Monday, February 12, 2007

Government’s Hand in High Petrol Prices

Government policy is partially responsible for the high petrol prices in Kenya. Equally destructive is the recently passed Energy Bill, which seeks to control petrol prices but does little to question KPC’s storage charges, local refining fees, and several bureaucratic conditions set by domestic regulators.

The Bill popularizes the idea that distributors are to blame for the Wananchi’s pain at the pump. It’s also awkward that the flawed Energy Bill had a heavy backing from the World Bank, which warned on being “deterred from funding the (energy) sector if the Bill was not passed rapidly.”

Following are some of government actions that have contributed to the high petrol prices:

  • Finance Minister Kimunya’s 2006/07 budget increased fuel levy tax by 55 percent (from Shs 5.80 to 9.00 per litre of petrol).
  • Kenya Petroleum Refinery, which is owned by the government and two other multinationals, increased crude oil refining fee from Sh2.90 to Sh3.58 per litre, a 22 percent increase.
  • The state owned Kenya Pipeline Company increased storage charges by 33 percent (from $2 to $3 per cubic metre).
  • Distributors are required to process 70 percent of their crude oil at the inefficient Mombassa plant. Only 30 per cent of processed petroleum can be imported from the Middle East, which has cheaper refining costs. (See The Standard).

Kenyanomics says: It makes no sense to target distributors yet the government is robbing Kenyans in broad daylight.

Wednesday, February 07, 2007

“Why isn't Africa Attracting Portfolio Investment?”

The past 20 years have seen Africa open more stock exchanges than any other region in the world. Some of African exchanges have been the world’s top performers, but that has not attracted the attention of international portfolio investors. But why? The World Bank’s PSD Bloggers had the following to say:

Why do the global emerging market funds ignore African-listed securities? Are mutual funds discriminating against Africa?

Not at all, said Todd Moss from the Center for Global Development in a presentation on his recent work to Bank staffers yesterday. Turns out there's no market failure at all. The problem lies with the African stock exchanges themselves.

Despite their recently good performance (as described in a prior post), Sub-Saharan African stock exchanges lose out because of their small size and very low liquidity. As he put it, "the New York Stock Exchange trades more before tea than all of Africa trades in a year." The glaring exception is the Johannesburg Stock Exchange (JSE), which is as large and popular as any emerging market stock exchange.

The bottom line - a stock exchange must have $50 billion in market capitalization and $10 billion in value traded to attract any interest from global emerging market funds. Of the 15 African exchanges, only South Africa hits either metric.

Moss thinks African exchanges might get a boost from large privatizations, but argues that the real key is to focus on investment climate issues. Big home-grown firms, hungry for equity finance, are needed to build up stock markets, which in turn attract mutual fund managers.

So where are the big African companies? Barriers to entry keep African firms out of the formal sector. Once they formalize, barriers to growth - such as higher infrastructure costs and "unofficial payments" - keep African firms small. For more on these barriers to growth, see the World Bank paper "Business Environment and Comparative Advantage in Africa: Evidence from the Investment Climate Data" from Benn Eifert, Alan Gelb, and Vijaya Ramachandran.

. . .

Kenyanomics Says: Doesn’t that make merging of African stock exchanges more reasonable?

Is the US Planning a Military Base in Kenya?

Two events that could shape Kenya’s position on global military supremacy took place yesterday. One was President Bush okaying a plan to establish a military command post in Africa (Africom). The other event took place in Nairobi, where the Chinese graced Kenya with military hardware worth more than $800,000. The Chinese have not indicated interest in establishing military command posts in the region, but nothing will stop their American counterparts.

It is not yet clear where the American command post will be based, but it is somewhere close to the Horn. The US military is already present in Djibouti, where it intends to contain “threats from Yemen and Somalia extremists.” But Kenya is also a prime target, given the US desire to take control of the East African coastline, from Djibouti City to Dar es salaam.

Kenya may be tricked with promises of better security and other goodies. But despite suffering terribly from terrorists, we must not believe that our neighbors are on a mission to harm us. Peace with our neighbors and other nations should be cultivated with dialogue, not with bombers or massive propaganda.

Tuesday, February 06, 2007

Only Private Sector Can Save EAC

The future of the East African Community (if any) lies in the private sector, not in politics being traded in Nairobi, Dar, Kampala, Bujumbura, Kigali, or Arusha. This fact is exemplified by the distinction with which politicians and businessmen are conducting their integration affairs. Regional companies are integrating their services with ease, but the political side is characterized by unending “consensus” meetings and epic court battles.

Picture this: East African cellphone companies just formed alliances without a single court battle or negative news in the media. Talks on amalgamating the three stock exchanges are calmly going on. But alas! Politicians in Kenya cannot even agree on who would represent their country in Arusha. Yet we expect the same political class to lay ground for economic integration.

EAC politicians need to learn one thing: that their role in establishing a thriving regional market does not go beyond shutting up and keeping off. Politicians must stop meddling and acting like they are doing something for the common man. Its only then that an individual living in Mbeya (Tanzania) could gain the confidence of forming beneficial relations with East Africans living as far as Gulu in Uganda or Garbatula in Kenya.