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Monday, March 22, 2010

The United States of East Africa


Like most other currency unions, East African Monetary Union is a political enterprise. That in itself is not a bad thing. London-based economist, Dr Gerard Lyons, observes that politics was the driving force behind European monetary integration —which, despite the problems with Greece, has been fairly successful.

According to Dr Lyons, historically there have been four types of monetary unions. One is where political union has ensured the monetary union's success. Examples include German Unification at the end of the last century; the longer lasting Italian Monetary Union that followed political unification in 1861; and the US Federal Reserve, established in 1913 as a decentralised system.

A second category comprises monetary unions of small countries that survive without political union, provided there has been economic convergence. Two examples are the 1923 Union between Belgium and Luxembourg and the CFA Franc zone in West Africa, which has survived since 1948.

In a third category, the survival of the monetary union is completely dependent on that of the political union. The original East African shilling is a good example of this. Others include the Soviet system, and the 19th century German Monetary Union, which collapsed with World War 1.

A final category is a temporary monetary union that survives for a long time without political union but eventually collapses. The Latin and Scandinavian Monetary Unions from the last century are examples.

So where does East Africa’s Monetary Union project fall? According to Barrack Ndegwa, Director of Economic Affairs at Kenya’s Ministry of East African Community, the EAC is based on an intergovernmental model of regional integration. The process of integration is led and directed by the partner states’ governments, especially their Heads of State through the Summit, the EAC’s highest decision-making organ. There is no supranational body, such as the EU’s Commission, to which some sovereignty is delegated.

The net effect is that political will matters most and personal or political disagreements between leaders threaten both the EAC and the Monetary Union -the same condition described in Dr Lyons’s third category. We have not taken lessons from the failure of the first monetary union. What should we be doing differently?

Well, the book Economics of Monetary Union by Paul de Grauwe recognises that a monetary union must be embedded within a political union to work well. However, in describing what such a political merger should look like, the book emphasises the need for “a certain degree of budgetary union, giving some discretionary power to spend and to tax” to a central executive body, subject to full democratic accountability.

According to Augustine Lotodo, a member of the East African Legislative assembly, proposals to turn the Secretariat into an EU-type Commission, as well as to make the East African Legislative Assembly into a properly representative and elective body along the lines of the European Parliament, are already being discussed. However that does not go far enough.

To fulfill de Grauwe's condition, the Secretariat will need to be endowed with budget-making and tax-levying powers, the EA parliament’s ambit and power expande and a mechanism for the implementation and enforcement of decisions devised.

Currently, Tanzania’s 42 million citizens are represented by 9 MPs in the East African parliament, the same as Rwanda’s 10 million. Burundi, with just 3 per cent of the region’s GDP, makes the same EAC contribution as Kenya, which accounts for 40 per cent. Lotodo says that equal representation in the EALA and contribution to the Secretariat’s budget will have to be replaced by representation and contributions reflecting members’ population and economy. This is bound to create tensions as the bigger countries seek to assert themselves. A mechanism would thus have to be found to cater for the interests of the smaller nations.

The East African Court of Justice will also need to have its jurisdiction similarly extended and partner states stripped of the power to constrict it as they did in 2006 when, after the court granted an interim injunction barring the swearing-in of the Kenyan nominees, the Summit decreed urgent amendments, passed in record time, to the EAC Treaty to clip the courts wings. That must never be allowed to happen again.

More interested in protecting their positions and woolly notions of “sovereignty,” politicians will probably be unwilling to cede power to the Secretariat. However, de Grauwe offers them some comfort. Though the book highlights the need for common institutions to regulate local social policies that may have regional macro-economic consequences, there is no requirement that decision-making in these areas be fully centralised. Even the transfer of budgetary power, for example, “does not have to be spectacular… It would certainly not be wise to aim at a central budget that comes near to the size of typical national budgets.” Nevertheless, it will require an EAC budget that increases significantly from its 2009 level of about $40.1 million or 0.05 per cent of the region’s GDP.

De Grauwe’s most relevant finding for the EAC is the requirement for “a strong national sense of common purpose and an intense feeling of belonging to the same nation.” Analysing the success of German Unification in the 1990s, he declares this to be “the deep variable that made the monetary and political union possible.” Its presence, he asserts, made it “inconceivable” that Germany start with a monetary union without a unified political system. Its weakness among the nations of Europe, he continues, “makes the progress towards political union difficult... [and] explains why Europe started with monetary union.” The same is true of East Africa.

Kenya is a particularly egregious example. Of all the EAC partner states, it is the only one where the ratification of international agreements is done by the Cabinet. This means that neither the people nor their representatives have ever had a voice on the subject of integration. Parliament never got to vote on the EAC Treaty nor on any of the protocols that followed.

Since EAC legislation takes precedence over national laws, it in effect means that Kenyans now find themselves subject to regulations and authorities that are not accountable to either them or their representatives. This may not yet be considered controversial (national consultations in 2007 and 2008 found that despite low levels of awareness, large majorities in all partner states, including Kenya approved of political federation), but it does little to foster a feeling of ownership of the Community and the processes that generate it.

This is not a uniquely Kenyan issue. In fact, a study last year found that one-third of East Africans had only a weak or no sense at all of being “East African.” In 2004, when the Summit instituted the Wako committee on Fasttracking Political Integration, it was the “slow pace of integration” that caused the leadership to remember the people — a tacit admission that popular participation was lacking.

Attitudes, though, are slowly changing. Last year, The EastAfrican reported that the partner states are to establish integration centres at border points to sensitise the citizenry on the benefits of regional assimilation and that Kenya's EAC Ministry will use mobile phones to educate up to 17 million people on the Common Market Protocol. It is also planning to hire a public relations firm as part of what Naim Bilal, Deputy Director of Public Communications, calls a “broad-based and comprehensive strategy” to communicate the benefits of integration to the people.

Welcome as they are, such measures are only of limited benefit. To be sustainable in the long term, the EAC must evolve into a truly independent and powerful union of peoples -a United States of East Africa- rather than a loose association of regional governments. Till that happens, the Monetary Union and the Community it is meant to serve will remain as fragile as the political will that created them.

Saturday, March 13, 2010

How Tanzanian Justice Fails to See the Wood for Trees

The East African Development Bank’s search for justice and self-preservation in the courtrooms of Tanzania has been as trivialised as it has been convoluted. Throughout the litigation, the courts have systematically focused on technicalities and blocked any attempt to interrogate the merits of the $61 million arbitral award that threatens the viability of the bank.

Between March 1990 and June 1992, the Bank provided a total of $2.2 million in loans to Blueline Enterprises Ltd, a Tanzanian transporter, for the purchase of to 10 heavy-duty trucks and other equipment. However, in November 1995, the Bank placed the company under receivership for non-payment. Following a successful arbitration process the Bank’s initial victory was overturned by the courts, which ordered new arbitration proceedings. The award, which some have termed “obscene,” stemmed from this latter process.

The EADB’s numerous attempts to have its day in court have been bogged down in legal minutiae. Not once has it had the opportunity to tell its side of the story. And as it stares bankruptcy in the face, what has been forgotten is that it was the Bank that actually lent money to Blueline, which with interest, would now amount to over $40 million. And since the Bank belongs to the governments of the EAC, it is their citizens who stand to lose this sum.

Below is a timeline of the case:

March 7, 1990: East African Development Bank advances a loan of approximately $1.86 million to Blueline Enterprises Ltd of Tanzania to purchase 10 heavy duty trucks and other equipment.

June 16, 1992: The EADB gives Blueline a supplemental loan of $340,000.

November 24, 1995: The Bank appoints Coopers and Lybrand (now PricewaterhouseCoopers) as Receiver and Manager of Blueline
.

December 4, 1995: Blueline procures an injunction from the High Court restraining the Bank from permitting its Receiver and Manager to “take over and run” Blueline’s business.

February 14, 2001: The Bank and Blueline file a Compromise Order appointing Hon. Francis L. Nyalali (the former Chief Justice of Tanzania) Sole Arbitrator and A. T. H. Mwakyusa as his substitute.

September 30, 2002: Hon. Mr Nyalali finds in favour of Bank and dismisses Blueline’s claim on the basis that it lacked legal merit. Hon. Nyalali dies shortly thereafter and Blueline files a petition challenging the award.

July 30, 2003: Mr Justice Luanda sets aside Hon. Mr Nyalali’s award and orders the Arbitration proceedings to commence afresh before Mr Mwakyusa.

The bank appeals on the grounds that Mr Mwakyusa could only have been appointed if Mr Nyalali had not acted as arbitrator.

November 21, 2003: The Court of Appeal of Tanzania strikes out the appeal because the Bank has failed to obtain Leave to Appeal.

To rectify the error, the Bank files an Application in the High Court seeking an extension of time to file a new Notice of Appeal and an extension of time to seek Leave to Appeal to the Court of Appeal .

July 9, 2004: Mr Justice Mihayo of the High Court refuses to grant the extensions of time.

Following commencement of arbitration before Mr Mwakyusa, the Bank applies afresh to the High Court for the removal of Mr Mwakyusa as the Sole Arbitrator and for the Arbitration proceedings to be stayed pending determination of its petition.

May 11, 2004: The Bank’s Application is dismissed by the Hon. Justice Massati because it has not annexed the Loan Agreement containing the Arbitration clause to the Application.

The Bank files a Notice of its intention to appeal to the Court of Appeal as well as an Application for Leave to Appeal. Simultaneously the Bank files an application to prevent the Arbitration proceedings from continuing pending the determination of its Appeal. The Court of Appeal strikes out the latter application on the ground that the order of the High Court was not capable of execution, and therefore a stay order relating to it could not be issued.

The Bank subsequently appealed to the Arbitrator to remove himself, but he declined to do so.
In light of the dismissal of the application for a stay order, the Bank abandons its intended Appeal against M. Justice Massati’s decision and as a result, Mr Mwakyusa, commences the Arbitration proceedings.

August 31, 2005: Mr Mwakyusa delivers his award awarding Blueline $61,386,853 in relation to Blueline’s claims against the Bank. No award is made in respect of the Bank’s claim for the outstanding loan.

The Bank files a Petition and Application in the High Court seeking to set aside the award; a declaration that Arbitration proceedings have failed and consequently the dispute should be determined by a Court of law; and a stay of execution of the arbitral award pending the final determination of the Bank’s petition.

Mr Justice Shangwa sustains Blueline’s objections that the Bank has omitted to annex a certified copy of the arbitral award even though the original was, at that time, before the High Court, and particularly, before the judge handling the matter, having been sent there directly by the arbitrator.

The Bank files a further Application to the High Court for extension of time in order to file another Petition to set aside the Arbitral award. However on the day fixed for the hearing of the said Application, the Bank withdraws the application upon advice of Counsel that the time limit has not lapsed after all. This advice is based on a previous decision made by the Court of Appeal that implies that the petition, being a “suit,” could be filed up to six years from the date of the award.

Immediately thereafter, the bank files a new petition in the High Court.

Blueline raise a preliminary objection that the petition is time-barred and should be struck out, relying on a 2002 Court of Appeal decision that a petition to set aside an award is an “application” (and not a “suit”) and was therefore still subject to the 60 days limitation.

June 22, 2007: Justice Mandia delivers his ruling noting that there are two conflicting decisions of the Court of Appeal on the matter. He, however, decides to rely upon the earlier decision, that a petition is an “application” and declares it time-barred.

July 5, 2007: EADB files a Notice of Appeal against the ruling of the Court together with an application for Leave to Appeal.

April 11, 2008: The Bank’s application for leave to appeal Justice Mandia’s decision is struck out with costs.

December 17, 2007: EADB files an application seeking an order from the court for extending the limitation period on the grounds that there is reasonable cause for the court to exercise its discretion.

March 26, 2009: Justice Sheikh of the High Court dismisses the Bank’s application because EADB had previously filed and withdrawn a similar application for the same order (for extension of time) without seeking liberty to reinstitute it.

May 12, 2009:Justice Shangwa dismisses the Bank’s application to vacate the garnishee order by way of which Blueline sought execution of the arbitral award declaring that the Bank’s immunity from attachment of its assets did not extend to its cash.

September 22, 2009: Leave is granted to appeal against Justice Shangwa’s ruling. Subsequently, Blueline consents to the grant of leave by the High Court for the appeal against the decision of Justice Sheikh.

March 8, 2010: A three-judge panel dismisses the Bank’s appeal on the grounds that since Justice Mandia had dismissed the petition previously brought by the Bank, it was not open to the Bank to go back before the same Court with an application for enlargement of time.

March 11, 2010: The hearing on the appeal against the decision by Justice Shangwa relating to the Bank’s immunity is adjourned after one of the judges recuses himself.

Banking on the EADB


As the East African Development Bank fights for its life in Tanzanian courts, its role as the East African Community’s Bank has come under fire. The Permanent Secretary at Kenya’s Ministry of East African Community blames a lack of vision by the leadership of the East African Development Bank for the failure to mobilize resources for cross-border infrastructure projects. Speaking to The East African, David Nalo stressed that the bank “needed to be reformed yesterday”, citing the example of the Athi River-Arusha road. The project took over ten years to kick off because each country was separately negotiating with donors to finance its chunk of tarmac. “The EADB should have repositioned itself to offer solutions as the Bank of the EAC to source the funds and execute the project,” the PS says.

The bank is appealing a $61 million arbitral award given against it to Tanzanian transporters, Blueline Enterprises Ltd. Its numerous attempts to have the award set aside have been dismissed on technicalities. According to lawyer Kibe Mungai, in 5 years of litigation, the case has never been heard on its merits.

Though its lawyers have warned that the institution may not have the resources to pay and may face the prospect of liquidation if all its appeals are unsuccessful, the bank is now seeking to reassure “all stakeholders” that its operations will continue. In a Press release, the bank declares that the EAC Partner States, who own over 80% of the bank as well as non-state shareholders “remain firmly committed to the EADB and will continue to support it.” This is despite the fact that the member states have already eschewed the idea of shelling out taxpayer cash to “pay a private businessman”.

The African Development Bank, which owns close to 7% of the EADB has declared that it is 100% behind the Bank. Though he would not be drawn out on the subject of a bailout, Bhargav Purohit, who represents the African Development Bank on the EADB’s Board of Directors, said the AfDB would support the EADB in its time of need. “We will be here to work with them as we have been for the last 40 years,” he declared.

PS Nalo believes East Africa must make a strategic choice between the proposed the East Africa Community Development Fund and restructuring the EADB to avoid “duplication.” Declaring that the EADB is potentially “an extremely useful instrument,” he advised the Bank’s management to start thinking about funding infrastructure projects such as a fibre optic cable from Mombasa to the DRC or a nuclear power plant, or mobilising equity and capital for renovating the railway system.

Purohit, though, observes that the Bank’s role is still defined by the 1980 Charter and any changes in its mandate would need to be reflected there. He believes that to properly perform its new role, the EADB would need to be restructured and adequately capitalized. He further adds that a strategic plan is currently being worked on by the Director-General and her team and it will include recommendations on the requisite level of capitalization.

Interestingly, in 2008, The EastAfrican reported that a $135 million recapitalisation package was yet to be realized and Nalo feels that partner states will remain unwilling to recapitalize it until it is restructured and shows readiness to delve into regional issues.

The bank has had a troubled history, having undergone at least three bouts of restructuring within the last two decades, mostly following losses. It was first restructured in 1993. Between 1994 and 1998, it had a good run, doubling its profits. This was followed by a period of deterioration which culminated in a $2.9 million loss in 2002, prompting another restructuring and the departure of 5 top managers. The latest facelift comes on the back of an $8 million loss in 2008 which led to the removal of its top brass including the Director-General.

One of the few remaining vestiges of the original East African Community, the Bank was created by Article 21 of the Treaty for East African Co-operation of 6 June 1967 and its Charter was set out in Annex VI of the Treaty. Its main purpose was to promote the equitable industrial development of the three member countries, Kenya Uganda and Tanzania. While the three countries contributed equally to its capital base, the bank was required to devote 38.75 per cent of its investments in each Tanzania and Uganda, against 22.5 per cent in Kenya.

However, under its statutes, it could only finance “viable” projects, most of which were in Kenya, especially during the 1971-73 period. This, and the absence of coordinated industrial planning in EAC, greatly limited the bank’s ability to effectively redistribute the benefits of the integration.

The EADB survived the dissolution of the EAC in 1977 largely because it did not rely on the EAC for funding. Headquartered in Kampala, Uganda, the bank was revitalized by a then rare show of unity when Kenya, Tanzania, and Uganda momentarily set aside their differences in an effort to bolster the bank's activities.

The Treaty Amending and Re-enacting the Charter of the East African Development Bank,which came into force on 23rd July 1980, rescued it from legal limbo. It provided that the EADB Charter would henceforth draw its legal validity from the 1980 agreement and not the 1967 Treaty which founded it. Under the new charter, in addition to promoting industrial development, the bank could also provide funding and technical assistance for agricultural, forestry, tourism, transportation, and infrastructure development projects. It had an authorised capital stock of US$ 1.08 billion though to date it’s actual paid-up capital remains at less than 10% of that figure.

In 1984 the International Monetary Fund agreed to provide further financial backing and by the late 1980s the African Development Bank and the Japanese government agreed to channel $56.4 million in credit through the EADB for regional projects. By 1990 the EADB had lent $28 million for 19 separate projects, but many of these and other loans were soon in arrears. Many of the bank's problems were blamed on currency devaluations and various technical financial adjustments. In 1993, the EADB agreed to a complete restructuring under the guidance of a new director general.

That same year, Kenya, Uganda and Tanzania took another crack at regional integration by forming the Permanent Tripartite Commission for East African Co-operation. The Treaty for the Establishment of the East African Community was signed in November 1999 and entered into force in July 2000. The EADB, along with other remnants of the 1967 Treaty, was declared an Autonomous Institution of the Community. The bank was charged with catalyzing regional integration through the provision of development finance.

The 2nd EAC Development Strategy which covered the years 2001-2005, recognized a gap in regional financing for regional projects, citing low savings and incomplete financial reforms. To plug this hole, the Strategy recommended establishing a Regional Development Fund with the EADB used as a transitional vehicle for raising funds for regional projects before the Fund is up and running.

While this seems to suggest that the Bank is of limited value, at least as far as EAC integration is concerned, a paper tabled at the July 2008 UN Conference on Trade and Development notes that given the important imperfections of private international capital markets, especially in the provision of long-term funding – such as is required for infrastructure – Regional Development Banks and Sub- Regional Development Banks such as the EADB need to play an ever increasing role in financing regional infrastructure.

Financing from Multilateral Development Banks such as the World Bank tends to come with strict conditionalities, give little regard to the views of developing countries, and are heavily influenced by the agendas of their shareholders’ domestic constituencies. RDBs and SRDBs on the other hand, can rely on informal peer pressure rather than imposing conditionality allowing for faster and more flexible disbursements of resources. There is also little danger of countries’ voices been drowned out in a bank they themselves own, or their being held hostage to foreign agendas.

RDBs and SRDBs can also help ameliorate the vagaries of international private finance by providing counter-cyclical finance when private flows dry up and developing innovative market instruments, such as GDP-linked bonds, that better spread risks and reduce the likelihood of costly and disruptive defaults and debt crises.

Therefore, while the EADB has financed numerous projects in different sectors within the region including education, agriculture, agro-processing, construction and real estate, health, transport and telecommunications,it needs to expand its portfolio to include financing regional integration efforts and especially the cross-border infrastructure. Just as the EAC is following the EU integration model, so the EADB should look carefully at the example set by its counterpart in Europe, the European Investment Bank.

The EIB was central to the process of European integration since the beginning. Indeed, just like the Treaty of East Africa Cooperation created the EADB, the 1957 Treaty of Rome that created the European Economic Community also created the EIB. The EIB, the most powerful instrument in the Treaty, was established in order to support the European integration process. It had a three-fold mandate: to ensure equitable development by channeling savings from the more developed parts of the Community to the less developed parts; to help modernize or replace “senile industries”; and to develop cross-border infrastructure by transforming Europe’s essentially national infrastructure into an integratedEuropean infrastructure.

To fulfill a similar role, the EADB needs to extend its portfolio to include financing of regional infrastructure projects. As the Deputy Governor Bank of Uganda, Dr. Louis Austin Kasekende notes, “the EADB… lends money to commercial enterprises to fund their capital investment and working capital. Most of these enterprises are in the private sector although a few are public enterprises and joint ventures.” In contrast, in its first ten years, the EIB lent almost exclusively to infrastructure and industry with the former accounting for nearly half (48%) of its total disbursements. In the SADC region, the Development Bank of South Africa also focuses primarily on its core mandate of infrastructure funding.

In some ways, though, the EADB is already set up to finance infrastructure. Such funding typically requires long-term loans. While the liberalization of financial markets and the rapid increase in the number of commercial banks in the financial system has largely improved availability of short-term as opposed to long-term credit, the latter accounts for well over 80% of the loans approved by the EADB in any given year. However, it needs to ramp up the scale of its lending. After a relatively modest start while it found its financial feet, the EIB now shells out more credit than the other multilateral banks put together. The EADB’s annual disbursement, on the other hand, is woefully small -in 2008 it was less that the amount Kenya’s Higher Education Loans Board advanced to the country’s students!

The EADB must also attend to its redistributive function just as the EIB funneled resources to the poorer sections of Europe. In fact, before joining the European Economic Community, Italy pressed for the creation of the EIB largely to help fund infrastructure in its Southern region. In contrast, between 1995 and 2006, the EADB’s approved investments were evenly split between Kenya, Uganda and Tanzania. The bank must revisit its roots and especially the requirement to ensure the fruits of integration are equitably distributed. Though Nalo is opposed to this, preferring policy incentives that encourage private sector investors to view the region as a single entity, he acknowledges that the EACDF does contemplate a mechanism of compensation for losses incurred due to the integration project and proposes that such mechanisms be included in a revised EADB Charter.

Monday, March 08, 2010

SA 2010: Stealing the Show

Kenya BPO Sector: Brain Processing Outsourcing?

For many developing countries outsourcing is the ultimate get-rich-quick scheme. The lure of a half trillion dollar market, 85% of which is unaddressed, is irresistible. The industry has grown exponentially in the last few years, by a massive 65% between 2005 and 2009. At $220 billion, the Business Process Outsourcing and Offshoring sector takes up nearly half of the total addressable market for industry, less than 11% of which has been exploited. It is this that is whetting many appetites.

Kenya has announced her intention to stake a claim to a piece of this pie. BPO has been identified as one of the six pillars of economic growth underpinning Vision 2030, the country’s strategy to achieve middle-income status within two decades. The vision calls for Kenya to “quickly become the top BPO destination in Africa”. The plan is to create at least 7,500 direct BPO jobs and grow the industry’s GDP contribution from almost nothing to KShs.10 billion, by 2012. However, a study by the international consulting firm McKinsey and Company indicates that the vision is not sufficiently ambitious. According to the report Seizing the Prize –Driving BPO Sector Growth in Kenya, the sector has the potential to generate Ksh 45 billion and 20,000 direct jobs by 2014.

The report emphasizes that this will not come like manna from the heavens. There is no inevitability about it. It will require a high degree of focus, effort and haste to realize the benefits. It identifies the country’s competitive strengths and weaknesses, identifies a strategic direction and lays out a series of recommendations covering strategy, marketing, training, funding and the country’s business environment, which must be implemented sequentially before the end of this year.

The general thrust of the report is that coming late to the party, Kenya has no chance of becoming a Tier 1 provider; it lacks the scale to become a global player like India or the Phillipines. So the suggestion is that she leverages her relatively small pool of cheap, accent-neutral English-speaking graduates, her strong ties to the US and UK (which together account for nearly 60% of the outsourcing market), improving infrastructure and an already thriving business environment, to create a niche for herself in basic sales and customer-care services and attract large international BPO companies.

On the face of it, this seems reasonable. At $104 billion, basic services represent nearly 50% of the total BPO demand, and two-thirds of that is basic voice services. Vision 2030 predicted that India, China and the Philippines, would be unable to meet the expanding global demand for labour required to produce BPO services and products and by 2008, a shortage of 200,000–500,000 workers would present business opportunities for countries like Kenya. As it also notes, each year the Philippines produces four times as many, and India 23 times as many, graduates as Kenya. The Philippines has been a global outsourcing destination for over a decade, has developed a BPO workforce of over 450,000 workers and earns about $7.2 billion annually. India has been at it for twice as long, has recruited a BPO army of over 1,000,000 people and earns $30 billion every year. So perhaps a frontal assault may not be the best idea.

That said, turning a significant proportion of our best and brightest into automated telephone answering machines does not seem like the correct strategy either. And this is precisely what is being contemplated. But for Jonathan Defensor De Luzuriaga, Managing Director, Tholons SE Asia and a consultant for the ICT Board, the key question is how to take advantage of the inherent strengths and capabilities of the country, not to dumb them down.

The 2006 ICT Strategy Paper identified the secondary school system as the “entry level threshold for call centre workers” and noted that we graduate 700,000 students at that level. Further, the Strategy paper identified the level at which we enjoy our cost advantage. “At an average salary of 15,000 a month for a secondary school leaver,” it says, “Kenyan wages would be comparable to those of India, making Kenya one of the most attractive call centre destinations in the world.”

This is confirmed by the preliminary findings of the Skills Taskforce, which was, ironically, formed on the recommendation of the McKinsey report. According to its chairlady, Esther Muchiri, local BPO firms have little demand for high level skills. Sanjay Sikka, CEO of Horizon Contact Centres, the largest contact centre by capacity in East Africa, says fourth-form leavers already possess the skills to work at call centres. His company only needs to train them for one week in “soft” skills and three weeks on the particular product they will be dealing with.

While basic services make up 46% of the BPO sector, the rest is composed of medium-level Information Technology Outsourcing (ITO) and high-level Knowledge Processing Outsourcing (KPO). Training graduates for either low end BPO or high end KPO and ITO would entail the same effort although the latter two would give richer rewards Luzuriaga notes. “Why aim for the mountains when we can aim for the stars?” he poses.

Aiming for the lower end of the BPO scale also a risk falling into the same bind the Philippines finds itself in. Identified for a long time as a source of cheap, minimally skilled BPO labour, the country has found it impossible to shed that image. As a result, high-value KPO contracts are passing it by. Kenya already has local software outsourcing firms such as Vervient Ltd. which services clients from the US to New Zealand. Its CEO Agosta Liko hotly disputes the assertion that Kenyans are not capable. He believes that Kenyans are “hustlers” and the most sophisticated in the region. Another example of hot Kenyan talent is Ushahidi, a platform that allows anyone to gather distributed data via SMS, email or web and visualize it on a map or timeline. Developed by four Kenyans to track the 2008 post-election violence, it is now being employed across the world to map disaster areas and direct relief agencies to areas of need, most recently in Haiti and Chile. Co-founder, Eric Hershman, believes that Kenya “has all the talent in the world” and he has put his (and other people’s) money where his mouth is, teaming up with several local it layers to set up the iHub, a focal point for the local IT community and a “pre-incubator” of developer talent.

The issue of the growth and development of local ITO firms, though, is glossed over by both the McKinsey report and Vision 2030. Though the latter talks of having “at least 5 large local players .. to become local champions” it still seems that the overarching goal is to position Kenya, not as a source of globally competitive, high-value BPO firms, but as destination for large international companies seeking cheap, low-skilled labour with a token local player presence.

To its credit, the ICT Board seems to be alive to this. It has engaged Luzuriaga and Nairobi University’s Professor Tim Waema to set up the Centre of Excellence, which aims at standardizing BPO curricula and certification across the industry. With such initiatives, the emphasis seems to be shifting from the purely low-end, foreign multinational-driven approach recommended by the McKinsey report, towards a more pragmatic, two-pronged approach which puts local talent (and hopefully local companies) front and centre and gives them the tools to compete at the higher end of the market while at the same time attracting foreign firms to provide the lower-end jobs for secondary school leavers. Continuous modular training through the Centre of Excellence will ensure that we not only upgrade the skills of the lower cadres but that the domain expertise so crucial to KPO can be sourced from the existing labour market and trained in specific BPO skills.

Such a strategy, which recognizes the differentiation in our labour market and plays to our strengths, rather than our limitations, is much more likely to succeed.

Tuesday, March 02, 2010

Let Them Eat Maize?

Last year, Kenya experienced the worst food crisis in her history, more than 10 million facing the prospect of starvation. In a letter to the IMF in May 2009, Finance Minister Uhuru Kenyatta and central bank Governor Njuguna Ndungu blamed it all on three “shocks” namely the post-election violence in early 2008 which impacted negatively on key sectors of our economy such as tourism, manufacturing, transport and agriculture, resulting in a year-on-year decline in real GDP of 1 percent in the first quarter of 2008; record high fuel and fertilizer prices; and the failure of the short rains in October-November 2008, resulting in a sharp decline in domestic food supplies, particularly, maize. They of course left out the one factor which is perhaps the most significant of all.

For while it is true that Kenya is prone to drought, it is equally true that famines are rarely caused by a deficit of rain. In his book Beyond the Miracle of the Market: The Political Economy of Agrarian Development in Kenya, Robert Bates shows that Kenya suffered 16 major droughts between 1889 and 1984 which averages out at one every 6 years. He also notes that relatively few of these resulted in famine. According to Mr. Bates, of all the factors that turn a drought into a famine, only one is under human control: public policy and political institutions. Nobel-prize winning economist Amartya Sen put it more bluntly in his book Development as Freedom: “…no famine has taken place in the history of the world in a functioning democracy – be it economically rich (as in Western Europe or North America) or relatively poor (as in post independence India, or Botswana or Zimbabwe.” And, after the events of 2008, Kenya was hardly a paragon of democracy.

The writing was on the wall as early as 2007 when the short rains failed. By February 2008, the country only had a stock of about 20 million bags of maize, enough to last till September. It was clear to government technocrats that maize needed to be imported by August to bridge the shortfall till the critical North Rift crop was harvested in late 2008. So they recommended to the political leadership the same solution that had been successfully implemented in 2004 when the country faced a similar crisis: a duty waiver to allow the private sector to import the needed grain.

However, for reasons that would perhaps become clear in the light of ensuing events, the politicians, at the very first meeting of the Grand Coalition Cabinet, opted for a novel and utterly untested approach. Under the Subsidized Maize Scheme, they would have the National Cereals and Produce Board, a parastatal company, import the maize and sell it, at subsidized cost, to millers who would then pass the savings on to the consuming public. This despite the fact that no national registry of millers existed, the NCPB having been stripped of this function in 2006, and that there was no way of ensuring that millers didn’t pocket the subsidy themselves. Carried out in two phases, it would involve the sale of grain from the country’s Strategic Grain Reserve as well as importation to top up stocks.

What followed was a 6 month free for all as everyone from elected officials to professionals within the civil service scrambled for a piece of the action. Former Permanent Secretary for Governance and Ethics, John Githongo describes it as “cannibalistic corruption,” as the very people entrusted with safeguarding the lives of 10 million starving Kenyans literally snatched the food from their mouths. And by the time they were done, not only was there no subsidized maize, but the price of the commodity had doubled pushing it even further out of reach.
The consequences were devastating. By January 2009, fully a quarter of the population was starving and, according to the International Rescue Committee (IRC), over a fifth of children under age five were malnourished. That month, the government declared a National Disaster, reversed course and waived duty on imported maize, the course originally recommended by its technocrats.

As food prices rose, so did public pressure for an accounting. A forensic audit of the scheme by PriceWaterhouse Coopers revealed the extent of the rot and more importantly, linked it back to the original decision. Companies in which government officials, including Cabinet Ministers, had interests were either allocated maize despite not being millers, or received lucrative contracts related to the industry. MPs admitted to buying maize from the NCPB as well as writing letters requesting for allocations to individuals known to them, according to Githongo a clear violation of the Public Officer Ethics Act. An insurance company in which the Minister for Agriculture held shares was awarded a tender to supply gunny bags. In fact, almost a third of the subsidized maize allocated from the country’s strategic grain reserve was sold to “traders” posing as millers, who then passed it on to the real millers, in return for “facilitation payments.”
Additionally, maize was imported at more than double the price paid to local farmers, raising queries about the manner it was sourced. A parliamentary committee report recommended investigations of “the personal assistant to Prime Minister, the Prime Minister’s family, the son and associates” with regard to the importation of maize. The total cost of the scam to Kenya’s starving taxpayers is expected to exceed Kshs. 2 billion. Despite all this, an investigation by the Kenya Anti-Corruption Commission was unable to find any evidence of wrongdoing

Makes one wonder: Did the Cabinet plan it all from the very beginning? This is what PwC calls the “big picture question –whether the whole exercise was from the outset designed to fail and to provide a means for considerable financial exploitation at the expense of the state.” Though the auditors are reluctant to give a definitive answer, it is hard not to reach that conclusion given the history of corrupt deals. According to Githongo, it would hardly be the first time scoundrels have created a crisis and then sought to benefit from it. He points to the power rationing scheme of 1999 which he attributes to the emptying of hydroelectric dams supposedly to clear out siltation. The consequent loss of generating capacity (since the dams take time to refill, especially when the rains fail) led to crippling power cuts necessitating the introduction of expensive private power suppliers, many with connections to the very people who precipitated the crisis.

The fact is the maize scheme was abused from its inception. It was adopted against the grain of expert advice, and provided numerous opportunities for rewarding dishonesty and theft. Most damningly, it appears that none of its political instigators will pay a price for it. What are the odds of such a deviously fortuitous set of circumstances occurring by chance?

The Ugly Canadian

Few issues have generated as much heat in recent African affairs as China’s foray onto the continent. Much has been made of the dragon’s insatiable hunger for the continent’s mineral wealth. The breadth of Chinese involvement has focused minds in the West and provoked much media hyperbole. However, at the same time, the Middle Kingdom’s great rival from North America has been active as well, though her activities seem not to attract as much attention. No, I’m not talking about the USA. Rather the other North American superpower – Canada.

Yes. Canada. Soft, unassuming Canada dominates mining and mineral exploration on the continent. According to the Ministry of Natural Resources Canada (NRC), only South Africa has more mining assets and investments. And while the Rainbow Nation’s interest is concentrated , is just ahead of Canada in the African mining industry. But with South Africa’s gold pot is to be found largely within its borders, by 2007, Canadian companies were active in 35 African countries and Africa represented 17% of the total $85.9 billion in cumulative Canadian mining assets. This year, the total value of Canadian mining assets in Africa is expected to surpass $21 billion compared to just $233 million in 1989.

The Canadian government has actively supported this expansion. Since the 1990s, under the influence of industry associations, the Canadian state has implemented a comprehensive strategy to support the expansion of investments and activities abroad. Fiscal measures designed to attract mining interests include tax deductions for expenditure incurred abroad and exemptions for profits repatriated to Canada. According to its 2007 annual report, Export Development Canada, the government’s export credit agency, has supported projects totalling $22 billion worth of exports and investments in Canadian companies in the extractive sector.
Endowed with both minerals and a long mining tradition, Canadians are not exactly lacking in expertise. As of 2001, the sector accounted for 4% of Canada’s Gross Domestic Product (GDP), with $64 billion in exports and $30 billion in capital expenditure, while employing a total of 400,000 people. The year before, in 2000, there were at least 2,200 Canadian companies related to the mining industry.

So why do they want our minerals? Could it be to power their manufacturing sector? With a modest 2% growth, Canada had been the exception to the trend of manufacturing job loss among developed countries over the last quarter century. But now they are playing catch-up. Between 2004 and 2008, as Canada’s mining investment in Africa has exploded, their manufacturing sector imploded, shedding over 300,000 jobs. Its share of total employment fell by close to one-third and when the U.S. Bureau of Labor Statistics released a comparison of average annual growth rates in manufacturing output over the 2000-2007 period in 16 different industrialized countries, Canada was right at the bottom with real output declining at an average rate of 0.3% per year. So, it is not like they have a voracious appetite for raw materials.

How about energy? Perhaps they need some of our oil and natural gas? Not a chance. Canada is a net exporter of oil, natural gas, coal, and electricity. In 2006, she produced 19.3 quadrillion British Thermal Units (Btu) of total energy, the fifth-largest amount in the world. Not only is she the largest producer of hydroelectricity in the world, she also ranks 3rd and 7th in global gas and oil production respectively. Even as Canadian companies are busy signing oil exploration and extraction contracts here, back home oil tycoons have invested more than CAD$30 billion in Alberta’s oil sands and estimates are for that investment to mushroom to CAD$125 billion in the next decade. So no, they don’t need our oil.

Why are they here then? The reasons is actually quite simple. For one, minerals are relatively easy to find in Africa. The continent hosts 30% of planet’s mineral reserves including 40% of Gold, 60% of cobalt, 90% of the worlds PGMs (Platinum Group of Metals) and proven oil reserves of over 117 billion barrels as at the end of 2007. In Canada, the easy-to-find stuff has already been found. Companies are now developing low-grade projects with marginal economics and investors have reached a stage where they assume that mines will not be delivered on time and on budget. A good example is British Columbia’s Galore Creek Project, a partnership between two Canadian mining entites, NovaGold and Teck Cominco, to develop what was supposed to be “one of the world’s largest undeveloped copper-gold deposits, with quality, long-life reserves and excellent geologic potential.” It was halted after costs more than doubled and the estimated long-term copper price raised questions about its economic feasibility. Interestingly, according to Mineweb , an internet-based international mining publication, Teck Cominco President and CEO Don Lindsay speculated that the mine might become more attractive if “problems develop with copper projects in the Congo.”

In some places in Africa, meanwhile, a company like First Quantum Minerals Ltd. can get its Lonshi mine up and running less than a year after a discovery is made and there are highly prospective regions like the Central African copperbelt that have had no serious exploration for decades, or ever. "You're looking at virgin ground that's almost untouched. It's finally being explored properly," says Jean Luc Roy, CEO of the copperbelt exploration company El Nino Ventures Inc. Robert Lavalliere, vice-president of investor relations at Anvil Mining Ltd., the leading copper producer in the DRC with three major projects, notes the productive potential of open pit mines there is “three, four, five times" that of the rest of the world. However, I hasten to add, this is not universally true of the continent. The experience of Tiomin Resources Inc. in Kenya will suffice to illustrate this.

That said, it is abundantly clear that Canadians are not here just for the minerals. They’re here for the money. And with sky high global prices for raw materials, you can bet there’s lots of it to be made. According to CorpWatch.org, 60 percent of all the world’s mining companies are based in Canada, generating $50 billion a year for Canadians. In fact, talk of a scramble for African minerals pitting the West and China is somewhat misleading. Much of it , no matter who mines it, eventually finds its way, via the global markets, to the booming economies of Asia. The scramble is for cash since the Chinese probably figure it would be cheaper (and safer) to mine the products themselves rather than wait for middle-men to deliver it.

As everyone (except the African people, of course) fights for his piece of the pie, moral standards are being thrown to the wind. Around the world, Canadians are generally regarded as a pleasant, soft spoken people. But being home to nearly two-thirds of the world’s mining and exploration companies, it is inevitable that there will be some rotten apples. Each year, a significant number of these are accused of environmental and human rights abuses, often in developing countries where the government is weak or corrupt. Their behaviour is so bad that in some places, according to the Toronto Star, the word "Canada" is so reviled that travelling Canadians mask their citizenship by wearing, of all things, American flags on their caps and backpacks. The Canadian government has struggled for a decade with how to hold mining firms accountable for their actions overseas. So far its attempts have proved inadequate.

It has disregarded repeated calls for an independent investigation into the 1996 Bulyanhulu gold mine incident. In 2001, eyewitness accounts, family testimony, photos and police videotape uncovered by the Lawyer's Environmental Action Team (LEAT) of Tanzania corroborated long-standing allegations that employees of the Canadian owned Kahama Mining Corporation, LTD (KMCL) in conjunction with the Tanzanian police, buried over fifty artisanal miners by bulldozing over the entrances to the shafts in which they worked at the Bulyanhulu gold mine in 1996.

In 2002 it ignored a United Nations report called on it to investigate the actions of seven Canadian companies accused of illegally exploiting resources from the Democratic Republic of the Congo. Two years later, 73 people were killed by the Congolese military, which used vehicles, supplies, pilots and drivers from a Canadian-Australian mining company to transport them to the site of the massacre. According to MiningWatch’s Jamie Kneen, Anvil Mining had been forced to shut down production at their Dikulushi Mine when a so-called “rebellion” took place in a nearby village; a rebellion of “10 to 12” villagers that had nothing to do with mining. Congolese Armed Forces (FARDC), of the DRC government, provided with trucks and logistics by Anvil, proceeded to seize the town and then went door-to-door “raping and pillaging.”

As recent revelations from Uganda demonstrate, these companies are not above signing secret agreements or dumping toxic waste into rivers as they did in Tanzania. Denis Tougas, director of the L'Entraide missionnaire (L'EMI) in MontrĂ©al, notes that “it’s a safe bet that Canada’s image as a moderate country and disinterested development partner in Africa is now thoroughly outdated.”

Why SA Creams Kenya

With a dairy cattle population estimated at nearly 7million, the largest such herd in Africa and more than the rest of the countries in East and Southern Africa combined, Kenya is the third-largest milk producer in Africa, behind Sudan and Egypt. The dairy industry is the single largest agricultural sub-sector, larger even than tea; it contributes some 14% of agricultural GDP and 3.5% of total GDP. And Kenyans love milk; they consume more of it than almost anyone else in the developing world. In terms of milk consumption per unit of average income, Kenya ranks only behind Mauritania and Mongolia globally among developing countries. On average, each Kenyan drinks, according to the International Livestock Research Institute (ILRI), about 145 litres of milk a year, triple his Ugandan counterpart and four times the average for Sub-Saharan Africa. A 1999 survey found that urban households spent an average of 18 percent of their income on dairy products, second only to their expenditure on cereals such as maize.

As milk is a bulky and perishable product, across the world the dairy sector tends to be highly localised, and dairy products are mostly consumed in the country or region where they are produced. If intra-EU trade is excluded, only 7 percent of the milk produced is traded internationally. However, Kenya manages to export substantial quantities of milk and milk products to the East African region and Asia. In 2007, the main dairy export destination was the Middle East, which received some 14 million litres, more than double the figure for 2006.

So it may come as a surprise to learn that though Kenya produces nearly 1.5 times more milk than its major competitor in the region, South Africa, it still earns 5 times less from that production. In 2006, according to the EA Report On Manufacturers & Commercial News, Kenya earned Kshs 64 billion from 3.5 billion litres of milk compared with SA's Kshs 220 billion from 2.6 billion litres which translates to revenue per litre of just Kshs 29 for Kenya and a whopping Kshs 96 for SA. With a dairy herd six times as small, the average SA dairy farmer produces ten times as much milk as his Kenyan counterpart.

Why?

Marketing of milk in Kenya is done through the formal and informal sectors. The formal sector in Kenya comprises of the following licensed milk dealers; 27 milk processors, 64 mini dairies, 78 cottage industries, 1138 milk bars and 757 primary milk producers. The numbers may sound impressive but they are deceptive. While the amount of milk marketed through the formal sector has been increasing over the last few years, only 70% of the country’s total milk production makes it to market and most of that is sold raw, through informal channels. Milk processors only collect 14% of the total production in any given year and only 1% of this converted into value-added, long-life products like cheese and butter, margarine, condensed milk, and powdered milk. Almost all dairy product consumption is in the form of liquid milk. The sad fact is, while they may be among the greatest consumers of dairy products in the developing world, Kenyans still fall woefully short of the 200 litres recommended by the Food and Agricultural Organization (FAO). By comparison, 90% of South African production is traded in formal markets and only 3% informally. The country converts 40% of all its milk into yoghurt, cheese and curdled milk.

Thus in SA payment for fresh milk is based on volume and quality of milk since processors need milk containing higher fat and protein percentages to reduce the production cost of dairy products. Globally, the market for higher value-added milk ingredients was estimated to be $ 19 billion in 2008. However, in Kenya, as noted in a 2008 report for the East Africa Dairy Development Program prepared by TechnoServe Kenya, milk purchases are currently driven only by volume and not quality. Processors are not willing to pay the premium for quality, discouraging investment in value added quality milk production and handling, and investment in cold chain technology needed to preserve the quality of milk.

Consequently, we have the strange paradox of milk being poured down the drain in a glut while at the same time imported dairy products are stocked in supermarkets. Though the Kenya Dairy Board asserts that dairy imports have gone down over time as the country becomes increasingly more self- sufficient in milk and milk products, it still admits that over Kshs. 400 million worth of “specialized milk products” are still imported mainly from New Zealand and the E.U.

A 2003 study by Andrew Karanja, a Research Fellow at Tegemeo Institute, Egerton University, showed that while the country could produce milk competitively, this advantage was lost due to inefficiencies in milk collection, marketing and processing. The study also indicated that though large-scale farms are the most competitive in milk production, in Kenya the industry is dominated by 600,000 small-scale producers located mainly in the Rift Valley, Central and Eastern provinces. They account for 80% of production and some 70% of marketed milk. By comparison, South Africa's market is dominated by only 4 000 large-scale milk producers.

Of course, small-scale dairy does have its compensations. While the South Africa industry employs about 60,000 farm workers and indirectly creates another 40,000 jobs, Kenya’s dairy sector supports 1 million households and generates 365,000 salaried jobs as well as over half million jobs in service sectors.

Other woes afflicting the dairy sector include a limited processing capacity which has not substantially increased in 2 decades; and a reliance on rain-fed agriculture which leaves the industry vulnerable to chronic cycles of underproduction in drought and overproduction when the rain comes, compounded by farmers’ lack of capital and knowledge.

In 2008, none of the farmers interviewed by TechnoServe knew their cost of production, or what increase in production resulted from adding an additional kilogram of food, or from altering the food regime. Because the benefits of additional feed or animal care are rarely examined in the context of increasing yields, most cows produce well below their potential. Additionally, even though dairy is an important source of income, for many producers keeping cattle is a cultural function which happens to meet domestic consumption needs while providing some cash flow. It is not seen as a business where the aim is to maximize income and minimize costs. As opposed to the trend towards intensification of milk production in developed countries, production growth in Kenya, as in most developing countries, is to a large part due to increasing numbers of milk animals (and dairy farms) and not productivity gains. The result is broke farmers, often dependent on open grazing to feed their animals and susceptible to the effects of seasonal weather patterns.

Add regulatory incompetence to this emphasis on quantity over quality and one gets the basic ingredients for the current milk crisis. The overseers’ reaction to the crisis is very illuminating in this regard. As the spectre of corruption is never far away from such tragedies, the Minister for Cooperatives Development, Joseph Nyaga, is fingering the NKCC management alleging “sabotage and deliberate incompetence.” He also cites the illicit dumping of subsidized milk powder from the EU. He is promising a crackdown on smugglers and the sacking of the entire NKCC team, including the chief engineer for the procurement of a Sh73 million milk-processing machine which has only been working for six hours a day.

The Kenya Dairy Board, finally waking up to its duties, is insisting that milk processors are obligated to absorb all the current production while in the same breath admitting that their capacity is overstretched. It is abundantly clear that this is not going to happen. New KCC (NKCC) and Brookside Dairies, which together account for 80% of the total processing volumes are already turning away farmers, and the situation is expected to worsen with the onset of the long rains.

But there is a more fundamental problem for the Ministry and the KDB. If, as the Export Processing Zones Authority asserts, the total inbuilt processing capacity is 2.5 million litres a day, why are milk processors struggling to cope with a surge of just over half of that? To blame the entire crisis on a single machine, on milk powder whose consumption is a tiny fraction local production, or on overstretched dairies reluctance to absorb more milk simply smacks of scape-goating. The truth is the crisis is largely as a result of long-term inefficiencies and weaknesses in the sector. It was entirely foreseeable, and therefore preventable, or at the very least, its worst effects could have been prevented. To find the real culprits, the Minister, like his minions at the KDB and NKCC, just has to take a long hard look in the mirror.