frontier markets

What China’s One Belt, One Road initiative means for Africa

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This article first appeared in my weekly column with the Business Daily on May 21, 2017

Last week China announced a plan to build a vast global infrastructure network linking Africa, Asia, Europe and the Middle East into ‘One Belt, One Road’. China plans to spend up to USD 3 trillion on infrastructure in an effort that seems to be centred more on linking 60 countries in the world with China, not necessarily each other. This One Belt initiative is perhaps part of China’s determination to position itself as the world’s leader in the context of Trump’s insular USA. This initiative has two-fold implications for Africa: the opportunities and potential problems that it creates.

One belt, one road

(source: https://qz.com/983581/chinas-new-silk-road-one-belt-one-road-project-has-one-major-pitfall-for-african-countries/)

In terms of opportunity, obviously African needs continued financial support in infrastructure development. The Africa Development Bank (AfDB) estimates that Africa’s infrastructure deficit amounts to USD 93 billion annually until 2021. In this sense any effort to support the development of Africa’s infrastructure is welcome.

Secondly, this is an opportunity for Africa to negotiate the specifics of the type of infrastructure the continent requires and create a win-win situation where Africa leverages Chinese financing to not only address priority infrastructure gaps, but also better interlink the continent.

However there are multiple challenges the first of which is that Europe, India and Japan seem edgy about this initiative and have distanced themselves from it. According to India’s Economic Times, India and Japan are together embarking upon multiple infrastructure projects across Africa and Asia in what could be viewed as pushback against China’s One Belt initiative. The countries have launched their own infrastructure development projects linking Asia-Pacific to Africa to balance China’s influence in the region.

Europe is also edgy because the initiative has not been collaborative and comes across as an edict from China; countries in the initiative were not consulted. Europe is also uneasy with the lack of details and transparency of the initiative seeing it as a new strategy to further enable China to sell Chinese products to the world.

Secondly, analysts have pointed out that from an Africa perspective, the One Belt seems to continue the colonial legacy of building infrastructure to get resources out of the continent, not interlink the continent. Will the initiative entrench Africa’s position as a mere raw material supplier to China and facilitate the natural resource exploitation of the continent?

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(source: africanbusinessmagazine.com/wordpress/wp-content/uploads/2017/01/Africa-infrastructure-1k.jpg)

Additionally, there are concerns with how the financing will be structured and deployed. Will financing be debt or grants? It can be argued that China needs to increase its free aid toward Africa in order to build its image as a global leader. Further, who will build the infrastructure? Africa has grown weary of China linking its financing to the contracting of Chinese companies. Will this infrastructure drive employ Africans and use African companies? If not, then it can argued that Africa will merely be borrowing money from China to pay itself back.

Linked to the point above, is the fact that Africa is already deeply indebted to China. In Kenya, China owns half of the country’s external debt. Kenya will pay about KES 60 billion to the China Ex-Im Bank alone over the next three years.  Kenya and Africa do not need more debt from China, and if this initiative is primarily debt-financed (in a non-concessionary manner), it will cause considerable concern in African capitals.

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

Problems with financial accountability at county level

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This article first appeared in my weekly column with the Business Daily on May 7, 2017

The management of public funds is an issue about which the Kenyan populace is passionate. However, the conversation on financial accountability in Kenya tends to be focused on National Government only. While this is right and warranted, Kenyans ought to extend the scrutiny on the accounting of public finances to county governments as well. One of the main purposes of devolution was to bring public finances closer to citizens in a manner that would allow them to have a say in how county budgets were planned for and used. This does not seem to be happening.

As the research firm International Budget Partnership (IBP) points out, the constitution of Kenya and the 2012 Public Finance Management Act (PFMA) require each of Kenya’s 47 counties to publish budget information during the formulation, approval, implementation, and audit stages of the budget cycle. In February 2017, IBP assessed documents related to budget estimates and implementation by county governments that were meant to be produced and made available on their websites between July and December 2016. IBP found that only 2 counties, Elgeyo Marakwet and Siaya, had approved budget estimate documents available on line. In terms of budget implementation documents, IBP found again, only two counties, Baringo and Kirinyaga, had published their first quarter implementation reports for 2016/17 online.

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(source: gabriellubale.com/wp-content/uploads/2012/09/47-Counties-Of-Kenya.jpg)

The dearth of information on budgets by county governments is worrying due to several reasons. Firstly, citizens cannot be sure of how public funds are being planned for and used. The lack of budget estimates and implementation documents means that not only do citizens not know how county governments stated they would use funds, they also do not know how county government actually used the funds. The lack of both budget estimates and implementation documents means that citizens cannot hold county governments financially accountable; there is no documentation against which accountability can be gauged.

Secondly, although the lack of information does not automatically mean funds are being embezzled, the lack of budget reporting facilitates embezzlement.  The fact that most county governments are not accounting for funds, as per the PFMA, provides leeway for unauthorised spending by county governments.

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(source: https://us.123rf.com/)

So why aren’t county governments publishing budget related documents? The first could be a capacity issue. In work I have done on county governments, it is clear that there are massive capacity constraints in county governments. Does every county government have competent and well staffed financial management staff and systems? If not, this constraint should be communicated by county governments so that remedial action can be taken. Obviously the second reason why county governments are not publishing documents is because they enjoy the lack of scrutiny as it allows ‘flexibility’ in the use of public funds.

As Kenyans gear up for elections in August, they should demand considerable improvements in the accounting of public funds by their respective county governments. Aspirants should be taken to task on how they will ensure that the citizenry is fully aware of budget use and that all documents are made public within the stipulated timelines.

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

 

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.

Image result for small business kenya

(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.

https://i1.wp.com/www.worldbank.org/content/dam/Worldbank/Feature%20Story/Debt/Debt_Ladder-400X269.jpg

(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

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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(source: http://footprint2africa.com/wp-content/uploads/2016/11/construction.jpg)

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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(http://www.afroautos.com/wp-content/uploads/2014/04/Jua-Kali3.jpg)

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

Neglecting the youth hampers the development of Africa

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This article first appeared in my weekly column with the Business Daily on March 5, 2017

A few weeks ago, a local television station aired the story of a young man who is an orphan, had been admitted to some of the most prestigious learning institutions in the country but was now living the life of a pauper. Dishevelled and unkempt, he looked like he was living the life of a homeless man; yet when he spoke, his clarity of mind and intelligence were unquestionable. This week a video of African children in the Congo working in mines went viral. The two children in question were eight and eleven year old boys, working in awful and dangerous conditions, barely making income and living a life of destitution and hopelessness. Why are these stories important? They are important as they reveal the extent to Africa is mismanaging the potential and promise of young people on the continent.

The average age of an African is 19.5 years, yet the average age of an African leader is 65. Is there any wonder then, as to why Africa’s leaders seems to be chronically unable to catalyse a young labour force and apply it to the development of young people themselves, that of their countries and the continent at large? In fact, sometimes it seems youth are seen as a demographic liability, not asset.

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(source: http://africa-facts.org/wp-content/uploads/2015/01/african-kids.jpg)

In Kenya the rate of youth unemployment is dire; 80 percent of those unemployed are under the age of 35. There are several factors that contribute to this figure the first of which is poor education. The Brookings Institution points out that 62 percent of Kenyan youth aged 15-34 years have below secondary level education, 34 percent have secondary education, and only 1 percent have university education. Skills are a crucial path out of poverty; indeed education makes it more likely for Kenyans to not just to be employed, but to hold formal jobs that are more secure and provide good working conditions and decent pay. So the fact that the country is doing such a poor job in educating the youth translates to the relegation of those young people to the periphery of the promise of the country.

Secondly, even among those who are educated, most are ill-equipped to be absorbed into employment. A study by JKUAT made the point that the commercialisation of tertiary education in Kenya has led to overcrowding in the institutions due to the increase in enrolment. This ‘massification’ policy by universities is characterised by degree programmes that do not address the job market. As a result, millions of Kenyans are poorly trained and become frustrated graduates who cannot find employment. Another report released by the World Bank stated that tertiary education in Kenya is characterised by a persistent mismatch of skills between what is taught and the requirements in the labour market. Thus, even education itself does not guarantee employment in this country.

Thirdly, due to the aforementioned dynamics, most young people are left to fend for themselves, invariably in the informal economy. The informal economy employs 80 percent of Kenyans and yet this sector of the economy is grossly neglected. Sadly in many ways, the neglect of the informal economy is the neglect of the youth as it is only in this sector that most youth with limited resources are able to start ‘hustling’ and earn a living. The cost of formalisation from tax payments to compliance to minimum wage, means that the informal sector is the only choice, as it has the lowest barriers of entry for economic enterprise.

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(source: https://www.iied.org/files/styles/main-image/public/fishsellers_0.jpg?itok=UIA7ZDur)

The good news is that it is not too late to act, but the nature of action must be very different to ongoing activities. At the moment, most youth interventions either operate in silos with the limited creation of long lasting structures and partnerships; are funded unsustainably where programs end when donors pull out; or provide interventions that do not address the needs of the youth effectively (think Youth Fund). Youth need a combination of on-going employment opportunity; credit lines for enterprises through the deployment of blended financial vehicles (grants AND loans); skills upgrading (life, business, management, financial and technical skills) and mentorship. Only in doing this will the country, and indeed continent, leverage the demographic dividend that is the young people of Africa.

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

 

TV Interview: State of the Nation with a focus on the economy

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On Monday February 27, 2017 I was interviewed by Citizen TV on the State of Kenya’s Economy.