The Market Dynamics of Corruption in Kenya
Category: Corruption
By: Leo Kipkogei Kemboi,
- Introduction
In the last three decades, Kenya has been bedeviled with public and private sector corruption. In the public sector, the most prominent forms of corruption include loss of public funds and wanton waste.
The severity of public sector corruption forced the drafters of the Constitution of Kenya, 2010 and subsequent legislation to codify the process of how governments buy their goods and services(including human labour) and also how it accounts for the same. The subsequent legislation referred to in this case includes Public Finance Management Act, Public Procurement and Disposals Act, Public Service Commission and Public Audit Act. From looking at the public finance architecture from the Constitutional and legal standpoint, the provisions are comprehensive and set out an elaborate process on how public resources shall be used and accounted for. The provisions in the chapters of Public finance, executive, Judiciary and Parliament can be seen as a bundle of public finance conventions that sought to set principles of how the resources in Kenya are managed. There’s a lot of literature on how corruption has besieged the public sector. To cite a few, they include Kiai(2009)[1], Nyambariga (2016)[2], Kabathi(2009)[3], Schröder(2009)[4], Ndii(2020)[5], andSalmon(2002)[6].
The drafters of the Constitution of Kenya 2010 gave more powers and independence to an entity outside the National Police Service to investigate issues around misuse of state power and resources. The drafters gave the entity (Ethics and Anticorruption Commission) and giving it autonomy by designating it as an independent commission. The 2010 Constitution also introduced the separation of powers where Parliament has bestowed the role of providing checks and balances to all arms of government. The 2010 Constitution went as far as disentangling the powers of the Purse from the Executive and handing them to peoples’ representatives(Parliament). The powers of the purse essentially in this case the fiscal policy. The Constitution has various provisions requiring a confirmation process for high-ranking officials placed in the management of resources. This ensures that the persons placed on the management of public resources are persons of integrity.
- Definition of Corruption
In this brief, I adopt the definition of corruption from Vito Tanzi in Begovic (2005) where Corruption is defined as the calculated non-compliance with the arm’s-length principle to derive some advantage for oneself or related individuals from this behavior [7]. This definition of corruption must satisfy these basic principles described as follows.
- The arm’s-length principle requires that personal or other relationships should play no part in the economic decisions that involve more than one party. Equal treatment of all economic agents is essential for a well-working market economy.
- There must be some be bias towards particular economic agents, which then violates the arm’s-length principle which fulfills a necessary condition for corruption. If there is no bias, there is no corruption. There are two additional necessary conditions for corruption or rather conditions that must be fulfilled for observed bias which essentially means that it is non-compliance with the arm’s-length principle to be specified as corruption.
- The first condition is that the bias must be an intentional – accidental violation of the arm’s-length principle because, for example, imperfect information, does not represent corruption.
- Second, there must be some advantage for the individual who violates the arm’s-length principle; otherwise, there is no corruption.
- Estimating Corruption Losses
Despite a new Constitution and legislation that elaborates extensively on the mechanisms on the protection of resources, the loss of resources has exceeded its expectations. In the last decade, the independent state-funded anticorruption agency Ethics and Anticorruption Commission claimed that Kenya loses one-third of its budget annually putting the figure at approximately $6 billion in 2016[8]. This approximation puts Kenya’s loss of public resources as a moving average. The President of Kenya also claimed that Ksh 2 billion is lost daily[9]. On an annual basis, the amount of public money lost would be equivalent to Ksh 730 billion or $6.8 billion. This is equivalent to 7% of Kenya’s GDP in 2020.
- Different forms of Corruption
Corruption in Kenya exists primarily in two forms. In this article, I distinguish them by the basis of how its manifests.
- The Corruption where firms and Individuals Rig Markets and Influence Regulatory Regimes
- This is the situation where individuals in positions of power influence violate the armlength principle in undertaking functions only undertaken by government entities which include regulation, licensing and approvals etc. This form of corruption is difficult to witness and needs technical evaluation, studies. This form of corruption is reinforced by complex licensing and regulatory regimes in Kenya. This form of corruption is durable and can go undetected unless through expert studies in the field. In practice, this form of corruption raises the cost of production in the economy. In most economies, it consists of anticompetitive behaviours and unfair trading practices. In most cases in Kenya, firms have to confer benefits to persons at the policy decision level to get the economic policy of their liking or be exempted unprocedural from a regulatory regime. I estimated the size of this corruption to be an average of Ksh 1 trillion on a calendar year basis. This could have had far-reaching consequences on the development of different types of markets in Kenya.
- The corruption where supply and demand-side players in the fiscal policy in this case Taxation and government spending.
- On government spending- This form of corruption is where the demand side actors who collude unlawfully with government officials to confer themselves a benefit are normally referred to as tenderpreneurs[10]. Other forms of unlawful collusions relate to how the government buys labour either through direct employment, contracting individuals or firms. This form of corruption is not complex and depends on undisciplined fiscal policy where programs are initiated and, providing certainty on Tax policy and administration and lowering Taxes. The pervasiveness of this form of corruption is dependent on fiscal expansion and programs that don’t have clear objectives. By this, I imply the projects that don’t meet the threshold of economic analysis.
- On the Taxation side- private individuals, firms and, government officials collude to compute taxes wrongly, misclassify items to get lower tax rates to evade or through any other means. I estimate the size of this corruption market to be less than 2.5% of targeted revenue or less than Ksh 50 billion at any time in the fiscal year. The explanation of this form of corruption is largely explained by the complexity of the Kenyan Tax Code. A select number of five taxes: Income tax act, customs and excise act, Value Added Tax, Tax Procedures Act and Tax Appeals Tribunal Act all come to almost 1300 pages. The complex tax administration makes it difficult for citizens and tax administrators (in this case Kenya Revenue Authority).
- The Reasons why Corruption Problem evolved Faster to become Systemic
The argument that the corruption problem in Kenya is a result of a lack of laws or provisions that prohibit wastage of resources or public officials conferring themselves of public resources is very weak. So, the most important question is where did the ball fall? To answer these questions, I identify majors problems that lie on the supply side that made the public sector corruption evolve to grand corruption. They are as follows,
- Parliament and Executive Operating outside the Constitution
The 2010 Constitution is embedded with the principle of the doctrine of separation of powers which was a major deviation from the previous Constitution. The powers to appropriate funds, determine the vertical and horizontal allocation of resources, raise revenue and approve borrowing was left to Parliament. At the County level, the power to raise revenue and appropriate expenditures was left to County Assemblies. On appropriations, Article 221(3) requires the accounting officers of legislature and Judiciary to submit estimates to Parliament for approval. The doctrine of separation of powers intended to separate the powers and functions of the executive and parliamentary branches to enhance accountability and transparency on the use of public resources.
Between 2010 and 2019, National Treasury submitted a budget on behalf of branches of government. Although the Public Participation was robust, the Public Finance Process was in contravention of the Constitution. When National Treasury began budget cuts in 2019, the Hon Chief Justice David Maraga in a public statement issued to the public instructed the Chief Registrar of Judiciary to take budget proposals directly to Parliament instead of National Treasury[11]. The move by Chief Justice Maraga reinforced the Constitutional principle in the budget-making process requiring each branch of government to submit estimates to the people’s representatives to make decisions.
Parliament enacted the Constituency Development Fund and put it under the National Government Constituency Development Fund (NGCDF) Board while members of the National Assembly acted as patrons for the fund. The fund is used to provide public sector entities. In doing so, Parliament was performing the functions of the executive branch of government. To make it worse, CDF was set at 2.5% of all the national government’s share of revenue as divided by the annual Division of Revenue Act enacted according to Article 218 of the Constitution as per section 4(1) an of the National Government Constituencies Development Fund Act of 2015[12]. This provided members of Parliament with the incentive to raise the budget annually.
- Disregard of the provisions of Financial Disclosures and Accountability Principles
The Institute of Economic Affairs carried out a study that identified that the most number of queries was the failure to reconcile books of accounts[13]. This implies that the entities failed to adhere to report sufficiently and meet the reporting standards as required by the financial management. By Ministries, departments and Agencies failing to report sufficient financial information, it misinformed the Parliament which is expected to provide checks and balances on other arms of government.
- Popular Narratives that influenced Fiscal Policy
In the earlier 2000s and the runup to 2012, the clamour for more development projects became faster. This was reflected in Vision 2030 which outlined comprehensive infrastructure plans amongst other plans. The period after 2013 to present witnessed rapid fiscal expansion to cater for infrastructural expansion. The premise is that building infrastructure could stimulate economic growth more quickly. Some of the infrastructure projects undertaken in the last decade include Rail, Roads, Ports, Pipelines. In the end, procurement fraud became a more pervasive form of corruption. Projects were too many and too rapid, with fewer meeting the value for money principle outlined in the Constitution. This ended in the non-delivery of contractual items christened as, “government bought air”.
- Conclusions
Corruption has evolved to be a market phenomenon with many players on both the demand side and supply side. Aside from requiring the executive and parliament to live within the Constitutional limits, disciplining spending, and robust project approval process, there’s a need for a radical measure that will ensure that the runaway corruption will stop.
End Notes
[3] Kabathi, Mwangi. 2009. “Public Service Besieged by Corruption.” June 2009..
[8] Miriri, Duncan. “Third of Kenyan Budget Lost to Corruption: Anti-Graft Chief.” Reuters, March 10, 2016. https://www.reuters.com/article/us-kenya-corruption-idUSKCN0WC1H8.
[10] Tenderpreneurs is a Kenyan term for politically connected persons participating in unlawful tendering processes with the aim to confer themselves public property contrary to the law and the Constitution.
[12] “The National Government Constituencies Development Fund Act, 2015.” 2015. Kenyalaw. 2015..
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The Market Dynamics of Corruption in Kenya
| Post date: Wed, Jul 7, 2021 |
| Category: Corruption |
| By: Leo Kipkogei Kemboi, |
- Introduction
In the last three decades, Kenya has been bedeviled with public and private sector corruption. In the public sector, the most prominent forms of corruption include loss of public funds and wanton waste.
The severity of public sector corruption forced the drafters of the Constitution of Kenya, 2010 and subsequent legislation to codify the process of how governments buy their goods and services(including human labour) and also how it accounts for the same. The subsequent legislation referred to in this case includes Public Finance Management Act, Public Procurement and Disposals Act, Public Service Commission and Public Audit Act. From looking at the public finance architecture from the Constitutional and legal standpoint, the provisions are comprehensive and set out an elaborate process on how public resources shall be used and accounted for. The provisions in the chapters of Public finance, executive, Judiciary and Parliament can be seen as a bundle of public finance conventions that sought to set principles of how the resources in Kenya are managed. There’s a lot of literature on how corruption has besieged the public sector. To cite a few, they include Kiai(2009)[1], Nyambariga (2016)[2], Kabathi(2009)[3], Schröder(2009)[4], Ndii(2020)[5], andSalmon(2002)[6].
The drafters of the Constitution of Kenya 2010 gave more powers and independence to an entity outside the National Police Service to investigate issues around misuse of state power and resources. The drafters gave the entity (Ethics and Anticorruption Commission) and giving it autonomy by designating it as an independent commission. The 2010 Constitution also introduced the separation of powers where Parliament has bestowed the role of providing checks and balances to all arms of government. The 2010 Constitution went as far as disentangling the powers of the Purse from the Executive and handing them to peoples’ representatives(Parliament). The powers of the purse essentially in this case the fiscal policy. The Constitution has various provisions requiring a confirmation process for high-ranking officials placed in the management of resources. This ensures that the persons placed on the management of public resources are persons of integrity.
- Definition of Corruption
In this brief, I adopt the definition of corruption from Vito Tanzi in Begovic (2005) where Corruption is defined as the calculated non-compliance with the arm’s-length principle to derive some advantage for oneself or related individuals from this behavior [7]. This definition of corruption must satisfy these basic principles described as follows.
- The arm’s-length principle requires that personal or other relationships should play no part in the economic decisions that involve more than one party. Equal treatment of all economic agents is essential for a well-working market economy.
- There must be some be bias towards particular economic agents, which then violates the arm’s-length principle which fulfills a necessary condition for corruption. If there is no bias, there is no corruption. There are two additional necessary conditions for corruption or rather conditions that must be fulfilled for observed bias which essentially means that it is non-compliance with the arm’s-length principle to be specified as corruption.
- The first condition is that the bias must be an intentional – accidental violation of the arm’s-length principle because, for example, imperfect information, does not represent corruption.
- Second, there must be some advantage for the individual who violates the arm’s-length principle; otherwise, there is no corruption.
- Estimating Corruption Losses
Despite a new Constitution and legislation that elaborates extensively on the mechanisms on the protection of resources, the loss of resources has exceeded its expectations. In the last decade, the independent state-funded anticorruption agency Ethics and Anticorruption Commission claimed that Kenya loses one-third of its budget annually putting the figure at approximately $6 billion in 2016[8]. This approximation puts Kenya’s loss of public resources as a moving average. The President of Kenya also claimed that Ksh 2 billion is lost daily[9]. On an annual basis, the amount of public money lost would be equivalent to Ksh 730 billion or $6.8 billion. This is equivalent to 7% of Kenya’s GDP in 2020.
- Different forms of Corruption
Corruption in Kenya exists primarily in two forms. In this article, I distinguish them by the basis of how its manifests.
- The Corruption where firms and Individuals Rig Markets and Influence Regulatory Regimes
- This is the situation where individuals in positions of power influence violate the armlength principle in undertaking functions only undertaken by government entities which include regulation, licensing and approvals etc. This form of corruption is difficult to witness and needs technical evaluation, studies. This form of corruption is reinforced by complex licensing and regulatory regimes in Kenya. This form of corruption is durable and can go undetected unless through expert studies in the field. In practice, this form of corruption raises the cost of production in the economy. In most economies, it consists of anticompetitive behaviours and unfair trading practices. In most cases in Kenya, firms have to confer benefits to persons at the policy decision level to get the economic policy of their liking or be exempted unprocedural from a regulatory regime. I estimated the size of this corruption to be an average of Ksh 1 trillion on a calendar year basis. This could have had far-reaching consequences on the development of different types of markets in Kenya.
- The corruption where supply and demand-side players in the fiscal policy in this case Taxation and government spending.
- On government spending- This form of corruption is where the demand side actors who collude unlawfully with government officials to confer themselves a benefit are normally referred to as tenderpreneurs[10]. Other forms of unlawful collusions relate to how the government buys labour either through direct employment, contracting individuals or firms. This form of corruption is not complex and depends on undisciplined fiscal policy where programs are initiated and, providing certainty on Tax policy and administration and lowering Taxes. The pervasiveness of this form of corruption is dependent on fiscal expansion and programs that don’t have clear objectives. By this, I imply the projects that don’t meet the threshold of economic analysis.
- On the Taxation side- private individuals, firms and, government officials collude to compute taxes wrongly, misclassify items to get lower tax rates to evade or through any other means. I estimate the size of this corruption market to be less than 2.5% of targeted revenue or less than Ksh 50 billion at any time in the fiscal year. The explanation of this form of corruption is largely explained by the complexity of the Kenyan Tax Code. A select number of five taxes: Income tax act, customs and excise act, Value Added Tax, Tax Procedures Act and Tax Appeals Tribunal Act all come to almost 1300 pages. The complex tax administration makes it difficult for citizens and tax administrators (in this case Kenya Revenue Authority).
- The Reasons why Corruption Problem evolved Faster to become Systemic
The argument that the corruption problem in Kenya is a result of a lack of laws or provisions that prohibit wastage of resources or public officials conferring themselves of public resources is very weak. So, the most important question is where did the ball fall? To answer these questions, I identify majors problems that lie on the supply side that made the public sector corruption evolve to grand corruption. They are as follows,
- Parliament and Executive Operating outside the Constitution
The 2010 Constitution is embedded with the principle of the doctrine of separation of powers which was a major deviation from the previous Constitution. The powers to appropriate funds, determine the vertical and horizontal allocation of resources, raise revenue and approve borrowing was left to Parliament. At the County level, the power to raise revenue and appropriate expenditures was left to County Assemblies. On appropriations, Article 221(3) requires the accounting officers of legislature and Judiciary to submit estimates to Parliament for approval. The doctrine of separation of powers intended to separate the powers and functions of the executive and parliamentary branches to enhance accountability and transparency on the use of public resources.
Between 2010 and 2019, National Treasury submitted a budget on behalf of branches of government. Although the Public Participation was robust, the Public Finance Process was in contravention of the Constitution. When National Treasury began budget cuts in 2019, the Hon Chief Justice David Maraga in a public statement issued to the public instructed the Chief Registrar of Judiciary to take budget proposals directly to Parliament instead of National Treasury[11]. The move by Chief Justice Maraga reinforced the Constitutional principle in the budget-making process requiring each branch of government to submit estimates to the people’s representatives to make decisions.
Parliament enacted the Constituency Development Fund and put it under the National Government Constituency Development Fund (NGCDF) Board while members of the National Assembly acted as patrons for the fund. The fund is used to provide public sector entities. In doing so, Parliament was performing the functions of the executive branch of government. To make it worse, CDF was set at 2.5% of all the national government’s share of revenue as divided by the annual Division of Revenue Act enacted according to Article 218 of the Constitution as per section 4(1) an of the National Government Constituencies Development Fund Act of 2015[12]. This provided members of Parliament with the incentive to raise the budget annually.
- Disregard of the provisions of Financial Disclosures and Accountability Principles
The Institute of Economic Affairs carried out a study that identified that the most number of queries was the failure to reconcile books of accounts[13]. This implies that the entities failed to adhere to report sufficiently and meet the reporting standards as required by the financial management. By Ministries, departments and Agencies failing to report sufficient financial information, it misinformed the Parliament which is expected to provide checks and balances on other arms of government.
- Popular Narratives that influenced Fiscal Policy
In the earlier 2000s and the runup to 2012, the clamour for more development projects became faster. This was reflected in Vision 2030 which outlined comprehensive infrastructure plans amongst other plans. The period after 2013 to present witnessed rapid fiscal expansion to cater for infrastructural expansion. The premise is that building infrastructure could stimulate economic growth more quickly. Some of the infrastructure projects undertaken in the last decade include Rail, Roads, Ports, Pipelines. In the end, procurement fraud became a more pervasive form of corruption. Projects were too many and too rapid, with fewer meeting the value for money principle outlined in the Constitution. This ended in the non-delivery of contractual items christened as, “government bought air”.
- Conclusions
Corruption has evolved to be a market phenomenon with many players on both the demand side and supply side. Aside from requiring the executive and parliament to live within the Constitutional limits, disciplining spending, and robust project approval process, there’s a need for a radical measure that will ensure that the runaway corruption will stop.
End Notes
[3] Kabathi, Mwangi. 2009. “Public Service Besieged by Corruption.” June 2009..
[8] Miriri, Duncan. “Third of Kenyan Budget Lost to Corruption: Anti-Graft Chief.” Reuters, March 10, 2016. https://www.reuters.com/article/us-kenya-corruption-idUSKCN0WC1H8.
[10] Tenderpreneurs is a Kenyan term for politically connected persons participating in unlawful tendering processes with the aim to confer themselves public property contrary to the law and the Constitution.
[12] “The National Government Constituencies Development Fund Act, 2015.” 2015. Kenyalaw. 2015..
More Blogs
Rule of Law and Economic Freedoms as the Key to Improve National Welfare
A manifestation of the rules by which many play the game, institutions are fundamental to national welfare. This remains true whether welfare is measured in economic, social, or political dividends. The importance of rules has been elaborated by thinkers as separated by time, space and empirical approach as Adam Smith, Daron Acemoglu and Johan Galtung.
Can People Afford to Pay Out of Pocket for Health Care in Kenya?
Anyone who lives in constant worry of what would happen to them if they get ill, of whether they will be able to afford care or time off work, lives in a state of un-freedom[restriction]. Any model of society that makes this worry inevitable is itself diseased (William Shoki, 2021).
Tracking Kenya’s Economic and Institutional Performance
Tracking the performance of the economic and institutions to inform policy decisions going forward remains one of the significant policy questions today. This can be achieved by taking stock of progress and challenges the state has made over time.
Demonetization Gets Rid of Black Money is a Fallacy
This fad captured the imagination not only of policymakers but also of many citizens. In essence, demonetization is the policy choice of ensuring the obsolescence of state-issued currency denomination against a tight timeline of a few months or less.
The Delusion That Was and Is COVID 19 Measures in the Matatu Sector
Regulating the public service transport (PSV) system, particularly the matatu sector in Kenya, which is a quasi-formal sector has been problematic. A case in point is the well documented resistance of the Legal Notice No. 161 of October 2003 rules and regulation (Often referred to as Michuki rules 2003).