KENYA PASSES TWO MAJOR ECONOMIC REFORM BILLS

UNCLAS SECTION 01 OF 03 NAIROBI 003287

SIPDIS

SENSITIVE

DEPT FOR AF/E, AF/EPS, EB/IFD/OMA
USAID FOR AFR/PPC PETER DELP, AFR/EA JEFF BORNS
MCC FOR KEVIN SABA
TREASURY FOR ANN ALIKONIS
LONDON AND PARIS FOR AFRICA WATCHERS

E.O. 12958: N/A
TAGS: ECON EAID EFIN KCOR PGOV KE
SUBJECT: KENYA PASSES TWO MAJOR ECONOMIC REFORM BILLS

Ref: A. Nairobi 3180, B. Nairobi 2651, C. 04 Nairobi 5038

Sensitive-but-unclassified. Not for release outside USG
channels.


1. (U) This is a Joint Embassy-USAID message.


2. (SBU) Summary: Kenya's Parliament has passed two pieces
of economic reform legislation, the Public Procurement Bill
and the Privatization Bill. Both are important in the long
march towards a stronger, faster growing economy and
improved governance. In the short-term, both are required
to unlock IMF and other donor funding, which in part
explains why the government worked so hard to ensure their
passage through an otherwise unproductive Parliament.
Unless final, as yet unpublished, changes to both bills
somehow offend the government or donors, it appears likely
both will receive Presidential assent and become law. This
is good news, but it also goes without saying that the
importance and impact of these bills will ultimately depend
on how effectively and aggressively they are implemented.
End summary.


3. (SBU) In the final days before it adjourns August 16,
Kenya's Parliament passed two critical governance and
economic reform measures promised by the Government of
Kenya (GOK) almost from the very start of the NARC
administration over two years ago. The first is the Public
Procurement and Disposal Bill 2005 (passed August 4),and
the second is the Privatization Bill 2005 (passed August
10).

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Procurement Bill: Changing the Rules of Game?
--------------


4. (U) While the final text of the Procurement Bill as
finally passed is not yet available, broadly speaking, the
law is intended to overhaul the entire system by which the
GOK procures goods and services. Public procurement in its
many guises over the decades has traditionally been, and
remains, the single greatest source of corruption in Kenya.
While the scope of such graft is hard to measure with any
precision, there is little doubt that procurement-related
graft has had, and continues to have, a major macro-impact
on economic growth and development in Kenya in terms not
only of the vast sums of money stolen or squandered, but
also insofar as procurement-related graft over time has
created disincentives and distortions to rational
policymaking writ large.


5. (U) As we understand the Procurement Bill in its
earlier draft form, the law will lead to the establishment
of a new procurement oversight body, bar public servants
from taking part in government tenders, seal loopholes to
reduce opportunities for corruption, and streamline
procurement procedures to make them less cumbersome and
time-consuming - among a raft of other features. The draft
has undergone revisions, however, including according to
numerous press reports, changes that will provide
preferences to Kenyan firms, including especially small and
medium sized enterprises, when bidding on GOK tenders.
While the proof will be in the fine print and in
implementation, it is unlikely such provisions will be
incompatible with Kenya's WTO obligations. We note that
Kenya is not a signatory to the plurilateral WTO Agreement
on Government Procurement.

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Privatization: Getting the State Out of the Economy
-------------- --------------


6. (U) The Privatization Bill 2005 follows successive but
limited efforts in the 1990s to reduce the role of the GOK
in the economy, and represents the legal framework by which
the NARC administration hopes to take privatization of
state-owned enterprises (SOEs) to a higher level. Kenya
continues to suffer from all of the usual problems
associated with excessive state-ownership of economic
assets: lack of competitive markets in cases of monopolies,
patronage and corruption, inefficiency and poor service
delivery, low and poorly targeted investment in key areas
of the economy (e.g. telecom),and excessive and
unsustainable government budget outlays to support loss-
making state firms.

7. (U) While the final text of the bill is also
unavailable at the moment, its key feature is the
establishment of a Privatization Commission, whose role
will be to implement the privatization of state assets in a
systematic, fair, and transparent manner. The bill takes a
flexible approach to the means of privatizing SOEs, and
according to press reports, late changes to the bill will,
like those made to the Procurement Bill, provide special
preferences to local investors as a means of encouraging
Kenyan ownership of privatized companies. A complete
assessment of the bill will also require clarification of
Finance Minister David Mwiraria's statement, in which,
according to press reports, he assured MPs the bill would
not give way to "blanket privatization" and that the
Government would not sell off "strategic" parastatals that
offer "essential services" to the public. We also
understand there are concerns about the size, composition,
and mode of appointment of members of the Privatization
Commission.

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IMF Program and Other Loans Hinge on Legislation
-------------- ---


8. (SBU) Passage of both bills is an important step in the
long slog towards better, less corrupt governance and
faster economic growth in Kenya. Both are also critical in
the short-term to the GOK's financial status. As reported
ref B, forward movement on Kenya's three-year, $240 million
IMF program was made contingent on passage of the
Procurement Bill. The IMF's conditionality was in turn
driven by twin EU and World Bank credits, both of which
require passage of the two bills as conditions for
disbursement (refs B and C). In short, the GOK had
compelling short-term reasons to put both bills at the top
of its legislative agenda, and this explains why the
administration, under the leadership of Vice President
Moody Awori and Finance Minister David Mwiraria worked so
hard to successfully ensure passage.

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What Does the IMF Think?
--------------


9. (SBU) Econ Counselor spoke with Jurgen Reitmeier, Kenya
IMF Resident Representative, on August 11. Reitmeier, like
the Embassy, has not yet seen the final versions of either
bill as passed by Parliament. Noting the "we need to see
the fine print," Reitmeier nonetheless characterized
passage of the two bills as "good news," and also reported
that he had spoken with the Finance Minister, who had told
him the final revisions made by MPs to the Procurement Bill
were "acceptable" to the GOK. The bills still require
presidential assent, but at this point, it seems unlikely
that the Kibaki administration will send either back to
Parliament for another round of revisions and debate
starting in October - unless a reading of the fine print
reveals features deemed unacceptable to the GOK and/or to
the IMF, the World Bank, or the EU.

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Comment: Proof As Always Will be in Pudding
--------------


10. (SBU) Three things. First, while long overdue, passage
of these two landmark bills is good news, and the GOK
deserves credit for pushing them through a Parliament whose
performance this year has thus far been otherwise
lackluster. Second, kudos to the IMF, the World Bank, and
the EU, all of whom used their leverage to prod the GOK and
Parliament into action. Without this pressure, the Finance
Ministry probably would not have had the leverage and
motivation it needed to win passage. Finally, passage of
these two bills, while critical, is merely a mileage marker
in a much longer journey. The bills will not matter much
if they are not intelligently and aggressively implemented
by the GOK. In this light, we expect assistance in
implementing one or both bills to come up in discussions
next week between the GOK and visiting officials from the
Millennium Challenge Corporation (see ref A) as the latter
considers Kenya for its Threshold Program. We think it's a
topic worth exploring as the USG searches for new ways to
effectively support better governance and economic reform
in Kenya.
Bellamy