Public spending needs a relook

Last week the Institute of Economic Affairs (IEA) held a webinar discussing the status of Kenya as a lower middle-income country, looking at various indicators.

But an anecdote used in the presentation stood out and needs to form part of public discourse — efficient use of public spending in public contracting.

Two weeks ago, the President identified a local carpenter who constructed copies of hospital beds then issued a directive that public hospitals should procure the beds from local carpenters. The average prices of those beds were reported to be Sh48,000 and Sh63,000 despite them being manual.

So, the IEA team went ahead to compare those prices with the international market to assess the carpenter’s competitiveness. They found hospital beds in China go for around Sh5,000-12,000, so public hospitals in Kenya will be acquiring the beds locally at five times the cost.

In short, this is not a sustainable economic model to transform Kenya’s local production capacity because we are simply crowding in inefficiency.

Now, let me stretch this further because when economists say inefficiency is costly especially when it comes to import substitution, we are told that we are theoretical. If public hospitals will be buying the beds from a local carpenter, it means the taxpayer funding health services has forgone five beds imported from China for one bed to promote the local carpenter. So, four patients needing hospitalisation will miss out critical services because we have to promote the local carpenter.

The contradiction in this directive is that a few days later the President ordered State institutions to start utilising lawyers at the office of the Attorney-General.

Private firms have been making millions of shillings selling legal services to State institutions. There is a case where a lawyer received more than Sh1 billion in legal services from the Nairobi county government in just one year.

These over the top rates are only charged in public sector and not private sector. These two cases are similar in nature and principle — efficient use of public spending in public contracting. But the President is speaking out of both sides of his mouth.

Also, last week I was at my phone repairer when we spotted two very young ladies doing cleaning of the pavements. The phone repairer appeared shocked that the ladies were real cleaners.

He questioned the government policy around Kazi Mtaani, employing people for a few months to do menial work then drop them. His proposal was that that Sh10 billion allocated to the Kazi Mtaani should have be converted to interest-free loans to small business.

In his case, he needs only Sh1 million to open three other phone accessory and repair outlets within the CBD and employ three people in each of the shops.

If this were replicated across many small businesses like his, there would be more sustainable jobs created than the Kazi Mtaani. He is right about small businesses having potential to create gainful employment.

And one of the biggest challenges they face is accessing cheap capital, so interest-free loans will come in handy for small businesses. Where he is wrong is SMEs having the large absorptive capacity to employ the many jobless youths.

Kenya’s unemployment problem is largely attributed to weak absorptive capacity of the economy and potential sectors to address this — agribusiness and competitive manufacturing.

Public works projects like Kazi Mtaani with short duration may effectively tackle frictional nature of unemployment but don’t address youth employment and our weak labour absorptive capacity problem.

Not unless the project is one with a long-term employment duration that allows the working population to build up assets and later concentrate efforts in income generation activities.

Overall, he is right that Kazi Mtaani is not a sustainable employment creation initiative.