Parastatals: How William Ruto deals with them will shape economic policy

Under pressure to reward multiple loyalists and campaign supporters with Cabinet, "political sandbox" (PS) and other posts.

Finding out that its commitments to the people are constrained by "discoveries" on Kenya's "dilapidated" fiscus and "opaque" monetary policy. Perhaps less wisely, loudly broadcasting this state of play with little regard for public confidence and market sentiment.

Let's revisit the fiscus. Once the hullaballoo over "only" Sh93 million in government's bank account dissipated, what have we heard? Three things from President Ruto.

First, a radical tax policy position that suggests a new hierarchy of wealth-consumption-income-trade. Second, a Sh300 billion cut in the 2022/23 national government budget. Third, a promise to deliver a revised Budget "soon". This last one is part of the established Budget revision process, not fresh news.

It might be better to engage the revenue side of the fiscus through the draft tax policy, as well as the quieter national medium-term revenue strategy that will soon commence preparation with IMF oversight (what happened to KRA's own medium-term corporate plan?). Add to this the idea of an actual strategy that goes beyond taxes and builds from service delivery to non-tax revenue.

Then, pursue spending rationalisation across MDAs driven by "form and function" reviews (the costed part of service delivery) rather than opportunistic budget-slashing. Within this review is an opportunity to better balance national and county functions in line with constitutional demands.

But all this sounds like a case of balancing the books, which the literature tells us is a necessary, but insufficient, condition for real growth.

The "hustler economy" is a story for another day, so let's get back to that part of government that was supposed to be an important economic actor, but is currently headlined as a fiscal black hole. We refer here to State-owned enterprises or parastatals.

Arguably, the real test of the new administration's commitment to the deep and sustained structural economic reform that Kenya needs will be demonstrated by its handling of State corporations.

These ones have a long history in Kenya, but a good place to start is the 2013 Report of the Presidential Task force on Parastatal Reforms. Terming them Government-Owned Entities (GOEs), the Task force identified five Vision 2030 objectives.

Role of markets

First, to promote and accelerate economic growth and development. Second, to build the state's institutional and technical capacity to facilitate and promote development. Third, to improve public service delivery for citizen benefit. Fourth, to support the promotion of employment opportunities across sectors and the country at large. Fifth, to support regional and international partnership building. Treat these as your starting check list for every parastatal you are aware of.

Then think about if that parastatal is a growth and development enabler, a builder of Kenya's capacities and capabilities, a citizen-focused service provider, a jobs generator either directly or indirectly or a creator of partnerships beyond our borders.

Have you fallen asleep yet? What is the role of markets, you ask? Isn't this last-century thinking, when State entities were the "commanding heights" of the developmental State? Aren't these the same corporations that are crowding out private enterprise, as well as county economic space? Isn't this the silent part of government in which we find State mega-projects of unknown value? Why is government in the business of business, shouldn't it simply be a facilitator?

Can't we just privatise the money-makers (or at least the money-making parts of these entities) and close down the money-guzzlers? What happened to the actual privatisation programme? Not for the first time, these are questions to wake us up; questions that need 21st century answers.

Let's get back to the 2013 task force report. In a nutshell, 262 GOEs were identified at the time, and the recommendation was to reduce these to 187 in two out of four new classifications.

First, 55 State corporations split between 34 purely commercial and 21 commercial but strategic entities. Then, 132 State agencies comprising 62 executive agencies, 25 independent regulatory bodies and 45 research institutions, public universities and tertiary education institutions.

New classifications were proposed for county corporations and county agencies. Overseeing these would be a brand-new Government Investment Corporation (a holding company under the National Treasury) and a National and County Agencies Oversight Office backed by an omnibus Government Owned Entities law that would supersede all existing parastatal statutes.

Let's just say that the one thing that this report will be remembered for is its Mwongozo Code of Corporate Governance.

The record on implementation of the restructuring just described is best understood through a July 2021 National Treasury "Update on Reforms of State Corporations" which notes that "Kenya has approximately 260 State corporations which play an important role in the economic and social development of the country". Just to be clear, this is eight years later!

The current moment offers an opening for the new administration to get behind what has happened since 2013, especially given that subsequent to the report, parastatal board appointments reverted to the "business as usual" practice known as "jobs for the boys"; and continued all the way up to the eve of the 2022.

Non-commercial entities

It is tempting to quickly jump to the financials and fiscals around these State entities , but it would appear we actually need to count them first. Here's what a 2021 State Corporations Review by the World Bank found. Using 2020 data, Kenya's portfolio comprised 247 majority-owned State corporations and 15 corporations in which government holds minority interests.

But they found that the Inspectorate of State Corporations (ISC) and State Corporations Advisory Committee (SCAC) counts "over 220" entities (whatever that means). In the National Treasury, one department (Government Investments and Public Enterprises - GIPE) reports on 247 State corporations and 14 minority interests (for a total of 261), while another department (Accounting Services and Quality Assurance - DASQA) reports on 199 State corporations and semi-autonomous government agencies and 72 universities and other learning institutions.

Interestingly, GIPE differentiates between commercial and non-commercial entities, but DASQA does not. The first two - ISC and SCAC - simply classify entities into eight functions using terms of service such as the institution's "pay grade".

Just to mix this up, a late 2021 National Treasury statement on fiscal risks associated with State corporations identified, to quote: "248 State corporations, out of which 46 are commercial enterprises, and 201 are non-commercial entities."

Employment bureaus

The IMF once recommended better identification and classification of these entities through its Fiscal Transparency Evaluations on Kenya published in 2016 and 2020. In the first (using 2012/13 data) they identified 38 commercial parastatals, 129 non-commercial parastatals, 48 extra-budgetary units and Central Bank for a total of 216 out of 419 public institutional units at the time.

In the second (based on 2017/18 data), the IMF counted (using a slightly different classification), 121 non-financial (commercial) public corporations, 15 financial public corporations (including the Central Bank), 213 extra-budgetary units (including KRA, KETRACO and roads authorities) and three social security funds for a total of 353 out of 519 public institutional units at the time.

To repeat, we haven't even got to the financials and fiscals yet, because the question that immediately comes to mind is "what is the current universe of State corporations (and government at large) in Kenya?" On narrow financials, these entities are about revenue versus costs.

At a wider fiscal level, we are talking budget transfers, subsidies and occasional bailouts. Think too about contingent liabilities around parastatal debt before we contemplate the utility of these entities as employment bureaus. Watch this space, this is an interesting one for the KK Alliance.

Which brings us back to those difficult earlier questions. Knowing what the parastatal universe represents will tell us what is in play, but it doesn't point us to if the investment pays. We will examine financials and fiscals in the next column as we begin to answer those questions.

Meanwhile, President Ruto is building his agenda around 22 ministries with 49 departments. Now, how many parastatals will he also need to deliver the promise? Better still, which ones will count?

In our eternal game of numbers, this just might be his quiet, yet ultimate, economic reform test.