Ruto's rush to sell plum state corporations raises eyebrows

In the push to privatise key state-owned entities, the government has mounted a narrative of a straightforward economic strategy that is aimed at improving efficiency and reducing it’s financial burden. 

Analysts, however, counter this, reading vested interests but also a cash-strapped government that is seeking quick revenue-raising schemes to meet short-term needs.

The government is also moving fast, with the pace seen in the bid to privatise Kenya Pipeline Company (KPC), which is, for instance, slated for listing in September, giving Kenyans barely enough time to weigh in on its sale. 

Local investors, who the government said are a major target as it seeks to get more Kenyans involved in the economy, may also not have enough time to gather resources to pump into the pipeline company, which is seen as a prime entity given its vast network of pipelines and huge petroleum depots.

There are also concerns that among the entities that are listed for sale, including KPC, are strategic assets and placing them in private hands could compromise on sensitive areas, some touching on national security.

Experts are cautioning the Kenya Kwanza regime to look beyond the rhetoric of inefficiencies and financial burden to the exchequer, arguing that while these could be true, there are complexities to privatising State entities but also unpredictable outcomes.

President William Ruto on Wednesday said KPC would be among the first to be privatised. Over the next two months, Ruto said, the deal will get Cabinet and the National Assembly approvals. The Privatisation Commission is also working on a programme to steer the process leading to the Initial Public Offer (IPO) in September.

It is, however, not the only State corporation that is being privatised. Ruto said the National Treasury is developing a disclosure framework for other State entities. The guidelines mirror Capital Markets Authority guidelines and, within an year of adopting the guidelines, the other State corporations would also be required to list at least 20 per cent of their stake at NSE.

“We are implementing a structured, time-bound divestiture programme, starting with the listing of KPC. I expect the Cabinet to grant approval for this IPO before the end of the month, after which it will be submitted to the National Assembly for consideration,” Ruto said.

“The Privatisation Commission is working on the final approval and by September, we will have that listing here (at NSE).”

In pushing public enterprises into private hands, the government is seeking to stop the frequent instances of bailing out the entities.

Many of them, due to instances of mismanagement and corruption, end up overshooting their budgets and are perennially reporting deficits while others are deep in debt that they cannot service, with the Treasury ending up taking over loans. 

The government is also looking at the short-term cash boom, with sale of all or part of some of the entities expected to raise billions for the cash-strapped government. 

The Parliamentary Budget Office has, in a recent report, estimated that the government could generate Sh30 billion annually over the medium term, totalling over Sh110 billion in the medium term.

It noted that if well executed, privatisation of State corporations could become a source of revenue while at the same time reducing costs and risks to the government. 

“For Kenya, depending on the privatisation methodology, targeted State owned enterprises and response from private purchasers, the privatisation resources are estimated to range between Sh60 billion and Sh110 billion spread out over the medium,” said PBO.

Ken Gichinga, a chief economist at Mentoria Economics, noted that the billions of shillings that privatisation offers were a major allure for the government.  

“Obviously, the big headline is that the government is cash hungry and privatisation is one of the options that has come up for it to raise revenues,” he said. 

Gichinga, however, noted that entities such as KPC remained strategic and should remain in government hands. He further noted that KPC is already profitable and relatively efficient, which are the two major areas of transformation the government would be seeking when privatising a public enterprise.

“Privatisation typically works well for industries that provide private goods while governments focus on industries that provide public goods,” Gichinga explained. 

“In the case of KPC, it offers a public good in the universe of large-scale infrastructure. Given that it provides public good, especially from an energy security perspective. When you take public goods and privatise them, you also raise the issue of cost. Profits become key because the private sector is driven by profit margins. 

“KPC is profitable and quite efficient as it is. It remains puzzling as to why the government would want to privatise it. I do not think everybody is convinced, especially because… what are the goals that the government is trying to meet in privatising it. One struggles to understand the objectives that the government is pursuing.”

Gichinga added that even in developed markets, governments still retained ownership of critical areas such as energy infrastructure as they are an important aspect of sovereignty. 

“Countries that are sovereign are independent in four areas: monetary, military, energy and food independence. They tend to protest these the most even when they are relinquishing other areas to the private sector,” he said.

Gichinga also noted that while there was a need to make NSE vibrant, there are other options for Kenya to privatise. 

“There are far better other areas that can be relinquished to the private sector.  There are hotels and conference centres, which are private goods that could also be better offered by the private sector,” he said.

Some state corporations have been a source of financial strain for Treasury, coming in to bail them out and have in some instances, taking over their debt when they have been unable to keep up with loan repayments.

Treasury documents show that the stock of government-guaranteed debt as at end June 2024 stood at Sh100.17 billion.

In the course of the financial year to June 2024, it had taken over a Kenya Airways loan of Sh58.65 billion, according to the Treasury.

This eased the airline's debt obligations and partly helped in improving its financial health to report a profit last year after a decade of loss-making.

Billow Kerrow also holds the view that the government should privatise the struggling state entities as opposed to disposing of those that are profitable.

“I would have thought KQ should top the list. How is KQ more strategic and in national interest than Kenya Pipeline? And the latter is highly profitable. The objective should be to sell an entity that is a financial burden to the Exchequer. The proposed privatization of the Kenya Pipeline is curious, to say the least,” said Kerrow in a past post.

Ruto noted that there is compelling evidence of privatisation, including the elimination of inefficiencies and raising the standards of governance in public enterprises.

“While other nations in the region have moved boldly and strategically to divest and reinvigorate their economies, Kenya has not undertaken a single privatisation in over a decade. That is about to change,” he said. 

He said the Treasury is developing guidelines that will require state corporations to adopt stricter disclosure standards that mirror those used by private firms in a bid to improve governance. After the implementation of the standards, the state corporations will within an year be required to list at least 20 per cent of their equity at NSE.

Though exuding confidence, Ruto faces the same challenges, particularly legal hurdles, that other regimes have faced in privatising government entities over the years and  cast  doubt on how fast it can list KPC at NSE. 

In late 2022, when the Kenya Kwanza regime took over power, Ruto unveiled an ambitious plan to privatise key entities. Other than KPC, others included Kenya International Convention Center (KICC), New Kenya Cooperative Creameries (KCC), Kenya Seed Company, Kenya Literature Bureau and the National Oil Corporation of Kenya. 

These plans were, however, scuttled after the High Court ruled that the Privatization Act 2023 was unconstitutional. The 2023 Act, which came into effect in October 2022, had repealed the Privatization Act 2005.

The new Act gave the Cabinet Secretary National Treasury powers in the sale of government-owned entities, including bypassing Parliamentary approval.

In pushing for the scrapping of the 2005 privatization law, the government had noted that it sought to cut through a thicket of outdated regulations and give the government tighter control of its ambitious privatisation drive.

With the nullification of the new law that had eased the privatisation process, the government now has to rely on the 2005 Act. 

The restrictive manner of the old law is seen in the few privatisations that have been undertaken in nearly two decades.

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), which it has attributed to a bureaucratic process in the legal framework.

“The Privatisation Commission has been unable to successfully privatise any SOE since 2008, partly owing to operational challenges (lack of a board) and external challenges (legal and stakeholder resistance)," said PBO. 

"Overall, challenges persist due to the lack of a (publicly adopted) Privatisation Policy, which highlights challenges experienced and sets out appropriate strategies to address them, modernise privatisation mechanisms, ensure broad-based approaches to enhance support, minimise resistance and prevent legal glitches."

Partly, the government is privatising key entities as it seeks to meet conditions of multilateral lenders, including the International Monetary Fund (IMF) which has insisted on reforming state-owned enterprises as part of conditions to receive concessionary loans.

IMF this week said Kenya should have in place a transparent framework for disposing of its stake in different companies to the private sector.

“Our engagement with the Kenyan authorities on privatisation has been focused on establishing a solid framework to ensure transparency and good governance, with the aim to unlock potential benefits,” said Julie Kozack, IMF Director, Communications Department at a recent IMF briefing.

“If done well, we see potential benefits that could include, for example, increased efficiency of improved private investment, reducing the fiscal burden, and improving service delivery."

It is not the first time that the IMF and other multilateral lenders have pushed for privatisation and reform of state corporations, according to the Institute of Economic Affairs (IEA).

The IMF pushed for the Structural Adjustment Programmes of the 1980s and 1990s, as it lobbied to reduce government involvement in commercial enterprises. Then, as is the case now, IMF noted the inefficiencies in government-run businesses but was also prone to political interference and a drain on public resources. 

IEA, in an analysis of the government's efforts to privatise, noted the state’s plans to dispose of its shareholding across different entities over the last decade, and instead, the number of parastatals has increased, putting increased pressure on the exchequer.

“The success of the 2025 privatisation plan is far from guaranteed. Several questions remain around transparency and reversibility of the proposed reforms. On the first issue, a major concern is whether the privatisation process will be transparent and insulated from vested interests. Past experiences show that this is unlikely,” said IEA in teh March analysis.

“The second concern around the reversibility of proposed reforms is informed by Kenya’s history of policy reversals, especially when political leadership changes. The question is how to ensure that today’s privatisation efforts are not undone by future administrations.

“A possible solution is through legislative amendments to ensure that privatisation is backed by sound legal frameworks that clearly define and limit the government’s role in economic activity. In addition, privatization should be through public listings rather than direct asset sales, for increased transparency and to reduce the likelihood of future nationalisation.”