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Ideas Thinkpieces

Living on the edge

Antifragility is beyond resilience or robustness. The resilient resists shocks and stays the same; the antifragile gets better.
In Antifragile: Things that Gain from Disorder, Nassim Nicholas Taleb, the Distinguished Professor of Risk Engineering at the New York School of Engineering, acclaimed author and essayist, philosopher, former option trader and avid Twitter user puts it forcefully that debt “fragilizes economic systems,” that is, makes them weaker. 

As our society has grown richer, we have grown more indebted. This is not unique to Kenya. The richest countries in the world are also the ones with the most government debt relative to GDP (link). Nobel-winning economist Paul Krugman has often argued that government debt is beneficial to the economy. In “Debt is Good” (link), Krugman makes the case for government debt, stating that it provides a safe asset for investors who use government securities to manage risk and hold them as a substitute for cash. By issuing debt, governments can raise the money required to pay for useful things. This line is frequently used in Kenya when the public debt is being discussed. In trying to be a good student of economics, I wholeheartedly agree. If debt is used to fund productive investments such as transport infrastructure, the direct (say a new road where once was none) and indirect benefits can be astonishing (from the increase in land prices after completion of the new road, to the farmers who spend less to transport their produce, to the transporters who spend less on maintaining their vehicles, and so on). I am not a betting man, but I would confidently wager that that the Thika Superhighway has generated exponentially more than the KES 34 billion that was spent to construct it. So what is the problem? 

I know better than to argue with Krugman, so I will not. Mine is about risk. Specifically, the economic fragility and increased exposure to risk that is caused by an increase in government debt. In truth, not all government debt is equal. If debt is denominated in the local currency, it is easily manageable. The government can issue bonds (which are basically pieces of paper or entries in a computer) and collect money from investors, promising to pay the principal and any interest back. When payments fall due, the government has at least 2 options: issue more bonds (or treasury bills) to pay for previous interest and principal payments, or print money to pay back investors. This can theoretically go on forever, a point Krugman makes (link) when he describes domestic debt as “money we owe to ourselves”. But it doesn’t go on forever. Simply, the demand and supply of money causes the price of money (interest rates) to fluctuate. Too high an interest rate and money can become too expensive for borrowers; too low an interest rate and it can make money too cheap, potentially causing the prices of goods to rise (inflation) as consumers make higher bids for a finite number of goods. For these and other reasons, governments complement local borrowing with external borrowing, in foreign markets and in foreign currencies. Because the debt is borrowed in foreign markets, the demand-and-supply effect on local interest rates is not as strong as it is when debt is issued domestically. 

However, external debt is serviced in foreign currency. If Kenya holds US$ 1 billion in debt, it must pay interest and principal in US dollars. And herein lies the worry. What happens if Kenya holds US$ 1 billion worth of debt, and the US dollar appreciates relative to the Kenya shilling? Kenya has to pay more to honour the same debt, since more Kenyan shillings will be required to make US$ 1. Just as less Kenyan shillings would be required if the US dollar lost value relative to the Kenya shilling. In good times (i.e. when the shilling is strong against foreign currencies), more foreign-denominated debt is a good thing for Kenya, since the debt portfolio loses value and it becomes cheaper to service external debts. But when things take a negative turn, it could spell doom.

debt

As of the 2017 Medium Term Debt Management Strategy Report (link) by the National Treasury, 49% of Kenya’s total public debt is external debt. In fact, the 2014 Eurobond accounts for 7.9% of Kenya’s total public debt. A sustained 2% appreciation in the US dollar would make the interest and principal payments on the US$ 2 billion Eurobond more expensive by US$ 44 million dollars. A sustained 2% appreciation in the bundle of currencies in which Kenya’s external debts are denominated would make the external debt portfolio more expensive by about US$ 340 million, or KES 34 billion. Imagine what could happen if the bundle of currencies appreciated by 5% or 10%.

If this was to happen, Kenya would probably first make use of the Central Bank reserves to try and stabilise the exchange rate prices by allowing more US dollars into the economy. As reserves dwindle the National Treasury and CBK would probably turn to the IMF for a dollar credit line with which to shore up the Kenya shilling. Remember that as this is happening, the price of imported goods would have risen sharply as the Kenyan currency depreciated. So fuel and all the other imported goods (Kenya is a net importer) and commodities would be much more expensive, with inflation rising and the cost of living shooting up. Depending on the level of interest rates, the CBK could try to arrest inflation by raising interest rates, and making the cost of money in the economy rise. With higher interest rates, access to credit by borrowers slows down and the economy cools off. However, because the inflation is mainly imported, this does not have the desired effect on inflation. With the economy growing slower, there are less jobs to go around, less money for everyone and less taxes collected by the state. This means that the government would have to reduce development spending to meet external debt obligations. This is a rather macabre vision of the future, but with the American and North Korean nuclear face-off escalating by the day, who knows what could happen to the US dollar and other reserve currencies.

Government debt is good, and can be a potent tool for fast-tracking infrastructural development. But there is a dark side to it; external government debt fragilizes the economy by increasing its exposure to foreign exchange rate movements.
There is, thankfully, a silver lining for Kenya. Tullow Oil, an oil and gas exploration company, estimates that there could be over 750 million barrels of oil (link) in the South Lokichar Basin. If Kenya could extract and export oil, it could develop some much-needed antifragility. If the oil is exported in US dollars, yes, Kenya would receive less per barrel if the US dollar depreciates relative to the Kenya shilling. But this would also make Kenya’s imports, such as oil, and the external dollar debt portfolio cheaper. If the US dollar appreciates, yes, imports would be more expensive. But the earnings from Kenya’s oil exports would increase as well, offsetting the rise in the costs of servicing external debt.

If Kenya could be able to export just 100,000 barrels of oil per day, and be able to earn a net profit of just KES 20 per litre (a barrel contains about 159 litres), the country could be earning up to KES 316 million a day (about US$ 3 million). In the medium-to-long term, if such resources could be used prudently, Kenya could theoretically pay all its current external debt (KES 1.72 trillion as of the 2017 Medium Term Debt Management Strategy Report) from the South Lokichar Basin alone. This is a huge “if” and would depend on how well Kenya -through its political class and state technocrats- uses the oil dollars, and how well it can stave off the resource curse (link), yet another source of fragility. Whatever the case, Kenya is likely to continue borrowing from domestic and external markets to fund infrastructure projects and try to close the infrastructure deficit caused by decades of underinvestment. The infrastructure that such debt pays for is an important and necessary catalyst for sustained economic growth, but the fragility that external debt introduces into the economy is a growing strategic weakness.
The gods have given us black gold, and with it an opportunity to strengthen (add some antifragility) our economy and pay for much-needed infrastructure. What will we do?

 

 
Thanks to Faith Nyawira for reading a draft of this.

 

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Ideas Thinkpieces

Cleaning up the Green City in the Sun

In most African countries, rural areas are lagging behind in terms of infrastructure development and access to utilities such as water, sanitation and health services. Private sector investment has clustered in the areas where these crucial elements can be found, the cities and towns, with millions of African youth migrating to urban areas. This is not a uniquely African phenomenon. Rural-urban migration happens everywhere in the world - the case of a young man or woman leaving home for the big city where prospects abound is an all too familiar story. As a consequence, aside from the enormous income inequalities existing between urban and rural areas, cities and towns are facing tremendous pressure on social services and amenities. In most African cities and towns, traffic gridlocks, congested hospitals, crowded schools and overflowing sewage pipes is commonplace.

Of the 10.7 million people living in urban areas in Kenya, Nairobi is home to one third of them. Kibera, Africa’s largest informal settlement, is located in Nairobi, in addition to Mathare, Huruma, Korogocho and Kawangware. Roads leading into and out of the city are gridlocked during morning and evening rush hour; Kenyatta National Hospital, one of the two referral hospitals in the country is struggling to cope with the number of patients in need of care; water service to residential areas is often rationed while a booming black market for piped water and electricity thrives in the informal settlements. The city is home to many top-tier hotels, hosts the African headquarters of dozens of multinationals, hosts countless regional, continental and global conferences, enjoys about 50% of Kenya’s GDP and its real estate is perennially in “best real estate market” lists. Given this backdrop of a vibrant, if under-equipped metropolis, Nairobi is facing a garbage crisis. More accurately, the green city in the sun has been experiencing a garbage crisis for over a decade now.

The Nairobi County (formerly Nairobi City) Council (NCC) has long been the main provider of garbage collection services in the city. Several private firms have cropped up over the years to provide this essential service in aid of a struggling NCC. Garbage, or municipal solid waste, is collected once or twice a week in most industrial and residential areas and delivered to the lone NCC-owned Dandora dumpsite, where the solid waste is piling up high owing to non-compaction, just about 8 kilometres away from the CBD. Every day thousands of slum dwellers try to eke out a living by sorting and collecting plastics, metals, glass and rubber from the waste heaps which they sell to recycling firms and other community-based organisations. A casual drive around the CBD and its environs provides proof that this is neither a sustainable nor an efficient way of managing municipal solid waste. Ikiara and company (2004) make the following damning assertion:

“Nairobi is literally under garbage. Of the estimated 1,500 tons of solid waste generated daily in the city, only about 25% gets collected. The rest is left in open spaces, markets, bus stops, drains and roadsides forming mountains of rotting, smelly and unsightly waste. Discarded polythene papers of all colours and sizes decorate the city landscape. Solid waste collection, transport, and disposal are thus generally chaotic” (Ikiara et al., 2004, p. 61).

Nothing much seems to have changed. According to the authors, about 375 tonnes of waste generated in the city would get collected, leaving approximately 1,000 tons uncollected. Daily. Kasozi et al. (2010) estimate that between 2,500 and 3,100 tonnes of waste are generated in the city every day. In a recently televised interview, the Nairobi County Governor (view it here, from 10:58) confirmed these numbers, informing us that now 2,000 tons of waste is being collected every day, a big improvement from the 375 tons being collected when he assumed office. Unfortunately, given that up to 3,100 tons are generated every day (likely much more, given that these numbers were put forward 7 years ago), if 2,000 tons are collected, 1,000 tons are therefore left uncollected, the same as Ikiara et al. found in 2004. Now, I am not assigning blame to anyone (well, perhaps past city council leadership?); merely presenting the facts as they are.

The dangers of poorly managed municipal solid waste are well documented. The solid waste in Nairobi tends to be a by-product of industrial, service and manufacturing processes i.e. chemicals, metals, textile derivatives, refuse from auto and equipment repair shops, refuse from construction sites, polythene bags, plastics, paper, etc. Poor management of waste materials such as these through open air combustion at the Dandora dumpsite, or at other illegal dumpsites across the city, generates and releases vinyl chloride monomers and dioxins into the atmosphere, polluting the air. Foul odour is the least of concerns however, bearing in mind the dangerous effects these pollutants have on the respiratory system. The World Health Organization considers these persistent environmental pollutants highly toxic, and on human exposure, dioxins can cause developmental problems, damage the immune system, interfere with body hormones and can lead to cancers. Media reports over the years (such as this and this) have confirmed that the garbage crisis is quickly escalating into public health issue. In a positive move, the Cabinet Secretary for Environment and National Resources, Prof. Judi Wakhungu, recently introduced a ban (see The Kenya Gazette, Vol. CXIX, №31, Special Issue) on “the use, manufacture and importation of all plastic bags used for commercial and household packaging” to the fury of the manufacturers of the stuff. That said, the public health concerns are very real. In a study funded by the National Council of Science and Technology, Mutune and company (2014) looked at African indigenous vegetables (such as kale, aramanth, pumpkin leaves, etc.) from 25 sites in the city and while their findings were varied, they concluded as follows:

“This notwithstanding, longterm metal exposure by regular consumption of such locally grown vegetables poses potential health problems to animals and humans. Further cleaning of the rivers needs to be done, and curtailing of all effluents and dumping of solid waste should be done to minimise contaminant leakage into water and soil that may be used for agriculture” (Mutune et al., 2014, p. 71).

Not only an eye sore but terrifyingly dangerous, I propose an idea that may help to improve the collection and management of municipal solid waste in Nairobi: waste to energy (WtE) technology. This would address the garbage problem sustainably through recycling, and generation of electricity that could be into the national grid, while considering the impact the system would have on the beneficiaries of the current model of waste management in Nairobi i.e. community-based organisations, garbage collection companies and their employees, recycling firms and their employees, all the people based at the Dandora dumpsite who sift and sort for glass, rubber and metals, etc.

Ikiara and company (2004, p. 66) mapped the solid waste value chain in Nairobi

WtE technology has been successful in Europe in the management of solid waste, so much so that Germany and Sweden are importing (see here and here) municipal solid waste from neighbouring countries to fuel incineration plants. Imagine that: a Nairobi so clean that it needs to buy solid waste from other counties in the country. Granted, in the NTV interview, the Governor speaks of WtE technology and its coming introduction in Nairobi, so I claim no novelty in proposing it. I do however propose the following implementation plan.

1. Sorting at source - Residents sort out solid waste into 3 categories, each in different coloured-labelled bags/ containers — glass and metals, paper and organics, plastics and other materials — prior to free collection by the NCC-designated agent (not less than twice weekly) while replacing the garbage bags/ containers;

2. Collection and delivery – Solid waste is delivered to the “Nairobi Waste Management and Solutions Centre” a.k.a. “Naiclean”;

3. Processing and treatment — At Naiclean, the metals are separated from glass by use of magnets. Once separated, these can be sold as-is to the existing recycling companies or community-based organisations. The paper and organics are directed towards biogas cylinders, where they are treated to produce biogas for firing the WtE chambers, and the residue is dried and compacted to produce briquettes which would be sold as an alternative to charcoal and firewood. Plastics and other residual materials are, in the end, directed into furnaces where they are used as fuel to propel turbines that generate electricity which is sold into the national grid.

Yes, this is a rudimentary proposal — I am no expert — but I think, if the right mix of minds coalesced around it, it could work. The existing system of collection and delivery can be used, with minor tweaks, as opposed to creating an entirely new one. People presently earning a living from the Dandora dumpsite can be trained and employed at either the collection, delivery or processing levels of the system. The financial investor who would fund the implementation of this project would earn revenues from (i) sale of electricity into the national grid, (ii) sale of glass and metals to recycling companies and CBOs, and (iii) the sale of briquettes. A feasibility plan, one that updates the statistics and incorporates the findings, recommendations and specific actions proposed in the Integrated Solid Waste Management Plan, can be carried out, and a prototype Naiclean system run for 6 months to assess the viability before full implementation.

Indeed, a more holistic approach would ensure that the production process uses as much organic or recyclable material as possible, and that consumers are educated and nudged to reuse and recycle as much as possible, with a view of reducing the quantity of solid waste produced. Yes, the Nairobi County government can always open a new dumpsite in Ruai or any other part of the city precincts. But that seems to me like it would merely be an act of kicking the can down the road, when the effects of solid waste mismanagement would manifest in more harmful ways, and intervention would cost much more. If an intervention must be made – and it must– let it be one that most holistically addresses the problem. We all want a clean Nairobi; I propose Naiclean.

 

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Academic references cited

  1. Ikiara, M. M., Karanja, A. M., & Davies, T. C. (2004). Collection, Transportation and Disposal of Urban Solid Waste in Nairobi. In I. Baud, J. Post, & C. Furedy (Eds.), Solid Waste Management and Recycling (Actors, Partnerships and Policies in Hyderabad, India and Nairobi, Kenya) (Vol. 76, pp. 61–91). Dordrecht: Kluwer Academic Publishers.
  2. Kasozi, A., Von Blottniz, H., Ngau, P., & Kahiu, N. (2010). Using local knowledge production and systems thinking approaches in the development of an Integrated Solid Waste Management (ISWM) Plan harnessing semi-formal systems: Lessons from Nairobi, Kenya. In The 20th WasteCon Conference and Exhibition (pp. 1–10). Johannesburg.
  3. Mutune, A. N., Makobe, M. A., & Abukutsa-Onyango, M. O. O. (2014). Heavy metal content of selected African leafy vegetables planted in urban and peri-urban Nairobi, Kenya. African Journal of Environmental Science and Technology, 8(1), 66–74.

First published on Medium.com

 

Categories
Ideas Thinkpieces

The Law of Unintended Consequences: How M-PESA can Gain from Adversity

Following up on Safaricom: Past, Present & Future and in response to the ongoing conversation regarding possible regulatory action that may lead to splitting the M-PESA operation from the Safaricom business, or opening up the M-PESA platform to other players. I make my case as follows. From the get-go, I am not convinced that splitting M-PESA from Safaricom would lead to significant increase in competition, a principal argument for the proposed split. Forcing the company to open up a key business segment to competitors does not coincide with my idea of capitalism.

Philosophically, the company should not be punished by the law for its success. The law should ensure that Safaricom, M-PESA and all other players in the market abide by a fair set of rules. A set of rules that aims to enable customers get value for their money, that protects customers’ civil rights, and enables shareholders have a fair chance of making profit in the process. While the M-PESA business is certainly head and shoulders above the rest in terms of market share, the market cannot be called a monopoly (see the Merriam-Webster dictionary definition of monopoly here). Airtel Money, Orange Money, Tangaza Pesa, Equitel and now Pesalink are all players in the mobile money game. A law that seeks to govern the operation of entities in the mobile money space is welcome. But the law cannot be used as a tool to destroy the competitive advantages built by one player to enhance the competitiveness of others. That, I believe, is no just law.

According to Safaricom’s 2016 annual report, Safaricom Limited “operates the M-PESA business on a license basis” from Vodafone Sales and Service Limited (VSSL). VSSL owns M-PESA and, through a Managed Services Agreement, charges Safaricom a quarterly license fee to operate M-PESA. The license fee, which is a percentage of the M-PESA revenue, was 10% up to 31 July 2015, and 5% from then onwards. M-PESA Holding Company, the report says, “acts as the trustee for M-PESA customers and holds funds the M-PESA business in trust to ensure that those funds are safeguarded at all times.” The M-PESA application is installed on a customer’s SIM card, and the company earns revenue principally in 2 ways:

i. A tariff, graduated based on the amount being transacted, is charged on all transfers and withdrawals performed by customers, and,

ii. Through a partnership with the Commercial Bank of Africa and KCB, customers can save and get loans. Revenue from this service, Mshwari, is earned at the point of loan disbursement and is shared between Safaricom and the banks.

While I expect the status quo will remain, I do not consider it impossible that the M-PESA operation can be forced open or to split from the Safaricom business. If such an event was to occur, I do not believe it would necessarily spell doom for Safaricom. In fact, I think there are some possibilities in which such actions could present great opportunities for the company.

Scenario I — Status quo

Revenue from M-PESA operations has been growing at a phenomenal rate over the last 5 years, with the full-year 2016 revenues 2.5 times that reported in 2011, and 4.5 times that reported in 2010. At no point in the last 5 years has revenue growth dropped below 20% per year, and as of the 2016 report, M-PESA contributes over 20% of the company’s total revenue. With the exception of a significant security event, I have no reason to believe that this will change.

M-PESA revenues to the company over the last 5 years would have any capitalist’s tongue wagging | Source: Company annual reports
The number of total customers and M-PESA agents over the last 5 years | Source: Company annual reports

Scenario II — Forced split

In the event that Safaricom is required to separate M-PESA from its core operations, I imagine one way of doing this would be by creating a separate legal entity for M-PESA operations (e.g. “M-PESA Operations Limited”, ‘MOL”). MOL would be a wholly owned subsidiary of Safaricom Limited, and it could be licensed by Vodafone Sales and Services Limited (M-PESA’s owner) to operate the M-PESA business on a license basis, just as Safaricom has been doing. MOL would be free to partner with other entities, such as its parent company Safaricom, to operate the M-PESA platform through a mobile phone SIM card application. In such a scenario, I do not see any material changes to the customers’ M-PESA experience, and no significant changes to operating expenses. In fact, other than the administrative nuisance and associated expenses, I see this working out to result in business as usual.

Granted, this is an oversimplification, but if separation were required, innovation around legal forms would be enough to do the trick.

Scenario III — Forced interoperability

Interoperability has been said to be the ICT Ministry’s preference on the matter. While the exact structure has yet to be revealed, I propose the following form. Like in scenario II, the newly created “M-PESA Operations Limited” is free to partner with mobile telecommunications operators. In the case of merely splitting the companies, scenario II suffices, with MOL limiting its partnership with telcos to Safaricom. If interoperability were required, or desired, MOL could easily partner with other telcos. Unlike in the current case where the M-PESA application is baked into Safaricom SIM cards only, this could be extended to the SIM cards of partner telcos. Alternatively, a USSD or software application could be created, through which the customers of partner telcos could access M-PESA. In this scenario, infrastructure costs and likely to be significant, with the telcos and MOL having to streamline IT systems and the like, but over time, Airtel customers in Kenya would be able to use M-PESA as easily as Safaricom customers.

Again, an oversimplification; I imagine opening-up the platform would result in an arrangement such as this

Given the adoption of M-PESA and competitive advantages such as its 100,744 agents across the country (FY 2016), I think that Safaricom could end up gaining the most. Simply, if an Airtel or Orange Money customer uses the M-PESA service more than their parent company’s service, M-PESA would gain market share and earn revenue from sources it previously was unable to access. Recall that the law would cut both ways; Airtel and Orange would also be required to open up their mobile money platforms. Consequently, the advantages network operators bear by baking mobile money applications into their SIM cards would be erased. In effect, any mobile phone user in Kenya could potentially have their pick of mobile money service provider to choose from, regardless of their network operator. In such a scenario, I am convinced that the other telcos would have much more to lose than they stand to gain. By opening-up the M-PESA operation to other players with the aim of increasing competition, it could result in reinforcing the platform’s leadership position in the market, reducing competition.

In a complex world, things we imagine cannot happen, frequently do. It is possible that Safaricom will be required to separate the M-PESA platform from its core business operation. It is also possible that in doing so, M-PESA’s market dominance in fact could be reinforced and competition in the mobile money space suppressed. Who stands to benefit? Safaricom. Beware of unintended consequences.

 

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First appeared on Medium.com