III — Sleeping Serpent

Al-Shabaab was like a wounded buffalo, and we in Kenya know that a wounded buffalo is even more dangerous

Raila Odinga
Ex-Prime Minister, Opposition Leader

Late in 2013, Kenya's Auditor General told the Parliament some money had gone missing from the government's coffers: $3.5 billion to be exact.

Edward Ouko said he had no way of knowing whether 303 billion shillings – a third of annual government expenditure – was incurred lawfully or not. In a 437-page report, he documented unauthorized expenses ranging from a monthly mobile phone bill for over $12,000 claimed by the late environment minister John Michuki to $90,000 for sundries including fresh flowers for the Ministry for Development of Northern Kenya & Other Arid Lands.¹

The money – enough to build and stock a hospital in each of the nation's 47 counties – went missing at a time when Kenya was battling its worst drought in half a century, with nearly a quarter of the population at risk of starvation, fumed the country's oldest newspaper, the Standard.²

The media outrage lasted all of two days, says Mwalimu Mati, a lawyer who runs an anti-corruption watchdog in Nairobi. No one resigned.

In the UK, a scandal over MPs' expenses epitomized by a $3000 duck house sparked dozens of arrests and resignations, months of front-page articles, even a West End musical.

“Here this sort of thing is normal,” says Mati, the founder of MARS Group or Media Analysis & Research Services. “We're used to corruption scandals in the order of a billion dollars as a matter of course.” ³

Grand-scale graft has been going on for as long as anyone can remember. One item in the auditor general's report is an $8 million payment on debt borrowed in 1970 for a fertilizer plant. The plant was never built. Yet the bill is still being paid almost half a century later.

At the MARS HQ that also serves as his home in a leafy and heavily guarded neighborhood of Nairobi, Mati is archiving evidence “in case at some point there might be a government that's serious about dealing with corruption.” But he doesn't hold out much hope.

In the five decades since independence, Kenya has had only four presidents and all are inter-related. Uhuru Kenyatta is the son of the first president. The second, Daniel Arap Moi, was Jomo Kenyatta's vice president. The third, Mwai Kibaki, was Moi's vice president.

“It's actually one regime,” says Mati.

Among the opposition leaders today, Raila Odinga, who contested against Uhuru for the presidency in 2013, is the son of the first vice president under Jomo Kenyatta. Musalia Mudavadi, who placed third in the 2013 vote, is the son of Moses Mudamba Mudavadi, who served as a minister under Moi and was married to one of his relatives. In 2002, Musalia Mudavadi was Uhuru Kenyatta's running mate.⁴

The nationalist politicians who led the independence movement and their descendants are in charge of politics, says Mati – “and it will stay like that for a very long time.”

One reason is more than half of the country's wealth is in the hands of the political elite and their relatives, led by Uhuru, Kenya's richest man.⁵ Uhuru's father amassed vast swathes of land in the 60s and 70s for a pittance under a British transfer scheme. The family estate spans half a million acres along with commercial banks, luxury hotels and dairies to boot. His media interests include The People newspaper, K24 TV and several radio stations.^6,7

Kroll Associates, a corporate investigation and risk consultancy, chronicled almost $1 billion dollars transferred from the country's coffers to family-owned bank accounts and private estates by Moi during his presidency between 1978 and 2002.^8,9 His family own stakes in the Standard newspaper group, KTN TV and a Swahili-language radio station.¹⁰ Odinga's wealth through oil, gas, real estate and media holdings may be over 7 billion shillings ($81 million).¹¹

“It's a stable, predictable political system,” says Mati. “They're the wealthiest, they're the ones who are able to mobilize, and there are no real ideological differences between them. The only things that change are the personalities.”

The clubby world of elite politicians isn't reflected on the street. In 2002, the year Moi ceded to elections, a Gallup poll showed Kenyans were the most optimistic people in the world as democracy beckoned.¹² The euphoria turned to despair five years later with the deadly clashes pitting Kikuyu masses backing Mwai Kibaki against the Luos and Kalenjin behind Raila Odinga in the 2007 election.

The lack of substantive policy differences between the politicians feeds the impulse to vote along ethnic lines. Every election has been a dead heat with 45% for one tribal grouping and 45% for another. Victory comes down to who can “steal” the remaining 10%, says Mati.

That game gets played out in the electoral commission that's meant to oversee fairness in the polling stations and declare the results. The system breaks down because the commission is itself made up of political appointees.

“It's as if the players choose the referees,” says Mati. “People don't trust any electoral commissions we've ever had.”

In the polls of 2007 and 2013, the commission announced the result before the last votes were even counted.

For Kenyans, it's just another corruptible institution – like the police, education and transportation. Kenya ranks among the 20 worst countries for fatal road accidents partly because the driving test can be bought – and that's the way it's been for decades.^13,14

“All Kenyans feel the pain of having to pay bribes to get medical attention, to get kids into schools, to get out of a jam with the police, to apply for national identification documents – the simplest services have become corrupted,” says Mati. “They feel very frustrated but I just don't see them rallying in the political field.”

Transparency International, the global watchdog where Mati previously worked as a lawyer, placed Kenya among the 40 most corrupt of 177 countries.¹⁵ It's one reason 40% of Kenyans are living below the poverty line.¹⁶

The government has a grand plan to lift the nation's fortunes. The cross-party Vision 2030 manifesto promises to boost economic growth to at least 10% a year by investing in oil exploration and connecting Kenya's cities.¹⁷ The remote and undeveloped Turkana region in Kenya's northwestern Rift Valley may hold 600 million barrels of crude deposits. London-listed Tullow Oil committed to exploration even as it scaled back its global program amid tumbling crude prices.

A new Nairobi to Mombasa railway line will speed up the connection between the capital and east Africa's biggest port from 2017, easing the pressure on roads. It's Kenya's most expensive infrastructure project since independence at a cost of over $5 billion. The wandering elephants, giraffes and buffalos of Tsavo will be kept at bay by a 1.8-meter reinforced concrete and metal mesh fence.¹⁸

Kenya hasn't laid a single piece of track since the British built the railway in 1902, despite taking 11 train-related loans. With billions of dollars being lent once again, anti-corruption activists like Mati are worried history will repeat itself. From the perspective of an investor bankrolling Kenya by buying its bonds, Brett is concerned about the risk of the country sinking into debt without putting the money to work effectively on improving infrastructure or other means to boost economic growth.

The rail project is already mired in allegations of inflated payments. The initial cost of the line at $3.8 billion looks high compared with a train track in Ethiopia, members of the National Assembly's Public Investments Committee complained in an April 2014 report. The committee questioned why the government had awarded the contract without an open bidding process.

The company contracted is China Road & Bridge Corp. The World Bank in 2009 debarred the Chinese government-linked group and two years later its parent, China Communications Construction Company Ltd., from participating in its road and bridge projects until 2017, citing fraudulent practices relating to a road project in the Philippines.^19–22 CCCC has appealed. It said in a 2014 statement that there's no basis for allegations of corruption and that it maintains strict management systems. Meanwhile Kenya is pressing on to the next stage, with an even higher price tag of $13 billion for a jointly funded plan to extend the line to Uganda and Rwanda.

The Standard newspaper fretted that the rail project risks becoming a bigger corruption scandal than Goldenberg. In Kenya's most notorious scam to date, hundreds of millions of dollars were siphoned from the Treasury as fictitious incentive payments to a supposed gold exporter called Goldenberg International – despite the country having no commercial gold deposits. The payments were in full swing when Musalia Mudavadi became finance minister under Moi in 1993. It took more than a decade for the fraud to be probed by a Commission of Inquiry in 2006, which absolved Mudavadi of involvement.²³

“It's very difficult to see this happening again,” says Mudavadi. We catch up with him a ten-minute drive from his home at a bungalow that serves as the headquarters for his party – the United Democratic Forum. The opposition group was formed in 2012 when Mudavadi was still deputy prime minister in the Kibaki–Odinga coalition. He went on to lead the UDF at the 2013 presidential election.

In a brass-button navy blazer, the 54-year-old fits us in before a golf competition at his club.

“In terms of transparency, there has been tremendous improvement,” he says. “I can tell you now, in this country it is extremely difficult to have transactions with public entities not being fully scrutinized.”

He points to checks and balances like the Ethics & Corruption Commission, parliamentary watchdogs, the media and all of the reporting requirements prescribed by the revised constitution.

The constitution was rewritten in 2010 in response to the post-election violence. Among the biggest changes is the devolution of power to local regions. At a national level, however, the new rules make it as hard as ever to break the political mold. Any new party must, for example, have offices in at least 24 constituencies. “For new players, that's very difficult,” says Mudavadi. “Expenditure is loaded on to the party.”

But there's more to it than just the cost. Unlike Europe or America's political systems, Kenya's parties lack obvious defining traits of left and right, or other ideologies that might help draw in nationwide support.

It is hard to grasp substantive policy differences at election time, Mudavadi acknowledges.

“If you were to look at the manifestos of the three major contenders at the last election, to a great extent they were almost the same,” he says. “Most of the issues were pegged around Vision 2030 – infrastructure, good economic management, governance and so forth. Looking at all the manifestos, basically they're talking about the same thing.”

This affinity increased in the aftermath of the Westgate siege. Uhuru, elected only five months earlier, asked the opposition leader Odinga to address the international media. The slogan “we are one” ran in countless newspaper headlines.

While Mudavadi insists the UDF does clash with the government on specific issues, like which goods should carry VAT and regulation of the media, it would take a “lot of voter education” for Kenyan politics to evolve from its ethnic basis to policies. “Being able to decipher what's a policy that's good for the country or region – we're very weak on that, we have a lot of work to do in that regard.”

One point both main opposition leaders criticized Uhuru for was his perceived attempt to escape trial at the International Criminal Court. The ICC repeatedly delayed his case as key prosecution witnesses withdrew on concern for their safety while the government blocked prosecutors from accessing Uhuru's bank statements for evidence.²⁴

Yet when the ICC finally abandoned the case against Uhuru in late 2014, Odinga congratulated his “brother.”

We meet with the former prime minister at a Nairobi hotel minutes after a press conference. Having lost his legal challenge to the election result, Odinga accepted the ruling and was now hoping to play a role as elder statesman in brokering closer economic ties with Kenya's neighbors, in particular Tanzania to the south.²⁵ Odinga offered to chair a Panel of Eminent Persons to mediate relations between the five members of the East African Community. All of the countries' presidents were reportedly willing to accept his diplomatic mission except one: Uhuru Kenyatta.²⁶

Under the previous administration, Odinga had been forging closer links with the four other nations of the EAC, easing restrictions on work permits and cross-border tariffs and discussing joint transport projects with Uganda, Rwanda, Burundi and Tanzania, all helped along by oil and gas discoveries in the region.

But under Uhuru's government, Kenya narrowed its focus to Rwanda and Uganda, excluding Tanzania in a club dubbed the “coalition of the willing.” While Tanzania has been slower to move forward on agreeing freedom of movement and land issues, some political analysts suspect the snub has more to do with the war in the Democratic Republic of Congo, which borders all three countries. Tanzanian troops are part of the United Nations' Force Intervention Brigade that's been fighting M23 rebels. Although Rwanda denies links to M23, Human Rights Watch accuses the government of direct support.²⁷ Tanzania hasn't won any favors with the Kenyan government either, after showing reluctance to back Uhuru's bid to defer the ICC case and in particular to have it transferred from The Hague to the Tanzanian city of Arusha.²⁸

“Kenya stands to gain more with Tanzania in the East African Community than when it is out of it,” says the 69-year-old Odinga. “For Kenya to access the central and southern African markets that we have tried to do for so long, we need to pass through Tanzania.”

While the East African Community represents the opportunity for Kenya's economy, Somalia is the country's biggest foreign policy challenge. Westgate was one of several acts of reprisal for Kenya's invasion in the al-Shabaab stronghold of Kismayo in September 2012. Odinga as prime minister co-chaired the National Security Council meeting that resolved to attack the city in alliance with the Somali National Army following grenade assaults on bars and churches in Kenya by the al-Qaeda linked group.²⁹

“We didn't go into Somalia blindly,” says Odinga. “We were forced in because they fought Kenyans, they kidnapped and killed tourists.”

“After we liberated Kismayo, al-Shabaab was like a wounded buffalo, and we in Kenya know that a wounded buffalo is even more dangerous. They were substantially weakened but not defeated, so we knew that it was a matter of when and not if, for them to carry out an attack like they did on Westgate.”

IV — Prowling Leopard

Njuguna Ndung'u grew up on a peasant smallholding in the Aberdare Mountains.

In the mornings as he walked from the coffee farm to school, hyenas and a leopard would prowl close by.

“I knew as long as I didn't make any sudden movements, the leopard wouldn't attack.”

The 12th of 19 children in a polygamous two-mother family, Ndung'u was the first to go to university.

“My father used to tell me, the only way to escape poverty is a good education, so I thought I'll study and one day save enough money to buy a parcel of land to grow tea.”

Ndung'u became a professor of economics and bought an 8-acre farm to plant tea for a hobby, before being appointed Kenya's central bank governor.

Sitting in his oak-paneled office in Haile Selassie Avenue, it's the lessons of the central highlands that retain the biggest hold on Ndung'u.

“You have to pull from where you are,” he says. “The moment you're appointed governor of the central bank you're in public policy, and public policy in a nutshell is welfare improvement; poverty reduction in short.”

His cornerstone has been financial inclusion: getting people however poor to save and borrow. The poorer the individual, the more important it is that they have secure ways to set aside what little they can for however limited a period of time. It's a way to maximize spending power and smooth consumption in good and bad times by providing the capacity to buy when the need is greatest or prices are lowest.

The tricky part was getting financial services out to remote farming communities with small, irregular flows of income at a low enough cost to be profitable for the bank while paying enough interest to prevent savings being eaten away by inflation.

The year was 2006. The worst drought in living memory was causing hunger and malnutrition in Kenya's northeast.^1,2 In the west of the country, a freshman Democrat senator from Illinois named Barack Obama visited his grandmother's village and warned that Kenya's “reassertion of ethnic identity as the basis for politics” was not a good sign.³ In Nairobi and Mombasa, Kenyans were starting to use their mobile phones to pay for shopping and send money to relatives.

To get cash to a mother in need far away in the countryside, the family bread winner in the city would have to pay a bus driver to carry their money. Mobile phones brought a cheaper and safer solution. Users would buy airtime and then transfer the credit to the person they owed money or to their family to redeem for cash.⁴ In a country where far more people have access to a phone than a bank account, airtime credits started growing rapidly.

Kenya's biggest network provider, Safaricom, realized the opportunity and adapted the system in March 2007 to create the world's first SMS-based mobile money, or in abbreviated Swahili: M-Pesa.

Banks were appalled. They lobbied for the central bank to ban the system, citing the risk of fraud. Instead, Ndung'u encouraged M-Pesa's development, telling banks it would help them in the long run by strengthening the financial system and bringing more Kenyans into the formal economy.

As financial inclusion doubled to 67%⁵ by 2013, banks went from opposing the system to pursuing tie-ups to turn Safaricom's subscribers into savers and borrowers.

“For financial inclusion, this has been the winning formula to reach the poor and those in geographically disadvantaged regions, away from financial services points,” says Ndung'u.

It's also made Safaricom the most valuable member of Kenya's stock exchange, accounting for 24% of the Nairobi All-Share Index with a market capitalization of $6.1 billion (Table 1.1).

Note: The index has 62 members in total. The % index weight is calculated from Bloomberg data as of December 2014. (Function: NSEASI Equity MEMB GO).

We head to the company's sleek headquarters in the Westlands business district, close to the ruins of the Westgate mall. The day's financial papers are dotted about on glass coffee tables, with Chief Executive Officer Bob Collymore grinning from every front page. The company has just reported its best quarterly earnings since listing in 2008. A quadrupling of the shares from the beginning of 2012 has sent the price to over 20 times annual earnings, among the highest valuations of its peer group (Table 1.2).⁶

Source: Data compiled by Bloomberg as of December 2014. (Function: SAFCOM KN Equity RV GO)

“One of the tricks about Safaricom,” says Collymore, in his spacious office, “is this understanding of the micro nature of the economy. I didn't understand that coming from the UK, but my team understood that.”

Kenyans can take out loans of just 100 shillings – $1.24 – from M-Kesho, a mobile account Safaricom set up with Equity Bank, Kenya's second largest lender. They can deposit a single shilling – 1 cent – in an M-Shwari savings account, created with Commercial Bank of Africa.

M-Pesa's green and red logo can be seen in every village across Kenya, transforming shacks and mud huts into formal financial transaction points. The handful of payments through M-Pesa every month to family or friends multiplies to 300 transactions per second from over 11 million subscribers.

The system is being upgraded on projections for twice that amount. Coca-Cola, Diageo and Unilever have started using M-Pesa, partly to minimize the risk of robberies by reducing the amount of cash held with delivery drivers and outlets. Transactions are developing from person-to-person transfers to settling rent, school fees, traffic fines - or buying a bottle of Coke.

Source: Data compiled by Bloomberg as of December 2014

While M-Pesa provides a safer route for money transfers than entrusting the bus driver, it isn't cheap. Charges start at 30%, or 3 shillings to transfer between 10 and 50 shillings. Withdrawing 50 to 100 shillings from a cash dispenser costs 10 shillings.⁷

The cost of a loan through the M-Shwari service was 7.5% a month in 2014. That would mean the customer paying back twice the amount borrowed over a year – though the loans are purposely only for 30 days.

It's a lucrative strategy for Safaricom. The rate M-Shwari pays out to savers is between 2% and 5% a year.⁸ Loans are typically around $10, with the risk of nonpayment underwritten entirely by the bank. The service had 2.5 million accounts within months of its launch in 2013.

“I don't ever want to be lending money to buy a car, that's not our business,” says Collymore. “But I do want to lend for emergencies.”

For Ndung'u, M-Pesa is a start. The next challenge is the third of the population that remains financially excluded – and that demands policies to lift millions out of poverty through economic growth.⁹

Ndung'u began pushing for growth in the aftermath of the ethnic violence of 2008 and the global financial crisis. He repeatedly reduced borrowing costs to stimulate activity in the economy. Initially the central bank's scope to decrease interest rates was helped by inflation slowing to a record low. But even when prices started creeping higher in 2011, Ndung'u kept on going with the rate cuts. Lending soared as benchmark government borrowing rates dropped way below inflation to 2%.¹⁰

To Ndung'u – who wrote his PhD thesis on controlling inflation – the best way to absorb rising prices was to expand the economy – to increase the opportunities for spending and investment. After all, inflation was out of his hands – the result of droughts lifting food prices and rising global energy costs.

For investors, however, cutting interest rates at a time of accelerating inflation was the sign of a central bank governor losing the plot. They sold the shilling for currencies benefiting from rising interest rates, causing the exchange rate to depreciate the most worldwide. That fanned inflation further by making imported food, fuel and other goods even more expensive. The reaction forced Ndung'u to finally hike interest rates from 5.75 to 18% by the end of 2011 as inflation peaked at 19.7%.

While the shilling soon strengthened again and inflation returned to single digits in 2012, Ndung'u took the wrath of parliamentarians who attempted to fire him through a censure motion. A Reuters poll ranked him Africa's worst policymaker of the year.¹¹ Then, two years later, Kenya's antigraft agency filed a case accusing him of abuse of office through involvement in a tender to install security software at the bank.

Ndung'u denied being involved in the tender process. He's equally emphatic that his approach to fighting inflation was right.

“Many years ago we used to ask, can you trust the central bank? Is he a conservative central bank governor, in the sense that he's going to do what he said he's going to do?” says Ndung'u. “The conservative central banker was very targeted to fighting inflation.”

But in the modern world, where inflation is imported through events beyond the influence of domestic policies, central bankers don't have the same anchor to pull prices down, he argues. In the Horn of Africa, the most important inflationary factor is rain, as shortages of food drive up prices and dams without enough water to generate electricity force people to use power generators that run on petroleum. That pushes up fuel prices, adding to production costs across the economy.

The best defense central bankers are left with is a strict pre-commitment to target inflation at a set level. For Kenya, the level is 5%, plus or minus 2.5 percentage points. In 2012, inflation dropped to 3.2% and remained in single digits through 2013 and 2014 (Figures 1.1–1.3).

“You have to train the market,” says Ndung'u, “because the market is very unforgiving if you don't do the right thing.”

V — Clinker

The thinly tarmacked roads that vex Bob Collymore in the business district of Nairobi aren't typical. Most have no tarmac at all.

Dusty tracks connect towns and villages housing people in the same round mud huts and wooden shacks their ancestors built before them. Paved roads and concrete homes are still an aspiration.

Despite purchases of cement rising by over 60% in the past five years, Kenyans use only a third of the quantity for each South African and a fifth of the amount by Egyptians. With the IMF predicting Kenya's economy will grow by at least 6% a year through this decade, a boost in construction seems a logical bet.^1–3

The trend in developing countries is for cement use to increase at almost twice the pace of economic growth, says Pradeep Paunrana, the chief executive officer of Athi River Mining, Kenya's biggest cement maker after Bamburi Cement. For Kenya, that's amounted to an increase of 14% a year since 1999.

“The biggest mistake of my career,” says Paunrana, who took over running ARM from his father, “was underestimating the demand for cement in this region. Had we believed in those numbers – that it was possible to grow at 14% every year for the next 14 years – we would have taken some different steps to build capacity, but we missed that.”

Kenya's demand for cement could double again by 2020, Paunrana says. Currently most goes to Nairobi for homes. Commercial construction such as warehouses makes up around 15% and government contracts slightly less, he says. With the government's Vision 2030 agenda, the state segment could grow rapidly.

Infrastructure projects like the Nairobi to Mombasa railway will not only increase use but should also create major cost savings to boost the economy. Using his own business as an example, Paunrana estimates a good train system would cut his cost to transport a ton of cement from Mombasa to Nairobi from $45 to $15. The saving across the economy from an efficient transport system may be equivalent to 10% of GDP, he says.

Paunrana is busy adding plants to grow his production capacity. He plans to spend $250 million building a factory to make clinker, the main cement ingredient, and a further $50 million on other expansion projects. Although ARM has shares listed on the exchange, the $300 million will probably come from the debt market. Paunrana is looking at a sale of Eurobonds, a type of IOU issued to international investors that can be bought and sold on financial markets. It's a relatively unusual step for a Kenyan company.

Whereas in most emerging markets, the amount of shares investors can buy is dwarfed by a mountain of tradable debt securities, or bonds, in Kenya, the situation has been the reverse.^4–7 While Nigeria has targeted international investors with Eurobonds since 2011, Kenya delayed tapping the market until 2014. Companies waiting for the government to set a benchmark rate so they could start borrowing in the bond market turned to banks for loans instead.⁸

Things are changing rapidly though with Kenya's inaugural Eurobond firing the starting gun for corporate borrowers. The Nairobi Stock Exchange has said it expects the amount of bonds sold by companies to reach the equivalent of 40% of GDP by 2023, compared with less than 2% now. That would open up a whole new market for investors like Brett.⁹

“The faster we develop the credit markets,” says Paunrana, “the faster we can build capacity.”

Source: Bloomberg data as of December 2014. (Function: ARML KN Equity RV GO)