How counties can attract smart investment

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This article first appeared in my weekly column with the Business Daily on April 16, 2017

The decentralisation of Kenya ushered in the county structure giving county governments power that was previously unavailable at that level. Sadly what seems to emerging is a focus by county governments is a focus on revenue generation through the imposition of new fees and levies on the private sector. This is arguably one of the most intellectually lazy means of generating income. In some ways it can be argued that the imposition of CESS, advertising fees and myriad of other fees is actually killing the business environment and the ability of private sector to generate jobs and money. So what short, mid and long term, can counties can deploy to attract the right type of investment and generate revenue?

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(source:www.montefeselfstorage.com/wp-content/uploads/2015/06/French-Investments.jpg)

An important action that can be done immediately is to determine the competitive advantage of counties. Within the County Integrated Development Plan (CIDPs), counties should articulate their competitive advantage, and strategies aimed at capitalizing on these in a manner that makes them profit and job generators. Further, it is crucial that important county leaders are identified. These include both those who live in the county as well as those with an attachment to the county. These leaders should be identified from all levels and include leaders in the private and public sectors, NGO leaders, village elders, women leaders, youth leaders as well as leaders from the disabled community. This county leadership should be consulted to develop an investment strategy in order to, among other things, identify county needs (health, education, infrastructure etc.), identify projects related to meeting these needs that are viable, identify sources of funding, develop the capacity required to raise the funds and source the skilled individuals needed to manage and implement the county projects.

In the mid-term, counties need to make an effort to make the county attractive for investment to both foreign and local investors. This includes reducing administrative and regulatory costs of doing business in the county, creating clear implementable strategies for ensuring stability and security, developing robust education and health structures and being seen to be visibly addressing corruption through the development of transparent county level public financial systems. Additionally, counties should participate in the Sub National Ease of Doing Business Index by the International Finance Corporation to determine how competitive their counties truly are.

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(source: https://anzetsewere.files.wordpress.com/2016/10/89a66-small-business-in-kenya-invest-africa-businesses.jpg)

In the mid to long term the county can make efforts to develop Public Private Partnership mechanisms to pull in the private sector to address county population needs. County governments should also clearly define accessible career pathways for the current and future skill needs of the county so as to identify those who are already well suited for key activities in the county in order to catalyse economic activity.

In the long term, counties should consider the development of an investment fund where some revenue can gain interest. This can be divided into short, medium and long term strategies that include deposits, treasury bills, treasury and corporate bonds as well as strategic equities with the ultimate aim of creating a county ‘sovereign wealth fund’. Through these strategies, county governments can build capital in a sagacious manner.

Anzetse Were is a development economist; anzetsew@gmail.com

 

Use Public Private Partnerships to reduce debt burden

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This article first appeared in my column with the Business Daily on April 9, 2017

When the budget was read two weeks ago, one of the key questions that kept coming us was the issue of growing public debt in Kenya.  In the 2017/18 National Budget, the Kenya government plans to borrow KES 524.6 billion (6 percent of GDP).

Views differ on whether Kenya’s debt is sustainable. Some are of the view that given the massive gaps in key sectors such as energy and transport infrastructure, the country must continue to do everything possible to finance and address the gaps and that debt accrued now will pay off in the long term. Further, they argue that at a debt-to-GDP ratio of about 53 percent, Kenya is still well below the World Bank ceiling (or tipping point) of 64 percent. And while the IMF has raised concerns about Kenya’s public debt, it is below what they view as the applicable ceiling for Kenya at a 74 percent debt-to-GDP ratio. Others are of the view that a debt-to-GDP ratio beyond 40 percent for developing and emerging economies is dangerous. Further, at about 53 percent, the debt-to-GDP ratio is above the government’s preferred ceiling of 45 percent raising questions as to why this ceiling is being openly flouted.

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(source: http://www.worldbank.org/content/dam/Worldbank/Feature Story/Debt/Debt_Ladder-400X269)

Beyond the number crunching on debt figures, the broader concern for the country is that the substantial investment requirements for the country cannot be met by debt alone. This is where Public Private Partnerships (PPPs) come in. PPP refers to a contractual arrangement between a public agency and a private sector entity in which the skills and assets of each sector are shared in delivering a service or facility for the use of the general public. In short, government teams up with private sector to finance, manage and operate projects that are for public use.

There are numerous forms of PPPs ranging from projects where government owns the project and private sector operates and manages daily operations, to where private sector designs, builds, and operates projects for a limited time after which the facility is transferred to government. As the Africa Development Bank points out, PPPs are a useful means through which investment in development can continue in the context of growing pressures on government budgets. But as the World Bank points out, for PPPs to work the private sector needs political stability, a pipeline of bankable projects, transparent and efficient procurement, risk sharing with the public sector and certainty of the envisaged future cash flows.

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(source: http://www.neoias.com/index.php/neoias-current-affairs/617-public-private-partnership)

The good news is that the Kenyan government seems to be aware of the importance of PPPs at both national and county level. Numerous county governments are working with development partners to build their PPP capacity as well as identify viable county-level PPP projects. At national level, the government seeks to lock in investment through PPPs worth about USD 5 billion between 2017 and 2020. This will be important in managing the growth of public debt in the medium and long term. Through the intelligent use of PPPs, government can put the country on the path of sustainable development financing.

Anzetse Were is a development economist; anzetsew@gmail.com

TV Panel Interview: Analysis of the Kenya National 2017/18 Budget

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Wallace Kantai engages Anzetse Were- Economist and Business Daily columnist, Dennis Kabaara- Business Daily columnist, Peter Karimi- CEO mCHEZA, Phyllis Wakiaga- CEO KAM, Ashif Kassam- Executive Chairman RSM, Sachan Benawra- Consulting Manager RSM in debating the pros and cons of the 2017/2018 Kenya Budget.

The Importance of Shadowing in African Political Accountability

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This article first appeared in my weekly column with the Business Daily on April 2, 2017

A Shadow Cabinet consists of a senior group of opposition spokespeople who, under the leadership of the Leader of the Opposition, form an alternative cabinet to that of the government, and whose members shadow or mark each individual member of the Cabinet. There is much use for the concept of Shadow Cabinets in the context of Africa’s political and economic development.

If every member of the Cabinet in ruling administrations in Kenya and Africa in general, knew they had an individual or team of qualified professionals scrutinising their policy, strategy and actions in their respective ministries two developments would likely occur. Firstly, the scrutiny would make cabinets more thoughtful and effective in policy and strategy development and implementation as cabinets would know all official communication and activity would engender an informed response and critique. If Shadow Cabinets were created in a context where Shadow roles were taken seriously, government would know that vague, incomplete or inaccurate information as well as inadequately thought through strategies would meet credible resistance. Secondly, the actions of Shadow Cabinets would give the general electorate a sense of how the Opposition would govern if they were in power. The track record of Shadow Cabinet critiques would present citizens with a clearer idea of how Opposition would address key challenges in the country. Image result for cabinet government

(source: http://media.dods.co.uk)

In Kenya the concept of a Shadow Cabinet is particularly important because political parties are not drawn along ideological lines. Unlike other parts of the world, political parties in this country are drawn along personalities and tribal lines. Further, political parties always realign and change composition in each election period, changing the dynamic of the leadership in the parties. As a result, in Kenya it is very difficult to know how an Opposition government would govern the country. I have long wanted to read Shadow Budgets as well as Shadow Policies on Agriculture, Education, Health and Finance for example. What would fiscal and monetary policy look like in an Opposition government? How would an Opposition government have handled the teachers’ and doctors’ strikes? How would Opposition address corruption if they were in government? These are all valid questions.

The frustration I have as a Kenyan is that I often do not know how governments will govern until they get into power. While Party Manifestos are produced every election year, they do not form a solid and consistence basis of engagement for analysis. Further, it seems Manifestos are political tools used during electioneering that are swiftly forgotten once elections are completed.

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(source: https://www.tutorialspoint.com/indian_economy/images/government_budget)

The time has come for Africans to demand Shadow Cabinets. In doing so citizen interests will be protected through the application of clearly thought out and consistent pressure applied on governments enhancing political and financial accountability. Further, the political landscape in Africa would stabilise as it would no longer be a guessing game as to how an incoming administration would rule the country.

Anzetse Were is a development economist; anzetsew@gmail.com

How fiscal policy can attract the right type of investment for Africa

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This article first appeared in my column with the Business Daily on March 30, 2017

Someone once told me that there are three types of foreign investors in Africa. The first are those who invest in the country in order exploit raw natural resources and direct them to their projects outside the country. The second are those who invest in countries in order to flood the country’s markets with their products. The third are investors who invest in the country for the long-term in a manner that creates employment, builds incomes, contributes to GDP growth and of course, generates profits. Africa seems to have little problem in attracting the first two investor type, but often struggles to secure the third type. The question for Kenya is, which type of investor is the country attracting? And what can be done to attract the third type of investor?

These questions are important in the context of fiscal policy, of which a key event will take place today when the National Budget 2017/18 will be read. Fiscal policy ought to and can play an important role in attracting the right type of investor to Kenya.

Over the past ten years, the government has been on an investment drive to build the country’s infrastructure. In principle, efficient public investment in infrastructure can raise the economy’s productive capacity by connecting goods and people to markets. The national budgets over the past few years have thus has allocated significant amounts to energy and transport infrastructure such as LAPSSET, the Standard Gauge Railway (SGR), Rural Electrification and the Last Mile Project. With the SGR due to be completed this year, it will become clear what dividends the country will reap from such heavy fiscal commitment to infrastructure. That said, infrastructure investment is a prerequisite to attract the third investor type as the ease and cost of transporting goods are an important business cost and variable.

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The second fiscal strategy that can bring long term investors as well as bolster food security and manufacturing is tax incentives to create productive agricultural value chains. Fiscal policy can more effectively engender a shift from subsistence to commercially productive farming by identifying commercially viable agriculture value chains and linking small holder farmers to manufacturers. Through incentives such as tax remissions along key food and beverage manufacturing value chains, fiscal policy can incentivise higher productivity in farming and contribute to making manufacturing more dynamic than is currently the case. The key however, is consistency in fiscal policy with no abrupt changes in tax remissions or other incentives so as to engender long term investment in food value chains.

Thirdly, the right investor type can be attracted to the country through investment in Kenya’s human capital. As the IMF points out, more equitable access to education and health care contributes to human capital accumulation, a key factor for growth and an improvement in the quality of life. Fiscal policy has two roles here; the first is creating incentive structures for private sector investment into the country’s private and public education and health networks and the second being the country’s own fiscal commitment to health and education sectors. National budget allocations to education stand at about 23 percent, while commitments to health are at about 6 percent of the national budget. Health allocations are paltry and while the education allocations look impressive, a great deal of the funds are directed to free primary education. In order to develop a healthy, highly skilled and productive labour pool, government ought to consider reorienting the almost obsessive fiscal commitment to infrastructure towards more robust allocations to health and post-secondary education. This should be complemented by the creation of incentive strategies that attract investment into national priority nodes for the sectors.Image result for health kenya

(source: https://investinkenya.co.ke/components/uploads/0942a7f713ab6801a17e2cfb325fc99c.jpg)

The fourth means through which fiscal policy can attract the right investors is by managing tax rates at national and county levels.  At the moment, private sector is facing numerous tax burdens due to the lack of harmonisation of tax rates between national and county governments. Fees and charges at county level are unpredictable, non-standardised and onerous; business face multiple payments for advertising and transporting goods across county borders. While these are not technically taxes, they are a form of tax exerted on private sector with no clear link to the service that should be expected for such payments. At national level, the main concern for private sector beyond VAT refunds, is that a small segment of business and individuals are onerously taxed due to the narrow tax base in the country. Thus national government ought to develop a long-term strategy for broadening the tax base.

A key component of broadening the tax base is addressing informality in the economy where millions of informal businesses do not pay taxes. The aim here is not to tax informal businesses, as most are micro-enterprises barely making profits, but rather creating an ecosystem that encourages the development of informal business. Again, fiscal action can be taken by government to direct financing focused at developing micro, small and medium enterprise through more the strategic deployment of the Youth, Uwezo and Women’s Funds. The financing architecture of these three funds has to be fundamentally rethought to focus on building technical skills and business management capacity, and improving productivity and profitability in the informal sector.

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Additionally, the government ought to develop a strategy for Kenya’s cottage industry which is the Jua Kali (informal industry) sector linked to solid fiscal commitments. Through fiscal action, the government should create an investment environment that attracts traditional investors as well as non-mainstream financing such as angel investors, impact investors and venture capitalists to invest in Jua Kali. In this manner, action will not only invest in the informal sector, it will create incentives for investment into a sector in which over 80 percent of employed Kenyans earn a living, in a manner that complements fiscal policy.

Anzetse Were is a development economist; anzetsew@gmail.com

Changes needed in National Fiscal Policy

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This article first appeared in my weekly column in the Business Daily on March 26, 2017

This week the National Budget for FY 2017/18 will be read, and being an election year this budget may indicate how fiscal policy will be approached post-election.

There are three issues with fiscal policy as articulated over the past few years. The first is sub-par revenue generation and unrealistic revenue targets. The economy grew at about 5.9 percent in 2016, yet the tax revenue forecast was raised by 8.7 percent. By December 2016, it was reported that the Kenya Revenue Authority (KRA) failed (once again) to meet its half-year target by KES 20 billion. This is not a new event; revenue targets are routinely not met begging the question as to whether or why unrealistic targets are set; this habit has to change in the upcoming budget. Kenya needs more realistic targets in order to more effectively anticipate debt requirements for the year.

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(source: http://www.capitalfm.co.ke/business/files/2013/11/BUDGET-BRIEFCASE.jpg)

The second issue in fiscal policy is notable increases in expenditure.  Please note that according to the Budget Policy Statement 2017/18 released in November 2016, the government seeks to curb non priority expenditures and release resources for more productive purposes. The BPS states an expected overall reduction in total expenditures resulting in a decline of the fiscal deficit (inclusive of grants) from KES 702 billion to KES 546.5 billion, equivalent to 7.5 percent of GDP. This is positive in that this fiscal deficit should be lower than the 9.3 percent of GDP for 2016/17. However, two problems linger; firstly a deficit of 7.5 percent is still above the preferred fiscal deficit ceiling of 5 percent. Secondly, it is almost certain that supplementary budgets that ramp up expenditure will be tabled over the course of the fiscal year. Just last month the government proposed KES 75.3 billion of additional expenditure for various ministries and government departments. Government has the problematic habit of creating what seem to be artificially narrow fiscal deficits and borrowing requirements during budget reading, only for these to be revised upward significantly over the course of the fiscal year.

Finally, and linked to the point above, government has to rein in its debt appetite. Growing expenditure, partially attributed to a bloated devolution-related wage allowances and benefits bills has contributed to government borrowing aggressively for capital expenditure. The debt to GDP ratio currently stands at 52.7 percent, up from 44.5 percent in 2013 and above Treasury’s 45 percent threshold. To be clear, the debt to GDP ratio in itself would not be worrying if there were clear and demonstrated action to manage debt levels more aggressively. The World Bank puts the tipping point for developing countries at a 64 percent debt to GDP ratio above which debt begins to compromise economic growth. Thus while there is still wiggle room, continued debt appetite juxtaposed with (or due to) subpar revenue generation means Kenya is headed towards debt unsustainability in the near future.

It is hoped that the fiscal policy due to be read will provide detailed strategies on how revenue generated will be stimulated, expenditure cuts effected as well as the articulation of a clear and realistic debt management strategy.

Anzetse Were is a development economist; anzetsew@gmail.com

How Africa can leverage growing insularity in Europe and the USA

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This article first appeared in my weekly column with the Business Daily on March 19, 2017

 It had been brewing for years, but was fully exposed last year when Brexit happened. It was bolstered by Donald Trump being elected as the President of the United States, growing popularity of Le Pen in France and now Geert Wilders, the Dutch right-wing politician who wanted to be Holland’s next Prime Minister. While celebrating Trump’s victory, Sarah Palin termed it a movement. What is it? The growing popularity of a specific strain of right wing politics in Europe and the United States.

Sitting in Africa there seem to be common threads that run through this ‘movement’; it’s anti-Islam and selectively anti-immigration with a specific strain of aggressive (white) nationalism. It also comes across as racist, self-involved and insular. Europe and the United States have grown weary of taking care of the world, the rhetoric argues, having sacrificed the welfare of ‘real’ Americans and Europeans at the altar of immigration, laissez faire economics (the Chinese are taking over!) and generous aid packages to under-developed (and corrupt) continents such as Africa.

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Naturally right wing populism is making some in African capitals jittery. Civil Society Organisations (CSOs) heavily rely on Europe and North American organisations for financing, which, they argue, allows them to engage in activities that alleviate poverty, protect the vulnerable, and fight for human rights and good governance on the continent. Kenya was one of Africa’s top Foreign Direct Investment (FDI) destinations in 2015 with key investors coming from the USA, UK and the Netherlands. Large companies from Europe and the United States have also set up shop across the continent buoyed by the ‘Africa Rising’ narrative (now somewhat battered) and the growing African middle class. And military and security support from Europe and the USA have been important for countries such as Kenya currently trying to fight Al-Shabaab.

Just as Africa was starting to be seen as more than a basket-case of poverty and poor governance by Europe and the USA, just as the continent was beginning to be perceived as a serious and attractive destination for investment, right wing populism stepped in and changed everything. Some Africans worry aid from the US and some of Europe will drop; in fact last week State Department staffers in the USA were instructed to seek cuts in excess of 50 percent for funding UN programs. And the combination of the economic recovery of the USA coupled with right wing populism juxtaposed with slowing economic growth in Africa may relegate Africa to the periphery of investment once more. Right wing populism wants to Make America/Britain/the Netherlands/France great/ours again; and it seems continents such as Africa will be very low on the ‘to do’ list.

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However, there is another side to the story. Gone are the days where African economies were dominated by western metropoles. We now live in a multipolar world where countries such as China and India have become important economic partners for Africa. Research from a French research institute indicates that the share of Europe in Africa’s total trade has steadily declined from around 68 percent in 1990 to 41 percent in 2016. Asia has surpassed Europe as Africa’s biggest trading partner, accounting for around 45 percent of the continent’s total trade. And while some of Kenya’s top FDI investors were from Europe and the USA, key investors also came from India, Japan and China.

And it must be stated, frankly, that some Africans are relieved by the growing insularity in Europe and the USA; perhaps now those countries will have less impetus to meddle in African affairs and focus on their own domestic issues. Older Africans have not forgotten how the UK and USA in particular took out post-colonial African leaders such as Lumumba and Sankara and many modern Africans are not ashamed of being Africans; in fact we revel in Africa’s culture and newfound economic dynamism.

So while the growing popularity of (extreme) right wing politics may negatively affect the continent in some ways, let Africans also leverage the reality of a multipolar world. As some retreat into self-involvement and insularity, let the continent intelligently engage the many who are still seated at the table.

 Anzetse Were is a development economist; anzetsew@gmail.com