The country has reacted with scepticism to National Treasury Cabinet Secretary John Mbadi’s plan to privatise Kenya Pipeline Company (KPC).
State-owned enterprises (SOEs) are dear to Kenyans, and they are, therefore, understandably reluctant to let go of them. Unlike private equity holders that have a profit motive, SOEs typically prioritise job creation and social welfare.
Besides, SOEs are used for political expediency; to pacify communities, often without a strict cost-benefit analysis. Moreover, some past privatisation programmes went terribly wrong. Mumias Sugar Company, Kenya Airways and East African Portland Company are few examples of corporations that were thriving under state stewardship, only for their fortunes to start dwindling immediately they were privatised, thus posing a huge financial burden on the Treasury.
As they say, once bitten, twice shy. Lawmakers are keeping their antenna high. The government intends to offload up to 65 per cent of its stake in KPC to strategic investors through an Initial Public Offer (IPO).
To allay citizens' fears, the minister is buttressing his argument on the back of the hugely successful Safaricom IPO of 2008. Safaricom was previously owned by the then-Kenya Post and Telecommunications Corporation, where its performance was dimmed by bureaucracy and lack of competitive strategies.
Its IPO was over-subscribed by multiples of the initial target of Sh50 billion. Since then, the firm has expanded aggressively and maintained profits. The government is keen to replicate this beautiful experience of Safaricom. Lawmakers, on the other hand, are demanding assurances from Mr Mbadi, based on Kenya’s experience with IPOs that led to capital losses and placed financial burdens on taxpayers. If the CS does not navigate this efficiently, the much-anticipated September IPO might have to be deferred. This debate calls for sobriety and a bipartisan approach.
Kenya is hanging precariously on a financial cliff. About 70 per cent of the Exchequer revenues go towards loan repayments, leaving less than 30 per cent to underwrite the cost of governance. Poor investments in productive sectors for more than a decade has translated to lacklustre growth of GDP. With a slow expansion of GDP – $56.3 billion in one decade – wealth accumulation and income generation are grossly undermined.
Consequently, the Kenya Revenue Authority struggles with its targets. The CS has to explore extra revenue-raising measures in order to finance the budget. With the Gen-Zs uprisings against the taxation measures, Mr Mbadi has resorted to other options in the debt pecking order. Since domestic borrowing puts pressure on interest rates, which increases cost of capital, this option is not advised.
Offshore financing is not without its hurdles. Already, most of the relevant indicators for Kenya’s credit risk assessment are in the junk zone. Indicators of risk exposures of Kenya’s public debt portfolio, including short-term debt-to-longer term debt; variable interest rate debt-to-fixed rate debt; and debt denominated in foreign currency, are stretched. Likewise, the country’s legroom for fiscal consolidation in terms of ordinary tax-to-GDP and ordinary revenue-to-sovereign debt, among other indicators, are not looking good either.
Essentially, any applications by Kenya for further loans will be considered risky. The country may only be considered for costly syndicated loans. This option will definitely push Kenya deeper into its already debilitating debt situation.
Someone might ask: why not try China for cheaper loans? The fact is that China’s aggressive debt diplomacy over the last decade or so has been enticing to poor countries. However, it is now emerging that China is the biggest creditor to the Global South, with a debt portfolio to this region amounting to slightly more than $1.1 trillion, courtesy of this well-oiled persuasive debt diplomacy.
Kenya must move cautiously to avoid saddling herself with further debt. Mr Mbadi’s option of privatising Kenya’s blue chip corporations is not without merit. Sadly, the country can only confirm the quality of the pudding in its eating, something that will only come long after the event.
Nonetheless, privatisation carries great promise in terms of improving operational efficiency and public service effectiveness, boosting market competitiveness, generating profits and more Exchequer revenue. Besides, it converts non-performing assets into cash cows for infrastructure and other projects, enhances resource optimisation, infuses innovative technology and new business models and relieves the government from the burden of losses and bad debts.
Last but not least, privatisation helps to keep the government from competing for business with private enterprises, and instead re-orients it to its traditional role of creating an enabling environment for entrepreneurs to thrive. Equally noteworthy is that the proposed shedding of the government stake in KPC by 65 per cent does not neutralise public ownership of the company. The rule of thumb in corporate governance is that if the first five or less major shareholders own among themselves 30 per cent or more of issued ordinary shares, the resultant situation is called “ownership concentration”.
It is so-called because the few shareholders who control the 30-plus per cent of issued shares retain the wherewithal to influence decision-making in the firm. The indicator for ownership concentration is referred to as Herfindahl Index (HI). In this case, the HI is above 30 per cent, which means the government, on behalf of the people of Kenya, can still benefit from decision-making discretion, proceeds from sale of stocks and increased taxes arising from superior performance.
Ideally, the injection of private equity into state-owned enterprises infuses higher levels of vigilance as the investors pursue the wealth maximisation objective. New ownership identities bring with them unique risk-taking behaviours, investment orientations and perceptions on managerial discretion, all of which have implications for firm performance.
At the same time, to achieve competitiveness and higher levels of profitability, the enterprise will necessarily require relevant skills, knowledge and attitudes. With upskilling and retooling of human resources, the enterprise and the society in general stand to benefit as more wealth and job opportunities are created across the economy.
Employees who cannot survive in one sector will find relevance elsewhere. That said, Kenyans must remain vigilant to ensure the hyped potential benefits are not a smokescreen for a rip-off by powerful forces. It has happened before; nothing stops it from happening again. This calls for the highest level of vigilance to ensure end-to-end transparency in the entire privatisation.
Kenyans should ask pertinent questions, and Mr Mbadi and his team must address them comprehensively. There must be no hurry to sell the country’s public assets. Kenyans must never tire of reminding the government that public assets belong to them, and that it is a mere custodian on their behalf. The National Treasury needs to invest in effective communication, to step down the public finance jargon to a language that can resonate with the common man.
Prof Ongore is a Public Finance and Corporate Governance Scholar at the Technical University of Kenya. [email protected]
