US embassy cable - 05NAIROBI3287

UNCLAS SECTION 01 OF 03 NAIROBI 003287 
 
SIPDIS 
 
SENSITIVE 
 
DEPT FOR AF/E, AF/EPS, EB/IFD/OMA 
USAID FOR AFR/PPC PETER DELP, AFR/EA JEFF BORNS 
MCC FOR KEVIN SABA 
TREASURY FOR ANN ALIKONIS 
LONDON AND PARIS FOR AFRICA WATCHERS 
 
E.O. 12958:  N/A 
TAGS: ECON, EAID, EFIN, KCOR, PGOV, KE 
SUBJECT: KENYA PASSES TWO MAJOR ECONOMIC REFORM BILLS 
 
Ref: A. Nairobi 3180, B. Nairobi 2651, C. 04 Nairobi 5038 
 
Sensitive-but-unclassified.  Not for release outside USG 
channels. 
 
1.  (U) This is a Joint Embassy-USAID message. 
 
2.  (SBU) Summary: Kenya's Parliament has passed two pieces 
of economic reform legislation, the Public Procurement Bill 
and the Privatization Bill.  Both are important in the long 
march towards a stronger, faster growing economy and 
improved governance.  In the short-term, both are required 
to unlock IMF and other donor funding, which in part 
explains why the government worked so hard to ensure their 
passage through an otherwise unproductive Parliament. 
Unless final, as yet unpublished, changes to both bills 
somehow offend the government or donors, it appears likely 
both will receive Presidential assent and become law.  This 
is good news, but it also goes without saying that the 
importance and impact of these bills will ultimately depend 
on how effectively and aggressively they are implemented. 
End summary. 
 
3.  (SBU) In the final days before it adjourns August 16, 
Kenya's Parliament passed two critical governance and 
economic reform measures promised by the Government of 
Kenya (GOK) almost from the very start of the NARC 
administration over two years ago.  The first is the Public 
Procurement and Disposal Bill 2005 (passed August 4), and 
the second is the Privatization Bill 2005 (passed August 
10). 
 
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Procurement Bill: Changing the Rules of Game? 
--------------------------------------------- 
 
4.  (U) While the final text of the Procurement Bill as 
finally passed is not yet available, broadly speaking, the 
law is intended to overhaul the entire system by which the 
GOK procures goods and services.  Public procurement in its 
many guises over the decades has traditionally been, and 
remains, the single greatest source of corruption in Kenya. 
While the scope of such graft is hard to measure with any 
precision, there is little doubt that procurement-related 
graft has had, and continues to have, a major macro-impact 
on economic growth and development in Kenya in terms not 
only of the vast sums of money stolen or squandered, but 
also insofar as procurement-related graft over time has 
created disincentives and distortions to rational 
policymaking writ large. 
 
5.  (U) As we understand the Procurement Bill in its 
earlier draft form, the law will lead to the establishment 
of a new procurement oversight body, bar public servants 
from taking part in government tenders, seal loopholes to 
reduce opportunities for corruption, and streamline 
procurement procedures to make them less cumbersome and 
time-consuming - among a raft of other features.  The draft 
has undergone revisions, however, including according to 
numerous press reports, changes that will provide 
preferences to Kenyan firms, including especially small and 
medium sized enterprises, when bidding on GOK tenders. 
While the proof will be in the fine print and in 
implementation, it is unlikely such provisions will be 
incompatible with Kenya's WTO obligations.  We note that 
Kenya is not a signatory to the plurilateral WTO Agreement 
on Government Procurement. 
 
--------------------------------------------- ------ 
Privatization: Getting the State Out of the Economy 
--------------------------------------------- ------ 
 
6.  (U) The Privatization Bill 2005 follows successive but 
limited efforts in the 1990s to reduce the role of the GOK 
in the economy, and represents the legal framework by which 
the NARC administration hopes to take privatization of 
state-owned enterprises (SOEs) to a higher level.  Kenya 
continues to suffer from all of the usual problems 
associated with excessive state-ownership of economic 
assets: lack of competitive markets in cases of monopolies, 
patronage and corruption, inefficiency and poor service 
delivery, low and poorly targeted investment in key areas 
of the economy (e.g. telecom), and excessive and 
unsustainable government budget outlays to support loss- 
making state firms. 
7.  (U) While the final text of the bill is also 
unavailable at the moment, its key feature is the 
establishment of a Privatization Commission, whose role 
will be to implement the privatization of state assets in a 
systematic, fair, and transparent manner.  The bill takes a 
flexible approach to the means of privatizing SOEs, and 
according to press reports, late changes to the bill will, 
like those made to the Procurement Bill, provide special 
preferences to local investors as a means of encouraging 
Kenyan ownership of privatized companies.  A complete 
assessment of the bill will also require clarification of 
Finance Minister David Mwiraria's statement, in which, 
according to press reports, he assured MPs the bill would 
not give way to "blanket privatization" and that the 
Government would not sell off "strategic" parastatals that 
offer "essential services" to the public. We also 
understand there are concerns about the size, composition, 
and mode of appointment of members of the Privatization 
Commission. 
 
--------------------------------------------- --- 
IMF Program and Other Loans Hinge on Legislation 
--------------------------------------------- --- 
 
8.  (SBU) Passage of both bills is an important step in the 
long slog towards better, less corrupt governance and 
faster economic growth in Kenya.  Both are also critical in 
the short-term to the GOK's financial status.  As reported 
ref B, forward movement on Kenya's three-year, $240 million 
IMF program was made contingent on passage of the 
Procurement Bill.  The IMF's conditionality was in turn 
driven by twin EU and World Bank credits, both of which 
require passage of the two bills as conditions for 
disbursement (refs B and C).  In short, the GOK had 
compelling short-term reasons to put both bills at the top 
of its legislative agenda, and this explains why the 
administration, under the leadership of Vice President 
Moody Awori and Finance Minister David Mwiraria worked so 
hard to successfully ensure passage. 
 
------------------------ 
What Does the IMF Think? 
------------------------ 
 
9.  (SBU) Econ Counselor spoke with Jurgen Reitmeier, Kenya 
IMF Resident Representative, on August 11.  Reitmeier, like 
the Embassy, has not yet seen the final versions of either 
bill as passed by Parliament.  Noting the "we need to see 
the fine print," Reitmeier nonetheless characterized 
passage of the two bills as "good news," and also reported 
that he had spoken with the Finance Minister, who had told 
him the final revisions made by MPs to the Procurement Bill 
were "acceptable" to the GOK.  The bills still require 
presidential assent, but at this point, it seems unlikely 
that the Kibaki administration will send either back to 
Parliament for another round of revisions and debate 
starting in October - unless a reading of the fine print 
reveals features deemed unacceptable to the GOK and/or to 
the IMF, the World Bank, or the EU. 
 
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Comment: Proof As Always Will be in Pudding 
------------------------------------------- 
 
10. (SBU) Three things.  First, while long overdue, passage 
of these two landmark bills is good news, and the GOK 
deserves credit for pushing them through a Parliament whose 
performance this year has thus far been otherwise 
lackluster.  Second, kudos to the IMF, the World Bank, and 
the EU, all of whom used their leverage to prod the GOK and 
Parliament into action.  Without this pressure, the Finance 
Ministry probably would not have had the leverage and 
motivation it needed to win passage.  Finally, passage of 
these two bills, while critical, is merely a mileage marker 
in a much longer journey.  The bills will not matter much 
if they are not intelligently and aggressively implemented 
by the GOK.  In this light, we expect assistance in 
implementing one or both bills to come up in discussions 
next week between the GOK and visiting officials from the 
Millennium Challenge Corporation (see ref A) as the latter 
considers Kenya for its Threshold Program.  We think it's a 
topic worth exploring as the USG searches for new ways to 
effectively support better governance and economic reform 
in Kenya. 
Bellamy