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A QUESTION OF POWER: Why Ethiopia’s economic transformation is a cautionary African tale

The arrival of reformist Prime Minister, Abiy Ahmed Ali, may have only given the ruling EPRDF a stay of execution. At the heart of the political crisis is an old problem: a command economy reluctant to liberalise. State-led infrastructure expansion fuelled a decade of miraculous growth, producing five times more electricity than the country requires. The returns on this investment are not forthcoming. Exports are falling, the Birr has been devalued; a severe forex shortage is underway. Is Ethiopia’s future as Africa’s premier power exporter viable? By DAVID NDII.

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A QUESTION OF POWER: Why Ethiopia’s economic transformation is a cautionary African tale

Something is stirring in Ethiopia. It began with the abrupt resignation of former Prime Minister Hailemariam Desalegn on February 15. After weeks of backroom dealmaking the EPRDF coalition which has governed Ethiopia with an iron fist since ousting the Derg, Mengistu Haire Mariam’s Marxist dictatorship in 1991, elevated youthful Abiy Ahmed Ali as prime minister. The new prime minister hit the ground running with a raft of political reforms.

Three years ago, students in the town of Ambo started a protest to oppose a metropolitan development plan that would have incorporated their town and seven others into the capital, Addis Ababa. Ambo is 120 kilometres west of Addis in the Oromia region. They accused the federal government of a top-down land grab that would deprive them of livelihoods and destabilize their communities and culture.

After the overthrow of the Derg, Ethiopia adopted an ethno-federalist constitution that even provides for orderly secession. But the EPRDF has sought to run a command-and-control developmental state. The Addis Ababa expansion plan was a head-on-collision between the two—the constitution’s federalist ethno-regional political bargain and the centralizing ideology and power politics of the EPDRF. While the EPRDF is a consociational coalition, it’s the late strongman Meles Zenawi’s Tigrayan People’s Liberation Front (TPLF), which led the liberation war, that wields most of the power in the coalition (and gets most of the spoils). The Tigrayans are a relatively small tribe (six percent of the population) from the north of the country.

The Addis expansion plan, which affected the Oromo and Amhara regions, ignited discontent whose depth the EPDRF clearly underestimated. The Oromo are the largest ethnic group in Ethiopia, accounting for a third of Ethiopia’s 100 million-strong population, with strong grievances of historic marginalization. The Amhara, who constitute just over a quarter of the population, are the erstwhile politically dominant ethnic group. Both Emperor Haile Selassie and Mengistu were Amhara (his father, originally Oromo, was adopted by an Amhara nobleman). Repression, including massacres, mass incarcerations and a state of emergency, a feature of both Emperor Selassie’s late rule and Mengistu’s Red Terror, returned under a beleaguered EPRDF.

Though unexpected, Desalegn’s resignation was preceded by a softening of the regime, including the release of political prisoners, which Desalegn said was meant to “foster national reconciliation”. The new prime minister is Oromo. His elevation was no doubt intended as an olive branch to the restive region.

The Addis Expansion Plan, which affected the Oromo and Amhara regions, ignited discontent whose depth the EPDRF had clearly underestimated…Repression, including massacres, mass incarcerations and a state of emergency, a feature of both Emperor Selassie’s late rule and Mengistu’s Red Terror, returned under a beleaguered EPRDF.

Hot on the heels of the tectonic shift in the politics have come equally momentous economic pronouncements. State owned Ethiopian Airlines and telecommunications and power utilities and other state corporations are to be partially privatized.

What exactly is cooking in Addis?

In his pronouncement speech, the Prime Minister Abiy spoke of a hard currency crisis. He is quoted in the media castigating his audience, Ethiopian businesspeople, for keeping their hard currency in Dubai and China and asking for their cooperation to resolve the crisis while also threatening unspecified actions on the hoarders of foreign exchange. Instructively, he also disclosed that the political crisis has dented diaspora remittances. Diaspora remittances are Ethiopia’s single largest source of foreign exchange, bringing in US$ 5.5 billion last year, almost double the country’s US$ 3 billion dollar export earnings.

The foreign exchange crisis is not new. In October last year, Ethiopia devalued the currency by 15 percent. While the recent government data shows foreign currency reserves equivalent to 2.3 months import requirements in December 2017, precarious but not dire (3-4 months requirements is the norm), some analysts say the reserves could have fallen below one month’s requirement, which is dire. Last week, the government announced that it had secured a US$1 billion foreign currency lifeline from the United Arab Emirates (UAE), part of a US$3billion aid and investment package. The UAE deal looks like a quid pro quo for Prime Minister Abiy’s de-escalation of tensions with Egypt over Ethiopia’s damming of the Blue Nile. The UAE is a strong ally of Egypt. This sequence of events begins to suggest that the foreign currency crunch is behind the softening of the EPDRF regime.

Prime Minister Abiy spoke of a hard currency crisis. [He castigated] his audience, Ethiopian businesspeople, for keeping their hard currency in Dubai and China and asked for their cooperation to resolve the crisis while also threatening unspecified actions on the hoarders of foreign exchange. Instructively, he also disclosed that the political crisis has dented diaspora remittances. Diaspora remittances are Ethiopia’s single largest source of foreign exchange, bringing in US$ 5.5 billion last year, almost double the country’s US$ 3 billion dollar export earnings.

Ethiopia has run into an old, mostly forgotten, economic development problem: the foreign exchange constraint. In the old days, it was caused by import substitution industrialisation. Import substitution industrialisation, the dominant development strategy for many sub-Saharan African states until the mid-seventies, entailed setting up industries to produce finished goods the country was importing, and protecting them from import competition with trade barriers, import and foreign exchange controls.

The new import substituting industries imported virtually everything from machinery, intermediate inputs, spare parts, technology and even management. The import substituting industry’s foreign exchange requirements ended up exceeding what the country was using to import the finished goods. Most of the import substitution industrializers relied on a few primary commodity exports. They soon found that their export earnings were insufficient to finance the industries.

Foreign exchange became scarce, and self-reinforcing. To circumvent foreign exchange rationing, businesses would hoard foreign exchange abroad through transfer pricing (over-invoicing imports and under-invoicing exports), compounding the primary motive for transfer pricing— tax evasion. One such scheme came to light not too long ago during the unravelling of the Nairobi Securities Exchange-listed corporate icon, CMC, which has since been delisted. It was revealed that the company had maintained a secret account in Jersey to which proceeds of over-invoicing were deposited and paid to its directors offshore. Remarkably, many of the beneficiaries of the scheme were the same bureaucrats who were responsible for enforcing foreign exchange controls.

The 1973 oil-shock and declining primary commodity prices in the ‘70s compounded the external imbalance that import substitution industrialization started. By the early ‘80s, most import substituting countries were on their knees. In some, Tanzania for example, manufacturing ground to a halt.

Ethiopia’s external imbalance and attendant foreign exchange crises emanate from over-investment in infrastructure. Ethiopia adopted an infrastructure-led growth strategy known as the Growth and Transformation Plan (GTP) in 2010. It has since doubled electricity generation from 1800 to 4200 MW, against peak power requirement of 2000 MW. There is close to 7,000MW of new power projects under construction. The Ethiopia Grand Renaissance dam alone has a capacity of 6450 MW. When these are completed, Ethiopia’s generation capacity will be more than four times domestic demand. The road network has been expanded two-and-a-half fold, from 44 km to 110 km of road per 1000 square kilometres. And there is of course the 670-km Addis-Djibouti railway, and a light rail system for Addis Ababa, operational since late 2015 .

The infrastructure building boom, described in a recent World Bank report as “one of the highest rates of public investment in the world”, turbocharged Ethiopia’s economic growth rate from a respectable 5-6 percent to an exceptional 10 percent per year. But close to a decade on, the anticipated private investment that would enable Ethiopia to pay for it has not materialised. Ethiopia was banking on export processing zones investment, and has built several industrial parks around the country.

Besides failing to attract investment, building booms of this magnitude have the effect of shifting incentives against “tradable” sectors of the economy. This phenomenon is more commonly associated with natural resource booms that economists call Dutch Disease. This is reflected in the decline of Ethiopia’s export to GDP ratio, from 17 percent to eight percent of GDP compared to Sub-Saharan average of 27 percent. Its export to GDP ratio is now the second lowest on the sub-continent after Burundi (6.2%).

Ethiopia has compounded its infrastructure-driven external imbalance with classic import substitution—a massive state-drivend sugar industry expansion. The state-owned Ethiopia Sugar Corporation is currently developing ten large-scale sugar projects that will put a million acres of land under sugarcane production. A capital intensive, low value product with distorted markets and a permanent global glut floating in the high seas, sugar is as bad as import substitution industries get. Yet there is no shortage of export-oriented agriculture investments Ethiopia could have chosen. Oilseeds are Ethiopia’s second largest export earner after coffee. It has a promising livestock and leather apparel industry. Maize even.

The Bretton Woods institutions spent the ‘80s and ‘90s preaching the free market economic orthodoxy known as the Washington Consensus. Ethiopia has done the complete opposite. But the World Bank has been nothing but effusive. In a 2016 report, Ethiopia’s Great Run: The Growth Acceleration and How to Pace it, the World Bank asserts confidently that Ethiopia was on course to become a middle income country by 2025. Astoundingly the World Bank goes ahead to give a thumbs up to the policy regime that its structural adjustment programmes (SAPs) dismantled:

“Heterodox financing arrangements supported one of the highest public investment rates in the world. Three less conventional mechanisms stand out: first, a model of financial repression that kept interest rates low and directed the bulk of credit towards public infrastructure. Second, an overvalued exchange rate that cheapened public capital imports. Third, monetary expansion, including direct Central Bank budget financing, which earned the government seignorage revenues.”

Ethiopia has compounded its infrastructure-driven external imbalance with classic import substitution—a massive state-driven sugar industry expansion. The state-owned Ethiopia Sugar Corporation is currently developing ten large-scale sugar projects that will put a million acres of land under sugarcane production. A capital intensive, low value product with distorted markets and a permanent global glut floating in the high seas, sugar is as bad as import substitution industries get.

Heterodox means unorthodox or unconventional. In plain English, it means distorting credit markets, overvaluing the currency and printing money.

 After all the cheerleading, the Bretton Woods sisters now find themselves in an awkward situation. In its most recent debt sustainability report, the IMF acknowledges that Ethiopia is now staring at a debt crisis. It has no advice to give. Ethiopia’s hopes, it writes, now rest on exporting electricity. The IMF posits that Ethiopia has the potential to earn US$ 1 billion a year from selling electricity.

In reality, Ethiopia is selling a little power to Sudan and Djibouti, and has signed power purchase agreements with Kenya and Tanzania. But these countries are ramping up their own generation capacity. Kenya’s installed capacity is presently 35 percent above peak generation requirements excluding the 340 MW Turkana wind power which is awaiting completion of a transmission line, 55 percent when it is included. There are several other projects underway, and Kenya’s government seems dead set on proceeding with a controversial 1000MW coal plant in Lamu. Ditto Tanzania.

After all the cheerleading, the Bretton Woods sisters now find themselves in an awkward situation. In its most recent debt sustainability report, the IMF acknowledges that Ethiopia is now staring at a debt crisis. It has no advice to give. Ethiopia’s hopes, it writes, now rest on exporting electricity. The IMF posits that Ethiopia has the potential to earn US$ 1 billion a year from selling electricity.

Ethiopia’s biggest electricity customer potentially is Egypt. This may begin to explain the reason for the olive branch. Prime Minister Abiy also made a quick visit to Somalia last week. He might be hoping to sell some electricity there. To flog a billion dollars worth of power, Ethiopia will need to make peace with all her neighbours, and then some. If truth be told, the electricity export bonanza is a fig leaf.

There is a cold reality that the Ethiopian government seems to be still in denial about. Its heterodox macroeconomic regime is now untenable Investors do not like putting their money in places where it is difficult to get out. And now that people know how precarious the situation is, hard currency hoarding and capital flight will get worse, not better.

The competing destinations for the export processing investment that Ethiopia is building industrial parks for do not have exchange controls. And Ethiopia has many disadvantages to overcome, not least, being landlocked, not to mention its byzantine bureaucracy and anti-capitalist instinct. Financial liberalisation is inevitable, a matter of when and how, not if. The Prime Minister talked of the foreign exchange problem being a long term problem. He is dead wrong. He has eighteen months—best case scenario. His options boil down to whether to do big bang or gradual – rather like choosing whether to do your root canals all at once or every other week.

The announced fire sale of family silver will not do it either. Deregulation should precede privatisation otherwise it substitutes public monopolies for private ones. In the case of the telecom monopoly in particular, deregulation will kill a whole flock of birds with one stone—bring in hard currency from license fees, investment, access (at 40% Ethiopia’s mobile penetration is the lowest in the region) and quality of services. The sugar factories I would sell right away on an “as-is-where-is” basis. A stitch in time saves nine.

Ethiopia is by no means the only country floundering on infrastructure-led growth. It is a foolish idea. Monuments, delusions of grandeur, cargo cults—this columnist has all but run out of metaphors. Last year, Zambia’s President called a national day of prayer for the Kwacha. Last week he suspended borrowing and instituted an austerity programme that includes freezing projects that are less than 80 percent complete. Kenya is surviving on speculative capital inflows and juggling debt as it negotiates an IMF bailout.

Ethiopia’s unravelling is a reflection of its macroeconomic policy regime. When demand and supply don’t balance, something must give. In a liberal regime it is prices that adjust (exchange rate, interest, and inflation). If prices are controlled then demand or supply must give, in this case, the supply of foreign exchange. Still, the crisis has provided an opportunity for transformational political and economic change. To quote economist Paul Romer, a crisis is a terrible thing to waste.

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David Ndii

David Ndii is one of Kenya's leading economists and public intellectuals.

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KENYA BUDGET 2018: Did CS Rotich just turn Kenya into a tax haven?

Deep inside the Finance Bill 2018 is an amendment on the Tax Procedures Act, 2015. Its intent is to protect illicit money returned to Kenya from any form of scrutiny. Alongside this are plans, well underway, to turn Kenya into an ‘international financial centre’, a common euphemism for a tax haven. Amnesty measures for past corruption globally have generally failed. So why is the Jubilee administration pursuing them? By JOHN GITHONGO.

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KENYA BUDGET 2018: Did CS Rotich just turn Kenya into a tax haven?

In September last year, the Tunisian parliament approved a law granting amnesty to officials accused of corruption during the rule of dictator Zine El-Abidine Ben Ali. This immediately triggered protests. Since the Arab Spring of 2011, Tunisia has been hailed as a democratic success in the Middle East. Unlike many of the other countries where the democratic convulsions of 2011 were quickly smothered or descended into chaos, Tunisia’s democratic experiment has perhaps not flourished but neither is in critical condition. In July 2013 Russia’s lower house of parliament approved an amnesty for thousands of entrepreneurs jailed for economic crimes. It was argued that the criminalisation of business disputes in Russia had had a deleterious effect on the commercial climate generally. In June 2015 the Indonesian Finance Minister Bambang Brodjonegoro announced an initiative aimed at boosting tax incomes by introducing an amnesty for past economic crimes that would allow billions of dollars parked abroad by Indonesians to be returned to the country. President Joko ‘Jokowi’ Widodo’s government was in a crunch. They had embarked on a series of expensive infrastructure projects but needed to bump up tax revenues by 30 percent to fund them.

Amnesty programmes always imply pragmatic choices seen as disproportionately benefiting elites that have benefitted from corruption in the past. For the independent media and civil society, the concern is always one of entrenching impunity with regard to economic crimes. Where impunity attends to economic crimes it is always accompanied by similar official attitudes to sometimes the most egregious human rights abuses.

The Finance Bill, 2018 published with the budget last month, included an amendment to the Tax Procedures Act, 2015, suggesting that Kenya may have quietly chosen to go in a direction similar to Indonesia’s. Though the rationale of the action here has yet to be publicly articulated like similar initiatives in other parts of the world, the new amendment changes the tax amnesty that was declared three years ago. It has been expanded to include undeclared income to the extent that: “The funds transferred under the amnesty shall be exempt from the provisions of Proceeds of Crime and Anti-Money Laundering Act, 2009 or any other Act relating to reporting and investigation of financial transactions, to the extent of the source of the funds excluding funds derived from proceeds of terrorism, poaching and drug trafficking.”

The Finance Bill, 2018

The Finance Bill, 2018

Amnesty programmes always imply pragmatic choices seen as disproportionately benefiting elites that have benefited from corruption in the past. For the independent media and civil society the concern is always one of entrenching impunity with regard to economic crimes. Where impunity attends to economic crimes it is always accompanied by similar official attitudes to sometimes the most egregious human rights abuses.

The new amendment changes the tax amnesty that was declared three years ago. It has been expanded to include undeclared income to the extent that: “The funds transferred under the amnesty shall be exempt from the provisions of Proceeds of Crime and Anti-Money Laundering Act, 2009 or any other Act relating to reporting and investigation of financial transactions, to the extent of the source of the funds excluding funds derived from proceeds of terrorism, poaching and drug trafficking.

Money has no loyalty and in this globalised era, wears the uniform or label of no country. It doesn’t announce itself as in, “I am being laundered”; or, “This is terrorism finance or the proceeds of poaching.” The rigour and integrity of the oversight mechanisms meant to check these flows needs to be world class. And even world class anti-money laundering mechanisms in the world’s most developed economies with the best resourced investigative authorities have only made a small dent on the giant global flows of illicit wealth around the globe over the last two decades. Typically, drug dealers, money launderers and globalised criminal enterprises are better resourced and more ruthlessly managed than even the best policing institutions in the world.

Kenya’s recent changes, combined with currently advanced plans to turn Kenya into an international finance center – a tax haven, essentially – could herald the end of the war against corruption in Kenya as we know it. All while we are distracted by the exciting scandals being reported on in the media. The reality of what’s playing out remains to be seen but it should be of some concern that one of the most corrupt yet sophisticated financial sectors in Sub-Saharan Africa is about to open itself up in a structured legalised manner to the darkest element of the global financial system.

Kenya’s dalliance with amnesties for past economic crimes is not new. As the end of the Moi era drew closer, I was involved in a national debate regarding what we would do with past economic crimes when a new administration came to power after the December 2002 elections. In 2000 and 2001, Transparency International-Kenya, the National Council of Churches of Kenya and the Law Society of Kenya among others convened a series of debates on the subject. The rationale at the time was that, first Kenya’s public service culture had been ruined by rampant theft and plunder especially since the 1972 Ndegwa Commission Report which legalised conflict of interest. Changing this culture meant having a structured national approach to dealing with past corruption. An option was to articulate an amnesty mechanism accompanied by a restitution programme that would allow the return of corruptly acquired wealth and a lustration initiative that would forever bar those who were granted the amnesty from ever holding public office in Kenya. The Commission of Inquiry into the Illegal and Irregular Allocation of Public Land of 2003 (aka the Ndung’u Commission) came out of this thinking, as did efforts to trace wealth stashed illegally overseas by Kenyans.

A second strand of reasoning at the time was that the opposition, which seemed likely to win the election, would be coming into office broke after over a decade of expensive campaigning, and would be confronted by a Moi-era political and bureaucratic elite opposed to progressive reform and possessed of the kind of wealth to cause a huge amount of political trouble; indeed with the capacity to stymie real reform altogether. The thinking was that this wealth needed to be squeezed out of our politics to allow a new administration the space to implement far reaching reforms aimed at improving the welfare of Kenyans generally and transforming the economy, society and politics.

The Kibaki era initiative faltered when the elite around him led by some of his key ministers decided to make private deals with the very thieves their own administration was ostensibly chasing down. It got so bad at one point that some officials were using the anti-corruption campaign as a highly lucrative extortion tool. Well-heeled players from the past coughed up the equivalent of billions of shillings in cash, forex, land, real estate, company shares and other considerations in exchange for essentially bringing the anti-corruption campaign to a halt and turning it into a PR gimmick to placate wananchi.

When one looks around the world since the early 1990s, amnesty initiatives for economic crimes – especially in countries where corruption is systemic – have largely been failures. They succeed in facilitating the repatriation of some hot money that causes bumps in stock markets, hikes real estate prices and strengthens local currencies in the short term. In the medium term they seem to send a message that theft works and therefore serve to entrench impunity especially with regard to economic crimes. In the developing world their limited successes seem to apply only during the first 18 months of a popular regime elected on an anti-corruption ticket.

The Kibaki era corruption amnesty initiative faltered when the elite around him led by some of his key ministers decided to make private deals with the very thieves their own administration was ostensibly chasing down… At one point, some officials were using the anti-corruption campaign as a highly lucrative extortion tool. Well-heeled players from the past coughed up billions of shillings in cash, forex, land, real estate, company shares and other considerations in exchange for essentially bringing the anti-corruption campaign to a halt and turning it into a PR gimmick to placate wananchi.

It is also the case that typically these amnesty initiatives are implemented only in the most corrupt countries where the context makes for the greatest challenges. This, as I have noted earlier, doesn’t always apply when accompanied by tectonic political changes, notably as the ones we are witnessing in Malaysia today.

Additionally, it is often the case that amnesty programmes are often desperate measures aimed at dealing with the fiscal distress of corrupt regimes. In this sense they can also be deeply cynical ploys to launder the ill-gotten gains of the past and concurrently wave the white flag for a political elite that has given up the fight against systemic corruption in public life.

 As I observed above, as an instrument aimed at dealing with a widespread culture of theft and plunder the issue of an amnesty for economic crimes has bubbled up several times over the last two-decades in Kenya. In 2007 the KACC complained about amendments the legislature had introduced to the Anti-Corruption and Economic Crimes Act, 2003 following the Anglo Leasing scandal. In a statement issued in September 2007 the then head of the Commission, Justice Aaron Ringera argued that parliament had essentially granted ‘a blanket amnesty’ for economic crimes committed before the 2nd of May 2003. More recently, the NCCK’s leadership, confronted with the current explosion of corruption scandals in the media called for a one-year amnesty for past corruption after which all future graft would be punished ruthlessly. The NCCK has been one of the most consistent actors in this debate for almost two decades now. The former head of the Anglican Church, Archbishop Wabukala is chair of the Ethics and Anti-Corruption Commission and was party to the statement made by the NCCK in May.

In 2007 the KACC complained about amendments the legislature had introduced to the Anti-Corruption and Economic Crimes Act, 2003 following the Anglo Leasing scandal. In a statement issued in September 2007 the then head of the Commission, Justice Aaron Ringera argued that parliament had essentially granted ‘a blanket amnesty’ for economic crimes committed before the 2nd of May 2003. More recently, the NCCK’s leadership, confronted with the current explosion of corruption scandals in the media called for a one-year amnesty for past corruption after which all future graft would be punished ruthlessly.

The amendments to the Tax Procedures Act 2015 may indicate that the Jubilee regime appears to have cynically heeded the NCCK’s call. Either that or the extent of the regime’s fiscal distress as it implements an IMF sanctioned austerity programme is such that they have resorted to extraordinary measures to find the money to keep government going and the elite with their snouts in the trough. I argued last month that in Kenya, the real corruption is not in the scandals that are tantalising us in the media but in the budget.

(Research by Juliet A. Atellah)

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CRONY CAPITALISM AND STATE CAPTURE: The Kenyatta Family story

With business interests in the heart of the Kenyan economy, how has Uhuru Kenyatta’s presidency benefited The Family? Has Kenya benefited from the Kenyattas? DAVID NDII looks at the numbers.

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CRONY CAPITALISM AND STATE CAPTURE: The Kenyatta Family story

Nothing is more dangerous than the influence of private interests in public affairs, and the abuse of the laws by the government is a less evil than the corruption of the legislator, which is the inevitable sequel to a particular standpoint. In such a case, the State being altered in substance, all reformation becomes impossible. ~ Jean Jacques Rousseau

In November 2013, seven months into Uhuru Kenyatta’s presidency, one of the dailies carried a story profiling what it termed as the Kenyatta family business “expansion drive”. “Uhuru Kenyatta’s presidency” it averred, “has injected fresh energy into his family’s commercial empire, putting a number of units on an expansion mode that is expected to consolidate its position as one of the largest business dynasties in Kenya.” The paper listed interests in hospitality, dairy healthcare, media, banking and construction. The feature went unremarked in public debate. Conflict of interest is not part of Kenya’s political lexicon.

At the time, Brookside Dairy, the family’s flagship business, was completing an acquisition spree that has swallowed up all the large private milk processors leaving only the state supported and erstwhile processing monopoly, Kenya Cooperative Creameries (KCC), and the farmer-owned Githunguri Dairies (owner of the “Fresha” brand) as serious competitors.

The pay-off has been remarkable. During Uhuru Kenyatta’s first term the consumer price of milk increased 67 percent (from KSh 36 to KSh 60 per half-litre packet), while producer prices remained unchanged at KSh 35 per litre), effectively increasing processors’ gross margin by 130 percent (from KSh 37 to KSh 85 per litre). Given the industry’s 400m litre annual throughput and Kenyatta family’s market share, which stands at 45 percent, the consumer squeeze translates to an increase of the Kenyatta Family’s turnover from KSh 13 billion to KSh 22 billion, and gross margin from KSh 6.7 billion to KSh 15 billion a year.

Two years ago, it emerged that the president’s sister and cousin (or niece) had abused procurement reserved for disadvantaged women and youth to supply the health ministry. The company involved was registered after Kenyatta assumed office. The website, which has since been taken down, listed their business as supplying healthcare products, building materials, construction equipment, dry foods and supplementary foods to “government entities, parastatal entities, non-governmental organizations, corporates and counties”. It also advertised investment consultancy and “facilitation” services, also known as influence peddling. The business was set up specifically to profit from Kenyatta’s presidency.

During Uhuru Kenyatta’s first term the consumer price of milk increased 67 percent (from KSh 36 to KSh 60 per half-litre packet), while producer prices remained unchanged at KSh 35 per litre), effectively increasing producers’ gross margin by 130 percent (from KSh 37 to KSh 85 per litre). Given the industry’s 400m litre annual throughput and Kenyatta family’s market share, which stands at 45 percent, the consumer squeeze translates to an increase of the Kenyatta Family’s turnover from KSh 13 billion to KSh 22 billion, and gross margin from KSh 6.7 billion to KSh 15 billion a year.

Koto Housing, associated with Uhuru’s sister and specialising in expanded polysterene (EPS) modular construction technology was cashing in on police housing. No sleuthing is required to establish this— it’s on the company’s website. Since then, the family has established an even bigger EPS building company C-MAX, which also showcases police housing on its website. Instructively, the website also markets “affordable housing” as one of the product lines. Affordable housing is one of Kenyatta’s “big four” agenda.

That the Kenyatta family would set up businesses to trade with the government during his tenure, and have no qualms showcasing government business on their websites, is astounding. But nothing brings home the family’s obliviousness to conflict of interest than its entanglement with the Rai family, the timber and sugar merchants now embroiled in the contaminated sugar import scandal. Parallels have been drawn between Kenyatta’s engagement with Rai and the South African Gupta state capture saga.

Two years ago, it emerged that the president’s sister and cousin (or niece) had abused procurement reserved for disadvantaged women and youth to supply the health ministry. The company involved was registered after Kenyatta assumed office. The website, which has since been taken down, listed their business as supplying healthcare products, building materials, construction equipment, dry foods and supplementary foods to “government entities, parastatal entities, non-governmental organizations, corporates and counties”. It also advertised investment consultancy and “facilitation” services, also known as influence peddling. The business was set up specifically to profit from Kenyatta’s presidency.

Sometime in the early 90s, the Rai siblings sued one of their brothers, Jaswant Rai, alleging that he had secretly been siphoning money from the family business and investing it on his own. They alleged that the money was invested in two Kenyatta Family businesses: Timsales, a timber merchant, and the Commercial Bank of Africa.

Raiply, the Rai family’s flagship plywood manufacturing business came to prominence for what appeared to be a carte blanche license to log public forests during Moi’s tenure. The case confirmed what the public had long suspected: that Moi had a stake in the business. Kabarak Limited, a name synonymous with Moi, had a 1.4 percent stake in Raiply. Moi banned logging of hardwoods from indigenous forests in 1986. According to the task force the Jubilee administration appointed recently, the Kenya Forestry service has continued to give Raiply licenses to log these invaluable forests for plywood.

Sometime in the early 90s, the Rai siblings sued one of their brothers, Jaswant Rai, alleging that he had secretly been siphoning money from the family business and investing it on his own. They alleged that the money was invested in two Kenyatta Family businesses: Timsales, a timber merchant, and the Commercial Bank of Africa.

Rai’s clout in the Jubilee administration became apparent during the disposal of the bankrupt Pan Paper Mills, Kenya’s lone pulp paper mill and a monument to failed import substitution industrialisation. Established in 1971 as a joint venture between the Government and an Indian investor, Pan Paper’s claim to fame is that it has never made a profit, even though during the pre-liberalization era, the Indian investors paid themselves handsomely through transfer pricing, management fees and royalties. Pan Paper collapsed in 2009, was bailed out and reopened by the government in 2010, but it closed down again a year later. A second revival failed.

In 2014, Pan Paper’s receiver managers resigned abruptly, protesting that a powerful hidden hand was manipulating the transaction to ensure that Pan Paper’s assets were sold cheaply to Rai. A new receiver was promptly appointed and the assets, reportedly worth KSh 18 billion were sold to Rai, for KSh 900 million – even less than the Ksh 1 billion the government had injected in the failed revival.

Kenya’s current sugar production according to Kenya National Bureau of Statistics data is in the order of 600,000 tons a year, against a consumption of 830,000 metric tonnes, making for an annual deficit of 230,000 tons. Kenya has been accorded safeguards to protect the domestic sugar industry by COMESA trading partners, but these safeguards dictate that Kenya imports the deficit from COMESA countries. Also, it was the practice, as I remember it, that preference was given to the domestic millers in proportion to their market share.

It has now come to light that mid last year, in the run-up to the election, the government, citing drought, opened the floodgates and allowed all and sundry to import sugar duty free. The KNBS data shows 990,000 tons imported during the year—more than a year’s consumption. To be sure, 376,000 tons, the volume of domestic production, was well below normal, but this translates to a deficit in the order of 450,000 tons – less than half of what was imported. Moreover, it is unclear why duty was waived—sugar withdrawal symptoms are not fatal.

Sugar importation was the Moi era’s default election financing racket. In those days, the racket was a closed shop controlled by a small cabal of Moi’s associates known as the “sugar barons”, not the feeding frenzy we are witnessing today. Jubilee’s dynamic duo may be Moi’s political children but one among the many things they did not learn from him was disciplined corruption. Little wonder that Moi once described them as “ndume hawajakomaa”.

Domestic sugar industry protection in these parts borders on the irrational. Sugar is classified as a “sensitive item” under the EAC’s Common External Tariff, which means it attracts punitive import duties, set at 100% or US$460 a ton, whichever is higher. With sugar currently trading at U$265 a ton on the world market, the applicable rate is US$460, which is effectively an import duty rate of 170 percent. Regular goods are taxed at 0,10 and 25 percent while rates for other sensitive items range from 35 to 60 percent.

Sugar importation was the Moi era’s default election financing racket. In those days, the racket was a closed shop controlled by a small cabal of Moi’s associates known as the “sugar barons”, not the feeding frenzy we are witnessing today. Jubilee’s dynamic duo may be Moi’s political children but one among the many things they did not learn from him was disciplined corruption. Little wonder that Moi once described them as “ndume hawajakomaa”.

But even with the punitive import duty, the landed cost still works out to between KSh 80-85 a kilo, which allowing for distribution costs and trade margins, would still have put sugar on the shelf in the KSh 110 to Ksh 120 range at which it has been selling. In effect, the foregone duty has been pocketed by the importers. For 960,000 tons, we are talking US$ 455 million (KSh 45.5 billion). If the importation had been done by the sugar millers, and at the right quantity, a duty waiver would have translated to revenue in the order of KSh 20 billion – enough, if properly managed, to turn the struggling mills around. Instead, when they most needed the financial cushion, the government let the dogs out.

When the contaminated sugar scandal first broke with a raid on a backstreet operation in Eastleigh (Nairobi’s “Somali Quarter”), with the culprits caught packing the contraband as “Kabras” sugar, it created the impression that this was a crackdown on the Somalia-Kenya border smuggling racket. Kabras is the brand name of the Rai-owned West Kenya Sugar Company. Then, Aden Duale, Jubilee’s motor-mouthed Parliamentary majority leader turned the guns on Rai. This immediately elicited a stern, sanctimonious public statement from West Kenya Sugar. It admitted to importing sugar, but did not disclose how much. It was not long before sugar hoardings popped up in various Rai establishments up and down the country, including Pan Paper.

It has been reported that Rai imported 189,000 tons of sugar, close to a fifth of the total duty free imports last year. The tax benefit to Rai, and loss to the public, for this amount of sugar is in the order of US$86 million (KSh 8.6 billion). We are talking here of the annual budget of an entire county. The sugar itself is worth upwards of US$50 million (KSh 5 billion). Businesses seldom have this kind of cash lying around, so it is most likely that the transaction was bank financed. If so, it would be interesting to know which bank this is.

It is western Kenya’s misfortune that the region was the hub of both the sugar industry and Pan Paper, Kenya’s most disastrous import substitution industries. The people of Webuye, and the larger Western region, have nothing to show for it. A log of wood typically converts to 8000 sheets of A4 paper worth Ksh. 60,000 (US$600). This is about the same as the value of raw timber. The same log converted into furniture will have a final value twenty times that amount (e.g. three dining tables worth KSh 40,000 each) or higher depending on quality. The furniture industry is a relatively low capital requirement, labour intensive industry that would have utilized Webuye’s forest resources for a locally-owned job and wealth-creating industry.

In its lifetime, Pan Paper has consumed 25,000 hectares of public forests — about 600 hectares per year. Pan Paper at its peak employed 1,500 people. A timber-furniture industry cluster utilising the same resource would have created ten times as many jobs, injecting more than Ksh 100 billion a year into the region’s economy.

In a previous column, I posed the question as to what made the leaders of the East Asian Tigers pursue export-led industrialisation going against the dominant development paradigm of the day. I postulated that they did not set out to perform economic miracles, but rather to improve the lot of their people, which led them to the realisation that capital intensive import substitution industries would not create jobs for the masses.

Half a century on, Uhuru Kenyatta, who claims to be inspired by Lee Kuan Yew, is taking the country back to crony capitalist import substitution. In recent months, import tariffs have been raised on timber, vegetable oils and paper products, in all of which the Kenyattas and Rais are players. It was rumored that the Rai purchase of Pan Paper was a Trojan Horse to access public forests for their timber business. The rumour was all but confirmed by the recent appointment of Jaswant Rai to the board of the Kenya Forestry Service. As I opined, “when East Asian leaders were asking prospective investors what they needed to do for them, ours were asking what was in it for them”. Nothing has changed. The “big four” manufacturing pillar is also about profits for Kenyatta & Co. – not about jobs. The president’s bread is buttered on the side of capital, not labour.

Kenyatta’s presidency has increased the profits of his family’s conglomerate by at least Ksh 10 billion a year, and that is not including the side lines of family members’ “tenderprises” such as the sister’s health ministry tenders and the uncle’s NYS fuel supplies. The best-run businesses in competitive markets typically make profits in the order of five percent of turnover. In effect, the presidency translates for the Kenyatta conglomerate the equivalent of a KSh 200 billion turnover business —a business the size of Safaricom (whose hefty earnings are due to inordinate market power).

When East Asian leaders were asking prospective investors what they needed to do for them, ours were asking what was in it for them. Nothing has changed. The “big four” manufacturing pillar is also about profits for Kenyatta & Co. – not about jobs. The president’s bread is buttered on the side of capital, not labour.

It should not surprise then that no expense has been spared, no price has been too high not only to keep Uhuru Kenyatta in power, but also to roll back the constitutional dispensation and restore to the presidency the unfettered power on which the family fortune rests.

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A GOOD MAN IN GOMORRAH: How shame died in Kenya, why seppuku is alive and well in Japan

In Japan, public officials routinely resign for reasons that would frankly astonish their Kenyan counterparts. In Mauritius, the President resigned for a matter that would be considered ridiculous in Kenya, where bureaucratic cock-ups, and entrenched sense of impunity and a basic lack of decency lose lives, stoke public health emergencies and waste vast sums of money. What is wrong, says MIRIAM ABRAHAM, is the end of shame in public culture.

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A GOOD MAN IN GOMORRAH: How shame died in Kenya, why seppuku is alive and well in Japan

I recently watched with interest a video of four senior Japanese officials bowing and apologizing to the public. I was curious. I wanted to know how many deaths these officials had caused or what a lifestyle audit had revealed about each one of them. I was curious to know if they too had been involved in approving contaminated food into the market, or rigging elections.

“It’s deeply regrettable that this misconduct took place. We’re sorry,” said one of the Japanese officials as the other three looked on gravely.

The misconduct was that one of their workers had been leaving work three minutes ahead of his lunch break. It was not just the public apology that took place. The worker was reprimanded and fined, losing thousands of Yen. This is how seriously public service is taken. It is about ethics and integrity.

I found this remarkable, especially during a week in which in my own country, public servants had done far worse things and shown no remorse. A week in which those entrusted by the public with their safety and security had probably been bribed to allow the importation and sale of contaminated sugar into the country.

Looking at the downcast faces of the four Japanese officials reminded me of how on 1 September 2017, I was tasked with preparing what was supposed to be a major statement following a historic decision by a key organ of government. The draft started with a public apology. Later, in consultations, reference to even the barest sense of remorse was deleted. To date, no apology has been offered. Not from me or any of my colleagues. Nobody has been made to account for the lives lost, the money lost, the time lost and the complete running down of the state institution. Instead, in small regular doses, we are treated to theatrics.

On 1 September 2017, I was tasked with preparing what was supposed to be a major statement following a historic decision by a key organ of government. The draft started with a public apology. Later, in consultations, reference to even the barest sense of remorse was deleted. To date, no apology has been offered.

Corruption, impunity, state capture and lack of integrity make for a toxic mix. Nobody feels responsible for failure. No shame. No possibility that one of these individuals, driven by guilt, will suffer a nervous breakdown because of the plunder of state resources. Or failure to uphold the Oath of Office. Not the President or any State Officer. Political leaders consciously lead their supporters to their deaths to increase their political bargaining power with their adversaries and feel no remorse. The police use violence to quell peaceful protests causing deaths and yet there will never be an apology, resignation or firing. The conclusion is simple: if I will not be held responsible for my actions, why apologize? If I can steal and still remain in office, why resign?

In hindsight, I should not have been surprised by the video of Japanese officials resigning. Tolerance levels for scandals in Japan are extremely low. Except for its current Prime Minister Shinzo Abe, who has been in office since 2012, Japan’s Prime Ministers since the Meiji Restoration in 1868, have served for an average of only two years. Prime Minister Abe, is facing public pressure to resign for actions that would be considered frivolous in Kenya or even in Donald Trump’s United States.

Abe is accused of cronyism in a case in which an old friend of his sought regulatory approval to open a veterinary medicine department at his university. This is not illegal in Japan. Another “scandal”: Abe is accused of assisting the owner of a kindergarten to buy a plot of land from the national government at around 14 percent of the market value in order to set up an elementary school. I must stress, that this was not a case of a public official trying to “convert” a school playground into private property. The details of that land controversy in Japan are nowhere near the Ksh 1.5 billion Ruaraka land scandal, or the myriad frauds documented in the Ndung’u Land Commission report.

Except for its current Prime Minister Shinzo Abe, who has been in office since 2012, Japan’s Prime Ministers since the Meiji Restoration in 1868, have served for an average of only two years. Prime Minister Abe is facing public pressure to resign for actions that would be considered frivolous in Kenya… Abe is accused of cronyism in a case in which an old friend of his sought regulatory approval to open a veterinary medicine department at his university. This is not illegal in Japan.

The private sector in Japan is not spared from scrutiny either. It is fairly common for Japanese chief executives to step down and take responsibility for unethical actions in their firms. The list is long including the CEO of Dentsu, Japan’s biggest advertising agency, who resigned in 2016 over a worker’s suicide due to overwork (there is a formal term for this: karoshi); Toshiba’s CEO who resigned due to an accounting scandal; the CEO of Olympus who resigned after a scandal over hefty advisory fees; and the CEO for Tepco over the Fukushima Daiichi nuclear plant crisis in 2011.

We are yet to have a resignation or even an apology from any of the entities involved in the pingpong corruption scandals in Kenya. The Central Bank and several other banks that facilitated the corrupt transactions have not taken responsibility for their actions. The Kenya National Chamber of Commerce, Kenya Private Sector Alliance (KEPSA) – the lobbies always the first to appeal for peace and calm in the aftermath of rigged elections, have been silent, as though the companies involved in corrupt practices are from Jupiter.

I am not implying that Japan is scandal-free. Far from it. They have their share of scandals. Public officials have been found guilty of corruption, cronyism, name it. The difference is the way their leaders deal with these situations, the society’s high bar of expectation, the shame accompanying these acts, and the legal processes designed to deter reoccurrence.

For sure, they have had sub-standard food approved for sale in the market but the officials involved have not waited for litigation. They own up to their actions, apologize to the public and face the full force of the law. In our case, public officials approved the importation and sale of contaminated sugar – whether it contains mercury, gold or bronze. Others approved the purchase and storage of contaminated maize and watched as their bank accounts bulged. What level of greed is this? Why would we not protect the lives of those we have been charged to serve? Why would we consciously approve the sale and distribution of “fake” fertilizer to unsuspecting struggling farmers? The answer lies in a combination of corruption, lack of basic ethical behavior and the lack of value for life.

Public officials receive bribes and look the other way when sub-standard construction of buildings and dams are done. Engineers and architects are willing to sacrifice the lives of hundreds of people for their personal gratification. And even when Solai Dam tragedies happen, there is no accountability. No heads roll. No apologies are given. No prosecution. We move on and wait for the next tragedy.

If Japan sounds too remote for us to analogise, there are examples closer to home worth looking at. In March this year, the President of Mauritius, Ms. Ameenah Gurib-Fakim was accused of using a credit card given to her by an NGO to cover travel expenses. Instead, she used the $27,000 to buy clothes, jewelry and other personal items. She refunded the money and stepped aside with Prime Minister Pravind Jugnauth saying that she had done so in “the interest of the country”. And we have Ministers and Governors in office who have been accused of stealing millions of dollars! It is no wonder that Mauritius ranks 50th in Transparency International’s Corruption Perception Index and we rank 143rd out of 180 countries and territories.

Public officials receive bribes and look the other way when sub-standard construction of buildings and dams are done. Engineers and architects are willing to sacrifice the lives of hundreds of people for their personal gratification. And even when Solai Dam tragedies happen, there is no accountability. No heads roll. No apologies are given. No prosecution. We move on and wait for the next tragedy.

Like many others, I often wonder what makes countries such as Botswana, Japan and Mauritius exceptional in their approach to leadership and governance. Some argue that for Japan, the magic lies in their education system that makes moral education compulsory. The principles of reflecting on one’s relationship to others, the relationship to nature and relationship to society. They credit Confucianism for it: “man’s relationship with the world around him, man’s relationship with others, with family and man’s relationship with nature”. Then again, we are taught all these morals in Kenyan schools – but only for the purpose of passing exams. We are super religious with a healthy competition between the number of religious centers in our communities and the bars. But as we know, teaching is one thing and practicing the ethos is another. This is why Japan, Mauritius and Botswana pull ahead. These countries have continuously led the pack in setting the pace for leadership and good governance.

Some would argue that we are evidently on that path too since there are countries setting plans to visit us and “benchmark” our fight against corruption! I am all for the fight against corruption. It is a fantastic idea to prosecute all those found guilty of siphoning money from the National Youth Service and other bodies. I could even support lifestyle audits, if I understood their methodology. And even the lie detectors if they were not so obviously a technological decoy designed to further mystify the basic question of public integrity.

But beyond the Machiavellian drums of corruption that we keep beating, we need to develop a national ethos that is beyond making a quick buck. We need to build a critical mass of leaders that will do to Kenya what the people of Mauritius, Botswana and Japan have been able to attain so far. Change does not need millions of people, it requires a few people committed to leadership and integrity. It needs individuals conscious that the path we are following will only lead to total annihilation of the nation. It requires strong men and women who are ready to challenge the status quo. Men and women, who are willing to challenge the corruption within their ranks.

Change does not need millions of people, it requires a few people committed to leadership and integrity. It needs individuals conscious that the path we are following will only lead to total annihilation of the nation. It requires strong men and women who are ready to challenge the status quo. Men and women, who are willing to challenge the corruption within their ranks.

This leadership is absent. Like many African countries, we face a leadership deficit. We lack a few men and women of integrity who are ready to take on the challenges ahead of us. Many of us are still waiting for the 2022 elections to usher in change, on the basis of a misleading assumption that voters decide who leads Kenya! This difficult work of change must begin in earnest now. Those who previously presented themselves as leading anti-corruption crusaders in the Opposition side appear to have thrown in the towel. Even as we collectively criticize them for doing so, we should seize the moment and begin nurturing that critical mass of change makers. As I have argued in these pages in the past, the millennials should seize this moment and fill the current leadership vacuum!

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