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When Oversight Becomes Undersight

A recruiter asked a candidate, “Why do you expect such a high salary when you have no experience in this field?”
The job applicant replied, “Well, the job is much harder when you don’t know what you’re doing.”

Many years ago, I found my name in the Kenya Gazzette having been appointed to the board of a government regulator. The parent act for this regulator required any board member to be vetted by Parliament before such appointment could be validated. In preparation for the exercise, I first checked the dictionary on what the definition of vetting was:

“Vetting is the process of investigating someone thoroughly, especially in order to ensure that they are suitable for a job requiring secrecy, loyalty, or trustworthiness”

So I channeled my second year of university energy vibes and got cracking on research. I researched the regulator. I read the parent act from cover to cover. I read up on decisions that the regulator had made, internalized them and played them out in my mind as if they were a Netflix court room drama.

I was the third in the vetting line at Continental House that morning, a building that housed many parliamentary offices. We were made to wait in a room filled with semi-occupied shelves of dust covered, unopened books. This was the Parliamentary Library I was told. It was as full of activity as the dense, overgrown bushes at City Park Cemetery. Eventually I was called into the vetting room. About sixteen Parliamentary Committee members were seated on a U-shaped table. I sat on an individual table at the top of the U.

The committee chairman welcomed me to the session as I shakily opened the tight seal of the water bottle that I was sure I was going to need to seek respite from. The protocol was that each member of the committee was going to ask me questions. Okay.

Question number one came from my left, a third time member of parliament (MP) who I had often seen on television standing on a podium next to a presidential candidate. “Why is the surname on your ID Musyoka, when your university certificates state another surname?” Hmmm. Okay, that was a pretty straightforward answer, I mean people get married somewhere along the journey of life and names get changed. He didn’t pay attention to my answer as he got a call on his mobile phone, leaned under the table and furtively began whispering. I directed my answer at the air above him. His neighbor took on the next question. “You sit on the board of Company X. Is this likely to provide a conflict of interest in your role as a board member of this regulator?”

Okay. Now the questions were getting more cerebral. “Company X is a company, like over a million companies registered in Kenya, that can appear in a matter before the regulator. If such an eventuality arises, I will declare my conflict and recuse myself from any discussion on the same.” The first MP emerged from under the table, business concluded. Second MP furrowed his brows, made as if to ask a follow up question, then yielded the floor. Third MP picked up from his colleague. “So how do we know you will recuse yourself? You also sit on the board of Company Y!” I took a sip of water, trying not to be distracted by the first MP who had received another call and whose mobile phone speaker volume was quite loud. Apparently a lorry of stones had been delivered to site and the lorry owner needed to be paid. He ducked under the table again.

I responded that I was a governance practitioner bound by professional ethical considerations. I. Would. Recuse. Myself. The fourth MP was had similar concerns to the first MP. Why did the Kenya Gazzette publish two surnames for me, yet my ID had one name and my university certificates had another name. “Honestly Sir, I cannot speak for the Government Printer,” I responded demurely. “You lawyers give us a hard time all the time and you cannot even print your names correctly,” he barked back. I bowed my head and took the beating like a good woman.

Twenty tortuous minutes later, the vetting was done. The remaining twelve MPs asked the same question in different iterations about what recusing looks like and my interchangeable last names. Not a single question was asked about the business of the regulator and my knowledge, if at all, of the same. The first MP had cement and ballast delivered on site and paid for via mpesa by the time the fifteenth MP was wrapping up. Anyway, two weeks later my name was tabled by the Committee in front of Parliament and I passed. I know the first MP, Bob The Builder, was rooting for me because I winced in sympathy each time he had to send an mpesa payment. Being an MP is a very hard job. And that is why they get paid millions to do it.

[email protected]
Twitter: @carolmusyoka

Founderitis

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Facts versus Emotion Where Interest Rates Are Discussed

A fact is a piece of data subject to objective, independent and sometimes scientific verification. For example, the geographical coordinates for the house of Kenya’s Parliament are 1°17′24″S 36°49′12″E. That is a fact. The Banking Amendment Act (2016), better known as the interest rate capping law, that Parliament passed has been fairly ineffective. That is a feeling, my feeling to be precise. Furthermore, what characterized its drafting, accelerated legislative approval and subsequent conversion into law in August 2016 was largely based on feelings.

Last month, the Central Bank Governor, Dr. Patrick Njoroge, appeared before the Finance, Planning and Trade Committee of Parliament where the subject of the proposed repeal of the interest rates capping law came up. The feedback from members of the Committee was as expected. Beginning with the originator of the law, Mr. Jude Njomo, the media quoted him as saying, “We know banks are not lending to SMEs because that is what they promised to do when we were enacting the law. They are now working as cartels on that promise as they did with high interest rates.” (Feelings!)

Mr Njomo breathlessly continued according to the same media reports – words in parentheses are mine for emphasis: “According to our Constitution, Central Bank Governor and Treasury have no power or mandate to amend laws. (Major Fact!) That is the prerogative of parliamentarians and therefore, the rest who are speaking (on the repeal), are just making noises that will change nothing.” (Major Feelings!)

The intersection between facts and feelings makes the difference between a good piece of legislation that is informed by and designed with credible data at hand and a bad one that is informed by and designed with peurile emotional reaction. Treating feelings as facts, which underpin the creation of legislation that has a far reaching macro-economic impact, is fraught with danger. In March 2018, the Central Bank of Kenya (CBK) launched a report titled “The Impact of Interest Rate Capping on the Kenyan Economy”. The 37-page draft report is a must read for anyone interested in the back story of how the banks have been enjoying a fairly good performance run and is replete with tables and graphs demonstrating data over the last five years on bank interest rate spreads, return on assets and return on equity with a comparison to other countries’ experiences. (A whole bunch of facts!)

The first part of the report does a good job of laying the groundwork to demonstrate that indeed the banks did need to have a courageous conversation with an accountability partner about the relatively generous returns they were enjoying compared to their African and global peers. The second part of the report goes into more detailed facts about the actual impact of interest rate controls in multiple jurisdictions and then provides empirical evidence from a number of surveys done in Kenya on the tightening credit standards in banks and subsequent shrinking of credit extension to borrowers.

Of great concern however, is that in playing its role as a creator of legislation, Parliament has inadvertently usurped the role of CBK as the body charged with formulation and implementation of monetary policy in Kenya. The interest rate capping law directed that the Central Bank Rate (CBR) be the index against which deposits and loans are priced. The CBR is a monetary policy tool used to increase or decrease demand in the economy; a lower rate means it wants to stimulate the economy by lowering prices while a higher rate means it wants reduced lending through higher prices, perhaps due to high inflation and an overheating economy. Monetary policy tools help to drive demand but do not drive supply which is what the interest capping law is trying to achieve dually.
By tying CBR to the lending and deposit rates, Parliament has tied CBK into a veritable knot. If it raises the CBR so that the pricing can get to a level that allows banks to price for the credit risk appropriately, it impacts on the overall monetary policy by raising prices upwards. If it lowers the CBR to jumpstart the economy through signaling lower rates it simply tightens the credit market even further as banks are even more constrained to provide the appropriate cover for the credit risk.
The moral of this story is that while legislative drafting for any economic matters may be motivated by feelings, they must be informed by reams of fact. After all, fact and feelings are like oil and water; they don’t mix too well.
[email protected]

Twitter: @carolmusyoka

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Chasing The Truth In Parliament

[vc_row][vc_column width=”2/3″][vc_column_text]Last week, an unlikely source in the form of a Parliamentary Committee helped to unseal the tightly held lips of the Chase Bank’s board of directors. The directors had been summoned to assist the Committee to understand the challenges that faced the Bank, resulting in the same being placed under receivership by the Central Bank of Kenya. This was an opportunity for the board to give its side of a controversial story, a tale that has as many versions as there are heads to the Greek mythical hydra. The story caught my attention for one reason only: The directors called the auditors professionally ignorant. Actually let me quote the exact statement here: “The Musharakah Agreements for each of the SPVs clearly show Chase Bank’s 99% interest in the Musharakah assets. Deloitte’s insistence on treating this as a normal loan or advance can only be labelled as professional ignorance at best.” Part of the dispute between the auditors, Deloitte in this case, and the board of directors has been on the treatment of a series of real estate transactions either as internal loans to a key shareholder (according to the auditor) or as Musharakah assets (Islamic financing terms according to the directors). So I pored over the submissions made by the directors in their vigorous defence of these assets.
Banking is premised on the fact that there are depositors who want a safe place to put their money, and there are borrowers who require to borrow funds for consumption. The bank is simply an intermediary. In the case of Islamic banking, the institution applies Sharia compliant procedures in the booking of those deposits and loans. The key point here is: there must be a customer. Period. Finito. Whether it is mainstream or Islamic banking there must be an individual or an entity who is the customer. But the directors state thus in their parliamentary submissions:
“Subsequently, Deloitte rejected the Musharakah Agreements and Deloitte insisted that the Musharakah properties be charged to the bank, thus effectively classifying the SPVs as Loans and Advances rather than Islamic investments as documented. These loans would then become technical insider loans, as the shares in the SPVs were held by the two directors, albeit held in trust for the Bank. Chase Bank’s Management emphasised to Deloitte that treatment of the Musharakah assets as Loans and Advances would be in contravention of not only the principles of Islamic banking (and therefore a breach of trust with Islamic depositors), but also of Section 12(c) of the Banking Act and
would incorrectly treat these as an insider loan. It was evident that Deloitte were simply not interested in appreciating the nature and substance of the Musharakah Assets or the principles of Islamic banking.”

I scratched my head and read the report twice over. At no point did the directors say who the ultimate customer was. I mean, a bank doesn’t wake up and decide to give a loan out to a customer, whether Islamic or otherwise. Why was there no attempt to say that this was an unfair treatment of a yet-to-be-named customer who had borrowed from the bank in good (Islamic) faith? That the assets were bought in the name of the SPV is not in doubt. That the SPV has two Chase directors as the shareholders is not in doubt. But where the shareholders were holding the shares “in trust” for the bank is where it starts to get “grab-a-bag-of-popcorn” interesting. The directors fail to mention if a “deed of trust” was provided to the auditors as evidence of that understanding between Chase Bank on the one hand and the SPV shareholders on the other. I mean, one doesn’t assume trust falls off the back of the Kisumu express train, it must be documented somewhere, right? The directors beat their Islamic financing drum further by dragging in the regulator into their drama: “On 26th July 2012, Chase bank wrote to the Director of Bank Supervision at CBK requesting CBK to revise the Central Bank Prudential Guideline on Publication of Financial Statements and Other Disclosures to accommodate Islamic products and
specifically:
(i) the Islamic Banking Income received to be reflected separately in the Profit and Loss
Account;
(ii) The Islamic Banking Expenses also to be reflected separately in the Profit and Loss
Account;
(iii) The Islamic Banking investments or Financing Activities as a separate Asset line in the
Balance Sheet;
(iv) The Islamic Deposits or Liabilities as a separate Liability item in the balance Sheet; and
(v) A separate Off Balance Sheet line item for Islamic banking.
The CBK has not objected, in the absence of any changes to the Prudential Guidelines, to the classification and treatment in any of its reports to the Bank.”

I have to admit, that this submission by the directors stumped me. If you wrote to the regulator and asked to be reporting Islamic Banking products separately, and the regulator did not object, then why do your 2014 and 2015 financial accounts not reflect the same? I zoomed across to the only fully-fledged Islamic Banks in Kenya, Gulf African Bank and First Community Bank (FCB) websites to see how their Islamic assets are recorded. Their professionally competent auditors in the name of KPMG and PriceWaterhouseCoopers (PWC) respectively reported loans as “financing activities (net)” exactly as Chase had requested the CBK to do in (iii) above. (It’s noteworthy that PWC audited the FCB accounts in 2014 but the 2015 published accounts are silent on who their auditors were) If Chase directors had knowledge as far back as July 2012 on how “Musharakah Assets” should be recorded on the balance sheet why wait until June 2016, or four years later, to call their auditors professionally ignorant? And why are the Islamic depositor funds not separately recorded yet the directors have vigorously highlighted the potential breach of trust for the Islamic depositors if Musharakah Assets are treated as loans and advances?

The Chase Bank saga is a case study of corporate governance failure, weak internal controls, questions on the auditors’ scope and depth of review and a passionate to almost rabid love for the brand by its most loyal customers. But on the back of all of that are innocent depositors who must always remain in the minds of all bank directors whose oversight role gets heavier with each passing day.

[email protected]
Twitter: @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]

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Outsourcing the Government

The National Assembly today voted unanimously for the bill to outsource the oversight and representative role of parliament to a leading international audit firm CWP. The same bill also outsources the role of government ministries to Dineshco, a Business Processing Outsourcing company in Madras, India. The extraordinary bill was the brainchild of the Member of Parliament for a previously unheard of constituency in Kwale county, long known to have harboured desires for secession anyway. “Since Pwani cannot leave Kenya, the next best thing is for the government to leave us, and for us parliamentarians to leave ourselves,” said the diminutive and often vituperative MP.

The quotation above sounds like a ridiculous headline story in a freakish nightmare movie. But is it preposterous to think of outsourcing as the solution to the chasmic corruption in the executive and the cataclysmic rent seeking in the institution that is supposed to keep the executive in check, namely parliament? Think about it for a River Road minute. We find a company that is willing to run our government ministries and ensure that efficient service delivery is procured for the ultimate customer: the mwananchi. We pay the company a percentage of the national budget. The company then delivers proficient services in health, education, tourism, environment etc. procuring supplies from the least cost provider and leveraging on economies of scale just from ordering in bulk across the ministries. We throw out the Cabinet Secretaries, Principal Secretaries and the entire civil service. We will have a President who will be the head of the country in as much as the non-executive chairman of a private sector corporate is the ceremonial head of the institution.
The President is actively encouraged to visit schools and hospitals and take appropriate kissing baby pictures for the media.

We then turn our attention to parliament. We throw them all out. We hire an audit firm to provide monitoring and oversight over the company running the executive. We keep 47 senators who will represent the counties and meet the audit firm once a quarter to receive a report on what the company running the executive is doing. We allow the senators to ask questions relating to services that are being provided to their counties. The senators never meet the company. They only engage through the auditors. We actively encourage the senators to visit schools and hospitals in their counties and take appropriate kissing baby pictures for the media.

Kenya has now hardwired corruption both in its institutions and in its collective DNA. We have to reboot. But we have to outsource management of our institutions away while we reboot. The idea of outsourcing everything, while extreme, has been undertaken in smaller measures elsewhere that are worthy of mention.

The Financial Times, in its March 23rd 2015 edition ran a story headlined: UK government outsourcing raises questions over pay. It turns out that the coalition government in the UK has outsourced GBP 88 billion worth of contracts to the private sector. The FT also reports that more than 2,800 top-grade engineers – who service military equipment including aircraft at the Defence Ministry’s Defence Support Group – are expected to lose the right to their civil service terms on April 1st 2015 after the agency was sold for GBP 140M to the outsourcing company, Babcock. The FT article also cites the example of the Lincolnshire Police Force where the G4S security company manages a number of back office functions. G4S staff now supports police officers in the logistics and administration surrounding arrests, which frees up more expensive police resources to remain in front line roles.

A November 2014 article in The Economist also sheds some light on government outsourcing. Titled Government outsourcing: Nobody said it was easy, the article mentions that the two big private-prison firms in the United States, Corrections Corporation of America and GEO Group, have delighted shareholders with an average annualized return since 2004 of 18.5%. The main cause is America’s bloated justice system, which locks up more people than in other rich countries. An American online magazine published by GOVERNING, ran an interesting article on the pros and cons of privatizing government functions in December 2010.

An interesting excerpt is as follows: “This past March, for example, New Jersey Gov. Chris Christie created the state Privatization Task Force to review privatization opportunities within state government and identify barriers. In its research, the task force not only identified estimated annual savings from privatization totaling more than $210 million, but also found several examples of successful efforts in other states. As former mayor of Philadelphia, Pennsylvania Gov. Ed Rendell saved $275 million by privatizing 49 city services. Chicago has privatized more than 40 city services. Since 2005, it has generated more than $3 billion in upfront payments from private-sector leases of city assets. “Sterile philosophical debates about ‘public versus private’ are often detached from the day-to-day world of public management,” the New Jersey Privatization Task Force reported. “Over the last several decades, in governments at all levels throughout the world, the public sector’s role has increasingly evolved from direct service provider to that of an indirect provider or broker of services; governments are relying far more on networks of public, private and nonprofit organizations to deliver services.”
The report took careful note of another key factor: The states most successful in privatization created a permanent, centralized entity to manage and oversee the operation, from project analysis and vendor selection to contracting and procurement. For governments that forgo due diligence, choose ill-equipped contractors and fail to monitor progress, however, outsourcing deals can turn into costly disasters.”

All these stories are of course ringed by spectacular failures as in any industry. But they demonstrate a willingness to look externally for solutions when no internal ones are forthcoming or viable. We are collectively sick as a nation, perhaps it’s time to give others a chance to cure us from the corruption malaise that bedevils us.

[email protected]
Twitter: @carolmusyoka

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16 Reasons Why Farmers Think MPs Are Liars

A bus load of politicians were driving down a country road one afternoon, when all of a sudden, the bus ran off the road and crashed into a tree in an old farmer’s field. Seeing what happened, the old farmer went over to investigate. He then proceeded to dig a hole and bury the politicians. A few days later, the local sheriff came out, saw the crashed bus, and asked the old farmer, “Were they all dead?” The old farmer replied, “Well, some of them said they weren’t, but you know how them politicians lie.”

Last week, I started a brief lesson for the 349 members of parliament who were out of office when Tornado VATA hit Kenya, leaving behind catastrophic destruction of the ordinary mwananchi’s cash flow in its wake. Just in case you missed it, Tornado VATA was the VAT Act 2013 that blew through parliament completely unnoticed by its most honorable occupants a few weeks ago. So to my dear parliamentarians, here is another thing you missed while you were away. You significantly hurt the Kenyan farmer and consequently hurt the ordinary mwananchi as you snoozed during the passing of the Act.

I’ll start with the basics. A farmer rears animals that are converted into food -fresh meat- or that produce milk or eggs for example. In order for those animals to create the end product, the farmer has to feed the animals with animal feed especially where he is into commercial production. That animal feed usually consists of about 80% of his production costs. Let me make it a little simpler. That chicken drumstick, T-bone steak or pork sausage that you are going to eat in the parliamentary restaurant today originally came from an animal and not from a supermarket. There are various costs that are borne by the producer of the meat you are about to eat which you need to know about. One of those costs is VAT which is discussed in terms of output and input VAT to those who are in the production of goods and services.

There are three kinds of VAT outputs. Remember that an output is what you charge your customer for purchasing your goods. (ermm when I say “You” I mean the person selling the goods and not you Mr. MP, as you clearly do not sell anything other than your dashing good looks and incontrovertible charm both of which certainly do not attract VAT).

Firstly, your goods can have a 16% VAT output, which is simply 16% charged over and above what the price of the goods is. Secondly, your goods can have a zero rating VAT output, which means that your goods attract a zero rate of VAT. However, zero rating allows for you the seller to claim back from KRA whatever VAT you have paid in the raw materials or input used to produce your goods, known as input VAT. KRA, in its undeniable generosity, allows you to make this claim and then spends the rest of your uncertain life assuring you that you will be paid the refund claim. In the meantime, your buyers get to enjoy your zero rated goods without paying for the 16% input cost which you endured when you purchased the raw materials because you are an honest business man who won’t pass that cost through to your customers and you await your KRA refund fervently. Thirdly, your goods can be VAT exempt. This means that you do not charge VAT for your goods (Amen to that!), but neither can you claim the input VAT that you paid for the raw materials that you purchased to make your VAT exempt goods (Ouch!). Of course, the result is that you include that input VAT into your total cost of production. Tornado VATA shifted a whole bunch of items from zero rated status to exempt status such as medicaments, fertilizers and sanitary towels, so guess where the input VAT costs for the manufacture of those items will go? To the shelf price of those items.
Let me take a break from all the technical gobbledygook before I lose you entirely. The chicken that you will have for lunch today will cost more to buy simply because the price of the animal feeds that were used during the chicken’s ill fated and very short life have increased therefore making for a more expensive production process. The animal feeds costs have gone up because the main raw material in the feeds which comes from millers is now being charged 16% VAT, which was previously not the case as the millers products were zero rated. The cherry on top of that cake is the fact that animal feeds, which were previously zero-rated now attract 16% VAT. So there’s a double whammy for the farmer: The raw material cost of the feed has gone up, as has the final product – the animal feed- gone up as it now attracts 16% VAT.

And since the farmer’s output is unprocessed meat and unprocessed milk – both of which are VAT exempt – the farmer cannot claim the input VAT that she has paid on the raw materials such as the animal feeds which make up about 80% of her costs. So she has to pass through the incremental costs to her buyers. The result, more expensive unprocessed meat and unprocessed milk. The more expensive unprocessed milk is purchased by the dairy producer who processes it and – drum roll please – sells it to us as processed milk with the new added tag of 16% VAT.

Look, I know your eyes are glazing over at this number 16 that I keep thrusting before you. Snap out of it. Life got very expensive while you were away Mr. MP, and you can never ever deny that you were not aware it would happen. I know what kept you busy though: 16 more cars in your garage; 16 more fuel allowance requisitions to submit and 16 more committee sittings to attend to. What’s that? I’m talking lies? I’m not the politician, you are!

[email protected]
Twitter: @carolmusyoka
16th September 2013