Sh1 billion Mumias gift is bad politics and hurts the economy
What you need to know:
- This money was not provided for in the regular budget process, but is to be funded through a supplementary budget for the year that ended in June 30, 2015.
- In effect, legislators and the Executive have simply diverted money from poorer, payslip-bearing tax payers to the corporate owners of equities.
- It’s unclear whether anyone has the courage to pull the plug on this and other state-owned firms that are truly a drain on public resources.
No explanation given by those who claim to understand the administrative challenges facing Mumias Sugar Company convinces me that spending more public money in the manner that has been chosen is good economics or politics.
The urgency with which a large dummy cheque for Sh1 billion was issued signals that the Executive has succumbed to pressure from selected legislators, ostensibly to show even-handedness and curry support for popular regional economic causes.
While this decision may have been determined by both political and economic motives, it illustrates several serious shortcomings in Kenyan policymaking.
The first is that the Executive and Legislature are unable to resist political pressure to continue funding poor-performing firms and state-owned enterprises. A sugar industry that has struggled to hold its own for 30 years is still being supported, merely because we are loath to admit errors and stop throwing more money at the problem.
The second is that many legislators from the Western belt hailed the cash infusion by the Executive that is supposed to enable the firm continue operations.
The disturbing fact for budget policy is that this money was not provided for in the regular budget process. It is now to be funded through a supplementary budget for the year that ended in June 30, 2015.
That the Treasury is setting before Parliament a supplementary budget for the previous budget year of 2014-2015 after the estimates for the current financial year of 2015-2016 were discussed didn’t strike legislators as odd. This is purely bad budgeting practice and its constitutional standing is, at best, shaky.
Third, even conceding that the politics of the moment ensured that the administration’s hands were bound, the real loser is still the taxpayer. This is because Mumias Sugar Company has private owners, and the public support in the initial gift Sh1 billion is overt corporate welfare. Private owners of equity in the corporation are receiving a subsidy without a direct dilution of their shares.
In effect, legislators and the Executive have simply diverted money from poorer, payslip-bearing tax payers to the corporate owners of equities. I am concerned that the Legislature as a whole did not question whether this is just.
Fourth, it is unjust to direct the Sugar Development Levy, generated from sugar consumers, to a firm that has been mismanaged.
Treasury has stated that a portion of the Sugar Development Levy will be added to the initial gift of Sh1 billion mentioned above. The levy is intended for development of the sector, going by its name, but it ought not to be available to uncompetitive, poorly managed firms.
Using the levy in this manner calls into question the existence of both the fund and the regulator that administers it.
It’s not evident that sending cash to Mumias Sugar Company is the best way to assist sugarcane farmers. If Kenya’s legislators are concerned for the farmers who are owed by Mumias Sugar Company, they could take the least bad option of appropriating funds and paying farmers directly.
The books of Mumias Sugar Company would be carefully scrutinised and the Sh1 billion gift split among farmers in proportion to the outstanding debt owed to them, ensuring that the corporation gains temporary relief from debtors and the farmers receive the cash at low administrative cost.
Government should not trust a firm that couldn’t even collect money due it to use new cash for the right priorities. Granted, the Mumias Sugar Company is an important firm in Kenya’s industrial sector, but my fear is that the gifts bestowed to it have merely locked this and future administrations in the dance for more subvention.
It’s unclear whether anyone has the courage to pull the plug on this and other state-owned firms that are truly a drain on public resources.
As an oversight body, Parliament should insist that Treasury draft and present a comprehensive bailout policy prior to any supplementary budgets for this year.
If bailouts are to happen, then Kenyans should understand the level of public exposure to expect in future bailouts because we do not hold an inexhaustible reserve of taxes.
Kwame Owino is the Chief Executive Officer of the Institute of Economic Affairs (IEA-Kenya), a public policy think tank based in Nairobi. Twitter: @IEAKwame
