VZCZCXYZ0000
PP RUEHWEB

DE RUEHNR #0219/01 0120803
ZNR UUUUU ZZH
P 120803Z JAN 07
FM AMEMBASSY NAIROBI
TO RUEHC/SECSTATE WASHDC PRIORITY 6615
INFO RUEHXR/RWANDA COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RUEAWJA/DEPT OF JUSTICE WASHDC

UNCLAS NAIROBI 000219 
 
SIPDIS 
 
SENSITIVE 
 
DEPT FOR AF/E, AF/RSA 
DEPT ALSO PASS USTR FOR BILL JACKSON 
TREASURY FOR VIRGINIA BRANDON 
 
SIPDIS 
 
E.O. 12958:  N/A 
TAGS: ECON PGOV EINV ENRG EFIN KCRM EPET KCOR KE
SUBJECT: KIBAKI SIGNS BILLS THAT MAY SPUR ECONOMIC GROWTH 
 
SENSITIVE BUT UNCLASSIFIED 
 
¶1. (SBU) Summary: On New Year's Eve 2006, Kenyan President Mwai 
Kibaki signed into law 11 more bills, including important laws with 
important implications for the financial and energy sectors.  This 
tally adds to several economic development-related bills passed 
earlier in the parliamentary year aimed at boosting the cotton 
industry, better regulating maritime affairs, and reforming the 
public statistics function.  Many of these new laws call for the 
reform of existing regulatory bodies, or the establishment of 
altogether new ones.  While the clear intent is that these new 
structures will bolster economic development and poverty reduction, 
the long-term impact, good or bad, will depend on implementation, 
which in any case may take some time.  End summary. 
 
----------------------------- 
A Productive Legislative Year 
----------------------------- 
 
¶2. (U) On December 31, 2006, Kenyan President Mwai Kibaki signed 
into law 11 bills passed by Parliament before it went into recess 
earlier that month.  This cable focuses on five of these bills 
(Microfinance, Finance, Banking, Insurance Amendment, Energy, 
Witness Protection), plus three others Kibaki signed in July and 
August (Cotton, Maritime and Statistics Bureau).  Kibaki touted the 
myriad social and economic reforms contained in these and the other 
laws he signed on December 31 as major initiatives of his 
administration.  While some in the private sector have objected to 
specific provisions in some of the bills, on balance they are 
expected to positively address some of the bottlenecks and 
constraints to economic growth -- if they are implemented 
effectively. 
 
---------------- 
Financial Sector 
---------------- 
 
¶3. (SBU) The Microfinance Act provides for the licensing, 
regulation, and supervision of the microfinance sector, and follows 
a long history of mismanagement and embezzlement in Kenya's 
micro-finance institutions (MFIs).  MFIs provide financial services 
to over 18 million Kenyans who are rarely served by mainstream 
banking institutions.  However, they have operated without an 
appropriate policy and legal framework, with several of them conning 
depositors out of millions of shillings.  In just one recent example 
among several, CBK closed down Akiba Microfinance in August 2006 for 
taking deposits without registering as a financial institution, and 
the directors were taken to court for stealing millions of shillings 
from depositors. The new law provides the legislative framework for 
regulating deposit taking by MFIs in Kenya and gives the Central 
Bank of Kenya (CBK) powers to regulate MFIs.  The new law should not 
only safeguard depositors, but also facilitate monitoring of money 
transfers associated with money laundering and other illegal 
activities.  (Comment: The Act has the potential to allow MFIs to 
increase their capital base (by deposit taking), making more money 
available for lending to average Kenyans. However, the practical 
transition to a deposit-taking institution will take time and 
resources, and will also considerably stretch the regulatory 
capacity of the CBK.  End comment.) 
 
¶4. (SBU) The Finance Act mandates a set of new taxes to raise Ksh250 
million ($3.4 million) to meet the government's revenue targets. 
Members of Parliament (MPs) in November 2006, however, rejected 
other proposed tax-raising proposals, thus adding marginally to the 
forecast $397 million budget deficit for 2006-07.  (Comment: The GOK 
should have little difficulty financing the budget deficit through 
sales of treasury bonds and bills.  While Parliament's rejection of 
proposed tax measures may have been politically self-serving in some 
cases, it is encouraging to see the legislature playing a more 
active oversight role, rather than simply accepting whatever the 
executive branch presents, as has been the pattern throughout 
Kenya's history.  End comment.) 
 
¶5. (SBU) The new Banking Amendment Act of 2006 maintains the 
Ministry of Finance's control over interest rates and introduces the 
"in Duplum" Rule, which limits accrued interest charges to no more 
than the outstanding principal.  Non-performing loans (NPLs) are 
estimated at Ksh103.6 billion (about 1.4 billion) or 22.7% of total 
outstanding loans in September 2006, but have been declining as a 
share of banks' portfolios as economic growth encourages new 
lending.  (Comment: Parliament again defied the administration, 
which sought to remove Ministry of Finance controls over interest 
rates, a step long overdue.  Moreover, the new provisions of the 
Banking Act are likely to encourage financial institutions to 
continue their focus on short-term loans at the expense of 
longer-term development loans.  The upside is that the ceiling on 
accrued interest will restrict growth in existing NPLs, and may 
encourage banks and financial institutions to write-off NPLs earlier 
and more cleanly.  End comment.) 
 
¶6. (U) The Insurance (Amendment) Act of 2006 establishes an 
independent regulator, the Insurance Regulatory Authority (IRA), to 
replace the ineffective Commissioner of Insurance.  Key players in 
the industry believe the law will encourage more people to purchase 
life insurance, which currently has a low penetration rate at 2% in 
Kenya.  The new law allows insurance agents to sell policies from 
any number of underwriters, but increases the required guarantee to 
get a brokerage license from Ksh1 million (about $13,700) in the 
form of government securities to KSh5 million (about $68,500), and 
raises other requirements as well.  The law caps individual accident 
compensation claims at Ksh3 million (about $42,000), but enables 
insurance companies to honor compensation claims more promptly. 
 
------------------------------------- 
Energy Sector Regulation Consolidated 
------------------------------------- 
 
¶7. (SBU) The Energy Act of 2006 represents a major effort by the 
government to re-organize the entire energy sector and follows 
extensive stakeholder consultation.  It establishes the Energy 
Regulatory Commission (ERC) to regulate all sources of energy, and 
the Rural Electrification Authority to manage the rural 
electrification program. The ERC's regulatory mandate includes the 
import, export, generation, transmission, distribution, supply and 
use of electrical energy, petroleum products, and other forms of 
energy.  The law empowers the ERC to license new transmission 
companies to compete with the existing monopoly, Kenya Power and 
Lighting Company.  The ERC is also charged with protecting the 
interests of consumers, investors, and other stakeholders.  In the 
context of complaints from consumers and politicians about price 
gouging by energy companies, the law authorizes the Minister of 
Energy, on the recommendation of the ERC, to regulate retail prices 
of petroleum and petroleum products.  While this appears to give the 
government the power to set gas prices at the pump, the private 
sector industry association, the Petroleum Institute of Eastern 
Africa, does not think the government will ever exercise this 
authority.  On balance, it likes the bill because it will greatly 
enhance the capacity for effective regulation and enforcement in the 
energy sector.  (Comment: We think the jury is out.  It is unclear 
whether the Energy Act's attempt to address high fuel costs through 
regulation will deter investment, importation, or sales.  End 
comment.) 
 
--------------------------------------------- 
Whistleblowers: Protected or Left Vulnerable? 
--------------------------------------------- 
 
¶8. (U) The Witness Protection Act of 2006 is aimed at improving 
prosecution and reducing Kenya's serious crime problem, and also 
offers protection to whistleblowers.  Under the Act, the Attorney 
General (AG) is required to establish and maintain a witness 
protection program and to protect the safety and welfare of 
witnesses who give evidence in criminal cases or record statements 
with the police or other law enforcement agencies. The law gives the 
AG wide discretion over who will be offered protection. 
 
¶9. (SBU) Human rights and anti-corruption groups have pointed 
complaints about the new law, however.  Critics say the AG should 
not have discretion over the fate of witnesses testifying adversely 
against the State.  The Kenya Chapter of the International 
Commission of Jurists told the press the new law does not address 
witnesses who might have vital information to give to parliamentary 
committees, the police or other legally established investigation 
authorities.  (Comment: We do not expect the Witness Protection Act 
to have a significant impact on corruption, mainly because the 
Official Secrets Act bars civil servants from revealing information 
about much public sector corruption to "unauthorized persons" under 
pain of prosecution.  End comment.) 
 
--------------------------- 
Bills Signed in Summer 2006 
--------------------------- 
 
¶10. (U) President Kibaki signed the Cotton (Amendment) into law in 
July 2006 to establish the Cotton Development Authority (CDA) and 
promote the revival of the cotton industry by providing a legal 
framework for the management, regulation, monitoring and direction 
of the industry.  The Act is supposed to give farmers and 
stakeholders greater control in the running of the sector.  Kenya's 
cotton and textile industry collapsed in the 1990s, after the 
government liberalized trade.  Together with the extension of AGOA 
third country fabric provisions, the GOK hopes the CDA will enable 
Kenya to produce cotton fabric for AGOA export garment producers. 
 
¶11. (U) Signed in August 2006, The Kenya Maritime Authority Act 
establishes the Kenya Maritime Authority (KMA) and gives it the 
responsibility to monitor, regulate and coordinate activities in the 
marine industry, including marine environmental issues.  KMA will be 
the regulator for the Kenya Port Authority (KPA), and thus have 
oversight over port security issues, including implementation of 
International Port and Ship Security (ISPS) requirements and 
International Maritime Organization (IMO) obligations. 
 
¶12. (SBU) President Kibaki signed the Statistics Bill in July 2006 
to upgrade the Central Bureau of Statistics (CBS) from a GOK agency 
into a more autonomous parastatal, the Kenya National Bureau of 
Statistics.  The agency will still be responsible for the 
collection, compilation, analysis, publication and dissemination of 
statistical information, and the coordination of the national 
statistical system.  The change is meant to increase the 
independence of the statistical agency (in response to complaints of 
GOK manipulation of census data for partisan purposes), improve the 
reliability of the product, and reduce GOK expenditures.  (Comment: 
The perceived independence and impartiality of the new National 
Bureau of Statistics will depend on the composition of the Governing 
Board the GOK appoints.  End comment.) 
 
 
----------------------------------------- 
Implementation Dates of New laws Uncertain 
----------------------------------------- 
 
¶13. (U) Although all the bills were signed into law, implementation 
may be significantly delayed to allow for the drafting and enactment 
of implementing regulations.  For example, the Public Procurement 
and Disposal Act was signed into law in November 2005, but did not 
come into effect until over a year later on January 1, 2007 because 
the implementing regulations were not completed and gazetted until 
December 2006. It is therefore not clear when Kenya will feel the 
impact, good or bad, of the new laws on economic growth and poverty 
reduction, especially those that call for the establishment and 
staffing of altogether new regulatory bodies. 
 
------- 
Comment 
------- 
 
¶14. (SBU) Kenya's Parliament was more productive in 2006 than last 
year, and that alone is a good story.  While some might say no law 
is better than a bad law, in this case, the consensus is on balance 
positive, namely that the bills reviewed here will eventually spur 
economic growth and development.  The Microfinance Act was badly 
needed and is clearly the most likely winner.  We note USAID/Kenya's 
KEMCAP program, which launched in 2004, was instrumental in 
catalyzing relevant Kenyan institutions to get the bill drafted and 
passed.  For the others, the potential is less certain.  Kenya 
clearly needs stronger and better-governed regulatory bodies in many 
economic spheres, and several of the bills passed in 2006 are at the 
very least a well-intentioned effort to remedy this deficiency in 
key sectors.  Only time and implementation will tell if they have 
their intended effect.  RANNEBERGER