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Jun 27th, 2006 - 11:00:07 |
Steve otieno
Dear Friends,
I am glad for the opportunity given to me as a middle career
professional
to be part of this discussion, and I hope your response will enrich my
knowledge about capacity building.
In most countries of Africa and other developing regions of the world,
the high level of poverty and low standard of living can be traced to poor
human and institutional capacities of these countries, the brain drain,
and the absence of genuine effort to improve on the existin
capacities.Many of the developmental initiatives in the past have failed because of
lack of priority given to capacity building, hence in order for theMillennium Developmental Goals to be achieved and sustained in these countries, much emphasis should be placed on capacity building.
Capacity building is the most effective method to reduce poverty, reduce child
mortality, halt the spread HIV/AIDS and malaria, promote gender equality and others.
The civil societies in these countries should be given the right knowledge
about project and programme management, and strategic planning. The citizens should be empowered to demand improved performance from the state and the private sector so as to face the challenges of the dynamic
global environment.
The capacity of the regional economic communities in Africa should be
strengthened to support the MDGs and effort should be made to ensure
peace and stability to appreciate and enhance the support of international
communities.
Jun 27th, 2006 - 10:56:41 |
Steve otieno
Will Corruption Ever Stop Developing in Kenya?
STEVE-CadifKenya
(January 2006)
ABSTRACT
Corruption is increasingly viewed as a major impediment to sustained economic development is Sub-Saharan Africa. Its importance is reflected in conditionalities for development assistance now being proposed by members of the international donor community, notably the World Bank. Conditionalities for assistance include political accountability, public sector reform, less direct involvement by the State in the economy, and more stringent monitoring of public expenditures and revenues.
This dissertation explores the magnitude and impact of corruption on Kenya’s development as well as the effectiveness of strategies for reducing it significantly.
Chapter one traces the growth and subsequent retraction of the State’s role in the economy.
Chapter two assesses the role of the State from the perspective of corruption in terms of two basic concepts. The first, State Capture is use of the State’s power to manipulate the “rules of the game”. The second is the economic “space” within which corrupt administrators and politicians can operate at any given time (Administrative Corruption). The magnitude of corruption in Kenya is assessed in relation to such indicators as the poverty level and GDP per capita.
Chapter three draws on original and in some cases yet unpublished sources to illustrate and estimate, if only in relative terms, five major costs of corruption. Also examined is the effectiveness of the current strategic approach of the international donor community, headed by the WB, to combat corruption by reducing the scope of the State and thereby the “space” available for Administrative Corruption.
The principal conclusion of the dissertation, in chapter four, is that this approach, although well intentioned, is insufficient in terms of reducing the extent of corruption and its adverse impact on economic development. Other measures are necessary, beginning with reform of the judicial system, heightened public awareness and direct political accountability to the electorate.
ACKNOWLEDGEMENTS
This dissertation is dedicated to Jeffrey Fine, a man of true wisdom and kindness; John Githongo and Mwalimu Mati of Transparency International (Kenya); the Center for Governance and Development (Kenya); and last but not least, my father who has shown me strength, courage, and undying support. Many thanks to you all.
TABLE OF CONTENTS
ABSTRACT ii
ACKNOWLEDGEMENTS iii
TABLE OF CONTENTS iv
DESCRIPTION OF ATTACHMENTS v
GLOSSARY OF ABBREVIATIONS AND ACRONYMS vi
CHAPTER ONE: BACKGROUND 1
Statism 2
The Minimalist State 3
Good Governance 5
Kenya: Key Events since Independence 11
CHAPTER TWO CORRUPTION: SOURCES AND COSTS 16
State Capture 18
Administrative Corruption 24
Five Costs 27
Direct Financial Payments 27
Transaction Costs 28
Non-Enforceability 29
Misused and Misallocated Resources 30
Uncertainty and Risk 34
CHAPTER THREE FINDINGS 36
Five Costs 39
Direct Financial Payments 39
Transaction Costs 42
Non-enforceability 45
Misused and Misallocated Resources 46
Uncertainty and Risk 56
CHAPTER FOUR CONCLUSION 59
BIBLIOGRAPHY 64
Attachment 01 69
Attachment 02 70
Attachment 03 74
Attachment 04 75
Attachment 05 78
Attachment 06 81
Attachment 07 86
ENDNOTES 87
DESCRIPTION OF ATTACHMENTS
Attachment 01 Costs of Project Incompletion (Controller & Auditor-General Report 1998)
Attachment 02 Approximated Losses to Irregular Payments (summarized From Controller & Auditor-General Reports 1991-1996)
Attachment 03 “Sunday Standard” Article on Case between Fairview Hotel and Kenya Power and Lighting Corporation
Attachment 04 Approximated Loss to Wasted Expenditure (summarized from Controller & Auditor-General Reports 1991-1996)
Attachment 05 Approximated Loss to Undelivered Goods and Services (summarized from Controller & Auditor-General Reports 1991-1996)
Attachment 06 Approximated Loss to Uncollected and Unsurrendered Revenue (summarized from Controller & Auditor-General Reports 1991-1996)
Attachment 07 Approximated Loss to Uncollected and Unsurrendered Revenue in 1995/96 (collected from the Center for Governance and Development)
GLOSSARY OF ABBREVIATIONS AND ACRONYMS
AC Administrative Corruption
Bank The World Bank
BWIs Bretton Woods Institutions
BWS Bretton Woods System
C&A-G Controller & Auditor-General
CASP Country Assistance Strategy Paper
CF Consolidated Fund
CGD Center for Governance and Development
DoD Department of Defense
DSDO District Social Development Office
FDI Foreign Direct Investment
FH Fairview Hotel
FX Foreign Exchange
GOK Government of Kenya
IBRD International Bank of Reconstruction and Development
IDB Industrial Development Bank
IDC International Donor Community
IFI International Financial Institution
IMF International Monetary Fund
ISI Import Substitution Industrialization
KACA Kenya Anti-Corruption Authority
KANU Kenya African National Union
KCB Kenya Commercial Bank
KPLC Kenya Power and Lighting Company
KPTC Kenya Post and Telecommunications
LDC Less Developed Country
MNC Multinational Corporation
NGO Non-Governmental Organization
NIEO New International Economic Order
OP Office of the President
POCA Prevention of Corruption Act
PRSP Poverty Reduction Strategy Paper
PSO Public Sector Official
ROK Republic of Kenya
SAL Structural Adjustment Loan
SAP Structural Adjustment Program
SC State Capture
SOE State-Owned Enterprise
TI Transparency International
UNDP United Nations Development Programme
USAID United States Agency for International Development
VAT Value Added Tax
WB World Bank
WDR “World Development Report” (World Bank)
CHAPTER ONE:
BACKGROUND
“Men are powerless to secure the future; institutions alone fix the destinies of nations”
Napoleon I, Imperial Séance (cited in WB, 1997, page 29).
Statism
At the commencement of the post-World War II era, national planning was widely viewed in countries, still possessing colonies, in particular by Britain and France, as the most effective approach to advancing economic development. Soon after independence, their former colonies introduced institution building based on State directed growth to ensure efficient utilization of resources and equitable access to benefits. Coupled with distrust in the capability of their private sectors, African governments formulated policies that entrenched centralized control and regulation on the economy and deeply involved the State in entrepreneurial activities, notably through the establishment of Public Enterprises.
This school of thought on Africa’s development assumed that the global economic structure favored the North and relegated the South to a perpetual “underdog” status. Creation of a new, more balanced global economic order was therefore to be pursued through industrialization by Import Substitution Industrialization (ISI) featuring high tariff rates; nontariff barriers; a system of exchange controls usually characterized by multiple exchange rates intended to favor the export of processed goods and discourage consumer goods imports; and extensive control over major primary product exports. These policies were intended to “determine the structure of production and consumptions of goods, which in turn [would] determine the amount and composition of imports and exports” (WB, 1994a, page 64).
The Minimalist State
Toward the end of the 1970s, conventional wisdom was changing. The development predicament of the South was now attributed largely to imperfections in the internal, structure of the national economy and, to some extent, weaknesses in national institutions and political structures. Sub-Saharan Africa was facing failing export earnings; poor infrastructure; limited technical and institutional capabilities; a limited tax base; poor human resources; and a weak indigenous private sector. Furthermore, economic policies of the 1960s and 1970s had placed major demands on the limited administrative and managerial capacities of public administration to the detriment of its other responsibilities. The public enterprise sector ha[d] been a “major drag on the fiscal budget, the banking sector, and other quasi-fiscal resources of revenue (stabilization funds and social security funds)” (WB 1994a, page 102) and had also undermined growth of the private sector, increasingly viewed as the source of employment and income generation.
Import substitution had not led to industrialization and a more diversified economic structure. Instead, it had fuelled a rising demand for imports and resulted in unrealistically priced export goods and products. A widening balance of payments deficit occasioned ever-greater borrowing leading in turn to ever more onerous debt servicing payments. Coupled with poor macroeconomic management, many countries also faced rising inflation; higher unemployment; declining incomes; fewer public goods; greater crime; and declining private sector investment. As the World Bank (WB) argued:
“The internal structural problems and the external factors impeding African economic growth have been exacerbated by domestic policy inadequacies”
(WB, 1981, page 04).
The WB sought a more tightly defined role for the State based on an outward oriented internationally competitive private sector “moving toward market determination of the level and composition of imports and domestically produced importables” (WB, 1994a, page 64). Structural Adjustment Programs (SAPs) began to be introduced in Sub-Saharan Africa in the 1980s with a broad focus on:
(1) price decontrol
(2) deregulation
(3) financial liberalization (i.e. FX and exchange rate liberalization )
(4) trade liberalization
(5) foreign direct investment
(6) increased domestic savings
(Carabacho-Burgos, 2000, page 116).
These measures were expected to offset the deficit in balance of payments; promote the private sector as the main motor of development; and ultimately “provide the incentives needed for new investments and productive use of resources” (WB. 1994a, page 61).
Good Governance
In “stylized” terms, over the last 15 years the pendulum has swung from a Statist to a liberalized market economy. There has been, however, growing contention that attempts to reduce the State’s role in the economy have overlooked the State’s role in facilitating economic development, especially in setting up the institutions required for a market economy (i.e. stock exchange and rule of law). Concern was expressed, in the nineties, that whilst a Minimalist State “[could] do no harm, neither could it do much good” (WB, 1997, forward).
The challenge was to establish an environment in which both markets and States could succeed in their respective roles rather than contest each other. Complaints were rife about the failure of the State to support an environment conducive to private and public sector growth. The weakness of institutional frameworks; the lack of security of property; the absence of predictable policies; problems of corruption and discretionary power in bureaucracy; and disruptions due to the politicization of the State were all seen as manifesting themselves in the new liberalized market economies and hampering chances for economic development. The WB followed on to say:
“Sustained development generally call[s] for formal mechanisms of restraint that [will] hold the State and its officials accountable for their actions”
but
“… restraining the potential use and abuse of State power [would be] a challenge in any country”
(WB, 1997, page 99).
The tasks entailed into restructuring the State to perform this new role commenced in the 1990s which:
“... witnessed several conditionality-driven articulations including demands to minimize the size of the civil service, strengthen anti-corruption mechanisms and prescriptions to ignite moral and ethical regeneration in the public service. Guiding these conditionalities [had] been the over-aching ambition to convert the economy to the liberal ideals espoused in the early 1980s”
(Shah, A & Mati, M., 2001, page 07)
With respect to Kenya, the Bank in 1996 proposed stronger, but more flexible, macro-economic policies consisting of a second phase of public sector ‘development’ through supportive institutions. Under new conditionalities, accountability was to be the backbone of new policies. Administrative accountability obligated the public sector to fulfill assigned duties. Financial accountability focused on the honest and prompt reporting of public sector expenditure. Political accountability stressed the quality of free and fair elections, and the ability of the “electorate to keep their finger on the pulse of the political arena” (World Bank, 2001a).
One of the World Bank’s first programs was directed toward public sector restructuring. It entailed rationalizing the functions and reducing the numbers of government ministries and public sector officials; withdrawal of the State from unnecessary involvement in the economy; pay reforms in the public sector; transparent privatization of State Owned Enterprises (SOEs) and parastatals; and establishment of “appropriate regulatory structures” (WB, 1998, page 09).
A central feature of public sector restructuring was to reduce State expenditure on non-vital resources so that funds could be directed to areas that were most necessary for development . Kenyan trends and outcomes are set out in the table below
Date Number of Ministries Date Number of staff in the civil service
1963 12 1963 80, 114
mid-1070s 22 1972 133,000
Late- 1980s 30 1980 214,800
2001 16 1996 277,600
Another aim of public sector restructuring was to reduce the number of “hoops” a private sector enterprise might have to jump through - each with its own level of misgovernance (specifically corruption) – in order to be able to invest and operate on a profitable basis . Reducing the number of public officials would expand the opportunity for productive activities. Compensation for dismissed public servants were heavily funded (WB, 1997).
Aside from retrenchment, the Bank program involved changes in remuneration and terms of service. The principle behind public pay reform was to offer “realistic wages”, meaning wages equivalent to those in the private sector , to create competition between the two and thereby encourage each employee to strive to maintain his or her own position in the public sector. Progressive mending of each Public Sector Official’s (PSO’s) corrupt ways was expected to evolve naturally, as a means of tackling a deeply rooted culture of corruption.
The second step proposed by the Bank, namely public expenditure management reform, was aimed at tightening the realm within which PSOs could use funds at their discretion. Supervising the inflows and outflows of national capital into the recipient and disburser of Kenya’s State revenue (the Consolidated Fund - CF) would relieve that State of the virtually unlimited resource wastage that it had faced up until that point.
Public sector expenditure management also took into consideration the quality of goods and services the public sector was expected / required to provide. The public sector was encouraged to devote itself to quality standards in budget management, settling pending bills, and signaling wasted expenditure. As the WB’s CASP to Kenya stated:
“This [eroded institutional checks and balances] reflects the lack of effective linkage between policy-making and budgeting, which is one of the critical weaknesses in Kenya’s economic governance”
(WB, 1998a, page 08)
The Bank anticipated that these measures would reduce misgovernance, and specifically corruption. They would not, however, remove it entirely. Successful anti-corruption policy, in effect, was expected to limit the bounds within which corruption would occur. Further reduction of corruption would also require aggressive and transparent transfer of ownership and/or control of assets from the public to the private sector. The privatization of SOEs would also stimulate economic growth by reducing mismanagement and inefficiency as well as ensure tighter control over resources available to the public sector (WB, 2000a). This fiscal contribution of privatization included the generation of revenue from the sale of SOEs, increased revenues from taxes and a reduction in public expenditure. Other benefits would be greater competitiveness within an increasingly dynamic public sector and a further reduction in corruption.
By the mid-nineties, however, “most contemporary economic development work ha[d] underestimated the primacy of governance, [specifically] the integrated view of governance and corruption” (WB, 1997, page 100).
The troubles were rooted in the divide between reforming technocrats and strong political forces favoring maintenance of the status quo. “Unfortunately, the political elite in government ha[d] not been faithful to the articulated policies but implemented them according to [their] narrow political interests which often conflicted with national interests” (Shah, A & Mati, M., 2001, page 01). There was little understanding of what later came to be known as technocratic governance and democratic governance. Technocratic governance was a “managerial notion of good governance” (Leftwich, 1996, page 15) and most often linked to the WB’s official policy. The latter, democratic governance, was unofficially accepted by the Bank and concerned both economic and non-economic factors . Democratic governance exemplified regulatory frameworks, government effectiveness, political stability and control of corruption (World Bank, 1994b, page 137-138).
In more recent years, increasing attention has been paid to the close association between accountability and corruption (WB, 2000d). Of course, corruption is only one segment of accountability (and good governance). However, it was viewed as pivotal in the sense that it affected all functions and sectors of the economy. In brief, corruption, in all its manifestations, was seen to affect policymaking (State Capture) and policy implementation (Administrative Corruption). These concepts will be elaborated in Chapter Two, where the meaning, prevalence, and the effects of corruption will be discussed in greater depth. First, by way of background, we set out the relevant key events in Kenya’s development since independence.
Kenya: Key Events since Independence
“Corruption … like an orgy … refuses to let go of the Kenyan society”
(Kibwana, 1996, page 02).
In 1965, Kenya’s first strategy paper for development, Sessional Paper No. 10, stated that markets were inefficient, and proposed that the only way to achieve growth would be through a self-sufficient and economy. Hence, the creation of State Owned Enterprises was presented as one of the first steps toward nation building. Tom Mboya, a leading politician “created a hands-on government that intervened directly and created a command economy [in which SOEs took over complete sectors and became the] biggest employer and investor in the economic sphere” (Shah, A., Mati, M., 2001, page 04).
Taken at face value, the view that a self-sustaining economy would be a creator of unity and internal economic growth was good ideology. However, the failing of this “Development Plan” was that it excluded the majority of the populous, with economic growth resting in the hands of the elite. The danger of instability and stagnation was ever-present. Kenya’s Development Plan for 1974-1978 proposed ‘redistribution with growth’ and the inclusion of all to revitalize the economy. However, it was ‘shelved’ because of international economic depression brought about by the oil shocks of the 1970s. Facing higher import costs and a declining external market for exports, Kenya’s government initiated Sessional Paper No. 4 of 1975 on Economic Policies that was to give it (the government) even greater control on the economy and take Kenya ‘off the global market’ (Shah, A., Mati, M., 2001). Luckily, Sessional Paper No. 4 did achieve part of its goals as Kenyan exports did maintain, if not increase, their export levels.
“Basic needs” became more prevalent in Kenyan policy with emphasis being placed on mass education and public health, and advocating industrialization and export as a means of developing rural as well as urban areas. To what extent this Development Plan (1979-1983) was due to the incoming of Kenya’s second president, Daniel T. Arap Moi, cannot be judged, but it was meant to benefit not the just the elite but those who supported the elite. Among its policies were:
§ Provision of access to credit, extension services, marketing facilities and training
§ Minimum wages, price controls and better taxation policy
§ Reducing the protection of large firms against other market entrants
§ Utilizing public expenditure to distribute facilities for education, health care and other social service more widely, including those in pastoral, arid and semi-arid areas
§ Encourage Harambees (self-help organizations)
§ Decentralize planning through the strengthening of lower level planning
(Shah, A., Mati, M., 2001, page 05-06)
Once again, the aims appeared to be sound, but implementation was lacking. By the time of Kenya’s attempted coup d’etat (1982) there was skepticism concerning the ‘impossible’ growth objectives set out by the plan. Philip Ndegwa, Governor of the Central Bank of Kenya, concurred with the WB and IMF that Kenya’s failing were indeed due to internal structural (State) failures. A series of SAP’s, commencing in 1986, promoted a much larger role for the market in developing the economy. “State minimalism, privatization and liberalism were seen as the economic panacea” (Shah, A., Mati, M., 2001, page 06).
Policy remained basically unchanged until the 1990s. Goals appeared to have been accepted by the general populace, but the political will to implement was in short supply. From the mid to late-1990s, international donors began to pressurize the GOK to show more initiative, especially in matters relating to State reform and governance. “The emerging consensus [of methodology required] seemed to point towards the sphere of good governance” (Shah, A., Mati, M., 2001, page 08). The Poverty Reduction Strategy Paper (PRSP) of 2000-2003 specified the “crucial role of the environment in which development occur[ed] and of the players in the process” (Shah, A., Mati, M., 2001, page 07). The main goals were improved performance of the public sector and public expenditure, the enhancement of investment incentives, and the implementation of anti-corruption mechanisms. Significantly, corruption began to rise on the list of priorities although it had been recognized as a major problem in Kenya’s “general” development since the early days of independence. Now it was viewed as so deeply engrained in Kenya’s social, political and economic structure that it had become the norm (Kibwana, 1996, page 124). Indeed formal acceptance of various reform programs for recasting the role of the State in the economy and reforming the public sector were belied by their periodic cancellation, e.g. in 1997, by those in power, even at the cost of discontinuing development assistance.
The first attempt to counter corruption in Kenya, The Prevention of Corruption Act, was enacted in 1956. The Act did not define exactly what corruption was, but did give rules as what could and could not be done, thereby criminalizing certain actions (Branz, H. A., cited in Heidenheimer, 1970, page 44). Amendments followed in 1965, 1991 and 1997, but little attempt was made to implement anti-corruption policy until December 1997 when the Kenya Anti-Corruption Authority (KACA) was established in fulfillment of World Bank conditionalities.
For the first time, an institution outside of the Executive was given wide-ranging powers that could only to be revoked by a judicial tribunal. KACA was empowered to prosecute all cases involving corruption outside the civil court system (seen to be highly corruptible) and try them on an individual basis in KACA’s supposed autonomous and incorruptible judicial system. Despite the structure, processes, and staffing of the KACA, it became ‘too sticky’ for the ruling elite and was suspended shortly after birth on account of alleged incompetence.
The failure of subsequent efforts to tackle corruption in Kenya attests to the ultimate unwillingness of the governing elite to compromise their hold over political power where the latter might be undermined by anti-corruption efforts. The specific rationale behind, and focus of these efforts is discussed in chapter two. The costs of corruption, both directly and in terms of economic development, have been the subject of direct field inquiry whose findings are presented in chapter three. Chapter four, concluding this dissertation, sets out our principal observations.
CHAPTER TWO
CORRUPTION: SOURCES AND COSTS
In conceptual as well as operational terms, efforts to combat corruption can be considered under two categories
1. State Capture (SC), namely
to limit the capacity of those exercising political and bureaucratic power to change the size and shape of the “box” defining the rules of the game (i.e. State Capture).
(Diagram 24 a)
AND
2. Administrative Corruption (AC), namely
to reduce the overall size of the “box” and scope within which Administrative Corruption can take place
(Diagram 24 b)
State Capture
From the early days of independence, Africanization of the public service and economic activities was seen as synonymous for two reasons. First, for a nation-state to grow politically, inter-tribal conflict boundaries would need to be reduced through a united African front against foreign Asian and European ‘elites’ . Second, dependence upon foreign elites needed to be lowered by having Africans take the lead in their own economic development. However, the majority of the population had little experience or knowledge of political and economic affairs. Only a tiny well-educated African elite was available to create both political and economic stability. A centralized system took hold and Kenya’s first power-monopoly was born.
The Ndegwa Commission Report (1971) was part of its foundation. In order to ‘consolidate’ knowledge and power, public servants were permitted to engage in private business on the grounds that it would spur economic development. The Commission did little more than support dishonest officials, create a more corruptible public sector and open up the private sector soon to exploitation. The principles of Africanization were thereby perverted for private illicit gains.
State Capture refers to this abuse of power by an African elite. Government discretionary powers were used to influence the formation and implementation of laws to capture public resources and/or private enterprises for individual benefit, rather than develop the Kenyan economy in the general interest. It was manifested in various ways:
“[The] sale [and purchasing] of parliamentary votes and presidential decrees to private interests [i.e. elites]; the sale of civil and criminal court decisions to private interests; corrupt mishandling of central bank funds; and illegal contributions by private actors to political parties”
(WB, 2000a, executive summary),
and the
“channel[ing of] State funds for the
personal use [of elites] in ways that [did] not involve other players at all”
(WB, 2000a, page 09).
Due to ill-prepared and weak institutions, and lack of political will, these wrongdoings were never countered effectively.
Under an elitist system SC flourished, with decisions, especially those relating to financial matters, being made by those who “infiltrated … and turned [institutions into positions] of individual enrichment” (interview held with John Githongo, Transparency International) . Two of the most glaring examples were foreign exchange (FX) and tariffs. Ironically, the goal of Africanization, one that encouraged the utilization of domestically produced goods rather than imported manufactures, was used to justify controls over economic activity. This largely open-ended discretionary power created major opportunities for illicit, individual benefit.
FX controls were implemented at independence (1963) . FX could only be purchased through the Central Bank of Kenya (CBK). Likewise, all FX revenue collected domestically (mainly from the tourism sector) was to be receipted by the CBK, and later converted into Kenya Shillings (at CBK’s rate) for domestic use only. For enterprises that depended upon imported goods, heavy informal ‘taxes’ were demanded. By capturing the State’s FX bureau, enterprises could drive competitors out of business by denying them access to FX. This practice became widespread. Likewise, the Ministry of Trade and Industry exercised control over tariff rates. For decades, it manipulated them in response to payments by firms in the private sector. Bankrupting competition by flooding the market with foreign goods and giving these firms advanced notice, and then raising tariff rates, allowed these firms to develop into quasi-monopolies enjoying unfair advantages over would-be competitors and an opportunity to charge abnormally high prices for their products.
Attempts to counter such misuse of power were marked by inconsistency. One example is domestic trade liberalization, which began to take effect in 1983. Under the Price Control Ordinance (1956), the number of commodities within the so-called General Order dropped from 56 to 6 by 1991, while those controlled within the so-called Specific Order dropped from 87 to 29 (Swamy, 1994, page 215). By 1993, only petroleum products remained under control in the former order and only three items (including maize) under the latter. However, by mid-1995 colluding political, bureaucratic, and private sector interests dismantled all trade control reforms (Ikiara, 1993, page 12). Similarly, inconsistency existed in FX liberalization.
Economic liberalization was only a guise to postpone change while at the same time stay on good terms with foreign donors. The underlying reality was not hard to detect. Inconsistency between Kenya’s ‘new principles’ and the ‘new reality’ was exemplified by the Goldenberg Scandal, which involved collusion between the executive, the legislature, the judiciary and regulatory agencies. Examples such as the one described below are still plentiful and, from the perspective of pessimistic reformers, not Kenya’s ‘worst’. A very senior ex-government official close to corruption but not participating in it, stated: “the Goldenberg Scandal is small fry in comparison to what takes place in the government” .
In October 1990, Kamlesh Pattni, a prominent Kenyan businessman, wrote to the then Vice President and Minister of Finance Prof. George Saitoti seeking exclusive rights to export gold and diamonds through his company Goldenberg International. Under the new scheme, Goldenberg International would be able to claim back a certain percentage (20%) of the value of the exported goods. Over and above the new “repayment legislation”, Goldenberg International received an extra 15% so as “to encourage further exports”. It was later revealed that neither gold nor diamonds were exported, but that Goldenberg International had received – from the Consolidated Fund - approximately US$100 million between 1991 and 1993.
Stating that there had been misunderstanding, and emphasizing that Saitoti had approved the payments, Pattni unwillingly pledged to settle his “bill” with the government. However, since almost all of Pattni’s assets had been transferred elsewhere – some used to purchase physical assets such as the Grand Regency Hotel (Nairobi), he was ‘unable’ to settle his debt. On failing to repay what might be called the theft of Ksh. 2.6 billion , the judge presiding over the case remanded Pattni in custody for three months in Kamiti prison awaiting bail . In further trials, Pattni was found to have forged a document associated with a transaction of the sum of Ksh. 322 million (March 1999). In this case, Pattni faced no sentence whatsoever. The legal battle – between Pattni and the Central Bank of Kenya - over the ownership of the Grand Regency, as well as all other cases involving him, are all still pending.
It has been alleged that those involved (either aware or directly participating in the Goldenberg Scandal, and Pattni’s other deeds) came from three tribes – the Kikuyu, Muluyia, and Kalenjin – the two largest and President Moi’s tribe, respectively. They included Prof. Saitoti and the next Vice President; the Minister of Finance Mr. Mudalia Mudavidi; Controller and Auditor-General, D.J. Njoroge; the head of the Central Intelligence Department (CID), Noah Arap Too; Judge Kuloba; President Moi’s most senior confident, Nicholas Biwott; President Moi’s son, Gideon; Court of Appeal judge, Effie Owour; former Treasury Permanent Secretary, Wilfred Koinange; former deputy CBK Assistant Chief Dealer, Onesmus Wanjihiia; Chief Justice Chesoni; President Daniel T. Arap Moi himself; and of course Pattni. Equally disturbing, those attempting to pursue justice were severely dealt with . Such misgovernance, specifically in the judiciary, has been costly to all sections of Kenyan society.
”Corruption in any institution impedes and distorts its objectives. However, corruption in the judiciary is particularly damaging for several reasons. The legal system is one of the fundamental pillars of a market economy whose role as arbiter of the law encompasses both the formulation and implementation of public policy … As a result, corruption in the judiciary can display aspects of State capture”
(WB, 2000a, page 16)
In summary, State Capture in the case of Kenya can be described as distortion of the State’s authority, through legislation and regulation, in the interest of minority, non-representative interests primarily concerned with self-enrichment and perpetuating their hold on political and economic power.
Administrative Corruption
Both SC and Administrative Corruption (AC) can be said to be “primarily related to demand, supply and exchange concepts derived from economic theory” (Van Klaveran, cited in Heidenheimer, 1970, page 05). However, where SC focuses on the enactment and alteration of legislature and regulations, AC focuses on exploiting the “rules of the game” that are already in place. Therefore, AC pertains primarily to those engaged in implementing regulations and legislation, e.g. collecting taxes, enforcing price control, administering customs etc..
By purposefully halting or slowing services, payment to expedite them has been the most common form of ‘tax’ typifying AC. This demand for ‘efficiency’ has perpetuated the culture of corruption engendered by bureaucratic procedures that stultify economic activity. The greater the number of inefficient public institutions and PSOs, the greater scope for AC. Because of the need to promote efficiency, the private sector has become compelled to participate in corrupt behavior in order to succeed, and in some cases, survive. As stated in Mullei’s book The Link Between Corruption And Poverty: Lessons From Kenya Case Studies, enterprises – of all sorts - are often “powerless in the face of … corruption among State officials” (B. Cooksey, A. Mullei, G. Mwabu, cited in Mullei, 2000, page 43). Manipulation of rules already in place manifested themselves in many ways.
One seemingly minor, but telling example is based on personal experience.
Upon returning to Kenya, I traveled to the South Coast for a four-day holiday. Whilst on the beach I decided to buy fruit from an elderly lady walking with a full bucket on her head. As I approached her, she directed me away from the hotel beachfront for a reason I did not understand. The lady did not have the fruit I desired but promised to bring it the following day. On that occasion, I was not led aside, and the askari (security officer, in this case an Administrative Police officer) guarding the beach quickly approached the old lady and me. Obviously not aware that I spoke Swahili, the askari quickly reminded the lady that she was not allowed to conduct any business on the hotel beachfront. Just as quickly as he ‘set down the law’, however, the askari stated that for 10 Kenya Shillings (about 10 pence) he would allow her to complete her transaction. I rapidly stepped in and foiled his plan!
Examples of the using the rules of the game to extract a ‘small’ fee are endless and affect the whole economy, but primarily the poorest and the most vulnerable.
Use of these ‘small fees’ has become so regular that it has taken on its own name. Toa Kitu Kidogo – which in Swahili means “take out something small” – has come to be known as TKK and joked about as if it were the norm (it is!). The small fees incurred due to TKK are considered an ‘overhead’ in all private enterprise. Whether a telephone or an electricity line is (re) connected, water pipes fixed, a specific road repaired, or a pineapple sold in front of a holiday resort, none is usually undertaken without TKK.
AC operates within the space created by existing laws and regulations whereas SC, described in the preceding section alters this space and distorts “rules of the game” for corruptive purposes.
Five Costs
Both SC and AC entail costs that the WB has broken down into five categories, namely: direct financial payments; transaction cost; non-enforceability; misused and misallocated resources; and uncertainty and risk.
Direct Financial Payments
One such cost involves direct financial payments between those with discretionary power to change or apply rules and those seeking to circumvent or misapply them. These transactions amount to “bribery” and
“occur[ed] in a context analogous to the market setting; private citizens are the buyers of the services rendered illegally and the public officials are the sellers. The buyers pay the bribe to get the service and, the sellers render the service after receiving the bribe or in anticipation of it”
(B. Cooksey, A. Mullei, G. Mwabu, cited in Mullei, 2000, page 45).
The Goldenberg Scandal, described earlier as an example of SC, illustrates how many people at all levels of the government, banking and law enforcement can, and have been, bribed. However, most direct financial payments exist within the bounds of AC.
Regardless of whether they stem from SC or AC, some key aspects can be quickly summarized. First, the existence of direct financial payments (bribery) is commonplace and deeply embedded in Kenya’s economy. Second, larger enterprises (i.e. MNCs) continue to have the means of buying their way into markets. Third, many firms will seek to gain an advantage over competitors through illicit non-market methods, especially where those in power are prepared to accommodate them. Fourth, “there has been hardly any action taken to punish those involved, and [this] has tended to encourage people involved in corruption” (G. Ikiara, cited in Mullei, 2000, page 83-84). And, fifth, direct financial payments have become a fixed cost of production in all sectors and lowered the profitability of national investment. Enterprises, paying a proportion of their revenue to obtain licenses or cover ‘extra costs’ have found the climate of economies such as Kenya’s costly and non-enticing.
Transaction Costs
Transaction costs comprise the expenditure in time incurred by operating in a corrupt system. In an attempt to avoid the direct costs of corruption (i.e. fee payments), enterprises are required to allocate time, personal and funds, to countering corruptive behavior.
One common problem in Kenya has been power–cuts, a problem I have had to face throughout the writing of this dissertation. The Kenya Power and Lighting Company (KPLC) , albeit under-financed by the State, has qualified engineers, vehicles, and all other technical equipment to ensure power provision. However, only some companies and households have assured rapid response to power failure, because they are prepared to provide ‘extra-financing’ to KPLC. Others not prepared to do so must face the brunt of numerous phone calls (if their phones work) and long waiting periods in government offices.
Having an electricity line reconnected, an every day occurrence in Kenya, is far from the most damaging example of transactions costs. One of its more substantial, but common effects , presented in Chapter Three “Findings”, involves a Nairobi hotel, KPLC and the Kenya Commercial Bank (KCB). A Nairobi Hotel was demanded to pay its electricity bill twice or face being disconnected. Although the hotel produced receipts indicating that the bill in question had been paid, little notice was taken by either the power company or the judiciary. The case in fact dragged on for two years!
Transaction costs occur in a State-led or a liberalizing economy . This is not to say that transaction costs are equivalent. With no competition, State owned monopolies, such as the KPLC have no motivation to be efficient. In a liberalized market setting, to sustain themselves, such corporations must reduce their inefficiency (an example being Kenya’s telecommunications sector). TelKom, the State telecommunications institution that used to be the sole provider in Kenya as the Kenya Post and Telecommunications (KPTC), faced difficulties with the arrival of cellular phone networks, and had to take into consideration the loses it could face with competition . Consequently, the incidence of transaction costs resulting from interactions with it has probably declined.
Non-Enforceability
Direct financial payments and transaction costs also reflect those arising from the non-enforceability of contracts, the third category of corruption. In the case of non-enforceability, private firms must confront uncertainty because of a judiciary in which corruption is deeply imbedded. Examples of uncertainty are plentiful, and indeed exceed the scope of this dissertation. They include the nullification of government licenses on arbitrary or undisclosed grounds. Whether it is a license for an individual to work in Kenya, for a business to operate in a certain sector of the economy, or a property deed, each can - and often is - revoked for no legitimate reason. In order to avoid such situations, direct financial payments and transaction costs become pertinent, since there is a need for individuals in the private sector and public sector to communicate and ‘settle their differences’.
Having to bribe in order to exact payment for work that has been completed is just one example of the costs of non-enforceability. In this case, the contract itself may be inflated – by the client, the contractor, or both – to accommodate the bribe and/or risk of not being paid in the end. This additional cost is passed on to the public. However, an equally damaging cost arises from business practices used to counteract possible non-enforcement of contracts. These include limiting transactions to companies and individuals that are part of a family, social or religious network, and by definition, excluding outsiders; limiting the use of credit (requiring payment in cash up front), a severe impediment for new, as well as medium and smaller scale, enterprises wishing to compete legitimately within a market environment; and demanding very onerous conditions in terms of collateral, period for repayment and interest (to cover risk of default by others as well as the party in question).
Misused and Misallocated Resources
The fourth cost of corruption, and the one most savored by the local media, is misused and misallocated resources. It has been broken down further by CGD into four components : (a) wasted expenditure; (b) undelivered goods; (c) irregular payments; and (d) uncollected and unsurrendered revenue (CGD, 2001, page 03-23).
(a) Wasted Expenditure
Wasted expenditure largely results from the lack of accountability by PSOs of all types. Un-repaid advances of wages and non-collection of imprests; excess payment for goods, services and accommodation; use of business funds for personal use; embezzlement; seizing government resources for personal gain (i.e. land-grabbing); payment of personal loans from company funds, etc. are manifestations of wasted expenditure. Yet, despite their limited occurrence, the most expensive area of wasted expenditure has been stalled projects, the worst culprit being the Office of the President (OP) “with a [project] completion rate of about 3% [between the years 1991 and 1997]” (CGD, 2001, page 02). Attachment 01 depicts the astonishing wastage in the fiscal year 1998, where just over Ksh. 2.6 billion was awarded to phony projects (CGD, 2001, page 03-04).
Other forms of waste are found in embezzlement and non-accountability associated with charity collections, known in Kenya as Harambees. Research from the Nation and East African Standard newspapers, and presented in TI’s research paper: “Harambee: Pooling Together or Pulling Apart” (TI, 2001), proved conclusively that funds had been embezzled most commonly by PSOs and spent on unspecified or non-approved activities. Whilst investigating public records, TI found that not one of the institutions set up to authorize the collection and disbursement of public Harambees funds had any records whatsoever. District Social Development Offices (DSDOs) were supposed to do just this. However, it appeared that “they did not expect to be accountable to anyone” (TI, 2001, page 04). What TI found was that “self-help groups [were] registered during the elections [when wasted expenditure was most prominent, and] disbanded after sharing the money” (TI, 2001, page 04). There is no doubt that these funds were indeed misappropriated and therefore wasted.
(b) Undelivered Goods and Services
Undelivered goods and services are simply those that are not received, delivered as sub-standard, or delivered despite being unordered, and then paid for by the Consolidated Fund through various public agencies. It has not been uncommon for providers of defective or non-existent goods and services to be overpaid. Goods that are received under these circumstances rarely have documents authorizing their purchase, and those that do, do not meet the specifications laid out in the paperwork. Fraud is endemic.
Despite the GOK having clear-cut regulations as to how accounting procedures should be applied in purchasing goods for the State, with expenditure regulations stating that “the examining officer[s] or section head[s] [should] complete the appropriate certificates to indicate that the vouchers have been examined and passed for payment
… the picture that emerges … is one of spendthrift ministries [and] weak internal controls”
(CGD, 2001, page 02-06)
teams that are obliged to ensure that the expenditure conforms to ordered goods and services in both quantity and quality are known to either forge or ‘lose’ documents relevant to goods in transit. Wasted expenditure and undelivered goods and services both point to poor oversight, purposeful or not, of misused State funds, because of the lack of accountability.
(c) Irregular Payments
Sections 99 & 100 of the Constitution of Kenya state that all payments made from the Consolidated Fund must first be approved by parliament. Irregular payments contravene this legislation. They consist of government intervention to settle private debts; payments for projects that have yet to be budgeted and approved by parliament; unapproved overdrafts and debts held by ministries and parastatals; unauthorized purchasing of property; etc.
Prime examples include
§ the direct debiting of funds totaling Ksh. 14.775 billion from the Central Bank of Kenya to private bank accounts;
§ public renovation of the Kenya International Conference Center (owned by KANU, the ruling party);
§ the development of a Department of Defense (DoD) (falls under the OP) project that was unknown, unaccounted for, unconstitutional, and totaled Ksh. 894.124 million;
§ the construction of Eldoret Airport & purchase of a private jet for the OP with government funds;
§ and rent free use of Nyayo House (public property) by KANU enterprises
Further examples from Controller & Auditor-General reports 1991-1996 can be found on attachment 02
(d) Uncollected and Unsurrendered Revenue
Coupled with the terrible wastage of revenues that have been collected, uncollected and unsurrendered revenue has been recognized as having a very damaging impact. The most frequently ‘lost’ funds are imprests (CGD, 2000, page 10). However, the majority of funds are lost to (1) uncollected duty (i.e. falsification of “tariff classifications” and exchange rates, inaccurate exemptions, etc.); (2) perversion of VAT exemptions; (3) non-submission of collected revenue to the CF; and (4) uncollected rent on State properties (CGD, 2000, page 09-10). Because the funds have never being ‘receipted’ by the CF, they are not drawn upon to promote development in general (Kibwana, 1996). .
Uncertainty and Risk
Uncertainty and risk, the fifth and final distinction of corruption umbrellas the above four costs (i.e. direct financial payments; transaction costs; non-enforceability; and misallocated resources), especially non-enforceability. However, its cost is in terms of foregone investment. Firms simply chose not to come to Kenya or reinvest in an uncertain environment. Risk and uncertainty can be caused by other factors, e.g. political and financial instability. In this case, however, the uncertainty arises from the unpredictability of corruptive behavior, and the opportunity to invest either in less corrupt and uncertain environments or in markets, e.g. China, whose size and opportunity makes such uncertainty and risk more bearable.
It may not be possible to estimate the costs of what is in the end counterfactual behavior, namely investment that might otherwise have gone to Kenya were it not so corrupt, since clearly other factors, e.g. poor economic performance, may also have weighed in such decisions. However, the fact that foreign and domestic investment – as a share of GDP – are still stagnating at levels below what is required for more rapid growth, would suggest, at the very least, that reducing corruption, and therefore uncertainty, should help stimulate investment.
CHAPTER THREE
FINDINGS
Devising a methodology that can unambiguously establish the existence or degree of corrupt practices is difficult. This observation especially applies to motive. Those public servants earning meager salaries might well consider feeding their families or following a code of conduct as a choice among the lesser of two evils. In light of such circumstances, the Bank observed that
“surveys of governance and corruption rely on the subjective view of outsiders, namely expert assessment, country analysts, or foreign investors”
(WB, 1994a, page 05).
Likewise, because of the illegality of corrupt practices, most PSOs are reluctant to admit to them. Without support from the public sector, data required for anti-corruption policy-making is hard to come by. Collecting data other than through targeted surveys can either under or over-state the degree of corruption. This possibility especially applies to studies that did not involve private sector firms, but only politicians (especially Kleptocratic rulers).
Contrary to these opinions and to the great satisfaction of the author, people have generally been very willing to discuss corruption even though it does pose considerable risk. Among those interviewed at length have been members of both major opposition parties as well as the ruling party, public sector employees (some of whom are now retired but previously held senior positions), as well as members of the financial elite who have been and/or are deeply involved in corrupt practices. Their willingness to converse on an individual but strictly confidential and anonymous basis appeared to have outstripped the fear of legal repercussions and the loss of earnings.
Semi-structured interviews were largely used for data collection. By conversing with many people , a wide array of perspectives that have helped to clarify more generally documented material has been obtained . Topics of discussion included forms of corruption in Kenya, some of which were put into a broader context by those officials who had international experience.
For purposes of quantifying the size and incidence of corruption, a comparative review of methodology and findings from surveys sponsored by the WB, TI, UNDP, and USAID, would be necessary. This task lies beyond the scope of this study, which is concerned with manifestations of different types of corruption.
Research presented in this report is based mainly on the analysis of the writings of the World Bank; authors that have researched the WB themselves and the Center for Governance and Development. African authors such as Aseto and Kibwana have also been of great value in the data collection process. On data specifically related to Kenya, TI documentation and John Githongo (Country Director) have been of paramount importance, as has the CGD’s Policy Brief and Wachira Maina. The author has attempted to clarify the boundaries among different forms of corruption.
Five Costs
Direct Financial Payments
In a survey, Transparency International collected data corresponding to the costs and prevalence of direct financial payments in Kenya. The survey consisted of a sample of three sectors of the economy, the small and medium sized enterprise sector (Jua Kali), the corporate sector (industries and professional associations), and a random street sample, totaling 1164 respondents (Transparency International, 2002, page 01). The structured interview devised by TI sought to accumulate data on 6 to 10 organizations (government); the frequency of corruption; the extent to which it effected profit (private and enterprise); and the total effect on Kenya’s GDP. Other indicators such as gender; age; education level; and socio-economic status were taken into consideration.
The survey found that “sixty-seven percent of the respondents’ interaction with public institutions … involve[d] bribes or bad service, harassment or no service if a bribe [was] not paid” (TI, 2002, page 05). Of the sixty-seven percent, seventy-eight percent of all corrupt transactions took place whilst respondents sought “regulatory and law enforcement”, that should have been provided as a free service by the government. The five most damaging institutions were the (1) Ministry of Works, (2) the Immigration Department, (3) the Ministry of Lands, (4) the Nairobi City Council, and (5) the Judiciary, with the gap between the regulatory & law enforcement agencies and the Ministry of Works (the second highest) being considerable.
It was also found that where direct financial payments were most prevalent, those most liable were the least educated and poorest i.e. the majority of the population in Kenya . This finding coincided with the fact that “most bribes involve[d] relatively small sums paid very frequently” (TI, 2002, page 06). With the average income of respondents being Ksh. 26,086.00, 75% of all transactions were below daily bribes of Ksh. 1000, 63% below Ksh. 500.00, and 41% of all transactions being Ksh. 200.00 and below (TI, 2002, page 06).
Education level Encounter bribery in interactions with the public sector (%)
Primary and below 75.0
Post-primary training 75.9
Secondary Schooling 67.3
Post secondary education 62.7
University 63.0
Income p/ month (Ksh.) Encounter bribery in interactions with the public sector (%)
Up to 5,000 74.4
5,000 – 10,000 63.2
10,000 – 25,000 61.7
25,000 – 50,000 64.9
50,000 – 100,000 61.9
100,000 and above 61.9
(Transparency International, 2002)
This is not revealed only by its prevalence, incidence, and frequency, but rather, its ‘trends’. TI asked respondents where they felt corruption has rise/fallen (i.e. which institutions), over which years, and the magnitude of change. Of the 8700 responses, 5.5% of all respondents stated that corruption had risen minimally over the past year (2000-2001); 10.6% stated that it had risen moderately; and 18.1% stated that there had been a sharp increase in corruption. The figures were comparable to studies of the previous three and five years.
Years past Partial increase % Moderate increase % Sharp increase %
1 year 5.5% 10.6% 18.1%
3 years 4.0% 14.2% 15.0%
5 years 6.0% 10.3% 16.2%
(Transparency International, 2002)
Those that stated that corruption had decreased, mainly listed a “partial decrease”. Corruption, therefore, can be said to have increased in the eyes of most respondents, and as affecting the majority of the population.
Reduction in the overall size of the public service may not prove sufficient since corrupt officials have been able to act with impunity. More fundamental reform, including the enforcement of strict guidelines, is necessary.
Transaction Costs
As previously defined, transaction costs relate to the time wasted in essentially unproductive activity caused by corrupt practices.
The case study described below, which also illustrates the problems associated with non-enforceability of contract, may appear to be extreme. In fact, in Kenya, it is a regular occurrence. Employees of the Kenya Power and Lighting Corporation (KPLC), a State monopoly, in this case collaborated with those of the Kenya Commercial Bank (KCB) to defraud several enterprises and transfer funds into private bank accounts. The Fairview Hotel was one of these enterprises (see Attachment 03). The facts in chronological order:
§ Fairview Hotel (FH) paid KPLC Cheque No. 2276, drawn on KCB Milimani Branch (Nairobi) for Ksh. 465’137.20 for three bills, for two accounts on 8th September, 1997 and obtained receipts
§ On 7th February 1998, i.e. five months later, KPLC debits the two above accounts claiming that the cheque had bounced
§ The driver of the hotel who had paid in the crossed cheque and obtained the receipts on September 8 is arrested on grounds of fraud.
§ FH immediately gives the KPLC a copy of the cheque indicating that it had been received and officially cleared. KPLC does not reply.
§ On 7th may, 1998, i.e. three months later, KPLC threatens to disconnect the hotel’s power supply. KPLC also alleges that the hotel cheque was in fact not accredited to their account.
§ FH immediately asked the KCB to investigate. It establishes that contrary to established bank practice, funds withdrawn from the FH account were not accredited to the KPLC, the payee, but to an unknown third party.
§ KPLC threaten to cut off all electricity if not paid. FH therefore arranges to make a second payment to the Company.
§ On June 6th, 1998 KCB Milimani state that they will further investigate the matter
§ The court case against the driver is postponed several times and is finally heard in Feb. 2000, i.e. two years after being charged. The case drags another ten months.
The transaction costs of this otherwise clear-cut case of fraud, in terms of time wasted by hotel, commercial bank, Central Bank, and electricity company executives and staff, was enormous. Since this case is not exceptional, the wastage, purely in human terms, is enormous and overall, a severe burden to the economy. Such costs also help explain why otherwise non-corrupt individuals will be induced to avoid a protracted, open ended and uncertain legal process through a direct financial payment, viz. bribe. Also at issue is the disincentive of exposing corrupt behavior. Neither of the two principal establishments, namely a state enterprise and a commercial bank, seemed perturbed by evidence of fraud or prepared to take appropriate action.
This case study also illustrates the limitations to reducing the incidence of corruption by minimizing the State’s direct involvement in the economy, i.e. by reducing the scope for State Capture. Although one of the establishments was a State monopoly, the other was a commercial bank, which presumably had both a direct interest in detecting and stopping fraud. The fact that it was only prepared to act after a long delay suggests that it remains wary of offending powerful officials in government including the Central Bank of Kenya.
Privatizing the power company would definitely lead to greater transparency and accountability in its financial transactions and allow management to remove corrupt officials more easily. Nonetheless, what this example suggests is that corruption is deeply rooted in the practices of many businesses, private as well as public. It also clearly underscores the overriding importance of a professional, well paid, and non-corruptible court system. Without it, businesses and firms will continue to confront the uncertainties and costs of corruptive behavior.
Non-enforceability
If the judicial system in Kenya were not corrupt, cases such as the one depicted above would be settled in no more than a few months. Presentation of a copy of the front and back of the cheque, a copy of receipts obtained, and proof of the transfer of funds would be sufficient. Examples of corruption in the judiciary are numerous. In 1988, a British businessman, Mr. George Papaeliopulos, commenced development of “Coastal Aquaculture”, a project consisting of a shrimp farm and a tourist resort in the Ngemeni Peninsula (Kenyan Coast). Out of the 13,000 hectares purchased, some belonged to private interests, but the majority were granted by the Government of Kenya. “Coastal Aquaculture” had, by this point, invested US$ 25 million in feasibility and other studies. In 1993, the GOK put a compulsory purchase order on the shrimp farm site, claiming environmental concerns, despite the fact that the GOK had previously allowed the United States Marines to use live ammunition for training exercises at the site. Members of President Moi’s family and senior government officials were alleged to be among those involved in the illegal land reallocation scheme.
“Coastal Aquaculture” sued the GOK for US$ 1.00 billion in a Kenyan court, However, “attempts to enforce court judgments in Kenya … failed” (www.ft.com, July 21st, 2001). On July 19, 2001, Mr. Papaeliopulos took up legal action against the GOK in the Comesa Court (Common Market for Eastern And Southern African States). Attorney General, Mr. Amos Wako failed to attend hearing in Comesa Court, and the case was suspended. “Coastal Aquaculture” later sued the GOK for case adjournment and all expenses incurred (i.e. legal fees, travel expenses, etc.).
In 1996, a Kenyan High Court judged in favor of “Coastal Aquaculture”, stating that the Minister of Lands had behaved in a “mischievous” manner, By that point, the illegality of the “irregular acquisition [of the plots] by people with high-level connections” (www.nationaudio.com, October 26th, 2001) was further depicted when the plots were found to have been sub-divided and sold to 40 different private companies and individuals, one company “Tiro Holdings Limited” belonging to President Moi’s son, Jonothan. The case has still not been completely settled. This high profile case underscores the problems raised for would be investors by the non-enforceability of contracts.
This case occurred as the involvement of the state in the economy was being reduced. Consequently, it illustrates the limitations of combating corruption through “State Capture”. Unless there is a strong, independent judicial system, elites can still “change the rules of the game”.
Misused and Misallocated Resources
Wasted Expenditure
In December 1988, the Ministry of Home Affairs and National Heritage requested the Treasury to sole source construction of the Garissa Medium Security Prison
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