Kenyans pay heavily as bad managers loot State firms

We trace how Kenyans continue to pay heavily for the mistakes of patronage-based appointments to government agencies. ILLUSTRATION | NATION MEDIA GROUP 

In Summary

• In 2014 some 15 State corporations made Sh21.2 billion in profits.
• In the years that followed, patronage-based appointments of incompetent managers, tough economic conditions and corruption have seen them deliver just Sh3.7 billion by 2017.
• Smart Company looks at what went wrong with the development model through State-owned enterprises and failed reforms even as the din to re-nationalise Kenya Airways is being peddled as the solution for the ailing national carrier.

By OTIATO GUGUYU
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The iconic Kenyatta International Convention Centre at the heart of Kenya’s capital has been a symbol of political fortunes much as it has defined the country.

During the Kibaki presidency it defined the spirit of a country dispossessed by decades under President Moi and the willingness to take back what had been plundered from public coffers to sustain a narrow elite represented by Kanu.

When Narc swept into power, it forcibly wrestled it away from the party in 2003 and set in motion efforts to rebrand and reinvent it to become a leading venue for regional and international conferences.

However to date, the land on which the monument stands, valued at Sh1 billion in 2006, is not registered in the name of the corporation.

Over the past decade, KICC has come to symbolise the rot in State corporations as management and boards loot national resources and leave a legacy where profits from national firms have fallen eightfold while several other companies are in a state of flux or collapsing.

According to the Auditor-General’s reports, KICC bought three vehicles in 2017 for Sh20.8 million but they were registered to Kenyatta International Conference Centre Management Ltd. While these might appear to be the same institution, it is not; it was just a simple trick to throw auditors off the scent but the ploy was caught.

“A scrutiny of the logbooks shows that the three vehicles were registered in the name of Kenyatta International Conference Centre Management Ltd and not in the name of the corporation,” the auditor said.

“Although it was explained that the problem rose as a result of PIN mix-up at the Kenya Revenue Authority, the issue has not been resolved with the view of having the logbooks issued in the name of Kenyatta International Convention Centre,” the auditor said.

Such boldness in State circles has been cultivated over time. Blatant corruption has gone unpunished for so long that those who stole did not bother to conceal their tracks.

At its height, KICC played host to high-profile global events including the 2018 Blue Economy Conference; the 2017 United Nations Conference on Trade and Development (UNCTAD); the 2016 Tokyo International Conference of Africa's Development (TICAD) VI, and the 2015 World Trade Organization ministerial conference.

These events thrust Kenya on to the international stage but beneath the glitz, a sinister side worked overtime to make a killing, with so much impunity as though the people knew there were no repercussions for their actions.

Between July and September 2015, Sh1.4 billion worth of tenders were handed to cronies without being taken to the tender committee.

“Award for 15 tenders (out of 17) was done singly by the then CEO through single sourcing while making reference to non-existent bids for tenders by fictitious companies in total disregard of the tender committee,” the auditor said.

Then chief executive Fred Simiyu was suspended on November 27, 2015, shortly before the WTO ministerial conference in mid-December.

Nana Gecaga, niece of President Kenyatta, was appointed acting CEO in April 2016 before her confirmation to the post in December.

While the board is supposed to offer oversight, the auditor noted that it was directly involved in the flawed process of revising the cost of the design, supply and installation of computerised conference management tender.

Elsewhere, the Kenya Medical Supplies Agency had stocked Sh351 million of expired drugs between 2016 and 2017 while the Geothermal Development Corporations was being sued for Sh3.3 billion for terminating a contract after the Auditor-General cited it for having ridiculously lopsided terms.

“Amongst other clauses, the contract provided for penalties on GDC and in the event of delays occasioned by its staff at the rate of Sh50,000 per truck and Sh160,000 per crane each day, but on the other hand if the contractor was to cause the delays he would only be liable to a penalty of 0.001 per cent of the unit contract price amounting to Sh427,” the auditor report read.

A review of 15 State corporations shows that in just under five years profits from them have declined from Sh21.2 billion to Sh3.7 billion.

State firms are bleeding with massive losses, forcing the government to dig deeper into taxpayers’ purses to rescue the companies or pay their debts.

Kenya has been forced to bail out several struggling parastatals, such as Kenya Power, Uchumi Supermarkets, Telkom Kenya, Mumias Sugar Company, Kenya Meat Commission and Kenya Broadcasting Corporation.

None of them has recovered and instead they are asking for more taxpayer money in bailouts each year, with the government setting aside more than Sh0.5 billion each year for failing corporations.

In the first quarter of this year alone, taxpayers spent Sh147 million on the Tana & Athi River Development Authority and Sh182.7 million on East Africa Portland Cement, which was more than what was budgeted for.

“Cumulative principal and interest payments of guaranteed loans to parastatals with liquidity problems amounted to Sh330 million against a payment target of Sh316.2 in the quarter ending 30th September, 2019,” Treasury Cabinet Secretary Ukur Yatani said in the first-quarter economic outlook.

The few companies that are making a little cash have recently become targets for a government desperate for cash after the Treasury raided the corporations’ bank accounts for up to Sh78 billion, which is akin to killing the goose that lays the golden eggs.

“To an extent, that will be a possible effect as it removes an incentive to the best-performing SOEs (state owns enterprises),” said Churchill Ogutu, senior research analyst at Genghis Capital said.

“The economic downturn is a contributor to the dwindling fortunes but in my view, the major stumbling block is a dearth in organisational capital that is manifested in incompetence in running the SOEs. Unlike the East Asian nations that pursued managed capitalism and grew their economies through SOE-led economic growth that fostered competition, our (Kenya’s) free-market capitalism is not conducive to emulate such growth,” Ogutu said.

Since the West-imposed crusade to privatise African companies led by the International Monetary Fund and World Bank, the continent has been left in confusion over which way to go.

The Institute of Chartered Accountants in England and Wales (ICAEW) says resistance to privatisation largely stems from the idea that SOEs’ performance should not just be assessed in terms of commercial efficiency but also in terms of social welfare.

Kenya Airways was once considered a model for successful privatisation after it became the first African carrier to be sold in the mid-1990s.

However, it started reporting losses in 2014 after making costly aircraft purchases, which coincided with a slump in tourist and business travel due to a spate of terrorist attacks.

The government announced last year that it plans to re-nationalise the loss-making airline, in an effort to boost competitiveness after failing to recapitalise it through issuing a Sh75 billion guarantee, restructuring debt and attempting a failed bid to put Jomo Kenyatta International Airport under the national carrier.

Despite debt restructuring, the company still made a pre-tax loss of Sh7.59 billion in 2018 and has already posted a loss of Sh8.56 billion for the first six months of 2019.

“The move will undoubtedly improve the company’s financial position over the short term, but there is a lot of uncertainty over whether increased government involvement will actually benefit Kenya Airways’ longer-term sustainability, especially when considering that most other airlines are moving away from nationalisation, towards privatisation,” said Michael Armstrong, ICAEW’s regional director for the Middle East, Africa and South Asia.

Five years ago, a presidential task force recommended that Kenya needed to scrap or merge poorly performing State-owned enterprises that have become a burden to taxpayers.

President Uhuru Kenyatta directed that the recommendations on the parastatal reforms be implemented within three months after he received the report in November 2013.

In 2014, the Government Owned Entities (GOE) Bill and the National Sovereign Wealth Fund Bill were drafted to facilitate the mergers but they are yet to be debated and passed
But wrangles, lack of political will and the Treasury’s reluctance to take the lead in pushing through the reforms have stalled the process.

The merger of three struggling State-owned banks — Consolidated Bank, Development Bank of Kenya and National Bank — was abandoned after South African consulting firm Genetics Analytics advised against it.

Since then ousted Treasury Secretary Henry Rotich made piecemeal proposals to introduce consolidation of State firms in his budgets.

It remains to be seen who will blink first in the graft fight.