Konza Feasibility Study 2010 (Summit Strategies)

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Konza Technology City

Summit Strategies Ltd

ICT Research & Consultancy

Summit Strategies ltd ICT Consultancy and Research

Landmark Plaza - 13th flr, Argwings Kodhek Road P O Box 62454 -00200, Nairobi Kenya

tel: +254 (20) 3673 925/2637177 cell+ 254(701)016555,722) 520090 [email protected] www.summitstrategies.co.ke

Summit Strategies Ltd

ICT Research & Consultancy Strategic information for decision support

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Summit Strategies Ltd

ICT Research & Consultancy

CREDITS

Prepared by:

Strategic information for decision support

in info-communication business

Summit Strategies ltd

ICT Consultancy and Research

Landmark Plaza - 13th flr, Argwings Kodhek Road

P O Box 62454 -00200, Nairobi Kenya

tel: +254 (20) 3673 925/2637177

cell+ 254(701)016555,722) 520090

[email protected]

www.summitstrategies.co.ke

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PREFACE

Konza Technology City presents a promising opportunity for Kenya to develop an alternative and complimentary path for economic development in line with Vision 2030 by exploiting ITES and IT Products in the ICT Park1_{. Konza also provides an}

opportunity as noted in the comparator countries to transform the country into a knowledge economy. Thus, this is a policy driven initiative as a tool for job creation and national transformation to launch the country to new frontiers. The first phase (2010-2015) commits heavy government exposure at political, legislative and funding levels as well as heavy marketing. Government can recoup this investment in later phases. The key focus areas of opportunity within the ITES are BPO, ITO, KPO and CSO as illustrated below:

BPO ITO KPO CSO

Horizontals Most developed with local captive markets dominating - services include contact centres and digitisation

Emerging with software development as key area of focus targeting local and foreign markets

Activity in this space not significant if any and therefore provide opportunity

Emerging with few companies starting animation

Verticals Banking Financial Service & Insurance Telecommunications

Government developing a shared service platform, digitisation

A key strategy to realise this goal includes:

• To sell demand and only then sell talent and other infrastructural advantages. Availability of talent and infrastructure provides a foundation but is not sufficient to excite investors. There exists unexploited local demand, which will provide comfort to international actors

• To sell Konza ICT Park as a product of the Eastern African region for the world. This takes advantage of the expanded East African Community market to provide language variety e.g. French from Rwanda and Burundi and the larger market access

• ITES industry is people-based and thus will drive uptake at Konza by shifting people – Centre of Excellence (COE) for Africa at Konza, affordable housing for 85% staff housing, mass transport system to Nairobi, low cost of space among others.

With the strong government commitment as demonstrated in the purchase of the 5000-acre land for the City, the project could help generate 15000 ITES/ electronic manufacturing direct jobs (and 45000 indirect jobs) nationally in phase 1 by 2015. Konza itself would host approximately 8000 direct jobs by 2015. Revenue generated arising from Konza ICT activities would be USD244 million annually. In phase 2, the jobs created nationally would rise to 39000 direct jobs with half of the direct jobs in Konza ICT Park. Konza ICT Park jobs are expected to generate USD607 million annually. By 2032 the national market would generate 349000 jobs (approximately 1 million indirect jobs). Konza ICT Park is expected to host the bulk of the direct jobs while the rest are in other private sector driven initiatives. Total revenue generated at Konza ICT Park is projected at USD5.4 billion by 2032. This market will initially be driven by regional demand and therefore Kenya can exploit the first mover advantage by positioning Konza ICT Park as a regional product for the world.

These figures are conservative compared with comparator countries and sites of Cyberjaya (Malaysia), Cyber City (Mauritius), SmartVillage (Egypt) among others and the projections are inspired by early trends of mature markets of India and Philippines. Recurring success factors in these comparator countries that inspire the design of Konza Technology City are:

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• A very focused and visionary government commitment over the long term to give the private sector comfort through a proof of concept in the first phase of the project

• Progressive inclusion of private sector to increasingly take over some of the risks

• Parks are increasingly generic in design and implementation thus the differentiator is the value addition demonstrated through commitment and a superior operating environment, strategic access to other markets in the neighbourhood of the Eastern African region, market insights, access to talent, geopolitical stability and macroeconomic stability • A self sustaining ecosystem within the City and its neighbourhood comprising Incubation, Science Park, Research and

Development, Centre of Excellence and universities.

This is a long-term project and will be developed through a sequenced approach with clear milestones driven by a high-level champion to handhold and transition the project into the future.

The government identified the need to establish Special Economic Zones (SEZs) to cater for industrial activities and requirements for agro-industrial, manufacturing, Information and Communications Technology and Small and Medium Enterprise (SME). The SEZ framework will address key factors that enhance Kenya’s competitiveness as an investment destination through infrastructure provision, simplification of business regulations, value chain integration and clustering, expanded market access for SEZ goods and services, and reduced taxation. SEZ will be a vehicle to enhance investment attractiveness at Konza Technology City. This document is organised in three volumes. Volume 1: Comparative and Competitive Advantage, addresses the universe of ITES and trends in electronic manufacturing mapped against Konza Technology City. Volume 2: Market Opportunity and Magnitude of Demand, addresses the market dynamics of ITES and electronics manufacturing and Volume 3: A Comparative Analysis of SEZ policy and legal regime, which is a benchmarking analysis of similar international sites on SEZ incentive regime characteristics.

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Vol 1 of 3

January 1st, 2011

Summit Strategies Ltd

ICT Research & Consultancy Strategic information for decision support

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Comparative and competitive

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Executive Summary

This is part of a three-volume report on the ICT Park component (also referred to as “ITES Park” or as the “BPO Park”) of the Konza Technology City (KTC) project. It comprises a Comparative and Competitive Analysis (Volume 1), a Demand Study (Volume 2) and a Comparative Analysis of SEZ Policy and Legal Regime (Volume 3). Volume 1 is underpinned by a benchmarking analysis of 11 similar sites internationally, out of which seven are selected in volume 3 due to its SEZ incentive regime characteristics. The study commissioned by International Finance Corporation (IFC) for the Ministry of Information and Communications of the Government of Kenya was undertaken in September/October 2010. The data sources include intensive literature review, in-depth face-to-face interviews and case studies. The analysis of these data provides the foundation of the findings of this report. The specific terms of reference for this report are annexed.

Comparator Parks selected for benchmarking

Park Country Nature/Motivation

International High Technology Park India Mature market

Ayala Technohub Philippines Mature market

University of Waterloo Research and Technology Park Canada Mature market

Invest Park Poland Varied

Smart Village Egypt Government initiative

Cyberjaya Malaysia Government initiative

Cyber City Mauritius Government initiative

Electronic Manufacturing

Saigon Hi-Tech Park Vietnam Government supported

Dalian High-Tech Zone China Mature market

Special Economic Zones

Panama Pacifico Panama Government supported

Aqaba Jordan Government supported

Konza Technology City presents a promising opportunity for Kenya to develop an alternative and complimentary path for economic development in line with Vision 2030 by exploiting ITES and IT products. Konza also provides an opportunity as noted in the comparator countries to transform the country into a knowledge economy. To realise this goal, certain actions need to be addressed at an early stage. At the outset, it should be clear this is principally a policy driven initiative.

Policy and regulatory framework

• Enhance efforts to re-brand the country with a positive image

• Establish a high level inter-ministerial consultative body for efficient coordination of ICT Park initiative • Reduce decision points regarding ITES/IT investment

• Commit to WTO/ ITA

• Approve SEZ policy and enact SEZ law or at the very least reform the incentive schemes in the EPZA Act • Establish a single window agency to ease doing business in the ICT Park

• Enact data protection law and strengthen intellectual property rights laws. Facilitation

• Government to handhold for the first five years and commit to develop requisite infrastructure as proof of concept • Work on cost structure as a low cost destination in the near term

• Enhance incentives as proposed in SEZ policy. Operational

• Position Konza ICT Park as a product of Eastern Africa • Establish a proactive ICT Park management

• Create an entity - Konza Development Authority - to drive its development • Mount a targeted high profile marketing - Sell Demand

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• Coordinate talent development

• Allow mixed use in the park for sustainability

• Promote an eco-system by building a Science & Technology Park, Incubation Centre and Centre of Excellence within the Park

• Manage local competition among government sponsored programmes – Dongo Kundu should not offer ICT Park services for now in competition with Konza

Industry level

• Strengthen industry lobby platform to create standards and undertake self regulation To catalyse the market and enhance the opportunity for the ICT Park we propose the following strategy:

- Sell demand and only then sell talent and other infrastructural advantages. Availability of talent and infrastructure

provides a foundation but is not sufficient to excite investors. There exists unexploited local demand, which will provide comfort to international actors.

- Shift to targeted and high profile marketing. Isolate no more than 3 countries, 3 major companies, 3 outsourcing companies and 3 services and focus national effort around them from a very high political level.

- Sell Konza as a product of the Eastern African region for the world. Exploit East African Community to provide language variety e.g. French from Rwanda and Burundi and the larger market access.

- Ease of doing business, competitiveness indices etc pose a very serious barrier to international investors. The country rating is not attractive for new investors and a deliberate action to improve the country’s perception and ranking is critical. In the meantime, introduce a world-class ITES player as an anchor investor to set market standards and catalyse growth of the local market. Country’s ratings do not matter to the local companies but those outsourcing from outside the country want an international player like IBM or Accenture etc to guarantee quality before they accept to outsource locally.

- ITES industry is people based and thus drives uptake at Konza by shifting people – Centre of Excellence (COE) for Africa at Konza, affordable housing for 85% staff housing (US$60), mass transport system to Nairobi, low cost of space ( US$4 per sq ft per year).

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Data sources and process

As set out in the Inception Report1_{, the Study analysis is founded on a number of data sources providing both primary data as} well as secondary data as described below.

• Literature review – conducted extensive desk and internet research based on a structured document interrogation

guide. The guide seeks to address the various components of the TORs. In this regard, at an early stage, the consultant developed an online space to share documents and online resources among the local and international members of the team. Some of the key resources address the evolution of ITES, the evolution of ICT Parks, the market demand and the direction of the market, the response by government to nurture the industry through options like Special Economic Zones(SEZ), country experiences as well as case studies for the outsourcing companies. At the local level, the literature review focused on the evolution of the ITES industry and the emerging demand and government responses through policy, strategic and institutional infrastructures. Note that ITES is taken to include electronic manufacturing/assembly.

• Case studies review – conducted detailed review of comparator countries with a focus on incentive frameworks like the Special Economic Zones to distil the policy and legal regime and lessons for Kenya and in particular the draft SEZ policy and SEZ Bill. Other case studies is an in-depth review of comparator ICT Parks and lessons for Konza.

The literature review helped shape the development of in-depth interview tools.

• Questionnaire interviews –Purposively selected 142 respondents and sent a questionnaire online. The respondents

represent regional distribution and are built from the list of those that have expressed interest in Kenya. Office of Permanent Secretary, Ministry of Information and Communications, Kenya ICT Board, BPO/ITES Working Group of the Prime Minister’s Office and the consultant’s in–house databases captured these potential respondents. Other sources include the International Association of Professional Outsourcers where the consultant selected the top 100. The key focus of this interview was to present empirical data on the awareness of Kenya as an outsourcing destination, the typical features of locators and especially the level of investment that a company can typically commit, the demand for space if any and staff growth projections. This information helps to get a market response and shape the modelling for demand.

The response was extremely low from this process suggesting limited interest or awareness.

• In-depth interviews -Selected key informants in the industry representing the leading actors in the ITES space (e.g.

Accenture, IBM, Avasant), local companies that are already outsourcing (e.g. Kenya Airways), local ITES outsourcing companies e.g. Horizon Contact Centres for an in-depth interview. Other key informants include Kenya government and specifically the Ministry of Information and Communications, Office of the President, Prime Minister’s office, Ministry of Higher Education and Ministry of Trade. The team interviewed over 40 such stakeholders representing all parts of the ITES value chain.

The list of the respondents is annexed.

• India ITES investor conference -the consultant participated in an event organised by ITES/BPO Working Group of the

Prime Minister’s office and met over 20 ITES potential investors interested in the African and Kenyan ITES market. They had very interesting insights on what works from their broad experiences. They had visited other markets in Africa and Asia and therefore were in a position to give a comparative perspective of the Kenyan ITES opportunity.

This extremely rich source of primary and secondary data provides a firm foundation for analysis and the development of this Report.

These three volumes of reports represent a reasonable draft of mainly desk research of comparable international ICT park sites supported by a limited number of sector interviews, both local and international. The reports’ conclusions could have been enhanced if the Consultants had also the opportunity to engage directly with the zone authorities of the comparator sites, zone developers and main locators, and government stakeholders at the comparator sites to better establish the factors that led those governments to take a policy decision to set up and support initial ITES park development, the similarities or differences with Kenya and Konza, the implementation steps, process, costs and incentive regime involved, and whether the original goals were met in the end. Reliance of these reports by the GOK to support policy decisions needs to be construed in light of the extent of study represented by these reports.

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The IT universe - defining the space for ITES and IT products

Information technology as discussed in this chapter has revolutionalised services industry and to support this industry has spawned IT products industry. This chapter reviews both the IT services as well as the products and explores a space for Konza.

The emerging universe of ITES as an opportunity

Kenya has taken a bold decision to exploit ICT as a potential alternative path for its quest for development and incorporated ICT at the heart of the Vision 2030 strategy. The key expected outcome is job creation and the contribution to the GDP in the growth of the economy by up to 10% per year to place the country firmly in the Newly Industrialised Country (NIC) status by 2030. Through this strategy, Kenya intends to take advantage of the fast growing IT-Enabled Services (ITES) sector and concentrate this effort under Konza ICT Park as a flagship project.

Quest for the ITES development; Setting the ITES roadmap through Kenya Vision 2030

Kenya’s desire to exploit ITES has been consistent and marked by a high-level statement of initiatives as well as action starting with inclusion of Business Process Outsourcing (BPO), a sub sector of ITES in Vision 2030 and investment of key supporting infrastructure. Kenya Vision 2030 aims to make Kenya “the globally competitive and prosperous country with a high quality of life by 2030”. The achievement of this Vision is intended to firmly ground Kenya’s position as the business hub for not only East Africa but also the African region. Vision 2030 is anchored on three key pillars, namely : Economic; Social; and Political Governance. The ITES sector, which encompasses the BPO, is identified as one of the six sectors to contribute to 10 per cent economic growth rate per annum. To make Kenya one of the top off-shoring destinations in Africa, the government aims to:

• Attract at least five major leading information technology (IT) suppliers, and at least ten large multinational companies and global BPO players to the country; and

• Strengthen at least five local players to become local champions through stand-alone operations or joint ventures. The Vision 2030 therefore positioned ICT as an economic driver and sought to address the enabling environment for the sector. Key components for the enabling environment are ICT infrastructure and the institutional support infrastructure. Konza ICT Park is intended as the focal point of the concentrated national effort to exploit ICT.

Supporting ICT infrastructure

In the Vision 2030, the government identified and prioritised the basic infrastructure that needs to be in place and has proceeded to address these infrastructural issues. Key among them is bandwidth. Since 2009, international bandwidth is connected to the country via three submarine optic fibres initiatives namely, TEAMS, SEACOM and now EASSy and shortly LION. The submarine optic fibre cables now provide the necessary redundancy for international connectivity as well as the quantity. With the commissioning of the submarine fibre initiatives, the price of bandwidth fell from a high of USD6000 to a range of USD400 per MB and the government wants the price to come down to USD50, a price that the government believes will enable Kenya to compete favourably with other leading outsourcing destinations.

To distribute this capacity to the hinterland, the government as well as private sector have rolled out optic fibre cables across the country. The government’s initiative, National Optic Fibre Backbone Initiative (NOFBI) - a 4500 km fibre initiative, was intended to reach out to the rural areas to cover 80% of the districts. Simultaneously, the private sector led by the Kenya Data Network (KDN) has built a countrywide fibre network. Other operators include Telkom Kenya Ltd and Kenya Power & Lighting Company for national connectivity. Additionally, connectivity in major towns has been realised through metro rings in major cities provided by Jamii Telkom, Access Kenya and Wananchi Telkom. In total, the country has slightly over 10 000 km of optic fibre built across the country.

The government through Communications Commission of Kenya (CCK) has reviewed the operating framework to support the introduction of broadband wireless through 3G and Wimax thus entrenching high capacity bandwidth across the country. The key foundational infrastructure for ITES is therefore progressively expanding.

Supporting institutional infrastructure

Alongside the technological infrastructure, the government established institutions to stimulate the growth of ITES. Establishment of the Kenya ICT Board (KICTB) and BPO/ITES Working Group in the Prime Minister’s Office by the government demonstrate a continuing commitment and focus in this regard.

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Challenges defining ITES

With the fast evolution of the ITES, the definitions have changed over time to keep pace with its changes as well as the perception of the promoters. For the purpose of this report, we take ITES to include and encompass the following:

• Business process outsourcing (BPO) • Information technology outsourcing (ITO) • Knowledge process outsourcing (KPO) • Creative services outsourcing (CSO)

Further details of the respective category is described in Table 1

Table 1: Components of ITES: horizontal and vertical processes

HORIZONTAL PROCESSES

Business Process Outsourcing

Information Technology

Outsourcing Knowledge Process Outsourcing Creative Services Outsourcing

Contact Centres Software & Applications _Development Finance and Accounting _Outsourcing Animation

Back Office Operations Embedded Systems Legal Outsourcing Game Development

Transcription Data Centre, Systems & Network _{Administration} Research and _Development Content Development _{and Writing}

Data Entry IT Project Management and _Consulting Medical Outsourcing Advertising and _Marketing

Digitization E-Commerce Market Research and _Analytics Musical Arrangement _{and Scoring}

Systems Integration Education and Training Film Production

IT Infrastructure Management General Consulting HR Outsourcing TYPICAL VERTICAL PROCESSES

Top 4 Banking, Financial _{Services and Insurance} Telecommunications Retail, Travel and _Hospitality Supply Management

Others Pharmaceuticals Automotive Life sciences Healthcare

Media Engineering Publishing Marketing

In the rest of the report, ITES encompasses the activities as set out in Table 1 unless explicitly indicated otherwise.

The growing importance of ITES

The cornerstone of ITES is the transformation of services from its proximity to the point of consumption. Before the advent and mainstreaming ITES, services had to be provided at the point of production and consumption. Information Technology (IT) unleashed and indeed divorced production of services from the proximity of the consumption and established a value chain. With IT therefore, suppliers could provide services far from the point of consumption. Reducing communications costs opened up access to cheaper labour costs and those labour intensive costs could be outsourced across town or across countries – this is essentially labour arbitrage. This opened up the opportunities to trade in services and hence the birth of the ITES.

With the increasing tradability of the services across borders, ITES became part of the GATS effort under Mode 1 export of services, since then, has been tracked as an export service by UNCTAD, and is growing at a rapid pace. From this humble beginning, ITES is now mainstreamed and comprises many services being offered and enabled by IT. Companies

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in developed countries notably the USA, Europe and Asia have exploited ITES to outsource certain activities to build competitiveness in their markets by reducing costs, creating efficiencies and often improving quality of their production. On the other hand, countries providing the outsourced services have gained in job creation, improvement of skills, closer linkages with developed countries as well as received increased Foreign Direct Investment (FDI). ITES is growing rapidly and is expected to continue the rapid growth. While the growth projections by research organisations differ, all however agree that ITES will continue to experience rapid growth. International Data Corporation (IDC) for example estimated that worldwide offshore IT spend would rise from USD32Billion in 2010 to USD42Billion in 2013 while world wide BPO spend is expected to rise from USD119B to USD148B in the period as illustrated in Figure 1.

Figure 1: Worldwide off shore IT and BPO spend projections

Source: IDC

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NASSCOM, the National ITES Association of India, on the other hand projects a growth of the BPO market from the USD200Billion in 2010 to USD890Billion by 2020 as illustrated in Table 2.

Table 2: BPO market projections (US$ 000)

Segment

2010

2020

Source

BPO Market

200,000,000

890,000,000

NASSCOM

ITES and BPO

122,000,000+

Mckinsey & Co

Breakdown

Banking 40,000,000

Insurance 35,000,000

Travel/Hospitality 12,000,000

Automotive 12,000,000

Telecommunications 10,000,000

Pharmaceuticals 8,000,000

Finance & Accounts, Human Resource 25,000,000

Others 15,000,000

Source: NASSCOM, Mckinsey & Company

This promise of a rapidly growing ITES with attendant job creation nudged Kenya to take a decision to pursue ITES as an additional growth path. Thus, Kenya desires to leverage these market opportunities by developing the ITES sector in order to play a significant role in generating employment and economic growth. This study seeks to quantify the demand2_{and the} features that are critical to incentivise actors in the ITES space to not only operate in Kenya but also locate in Konza. Such incentives include operationalisation of a SEZ framework.3

ITES opportunity; mapping Kenya in the ITES space

The range of the services under ITES is broad and increases by the day. Where is Kenya and what is the long-term strategy to exploit the space?

Firstly, it is important to note that ITES has evolved and continues to evolve. In mid 90s, the outsourced activities were simple rule-based tasks typically claims and loan processing, and transcription services. With increasing skill on the part of the outsourcing country and more confidence by the client company, the range and the complexity increased to high-level problem solving in early 2000. Today, ITES is firmly moving towards expert knowledge services. This includes research and development, legal and customer analytics. This evolution is illustrated in Figure 2.

2 The quantification of demand is presented in an accompanying report V2/3 3 The incentive framework is discussed in accompanying report V3/3

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Figure 2: The evolving ITES landscape Source: THOLONS

The evolution of the ITES in terms of skill and complexity of knowledge required to accomplish an increasing range of activities provides a framework to understand the ITES space and where a country is positioned. To understand the ITES space and where Kenya fits, we categorise the services based on skills, ranging from low skills and knowledge intensity requirement, to medium or intermediate and to high-end skills and complexity.

The lowest level is the low skilled services with lowest entry barriers in terms of skill, scale and the technology. Such services include data entry, call centres and general transcription services etc. In general, services at this level are routine and the process is fully scripted requiring mostly the working knowledge of the relevant language. A feature of this level of activity is few economies of scale and therefore does not necessarily need the development of other manufacturing and/or other services for its competitiveness. In this regard, the spillover in terms of high supplier linkages is low (UNCTAD, 2004).

Medium skill services require advanced skills to undertake tasks that are more complex. These tasks require judgement by the worker and the interaction is usually unscripted. Thus, specialised training would be required and may offer economies of scale and linkage to other services and industry. The tasks include secretarial, data capture and processing, bookkeeping, account enquiries and specialised transcription. According to UNCTAD 2004, some of the services may require a critical mass of different skills in one location to provide a whole package.

High-skill services are professional services and have the most skill intensive requirements. This spans all areas including finance and accounting, medical, legal, engineering, research, and design as well as software development. Due to their professional nature, these services require high levels of specialisation. They require agglomeration economies with different skills and enterprises interacting with each other to share work and stimulate knowledge flows. This requires a location that is conducive to this work (UNCTAD 2004).

Mapping this categorisation on the Kenyan efforts to develop the ITES provides a framework to understand the current positioning and how to move forward. It also provides the framework and inputs required to move higher in the ITES value chain.

The range of activities spawned by the ITES differs widely cutting across most professional services, internet related services, health, education etc. Davis et al (2002) categorises the services broadly as administrative, customer service and technical services.

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Administrative services are generally back-office services to support the organisation outsourcing the services. The skill range cuts across the whole spectrum i.e. from low skill level of knowledge intensity to the high-end skill edge. Thus low end include routine administrative work like document conversion to high-end accounting and the payroll or legal services.

Customer services include the front-end activities that interface with the customer. Just like administrative services, the skill level and the knowledge intensity requirement range from the low to the high-end skill and knowledge intensity. This range from the call centres services to high-end problem and dispute resolution.

Technical services require highly specialised IT skills and range from transcription to high-end software development, research and development among others.

Mapping the category of services offered to the skill level and the knowledge intensity required provide a framework to deduce a model to define a space that Kenya could operate from. The taxonomy of the ITES is illustrated in Table 3.

Table 3: Taxonomy of ITES

Skill level and knowledge intensity

administrative Customer service Technical

Low

(routine – scripted)

Data entry; clerical; digitization, document conversion

Call centre; routine queries; order taking; direct mail order processing, lead generation, Public Relation, Marketing alerts, sales and marketing, emergency alerts, political campaigns

Transcription; indexing and abstracting, captioning

Intermediate ( judgement, unscripted interaction)

Secretarial; data capture and processing; mailing lists; credit card application processing; bookkeeping, Human resource outsourcing; record management; legal outsourcing; Benefit Administration; record and file management

Account queries; after sales support; insurance claim processing, processing of warranty card and claims; help desk

Website design and

management; medical records management; specialised transcription – medical, financial, legal High (professional services ) Accounting; payroll;

electronic publishing; facilities management; management consultancy; legal services; logistics support; procurement; supply chain management; contract management; Due diligence; Medical coding; Billing and collection; Medical forms processing

Problem and dispute resolution; Software development; R&D; Application hosting; technical writing; computer aided design; tele- medicine, engineering design; digital animation; data mining;

Source; Adapted from Davis et al (2002)

A feature to be noted is that highly complex tasks have increasingly higher margins. As illustrated in Table 4, the margins for BPO are lower than that of KPO. This is a motivation to migrate to high-end value services.

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Table 4: Differentiators BPO and KPO

Parameters BPO KPO

Expertise Process specific Domain specific along with analytical, interpretation and judgmental capabilities

Resource Pool Graduates Professionals – Doctors, Lawyers, Bio-technology professionals, MBAs, etc.

Impact on core business Low-Medium High -impact on top line

Nature of work Commoditized (Industrialized and repetitive activities)

Customized

Billing rates Low-Medium Medium-High

Margins 25-35% 40-45%

Impact on client business Low-Medium High

Dependence on IT /Telecom High Medium

Scalability High Medium

Source: THOLONS

The nascent ITES in Kenya; a private sector response

Private sector entrepreneurs responded and entered the market to exploit the opportunity partly responding to the government initiative or responding to the international evolution. As early as 2007, heightened interest and the nascent steps in the early years are illustrated in Figure 3.

Figure 3: The nascent steps

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From this position at the time of a 2007 study by Summit Strategies, many of these companies have closed down despite the continuing effort of the government to improve the operating environment for the ITES4_{. This study takes into account and} learns from this experience and a range of studies carried out by the local as well as international consultants to help develop a model for future growth of the sector.

The quick scan of published literature indicates that Kenya is making an entry at the low level. This has its challenges that include stiff competition at this level and therefore low margins.

Electronic manufacturing opportunity and trends

In this section, we review the opportunity offered by manufacturing and assembly of IT products taking advantage of Information Trade Agreement (ITA)

By early 90’s, the increasing role of ICT in national development was evident and access of ICT equipment was critical for national development. In 1996, governments working under WTO framework concluded the Information Technology Agreement (ITA) and for the participating countries, ITA set a timeline for eventual elimination of tariff barriers. This unleashed faster growth of IT products for countries manufacturing the goods and a new source of export revenue as well as job creation. IT products provide an opportunity for Kenya to generate jobs and export revenue and the framework of how this can be achieved as a compliment to ITES is discussed in this report.

Information Technology products

A study by Anderson and Mohs (2010) posits that ITA immensely contributed to the expansion of ITA trade rising from USD1.2 Trillion to USD4 Trillion over a 12-year period from 1999. The paper demonstrates huge national growth of ITA trade as facilitated by ITA in the case of China, Philippines and Malaysia as well as Vietnam. In the case of China, the country gained Most Favoured Nation (MFN) access to major markets and became an increasingly attractive location for export oriented FDI (Anderson & Mohs 2010 p 15). These IT products are illustrated in Table 5.

Table 5; Representative ITA products and number of HS codes by attachment

Number of HS Codes Sample products

Attachment A1 112 Computers and computer peripherals: personal computers, laptops, work station, monitors, keyboards, hard drives, CD-ROMS drives, smart cards, printers, scanners, and other input/output units

Telecommunications equipment: telephone sets, cordless phones, mobile handsets, pagers, answering machines, switches, routers, hubs, modems, fibre optic cables

Semiconductors: microprocessors, integrated circuits, printed circuits, diodes, resistors

Software: magnetic tapes, unrecorded media

Office equipment: certain photocopy machines, fax machines, cash registers, adding machines, calculators, automatic teller machines

Scientific and measuring devices: spectrometers, chromatographs, flow meters, gauges, optical radiation devices

Other: loudspeakers, still digital cameras parts

Attachment A2 78 Semi-conductor manufacturing equipment (SME) : etching and stripping apparatus, vapour deposition devices, sawing and dicing machines for wafers, spinners, ion implanters, water transport, handling and storage machines, injection moulds, optical instruments, parts and accessories

Attachment B 13 Computers, electric amplifiers, flat panel displays, networks equipment, monitors, pagers, CD and DVD drives, plotters, printed circuit assemblies, removable storage devices, set-top boxes

Source: Anderson & Mohs (2010) adapted from WTO.

4 A more detailed discussion on the challenges of the local efforts on BPO is discussed in the accompanying report addressing quantification of demand.

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Countries taking advantage of the ITA framework manufacture or assemble the IT products as discussed in the following section.

Contract manufacturing and electronic assembly

Contract manufacturing is a form of outsourcing where a firm manufactures components or products for another firm. By consolidating manufacturing from many clients, a contract manufacturer is able to build economies of scale and therefore build competitiveness on cost – again labour arbitrage. The contracting firm on the other hand is able to produce IT products without investing in factories. Key inputs quoted by the contract manufacturer include processes, labour, tooling, and material costs5_. Countries with low labour costs as long as they are skilled have an opportunity to tap into this outsourcing business. At least three comparator sites6_{namely China, Vietnam and Bangalore provide contract manufacturing. The leading companies include} Hon Hai Precision Industries (Foxconn), and Jabil noted in the comparator sites. The services the contract manufacturing offered are mainly printed circuit board fabrication and assembly of complete units in consumer electronics among others. Most of the research and design for the comparators countries took place in Taiwan, Hong Kong and USA. Raw material was supplied from China, Taiwan, Japan and South Korea.

To compete on price implies a low margin for manufacturers and therefore it is a volume business. Access to a huge labour pool is critical. All the manufacturing sites were under a SEZ framework. In addition to generating export revenue for the comparator country, the contract manufacturing created jobs. Vietnam for example reported that 300,000 jobs were created and sustained by electronic manufacturing by 2009.

On the other hand, assembly sites include Panama, Shenzhen and Aqaba. The client companies include Dell, IBM, HP and Apple. Assembly is downstream business and skill requirement is lower than contract manufacturing.

The Kenyan experience in electronic assembly

The government promoted local assembly in order to help build skills and capacity in the assembly of IT equipment. Some of the initiatives include:

Zebra Computer a product of Telkom Kenya assembled in Gilgil Telecommunications Industries. The assembly was discontinued

with the declining fortunes of the mother company.

Madaraka Computer was an initiative of the Ministry of Information and Communications to assemble cheap computers. Three

universities namely University of Nairobi, Jomo Kenyatta University of Agriculture and Technology, and Strathmore University were to act as incubators of the project while Kenya Technical Training College (KCCT - now Multimedia University) was to be the implementing agency. The initiative funded by Communications Commission of Kenya (CCK) and Safaricom Foundation for up to USD0.25M intended that the universities would do research for the components and pass over the findings to local assemblers. Target cost of the computer was projected at USD450,7_{however the initiative did not take off as planned.}

Mecer Computers, a South African firm started assembling computers in the export-processing zone but had to close mid 2004.

It cited high import tariffs of the inputs as the barrier8_.

Lessons in assembly

In all these instances illustrated, the following issues were some of the contributory factors to discontinuance of electronic assembly initiatives:

- branding was an issue - the brands were unknown

- the focus of the local market was inadequate to create a sustainable business - the taxation regime favoured completely assembled units.

These issues will need to be addressed for assembly to be a promising activity in Konza.

Clustering effect: the case for Konza ICT Park

To place Kenya on the alternative growth path of development, the government acquired 5000 acres of land at Konza, 60 km from Nairobi along Nairobi Mombasa highway and commits to develop the site as the confluence of ITES activities in Kenya. An advantage cited is that by clustering, there are gains to be realised through linkages among the activities, and for policy makers 5 source; http://en.wikipedia.org/wiki/Contract_manufacturer

6 Are Park sites and countries used as comparators for the purpose of the study? These are discussed in the following section. 7 http://www.balancingact-africa.com/news/en/issue-no-340/computing/kenya-to-assemble-cheaper-computers

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it provides a 360 degree view of the sector, and easy to zone the activities within Konza. By being a Greenfield, the project moves away from legacy planning constraints and therefore will be custom built.

In our quick overview of the comparator sites (discussed in the following sections), we came across Greenfield sites that have been developed ground up. This is notably the case of the Malaysia MSC and HITEC city in India and recent projects in China among others. The initial finding is that in promoting such projects, governments have to be very heavily involved in high speed or dedicated transport facilities between the site to the main cities. Secondly, the government has to consider and provide a set of incentives to encourage investors to do business in comparator countries and particularly to decide to locate to Konza. Comparator countries have used Special Economic Zone (SEZ) framework to provide the necessary incentives for growth. SEZ Bill in Kenya has been developed in this context and is now ready for presentation to parliament.

This study illustrates lessons from comparator IT Park sites and the SEZ countries and using the lessons develops recommendations for Konza ICT Park.

Our working hypothesis is to position Konza as a product of Eastern African region for the world. The following aspects inspire our working hypothesis:

• Egypt is positioned to serve the Middle East region while South Africa is serving most of Southern Africa as well as Sub Saharan Africa. Konza could seek to carve a space for Eastern Africa and indeed Sub Saharan Africa and for the world • Studies and in particular a 2008 study by Summit Strategies on BPO phenomena in 15 Anglophone countries reported

that countries that were successful in BPO activities adopted an inside-out approach. Such countries built their BPO industry from in-shoring as a foundation for off-shoring. The framework inspires Nigeria’s BPO development policy promulgated in 2008. The Kenya government’s effort to support local outsourcing is a move in this direction • Previous studies on successful IT Parks report an advantage of operating as a constellation of ICT Parks. These

constellations can be in country (Egypt) or regional (Internet city) and are effective in providing redundancy or time difference advantages. This is to be explored for Konza

• Being a Greenfield project it is feasible to create a lifestyle ground-up, building on the best practice from Africa and the world.

• Unique value proposition to attract regional as well as global investment.

This working hypothesis provides a foundation for the study and is tested through primary and secondary data collected and the subsequent analysis.

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Comparative ICT Park sites of interest

ITES and electronic manufacturing as discussed earlier is a fast growing sector and many countries have established or are establishing ICT Parks to exploit this opportunity. The experiences provide lessons for Kenya to benchmark its effort in this regard. In this study, we have scanned globally and working with the client, identified a number of Park sites as comparator sites. For the purposes of this study, the Parks sites as illustrated in Table 7 have been identified and studied in detail to provide the necessary lessons.

Table 6: Comparator ICT Park Sites

Park Country Area Distance from City App. project cost

ownership

International High Technology Park

India 28 ha 18Kms from Bangalore USD38.8M Private (Ascendas Ltd)

Ayala Technohub Philippines 37 ha Within Quezon USD138M Partnership between

University & Ayala Land

University of Waterloo Research and Technology Park

Canada 49 ha Within the University USD 210M Partnership University

& Private Sector

Invest Park Poland 245 ha USD4.04Bn Private (Invest Park)

Smart Village Egypt 243 ha 28Kms from Cairo USD2.6Bn first

phase

PPP, govt 20% private sector 80%

Cyberjaya Malaysia 2894 ha 50Kms from Kuala

Lumpur

USD15Bn Under PPP

arrangements

Cyber City Mauritius 10Kms from Port Louis USD100M Govt through Business

Parks Mauritius Ltd Electronic Manufacturing

Saigon Hi-Tech Park Vietnam 17km from HCM USD300M Private

Dalian Software Park China Suburbs of Dalian USD62M Private (Dalian)

Special Economic Zones

Panama Pacifico Panama 1113 ha In the suburbs of

Panama City (15 min drive)

USD700M Private (London & Properties)

Aqaba Jordan Part of Aqaba City USD281M PPP

The selection of the ICT Parks was concluded after a global scan of such initiatives and the final list is intended to provide a wide range of experiences. The considerations include the following:

- Evolution in the global market place - thus some of the Parks are relatively old having been conceived in

mid 1990s and therefore provide needed information on typical Park evolution from conceptualisation to operationalisation. Some of the other Parks included in case studies have recently been established and therefore provide an inspiration to understand to what extent they have taken on board the experiences of the older Park sites

- Geographical spread - the selection is spread across the continents and thus different time zones and therefore whatever advantage that could be related to time zones is taken into account

- National population size - to take into account the national dynamic, the team selected countries with large populations as well as those with low populations. This addresses the national dynamic that could be influenced by the population and whether the population size influences the activity of the ICT Park

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- Language - while English predominates in the ITES sector, the team selected countries that reflect a wide

range of national languages to understand how they were dealing with the language issue. Vietnam for example provides useful lessons in this regard.

- Level of national development - the comparator sites include developed as well as the developing countries, and finally,

- Different political and social orientations – to understand how political and social orientation influences

planning and execution of the ICT Parks under varying situations.

The diverse range of choice provides a rich framework to understand the dynamic of ICT Parks and is used to benchmark and provide insights on the way forward for Konza.

The details of each of the sites is described in detail in the annex.

Distilling lessons from comparator sites: a framework

A deep insight of the Parks, some successful and some not so successful illustrates common features for the Parks. In all the Park sites, a common feature is that there are factors internal to the ICT Park management, which it is able to influence and guarantee while other features are external and the Park can only take advantage of such features since they are part of the national or global effort. The various spheres of influence and corresponding actors are illustrated in Figure 4.

Figure 4: Spheres of influence

Source: Summit Strategies

All the ICT Parks reviewed have a management team that have under their control a set of tools to ensure ease of doing business within the Park, while all the countries have enacted a set of an incentive framework to make the site(s) attractive and finally, the location provides opportunity to be exploited. The parameters for analysis are therefore set out along these lines.

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Internal to the Park

The Park management have implemented features to make them attractive for the investors. These include the following;

Infrastructure - Infrastructure at the Park site is critical to attract investors. Key infrastructure include among others the

following;

• ICT - all sites seek to provide excellent ICT infrastructure to provide adequate bandwidth, high reliability that is cost effective.

• Physical infrastructure includes access roads within the Park

• Utilities include clean power and water - a differentiator going forward is green and clean energy

• Ambient working environment - this is achieved by physical planning designs that allow high level of greenery and large open spaces and generally low-rise buildings

• Mixed use in the Park to provide for amenities, supportive and complimenting commercial activity within the Park. Mixed use provides all round lifestyle amenities and services and is also imperative to ensure economic sustainability. • One stop shop statutory facilitation at the Park level to ease doing business

• An eco system to provide talent and incubation services within the Park. Most government driven parks have an incubator, a science park and and/or an industrial park.

• Certification of the Park sites with global standards e.g. ISO 14001 compliance.

These features are often within the control of the Park management. With the increasing number of parks, these features are standard and only give the Park the right to compete but is not a differentiator.

Industry - ITES and IT manufacturing

At this level, ICT sector is one of the many actors to create the necessary conducive business environment and therefore how the sector evolves is critical to the success of the Park. Parks have established industry associations to positively influence the industry, create standards and often self regulate. India has a strong body – NASSCOM, and Philippines has a framework for self-regulation on data protection. The park operates within the context of the industry shaped by other actors.

External - National business operating environment

In all the Parks, the country is fully engaged in the sector and has implemented or can influence a number of features to make the Park(s) attractive. These are described below:

Enabling business environment

An enabling business environment is a precondition for investment and is well illustrated in the comparator sites and countries. Key areas of focus are:

Stability of the country and the region - investors will not risk their investments unless national stability is evident. Political, social and business frameworks need to be stable and predictable. In very rare cases, other advantages could outweigh these considerations. We noted the case of Mindanao in Philippines where despite social instability, investors are trooping to the region and investing in BPO. This case is also noted in Sri Lanka. The government has an overriding duty to assure stability as a precondition for ICT park success.

Supportive inter-country arrangements - To expand the market for the ICT Parks, countries have gone a long way to enter into

bilateral and/or multilateral arrangements. While some of the arrangements are very broad on trade, others are specific to the ICT sector. Some of the arrangements include the following:

• General trade - General trade arrangements include global trading blocs (WTO), regional (ASEAN, COMESA, EAC), and bilateral (AGOA). Other arrangements include avoidance of double taxation among countries, repatriation of profits etc. Additionally, all the comparators countries have arrangements to facilitate ease of entry of key staff through relaxed visa requirements

• Specific to ICT- In addition to the general trade support arrangements, all the comparator countries have entered into multilateral arrangements specific to ICTs. All comparator countries are members of Information Technology Agreement (ITA). ITA has expanded trade in IT products and some of comparators countries have recorded remarkable growth in exports of IT products as in the case of China and Vietnam

National image and perception - Indices of doing business and the subsequent ranking are generally a reflection of the status of the country. Poor indicators are a very formidable barrier for new business and as noted in our interviews, this is a deal breaker particularly for top global companies. Indicators like Global Competitiveness Index by the World Economic Forum (WEF), Ease of Doing Business, and Corruption Perception Index among others are very critical. Most of the comparator countries rank well in such indices and indeed use the ranking as a tool to entice new business.

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Incentives-All comparator countries have a range of incentives - tariff and non-tariff - to encourage investment. Without exception,

all have a Special Economic Zone law in place and specifically the comparator Park site operate under the SEZ framework. The range of incentives is described in the annexes for each site.

Economic performance - The national economic performance in comparator countries influences the success of ICT Parks. The

Parks take advantage of government efforts to grow the economy. It is only after the maturity of the Park and generally the ITES that the Parks contribute to the economy through job creation arising from export of IT products, software and services. Some of the economic considerations include;

• Economic linkages - Backward and forward linkages to the economy in comparator countries were found important to ensure sustainability of the Park. Without the linkages, the Park activities are weakly anchored in the economy. Almost all the comparator Parks have incubators within the Park to nurture new business.

• Local ITES market - While ITES and electronic manufacturing is export-led business, there was a notable effort to grow the local ITES market. In India for example, up to 30% of ITES business is local.

Labour - ITES is a people business and highly qualified and motivated staff is required. Access to the labour pool and the training institutions to produce the necessary skilled labour is critical. All the sites are located near a growing pool of skilled workers. While academic institutions are ideal, investors also had their own specialised training facilities.

Infrastructure - The Park has to be serviced by the national infrastructure and therefore high-class infrastructure is critical. This

includes ICT and physical infrastructure.

Remote forces

These are features outside the control of the Park and the national government and include location, climatic conditions, and global socio-economic trends among others. Comparator countries took advantage of these features in the following ways:

Climatic conditions - Extreme climatic conditions such as cold, very hot or natural phenomena are not under the control of

the state. Very hot temperatures imply very high costs of cooling data centres. Yet a lot of sun provides an opportunity to tap green energy using solar technology. Google Inc although not part of our study is keen to exploit solar energy as part of the green agenda. The extent to which a Park exploits such features could be a differentiator.

Location - Location of a country and consequently time zones are features outside the control of the Park or the national government. The differentiator is how these attributes are packaged for the benefit of the country. Most of the comparator sites used time zones as a differentiator. This is addressed in a later part of the report

International socio-political dynamic - These are factors that the comparator country has no control over. A case in point is political

direction in the USA which is the largest market for outsourcing. None of the comparator countries has influence on its politics especially as relates to job creation and the possible impact on outsourcing.

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Table 7: Benchmarking Konza against the comparator sites

Kenya rating Comments

Internal to the ICT Park Infrastructure N/A Not yet developed

Certification of Park site N/A Not applicable

ITES Industry Supportive associations Weak National association to support industry wide growth weak

ICT Sector Strong ICT infrastructure well developed

and provided competitively like comparator sites

Competition among other ICT Parks

N/A None operational however if

incorrectly positioned will have to compete with private sector initiative at a very early stage e.g. Tatu City.

National business environment

Business environment Weak Poor global indices

Ease of doing business Weak Poor global indices

Economic performance Moderate

Infrastructure Emerging Underlying infrastructure now

supplied competitively through PPP

External Climatic Good

Location National – business hub

Site – has challenges which are discussed in the report. Global social-economic

dynamic

Weak Creating synergy to align to the

Konza Feasibility Study 2010 (Summit Strategies)

Konza Technology City

Summit Strategies Ltd

ICT Research & Consultancy

Summit Strategies Ltd

Summit Strategies Ltd

ICT Research & Consultancy

CREDITS

Prepared by:

Strategic information for decision support

in info-communication business

Summit Strategies ltd

ICT Consultancy and Research

Landmark Plaza - 13th flr, Argwings Kodhek Road

P O Box 62454 -00200, Nairobi Kenya

tel: +254 (20) 3673 925/2637177

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www.summitstrategies.co.ke

Proofreading & Layout

PREFACE

CONTENTS

Vol 1 of 3

January 1st, 2011

Summit Strategies Ltd

Comparative and competitive

advantage

Executive Summary

Data sources and process

The IT universe - defining the space for ITES and IT products

The emerging universe of ITES as an opportunity

Quest for the ITES development; Setting the ITES roadmap through Kenya Vision 2030

Supporting ICT infrastructure

Supporting institutional infrastructure

Challenges defining ITES

The growing importance of ITES

Segment

2010

2020

Source

BPO Market

200,000,000

890,000,000

NASSCOM

ITES and BPO

122,000,000+

Mckinsey & Co

Breakdown

Banking 40,000,000

Insurance 35,000,000

Travel/Hospitality 12,000,000

Automotive 12,000,000

Telecommunications 10,000,000

Pharmaceuticals 8,000,000

Finance & Accounts, Human Resource 25,000,000

Others 15,000,000

ITES opportunity; mapping Kenya in the ITES space

The nascent ITES in Kenya; a private sector response

Electronic manufacturing opportunity and trends

Information Technology products

Contract manufacturing and electronic assembly

The Kenyan experience in electronic assembly

Lessons in assembly

Clustering effect: the case for Konza ICT Park

Comparative ICT Park sites of interest

Distilling lessons from comparator sites: a framework

Internal to the Park

Industry - ITES and IT manufacturing

External - National business operating environment

Remote forces