KIBAKI SIGNS BILLS THAT MAY SPUR ECONOMIC GROWTH

UNCLAS NAIROBI 000219 SIPDIS SENSITIVE DEPT FOR AF/E, AF/RSA DEPT ALSO PASS USTR FOR BILL JACKSON TREASURY FOR VIRGINIA BRANDON SIPDIS E.O. 12958: N/A TAGS: ECON PGOV EINV ENRG EFIN KCRM EPET KCOR KE SUBJECT: KIBAKI SIGNS BILLS THAT MAY SPUR ECONOMIC GROWTH SENSITIVE BUT UNCLASSIFIED ¶1. (SBU) Summary: On New Year's Eve 2006, Kenyan President Mwai Kibaki signed into law 11 more bills, including important laws with important implications for the financial and energy sectors. This tally adds to several economic development-related bills passed earlier in the parliamentary year aimed at boosting the cotton industry, better regulating maritime affairs, and reforming the public statistics function. Many of these new laws call for the reform of existing regulatory bodies, or the establishment of altogether new ones. While the clear intent is that these new structures will bolster economic development and poverty reduction, the long-term impact, good or bad, will depend on implementation, which in any case may take some time. End summary. -------------- A Productive Legislative Year -------------- ¶2. (U) On December 31, 2006, Kenyan President Mwai Kibaki signed into law 11 bills passed by Parliament before it went into recess earlier that month. This cable focuses on five of these bills (Microfinance, Finance, Banking, Insurance Amendment, Energy, Witness Protection),plus three others Kibaki signed in July and August (Cotton, Maritime and Statistics Bureau). Kibaki touted the myriad social and economic reforms contained in these and the other laws he signed on December 31 as major initiatives of his administration. While some in the private sector have objected to specific provisions in some of the bills, on balance they are expected to positively address some of the bottlenecks and constraints to economic growth -- if they are implemented effectively. -------------- Financial Sector -------------- ¶3. (SBU) The Microfinance Act provides for the licensing, regulation, and supervision of the microfinance sector, and follows a long history of mismanagement and embezzlement in Kenya's micro-finance institutions (MFIs). MFIs provide financial services to over 18 million Kenyans who are rarely served by mainstream banking institutions. However, they have operated without an appropriate policy and legal framework, with several of them conning depositors out of millions of shillings. In just one recent example among several, CBK closed down Akiba Microfinance in August 2006 for taking deposits without registering as a financial institution, and the directors were taken to court for stealing millions of shillings from depositors. The new law provides the legislative framework for regulating deposit taking by MFIs in Kenya and gives the Central Bank of Kenya (CBK) powers to regulate MFIs. The new law should not only safeguard depositors, but also facilitate monitoring of money transfers associated with money laundering and other illegal activities. (Comment: The Act has the potential to allow MFIs to increase their capital base (by deposit taking),making more money available for lending to average Kenyans. However, the practical transition to a deposit-taking institution will take time and resources, and will also considerably stretch the regulatory capacity of the CBK. End comment.) ¶4. (SBU) The Finance Act mandates a set of new taxes to raise Ksh250 million ($3.4 million) to meet the government's revenue targets. Members of Parliament (MPs) in November 2006, however, rejected other proposed tax-raising proposals, thus adding marginally to the forecast $397 million budget deficit for 2006-07. (Comment: The GOK should have little difficulty financing the budget deficit through sales of treasury bonds and bills. While Parliament's rejection of proposed tax measures may have been politically self-serving in some cases, it is encouraging to see the legislature playing a more active oversight role, rather than simply accepting whatever the executive branch presents, as has been the pattern throughout Kenya's history. End comment.) ¶5. (SBU) The new Banking Amendment Act of 2006 maintains the Ministry of Finance's control over interest rates and introduces the "in Duplum" Rule, which limits accrued interest charges to no more than the outstanding principal. Non-performing loans (NPLs) are estimated at Ksh103.6 billion (about 1.4 billion) or 22.7% of total outstanding loans in September 2006, but have been declining as a share of banks' portfolios as economic growth encourages new lending. (Comment: Parliament again defied the administration, which sought to remove Ministry of Finance controls over interest rates, a step long overdue. Moreover, the new provisions of the Banking Act are likely to encourage financial institutions to continue their focus on short-term loans at the expense of longer-term development loans. The upside is that the ceiling on accrued interest will restrict growth in existing NPLs, and may encourage banks and financial institutions to write-off NPLs earlier and more cleanly. End comment.) ¶6. (U) The Insurance (Amendment) Act of 2006 establishes an independent regulator, the Insurance Regulatory Authority (IRA),to replace the ineffective Commissioner of Insurance. Key players in the industry believe the law will encourage more people to purchase life insurance, which currently has a low penetration rate at 2% in Kenya. The new law allows insurance agents to sell policies from any number of underwriters, but increases the required guarantee to get a brokerage license from Ksh1 million (about $13,700) in the form of government securities to KSh5 million (about $68,500),and raises other requirements as well. The law caps individual accident compensation claims at Ksh3 million (about $42,000),but enables insurance companies to honor compensation claims more promptly. -------------- Energy Sector Regulation Consolidated -------------- ¶7. (SBU) The Energy Act of 2006 represents a major effort by the government to re-organize the entire energy sector and follows extensive stakeholder consultation. It establishes the Energy Regulatory Commission (ERC) to regulate all sources of energy, and the Rural Electrification Authority to manage the rural electrification program. The ERC's regulatory mandate includes the import, export, generation, transmission, distribution, supply and use of electrical energy, petroleum products, and other forms of energy. The law empowers the ERC to license new transmission companies to compete with the existing monopoly, Kenya Power and Lighting Company. The ERC is also charged with protecting the interests of consumers, investors, and other stakeholders. In the context of complaints from consumers and politicians about price gouging by energy companies, the law authorizes the Minister of Energy, on the recommendation of the ERC, to regulate retail prices of petroleum and petroleum products. While this appears to give the government the power to set gas prices at the pump, the private sector industry association, the Petroleum Institute of Eastern Africa, does not think the government will ever exercise this authority. On balance, it likes the bill because it will greatly enhance the capacity for effective regulation and enforcement in the energy sector. (Comment: We think the jury is out. It is unclear whether the Energy Act's attempt to address high fuel costs through regulation will deter investment, importation, or sales. End comment.) -------------- Whistleblowers: Protected or Left Vulnerable? -------------- ¶8. (U) The Witness Protection Act of 2006 is aimed at improving prosecution and reducing Kenya's serious crime problem, and also offers protection to whistleblowers. Under the Act, the Attorney General (AG) is required to establish and maintain a witness protection program and to protect the safety and welfare of witnesses who give evidence in criminal cases or record statements with the police or other law enforcement agencies. The law gives the AG wide discretion over who will be offered protection. ¶9. (SBU) Human rights and anti-corruption groups have pointed complaints about the new law, however. Critics say the AG should not have discretion over the fate of witnesses testifying adversely against the State. The Kenya Chapter of the International Commission of Jurists told the press the new law does not address witnesses who might have vital information to give to parliamentary committees, the police or other legally established investigation authorities. (Comment: We do not expect the Witness Protection Act to have a significant impact on corruption, mainly because the Official Secrets Act bars civil servants from revealing information about much public sector corruption to "unauthorized persons" under pain of prosecution. End comment.) -------------- Bills Signed in Summer 2006 -------------- ¶10. (U) President Kibaki signed the Cotton (Amendment) into law in July 2006 to establish the Cotton Development Authority (CDA) and promote the revival of the cotton industry by providing a legal framework for the management, regulation, monitoring and direction of the industry. The Act is supposed to give farmers and stakeholders greater control in the running of the sector. Kenya's cotton and textile industry collapsed in the 1990s, after the government liberalized trade. Together with the extension of AGOA third country fabric provisions, the GOK hopes the CDA will enable Kenya to produce cotton fabric for AGOA export garment producers. ¶11. (U) Signed in August 2006, The Kenya Maritime Authority Act establishes the Kenya Maritime Authority (KMA) and gives it the responsibility to monitor, regulate and coordinate activities in the marine industry, including marine environmental issues. KMA will be the regulator for the Kenya Port Authority (KPA),and thus have oversight over port security issues, including implementation of International Port and Ship Security (ISPS) requirements and International Maritime Organization (IMO) obligations. ¶12. (SBU) President Kibaki signed the Statistics Bill in July 2006 to upgrade the Central Bureau of Statistics (CBS) from a GOK agency into a more autonomous parastatal, the Kenya National Bureau of Statistics. The agency will still be responsible for the collection, compilation, analysis, publication and dissemination of statistical information, and the coordination of the national statistical system. The change is meant to increase the independence of the statistical agency (in response to complaints of GOK manipulation of census data for partisan purposes),improve the reliability of the product, and reduce GOK expenditures. (Comment: The perceived independence and impartiality of the new National Bureau of Statistics will depend on the composition of the Governing Board the GOK appoints. End comment.) -------------- Implementation Dates of New laws Uncertain -------------- ¶13. (U) Although all the bills were signed into law, implementation may be significantly delayed to allow for the drafting and enactment of implementing regulations. For example, the Public Procurement and Disposal Act was signed into law in November 2005, but did not come into effect until over a year later on January 1, 2007 because the implementing regulations were not completed and gazetted until December 2006. It is therefore not clear when Kenya will feel the impact, good or bad, of the new laws on economic growth and poverty reduction, especially those that call for the establishment and staffing of altogether new regulatory bodies. -------------- Comment -------------- ¶14. (SBU) Kenya's Parliament was more productive in 2006 than last year, and that alone is a good story. While some might say no law is better than a bad law, in this case, the consensus is on balance positive, namely that the bills reviewed here will eventually spur economic growth and development. The Microfinance Act was badly needed and is clearly the most likely winner. We note USAID/Kenya's KEMCAP program, which launched in 2004, was instrumental in catalyzing relevant Kenyan institutions to get the bill drafted and passed. For the others, the potential is less certain. Kenya clearly needs stronger and better-governed regulatory bodies in many economic spheres, and several of the bills passed in 2006 are at the very least a well-intentioned effort to remedy this deficiency in key sectors. Only time and implementation will tell if they have their intended effect. RANNEBERGER