Kenya August 2018

 

Kenya Summary 10 August 2018

The petroleum and mining ministry convinces United Kingdom (UK)–based Tullow Oil to resume its Turkana oil operations after protests ground work to a halt in July. The sugar scandal begets yet more corruption in parliamentary committees after members of parliament allegedly accepted bribes to doctor a report on sugar contamination tests. The International Monetary Fund (IMF) praises Kenya’s macroeconomic position ahead of a credit facility review.

 

Government persuades Tullow to resume Turkana oil operations

The Kenyan government reacted quickly to United Kingdom (UK)-based Tullow Oil’s announcement on 25 July that it had suspended its operations in Turkana County, convincing Tullow on 7 August to resume work.1 Tullow manages the extraction and transport of Kenya’s oil to Mombasa under the Early Oil Pilot Scheme (EOPS). The EOPS saw Kenya become an oil exporting country for the first time with barrels of oil sent by truck from the Ngamia oil fields in Turkana County to the port of Mombasa (see ARC Briefing Kenya June 2018).2 Faced with an issue that could bring about a loss of confidence in Kenya’s political processes to facilitate large-scale investment, the mining and petroleum ministry came to an agreement with Tullow Oil in which the Kenyan government has committed to ensuring good relations between Turkana residents and Tullow Oil to facilitate oil operations.3 The petroleum and mining ministry stated it would offer both Tullow Oil and local residents “avenues for addressing any emerging issues and concerns”.4

Since mid-June, just weeks after its launch on 3 June, the EOPS has suffered disruptions that halted operations after the local community began a wave of protests to sabotage its smooth running.5 The first protest occurred on 27 June when local residents blockaded the path of five trucks transporting oil from the Ngamia-8 oil storage site at Tullow’s Lokichar Base to be refined in Mombasa, forcing them to turn back.6 Residents broke into the Ngamia-8 site on 29 June after barring oil tankers’ exit from the site with tree branches.7 Tullow removed all but a ‘skeleton staff’ from its Lokichar Base.8 Tullow CEO Paul McDade announced on 25 July that the company had suspended its operations in Turkana County as disruption to its business showed no sign of abating.9 On 30 July, Tullow Oil stated it would sell a 10% stake in oil Block 12A in Elgeyo-Marakwet County.10

Tullow appears to be a political casualty in a security dispute between the government and local residents. Bandit attacks and cattle rustling between ethnic Pokot and Turkana people have continued despite President Uhuru Kenyatta’s (2013-present) assurance to locals when he launched the EOPS on 3 June that the government would intervene to improve security.11 The continuing attacks appear to have incentivised locals to protest against the oil scheme to strongarm the government into action to bolster security measures.12 McDade said protesters were using Tullow as a political pawn:

“What you saw locally was the local people, the community... using the trucking operation as a lever really to demonstrate to the national government that the security situation on the ground had to improve.” 13

The thorny issue of revenue sharing between residents, local government, national government and Tullow Oil similarly motivated protesters into action. 14 The revenue sharing issue engendered a long impasse between the local government and national government during the initial negotiation period (see ARC Briefing Kenya June 2018). Protesters claimed on 30 June that not only are cattle rustlers stealing their livestock, but the government is also stealing their oil.15

Tullow Oil’s experience in Turkana County shows both the perils of operating in insecure areas of Kenya with little state control of violent actors, and the importance of good relations between business and local communities in such areas. Whilst the Kenyan government’s swift action to resume Tullow’s business operations as quickly as possible demonstrates its commitment to the success of the Kenyan oil industry, it remains to be seen whether Kenyan security forces have the capacity or inclination to mitigate rural violence and crime in such regions.

Corruption emerges over reports of mercury contamination in sugar

Kenya’s sugar scandal continues to reveal further layers of corruption. The Kenya Revenue Authority (KRA) has seized over 500,000 tonnes of contraband sugar since June, much of which is suspected to be contaminated and unfit for human consumption.16 This has led to the arrest of seven Kenya Bureau of Standards (KEBS) officials and implicated several high-level political figures (see ARC Briefing Kenya July 2018). KEBS chemists carried out testing on the contraband sugar to determine whether it was fit for human consumption.17 KEBS’ acting managing director, Moses Ikiara, told National Assembly committees on 17 July that KEBS tests found traces of poisonous copper and lead in only two of the 1.2 million samples taken from seized sugar.18 However, chemists under the purview of the interior ministry performed separate tests and found traces of poisonous mercury in the impounded sugar, contradicting the KEBS’ findings.19

The National Assembly trade and agriculture committee prepared a report detailing KEBS’ sugar test findings. The report stated that no heavy metals were found in samples, and that such sugar was fit for human consumption, with high levels of moisture the only problematic finding of KEBS’ tests.20 A committee member told local news agency The Standard on 26 July that certain committee members had moved to omit the findings of government chemist Ali Gakweli, whose tests had found traces of mercury in sugar samples taken from Nairobi and Bungoma counties.21 A shouting match reportedly broke out between committee members intent on including Gakweli’s findings and those eager to omit them.22

Committee members led by MP Simba Arati accused MPs working to omit Gakweli’s findings from the report of protecting the vested interests of business owners and politicians. Arati’s faction advocated that cabinet secretary for East African Community (EAC) affairs, Adan Mohamed, and national treasury cabinet secretary Henry Rotichface liability for the scandal.23 Rotich reportedly granted blanket sugar import licences to companies not certified to deal with products for human consumption, and Mohamed failed to ensure the quality of imported sugar.24 However, other committee members worked to extricate Mohamed and Rotich from culpability for the scandal.25

Companies cited in the report also reportedly worked to undermine the report to avoid large tax claims against their companies26 and a loss in revenue, as their sugar would be destroyed if found to contain traces of mercury.27 Committee members told local press that their colleagues received as little as KSh10,000 ($99.53) to quash sections of the report that implicated certain companies or politicians.28

“MPs openly stated that they were taking money to kill the amendments [that implicated Mohamed and Rotich], which unfortunately is not surprising in Kenya.”29

Kieni (Nyeri County) member of parliament (MP) Kanini Kega, the chairman of the trade committee, denied that the report was doctored30 and the Women Representative for Wajir County, Fatuma Gedi, has denied offering MPs bribes to ratify the allegedly doctored report.31

The National Assembly threw out the report on 9 August on grounds of inaccuracy and ignoring evidence presented by Gakweli’s chemical testing of the sugar.32 It remains to be seen whether the National Assembly committees for trade and agriculture will draw up a new report to better ascertain the events of the scandal, as some MPs have called for the Directorate of Criminal Investigations (DCI) and other investigative organisations to take over.33

If true, the alleged doctoring of sugar tests and the parliamentary report demonstrate the extent of corrupt private influence on the public sector in Kenya and the pursuit of ‘self-interest’ by Kenya’s public servants.34Investors are advised to conduct thorough due diligence of prospective public and private sector partners to avoid commercial affiliation with potentially corrupt individuals.

IMF praises Kenya’s macroeconomic position ahead of credit facility review

An International Monetary Fund (IMF) team reported on 3 August that Kenya is making “significant progress”.35 The team visited Kenya between 23 July and 2 August, reporting favourably on Kenya’s current macroeconomic position during discussions for the second review of the IMF credit facility.36

The IMF reported that Kenya’s economy grew 5.7% year-on-year during the first quarter of 2018, up from 4.9% in the same period of 2017.37 The IMF cited the end of the long election period, good weather and the resurgence of the tourism industry as key drivers of Kenya’s economic growth.38 Kenya’s current account deficit has begun to contract after reaching 6.7% of GDP in 2017 following drought, the expensive Nairobi-Mombasa Standard Gauge Railway Project, and the high price of oil imports.39 The inflation rate has remained low for the past two years, falling between the IMF’s set target range of 5+/-2.5% since July 2017.40

The IMF’s positive outlook on Kenya’s macroeconomic health is a marked improvement from previous relations. In June 2017, the IMF denied Kenya access to its $1.5 billion credit facility due to prolonged political instability during the 2017 election period.41 This instability inhibited any chance of a necessary IMF fiscal review and contributed to Kenya’s failure to decrease its budget deficit.42 Following the 2017 denial of access to credit, treasury secretary Henry Rotich assured the IMF that Kenya would halve its budget deficit by 2021 and stimulate the private sector through lifting an interest rate cap on lending to private companies.43 The IMF approved the Kenyan government’s request for a six-month extension to their credit facility worth $989.8m on 12 March.44

Despite the IMF’s endorsement of Kenya’s economic performance, several fiscal issues remain problematic. As of June 2018, 12% of bank loans were “non-performing”.45 Moreover, revenue collection during the 2017/2018 financial year fell 2.2% of GDP below the IMF’s target figure.46 Debt repayments are set to cost the Kenyan government 50% of its tax revenue for the 2018/2019 financial year.47

Parliamentary opposition to the IMF’s recommendations may also scupper Kenya’s favourable position with the IMF. In line with the IMF’s recommendation, Rotich announced a repeal of the interest rate cap on commercial lending of 4% above national interest rates in his June budget, but influential MPs have vowed to oppose Rotich’s policy, which must pass through parliament before its implementation.48 In addition, the Consumer Federation of Kenya (Cofek) filed a legal challenge to Rotich’s proposed removal of an interest rate cap on 6 August, arguing that it is “unconstitutional” and would leave consumers with unreasonably high rates of interest to pay.49

Kenya will seek a further credit extension from the IMF when its current facility expires in September 2018. The government will need to continue to demonstrate commitment to the IMF’s recommendations to secure such a credit facility.50

A continued credit facility from the IMF to Kenya and an increase in commercial lending should boost Kenya’s private sector. Despite tentative signs of promise for these developments, it remains to be seen whether either will be granted.

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1. [ Reuters, 8 Aug 2018.]

2. [ Daily Nation, 4 Jun 2018.]

3. [ The Standard, 7 Aug 2018.]

4. [ The Standard, 7 Aug 2018.]

5. [ The Standard, 25 Jul 2018.]

6. [ The East African, 23 Jul 2018.]

7. [ Daily Nation, 30 Jun 2018.]

8. [ The Standard, 18 Jul 2018.]

9. [ The Standard, 25 Jul 2018.]

10. [ The Standard, 30 Jul 2018.]

11. [ Tuko, 4 Jun 2018.]

12. [ The East African, 30 Jul 2018.]

13. [ Paul McDade quotes in Reuters, 25 Jul 2018.]

14. [ Daily Nation, 30 Jun 2018.]

15. [ Daily Nation, 30 Jun 2018.]

16. [ BBC, 24 Jun 2018 and Daily Nation, 17 Jun 2018.]

17. [ The Star, 17 Jul 2018.]

18. [ The Star, 17 Jul 2018.]

19. [ The Standard, 24 Jul 2018.]

20. [ The Star, 4 Aug 2018.]

21. [ The Standard, 27 Jul 2018.]

22. [ The Standard, 27 Jul 2018.]

23. [ Daily Nation, 1 Aug 2018.]

24. [ The Standard, 4 Jul 2018.]

25. [ Source, analyst, South Africa]

26. [ The Standard, 7 Aug 2018.]

27. [ The Standard, 27 Jul 2018.]

28. [ The Standard, 9 Aug 2018.]

29. [ Source, analyst, South Africa]

30. [ The Star, 4 Aug 2018.]

31. [ Daily Nation, 13 Aug 2018.]

32. [ Daily Nation, 10 Aug 2018.]

33. [ Daily Nation, 10 Aug 2018.]

34. [ Source, analyst, South Africa.]

35. [ Africanews, 4 Aug 2018.]

36. [ Press Release, International Monetary Fund, 3 Aug 2018.]

37. [ Press Release, International Monetary Fund, 3 Aug 2018.]

38. [ Press Release, International Monetary Fund, 3 Aug 2018.]

39. [ Press Release, International Monetary Fund, 3 Aug 2018.]

40. [ Press Release, International Monetary Fund, 3 Aug 2018.]

41. [ Financial Times, 21 Feb 2018.]

42. [ Financial Times, 21 Feb 2018.]

43. [ Financial Times, 22 Feb 2018.]

44. [ Press Release, International Monetary Fund, 3 Aug 2018.]

45. [ Press Release, International Monetary Fund, 3 Aug 2018.]

46. [ Africanews, 4 Aug 2018.]

47. [ Business Daily, 3 May 2018.]

48. [ Africanews, 4 Aug 2018.]

49. [ Business Daily, 7 Aug 2018.]

50. [ Africanews, 4 Aug 2018.]