Why Uhuru’s parastatal reform was doomed to fail

Why reform parastatals? The parastatal reforms report does not provide compelling reasons. Much to the contrary, it acknowledges that their performance has improved considerably in the recent past. Commercial ones were making good profits and paying dividends to the Treasury, while other self-financing ones, the regulatory agencies ‘managed to generate funds at fairly sustainable levels’. If it ain’t broke, why fix? asks David Ndii

One of President Uhuru Kenyatta’s first policy initiatives was to appoint a task force on parastatal reforms. The task force was appointed in July 2013. It submitted its report three months later in October.

Outside government, it created anticipation of the most radical shake up of the parastatals since the heydays of privatisation in the early 1990s. Inside government, the rationalisation and mergers that it proposed caused considerable disquiet and uncertainty. Nothing has been heard of it in the public domain since.

Two weeks ago, the President announced a long list of appointments to boards of parastatals — his second controversial list in as many months. The big gripe with the list is the recycling of old politicians and cronyism. The list includes appointments to boards for all the existing parastatals including those that were to be merged. Economic pundits have seen this as a death knell for the parastatal reform initiative.

I concur that the President’s parastatal reforms initiative is dead, but not on account of the appointments. My conclusion on reading the report when it came out was that the initiative was stillborn. For it is a textbook study on how not to go about public policy reform.

A good public policy reform document is essentially an exercise in persuasion. It has three components, the “why”, the “what” and the “how”.

First, the “why”. Reforms are painful and politically costly. Reform architects therefore need to provide very compelling reasons for it. The justification must demonstrate that the pain is necessary.

The message to politicians should be something like this. We have to do this. It will be very painful and might even cost us the next election. If we don’t, we will have an economic meltdown in 18 months and we will definitely lose the election.

REFORM BENEFITS

Once a compelling case is made, the document articulates what needs to be done. It should demonstrate the reform benefits and aim to convince most, if not all the stakeholders, that they will be better off for it. Essentially, the “why” part speaks to the sectors and institutions that are targeted by the reforms. To the extent possible, their buy in should be secured before the reforms are pronounced.

The “how” addresses implementation issues such as the time frame, sequencing institutional arrangements and so on. It entails exercising sound judgement of feasibility within the political, institutional and resource constraints that exist. For this, knowledge of the politics, political economy and institutional terrain is absolutely critical. This is where policy advice by foreign experts fails.

My favourite example of a good policy document is Sessional Paper No. 1 of 1986 “On Economic Management for Renewed Growth.” The paper was the blueprint of liberalisation of the economy. How did it sell the reforms?

On “why”, the paper juxtaposed the economic and population trajectories that the country was on, and demonstrated that if we did not change the economic trajectory, we were headed for political implosion. Population growth, it said, would “overwhelm” us.

On what to do, it made a persuasive case for the reforms it proposed in each sector, providing rigorous analysis and evidence on why and how the policies in place were not delivering, and the expected impact of the reforms.

On the “how”, it adopted a gradual liberalisation. The architects of the reform recognised that the country did not have the political shock absorbers for a big-bang liberalisation. Instead of removing maize movement controls all at once, for example, it would be done gradually by allowing free movement of 44 bags, then 88 bags and finally any quantity.

It was far from ideal, but it was the only way that the reforms were going to get political buy-in.

Now, let’s see how the proposed parastatal reform measures up.

COMPELLING REASONS

Why reform parastatals? The report does not provide compelling reasons. Much to the contrary, it acknowledges that their performance has improved considerably in the recent past. Commercial ones were making good profits and paying dividends to the Treasury, while other self-financing ones, the regulatory agencies “managed to generate funds at fairly sustainable levels”. If it ain’t broke, why fix?

What needs to be done? Parastatals are a diverse bunch. They range from organisations that perform core government functions, such as the Kenya Revenue Authority, to purely commercial enterprises which operate in competitive markets, such as the Government’s ailing sugar mills. They come in all shapes and sizes, are in all spheres of government, and have been established at different points in time to serve a specific purpose.

Take the electricity industry. There are several parastatals there: Kenya Power and Lighting Company (KPLC), KenGen, Kenya Electricity Transmission Company (Ketraco), Rural Electrification Authority (REA), Geothermal Development Company (GDC), and the regulator Energy Regulatory Commission (ERC) previously Electricity Regulatory Board (ERB). All these parastatals are products of a sector reform. They are all spin-offs from KPLC.

Similarly, the parastatals in the water sector, including a regulator, water boards, water supply companies and trust funds, are products of a massive and by and large successful reform of the sector.

The Kenya Wildlife Service (KWS) was created out of the Wildlife Department in response to a crisis in the management of parks, and has a done a pretty good job of it, leading to replication of the model with the transformation of the forest department into the Kenya Forestry Service (KFS).

I could go on and on. The point is, there is no generic category of organisations that fits the Task Force’s tag “Government owned Entities” (GOEs). Each parastatal is a unique policy instrument and its form is dictated by the purpose. The maxim, form should follow substance, applies.

NO SUBSTANCE

Seemingly oblivious to this fact, the task force proceeds to meddle with the policy and institutional frameworks of virtually every sector — merge this and that, hive this off here put it there, rename this and so on and so forth. As the report unfolds, what we are told at the outset is a parastatal reform, morphs into a general re-organisation of government which on close inspection, is all form and no substance.

The underlying assumption of the entire reform is that bigger is better. How this is arrived at we are not told. I am not aware of any evidence that bigger multifunctional public agencies perform better than smaller specialised ones. It also runs counter to the spirit of devolution and decentralisation.

In general, the report is long on prescriptions and short on analysis and evidence. The little analysis that is presented is shallow and sloppy. The report observes for instance that the average salaries in parastatals have in recent times risen faster than the mainstream civil service as well as the private sector. The conclusion drawn from this is that it is “anecdotal evidence as to why, apart from the clear and efficiency arguments, there is demand for establishment of more State Corporations”.

I am unable to make out exactly what this conclusion is supposed to mean, but I do have a good idea why average parastatal wages have risen faster. It is to be expected that parastatals like KenGen or Kemri, which are staffed by engineers and scientists respectively, will have a higher average wage than a line ministry or manufacturing company that are bottom heavy with clerical and shop-floor workers respectively.

If KenGen expands by hiring more engineers, as it should, it follows that its average wage will rise faster than a ministry that hires more clerks or a private company that employs more factory casuals. In effect, that observation is exactly what should obtain, and no conclusion for or against parastatals can be drawn from it.

Another example is the proposal to create a sovereign wealth fund. This was of course in anticipation of the country becoming an oil producer in the near future. It makes sense to formulate a policy on management of oil revenues, but what is this doing in a report on reform of existing parastatals?

WEALTH FUND

But even if it were relevant, no analysis is provided to justify the establishment of the wealth fund. How much money are we expecting from the oil and mineral wealth and is a sovereign wealth fund the best place to put it? How can we be sure the fund will not be plundered?

There are many other ways of investing natural resource windfalls for the future wisely. My preferred investments are education, paying off debt and planting trees, but I digress.

How to do it? The mergers of parastatals would have meant abolition of hundreds of parastatal board positions. Several CEOs of State corporations were to be demoted to heads of directorates in the merged parastatals.

To expect a narrow and fragile ethnic coalition that is the Jubilee government with its large retinue of hungry supporters to implement such a policy is monumental political naivety.

One of the pillars of the reforms is to transfer the control of all commercial parastatals from the line ministries to the Treasury. The wisdom of such a move is questionable. Quite apart from that, it is not difficult to see that this is a massive power grab attempt by the Treasury that was bound to be resisted by the line ministries.

ESTABLISH OFFICES

Another political blunder is the proposal to establish an oversight body for both national and county parastatals to be known as the National and County Agencies Oversight Office (NACAOO).

The body would be accountable to the President. The constitutionality of this move is doubtful — it seems to be another backdoor attempt to introduce national executive oversight over county executive functions. It was bound to be resisted by the counties.

Moreover, the task force advises the President to establish the oversight agency by executive fiat, citing Article 132 (4) of the Constitution. This is the article that gives the President authority to establish offices in the public service.

They are advising the President to implement a policy that affects counties without consultation or legislation that is passed by the Senate as required by the Constitution. This is the kind of bad advice that is bound to end up in court, and with egg all over the President’s face. With advisors like these, he does not need enemies.

There you have it. This thing was going nowhere.

David Ndii is managing director of Africa Economics ([email protected])