II ,616, Nairobi III ,833, Nakuru ,592, C. ECONOMIC ACTIVITY Total L Textiles ,955, Transport 2 3 1,372,475 2 Wood Products ,795,071 8 Metals ,580, Food 2 3 1,534,784 3 Leather ,331 1 Chemicals 5 6 5,088,984 8 Building Materials 2 3 1,402,128 2 Other ,514, Total Aj7a= 100 a/ DM approvals converted at 3.55 Sh/DM.

47 ANNEX 6 page 2 of 2 ICDC Machinery Portfolio ICDC has used KfW funds to provide loans for equipment for the factories on the Nairobi and Nakuru estates. As of June 30, 1976 KfW had committed Sh 64 million for these loans. ICDC has supplemented the KfW funds with approximately Sh 10 million in local funds. Approvals As of June 30, 1976 ICDC had approved 76 machinery loans totalling Sh 60.8 million. Approximately two-thirds by number and amount of these loans were for Nairobi, with the remaining one-third for Nakuru. Fifty percent of the loans are in the range of 100, ,000 Sh. Ten loans totalling Sh 31.8 million are over Sh 2.0 million in amount. The two largest categories of economic activity are metals and textiles (both 30% by amount). Portfolio and Arrears As of June 30, 1976, ICDC outstanding machinery loans totalled Sh 29.8 million compared to Sh 5.8 million in Arrears of more than 6 months totalled Sh 4.9 million or 16% of the outstanding portfolio, and the principal outstanding for loans with arrears of over six months amounted to 78% of the outstanding portfolio. EAPID October 31, 1977

48 ANNEX 7 KENYA INDUSTRIAL ESTATES Financial Statements for (Sh million) Year Ending June BALANCE SHEET Assets Current Assets Loan Portfolio Fixed Assets Total Assets Liabilities and Equity INCOME STATEMENTS Income Expenses Current Liabilities Government Loans a/ ICDC Loans a Government RIDP Grants Capital Reserve Accumulated Loss b/ (1.5) (2.4) (5.0) (6.5) Total Liabilities and Equity Rents Receivable Interest Receivable Service Charges Government Administration Grant Total Income Administrative Expenses Financial Expenses Depreciation Provisions / Total Expenses Net Loss a/ In 1977, these funds were converted into grants according to the terms of thle eriginal Aonors, except for Ysh 23.0 outstanding on KfW loans. b/ Net of annual administration grants from Government. c/ Against durrent liabilities. EAPID October 31, 1977

49 ANNEX 8 KENYA INDUSTRIAL ESTATES Operational Plan Industrial Estates and Industrial Promotion Areas June NAIROBI ESTATE Factories Constructed Factory Area (ft 2 ) 155, , , , , , ,000 Factories Occupied NAKURU ESTATE Factories Constructed Factory Area (ft 2 ) 83,000 83,000 83,000 83,000 83,000 83,000 83,000 Factories Occupied KISUMU ESTATE Factories Constr"cted , Factory Area (ft 2 ) 58,000 58,000 58,000 58,000 58,000 58,000 58,000 Factories Occupied MOMBASA ESTATE Factories Constrvcted Factory Area (ft 2 ) - 83,000 83,000 83,000 83,000 83,000 83,000 Factories Occupied ELDORET ESTATE Factories Constructed Factory Area (ft 2 ) - 42,000 63,000 84,000 84,000 84,000 84,000 Factory Occupied KAXAMEGA ESTATE Factories Constructed Factory Area (ft 2 ) ,000 42,000 63,000 84,000 Factories Occupied NYERI ESTATE Factories Constructed Factory Area (ft ) ,000 42,000 Factories Occupied RURAL INDUSTRIAL PROMOTION AREAS Factories Constructed Factory Area (ft 2 ) 6,000 27,000 42,000 67,000 94, , ,000 Factories Occupied 6, URBAN INDUSTRIAL PROMOTION AREAS Factories ConstrtJcted Factory Area (ft ) ,000 14,000 22,000 22,000 Factories Occupied TOTAL Factories Constructed Factory Ares (ft ) 302, , , , , , ,000 Factories Occupied MODERN SMALL INDUSTRIES OFF ESTATES Factories Occupied EAPID October 31, 1977

50 ANNEX 9 Page 1 of 2 1. Disbursements (Sh million) KENYA INDUSTRIAL ESTATES Projection Assumptions Loans Construction Estates are fully occupied in the following years: Mombasa , Kisumu , Eldoret Fifteen IPAs are fully occupied in 1981 and thirty modern small industries off the estates are occupied in Share Capital In 1977, Sh 50.0 million in former grants are converted to share capital. 3. Transfer of ICDC Small Loan Portfolio A net portfolio amounting to Ksh 40 million is assumed to be transferred to KIE in FY1978 along with the corresponding resources consisting of KfW borrowings of Ksh 35.2 million and Ksh 4.8 million local currency grants. 4. KIE Loans Terms KIE loans prior to the end of 1977 bear interest of 8% and have maturities of six years with one year grace. All KIE loans in 1978 and afterwards have interest of 11% and maturities of 10 years including two years grace. 5. Rental Income The following standard rental rates are assumed (in Shift. /mo 2 ). Rent for firms in operation less than three years assumed to be 0.50 Sh/ft. /mo. less than the standard rate Interest on short-term investments - 5%. 7. Administrative Expenses - increase 20% per year in real terms during KIE's reorganization until 1979 and 7% per year thereafter, with an additional 5% per year allowed for salary increases. 8. Interest Expense: IDA - 6% KfW Loans - 3% Other - 6%

51 ANNEX 9 Page 2 of 2 9. Provisions Loans - 8% of annual disbursements Interest due - 8% of annual income Rent due - 8% of annual income EAPID October 31, 1977

52 ANNEX 10 KENYA INDUSTRIAL ESTATES Projected Balance Sheet (Sh million) Year Ending June (act) ASSETS Cash and Short-term Investments Other Current Assets (net) Total Current Assets Loan Portfolio Provisions - (O0.94) (6.30) (9.92) (13.31) (16.65) (19.49) Net Loan Portfolio Fixed Assets (net) TOTAL ASSETS LIABILITIES & NETWORTH Current Liabilities Long-term Borrowing IDA 6% KfW 3% Other 6% Total Long-term - Borrowing ShareCapital Grants Reserves (1.49) Total Networth TOTAL LIABILITIES & NETWORTH EAPID October 31, 1977

53 ANNEX 11 KENYA INDUSTRIAL ESTATES Projected Income Statement ( ) (Sh million) Year Ending June (Act) REVENUE Interest on Short-term Investments a/ Interest on Loans Rents-a/ Administrative Grant Other TOTAL REVENUE EXPENSES Administrative Interest Depreciation Provisions on Portfolio 0.84b/ TOTAL EXPENSES Net Income (1.49) a/ Net of Provisions. b/ Against current liabilities. EAPID October 31, 1977

54 ANNEX 12 KENYA INDUSTRIAL ESTATES Projected Cash Flow ( ) (Sh million) Year Ending June SOURCES Net Profit Depreciation Provisions Loan Collections Long-term Borrowings IDA KfW Other Grants USES TOTAL SOURCES Loan Disbursements Borrowing Repayments IDA KfW Increase in Net Current Assets Increase in Fixed Assets TOTAL USES Increase in Cash 0.82 (13.31) (2.3) (5.47) 5.23 (0.29) EAPID October 31, 1977

55 AIREX 13 KENYA INDUSTRIAL ESTATES Actual and Projected Financial Ratios ( ) Actual Pro,ected Year Ending June A. Income Statement Items as % of Average Total Assets Interest from Loans Rents Government Grants Other Gross Income ,2 Less: Administrativer Expenses Interest 1.7' o Provisions o Depreciation Net Income (3.9) (4.1) (8.1) (2.3) B. Selected Income Items Cost of Debt as % of Average Long Term Debt , Income from Loans as % of Average Net Loan Portfolio Net Rent~/ as % of Average Net Fixed Assets Spread on Loans (1.7) (2.0) Spread on Filed Assets (1.7) (2.0) (1.7) (1.3) (2.6) C. Structural Ratios Long Term Debt/Networth neg neg Provisions as % of Loan Portfolio D. Debt Coverage Debt Service Coverage (DSC) n.a. n,a. n.a. n,a. n.a a_ Rent minua depreciation EAPID October

56 ANNEX 14 Kenya Small Scale Industry Project Estimated Schedule of Disbursements (US$ '000) Fiscal Years Cumulative 1979 First Quarter 600 Second Quarter 800 Third Quarter 1,000 Fourth Quarter 1,100 3, First Quarter 1,100 Second Quarter 900 Third Quarter 800 Fourth Quarter 700 7, First Quarter 700 Second Quarter 700 Third Quarter 600 Fourth Quarter 600 9, First Quarter 300 Second Quarter ,000 EAPID October 31, 1977

57 ANNEX 15 page 1 of 3 Eldoret Industrial Estate 1. The National Development Plan for proposed that several industrial estates would be constructed throughout the country in addition to those already in existence at Nairobi, Nakuru, and under construction at Mombasa and Kisumu. Of the industrial estates proposed in this plan, the one given the highest priority was that at Eldoret. 2. An agreement was signed in September 1974, between the Government of Denmark and the Government of Kenya whereby a Danish contribution of million Danish Kroner (US$ 3.29 million) would be granted for the Eldoret project. Of this sum 4.27 million Danish Kroner were for construction of buildings and workshops on the estate, and 6.80 million Danish Kroner (US$ 1.16 million) was for revolving credit fund for equipment for industries setting up on the estate. The Government of Kenya was to pay for the infrastructure. Even before the signing of the agreement,two Danish economists had been studying the feasibility for the estate project. The agreement was signed only after the economists had showed that there were a number of viable projects for new industries on the estate. The project was to consist not only of the industrial estate at Eldoret, but to include four Rural Industrial Development Centers at Kitale, Kericho, Kapsabet, and Kabarnet. 3. The study carried out by the Danish advisers covered not only the town of Eldoret, with a population of close to 20,000, but also the district around the town. This district has an area of 3,784 sq. kilometers and a population of 191,000 according to the census of Seventy percent of the large farms in Kenya (farms with an area of over 1,000 acres) are located in the Rift Valley Province of which Eldoret is one of the principal marketing centers. Fifty four of the 360 large farms in the Rift Valley Province are actually located in the district around Eldoret Town. As an indication of the extent of farm mechanization in the Eldoret District, it may be cited that 22% of the wheel tractors and 46% of all the combined harvesters in Kenya are in use in the Eldoret District. 4. Apart from the extensive livestock produce, including meat, dairy products, hides and skins which are produced and processed in this area, the province is also well known for its forests, which cover 560 sq.km. or 15% of a total area of 3,784 sq. kilometers. The forest resources account for 10 mechanized saw mills in and around Eldoret, and a number of small furniture factories. 5. The Danish survey of the district shows that Eldoret is well endowed with power, water, and good means of communication including road and rail links to the rest of the country. The rates of utility tariffs are comparable to those in Nairobi. A number of small industries already operate in the town

58 ANNEX 15 page 2 of 3 including plants manufacturing baby foods, grain mill products, confectionery, animal feeds, knitwear and hosiery, shoes, furniture, simple agricultural machinery and forest products. Two of these industries -- baby foods and knitwear -- are large enough to supply a national market. Two new large industrial enterprises have recently been established in Eldoret -- a textile mill now in its final stage of construction and a glucose and starch factory already in operation. Together they will employ over 1,000 workers. 6. The Danish survey also indicated a scope for the development of a 'number of small and medium industries based on the resources of the region, or in providing services for the agricultural sector. Among the projects approved or in the pipeline for the first phase of the Eldoret Industrial Estate are a number of such industries. These include a factory for processing agricultural straw into kraft paper, an animal feed plant, a mechanical workshop for repairing agricultural equipment, a factory for manufacture of transport equipment and trailers, and further facilities for providing spares and servicing of agricultural machinery. 7. In late 1975 and early 1976 differences of opinion developed between the Kenyan and the Danish governments on the procedures to be followed in implementing the terms of the agreement. These differences led to the withdrawal of the Danish grant for the construction of the Eldoret Estate early in 1976,' even though it was the clearly stated opinion of the Danish technical advisers and the representatives of DANIDA (Danish International Development Agency) in Kenya that the Eldoret Estate was a viable project and worthy of support. As there were a number of entrepreneurs who had already been identified as ready to set up industries on the estate and some who had even made down payments, the Kenya Government decided to go ahead with the Eldoret Estate Project on its own. In May 1976 it allocated Sh. 6 million for this purpose, and construction was started soon afterwards. It is anticipated that by the sulmmer of 1977 or soon afterwards, the first 12 factories will be completed as well as the infrastructure for the estate. 8. This first stage of the Eldoret industrial estate under construction consists of 12 sheds made up as follows: (1) four small sheds of about 1,500 sq. ft. each; (2) four medium-sized sheds of 3,000 sq.. ft. each; (3) four larger sheds of 4,000 sq. ft. each. 9. The estimated costs of construction are as follows: (1) small sheds: Sh. 900 per sq. meter; (2) medium-sized sheds: Sh. 668 per sq. meter; (3) large sheds: Sh. 590 per sq. meter.

59 ANNEX 15 page 3 of 3 These unit construction costs are not much higher than estates built a few years ago even though construction costs have increased considerably. More recent estimates for equipment costs for the 24 units of the Estate (12 first phase, 12 second phase) are around Sh. 20 million, compared to Sh. 9 million for the first eight projects. The investment costs for the second phase will be smaller than for Phase I. The high figure for investment for the first eight projects at Eldoret is due to the kraft paper plant which itself requires an investment of Sh. 3.2 million. Only one other project within the first eight requires an investment of more than Sh. 1 million. 10. The Eldoret Estate is the first estate of KIE to be constructed in two phases, thus making it possible to identify and approve projects and entrepreneurs before the completion of the factories. The second phase will only be constructed when projects are already approved for the majority of the sheds to be constructed. 11. The KIE staff at Eldoret include a regional manager and an economist; there is a vacancy for a Kenyan engineer. An expatriate technical adviser and a regional coordinator for the RIDC's and IPA's are needed. 12. The plans for Eldoret Estate include the establishment of a technical service center, and it is estimated that Sh. 1.2 million of equipment is needed for this center. Construction of the building for the center is not included in the first phase construction plans for lack of finance. So far no study has been made to determine whether the construction and equipping of a technical service center are justified on the basis of the needs and demand of the industries planned for the estate. 13. The industrial estate at Eldoret is probably the last estate of its type to be constructed by KIE for several years. There are enough viable projects and entrepreneurs to occupy factories on the estate in a comparatively short period. These new industries could create employment for workers in Eldoret town and provide an important stimulus to the future industrialization of the area. EAPID October 31, 1977

60 ANNEX 16 page 1 of 6 PRODUCT POSSIBLITIES FOR WORKSHOPS AND SMALL INDUSTRIES 1. There is a need to introduce new products to rural-and urban craftsmen since in several areas this sector suffers from intense competition on a limited number of product lines. Carpenters tend to concentrate on a few limited items such as tables and chairs, while metal workers concentrate upon such products as containers and charcoal braziers. Designs are copied from neighboring craftsmen and the skills and experience of artisans tend to be limited to a narrow range of products. Since local and total demand for these products are limited, profit margins are extremely low, savings and icentives for expansion almost non-existent. 2. Increasing the production efficiency or capacity of one carpenter or metal worker making these common items would have the effect of displacing other small-scale producers. It becomes important therefore for KIE to offer assistance in new product development and introduction; some of these products would involve actual innovation and adaptation to develop new items suited to local consumer or agricultural needs, while other products might involve goods previously imported or involve further processing of products of the large-scale industrial sector. 3. Possibilities for new products fall within the following categories: (1) processing of local materials; (2) industries and services to meet local producer and consumer demand; (3) ancillary or secondary industries linked to large-scale industries. Local Consumer Goods 4. Studies of consumption patterns in Eastern Africa highlight the low purchasing power in rural areas, resulting in low quantity and quality of goods purchased. In view of this low purchasing power there is a need to increase the availability and reduce the price of basic consumer goods. An inventory of common consumer goods indicates that the following craftbased product lines have high demand: (1) building materials such as cement blocks, tiles, pipes, bricks, lime, ceramics, hardware; (2) clothing and footwear; (3) manufacture and repair of agricultural implements, transport equipment and accessories. 5. Several of these categories are widely produced (e.g. furniture, metal consumer goods, steel windows) by artisan and small-scale enterprises. In these lines, new markets could be sought and product diversification introduced using existing craft skills.

61 ANNEX 16 page 2 of 6 Agro-Processing Industries 6. Recently the Government of Kenya has placed emphasis on encouraging industries based upon local resources; sugar refining, tanning, and kraft paper products (from wheat chaff) are examples of small to medium-scale agro-processing industries which KIE has recently supported following this trend. 7. One difficulty which KIE has encountered in developing agroindustries is that KIEs staff tend to be experienced in metal-mechanic industries, which in turn affects the industries identified and the project preparation capability. It is recognized that opportunities for agroprocessing and other local resource-based industries may have been missed due to the lack of specialized assistance in this area. There is, therefore, a strong case for including an agro-industry specialist in the specialized projects staff at headquarters. This specialist would identify and assist in preparing projects for small agro-industries, some of which might be implemented in several regions as part of the rural and urban workshops program. 8. A further difficulty is that some agro-processing industries cannot be justified economically on a small scale; and, in fact, Kenya already has a number of plants engaged in such processes on a larger scale. Such plants operate in the processing of tea, coffee, meat and dairy products as well as in the canning and dehydration of certain local fruits and vegetables. Even in the case of projects for milling animal feed and grain, processing oil seeds, tanning of leather, ginning and spinning of cotton and sawmills, and plywood and veneer manufacturing, the investments required may be in the order of at least medium-sized plants. 9. The development of further small-scale industries in this field of processing of agricultural products therefore needs careful study and project appraisal. However, even where the primary processing of the agricultural materials may require larger-scale operations there will be scope for smallscale industrial development as secondary processing as in the case of manufacture of jam, sauces, biscuits, confectionery, leather products, cheeses, canning of certain vegetables, fruit and fish items, and a variety of other food products. There is also scope for small-scale industries acting as suppliers of items and services needed by large-scale industries particularly containers, packaging materials, transport equipment, tools, protective clothing, office or workshop furniture and accessories, etc. 10. Furthermore, many resource-based industries (e.g. sawmills, sugar refinery, tannery) need to be located near the sources of raw materials because of the large amount of materials that need to be transported in relation to the final products and the extensive space required for storage and handling. These features, often combined with waste disposal problems, make them unsuitable for location on industrial estates.

62 ANNEX 16 page 3 of 6 Manufacture and repair of agricultural tools and equipment 11. Over 150 metal working units are working regularly with the RIDP. Most make charcoal braziers, containers, random spare parts, and metal windows. These producers could be organized to make a variety of intermediate equipment for cultivation, processing, storage and transport for the agricultural sector. 12. There is a wide range of improved hand- and animal-drawn agricultural tools and processing equipment currently available in Kenya and other countries. Some of this equipment requires further testing for its suitability for use in various regions of Kenya. In other cases, training of extension agents, farmers and small-scale manufacturers is required to increase demand through dissemination of information on use and production capabilities. 13. Purchasing power in the rural areas is a major constraint in sales of agricultural implements as well as other goods. One attractive feature of low cost agricultural implements is that it can help raise agricultural production and increase incomes, thus improving consumer demand in rural areas. 14. Most of the following items require simple forging tols, welding equipment and some jigs and fixtures. In some cases, certain components may require more sophisticated equipment; in a few, modern small or mediumscale production would be more appropriate than upgraded blacksmithing and metal-working operations. A. CULTIVATION AND HARVESTING TOOLS/EQUIPMENT (1) two furrow ploughs; (2) single row planters; (3) interior cultivators; (4) spike tooth harrows; (5) various types of ploughs, spares; (6) ox-drawn weeders; (7) hand planter/seeder; (8) rotating hand planter; (9) tractor accessories (10) spraying equipment; (11) hand pumps; (12) windmills and pumps; (13) plough and tool bar; (14) flat valve pump; (15) hoes; (16) panga and other weeding tools; (17) axes.

63 ANNEX 16 page 4 of 6 B. PROCESSING EQUIPMENT C. STORAGE (1) threshers; (2) winnowers; (3) maize and groundnut shellers; (4) simple oil presses; (5) feed mixers; (6) solar heat drier; (7) kerosene incubators; (8) pyrethene and tobacco dryers for small farm. (1) storage bins for grains and cereals; (2) small milk coolers; (3) water storage tank; (4) silo. D. TRANSPORTATION (1) ox-, donkey-, hand-, and bicycle carts of various designs; (2) wheelbarrows; (3) trailers. Choice and Size of Technology 15. There are several food processing industries for which alternative investments and degrees of capital intensity may be chosen. In some cases prices and quality are comparable; in others different sized investments result in products suited for distinct market segments. Woodworking 16. Rural and urban carpentry workshops probably represent the largest number of small-scale units. As mentioned earlier, the problem of competition for a limited market for a narrow line of products is especially prevalent in wood working. Diversification and new product development is essential in these lines if KIE financial and technical assistance is to result in a net increase in production and employment of carpenters. If KIE limits its assistance to funds for tools and working capital, the net result is likely to be the displacement of informal sector carpenters with a few carpentry units making the same, or slightly improved tables and chairs. 17. In Kenya, the craftsmanship of carpenters is generally good, i.e. of a standard acceptable to local, regional or even in some cases export markets; some upgrading of skills may be required with the introduction of new products and processes, and in particular in the use of more sophisticated machinery. However, the major training required is in design and in

64 ANNEX 16 page 5 of 6 such areas of management, as costing and bookkeeping. Another problem is the acute shortage of timber seasoning facilities. 18. Craftsman guides or other informal marketing associations could be developed among carpenters from various RIDCs and IPAs to enable them to obtain and meet larger orders, especially for smaller wooden items which are easier to transport. 19. Product possiblities for rural and urban carpentry workshops include: (1) packing crates (tea, tobacco, soft drinks); (2) pallets; (3) doors, windown frames; (4) clothing pegs and hangers; (5) sports goods; (6) drafting equipment; (7) toothpicks; (8) neck yokes for oxen; (9) television and radio cases; (10) special furniture for schools, gymnasiums, hospitals, clubs, hotels, restaurants, etc.; (11) photo and picture frames; (12) bobbins; (13) educational supplies (rulers, pencils); (14) loom accessories; (15) toys; (16) lamp stands; (17) cork products; (18) parquet flooring; (19) prefabricated housing; (20) carvings; (21) cedarwood oil; (22) orthopedic items; (23) patterns for foundaries. 20. Wood-related industries suitable for larger-scale enterprises (investments exceeding Sh 500,000) include: sawmills, splints and veneers; plywood mills; particle board; and kiln drying facilities.

65 ANNEX 16 page 6 of 6 PROCESSED FOODS WHICH ARE PRESENTLY IMPORTED -Source Canned Beef Meat Extracts Dried Meat Cereal Grains Breads, Cakes Preserved Fruit (canned) Potato Flour, Flakes Tanzania U.K. U.S., Netherlands Netherlands U.K. France U.K. Preserved Vegetables Cocoa Butter Margarine Vinegar Fish Oil Olive Oil Linseed Oil Castor Oil Other Vegetable Oils U.K. Tanzania U.K. Norway, U.K. France, Italy U.K., Germany Netherlands, India Netherlands, U.K. Source: Annual Trade Report of Tanzania, Kenya and Uganda EAPID October 31, 1977

66 ANNEX 17 Marketing and Sales Promotion 1. A quick survey of the industries set up by KIE on the various industrial estates reveals that one of the major problems facing the entrepreneurs is marketing for products. Many of these entrepreneurs came to KIE with only technical experience in producing the items they were to manufacture. The firms encountering difficulties explain their problems as inability to sell their products. However, the reasons differ from firm to firm. In some cases the entrepreneur has been unable to find suitable agents and outlets in the major centers. In other cases the design of the item has not taken sufficient account of consumer preferences. In other cases the product plans are too limited, and there are unexplored possibilities for diversification within the scope of the equipment and facilities available. Inferior quality and inability to conform to standards laid down are additional sources for marketing difficulties. Although KIE management has been aware of this problem for sometime, no satisfactory solution has yet been found. A marketing adviser from Germany has joined the team of foreign advisers in the Nairobi Headquarters and has been studying some aspects of the marketing problem. Some marketing assistance was also provided by SIDA at the Kisumu estate. 2. The diversity of products makes the marketing problem especially complex. Furthermore, the size of enterprises does not permit any extensive effort in sales promotion even if the entrepreneurs were disposed to devote funds to this purpose. The general level of entrepreneurship on the estates suggests that actual sales promotion is needed rather than marketing advice in general terms. 3. Despite the wide variety of items produced, a number of products that could be grouped together. Examples are household goods, building hardware, accessories for the textile industry, different types of clothing, and products catering to the agricultural sector. KIE should consider developing a sales promotion wing with a number of sales agents who would each be concerned with marketing a specific group of items. In order for such a plan to succeed persons are needed with sales experience and suitable connections with distributors. To put the whole operation on a commercial basis, the sales agents should be remunerated at least partially according to the amount of sales they generate. L. Before a final conclusion could be reached on the feasibility of such a scheme, it would be necessary to examine more closely the volume or potential sales that could be generated in relation to the costs of such a sales force. A further problem would be how to organize the sales wing to maintain its business character while maintaining organization links with a public corporation such as KIE. KIE should therefore have a study made of this problem by an experienced consultant. (The technical assistance funds included in this project could be used for this purpose.) The consultant would recommend the most suitable arrangement for servicing the marketing needs of the KIE enterprises including the feasibility of establishing an independent sales agency. EAPID October 31, 1977

67 ANNEX 18 KENYA INDUSTRIAL ESTATES Disbursement Percentages Credit Allocated % of (Expressed in Expenditures Category Dollar Equivalent) to be Financed (1) Sub-loans to: (a) Workshop 1,430,000 80% Enterprises (b) Eldoret Enter- 7,320,000 80% Drises and Private Factory Enterprises (2) Civil Works: (a) Factories 130,000 40% and ancillary facilities at Eldoret Industrial Estate (b) Workshops and 320,000 40% ancillary facilities in Industrial Promotion Areas (3) Technical assistance 800,000 80% and training TOTAL 10,000,000 EAPID October 31, 1977

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