Plan to sell State firms gathers pace amid lingering hurdles

The government in 2008 came up with a plan to privatise 26 parastatals through the Privatisation Commission, but it has only managed to conclude a single deal involving Kenya Wine Agencies Ltd (Kwal).

The government had hoped to sell stakes in the SOEs to strategic investors as well as to the public through listing at the Nairobi Securities Exchange (NSE).

The dismal performance has been attributed to, among other factors, a bureaucratic process in the existing legal framework that is now under review.

In the just published Privatisation Bill, Treasury is not required to seek Parliament's approval in the privatisation process.

Unfettered powers

While it could make it significantly easy for Treasury to sell off the entities, Dr David Kabata, an economist, expressed concerns about Treasury's unfettered powers in the process.

"The privatisation process will be driven by the Executive, which would mean there are no checks and balances... the National Assembly is the representative of the people and, therefore, should play a major role when it comes to the privatisation of public resources," he said in a media interview.

"We have checks and balances because of the issue of abuse. If you look at the board, all the people will be appointed by the President, which means that whatever the Executive wants is what will happen."

Dr Kabata also noted that privatisation might not necessarily be the cure for some of the parastatals, noting that it has not worked in some of the instances in the past.

He cited the cases of Mumias and Uchumi, which noted did well for some time but were eventually run down due to poor corporate governance.

The Privatisation Commission, which will be replaced by the Privatisation Authority, if the bill is passed, has in the past said delays in selling government stakes in the companies that had been earmarked for privatisation was on account of delays in obtaining approvals at various government levels.

The absence of a fully constituted board had for several years hampered the implementation of the privatisation programme.

Public participation is a constitutional requirement but as the Privatisation Commission has noted in its past reports, it could cause major delays to the privatisation process. According to the Commission, this has been the case in privatising sugar millers.

Transaction advisers

The Commission has been evaluating the privatisation of the Kenya Meat Commission, the Tourism Finance Corporation (which has a shareholding in several hotels, including Intercontinental and Hilton), government-owned sugar millers and the Agro Chemical and Food Company.

It had contracted transaction advisers to look into how the companies would be sold, which reported back in the financial year to June 2021.

The different reports, the commission said, awaited consideration by the board, which at the time was not fully constituted. The delay in privatising the SOEs has seen the Auditor General cast doubt as to whether the transactions will ever proceed.

"The privatisation programme for some of the entities has been underway for over eight years, casting doubt on the likelihood of realising the privatisation objective," said Auditor General Nancy Gathungu when auditing the commission's financials for the year to June 2021.

The Commission spent Sh48.7 million in hiring the transaction advisers, which the Auditor General noted did not provide value for money because of the delay.

President William Ruto recently committed to the privatisation of between five and 10 State corporations this year.

He expects most of the privatisation to be undertaken through public offers at the NSE, which he noted would also give citizens an avenue to buy into the companies. "My administration will revitalise the capital markets by embarking on privatisation of State corporations where divestiture is overdue and strategic as well as the introduction of such innovative products as a domestic dollar-denominated bond," he said.

"I have made a commitment that between five and 10 public enterprises that are mature should be listed in the next 12 months. I expect that the private sector will work with the capital markets so that we can have private sector companies to also list at the (securities) exchange."

Prime Cabinet Secretary Musalia Mudavadi told The Standard in a recent interview some State-owned entities might have to shut down considering the current state of the economy.

Mr Mudavadi revealed that the closure of select parastatals was part of new austerity measures to be implemented by the Kenya Kwanza administration to turn around the economy. "Going forward, some painful decisions will have to be made. Some parastatals will have to be shut down. They will individually have to justify their existence and benefit to Kenyans," he said.

Treasury in the Budget Policy Statement published in January also said it would increase oversight on parastatals to reduce the exposure to government.

This is even as it noted that while bailing them out is not sustainable, it continues to do so owing to a combination of factors such as the strategic importance and the State's moral obligations to its people.

"The total outstanding government-guaranteed debt to SOEs and government-linked entities amounted to Sh1.08 trillion as of June 30, 2022. This includes: direct GoK (Government of Kenya) loans of Sh120.76 billion, on-lent foreign loans of Sh796 billion and direct commercial domestic loans of Sh165 billion, SOEs also had a contingent liability of Sh135.61 billion," said Treasury in the budget policy statement (BPS).

"Debt-stricken State corporations constitute a potential source of fiscal risk. However, the government is cautious in the issuance of guarantees and other support measures to State corporations upon such requests. However, as the principal owner of all State corporations, the government is the natural underwriter of the risks they face. During the review period, FY 2022/23 the stock of risk exposure is estimated to be Sh2.75 trillion, where Sh2.66 trillion is from SOEs, and Sh90.65 billion is from government-linked Corporations (GLCs)."

The high risk is against little dividends that the State earns from the SOEs, which have also been on the decline in the recent past.

Covid-19 pandemic

Over the year to June 2022, for instance, earnings in form of dividends from these companies fell nine per cent, but largely on account of an economy that continued to reel from the impact of the Covid-19 pandemic.

The government earned Sh45.53 billion from the different companies that it fully or partially owns over the financial, which was Sh4.5 billion less than the Sh49.98 billion earned over a similar period in 2021.

The collections were, however, higher than the Sh39.9 billion that the government had expected to receive over the year, according to the just published Budget Review and Outlook Paper (BROP) by Treasury.

"During the 2021/22 financial year, the government collected Sh45.5 billion of investment income in the form of dividends, surplus funds, directors' fees and loan interest receipts against a revised target of Sh39.9 billion," said Treasury in the BROP.

"State agencies with on-lent loans from the National Government paid interest of Sh1.9 billion against the revised target of Sh2.2 billion."

Over the financial year to June 2021, the government's income from profits and dividends dropped 37 per cent from the Sh72 billion reported in the previous year.

Among the government entities that will have to stand on their own are Kenya Airways, which Treasury said it does not intend to continue injecting cash into beyond December 2023, in a resolve that might also affect the dozens of State corporations that have been underperforming and are a drain to the Exchequer.

The Ruto administration maintains that KQ has in the past proven that it can sustainably run without government support. "Aviation is a strategic industry for the economy. It is vital for the tourism industry, exports of fresh produce and maintenance of Kenya's position as a regional hub," said Treasury in the BPS.

"Kenya Airways had demonstrated that Kenya could become a global aviation hub. To support the aviation industry, the government will develop a turnaround strategy for Kenya Airways. A critical plank of this strategy will be a financing plan that does not depend on operational support from the exchequer beyond December 2023."

The case for letting KQ fly on its own has, however, been complicated by the profit warning the airline issued Saturday, indicating its losses for the year to December 2022 would be higher than the Sh15.88 billion it reported in 2021.

The carrier, however, said this was due to a one-off foreign exchange loss that is due to a financial restructuring that it is undertaking.

"The board wishes to bring to the attention of the public that the earnings for the current financial year are expected to be lower by at least 25 per cent compared to the earnings reported for the same period in 2021. This announcement is based on the forecasted financial results of the group for the year ended December 31, 2022," said the airline.

"Although the company's performance would reflect an improved revenue position in the year, and in fact, is projected to post significantly improved operating results, despite the high fuel prices, the net earnings would be constrained by foreign exchange losses. The forex losses were occasioned by the novation of guaranteed US dollar loans as part of the ongoing financial restructuring programme.