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State capture will undermine the Big Four Agenda and the future of Kenya

Wednesday October 9 2019

By LUIS FRANCESCHI
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By KARIM ANJARWALLA
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The weather is not perfect and society has lost its natural kindness and human touch. But systems work clockwise. Public transport is punctual, efficient and clean. Parks are sacred, meetings happen on time, professionals work and students study. Clergymen pray and drunkards drink.

This is the UK in the 21st century. It may become a divided kingdom. It is at war with itself, on the verge of an uncertain Brexit, supported by masses in England and Wales, driven by populist leaders and attacked by the more educated and exposed.

No matter in which camp you pitch your thoughts, one gets the impression that neither side has thought about this matter in depth. Whatever happens, change is in the air and the UK is on the verge of a drastic, irreversible and unforeseeable change.

While the Great Britain is at war with its own destiny, some of its former colonies have put their destiny up for sale, to the best bidder, and Kenya is one of them.

I departed Kenya at the end of September, to spend three months as a visiting fellow at Mansfield College, University of Oxford. Mansfield hosts the most impressive human rights institute in Oxford, the Bonavero Institute of Human Rights.

The day before my departure, I had a long conversation with Karim Anjarwalla, a commercial lawyer based in Nairobi. We spoke about the courts, politics and business.

Karim, like many other good lawyers, economists, politicians and clergy, is deeply concerned with the depth of rottenness and cartel capture in our system. The matter is serious and it may have reached the level of ‘state capture’.

A corrupt state often has just laws which are undermined by corrupt individuals or by sophisticated networks of corruption. Kenya is one of those states. However, Karim argues that Kenya has now graduated. Kenya is rising fast into an elite group of nations. Nations defined by “state capture”.

According to Karim, the capture was insidious at first and so we barely noticed it. As time went on and in keeping with our athletic prowess, we are now racing to catch up with those states, scattered around Africa, South Asia and South East Asia and in parts of South America. Keeping in step with the tradition of some of our great athletes, whilst we may have started at the back of the pack we are now racing past many other nations.

POWERFUL INTEREST GROUPS

But how does one diagnose state capture? Its main characteristics are these: the state is so corrupt that it has gone beyond not respecting the rule of law. Instead, laws and policies are enacted to specifically suit the interests of certain powerful interest groups. They may be business people, politicians or indeed other nations. In other cases, laws and law enforcement agencies are simply tools for hire, for political or business needs, just as one can hire a pirate. Often, laws that ought to be enacted are not, because to do so would inconvenience the pirates (because it is pirates that hijack things, after all).

The devil is often in the detail and the detail is devastating. But the problem with detail is that it is easily missed. Before you know it, the ship of state that you were sailing on, which you hoped would be a luxury liner, has turned into a pirate’s brigantine.

In 2013, Parliament passed the Value Added Tax Act 2013 subjecting books to VAT, but letting helicopters go free. This was not a mistake. It was repeated in 2014 and the following years as well. Maybe Treasury was desperate to balance accounts and make ends meet, but why exempt helicopters?

I explained a few years ago that the First Schedule of Exempt Supplies of the VAT Act of 2013 had exempted certain items instead of zero-rating them. The difference between zero-rating and exempting is important. Local suppliers of exempted goods cannot charge VAT, which is output VAT, even though they have already paid VAT, which is input VAT. This makes local supplies more expensive, at least by the cost of input VAT, which may range from eight percent to 16 percent.

But why legislate nonsensical exemptions, such as helicopters of an unladen weight not exceeding 2,000 kg and helicopters of an unladen weight exceeding 2,000 kg? So, basically all helicopters are VAT exempt. Why should legislators decide to impose VAT on text books, while exempting helicopters? Is this a war against culture? Not necessarily. Someone needed to import helicopters, and wanted to do so without paying tax. So why pay tax when you can change the law? This is state capture.

This year, the President assented into law the Statute Law (Miscellaneous Amendments) Act. Amongst the amendments there is a reduction from 90 percent to 50 percent of the threshold at which those who acquire shares in a company can force, against their will, the other shareholders in the company to sell their shares. Karim explains that the reduction is huge and 90 percent is virtually a global norm, designed to ensure the protection of minority shareholders.

MINORITY OPPRESSION

Without any apparent prior consultation and despite apparent protests in Parliament (as recorded in the Hansard) this amendment sailed through Parliament on 13th June, 2019. A tsunami of legalised minority oppression may follow. Our stock exchange, struggling to add new companies to its list, may find many companies applying to de-list. Why would they not? Now, if an offer is accepted by more than 50 percentage of shareholders, the rest can be forcefully exited.

The question again arises, why was this amendment, not requested and entirely out of keeping with global norms, enacted? Someone powerful somewhere needed this law, so they captured our state, without much effort.

A final example, we built a new railway and without any legal support, forced all importers to carry their goods on the railway. There are cases of businesses who wanted their goods to go to Malindi and elsewhere along the coast being forced to transport them first to Nairobi before bringing them back to the coast. Have we literally lost our collective minds? So, who captured us in this case? The railway did not come cheap and we have debts to pay.

So, silently, as we talk of Vision 2030, of our Silicon Savannah and the Big Four Agenda, our country has been taken hostage.

Prof Luis Franceschi, founding dean of Strathmore Law School and Visiting Fellow, University of Oxford.

Karim Anjarwalla is Managing Partner of Anjarwalla & Khanna ALN Advocates.