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State House push for housing levy left more questions than answers

Housing Principal Secretary Charles Hinga when he appeared before the Senate Devolution and Intergovernmental Relations committee on May 25, 2023. [Elvis Ogina, Standard]

The heightened activities from State House to push through the controversial proposal for a mandatory housing levy have left more questions than answers.

Inadvertently, Housing Principal Secretary Charles Hinga opened the lid on the exact nature of the Public Private Partnership (PPPs) arrangements surrounding this housing scheme.

The insights from these revelations seem to provide clues to the questions that we have all along been asking. In the minds of many objective analysts have been two primary questions: why this sense of urgency by the government to build houses for hustlers, who may not afford them anyway amidst a humiliating cost of living? Exactly what problem is the government trying to solve that necessitates forceful deductions from employees and employers that obviously are a disincentive to work and invest in the country?

Scheme flaws

Unfortunately, the PS insinuates those of us asking the hard questions lack an understanding of the economic logic behind the housing scheme. Further, the public is suffering from trust deficiency syndrome. If the questions shot back by the media present at the briefing are anything to go by, assuming they were a true representation of the mood of the public, then any right-thinking policymaker would consider going back to the drawing board.

But the Kenya Kwanza administration looks determined to push through this thing despite the heavy resistance from the target taxpayers. However, all indications are that it will not be as easy for them as they imagine. A long, messy and noisy battle lies ahead from employee unions and lobby groups.

This past week, I responded to a detailed and incisive opinion survey that was circulating through social media platforms on the controversial clauses in the Finance Bill 2023. I was also a Situation Room guest on Spice FM for the same debate, especially on the PPP implementation framework. It is time somebody reminded the KK top brass and advisors that luck does not strike the same place in quick successions. They may have coerced the unions to have their way on the NSSF increments two months ago, but this time, it doesn't seem that it will rain in their corner.

Four socio-economic variables expose the fallacy of this scheme. These include the assumption on the basic economic principle of arbitrage, the existence of a vacuum in the market, the land tenancy system in Kenya and presumptions of generational equity.

First, the cardinal rule in economics is that there cannot exist an opportunity that promises above-normal returns for long in any normal market-based economic system. Any such, opportunity would attract enough investors to wipe out the above-normal returns until the market evens out.

In the past five years, the Jubilee administration was implementing the 'Big Four' agenda, the affordable/Social housing scheme received a budgetary allocation of at least Sh42.4 billion between the 2018/19 and 2022/23 fiscal years.

This excludes much more that went into police/prisons housing scheme, civil servants housing scheme, informal settlements upgrading scheme - phase II - and urban markets development projects. If indeed these affordable housing propositions are such a good deal, how come the consumers/households cannot see these benefits from the past five years the scheme has been ongoing? Why is it only those forcing it down our throats the ones who seem to notice it?

If indeed it was that good and sufficient demand for these houses existed under the scheme terms and conditions, the Boma Yangu voluntary applications would have overwhelmed the government by now. Otherwise, the promoters and advocates of the scheme are telling us that the market is collectively and individually foolish to the extent that it cannot identify such a great profit opportunity for households.

President William Ruto. [PCS]

Second, the government assumes there has been a vacuum for the entire duration spanning almost five decades it has not been active in the housing sector. No economic system harbours such vacuums. Over the years, folks have heavily sacrificed to put up decent shelters both in the villages, sub-urban areas and the cities. Even those who are in rentals, it is because savvy investors identified the housing gaps and invested there. Official data indicates the real estate sub-sector is among the fastest growing in the last two decades.

Third is the land tenancy system in the country. Most of the land in the country is either freehold or community trust land which makes it extremely complicated and expensive for the government when they need land for development. This has opened a window of opportunity for wheeler-dealing and scramble for the little available public land. The free public land sweetener in this housing scheme would be the Waterloo for it all.

The fourth is the idea that people should transfer their burdens across generations, violating the other cardinal rule of economics on generational equity. By design, the creator and any good economic system should not facilitate an intergeneration burden of consumption. The reason we all invest in the education of our children is to offer them a chance to become better than ourselves socio-economically. How then do we have a national scheme that formalises the transfer of housing costs to our children and possible grandchildren? Exactly what kind of thinking is this?

PPP fallacy

Ideally, PPPs represent the purity of financial engineering in economics. The primary reasons of doing PPPs are threefold. One is to attract private capital into the provision of public goods and services to accelerate development; two is to tap into the private sector efficiency and effectiveness in the delivery of public projects; and three, to access private sector innovation and technology. This is because the private sector is forced to be innovative by market forces.

However, the interest of the private sector and those of the public sector are in conflict. The private sector exists for profit while the public sector is non-profit oriented. Thus, for any project to become a candidate for a PPP, it must be commercially viable.

Ordinarily, the public entity provides sweeteners to reduce the cost of delivering the project or providing the service. But the parties must agree on how to share the benefits and risks of the project.

This is where these housing PPP deals get really murky. Like their cousins in the energy, railway and road sectors, the government is offering free prime public land; wavering all levies, permits, licenses and taxes; and guaranteeing a 100 per cent buyout on any completed unit at a profit.

The question then is: what exactly is the responsibility and shared risk for these private investors?

Technically, all one needs is to have millions of shillings stashed somewhere, legally acquired or otherwise, pose as an investor, sign the contract and cash out at a mouth-watering profit at no assumed risk at all.

That smells like a fertile official platform to cleanse stolen money, folks!

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