Why State is rushing to sell huge stake in cash-rich Kenya Pipeline

Kenya Pipeline Company depot in Nairobi, on August 21, 2024. [File, Standard]

William's Ruto administration is moving ahead to privatise a stake in the lucrative Kenya Pipeline Company (KPC) in a bid to raise crucial funds as budget and development support from global institutions has taken longer than expected.

Reports from Treasury say the government plans to sell at least 60 per cent of the shareholding through an initial public offering on the Nairobi Securities Exchange (NSE), which could net more than Sh80 billion going by its valuation at the time of sale.

KPC had assets worth Sh120.7 billion in the year to June 2024, though this was a significant fall from Sh128.8 billion in 2023.

It made a profit of Sh6.87 billion last year, from Sh4.5 billion in 2023.

The Cabinet's approval of the divestiture on Tuesday paves the way for a sale that the cash-strapped Treasury hopes will emulate the roaring success of past privatisations such as Safaricom and KenGen.

The Ruto government, grappling with fiscal pressures and a need for new revenue streams, views KPC as a prime candidate for a 'Safaricom moment', aiming to attract significant investor interest and generate a substantial windfall.

"The Cabinet gave the green light for the reinstatement of Kenya Pipeline Company into the privatisation programme, paving the way for partial divestiture of government shares in a move aimed at democratising ownership by Kenyans at the Nairobi Securities Exchange and unlocking the company's full commercial potential," said the Cabinet brief on Tuesday evening.

"The decision reflects the government's policy shift toward reducing its role in doing business and instead enabling the private sector and industry experts to drive growth, efficiency, and innovation."

The sale is part of the earlier broader Ruto government 2023 Privatisation Programme, which seeks to reduce the demand for government funds and foster the development of the capital market, according to the programme's official document.

KPC is seen as a mouthwatering prospect for many watchers and potential investors.

For a start, it operates as a formidable, asset-rich monopoly, forming the backbone of Kenya's and indeed East Africa's petroleum supply chain.

Its infrastructure is unparalleled in the region, encompassing 1,342 kilometres of pipelines that transport refined petroleum products from Mombasa to an extensive network of depots across Kenya and onward to neighbouring countries.

The company boasts extensive storage facilities with 884,000 cubic metres of capacity spread across seven key locations, along with two aviation hydrant refueling facilities at Jomo Kenyatta and Moi International Airports.

This expansive network is further supported by 11 pumping stations and vital oil and gas marine terminals in Mombasa and Kisumu.

This comprehensive infrastructure makes KPC "pivotal in driving economic growth and development throughout the East African Region," as stated in its 2022-23 Annual Report.

The company's strategic value extends beyond its physical assets.

The full operationalisation of the 20-inch Mombasa-Nairobi pipeline, dubbed Line 5, and additional storage tanks has significantly increased the efficiency of fuel transport, reducing reliance on costlier road transportation and lowering demurrage costs, which ultimately impacts consumer prices.

KPC's own "Vision 2025" strategic plan aims to solidify its position as "Africa's premier oil and gas hub," a testament to its forward-looking investment strategy.

From a financial perspective, analysts and officials reckon KPC presents itself as a robust and cash-rich entity, making it an attractive prospect for investors.

KPC's consistent operational role and its status as a State-owned corporation subject to regular audits imply a fundamentally sound financial standing, insiders reckon.

Such a profile typically appeals to both institutional investors seeking stable, dividend-paying assets and retail investors looking for exposure to essential infrastructure according to one school of thought by officials vouching for KPC privatisation.

For the government, analysts and officials reckon selling a stake in KPC makes strong economic sense beyond merely raising funds.

"KPC, a strategic player in Kenya's energy supply chain, has maintained a strong profitability record and holds significant asset value.

"However, the Cabinet noted that the company has not yet reached its optimum performance and market value, largely due to bureaucratic constraints and public sector inefficiencies," said Cabinet.

"Bringing in private capital and professional expertise is expected to inject new energy into the company, modernise operations, and position KPC as a regional logistics and energy powerhouse. Cabinet was reminded that similar moves in the past have yielded transformative results."

The Kenya Kwanza privatisation programme says the divestitures aim to improve corporate governance and efficiency within state-owned enterprises (parastatals) and "facilitate broader participation of Kenyans in the economy".

By listing on the NSE, the company will face increased scrutiny from public shareholders, potentially leading to enhanced transparency and operational improvements.

This aligns with a global trend where governments seek to reduce direct involvement in commercial enterprises to focus on regulatory and policy functions.

The playout of this privatisation will be keenly watched on the NSE.

The 2008 Safaricom initial public offering - the first sale of shares to the public by a previously private company - and earlier KenGen sale remain benchmarks for successful public divestitures in Kenya, widely broadening share ownership and significantly boosting market activity.

Strategic importance

The Ruto government is banking on KPC's strategic importance, asset base, and profitability, coupled with an increasingly accessible stock market, to equally deliver another of the successes and provide a crucial financial lifeline to the state.

"Safaricom, Kenya Commercial Bank, and KenGen are prime examples of formerly State-controlled entities that became high-performing companies following privatisation, driving shareholder value, expanding regionally, and creating thousands of jobs," said Cabinet in its brief.

"The divestiture of KPC is expected to follow this path, boosting investor confidence and supporting the development of Kenya's capital markets."

KPC's offering could similarly capture public imagination and draw in both large institutional players and a burgeoning segment of retail investors.

The sale comes as the NSE itself is making significant strides towards greater inclusivity. Effective August 8, the NSE will enable single-unit share trading, eliminating the previous 100-share minimum.

This means investors will be able to buy as little as one share.

"We are pleased to take this significant step towards enhancing retail investor participation in our market," NSE chief executive Frank Mwiti said.