Why Mailu’s Shisha Ban is Illegal

Cabinet Secretary Cleopas Mailu has purportedly banned Shisha in the country. The legal tool he used to do so, is the same provision that empowers him to deal with outbreak of rats. The move is irrational. For Externalities are better dealt with using Pigouvian taxes than command and control tools.

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Shisha smoker. Photo:Courtesy

By gatuyu tj

Health Cabinet Secretary Cleopa Mailu, through the Legal Notice No 292 of 2017, recently banned any form of dealing and consumption of Shisha, a tobacco concoction. Granted, it is the responsibility of the government to protect and promote public health.

However, this mandate ought to be exercised within the ambit of the law and hinged on appropriate public policy. Unfortunately, the move by CS Mailu, however well intentioned, raises numerous legal issues that cast doubt on its validity and policy questions that cast aspersions on its appropriateness.

Defective Legal Notice

In effecting the ban, CS Mailu invoked the rule making powers conferred to him under section 36 of the Public Health Act (the Act). On closer look, this section empowers the CS to make rules only when a part of the country is threatened by any formidable epidemic, endemic or infectious disease.

Such rules would be, among others, serve purpose of dealing with issues such as speedy interment of dead, disinfection and guarding against spread of a disease, removal of corpses, removal of persons suffering from infectious diseases and persons who have been in contact with such persons, and destruction of rats. A clear intendment of the provision was to provide mechanisms for handling health emergencies.

Even the generic sub-section 36(m) of the Act specifically invoked by CS provides its purpose as “…for prevention, control and suppression of infectious disease.” It is surprising how CS Mailu would equate consumption of Shisha to an outbreak of infectious disease or an endemic contemplated under this section. This is a very strained interpretation of a statutory provision and the CS may have misaddressed himself on the issue.

There are statutes in the legal regime that CS Mailu may have invoked to offer his ban more validity. Perhaps, he would have implemented the ban by invoking the rule making powers conferred to him by the Narcotic Drugs and Psychotropic Substances (Control) Act, a law that deals with control of the possession of, and trafficking in, narcotic drugs and psychotropic substances.

A keen eye will notice that CS Mailu Rules may have some errors. For instance, the rules provide a general penalty for persons contravening them to be one outlined under section 163 of the Act. Section 163 only deals with powers of entry and inspection of premises. The drafters of the rules meant Section 164, which provides for a general penalty.

This may look like a small and minor error not affecting the underlying substance. True, but it reveals a lot, on the un-consultative nature of the process the rules were made, making it possible for such errors to go unnoticed. It indicates the rules may have been conceptualized, made and validated in closed boardroom doors. The opinion and input of the general public was not sought.

Public Participation

Yet, Public participation is the cornerstone of our democracy. It is a guide for legislative and policy functions of government. It is a national value and principle under Article 10 of our Constitution. It avails an equal opportunity for people to participate in decision making process, to enable them share their facts, experiences, ideas, fears, hopes and opinions.

The Kenyan courts have asserted as much. In Robert Gakuru & others v Governor Kiambu County & 3 others (2014) Eklr, it was stated any process for legislative enactment must be backed by real, not illusionary, public participation. The new constitutional order has brought to an end an era where state officers would issue policy prescription, like religious edits from pulpits. CS Mailu Rules, revealingly, did not benefit from public input and this puts them in a check mate position.

The ban was informed by an advisory from World Health Organisation. If the product has adverse health effects, with negative externalities, government is always compelled to intervene, to correct the externalities and prevent market failures. The issue is whether employing regulations was the appropriate policy tool of correcting negative externalities from Shisha usage.

History offers us precedents and lessons. In 1920, United States, moved by pietistic Protestants, banned alcoholic beverages in the eighteenth amendment to their Constitution. The ban failed, for it was hard to implement. It made trade the alcohol trades go underground, increasing enforcement costs. What can be learnt from this event is that regulations cannot always substitute personal responsibility.

Pigouvian taxes over command and control

It is why the best approach of correcting such negative externalities, as those resulting from Shisha usage, is by compelling the National Treasury to levy Pigouvian taxes, (popular in Kenya as ‘sin taxes’) on this trade. Pigouvian taxes are more appropriate tools as it deters consumption by imposing a huge cost.

Users pay for harm they cause to themselves and others by contributing towards provision of public goods such as universal healthcare, which result to a net social welfare and achieves better results. It is the approach used to deal with alcohol and other tobacco products.

Lastly, when government officials are making regulations or public pronouncements, they should be mindful of private property rights and not to discourage investment efforts through abrupt decisions.

Uncertainties in the legal environment, lowers political credibility which discourages investors. CS Mailu ban did not show reverence for property right. Otherwise, he would have set a future effective date to his Rules to offer opportunity on those who have invested in the sector to divest. This is not a good trend. Recently, bar owners in central Kenya suffered huge losses from orgy of officially sanctioned destruction on pretense of fighting illegal brew.

We need to create a predictable legal system, where the laws are stable, clear and discretionary powers of state bureaucrats limited. Policy decision should be hinged on appropriate law and sober public policy. For CS Mailu’s Shisha ban, fortunately, the country has an independent judiciary. It will make an appropriate determination.

Lessons Kenya can learn from Implementation of MiFID II

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MiFID 2 will revolutionize the law and practice of financial markets worldwide

By Gatuyu t.j

The Second European Union Markets in Financial Instruments Directive (MiFID II), that will restructure financial markets worldwide, came in force on January 2018. Financial markets regulators should pay a close attention and learn.

Western countries have a certain advantage. They quickly learn from their history and mistakes. An otherwise gloomy even provides impetus for glorious reforms.

When, the sub-prime mortgage triggered financial crisis of 07/08 struck, they moved to revamp their financial markets laws to ensure such an eventuality may never again, happen.

Unlike us here in Kenya, where a bank called charterhouse will collapse on account of insider looting. We will neither learn or do anything, until Dubai collapses, for same reasons. We will do nothing until Imperial bank collapse. No action will be taken. We don’t learn?

United States reacted to the financial crisis by revamping her financial market laws, through the voluminous Dodi-Frank laws, which President Donald Trump hates, accusing them containing too much red tape, which hampers doing business. In the late 2017, Secretary Mnuchin submitted a detailed report on reform necessary in the banking sectors and financial markets. It is such constant reforms that make America great.

But it is in the EU where reforms to the financial laws were more ambitious. After the financial crisis, they issued the first Markets in Financial Instruments Directive (MiFID). This was an overarching directive, that reviewed the trade in all the financial instruments, these being shares, bonds, units in collective investment schemes and derivatives.

But still, this initial directive focused more on equities and general trading. It has been so since until there was an overwhelming urge for review, which resulted to a revolutionary MiFID II, that came in force this week.

MiFID II offers another comprehensive review of the financial markets law and practice. It streamlines the markets and offers more clarity for customers. It has been introduced at an opportune time, when the investor confidence in the markets is dwindling, ostensibly to ensure never again, will there be market caused financial crisis.

As anticipated, the directive as fulfilled its revolutionary hype. It introduces deep changes. First, is one the aspect of market research. Fund managers will hence be required to pay for research they receive from investment analyst, as free market analysis, is no longer allowed.

If Cytton, a Kenyan investment firm, was for instance operating in Europe as a financial market intermediary, they would be required to charge separately for the Sunday night newsletter they circulate with research on market analysis. So the research costs will need to be unbundled and segregated from execution cost.

The second issue is the directive gags the so called dark pools, or as they are more common known, the dark pools of liquidity.

We will explain. In public markets such as the Nairobi Securities Exchange, dark pools would be deemed to be private placements, that would allow investors to buy and sell large blocks of shares directly to one another, without necessarily revealing beforehand the size of the orders or the price they paid to the general public.

At the NSE, dark pools and their equivalents are not common, for one cannot execute them without an approval of the regulator. And our capital markets regulator is a snail. It will take eternity to offer an approval of even a minor application. But in advanced markets they are common.

It is true that dark pools serve an important market function. They prevent panic disposal of securities or ecstatic purchases, ensuring there are no market failures. They are can also be bane. They can create market asymmetry. Despite the trade being off the market, sophisticated high-frequency traders, who ordinarily use advanced algorithms, can always spot block orders and almost instantly trade against them. This distorts market trading and makes the general investors to feel duped.

Above the financial markets, the directive may have some impacts on taxation, even though it was not incentivized by tax issues. For instance, with a requirement that research costs be unbundled and treated separately, these costs may be deemed to a supply of services on their own. Thus, there will be VAT implications, unless the VAT laws will specifically exempt them.

The directive applies in Europe, but its impacts will be felt worldwide. But there are lacunas. There has arisen a trade in crypto currencies such as Bitcoin. Even regulated exchanges are unable to keep off. The directive is mum. It does not even classify them as financial assets or otherwise.  Probably they did not have a solution. Have they ceded their regulatory powers to blockchain?

Now than ever, we should be like Europe. Our financial markets laws are medieval and rudimentary. They have failed to keep pace with evolving world. A huge bundle of the Kenyan capital markets regulations is for the year 2002, save for token amendments. This was before the financial crisis, pre-social media era. We need to keep pace. We need to move fast. To have our own MiFIDs’.

The author is an advocate of the High Court. @gatuyu

Post Script.

This piece was later published in the Standard Newspaper. It is available here