Formalizing the Informal Sector

This blog post was written by Bill Grant, a Senior Principal Development Specialist in DAI’s Economic Growth sector, following the "Formalization of the Warm Milk Channel in Kenya: A Study in Effective Facilitation" Breakfast Seminar on October 20, 2011.

During my recent presentation with Harun Baiya (SITE Enterprises) on the formalization of the raw milk sector in Kenya, we discussed how good facilitation techniques can lead to the sustainable development of a value chain, driven by the market actors who will benefit most from that growth. Starting with an in-depth understanding of the end markets and the critical factors driving consumer preference and demand in those markets, SITE Enterprise has put together a number of facilitation programs over the past eight years that have led to some remarkable results, best summarized as the formalization of the informal sector.

My presentation touched on the key characteristics of an effective market facilitator – a non-market actor with a time bound, temporary role, who starts with an understanding of the entire sector and is seen as an objective observer and able to bring together the different market actors to facilitate improved coordination and collaboration. A good facilitator asks the following questions:

• What are the market failures?
• Which market actors stand to benefit most from fixing them?
• How can we incentivize those market actors to change their behavior and address those issues?

I also explored the differences between internally and externally driven facilitation, as well as the continuum between “light touch” and “heavier hand” facilitation, and presented a model for donor programming to drive more effective market facilitation activities by building up the capacity of local facilitators.

Throughout the presentation, we looked at facilitation through the lens of the SITE case study. In Kenya, SITE has helped to create a dialogue between the industry regulators and the informal sector, helping the former to gain a clearer insight into the factors driving behavior by the traders. By integrating the market regulator into the diagnosis of the problem and the definition of the solution, they helped to create an initial win-win scenario that has led to a common understanding of the interests of all parties. This understanding has helped the regulator to design a process to incentivize informal traders to register and become regulated, which has generated significant benefits to both parties. In addition, SITE has helped enhance both horizontal and vertical coordination among the market actors. These factors have combined for a steady crowding-in of new market actors, an increase in the efficiency of the marketing channels, and steady growth of the sector.

Much of the growth in the Kenyan dairy sector has been led by increased efficiency by the raw milk traders. As a result of the enhanced regulatory environment, informal traders who have registered with the Kenya Dairy Board are now more secure in their operating environment, with fewer hassles from the police and health departments. They have invested significantly in upgrading their businesses, particularly in transport (which had been easily seizable assets in the past) and in storage capacity. SITE-facilitated capacity building with the dairy traders (requested by the traders themselves) has led to increased access to services (training, finance, and negotiating power with the regulator), and a subsequent steady increase in Dairy Trader Association membership. While there has been increased concentration among the dairy traders as the more efficient businesses take on greater market share, there has been a steady growth in the numbers of producers with improved productivity.

In conclusion, through our presentation, Harun and I hoped to provide a good model for how to use a value chain analysis to lay out the key issues facing a sector and to orient program activities in a direction that everyone had been wary about tackling before – regulatory change. On the implementation side, excellent facilitation and building up of trust between the market actors have helped to transform the sector and stimulate greater efficiency and pro-poor growth.