2.2 Bases teóricas
2.2.7. Instrumentos del Sistema Financiero Indirecto
Private equity, as a source of business finance and investment know-how, supports creative entrepreneurship. Entrepreneurship is the process by which firms are born and others
phased out - new ideas emerge as old ones die off: a process termed ‘creative destruction’.102 Entrepreneurs are business people that seek to generate value through the creation or expansion of some economic activity, by identifying and exploiting new products, processes and markets.103Schumpeter (1934)104and Baumol (2008)105define entrepreneurial activity in terms that closely match the impact of private equity: the introduction of new goods; introduction of new production methods; opening of new markets; establishing new supply sources; or carrying out the new organisation of an industry. In this sense, entrepreneurship is a fundamental catalyst to economic growth.106
Kenya’s public policy has not always matched the policy-recognition of the importance of entrepreneurship to economic growth with commensurate public policy measures that translate such recognition into market practice. Development research illustrates that the historical mismatch between academic and policy recognition of that role is increasingly being bridged, as governments across the world give closer attention to the determinants of entrepreneurship.107Three main elements are said to drive entrepreneurship:
determining factors (regulation, culture, market conditions, skills, research and development and access to finance);performance measures(firm-based and employment-based indicators); and impact (job creation, economic growth and poverty reduction).108 It is interesting to
102Powell,Making Nations Rich(2007) (n 98) 1, 79, 112. 103ibid
104Joseph A Schumpeter, The Theory of Economic Development: an inquiry into profits, capital, credit, interest
and business cycle (Transaction Publishers, 1982 reprint), ch 1
105William J Baumol and Robert Strom, ‘Entrepreneurship and Economic Growth’ (2007) 1(3-4) Strategic
Entrepreneurship Journal 233-237
106Powell,Making Nations Rich(2008) (n 98) 112
107OECD, ‘Measuring Entrepreneurship – A Digest of Indicators’ (2008) OECD –Eurostat Entrepreneurship Indicators Programme, 5, 6 <http://www.oecd.org/dataoecd/53/23/41664409.pdf> accessed 15 December 2008 - These indicators canvass a wide range of sub-themes: levels of expenditure on research and development as a proxy for the creation and diffusion of knowledge; collaboration on innovation – for the joint development of products, processes and networks, as well as linkages between large and small companies within an economy; ease of access to loans – especially against the strength of a business plan without collateral (debt; equity); population size, and education levels; ease of doing business (including clear and enforceable regulatory framework, supported by property rights, dispute resolution institutions and protection of contractual partners; and efficiency of the tax system as an important regulatory tool.
observe that the determinants of entrepreneurship are closely associated thematically to the four factors said to drive the emergence and growth of private equity – discussed earlier in this chapter.
Kenyan public policy since 2003 is increasingly emphasising the instrumental role of Kenya’s private sector in driving sustainable economic development, job and wealth creation.109 The leading policy statements on point are: the Economic Recovery Strategy
(henceforth ERS) of 2003-2007,Vision 2030 of 2007(henceforth Vision 2030),110thePrivate Sector Development Strategy(henceforth PSDS) 2006-2012,111and theMaster Plan Study for Kenya’s Industrial Development (henceforth MAPSKID) 2007.112This recognition mirrors global practice, reinforced by recent and ongoing governmental reactions to the ‘Great Recession’ – the banking crisis of 2007-2008 – which saw governments around the world directly channelling huge amounts of public funds into private businesses to stem a drawn- out recession.113
The government is matching these policy pronouncements with specific programmes such as allocating funds to a Youth Development Fund, Kazi kwa Vijana, Small and Micro- Enterprise Fund, Women Enterprise Fund, Kenya Youth Empowerment Project and the wider economic stimulus programme under implementation since 2008.114It is also continuously
109Government of Kenya, Budget Statement for Fiscal Year 2011 2012, (Uhuru Muigai Kenyatta, Minister for
Finance & Deputy Prime Minister, 8 June 2011), paras 10, 19, 22, 35 – focusing on tax and business regulatory reforms <http://www.treasury.go.ke/index.php?option=com_docman&task=cat_view&gid=110&Itemid=86> accessed 23 January 2012
110 Government of Kenya, ‘Vision 2030’ <http://www.vision2030.go.ke/index.php/front/vision> accessed
August 2007.
111Republic of Kenya, Private Sector Development Website
<http://www.psds.go.ke/index.php?option=com_content&task=view&id=28&Itemid=32> accessed 8 January 2008
112Republic of Kenya, Ministry of Industrialisation (2011)
<http://www.industrialization.go.ke/index.php?option=com_content&view=article&id=164:mapskid&catid=59: downloads&Itemid=131> accessed 21 October 2011
113 Masaaki Shirakawa, ‘The International Policy Response to Financial Crises’ (2009)
<http://www.kansascityfed.org/publicat/sympos/2009/papers/Shirakawa.08.24.09.pdf> accessed 18 October 2011
reforming the business environment including through introducing the Single Business Permit (SBP) initiative (funded by DfID in 2000) that collapsed 16 business licenses into a SBP.115While laudable, the persisting fragmentation of the business licensing regime, driven by statutory requirements under the Local Government Act of 1963, mean that if a business operator wishes to establish business operations in more than one local authority, they would be required to seek and obtain separate SBPs for each locality.116The government has since 2003 phased out over 1,300 business licenses that added immense cost and opacity to business set-up in Kenya, and since 2006, has adopted a ‘guillotine’ strategy by which inefficient and unnecessary business regulations and permits are phased out through the annual budget process – arguably a more efficient strategy for dealing with an overly- bureaucratic regulatory system.117
It is also widely recognised that Kenya’s private sector, like others around the world, has experienced a long-standing funding gap.118The PSDS recounts the numerous structural inefficiencies private businesses face in Kenya including a narrow formal economy, a large informal economy, a lack of access to credit and related financial services, a festering system of regulatory arbitrage, and disconnects between small and large entities within the economy.119On the difficulties surrounding access to finance, the constraints include limited access to bank credit, prohibitive collateral requirements, a narrow range of financial products, and limited financial services for small and medium enterprises.120Private equity is not a panacea to these myriad development issues: it is merely a part solution to a much larger problem, and other programmes are necessary to bring about sustainable development. 115Kituyi, ‘Improving the Investment Climate’ (2005) (n 3) 2,3
116Cap 265, ss163, 163A, 164, 165 and 166
117Kituyi, Improving Investment Climate (2005) (n 3) 4-6
118World Bank, IFC, Financial Investment and Advisory Service, ‘Review of Administrative Barriers to
Investment in Kenya’ (2004) <http://www.ifc.org/IFCext/fias.nsf/..../> - the study found that among others, access to finance remained a challenge.
119 Government of Kenya, ‘PSDS 2006-2010’ (Ministry of Trade and Industry) 16-18
http://www.psds.go.ke/images/stories/psds.pdf accessed 12 January 2012
The question of increasing the supply of creative capital remains a long-standing agenda, however. For instance, in 2005, the Ministry of Trade, with World Bank support, launched the Micro Small and Medium Enterprise (MSMEs) Competitiveness Project to promote the flow of capital to MSMEs, as well as the provision of institutional and capacity building programmes for these businesses.121 Improvements to the business environment, training of businesses in enterprise skills, and building market linkages were additional objectives. 122 Financial deepening involved the establishment of a Financial Sector Deepening Trust to pilot a range of financial services and products tailored to the needs of MSMEs. The programme additionally involved a MSME Risk Capital component – which was aimed at pioneering a new range of risk capital instruments including mixed debt and equity finance, and related variants.123
The cited studies and policy pronouncements underscore government’s growing recognition of the sense of urgency surrounding the need to create structures that enable the private sector to flourish – and one such response is expanding access to finance and related services. These studies also show that a recurrent theme is not just a lack of access to adequate amounts of business finance, but specifically access to appropriate types of business finance. The needs of Kenya’s small and microenterprise entities (SMEs)124are particularly acute, as chapter four elaborates.125 Some of the policy responses since 2005 propose solutions that strikingly mirror the private equity contracting strategy, as the preceding paragraph clearly outlines.
121Kituyi, Improving Investment Climate (2005) ( n 3) 3
122This theme was recognised in the form of ‘Measure 6’, in the ‘Blue Book on Investment Best Practice in
Investment Promotion and Facilitation – for Kenya’ (2005), developed under UNCTAD’s technical assistance: <http://www.unctad.org >
123ibid 3
124The Capital Markets (Registered Venture Capital Companies) Regulations 2007, section 2, defines a small
and micro-enterprise (SME) to mean ‘any business whose annual turnover does not exceed Kenya shillings five hundred million’ - the vast majority of the Kenyan private corporate sector falls within this financial bracket.
If Kenya is to achieve economic prosperity through its private sector, access to innovative business finance must be expanded, not incrementally, but exponentially. This work argues that private equity offers a potential part-solution to this need, justifying an exploration of legal and institutional factors that can support its emergence as a significant segment of a country’s financial system.