According to the Treasury’s own estimates, Kenya has about $10 billion of committed but un-disbursed official development assistance money sitting idle in banks in Japan, China, Europe and the US but on which we have been paying heavy commitment fees.
Is it not ironic that we still have problems spending money from loans and grants we negotiated and signed off many years ago with international lending institutions and bilateral governments?
Weak capacity in budget execution is clearly one of the problems. Today, we have thousands of donor-funded projects that cannot progress to rollout because the government did not include them in this financial year’s budget.
There are cases where money from loans that have been signed off sits idle because the government has not provided or allocated resources for counterpart funding in the budget in the current financial year.
It is not uncommon to find diplomats lobbying government offices to have monies they have committed to projects included in the budget.
That is how we end up paying billions of shillings in front-end and commitment fees on idle funds sitting in banks abroad.
In several cases, the disbursement of funds from committed loans and grants suffer when we implement ill-thought-out spending cuts across ministries all in the name of austerity.
I make these remarks as an entry point to the long-running saga between Kenya and Japan and how the dispute over tax exemption shenanigans has adversely affected the implementation of important Japanese-funded infrastructure projects, especially in Mombasa.
As we all know, the most frequently used device for formally recording agreements between two governments is what is known as the ‘exchange of notes’.
Indeed, an exchange of notes is a record of an agreement that has many similarities with private law contracts. For many years, the practice has been that an exchange of notes has to be signed before any loan agreements are entered into.
We have been signing exchange notes with the Japanese over grants and loans for years. The typical agreement with Japan provides for the following tax exemption.
First, fiscal levies and taxes are imposed on the development agency operating in the host country, namely, JICA.
Secondly, exemptions to Japanese companies' suppliers, contractors or consultants with respect to income accruing from the supply of products or services provided under the loan.
Thirdly, exemption from duties and fiscal charges with respect to the import and re-export of their own materials and equipment needed for the project.
Finally, exemption from taxes to Japanese employees engaged in the implementation of projects.
There is a sense in which such arrangements will rub your sense of sovereignty the wrong way. But the counterargument is that this is the reality when it comes to tied-aid.
Everything went smoothly until 2021 when the Kenya Revenue Authority (KRA) started refusing to accept ‘the exchange of notes as the basis for allowing exemptions. The taxman insisted that all Japanese contractors and employees of JICA needed to produce a gazette notice from the minister for Finance granting them tax exemptions.
As it turned out, the consequences in terms of disruption of Japanese-funded projects and disbursement of funds from loans from Tokyo were dire.
So, then Finance Minister, Ukur Yattani, hurried to Parliament where he received approval from the committee on delegated legislation to introduce new regulations granting the Japanese waivers and exemption and published a gazette notice.
Last month, the High Court in Nairobi quashed the income tax waivers for the Japanese and ruled that exemptions can only be granted by Parliament after public participation.
The upshot is that we must brace for huge disruptions in Japanese-funded projects. Billions of funds committed to projects will keep sitting idle in banks in Tokyo even as we continue to pay fees on the facilities.
Indeed, the Japanese are behind some of the largest and game-changing infrastructure projects in Kenya especially in Mombasa. If you add up loans and grants to projects, the largest of which being the Mombasa Gate Bridge and the Dongo Kundu Special Economic Zones, the Mombasa Port Development Project and the Mombasa Southern Bypass, the commitment both in terms of loans and grants amount to nearly $4 billion.
We forget that before big bilateral lenders and donors like Japan commit to supporting us, the question uppermost in their minds is the following: If I start an undertaking on the strength of tax holidays and exemptions, how can I be sure that the concessions will remain in force until the end of the project?
Tax policy in this country is framed by revenue-obsessed mandarins who believe that collecting more money for the government is more important than pursuing game-changing infrastructure projects for the country.
