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SGR by the numbers – some unpleasant arithmetic

In the beginning was a fiction – that the Chinese railway would freight 22 million tonnes a year, and in so doing, replace the trucking business. Turns out – and this from the government’s own internal assessments – that the maximum amount of annual freight on the SGR is 8.76 million tonnes, almost a third of what was promised. Interest alone on the $3 billion debt is in US$200 million (KSh 20 billion) per year, which works out to KSh 45,000 – KSh 60,000 per container. Contrary to official assurances, explains DAVID NDII, the railway will require both State coercion and a massive public subsidy to stay in business.

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What is the economic rationale of establishing a subsidized public monopoly to replace a competitive industry?
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“Unpleasant arithmetic” is a popular economists phrase coined by Thomas Sargent, the 2011 economics Nobel Prize laureate and Neil Wallace in an influential 1981 paper simply titled “Some unpleasant monetarist arithmetic” that sought to demonstrate that monetary policy is a useless anti-inflation tool. The deadpan title had a double meaning, the truly horrendous math and the unsettling policy implications. The good news is that Kenya’s standard gauge railway (SGR) arithmetic turns out to be unpleasant only in one dimension. The bad news is that it is the money end of the business, not the math.

It is helpful to start by putting the scale of the project in perspective.

UK’s Crossrail project, an expansion of the London commuter rail system has been billed as Europe’s most expensive infrastructure project, with a price tag of US$ 23 billion, five times the cost of the Mombasa-Naivasha SGR. But the project amounts to less than one percent of UK’s $2.6 trillion dollar economy (37 times Kenya’s), and 3.5 percent of government revenue. The UK borrows long term domestically at between 1.5—2.5 percent per year. If we take the higher figure, the interest cost of financing the Crossrail project is about 0.1 percent of government revenue. The most expensive infrastructure project in Europe increases the UK’s public debt by less than one percent of GDP and puts no pressure on the government budget.

When it was starting in 2014, the $3 billion outlay for the Mombasa-Nairobi segment amounted to 5.4 percent of GDP and 11 percent of government revenue. The cost to completion (Mombasa to Malaba), estimated at US$8 billion at the time, was in the order of 15 percent of GDP and 73 percent of government revenue. If we were to finance it from floating international bonds, the interest cost on the $4.5 billion dollars we’ve borrowed already would translate to 2.5 percent of government revenue, 28 times the cost of Crossrail’s debt burden on UK’s taxpayers.

But the Chinese bank loans have a higher revenue burden than bonds since we have to pay both interest and principal. We now know that the cost is in the order of KSh 50 billion per year currently, equivalent to four percent of revenue. That translates to 45 times CrossRail’s debt burden on UK taxpayers. Moreover, as noted, the UK borrows domestically, with no currency risk. The shilling has depreciated 18 percent since we borrowed, raising the interest cost by KSh 3 billion a year.

When it was starting in 2014, the $3 billion outlay for the Mombasa-Nairobi segment amounted to 5.4 percent of GDP and 11 percent of government revenue. The cost to completion (Mombasa to Malaba), estimated at US$8 billion at the time, was in the order of 15 percent of GDP and 73 percent of government revenue.

To contemplate a project of that scale, you need a very high degree of certainty of its viability. It is otherwise reckless.

The key selling point of the SGR project is that it would get the huge trucks off the road. It would also be cheaper and faster. The public was told that it would haul 22 million tonnes of freight a year. As this column pointed out then, this was always doubtful.

A typical locomotive hauls of between 3000 and 4000 tonnes of freight. We now know that the SGR locomotives’ capacity is 3000 tonnes. The 22-million ton target works out to 20 trains a day, a train every 80 minutes. But the government has also marketed passenger services, which brings you down to a train an hour. It matters that over 90 percent of the freight is imports. If it was equally divided between imports and exports, you would need half the departures. But with virtually all freight going one way, a departure every hour both ways on a single track is a stretch.

We now know courtesy of a study by government policy think tank, KIPPRA, that the operational capacity of the railway in terms of the rolling stock already acquired and configuration of the line (e.g. provisions for trains to pass each other), is twelve trains a day, with provision for four passenger and eight freight trains a day, with a capacity of 8.7 million tonnes a year.

Besides falling far short of the so called design capacity, this raises a serious question about the viability of extending the railway to Uganda. Currently, the volume of transit cargo coming through the port of Mombasa is close to eight million tons, just about the same capacity as the railway. Thus, the current operational capacity cannot serve both the domestic and transit cargo—it is one or the other. To serve both will require expanding the capacity on the completed section to at least double what it is, escalating the already exorbitant cost even further. In a decade or so, it will still come down to a question of domestic or transit freight. If the railway will have been extended, it will only make business sense to carry transit cargo, begging the question why Kenya would have borrowed so much money to build a railway for other countries.

The railway has been sold as a commercially viable project, that is, it would pay for itself. This column challenged this claim from the outset. In the first of many columns, I maintained that the railway could not pay, and that the debt would be paid from the public purse. This has now come to pass.

Currently, the volume of transit cargo coming through the port of Mombasa is close to eight million tons, just about the same capacity as the railway. Thus, the current operational capacity cannot serve both the domestic and transit cargo—it is one or the other. To serve both will require expanding the capacity on the completed section to at least double what it is, escalating the already exorbitant cost even further. In a decade or so, it will still come down to a question of domestic or transit freight. If the railway will have been extended, it will only make business sense to carry transit cargo, begging the question why Kenya would have borrowed so much money to build a railway for other countries.

The only feasibility study I have seen was done by the contractor China Road and Bridge Corporation (CRBC). It is possible that the lenders could have conducted their own feasibility studies as other development financial institutions do, but if such exist, they are a closely guarded secret.

The CRBC feasibility study has a chapter titled economic evaluation, though it is unlike any investment appraisal I have come across. It asserts that the project has “high profitability” and “financial accumulation ability”, but there are no cash flow projections to back this up. It presents Net Present Value (NPV) of three different configurations of US$ 2.0, 2.4 and 2.6 billion as evidence of viability, leaving one at a loss to understand how this justifies borrowing US$3.2 billion for the project. NPV is the current value of the future earnings of a project and should be higher than the cost of the project.

Be that as it may, the railway’s economic justification turns on cheap freight. The study asserts that the railway would turn a profit with a tariff of US$ 0.083 a ton per kilometre (8 US cents). Containers weigh between 20 and 30 tons, hence the study’s tariff at the time translated to between US$ 830 and US$ 1245 (Ksh. 70,000 to Ksh. 100,000) to freight containers from Mombasa to Nairobi. It puts road haulage cost at US$ 0.10 to US$ 0.12 (10 to 12 US cents), hence the proposed SGR tariff would have been 20 to 45 percent cheaper than trucking.

The only feasibility study I have seen was done by the contractor China Road and Bridge Corporation (CRBC)…It has a chapter titled economic evaluation, though it is unlike any investment appraisal I have come across. It asserts that the project has “high profitability” and “financial accumulation ability”, but there are no cash flow projections to back this up. It presents Net Present Value (NPV) of three different configurations of US$ 2.0, 2.4 and 2.6 billion as evidence of viability, leaving one at a loss to understand how this justifies borrowing US$3.2 billion for the project.

According to the Economic Survey, the source of official statistics, in 2012, when the feasibility study is dated, railway freight revenue was Ksh. 4.40 a ton per kilometre, which works out to $0.052 cents. In effect, the SGR claimed that it would make freight cheaper, while in fact its break-even tariff was higher than the railway tariff prevailing at the time. Even the postulated tariff advantage over trucks is flawed because it covers freighting to the inland container depot (ICD) and does not include the additional cost of moving the containers from the ICD to the owners’ premises.

If the tariff advantage over road could be defended, the correct way to measure its economic benefits would be the cost savings, the difference between the “with and without” scenarios. We now know, courtesy of the KIPPRA study, that the actual operational capacity of the railway is 8.76 million tonnes. If we assume, heroically, trains operating at full capacity for the 25 years used in CRBC’s feasibility study and the maximum cost saving ($0.037 a ton per kilometre) we obtain an Internal Rate of Return of 2.4 percent, against a standard benchmark opportunity cost of capital for development projects of 12 percent.

More importantly, the returns are highly sensitive to the railway’s cost advantage over trucking. If we use the lower-bound trucking cost of $0.10 which reduces the cost advantage to $0.017, the project’s Internal Rate of Return (IRR) falls close to zero, the NPV drops to $580 million and the benefit cost ratio (BCR) to 0.2. The IRR is the discount rate at which the NPV of a project is zero and is used to compare a project’s return to the cost of capital. The BCR is simply the benefits over costs and should exceed one for a viable project. A BCR below one means that the project is an economic liability.

The parameters of the feasibility study have already been blown out of the water by exchange rate movements. The 12 US cents trucking tariff used in the study was KSh10.15 in 2012 (at Ksh 84.50 to the dollar). Today KSh 10.15 translates to 10 US cents which as we saw, makes the railway an economic liability. The problem with the SGR is that the bulk of its costs are in foreign currency— indeed, its approved tariffs are dollar-denominated. Trucking has less foreign currency exposure and it is indirect. If the shilling depreciates, the railway loses cost advantage. This is exactly what has happened. As of mid last year, trucks were charging between KSh 70,000 and 90,000 to transport a 40-foot container from Mombasa to Nairobi, which works out to between $0.05 and 0.07 a ton per kilometre compared to the feasibility study’s break-even rate of US$ 0.083.

Over the long haul, currencies adjust to the inflation difference between a country and its trading partners, which for the Kenya shilling translates to depreciating by five percent per year on average. So far the government is relying on coercion to put cargo on the train, even though it is charging what it is calling a discounted tariff. Raising prices is going to be a difficult proposition. We can also expect the prices and operational efficiency of trucks to continue improving, while the railway is stuck with its current locomotives for decades. The price advantage will continue moving in favour of trucking.

With the installed operational capacity of 8.76 million tonnes, interest on its debt which is in the order of US$200 million (KSh 20 billion) translates to 4.6 US cents a ton per kilometre which works out to KSh 45,000 – KSh 60,000 per container. Add operational costs, and it is readily apparent that there is no competitive tariff that would enable the railway to service its debt. Moreover, it is difficult for the railway to operate at full capacity all the time. In effect, the railway will require both coercion and a massive subsidy to stay in business.

We are now compelled to confront the question: what is the economic rationale of establishing a subsidized public monopoly to replace a competitive industry? With cost advantage more or less out of the question, we are left with two arguments. One, that road haulage does not factor in the public costs of building and maintaining roads— including the disproportionate damage that heavy trucks inflict on the roads. The second is that road haulage cannot cope with the projected freight growth, in effect, that the railway line is a necessity, regardless of the cost. Let’s look at each in turn.

The contention that road haulage is implicitly subsidized is simply untrue. Freight trucks do exact a heavy wear and tear toll on the highway, but they also pay their fair share for it. The government is presently collecting KSh 18 per litre of fuel, which translates to Ksh 3,200 per Mombasa-Nairobi trip for a prime mover consuming 180 litres of diesel. Current freight container traffic on the road is at 1.2 million twenty-foot equivalent (TEUs), we are talking fuel levy revenues in the order of KSh 3.5 billion a year. When you add other users, the Mombasa-Nairobi section is generating upwards of KSh 5 billion in fuel levy funds – KSh 10 million per kilometre. It is enough to maintain it. In fact, if the government were to leverage it (i.e. float a bond and pay interest from it), it would be able to finance a phased expansion into a dual carriageway.

What is the economic rationale of establishing a subsidized public monopoly to replace a competitive industry?

The other is that the road would not be able to cope with the growing freight volume and a railway. International evidence suggests otherwise. In the EU for instance, the rail’s share of freight has fallen from 60 percent in the 70s, to just under 20 percent today, despite determined efforts by governments to reverse it. Railways have struggled to offer the flexible logistical requirements of the distributed just-in-time supply chains of a globalized information age. It is, after all, a nineteenth-century technology. Which is why I get rather amused when I hear the building of the “standard gauge” rail (a “standard” established in 1886) being characterized as a giant technological leap into the future.

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David Ndii

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

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India Election 2019: Modi’s Victory Signals Growing Far Right Intolerance in India and Around the World

Narendra Modi epitomises the kind of neo-fascist right-wing leadership that is sweeping across some parts of Europe, the United States, South America, Asia, and even Africa, where the likes of Donald Trump, Victor Orban, Benjamin Netanyahu, Rodrigo Duterte and Jair Bolsonaro are imposing intolerant, highly regressive policies that polarise populations and create false “them-versus-us” narratives.

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India Election 2019: Modi’s Victory Signals Growing Far Right Intolerance in India and Around the World
Photo: Flickr/Narendra Modi
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The re-election of Narendra Modi as India’s Prime Minister (his second term) is hardly surprising but does signify a worrying global trend of increasing intolerance and xenophobia. India’s weakened opposition – personified by the lacklustre and lightweight Congress leader, Rahul Gandhi – had no chance in a country riding on a wave of nationalism that equates Hinduism with patriotism. Rahul Gandhi’s lineage (he is the son of former Prime Minister Rahul Gandhi, the grandson of India’s “Iron Lady”, Indira Gandhi, and the great grandson of India’s founding father, Jawaharlal Nehru) failed to attract sufficient voters, perhaps because the Gandhi family is associated with the kind of dynastic politics that Modi says he is eschewing. (Modi never fails to remind Indians that he is the son of a tea seller who rose through the ranks without the support of any political godfather or dynastic family.)

Modi and his Bharatiya Janata Party (BJP) have been selling the narrative that the Hindu religion and way of life have been undermined by centuries of subjugation of the Indian people, first by Muslim Mughal conquerors/emperors, then by British colonialists, and finally by the secularist (read Congress) politicians who led India to independence and thereafter imposed a socialist mindset on the country’s governance. This narrative also feeds off the decades-old rivalry between India and Pakistan that began when India split into two countries at independence in 1947.

The re-election of Narendra Modi as India’s Prime Minister (his second term) is hardly surprising but does signify a worrying global trend of increasing intolerance and xenophobia

As the activist and author Arundhati Roy quipped, being a Muslim in Modi’s India is now considered unpatriotic. “Of late, the criterion for being considered anti-national has been made pretty simple: If you don’t vote for Narendra Modi, you’re a Pakistani. I don’t know how Pakistan feels about its growing population.” (The number of Muslims in India is almost the same as the number of Muslims in Pakistan, around 180 million.)

Despite not keeping many of his promises (like improving the lot of India’s struggling farmers), Modi managed to rally his countrymen and women behind him. The reasons for this are many, among them a compliant and conservative Indian media, which did not challenge his divisive politics. As one Indian commentator put it, “A major section of the media has been a willing accomplice in the marketing of the Modi cult and the over-selling of the government’s performance in various ‘schemes’.”

Modi and his Bharatiya Janata Party (BJP) have been selling the narrative that the Hindu religion and way of life have been undermined by centuries of subjugation of the Indian people, first by Muslim Mughal conquerors/emperors, then by British colonialists, and finally by the secularist (read Congress) politicians who led India to independence and thereafter imposed a socialist mindset on the country’s governance

Indeed, the mainstream media and journalists have been under increasing attack in recent years by the BJP government. Journalists have also been targeted for assassination by Hindu fundamentalist groups, among the most recent case being that of Gauri Lankesh, an outspoken left-wing journalist who was killed outside her house in Bangalore in 2017.

Elitist politics

Modi’s victory perhaps reflects an Indian electorate that is fed up with the elitist kind of politics associated with the Congress Party, which, despite (or perhaps because of) its secular credentials, failed to inspire a majority of the country’s people who have lost faith in the institutions that Nehru and his successors in the Congress party set up. As Ramesh Thakur commented in an op-ed piece in the Times of India, “Inevitably this [Congress Party culture] morphed into the VIP culture that Indians by and large detest with a depth of contempt, anger and resentment” – a situation that Modi fully exploited.

Aatish Taseer explained some of the reasons for Modi’s victory in a recent TIME magazine article:

“The nation’s most basic norms, such as the character of the Indian state, its founding fathers, the place of minorities and its institutions, from universities to corporate houses to the media, were shown to be severely distrusted. The cherished achievement of independent India – secularism, liberalism, a free press – came to be seen in the eyes of many as part of a grand conspiracy in which a deracinated Hindu elite, in cahoots with minorities from the monotheistic faiths, such as Christianity and Islam, maintained its dominion over India’s Hindu majority. Modi’s victory was an expression of that distrust.”

Modi’s and his party’s supporters claim that he has brought India into the 21st century, and rather than being a traditionalist, he is actually a modernising reformer. (However, as he himself has pointed out, he does not equate Westernisation with modernisation; rather, he sees all the trappings of modernity in India, such as being fluent in English, drinking alcohol or eating meat, as contrary to the Hindu ethos of vegetarianism and spiritual purity. (Alcohol and meat are no longer on the menu at state banquets and several states in India have banned the eating of beef.)

As the activist and author Arundhati Roy quipped, being a Muslim in Modi’s India is now considered unpatriotic. “Of late, the criterion for being considered anti-national has been made pretty simple: If you don’t vote for Narendra Modi, you’re a Pakistani. I don’t know how Pakistan feels about its growing population

But Modi’s claim that he is taking India into modernity are not entirely accurate. India under the leadership of the Congress Party’s Oxford-educated Manmohan Singh, first as Finance Minister, then as Prime Minister, ushered in the first wave of liberalisation in the early 1990s, which opened up the economy to foreign investment and led to the deregulation and privatisation of various sectors. Modi is simply riding on the back of that first wave, which, fortunately, also coincided with rising economic growth, which catapulted millions of Indians into the middle classes.

Modi’s main appeal lies in his ability to convince a majority of India’s people that he is a reformist that can uproot India’s entrenched corruption and make government bureaucracy less cumbersome by ushering in a business- and private sector-friendly environment that can compete with the likes of China and the United States.

He also appeals to the aspirational instincts of India’s rising middle classes, who are eager for a cleaner, more efficient India. They say that the BJP has increased the country’s economic potential by building new roads, highways and airports. This is evident in cities such as Mumbai and New Delhi, where the infrastructure has been markedly improved in some areas. The Prime Minister’s campaign to clean up India and improve access to sanitation has also been welcomed by a population used to seeing filth on the streets of Indian cities and villages. He even managed to mesmerise some leading Bollywood stars, who not only campaigned for him, but even stood as candidates on a BJP ticket.

Hindutva and fascism

Modi is no doubt a charismatic and disciplined leader, but his brand of politics can also be dangerous for a nation, especially a nation as vast, diverse and complex as India. He represents a particular kind of nationalism-cum-populism that has the potential to fragment a country irreversibly and take it back to place where rights and freedoms are arbitrarily – not universally – applied.

Modi’s main appeal lies in his ability to convince a majority of India’s people that he is a reformist that can uproot India’s entrenched corruption and make government bureaucracy less cumbersome by ushering in a business- and private sector-friendly environment that can compete with the likes of China and the United States.

While paying lip service to secularism, Modi has entrenched an insidious form of Hindu nationalism (Hindutva) that has allowed anti-Muslim, anti-Christian and anti-Dalit (lower caste) sentiments to flourish. Physical attacks and violence against non-Hindu groups and individuals have risen in recent years and the image of India as a country that accepts all religions is being severely eroded. India, a land of immense diversity and where virtually every religion in the world has found a safe home, is now being touted as land for and of only Hindus.

The BJP has also embarked on propagating a revisionist history of India that fails to recognise that the subcontinent has never been a purely Hindu entity; it has been an amalgam of different religions for centuries, and Hinduism itself has undergone various transformations since its birth some four thousand years ago. In fact, one could say that India has never been a purely Hindu country, and that Hinduism is not so much a religion as it is a way of life that is interpreted differently by every Hindu, depending on her God, what region she hails from, and what caste group she belongs to.

Unfortunately, Modi epitomises the kind of neo-fascist right-wing leadership that is sweeping across some parts of Europe, the United States, South America, Asia, and even Africa, where the likes of Donald Trump, Victor Orban, Benjamin Netanyahu, Rodrigo Duterte and Jair Bolsonaro are imposing intolerant, highly regressive policies that polarise populations and create false “them-versus-us” narratives. Brexit and growing neo-Nazi and racist groups in Europe and the United States have further fuelled the idea that outsiders are to blame for a nation’s woes. In India, Modi’s Hindutva has emboldened Hindu chauvinists who no longer feel they need to hide their hatred for other races and religions. In all these places, democratic institutions are being weakened and the media and intellectuals are being vilified. Fascism – the feverish exaltation of ethnicity, race, nation or religion above the rights of the individual – has become the new normal.

Modi’s victory perhaps reflects an Indian electorate that is fed up with the elitist kind of politics associated with the Congress Party, which, despite (or perhaps because of) its secular credentials, failed to inspire a majority of the country’s people who have lost faith in the institutions that Nehru and his successors in the Congress party set up

There is also an inherent anti-intellectualism in these leaders’ statements and a propensity to install pliant and mediocre people whose only qualifications are sycophancy and blind loyalty to the leadership. In the Indian state of Uttar Pradesh, for instance, the BJP appointed a hate-mongering Hindu priest as chief minister, and did not suffer any consequences for this grave mistake. These trends, not just in India, but in many parts of the world, should worry all those committed to promoting human rights and democratic values.

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Out of the Box Thinking or Garbage Can Policy: Is Jubilee’s Government Protectionism and Economic Controls Good for the Country?

Uhuru Kenyatta’s grand scheme, the Big Four manufacturing agenda, is predicated on the restoration of protectionism and economic controls. But as DAVID NDII argues import licensing and exchange controls – the old tools of the trade – are no longer available, hence the “out of the box” solutions of the Jubilee government.

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Out of the Box Thinking or Garbage Can Policy: Is Jubilee’s Government Protectionism and Economic Controls Good for the Country
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In October last year, Uhuru Kenyatta fired a broadside at imports of fish from China: “The Finance bill has passed but we can think outside the box. We might as well say the fish imported is bad then we lock it. There are many ways the government can work if we really intend on serving our people.”

The trick backfired. The ban was imposed in November and lifted two months later following what was reported as a “biting shortage”. Had he taken a quick peek into the Economic Survey – the government’s annual statistics report that should be on his desk – he would have noted a steady decline in domestic fish production over the last five years – from 160,000 tonnes to 98,000 tonnes, a difference of 35,000 tonnes. Imports in 2018 were 22,000 tonnes, not enough to plug the deficit. On several occasions prior to the ban, senior government officials had been widely reported explaining that Kenya has a large and growing fish deficit. That they went ahead to implement a harebrained roadside declaration tells us everything we need to know about the state of sycophancy in the Jubilee government.

The latest from the Uhuru Kenyatta out-of-the-box policy institute is a proposed ban on used motor vehicle parts. Initially reported as a blanket ban, the Government has since clarified that it is limited to particular parts that endanger safety, such as brake pads. Sensible, isn’t it? Roads full of overloaded matatus and Proboxes with faulty brakes is a scary thought.

Road safety is not the business of trade policy. The person most at risk from a defective vehicle is the driver so, a safe, roadworthy car is in their interest. That said, drivers do kill and maim themselves and others far too often, not just because of defective vehicles but also by dangerous driving, notably speeding and drink driving. I can say without fear of contradiction that defective drivers, and not defective vehicles, are the single largest cause of road accidents. Moreover, there is no law that compels owners to service their vehicles. In many countries, vehicles over a certain age are required to undergo regular roadworthiness inspections. In the absence of a law requiring vehicle owners to replace worn parts, banning the import of used parts is an exercise in futility. What, then, is the ban in aid of?

The latest from the Uhuru Kenyatta out-of-the-box policy institute is a proposed ban on used motor vehicle parts. Initially reported as a blanket ban, the Government has since clarified that it is limited to particular parts that endanger safety, such as brake pads. Sensible, isn’t it? Roads full of overloaded matatus and Proboxes with faulty brakes is a scary thought.

Some economic history background is helpful and this is the history of the import control regime that was in place from the early 70s to the early 90s. The regime was a two-stage process, the first of which was the acquisition of an import licence. Import licences were issued by a committee of the Ministry of Commerce and Industry known as the Import Management Committee (IMC). Having acquired an import licence, one proceeded to apply for a Foreign Exchange Allocation Licence (FEAL) at the Central Bank. The role of the IMC was to implement quantitative restrictions. It would review the imports to be authorised based on the domestic production capacity and adjust the amount of imports that would be allowed in accordingly. Obviously, it is impossible to do this for hundreds of products when both the production capacity and the size of the market are constantly changing. Moreover, for some strategic products, importers were required to obtain a “no objection” from the domestic monopoly.

While import substitution industrialisation became the accepted justification, this was actually not how the control regime came about; import substitution industrialisation had been proceeding satisfactorily using tariff protection without import and foreign exchange controls. The regime was put in place in response to the effects of the 1973 oil price shock on foreign exchange and the controls were supposed to be temporary, to be lifted once the effects of the shock subsided. The effects subsided and were, in fact, followed by a coffee boom that more than offset the oil price shock, but the control regime remained.

I can say without fear of contradiction that defective drivers, and not defective vehicles, are the single largest cause of road accidents

Once it was in place, people discovered that it was useful in other ways. Everything about the regime was subject to bureaucratic discretion that could be abused – and was abused – in two ways. First, the determination of import tariffs was completely discretionary, and was determined to a considerable extent by political influence as opposed to economic logic. Second, influential incumbents were able to buy protection not just from imports but also from potential domestic competitors. Suppose an established incumbent noticed a competing product from a new local manufacturer on the shelf. With sufficient influence, the incumbent would get the bureaucrats to frustrate the competitor by denial or long delays in obtaining import licences or foreign exchange allocations. The surest way of buying influence was to have a business relationship with powerful people in government, either as sleeping partners or as distributors or suppliers. The overall effect was a corrupt, distorted, unpredictable policy regime that stifled competition and rewarded inefficiency, effectively undermining investment and entrepreneurship.

It should not come as a surprise then that by the early 80s, import substitution industrialisation had stalled. In Sessional Paper No.1 of 1986 on Economic Management for Renewed Growth, the government owned up to the failure of import substitution industrialisation and ushered in the era of market liberalisation and economic policy reforms known as structural adjustment programmes (SAPs). The paper argued that the state-centric protectionist economic model had reached a dead end. In particular, it highlighted the system’s failure to create jobs and warned that, unless it was reformed, we would be “overwhelmed” by population growth.

The trade regime was one of the first targets for reform. The first task of the reform agenda was an exercise known as tariff harmonisation, which culminated in three tariff bands: 0 per cent for raw materials and capital goods, a 10 per cent band for intermediate products and a 25 per cent band for finished goods. Also included was a list of items prohibited for health and safety reasons. The second task was the removal of import licences and foreign exchange controls, which was completed in 1993. The same regime was subsequently adopted by the East African Community. The effect of these reforms was to level the playing field and to tie the government’s hands, and the policy regime itself became stable and predictable. It is this policy straightjacket that the out-of-the-box solutions are meant to circumvent.

In Sessional Paper No.1 of 1986 on Economic Management for Renewed Growth, the government owned up to the failure of import substitution industrialisation and ushered in the era of market liberalisation and economic policy reforms known as structural adjustment programmes (SAPs)

Up until 1993, the reforms had been proceeding in fits and starts, with several reversals in between due to resistance from vested interests. But in the aftermath of the 1992 general elections, the Goldenberg chickens came home to roost. Staring an economic meltdown in the face, Moi accepted to open up the economy in exchange for a financial bailout. The impact was immediate; trade boomed and within a year, Nairobi’s city centre was transformed into one big bazaar. People spruced up. On the streets, you could no longer tell people’s socio-economic status by their appearance – everyone was well dressed. In the rural areas, patched up clothes disappeared. Everyone wore shoes. Motor vehicle ownership boomed. Vehicle registrations, which had been in decline, rebounded immediately, growing 22 per cent per year over the next five years, and 12 per cent per year over the decade (see chart). Owning a decent car ceased to be a status symbol for the upper echelons of society, and they resented it – some still do.

The rationale for foreign exchange controls – that liberalisation would cause scarcity – was blown out of the water; foreign exchange availability actually improved. But most importantly, the prognosis of the 1968 Sessional Paper on employment was vindicated; employment growth doubled from 4.8 per cent in the previous decade, to 9.4 per cent in the decade following liberalisation. This labour absorption was driven by an explosion in micro and small enterprises, particularly in trade, but also in jua kali manufacturing and in other sectors as well. Supermarket shelves featured a wide variety of colourful, affordable local brands of consumer goods – toiletries, shoe polish, vegetable oils – where previously choice was limited to two or three staid multinational brands that had remained unchanged for twenty years or more.

Staring an economic meltdown in the face, Moi accepted to open up the economy in exchange for a financial bailout. The impact was immediate; trade boomed and within a year, Nairobi’s city centre was transformed into one big bazaar. People spruced up.

Uhuru Kenyatta’s grand scheme, the Big Four manufacturing agenda, is predicated on the restoration of protectionism. But import licensing and exchange controls – the old tools of the trade – are no longer available, hence the “out of the box” solutions.

The used spare parts ban opens a window for bureaucrats to rummage through every consignment of used car parts looking for prohibited parts. Bribes, demurrage and other transaction costs will go up. Many businesses, particularly small ones, will be driven out of business. Maintaining the diverse models of imported used cars will become a challenge and the used-car import trade will be strangled to death by regulation and bureaucracy.

Uhuru Kenyatta’s grand scheme, the Big Four manufacturing agenda, is predicated on the restoration of protectionism. But import licensing and exchange controls – the old tools of the trade – are no longer available, hence the “out of the box” solutions.

The Draft National Automotive Industry Policy featured in this column a month ago has precisely this situation as one of its objectives. This ban complements the plan to initially lower the maximum age of used-car imports to five years from the current seven, and then to three years, effectively putting cars out of reach for many people.

But the Government has a plan – model rationalisation and homologation. Model rationalisation means reducing the number of models sold in the market while homologation simply means state certification. The policy is “geared towards an entry model for the local market based on acceptability and affordability”. In short, the state will choose one model of car that will be mass-produced for the local market.

The logic of this is as follows: because we are a small market, having too many models makes it difficult for the local assemblers to have economies of scale. This of course means that the chosen model will be frozen in time technology-wise, and will probably be available in just a couple of colours. But of course, in other markets, design and technology will be moving on and therefore, this will only work if “the people’s car” is protected from the imported used cars that consumers would prefer.

This has been done before; India had the Ambassador, the Soviet Union had the Lada, and East Germany the Trabant. We had the Peugeot 504, which we kept assembling for at least a decade after it had gone out of production. I had the good fortune of visiting Berlin in my youth, just a year before German reunification, and I still recall the surreal images of Trabants sputtering along on one side of the Wall while BMWs, Audis and Mercedes Benzes whizzed by on the other. I find it difficult to contemplate that, thirty years on, and on the cusp of the fourth industrial revolution, we have apparatchiks formulating communist industrial policy.

In the decade after the 1993 “big bang” as we called it, the economy created four million jobs – 400,000 a year, compared to 80,000 a year in the preceding decade. In the absence of these reforms, Kenya would have preceded Zimbabwe on the route to land invasions and economic meltdown. We may not have led then, but we are certainly doing our best to follow now.

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In Whose Interest? Reflecting on the High Court Ruling Against John Githongo

The core issue in the Murungaru v Githongo case remains whether the revelations of the Anglo Leasing scandal – which was not just exposed in the Nation newspaper that published the Githongo Dossier in 2006, but was also extensively documented by the British journalist Michela Wrong in her book, It’s Our Turn to Eat were in the public interest.

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In Whose Interest? Reflecting on the High Court Ruling Against John Githongo
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The awarding of a hefty Sh27 million ($270,000) in damages to the former minister Christopher Ndarathi Murungaru by the High Court judge Joseph Sergon has sent a chilling message to all those who might be inclined to report corruption or wrongdoing within government: do so at your own peril.

Murungaru’s libel case against anti-corruption activist and former Governance and Ethics Permanent Secretary, John Githongo, has raised serious questions about whether court decisions are being made without due reference to constitutionally-protected rights and freedoms and whether Kenya’s judiciary has been “captured” by the state.

These questions were recently discussed and debated at a public forum in Nairobi organised by various civil society organisations, and attended by prominent legal minds, including the former justice minister and NARC leader, Martha Karua, who described the Sh27 million award by the judge as “outrageous”. Karua, who has been accused by her critics of not doing enough to protect Githongo when she served in Mwai Kibaki’s administration (when the so-called Anglo Leasing scandal that implicated Murungaru and others in government was exposed), stated that the case will make people afraid of coming out and reporting corruption within government. She further claimed that when she realised that many of the Anglo Leasing contracts that Githongo had exposed in what is known as the “Githongo Dossier” were fraudulent, she made several attempts to have the government not honour them, but was thwarted in her attempts by none other than the then Attorney General, Amos Wako.

As George Kegoro, the Executive Director of the Kenya Human Rights Commission, pointed out, “This case was about isolating John and exposing him financially. It was to embarrass and ruin him and to silence him.”

Wachira Maina, a constitutional lawyer and governance consultant, believes that this case illustrates how “state institutions have been repurposed for private gain”. He wondered why Murungaru had not sued the Nation newspaper, which published the dossier, suggesting that the case was a personal vendetta against a soft target who could be financially crippled by the case. As George Kegoro, the Executive Director of the Kenya Human Rights Commission, pointed out, “This case was about isolating John and exposing him financially. It was to embarrass and ruin him and to silence him.”

The amount awarded to the plaintiff also seemed unusually large. As Jill Ghai noted, “If you lose a leg in an accident in Kenya, the most you get awarded is 2 million shillings, so 27 million for damages is outrageous.”

“The court did not consider that Anglo Leasing happened under Murungaru’s watch,” said Maina. He further pointed out that every ruling in the courts must “pass the constitutional test”, which this ruling clearly did not. “There is no single reference in the judgement to the constitution. Judges are not only expected to apply the constitution, but are also expected to interpret law to reflect the constitution.”

Did the public have the right to know the people and events that constituted the Anglo Leasing scandal? Definitely, because billions of Kenyan taxpayers’ shillings were involved, and the contracts signed had to do with national security

Several countries are reconsidering their libel laws and amending them so that they do not impinge on freedom of speech and the right to access to information, which are constitutional rights in many countries, including Kenya. These rights and freedoms become even more salient when the publication of certain information is in the public interest. The UK’s Defamation Act of 2013, for instance, curtailed what is known as “libel tourism” (libel cases brought by people who go to court in countries where they are most likely to be awarded large amounts of money in damages) and extended to the mass media the “qualified privilege” defence, which provides protection from a defamation lawsuit for journalists who publish information that is in the public interest.

Perceived injury to an individual versus public interest

The core issue in the Murungaru v Githongo case remains whether the revelation of the Anglo Leasing scandal – which was not just exposed in the Nation newspaper that published the Githongo Dossier in 2006, but was also extensively documented by the British journalist Michela Wrong in her book, It’s Our Turn to Eat: The Story of a Kenyan Whistleblower, published in 2009 – was in the public interest. Did the public have the right to know the people and events that constituted the Anglo Leasing scandal? Definitely, because billions of Kenyan taxpayers’ shillings were involved, and the contracts signed had to do with national security. (The Anglo Leasing scandal, as the corruption scam that Githongo exposed has come to be known, was a series of fictitious security contracts signed with shell companies by the Moi and Kibaki governments that cost the Kenyan taxpayer millions of dollars. According to reliable estimates, the contracts were worth more than $700 million, of which an estimated $250 million was paid out). Some of those implicated are currently facing trial in the Kenyan courts.

Kimeu said that the role of the judiciary is to interpret the law, and to do so in line with the aspirations of the people. “This case was about Kenyans and their money,” he stated. “The case made an example of John – it is basically telling us to lie low. If you speak out, it is to your personal detriment.”

Moreover, the court must determine that there was “actual malice” on the part of Githongo when he claimed that Murungaru and four other high-level government officials orchestrated the Anglo Leasing scam. So, for instance, there needed to be evidence that Githongo deliberately tried to malign Murungaru in order to cause harm to him or to damage his personal or professional reputation. (Murungaru claimed that he lost his parliamentary seat as a result of Githongo’s allegations, which is neither here nor there.) As Samuel Kimeu, the Executive Director of Transparency International-Kenya, rightly asked, “How is it that a perceived injury to one person trumps the public interest?”

Kimeu said that the role of the judiciary is to interpret the law, and to do so in line with the aspirations of the people. “This case was about Kenyans and their money,” he stated. “The case made an example of John – it is basically telling us to lie low. If you speak out, it is to your personal detriment.”

Kimeu highlighted that there is currently no law in Kenya that protects whistleblowers, which makes exposing wrongdoing a daunting task, and that this particular libel case has had a “disorienting” effect on those who protect the public interest.

Integrity issues

Prof. Kibe Mungai, an advocate of the High Court, admitted that many judges and public officers in Kenya disregard the constitution, especially on issues to do with integrity and values. However, as I have noted in previous articles, the precedent was set by none other than the current presidency, Uhuru Kenyatta and William Ruto, who stood for the highest political office in the land despite being indicted by the International Criminal Court (ICC) for crimes against humanity. By doing so, they contravened Article 73 of the constitution that states that “authority assigned to a State officer is a public trust to be exercised in a manner that … promotes public confidence in the integrity of the office”.

In my opinion, Kenyatta and Ruto should have disqualified themselves as candidates in the 2013 election (but could have stood for political office when or if they were acquitted). While I believe that the ICC process has proved to be flawed and perhaps even discriminatory, and that Mwai Kibaki and Raila Odinga – respectively the head of state and the leader of the opposition during the post-election violence in 2007/8 – should have borne ultimate responsibility for the deaths and destruction during that time, I think that by putting themselves up as candidates, Kenyatta and Ruto rubbished both the ICC and the Kenyan constitution – an unfortunate development that severely eroded Kenya’s reputation as a country that upholds the rule of law and which had a detrimental effect on the country’s political landscape.

The constitution, in particular Chapter 6 on Leadership and Integrity, was further ignored by a large segment of the Kenyan electorate, which went ahead and voted for Kenyatta and Ruto, not despite the fact that they were indicted, but because they were. The country has been on a downward spiral constitutionally since then, and we the Kenyan voters, have only ourselves to blame.

Justice Sergon also failed to recognise that the role of a whistleblower is not to bring forth evidence, but simply to raise suspicion about possible wrongdoing that will, hopefully, result in a full investigation by the relevant authorities

George Kegoro believes that the case, which took 13 years to conclude, was flawed from the start. First, in March 2015, the previous judge, Justice David Onyancha, disqualified himself from the case on the grounds that there had been attempts to compromise him, while providing no details about who the compromisers were. This raised the question about whether his successor, Justice Sergon, was considered to be a more pliable judge by those who tried to compromise his predecessor.

Moreover, Justice Sergon proceeded as if Anglo Leasing never happened. As Kegoro argued in an opinion piece published in the Standard:

“Besides underrepresenting issues of process in the final judgement, Justice Sergon totally ignored questions of context. The suit against Githongo arose from the Anglo Leasing scandal that gripped the country in 2006, giving rise to a tumultuous political situation that almost toppled the young Kibaki government. The fallout from the scandal included the resignation of Githongo from government before he went into exile in the United Kingdom. Also, a number of high officials, including Murungaru and [former finance minister David] Mwiraria, eventually lost office or were charged in court in relation to the scandal over which there was significant public outrage… Allowing Murungaru’s claim against Githongo has given judicial approval to a blinkered and contrived self-view by the former minister, which is at variance with how the general public has come to view him…”

Yet, in his ruling, Sergon stated: “There were no iota of evidence presented by the defendant and his witness linking the plaintiff to the corrupt practices. Therefore the contents of the dossier in the absence of evidence to establish their truthfulness means that the publication is and was defamatory of the plaintiff.”

Justice Sergon also failed to recognise that the role of a whistleblower is not to bring forth evidence, but simply to raise suspicion about possible wrongdoing that will, hopefully, result in a full investigation by the relevant authorities.

Kenya’s legal history is littered with bad judgements and excessive punishments, not just for those who raise their voices against injustices and human rights violations but also for those ordinary citizens who cannot afford savvy lawyers or who lack access to political influence

Githongo has said that he will appeal the High Court decision, and a crowd-funding mechanism to raise Sh27 million has already been put in place in case he loses the appeal.

Kenya’s legal history is littered with bad judgements and excessive punishments, not just for those who raise their voices against injustices and human rights violations but also for those ordinary citizens who cannot afford savvy lawyers or who lack access to political influence (like chicken thieves who end up eight years behind bars because a judge deemed that a hungry man who steals a chicken is more criminal than a man who robs an entire country).

We must also not forget that Kamlesh Pattni, the mastermind of the Goldenberg scandal in the early 1990s, which almost brought Kenya to its knees economically, is still enjoying fresh air and living large. The Murungaru v Githongo case might just outrage Kenyans enough for them to demand more accountability from governments that steal and from courts that continuously thwart or ignore the will and aspirations of a fatigued citizenry yearning for a more just and humane society.

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