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Who Is Afraid of Commuter Ride-Hailing Apps? Tech Meets Matatu, and Why Nairobi Does Not Need State-Run Public Transport

8 min read. DAVID NDII explores the disruptive power of ride-hailing apps on public transportation in Nairobi and why both the government and the matatu industry should be embracing the commuter ride-hailing apps instead of fighting them.

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Who Is Afraid of Commuter Ride-Hailing Apps? Tech Meets Matatu, and Why Nairobi Does Not Need State-Run Public Transport
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Technology platforms have become disruptors in unexpected places. They have over the years disrupted the music distribution business, the book trade, and even the hospitality industry, but none has been as turbulent as Uber’s disruption of public transportation.

A couple of days ago, the commuter ride-hailing app services Little Shuttle and SWVL announced that they were suspending their operations. Little Shuttle and Little Cab ride-hailing apps are products of technology company Craft Silicon. SWVL is an Egyptian start-up that has invested in the country to do this specific business. Launched seven months ago, SWVL is reported to have 150 buses serving 100 routes, and has raised Sh1.5 billion from investors to expand its operations.

The National Transport and Safety Authority (NTSA) subsequently issued a statement giving its reasons for the suspensions. The agency explained that the two companies had obtained the “wrong” licence—known as a Tour Service Licence (TSL)—which it deemed to be a violation of Passenger Service Vehicle (PSV) regulations. NTSA also accused the operators of failing to register their vehicles with the authority as required by Section 26 of the Transport and Safety Act No. 33 of 2012. “The two companies have never contacted the Authority to show any intention to operate as commuter service providers”, the NTSA avers.

Technology platforms have become disruptors in unexpected places. They have over the years disrupted the music distribution business, the book trade, and even the hospitality industry, but none has been as turbulent as Uber’s disruption of public transportation.

Section 26 of the Transport and Safety Act, the provision that NTSA claims has been violated, states that “[a] person shall not operate a motor vehicle whose tare weight exceeds three thousand and forty-eight kilogrammes for the carriage of goods or passengers for hire or reward unless the vehicle is licensed by the Authority in accordance with this Part and in such manner as the Cabinet Secretary may prescribe. Violating the provisions, i.e., operating a commercial vehicle without a prescribed licence is a criminal offence that can attract a fine of Ksh. 300,000 or imprisonment for a term of five years.”

The other ground for suspension is that the two operators have violated PSV regulations. To be licensed under these regulations, the operator is required to be a corporate body which may be a company, a cooperative society (SACCO) or other collective registered under the Societies Act, and have a minimum of 30 vehicles owned by the operator or under a franchise arrangement with the owners.

Regulation 7 (f) requires passengers to be “issued with receipts for fares paid, and as from 1st July 2014, operate a cashless fare system.” Another regulation requires “a transport safety management system based on ISO3900.” Obviously, these regulations are not enforced—and therein lies the paradox. The shuttle services that the NTSA has suspended were the closest thing to compliance with the spirit of these regulations that we have seen since the collapse of the Kenya Bus Service (KBS) franchise several years ago. It is in fact not apparent from my reading of these regulations that Little Shuttle and SWVL have violated these regulations in any substantive way.

The NTSA is disingenuous. Investors do not determine for themselves what licences they need. They go to the government and say, look, I want to run a business of the following nature, what do I need? The government then makes the determination and advises the investor accordingly. In the statement announcing the suspension of operations, Little Shuttle’s Chief Executive Officer disclosed that they were operating on the basis of a national Transport Licensing Board (TLB) licence—also issued by the NTSA—which does not restrict them to specific routes. Someone at the NTSA must have determined that a national TLB licence is what they required. Moreover, if it was deemed that there was no suitable licence, the Transport and Safety Act gives the Cabinet Secretary the power to “exempt any person or class of persons or any motor vehicle or class of motor vehicles from all or any of the provisions of this Act.” The NTSA could have advised the investors to apply for exemption.

In his statement, the Little Shuttle CEO alludes to cartels: “I am not sure if the decision to stop us was from the authorities or they were under pressure from the public transport cartels.” There is a whole range of actors that this could apply to, either working independently or in concert. There are the investors, that is, the vehicle owners, the crew who operate the vehicles and control the revenue, route cartels who control access to particular routes and the police extortion racket. The industry has also been associated with money-laundering syndicates. As one of the biggest cash businesses around, it is as close to the ideal laundromat as you can get.

A key challenge that bona fide investors in the matatu industry face is that they are hostage to crew and route cartels. Precisely because PSVs do not issue receipts as required by law, the owners have no way of keeping tabs on revenue. Moreover, even if they could do so, they would still be compelled to give the crew leeway to pay bribes. Students of economics may recognise this as a principal-agent problem. 

The principal-agent problem arises in contractual relationships where the principal (the vehicle owner) cannot observe whether poor performance by the agent (the crew) is because of external factors (e.g. poor market conditions) or lack of effort or dishonesty on the part of the agent. We say that the interests of the principal (maximum effort by the agent) and the incentives of the agent (maximum income for least effort) are not compatible.

To mitigate this problem the industry has come up with a fixed daily revenue target, which in essence changes the contract between the owner and crew from a wage to a vehicle lease. In economic theory, we call this the incentive-compatible contract. An incentive-compatible contract seeks to motivate the parties to achieve mutually beneficial outcomes. This particular incentive-compatible contract has an extremely high social cost. 

Because the crew gets to keep the revenue above the daily target, they are motivated to maximise the number of passengers, and this they do at the expense of road and passenger safety. The cashless system the government sought to enforce would have gone some way towards resolving this problem, which is probably partly why it was resisted—not to mention the resistance by those others with vested interests in a cash business, notably the money-laundering syndicates and the police extortion cartel.

The ride-hailing apps portend a more robust solution to this problem; because of the ubiquity of mobile payments, they can easily combine revenue tracking and cashless payments. And since the revenue is tracked electronically, this makes it possible to enter into a wage contract between the owner and the crew. Crew on a wage contract have no incentive to compromise safety in order to maximise revenue.

That said, it is not evident that the commuter ride-hailing services are an immediate threat to the matatu industry. The two suspended services appear to be more of an alternative to personal cars than direct competitors for matatus. This can only be a good thing in terms of reducing congestion on the roads. Still, the development has caused sufficient concern somewhere, perhaps because the reputation of the disruption caused to the conventional taxi industry precedes Little Shuttle and SWVL. But it is also the case that sometimes these regulatory hurdles are extortion rackets that are intended to extract bribes or a share of the business.

The principal-agent problem arises in contractual relationships where the principal (the vehicle owner) cannot observe whether poor performance by the agent (the crew) is because of external factors (e.g. poor market conditions) or lack of effort or dishonesty on the part of the agent.

There is another vested-interest candidate—the government itself. It is now one and a half years since the government hastily painted some red lines on some of Nairobi’s thoroughfares and declared the lanes thus demarcated dedicated Bus Rapid Transit (BRT) lanes. The red paint has since faded. It is said that the buses are being assembled in South Africa, after local samples failed to make the grade. But other than the now faded lines, there is no evidence of actual BRT infrastructure being built. A BRT system is a metro light rail on the cheap but it also costs. The first phase of the Dar es Salaam system covering 21 kilometres took three years to build at a cost of $140 million (Sh14 billion) while the second phase covering another 19 kilometres will cost $160 million (Sh16 billion).

Nairobi is one of several African cities that do not have municipal public transport. For all their notoriety, matatus, dala dala and tro tros manage to move the cities quite efficiently. They are accessible, responsive, affordable, flexible as well as colourful and entertaining. A number of surveys conducted in Nairobi over the last decade or so indicate that public transport—predominantly matatus—accounts for between 50 and 55 per cent of commutes in the city; 40 per cent of commuters walk, while between 8 and 12 per cent use private cars.

By way of comparison, London’s elaborate public transport system comprising of buses covers 35 per cent of the commutes. The iconic underground moves 10 per cent. For all the congestion hullabaloo, a recent paper titled Commuting in Urban Kenya: Unpacking Travel Demands in Large and Small Kenyan Cities, published in the academic journal Sustainability, observes that average commuting journeys in Nairobi are comparable to those of major cities in the United States such as New York and Los Angeles.

This data is telling us that Nairobi is none the worse for lack of a municipal public transport system. Municipal systems are hugely expensive to build and to run, requiring operational subsidies. At £17.6 billion (Sh2.3 trillion) and counting, CrossRail—London’s new train system which has been under construction since 2009—is billed as the most expensive public infrastructure project in Europe. As observed, the Dar es Salaam BRT has already cost $300 million (Sh30 billion) and is nowhere near solving the city’s congestion problem.

There is, in fact, a parallel between what the commuter ride-hailing apps are trying to do and the story of mobile telephony in Africa. The phenomenal growth of mobile telephony in Africa is, to a large extent, a leapfrogging of the largely non-existent landline telephony. The same applies to the innovations around mobile telephony, notably mobile money, reflecting the poor reach of financial services referred to nowadays as financial exclusion. Mobile telephony systems and services are estimated to account for close to 9 per cent of Africa’s GDP, only marginally below manufacturing at 10 per cent, which is remarkable for a sector that is only two decades old.

To mitigate this problem the industry has come up with a fixed daily revenue target, which in essence changes the contract between the owner and crew from a wage to a vehicle lease. In economic theory, we call this the incentive-compatible contract

Like landline telephony, public urban transport systems are characterised by rigidity. Customers must go to the bus or train and follow fixed routes and timetables, just as in the old days when we used to have to go—sometimes for miles—to reach a telephone. To send money urgently, you went to the Post Office to send a telegraphic money order which was physically delivered to the recipient who in turn physically went to cash it at the Post Office.

The disruptive power of ride-hailing apps is what the Little Shuttle CEO refers to in his memo as “supply and demand software technology.” In plain English, this is about using customer ride request data—how many customers want to travel, when and where—to provide services that are responsive to demand in terms of capacity, routes, scheduling and pricing. But this is not entirely new; one of the reasons why matatus eclipsed scheduled bus services is precisely because they were more responsive.

As observed, between 8 and 12 per cent of Nairobi’s estimated three million commuters use private vehicles This works out to something in the order of 300,000 commuters and, assuming two people per car, 150,000 vehicles that spend eight hours or more hogging parking spaces—Sh150 billion worth of idle capital, over and above fuel, pollution and congestion costs.

Nairobi’s public transport imperative is to put more of these people on matatus and this seems to be precisely what the suspended ride-hailing services had set out to do. A smart government would be doing its best to make commuting by private vehicles costly. How so? For starters, the Nairobi County government needs to go back to a time tariff for street parking. Leaving a private car in a street parking all day should be extremely punitive. I would propose a rate of Sh100 per hour. We may also want to think about applying congestion charges on the city’s main arteries: Mombasa Road, Waiyaki Way, Thika Road, Jogoo Road, Ngong Road and Langata Road.

Assuming that each of the minibuses serves 40 commuters who would otherwise travel in private cars, we are talking of each bus displacing 20 private vehicles on the road. If only 20 per cent of driving commuters take to these services, we are talking of replacing 30,000 cars with only 1,500 minibuses. This would certainly have a discernible impact on de-congesting the roads. And the less congested the roads become, the faster the trips, the more attractive using public transportation becomes, and the more profitable the entire industry becomes. Far from fighting them, both the government and the matatu industry should be embracing the commuter ride-hailing apps.

David Ndii
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David Ndii is a leading Kenyan economist and public intellectual.

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South Sudan: An African Tragedy where Looting is the Name of the Game

7 min read. A never-ending cycle of killing and looting has left South Sudan fragile and impoverished. Moreover, a kleptocratic class of politicians and generals at the top with deep ties to “international partners” has been benefitting from the conflict, which could explain why Africa’s youngest nation remains in a permanent state of political instability.

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South Sudan: An African Tragedy where Looting is the Name of the Game
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The signing of a peace agreement by the Government of South Sudan and opposition groups on November 20th 2019 has signaled to the international community that there is a real possibility of peace in Africa’s youngest country. But I am not hopeful, nor do I believe that the current leaders of this war-ravaged country, Salva Kiir and Riek Machar, are committed to a peace process, despite being humbled by Pope Francis (who kissed their feet last year—a gesture that spoke more about the Pope’s humility and generosity than it did about South Sudan leaders’ leadership).

I also believe that the two leaders should be held accountable for the violence and other atrocities they have inflicted on their people. As a new report has shown, not only are Kiir and Machar war criminals but they have been systematically looting their country for their own personal benefit for years. The report by The Sentry titled “The Taking of South Sudan: The Tycoons, Brokers and Multinational Corporations Complicit in Hijacking the World’s Newest State”, which was released in September last year, states:

“The men who liberated South Sudan proceeded to hijack the country’s fledgling governing institutions, loot its resources, and launched a war in 2013 that has cost hundreds of thousands of lives and displaced millions of people. They did not act alone. The South Sudanese politicians and military officials ravaging the world’s newest nation received essential support from individuals and corporations from across the world who have reaped profits from those dealings.”

The report documents what is often described as Africa’s “resource curse”—a never-ending cycle of killing and looting that leaves an African state impoverished and in a permanent state of political instability, and which creates a kleptocratic class of politicians and generals at the top with deep ties to international partners who benefit from the conflict and whose names and faces often remain hidden. These politicians and their partners in crime are wined and dined by these international “partners” who are keen to have their fingers in South Sudan’s resource pie—oil, in this case.

The report claims that local politicians and their “international partners”, which include Chinese-Malaysian oil giants, British tycoons, and networks of traders from Ethiopia, Eritrea, Kenya and Uganda, have plundered billions of dollars from the people of South Sudan, who remain mired in conflict, poverty and underdevelopment. It says that the largest multinational consortium in South Sudan, which is controlled by the China National Petroleum Corporation and Malaysia’s state-owned oil company, Petronas, provided material support to a pro-government militia that burnt entire villages and committed atrocities against civilians. South African and American arms dealers and mercenaries also seem to have benefitted from the conflict. It is believed that Kiir’s and Machar’s armies could be responsible for the deaths of up to 300,000 people.

Some of these “investors” formed companies with President Salva Kiir’s family members. (Former President Daniel arap Moi’s son, Gideon Moi, is mentioned in the report as one of the Kenyan individuals who formed a company with Salva Kiir’s daughter Adut.) In all, individuals and firms from 13 countries, including India and Canada, are implicated.

This African tragedy is being played out even as the international community tries to bring together warring factions in the hope that South Sudan will eventually become a functioning state with a thriving democracy. Why the two warlords, Kiir and Machar, have not been hauled before the International Criminal Court (ICC) for crimes against humanity is one of those enigmas whose answer lies in the geopolitical and financial motives of the international community, including South Sudan’s neighbours.

Both Kiir and Machar should be referred to the ICC, but neither the United Nations Security Council nor the African Union is likely to do this. The United States and other countries that financially supported South Sudan’s independence from the Arab-dominated north will also not admit that South Sudan has been unable to have the kind of leadership that can sustain peace and democracy.

But were we too quick to assume that South Sudan would one day become Botswana—a resource-rich country whose leadership did not go on a looting spree, and which managed its natural resources in a way that did not lead to conflict? I think so, because South Sudan was never intended to be a peaceful and stable democracy. And influential forces in neighbouring countries like Kenya were eager to take part in the looting.

Safe haven

In their latest report, The Sentry calls on the United States, the United Kingdom, the European Union, Uganda and Kenya to enforce and enact sanctions against individuals involved in the plunder of South Sudan and in human rights violations against civilians. These sanctions, it says, should include travel bans and the freezing of assets held abroad by these individuals.

This week the US finally imposed sanctions, including freezing of assets, on two senior South Sudanese officials, not because they looted South Sudan or inflicted violence on its people, but because they were perceived to be “disrupting efforts to end the conflict”. Kiir and Machar are not on the sanctions list. In essence, the sanctions are against “spoilers” of the peace deal between Kiir and Machar, which began in 2015, but which has been stalling mainly because both leaders have not agreed to all aspects of it. Machar, for instance, insists on his security being assured before he forms a transitional government. It is assumed that peace will return when Kiir and Machar form a government together. But past experience has proved this to be difficult.

The recommendations by Sentry are also not likely to be enforced for a variety of reasons.

One, Kenya’s capital Nairobi has for years been a safe haven for warlords from the region, and this has benefitted Kenyan politicians and businesses. Nairobi seems to be the preferred destination of criminals and warlords from neighbouring conflict-prone countries who want to quickly launder their money or make deals with corrupt Kenyan politicians or businessmen.

Kenya’s “bandit economy” has benefitted enormously from conflicts in the region, not just in terms of the illicit money that pours into the country, but also with regard to humanitarian agencies. The conflicts in Somalia and South Sudan generated enormous amounts of funds for Nairobi-based aid and humanitarian agencies, and private companies that transported or distributed aid to these countries.

We must also remember that the Mwai Kibaki administration’s support for a liberated South Sudan was predicated on the administration’s ambitions to link oil from South Sudan to a port in Lamu through the Lamu Port, South Sudan, Ethiopia Transport corridor (LAPSSET). So Kenya was already eyeing South Sudan’s oil long before the country seceded from Sudan and achieved independence in 2011.

Nairobi is also the preferred residence of many South Sudanese warlords. South Sudanese leaders are known to own houses in the poshest parts of Nairobi. Their children go to school here and their relatives come here for medical treatment.

According to an earlier investigative report by The Sentry titled “War Crimes Shouldn’t Pay” (foreword by George Clooney and John Prendergast), both President Salva Kiir and his former deputy Riek Machar, and top military officers in the Sudanese People’s Liberation Army and South Sudan’s armed forces, own or rent luxurious homes in Nairobi and have accounts in Kenyan banks through which they have laundered millions of dollars. Kenya’s property market and banking sector thus appear to have been big beneficiaries of South Sudan’s conflict.

The report confirmed that the rivalry between Kiir and Machar was not so much about ethnic divisions as about competition over the country’s vast natural resources. South Sudan’s leaders are enjoying first-class lifestyles in Nairobi while at least half of South Sudan’s population faces starvation and more than 2 million people are internally displaced.

Another reason why South Sudan’s leaders are not likely to be brought to account is that for years South Sudan was the darling of the United States, which mistakenly believed that South Sudan’s war of secession with the north was about religion, not greed. Western countries have provided billions of dollars in aid to South Sudan in the belief that they were helping a budding Christian nation that wanted to be free of Muslim hegemony. After having financially and morally supported secessionist armies in South Sudan, the United States is unlikely to acknowledge that it has created a monster.

The recurrence of conflict in South Sudan has shown us what happens when the international community confuses clannism with nationalism and does not make the distinction between leadership and gluttony. The truth that is becoming increasingly apparent is that neither Kiir nor Machar should have ascended to leadership positions in South Sudan because both have blood on their hands. Both are incapable of seeing beyond their Dinka and Nuer clans, and both have shown no remorse for the thousands of men, women and children who have died, been displaced or been raped in their name. Independence in 2011 did not end the conflict in South Sudan; on the contrary, the conflict became more protracted.

And while Salva Kiir claims that he does not have the money to solve his country’s myriad problems, he seems to have a lot of money to improve his image. According to a report published by Vice News and the Center for Public Integrity, the Sudanese president spent more than $2 million on lobbying and public relations firms in Washington between 2014 and 2015. These firms were paid to boost his image, to keep US aid flowing and to prevent any criticism of the South Sudanese government’s atrocities against its own people that might have resulted in sanctions.

A large chunk of this money went to the Podesta lobby group, which included high-level officials who served in Bill Clinton’s and Barack Obama’s administrations. When a United Nations report accused the South Sudanese government of failing to end violence, protect civilians and punish perpetrators, Podesta issued press releases that discouraged sanctions against South Sudan, claiming that such sanctions could lead to the collapse of the fragile peace agreement.

South Sudan is not the only country that relies on PR firms to stave off criticism. Increasingly, rogue African states and leaders are turning to PR firms in the West to whitewash the atrocities they are inflicting on their people. Many countries, including Egypt, Nigeria, Equatorial Guinea, Iraq and Azerbaijan, have recruited lobbyists in the West to influence public policy and opinion. The spin-doctoring is so successful in some cases that human rights abusers turn into human rights defenders overnight.

South Sudan was bound to be a failed state straight from birth. In other countries, the “resource curse” strikes when stable countries discover oil or other resources and then descend into conflict over competition for those resources. In the case of South Sudan, the “resource curse” was brewing even before the country was liberated.

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No Country for Muslims? Modi Underestimated Indians’ Tolerance for Diversity

7 min read. What India’s Prime Minister forgets – and what the mass protests in Indian cities demonstrate – is that India’s secularist democracy has survived more than 70 years because Indians decided that religion was too personal and too precious to be left to the whims of the state.

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No Country for Muslims? Modi Underestimated Indians’ Tolerance for Diversity
Photo: Unsplash/Girish Dalvi
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Just before Christmas, when thousands of Indians – both Hindus and Muslims – were protesting against a controversial new law that discriminates against Muslims, a court in Pakistan handed down the death sentence to Junaid Hafeez, a 33-year-old university professor who was found guilty of blasphemy. Hafeez had been accused of posting derogatory comments about the Prophet Mohammed on social media. His case is one among many in Pakistan where harsh sentences have been handed out to those perceived to be insulting Islam.

That same week, a court in the Kingdom of Saudi Arabia – Islam’s holiest land – sentenced five men to death for the murder of the journalist Jamal Khashoggi. Critics believe that the trial was a farce and the real perpetrators of the crime, including Saudi Prince Mohamed bin Salman, have got away scot-free. Khashoggi’s brutal murder in a Saudi consulate in Istanbul in October 2018 shocked the world and led many to point fingers at the repressive Saudi monarchy, which is known to torture and detain those opposed to it – and which seems to suffer no consequences for its inhumane treatment of dissidents, not even from Western nations that advocate democratic ideals to the rest of the world

There were no mass protests or riots in either Pakistan or Saudi Arabia – or even outside these countries – against what are undoubtedly flawed and extremely unfair justice systems. On the contrary, the Trump administration congratulated Saudi Arabia for the verdict against Khashoggi’s alleged killers, thereby whitewashing what was clearly a miscarriage of justice.

So the fact that Indians of all religions have risen against the Citizenship Amendment Act (CAA) is perhaps on indication of how resilient India’s democracy and secularist traditions are. The CAA is being opposed because it allows Hindus, Sikhs, Christians, Jains and Parsees who are in India illegally to acquire Indian citizenship if they can prove that they are being persecuted in Bangladesh, Pakistan or Afghanistan, all of which are predominantly Muslim countries. This privilege, however, is not extended to Muslims from these countries. This is viewed by many as grossly discriminatory and contrary to India’s constitution, which was founded on the principle that religion should not determine citizenship.

At least 25 people have been killed by security forces since the protests began, but Prime Minister Narendra Modi has shown no signs of reconsidering the wisdom of the Act; on the contrary he has become more defiant. This could be because, like Donald Trump, he believes he has a strong base that will support him and his policies no matter what. But that base, it seems, is crumbling in Modi’s case. The protests have not stopped; on the contrary, they are getting louder.

Moral high ground

Since independence in 1947, India has prided itself for not being like its neighbour Pakistan, which insisted on forming an independent state for India’s Muslims rather than being part of a united India where both Hindus and Muslims could co-habit peacefully. India held the moral high ground with respect to its neighbour, often boasting that despite being a Hindu-majority country, it had no issue with its sizeable Muslim minority. (There are currently roughly 200 million Muslims in India – almost the same number as the total population of Pakistan.) In fact, until Narendra Modi’s right-wing Hindu nationalist party took over in 2014, successive Indian governments have made it a point to woo and accommodate the nation’s Muslims.

The fact that Hindus in India are fighting to preserve Muslims’ rights is itself a testament to Indians’ tolerance and maturity – even among those who have historical grievances against the Muslim community. Although Muslims have lived in India before the advent of the Mughal Empire, which ruled over India from the 16th century to the mid-18th century, the Islamicisation of India is often attributed to the Mughal invaders/conquerors and their proselytising mission.

There is no doubt that Mughal culture has contributed enormously to the arts, architecture, culture and cuisine of India. Architectural marvels like the Taj Mahal, biriyani, kebabs, and the Urdu language are a legacy of India’s Mughal/Muslim heritage. But the Mughal Empire (which lost power after the East India Company and later the British Empire controlled large swathes of India) is also associated with atrocities, including forced conversions, which India’s Sikhs are acutely aware of as their religion is founded partly on resistance to Mughal hegemony.

Although Sikhism is often viewed as a reaction against Hinduism’s stifling and oppressive caste system, and its first guru, Nanak Devji, is remembered for fusing Islam with Hinduism, thereby creating a monotheistic religion that shunned the worship of gods and goddesses and that bequeathed more rights to women, Sikhs’ resistance to Islam has come to define their religion.

Distrust of Muslims is an instinct that is inculcated in Sikhs and Hindus from childhood, much like the way Kikuyus are taught to distrust Luos. When I was a child, my grandmother reminded me that many Sikh gurus, such as Guru Tegh Bahadur, were tortured or put to death by Mughal emperors for resisting forced conversions to Islam. The sons of Sikhism’s last guru, Govind Singh, were buried alive by the sadistic Emperor Aurangzeb in the late 17th century. Govind Singh formed the “Khalsa” (a militant group of disciples) to wage war against the Muslim rulers.

Northern India’s Sikhs and Hindus thus have an instinctive fear of Muslims that is based on a history where they – not the Muslim/Mughal invading armies – were the persecuted ones, a fact that neither the left nor the right in India is comfortable addressing, but which Prime Minister Narendra Modi and his Bharatiya Janata Party (BJP) have cynically tapped into.

What is happening in India is not your garden variety Islamophobia that emerged after 9/11 but a much deeper instinctive reaction that has its roots in Indian history. While the Mughal period in India is often seen as a golden age when beautiful buildings, poetry, dance forms such as kathak and other fine arts flourished, it is also viewed as a period of intense violence and cruelty. While Mughal emperors like Akbar the Great (who married a Hindu woman) are lauded for fostering harmony between the sub-continent’s largely Hindu population and the Muslim rulers, the atrocities committed by some Mughal emperors has also marred their reign. These atrocities shaped the formation of religions like Sikhism. Yet, the Sikh community’s religious leaders were among the first to oppose the CAA.

A “pure” India

The violence that characterised the Mughal Empire, especially in the 17th century, was reenacted again in 1947 when India attained independence and when millions died or were displaced when the new country Pakistan was born and the Indian subcontinent was partitioned. My ancestral family home in Lahore became part of Pakistan. This is a wound that my great grandparents and grandparents harboured for years.

And yet, India’s Muslims who did not cross the border to live in Pakistan in 1947 have rarely felt like they do not belong to India. Hindu temples sit comfortably next to mosques in most Indian cities as do cathedrals and synagogues. That was the beauty of India…until Modi came along, and told Hindus that India belongs to them and them only.

Modi and his BJP party exploited Hindus’ instinctive distrust of Muslims. The Rashtriya Swayamsevak Sangh (RSS), a militant Hindu organisation formed in 1925 and which Modi belongs to, has an agenda to “purify” India, much like Adolf Hitler sought to “cleanse” Germany. In the 1940s, as World War II was raging in Europe, the RSS leader MS Golwalker spoke of an exclusively Hindu nation: “Ever since that evil day, when Moslems first landed in Hindustan [India], right up to the present moment, the Hindu Nation has been gallantly fighting to take on these despoilers. In Hindustan, land of the Hindus lives and should live the Hindu Nation…”

He then went on to extol the virtues of Nazism: “To keep up the purity of its race and culture, Germany shocked the world by her purging the country of the Semitic races – the Jews. Race pride at its highest has been manifested here, a good lesson for us in Hindustan to learn and profit by.”

In January 1948, five months after India’s independence, Nathuram Godse, a member of the RSS, assassinated Mohandas (Mahatma) Gandhi, who the RSS viewed as being sympathetic towards Muslims.

In an article published in The Caravan and adapted from a lecture she gave in New York last year just before the protests in India began, the Indian activist and writer Arundhati Roy stated:

If Nazi Germany was a country seeking to impose its imagination onto a continent (and beyond), the impetus of an RSS-ruled India is, in a sense, the opposite. Here is a continent seeking to shrink itself into a country. Not even a country, but a province. A primitive, ethno-religious province…That it will self-destruct is not in doubt. The question is what else, who else and how much else will go down with it.”

To understand the depths of Modi’s fascist tendencies, we need not go very far in time. In the six years he has been Prime Minister, he has taken the country down a path that will not go down well in history.

A few recent examples: In November last year, Modi’s government revoked the overseas citizenship of journalist Aatish Taseer on the pretext that Taseer’s father was a Pakistani. Taseer, who grew up in India with his Sikh mother, but who is now a British citizen, had written a cover story in May 2019 for TIME magazine that described Modi as “India’s Divider In Chief”. The revocation of his overseas citizenship (which is extended to individuals who can prove that they have Indian ancestry or who once held Indian citizenship, and which allows one to travel visa-free to India) was clearly an act of retaliation by a leader who does not take criticism lightly.

In August 2019, Modi’s government annexed Jammu and Kashmir by repealing Section 35A of the Indian constitution, which gave the former princely state semi-autonomous status. This act was viewed by the state’s Muslim majority as a direct attack on them and their territory, akin to what Vladimir Putin did in Crimea. Jammu and Kashmir has been a front line state caught between the crossfire between Indian and Pakistani armies for years. The current and previous governments have often viewed it as harbouring terrorists sympathetic to Pakistan, even though the residents have argued that they have no desire to be part of either India or Pakistan.

Violence against Muslims has also risen under Modi’s regime. According to news reports, more than a hundred Muslims have been killed by Hindu mobs since 2015.

What Modi forgets – and what the mass protests in Indian cities demonstrate – is that India’s secularist democracy has survived more than 70 years because Indians decided that religion was too personal and too precious to be left to the whims of the state. Most Indians recognise that their country’s strength lies in its religious and cultural diversity. If India had gone the Pakistan way, there would be rivers of blood everywhere, like those that flooded the India-Pakistan border at independence when Muslims, Hindus and Sikhs crossing the border were slaughtered in the hundreds of thousands in revenge attacks. Few Indians want to go down that road again.

What Modi and his government have done may appeal to the anti-Muslim instincts of India’s non-Muslim majority, but it goes against the grain of how Indians (except members of the RSS and its offspring the BJP) perceive themselves and their country. With economic growth rates sharply dropping in India currently, it is only a matter of time before the protestors’ anger against the government’s anti-Muslim stance turns into widespread disaffection.

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Of Tigers, Debt Merchants and 2020 Vision

8 min read. The former president of the African Development Bank, Donald Kaberuka, has dismissed as “nonsensical” any suggestion that Africa may have over-borrowed, saying instead that with better debt management and higher domestic revenue mobilisation, the continent can take on more debt. But Kaberuka fails to make the link between the increased borrowing and the revenue problem.

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Of Tigers, Debt Merchants and 2020 Vision
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The public debt burden has dominated economic debate in 2019. Public debt is likely to be even more topical in 2020, both domestically and globally. As at end November 2019, 31 out of 70 countries in the IMF’s roster of low-income countries are listed as either in or at high risk of debt distress. Another 26 are listed as being at moderate risk, leaving only 13 that are still at low risk. Last week, the IMF approved a $2.9b bailout for Ethiopia, one of the high distress risk countries.

I first called out the Jubilee administration’s borrowing binge six years ago. Up until two years ago, the IMF and the World Bank were still giving it the thumbs up. (Very often we forget that these institutions are lenders and therefore conflicted on matters debt.) A few weeks ago Donald Kaberuka, the immediate former president of the African Development Bank (AfDB) and erstwhile Finance Minister of Rwanda, dismissed as “nonsensical” any suggestion that Africa may have over-borrowed:

“The idea that Africa is drowning in debt is nonsensical . . . If we can improve on our own domestic revenue mobilization, if we can improve on our public debt management and if we can improve on our debt management capabilities, the continent is able to take a bit more debt, especially at this time when the markets are looking for yield.”

This is an interesting argument. You may also have heard it from the Jubilee administration—the problem is not too much debt; it is the Kenya Revenue Authority (KRA) that is failing to meet revenue targets.

Kaberuka, who I gather is an economist, wittingly or otherwise, fails to make the connection between the borrowing binge and the revenue problem. Only a most incurious economist would look at revenue and debt trends such as ours (see chart) and conclude that they are completely unconnected. Although I have written about the connection on more than one occasion, it is worth recapping. There are two dimensions to the connection: an accounting one and an economic one.

Let’s start with the accounting. Let’s say we start with a GDP of Sh10 trillion which is 80 per cent private economy and 20 per cent government. Let’s then say the government is raising Sh2 trillion, which is 20 per cent of GDP, in tax revenue. Suppose the government goes to China and buys a railway worth Sh500 billion on credit. The GDP will now be Sh10.5 trillion. We will be told that the economy has grown by 5 per cent. But the railway has not added anything to the economy, and nor is it paying tax, so the government still collects Sh2 trillion, but which is now 19 per cent of the Sh10.5 trillion GDP. If this is repeated every year, by year five, the GDP will have expanded to Sh12.8 trillion and the tax revenue-to-GDP ratio will be down to 15.7 per cent.

This is a purely accounting view, which assumes that government investment is neutral, neither helping nor harming the economy. This is not as far-fetched as it might at first appear. For example, it could simply reflect government investments with long gestation periods. Indeed, we have been told that the new Standard Gauge Railway (SGR) is one such long-term visionary project whose benefits will be realised by our grandchildren. But for no harm to occur, two conditions need to obtain. First, all the borrowing needs to be foreign. Use of domestic resources means diverting these from the private economy, and that is harmful. We call this crowding out. Second, there are no repayments, because repayment of foreign debt amounts to sucking money out of the economy, also harmful. Neither obtains.

Let us start with repayments. This year, we have budgeted to pay Sh139 billion ($1.39 billion) in foreign interest, a tenfold-plus increase from Sh11b ($130m) in the 2012-2013 financial year, the last year of the Grand National Coalition government. And this does not include the hefty payments of the principal on the SGR loans that kicked in this year. The use of domestic resources is also a very significant factor. Half the debt that the Jubilee administration has accumulated is domestic. The crowding out extends beyond credit. With so much money to spend liberally, trading with the government becomes the most profitable business, diverting other economic services away from, and inflating the costs for the private sector. This could not be better demonstrated than by the case of Kenya’s banking industry.

Chart 2Last year, the industry made a consolidated profit of Sh110b, and Sh119b in interest from government securities. Considering that lending to government is virtually costless and risk-free, this implies that banks made all their profits from the government, and lost Sh9b on the business they did with the rest of the economy. The contribution of interest on government securities has increased steadily from 37 per cent in 2013 to 108 per cent in 2018 (see chart). But we also see that the banks’ profitability has declined. Profits declined by 40 per cent in 2017, following the capping of interest rates in late 2016. In 2018 profits were 14 per cent lower than in 2013. If banks are not making money from the private economy, it stands to reason that government revenue will also take a hit.

How much public debt is too much?

Debt experts have sophisticated models that are supposed to tell us. These models are built around “present value.” Present value is the sum of a forecast, such as a cash flow, and in this case annual debt repayments, discounted by a rate of interest or other relevant discount factor, used to give an estimate of current worth. If two similar countries borrow the same amount of money on similar terms, one invests wisely, and the other plunders it all, the net present value of the debt will be the same. It should not surprise then that the IMF’s models were giving the Jubilee borrowing binge the thumbs-up even as the Eurobond went walkabout and one Josephine Kabura was mocking us with tall tales of cash stuffed in gunny bags.

Chart 3For the financial health of a country, a simple rule of thumb is to ensure that debt service does not grow faster than government revenue for too long. If the debt is invested productively, the investments expand the economy, the government generates more tax revenue from the expanding economy, which it then uses to service the debt. How long is too long? That is a matter of exercising sound judgement. As John Maynard Keynes famously quipped, in the long run, we are all dead. But the question becomes moot when the trend looks like what we see in the chart—debt service heading north, revenue heading south. You do not need present value calculations to see that this trend cannot go on for much longer. Sooner or later, something will have to give.

Expect to hear a lot about fiscal consolidation in 2020.

Fiscal consolidation is defined as policy measures that aim to reduce the deficit and stop the accumulation of debt. The substance of it is what we used to call structural adjustment but, following the 2007 financial crisis, it became necessary to invent a new name—it just wouldn’t do to speak of Spain, or the UK for that matter, as implementing structural adjustment.

A fiscal consolidation strategy is predicated on the expectation that governments can find ways of bringing down deficits without hurting growth. Budget deficits are, in essence, the pumping of money into the economy, which ought to stimulate growth. Conversely, fiscal consolidation amounts to withdrawing money from the economy, which would dampen growth. The problem is that economic slowdown hurts revenue, meaning that the government has to constrain expenditure even further to meet its deficit reduction targets.

The first strategy entails counteracting the contractionary effect of fiscal consolidation with expansionary monetary policy. Simply put, what the government takes away, the Central Bank puts back in circulation. The Central Bank has a couple of tools to do this, principally by buying bonds and lowering the cash ratio and liquidity requirements for the banks (the percentages of assets that banks are required to have in cash and near-cash assets such as Treasury bills and bonds). Shovelling money out of the door is also expected to reduce interest rates, which besides making borrowing attractive for businesses and consumers, can substantially lower the interest cost of domestic debt. But unlike fiscal stimulus where the government is the spender, monetary stimulus depends on market response. The policy makers hope the money will stimulate production, but it could just as well suck in imports, or leave the country to seek higher returns elsewhere, thereby depleting foreign exchange reserves and putting pressure on the currency.

The second strategy is to find “off-balance sheet” financing of public investment. The default alternative these days is the so-called public-private partnerships (PPPs). Simply put, PPPs are the public equivalent of equity financing. Instead of the government borrowing to build a hospital for instance, a private investor builds, and the government leases it. But PPPs have their drawbacks. First, to make them attractive to private investors, PPP projects are usually structured in such a way as to ensure that the investors cannot lose money—“de-risked” in financial lingo.

Second, PPPs are seldom commercially viable so, more often than not, the Government usually has to part-finance the project in order to achieve an attractive rate of return for investors. Third, PPP financing cherry picks projects with commercialisation potential, which typically will be projects that benefit more developed areas or better-off people in society. In economics, we call such policies “regressive”, meaning they transfer resources from the poor to the rich. Fourth, PPPs have a very high corruption risk—we need look no further than the stink that is the medical equipment leasing scheme known as the Managed Equipment Services (MES) project.

Another scheme is to shift debt and deficit financing from the national government’s books to quasi-government agencies, such as has recently been done by amending the law to allow the Kenya Roads Board (KRB) to issue bonds leveraged on the fuel levy revenues that are earmarked for road construction. Assuming an interest rate of, say, 12 per cent, each shilling of fuel levy revenue can be leveraged to borrow 8 shillings. Already, the KRB has published an expression of interest for transaction advisors to raise Sh150 billion. Suffice it to say that Greece used financial gymnastics of this nature to first be admitted into the Eurozone and to subsequently fake compliance.

PPPs have a very high corruption risk—we need look no further than the stink that is the medical equipment leasing scheme known as the Managed Equipment Services (MES) project

How much public finance does development require? There is perhaps no better place to benchmark than with the Asian Tigers.

Chart 4In the 70s, Thailand and South Korea were raising 13 and 15 per cent of GDP in tax revenue, well below Kenya’s 18 per cent, while Malaysia and Singapore were doing better at just over 20 per cent (see chart). But where the East Asians stand apart is that each of them was able to put at least a third of their revenue into investment. The real miracle here is how they managed to keep their recurrent budget to a maximum of 10 per cent of GDP, out of which they were also heavily investing in education. As economists Mahbub ul Haq and Khadija Haq observed, beneath the East Asian economic miracle lay an education miracle.

Chart 5It is also a miracle of public finance, specifically, public thrift. We hear a lot about the high saving and investment rate part of the story. What we do not hear about is the role of government in that story. In the early seventies, East Asian and African countries had similar national savings rates, but even then East Asian governments were contributing more to national saving and investment, although African governments’ contribution was also significant (see chart). A decade later, East Asian governments were still contributing over a third of national investment, while for African and other LDC governments this contribution fell to 11 and 6 per cent respectively. Consequently, we turned to foreign resources. By the early 80s, Africa was investing 20 per cent of GDP more than half of which was foreign-financed, while the East Asians were investing 30 per cent, 90 per cent of which was domestically financed.

In the 70s, Thailand and South Korea were raising 13 and 15 per cent of GDP in tax revenue, well below Kenya’s 18 per cent, while Malaysia and Singapore were doing better at just over 20 per cent

The East Asian experience is telling us that when people were too poor to save much, it is the government, and not foreign resources, that closed the gap between private savings and investment requirements. In economics, we postulate that saving is determined primarily by income, and investment by rate of return. As these public investments paid off, they boosted private income and consequently private saving. When countries save more, they need less, not more foreign resources to finance investment. Donald Kaberuka is telling us that we need to raise more revenue to enable us to borrow more. Is he ignorant or dishonest?

During his tenure, the AfDB became the lightning rod for infrastructure-led growth, a fallacy that this column has discussed before. In fact, the nonsensical comments echo sentiments in the AfDB’s 2018 Africa Economic Review, to wit:

“For much of the past two decades, the global economy has been characterised by excess savings in many advanced countries. Those savings could be channeled into financing profitable infrastructure projects in developing regions, especially Africa, to achieve the G20’s industrialisation goal. That this mutually profitable global transaction is not taking place is one of the biggest paradoxes of current times.”

You may want to note that the objective is to “meet the G20’s industrialisation goal.” The irrepressibly prescient Franz Fanon read in the tea leaves:

“The national bourgeoisie will be quite content with the role of the Western bourgeoisie’s business agent, and it will play its part without any complexes in a most dignified manner.”

And therein lies the rub.

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