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Tracking the billions of taxpayers’ money spent on cash-strapped corporations

FINANCIAL STANDARD
By Dominic Omondi | July 7th 2015
President Uhuru Kenyatta and his Deputy William Ruto hands over 1 Billion Shillings to Mumias Sugar Company Chairman Dan Ameyo (Fourth left) as the Kakamega County Governor Wycliffe Oparanya (Third left) and Kakamega County Senator Dr. Boni Khalwale (Center) looks on. (Photo: Benjamin Sakwa/Standard)

Over the years, the Government has bailed out companies and a handful of parastatals in ambitious attempts to prevent them from going under. No beneficiary has ever repaid the loan, and contrary to business logic, none of the entities has announced they intend to return the money.

As at June 30, 2014, State-owned enterprises (SOEs) held a total of Sh14.6 billion in inactive loans, according to the 2015-16 Budget summary. The fact that the State is the guarantor means that taxpayers’ money will be used to pay them off. This money could have been used for development, say in expansion of roads, irrigation to boost food security or construction of health facilities.

Amongst the parastatals that have been bailed out in the past, few have become profitable. Kenya Meat Commission (KMC), Coffee Board of Kenya and the Kenya Petroleum Refineries are in worse shape than they were before they were bailed out.

National broadcaster KBC and Tana River Development Authority (Tarda) are yet to regain their footing, despite taxpayers shouldering massive amounts of their debts, while some like the Pan African Paper Mills, have closed shop.

 One billion

This has led to questions the State’s bailout policy, and whether spending billions of shillings of taxpayer funds on non-performing ventures should be encouraged. There have also been concerns as to why beneficiaries are never made to account for the money or repay it when they become financially sound.

“Government should stop babysitting parastatals and let them stand on their own. We need less Government interference in managing parastatals, from recruiting MDs to boards of directors and reinvesting profits,” says XN Iraki, an economics lecturer at the University of Nairobi.

Last month, the State pumped Sh1 billion into cash-strapped Mumias Sugar Company in an effort to lift the miller from its financial coma. Mumias is an example of the several firms the Government has tried to hoist out of a financial abyss. In May, the State announced in its supplementary budget that it would loan Kenya Airways (KQ) Sh4.2 billion. The Government holds a 29 per cent stake in the national carrier while Dutch airline KLM owns a 26 per cent stake.

The bailouts have kicked off debate, with some financial experts questioning the morality of using taxpayers’ money to sanitise the mistakes of a few individuals. Others have questioned why the Government is involving itself in business.

President Uhuru Kenyatta, while handing over the Sh1 billion cheque to Mumias, said the money was to be used to pay sugarcane suppliers and salaries.

But should SOEs be allowed to run on free-flowing empathy?

Bureaucratic structures

George Njenga, the dean at Strathmore Business School, says the solution to Kenya’s economic problems does not necessarily lie with the Government. Like Mr Iraki, who says businesses should be at the mercy of the invisible hand of the market and the visible hand of regulation, Mr Njenga believes the key to success for these enterprises is letting them play to market dynamics.

“Efficient institutions never rely on bureaucratic structures such as government administration and politics. The Government should facilitate and offer incentives while safeguarding justice. The State is a referee and one cannot referee and play at the same time,” says Njenga.

Yet, this is not the first time that companies like Mumias, KQ and Uchumi are making a huge financial mess and receiving a taxpayer-funded bailout to fix it.

The question is, if taxpayers keep rescuing these entities from their own greed, who’s to say that they won’t come to rely on taxpayers as an insurance policy with no limits, and manage to make an even bigger mess next time?

Furthermore, will those responsible for the mess ever be brought to book?

Njenga says that bad policies and poor business decisions often drive firms into difficult situations. He says the fact that the Government has been favouring a company like KQ, by facilitating situations that interfere with the natural competitive business environment, has worked against the airliner.

This, coupled with poor purchasing strategies, management of operations and monopolistic tendencies, according to Njenga, have worked against KQ.

“There are middlemen who deliver planes, and they add unnecessary costs. That is what should be investigated,” says Gerrishon Ikiara, an associate director at the Institute of Diplomacy and International Studies, adding that the effects of letting companies like KQ and Mumias, which employ a lot of people and play key roles in the economy, fail would be devastating.

Profit-making

Companies like Kenya Commercial Bank (KCB) and Kenya Power, which went private, albeit with the State still holding a stake, are among the few profit-making parastatals that have successfully emerged from the bailout pack.

Uchumi Supermarkets, which had shown streaks of success under the captaincy of Jonathan Ciano before heading back to stormy waters, would have been in this group were it not for the recent negative turn of events. Some analysts have cited the dismal results of the bailout policy while dismissing its efficacy.

Mr Ikiara says that most Government bailouts are motivated by politics and not economics.

“You cannot separate politics from running an economy. For instance, sugar millers were established in the wider western region of Kenya to compensate for the lack of alternative cash crops. Unfortunately, they became inefficient. Boards of management were politically appointed by people in those areas. Some people interfered with sugarcane farmers and exploited them by not paying them on time. Some farmers stopped supplying sugarcane to factories leading to the collapse of sugar companies,” says Ikiara.

Mismanagement and inefficiencies at Mumias Sugar have seen the firm, which was once a healthy profit-maker, sink into debt. The reason given for the recent Sh1 billion bailout, is that the Government cannot let the company go down because so many people depend on it.

“There are not many options for the State. When those people lose their jobs, they will come and blame the Government. But the politics involved is much more. Politicians, including the President, require support from all regions. So, if an issue in any region is key to them, they will definitely play it to their advantage,” says Ikiara.

Njenga says such firms should be privatised to make them competitive. Targets should then be set within the private sector so that there are rules and a support system to ensure successful business.

“To bail out companies and continue running institutions inefficiently is equivalent to growing poverty exponentially,” said Njenga.

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