Kenya’s New Konza City – ‘Golden Goose’ or ‘White Elephant’?

By Jessica Asunugo

In January 2013, on empty savannah land 60km south of Nairobi – in an area primarily inhabited by elephants and wildebeests – Kenya’s President Mwai Kibaki broke ground on the new Konza City. Konza City, also referred to as Kenya’s Silicon Valley or Silicon Savannah, is a $14bn ‘green field’ techno-city development project spanning 5,000 acres. The city aims to advance technology investment and growth, and cement Kenya’s position as Africa’s technology leader. The city will feature infrastructure to promote mixed-use commercial and residential activities. In addition to technology and science districts, the city will include a university campus, mega malls, a championship golf course, world-class hotels, a high-speed mass transport system, and 35,000 residential homes. The project is expected to be completed by 2030, and generate up to 200,000 jobs.

Several key fundamentals of this new city plan are positive:

· Strong government support and alignment. Konza City is part of Kenya’s Vision 2030 – the country’s economic development plan. Since 2009, the government has put in place measures to address the ICT sector infrastructure, policy and legal frameworks.

· Domestic and international players. Kenya has produced successful home-grown tech companies such as Safaricom, and is the Africa headquarters for international players such as IBM, Microsoft and Google.

· Public-private partnership deal structure. The government will be responsible for facilitating key infrastructure such as roads, water, and energy, while the private sector will raise funds for developing the actual city.

· Phased development plan. In order to mitigate economic risk and spread costs over time, development will be split into four phases.

· Investment incentives. The city will be a designated special economic zone with tax breaks and incentives to attract investment.

A more nuanced look into Kenya’s technology sector however paints a bleaker view of the country’s tech market potential, and calls into question whether Konza City will be a profitable entity (golden goose), or an expensive and illiquid asset (white elephant).

Unproven technology business models. Kenya is home to thousands of tech entrepreneurs, however, it is unclear what percentage actually have profitable businesses versus rely on grant funding and competition prize money.

Limited market size. Outside of South Africa, Kenya is the most mature technology market in sub-Saharan Africa, with other countries falling significantly behind. However, the population is a mere 40 million, with GDP per capita at $800, and a gini coefficient of 42.5. It is questionable whether the market size can absorb the estimated growth necessary to justify a $14bn investment, and whether investors will be patient enough for their return.

Political and economic Risk. Kenyan elections will take place in March 2013. The country’s last elections were marred with large civil unrest and corruption. Although Konza is part of Vision 2030, the fact is that it was ultimately President Kibaki’s vision, and the next political party may not provide as much support – particularly given other activities such as the Lamu port project, Isiolo Resort city construction and now oil discoveries, all of which compete for economic resources.

I am of the opinion that a modest technology development site would be a more appropriate solution for Kenya, with a higher probability for attractive return on investment. The country has selected to develop a crème of the crop high-end city, and is placing a strong bet on market potential and projections to realize return. For a country that is still one of 30 poorest in the world, this is an extremely risky – and potentially crippling – bet.

Sources:

http://atlantablackstar.com/2013/01/24/kenya-launches-silicon-valley-project/

http://www.the-star.co.ke/news/article-16855/konza-city-it-just-dream-or-can-it-be-done#sthash.KeEYhPqR.dpuf

http://www.konzacity.co.ke/about-konza/why-kenya/

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2 thoughts on “Kenya’s New Konza City – ‘Golden Goose’ or ‘White Elephant’?

  1. Pingback: How can we best talk about people in a finance course? | Sustainable Cities: Urbanization, Infrastructure, and Finance

  2. By John Macomber

    Thoughtful analysis of a contemporary situation using the concepts of the course. I wonder if there is a theory of some self-reinforcing choices around “size of the bet.” Meaning that with all the high tech trappings, more capital can be attracted. But the “more-capital” entity wants to place a bigger bet and usually a one-way bet (put it all on red…). It would appear that the lower-risk, less capital bet is less attractive [for politicians] or harder to fund [not so exciting]. Are there analogs in the HBS VC/PE world – win big – and the HBS “Financial Management of Smaller Firms” world – growing in a contained way from retained earnings – is out of favor? KAEC vs PMH and Masdar vs SS Tianjin are both potential illustrations of this at city scale in the course material.

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