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.

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A Productive Legislative Year
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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.

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Financial Sector
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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.

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Energy Sector Regulation Consolidated
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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.)

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Whistleblowers: Protected or Left Vulnerable?
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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.)

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Bills Signed in Summer 2006
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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.)


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Implementation Dates of New laws Uncertain
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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.

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Comment
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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