From Contracts to Growth: How Public Procurement Empowers Kenya’s Private Sector

A World Bank–IMF study finds that Kenyan firms winning government contracts see sharp, lasting gains in productivity, revenue, and employment—comparable to trading with multinationals. Public procurement, the study concludes, acts as a powerful engine for private sector growth and economic resilience in developing economies.

A groundbreaking study by the World Bank’s Africa Chief Economist Office, the International Monetary Fund (IMF), and the Privatization Commission of Kenya has revealed how government spending can transform private sector fortunes in developing economies. The report, “Public Procurement and Firms: Evidence from Kenya”, authored by Justice Tei Mensah, Peter Chacha Wankuru, and Benard K. Kirui, examines millions of firm-to-firm transactions between 2015 and 2022. It finds that becoming a government contractor can dramatically accelerate firm growth, productivity, and resilience, in some cases matching the gains from partnerships with multinational corporations.

Kenya’s Public Sector as a Catalyst for Private Growth

The researchers used administrative tax data from the Kenya Revenue Authority, including value-added tax (VAT) records, payroll submissions, and firm registration information. Firms were defined as government contractors once their annual sales to public entities exceeded 15 percent of total revenue, signaling a major trading relationship. The study compared these firms to similar ones that never secured such contracts, employing a robust event-study design to establish causal links between government procurement and business performance.

The results were striking. Four years after winning a public contract, firms saw their productivity rise by 27 percent, revenues surge by more than 70 percent, and employment increase by 10 percent compared to non-contractors. Wages also climbed by around 25 percent, demonstrating that the gains extend beyond profits to workers’ welfare. Crucially, firms did not just grow; they evolved. Their supplier networks expanded, and their purchasing volumes increased, showing that public procurement creates ripple effects throughout the economy.

Initially, some firms diverted resources from private clients to fulfill public contracts, leading to a temporary dip in non-government sales. Yet by the second year, those sales rebounded, and by year four, they had grown by 65 percent. This finding debunks the common concern that public contracts “crowd out” private sector business; instead, they appear to stimulate overall productive capacity.

Matching Multinational Gains

To benchmark these results, the authors compared the impact of public contracts with that of trading with foreign multinationals, a relationship long recognized as a major driver of productivity in developing economies. The data showed that firms supplying multinationals experienced sales growth of 34 to 38 percent over four years, nearly identical in magnitude to the effects of supplying government entities. Both relationships produced substantial and sustained gains in productivity and value-added per worker.

However, the nature of benefits differs. Multinational linkages typically transmit technology and management know-how, while government contracts primarily deliver stable and large-scale demand shocks that allow firms to expand operations. Together, they form complementary growth engines, with public demand serving as a domestic counterpart to global value chain participation.

Why Public Contracts Work: Credit and Crisis Cushion

Two powerful mechanisms explain why public procurement drives such sustained firm success. First is access to credit. In Kenya’s underdeveloped financial market, government contracts serve as a form of collateral, as banks trust public institutions to honor payments. Firms with public contracts were found to be 18 percentage points more likely to secure credit lines than those without. The infusion of affordable financing enables them to invest in technology, hire more workers, and scale operations.

The second mechanism is resilience during crises. During the COVID-19 pandemic, firms with existing government contracts weathered the downturn far better than their peers. While private sector demand collapsed, government spending on essential goods and services remained steady, acting as a stabilizing force. These contractors maintained higher sales, employment, and productivity levels, clear evidence that public procurement can function as a countercyclical buffer in times of economic distress.

Patterns Behind the Numbers

The study also sheds light on who benefits most from Kenya’s public procurement system. About 61 percent of the total contract value goes to locally owned firms, though large companies capture most of the money. Micro and small enterprises make up roughly half of contractors by number, but receive a smaller share of total contract value. The construction sector dominates, absorbing around 35 percent of public procurement, reflecting the government’s infrastructure push. Regionally, the distribution is highly unequal; Nairobi and Mombasa firms account for 87 percent of all contract value, underscoring the urban concentration of economic opportunity.

While initiatives like the Access to Government Procurement Opportunities (AGPO) program aim to channel 30 percent of tenders to women, youth, and persons with disabilities, the study suggests that significant imbalances persist. Nonetheless, the overall evidence highlights that public procurement remains one of the most potent yet underutilized levers for inclusive growth in developing economies.

Rethinking Procurement as Industrial Policy

The authors argue that public procurement should be recognized not merely as an administrative process but as a strategic instrument for industrial and employment policy. In countries where private demand is weak and credit access is limited, government purchasing power can fill the gap, boosting production, investment, and innovation. By awarding contracts efficiently and transparently, governments can nurture competitive domestic firms and stimulate supply chains that spread benefits widely across the economy.

The joint research by the World Bank, IMF, and the Privatization Commission of Kenya demonstrates that government demand is a powerful force for economic transformation. Firms that supply the public sector not only grow faster and hire more but also become more resilient to economic shocks. The study’s message is clear: improving the efficiency, transparency, and inclusivity of public procurement could unlock vast potential for private sector development across Africa. By turning procurement into a deliberate tool of industrial strategy, governments can convert public spending from a budgetary obligation into a dynamic engine of growth and shared prosperity.