Explainer: What you need to know about Kenya’s Privatisation

February 3, 2023 - Reading Time: 5 minutes - By Brian Otieno

Bill, 2023

At the core of national conversation lately is a proposed legislation seeking to govern the process of privatising state-owned companies and entities. The Privatisation Bill, 2023, which is at the public participation stage, seeks to streamline the regulatory and institutional framework for the implementation of privatisation. If it passes, the bill will repeal the current law, the Privatization Act No. 2 of 2005.

History of Privatisation in Kenya

The history of privatisation draws back to Sessional Paper No. 10 of 1965 on African Socialism which among other things, sought to spur the country’s economic development, right after independence, by promoting indigenous entrepreneurship as well as increasing the participation of Kenyans in the growth of the economy.

Subsequently, in 1979 and 1982, in-depth reviews on public enterprises were conducted. The cross-cutting revelation in both reports, the Report on the Review of Statutory Boards, 1979 and the Report of the Working Party on Government Expenditures, 1982, was that parastatals were largely unproductive, highly inefficient and there were widespread cases of financial mismanagement across all of them. As a result, there was a proposal to have the government divest from its investments in commercial and industrial enterprises to transfer active participation to more Kenyans through participation in shareholding.

Attempts to entrench these proposals vide the State Corporations Act flopped and the government in July 1992 issued another policy paper. The Policy Paper on Public Enterprise Reform and Privatization identified about 240 entities that it considered ripe for privatisation. Despite the privatisation of some of these entities, there was a limited impact on the economy largely due the small nature of the entities privatised then, coupled with the lack of a sound legal and institutional framework governing the process of privatisation.

The response to this was Privatization Act, No. 2 of 2005 alongside the Economic Recovery Strategy for Wealth and Employment Creation (ERSWEC) 2003-2007. This response saw the privatisation of a number of key entities including the Kenya Electricity Generating Company (KenGen) Initial Public Offer (IPO), the concessioning of the Kenya Railways operations, the Mumias Sugar Company second offer, Kenya Reinsurance Corporation IPO, sale of 51% Telkom Kenya shareholding to a strategic partner and the Safaricom IPO. These transactions saw the mobilisation of over Kshs.80 billion that came in handy in supporting the country’s economic recovery as well as the overall development agenda.

The Privatisation Bill, 2023

At the epicentre of the William Ruto-led government’s campaigns was the issue of privatisation of public entities as a way of raising funds to support economic recovery and re-stabilisation. Fast forward, a Privatisation Bill, 2023 has been drafted and is out for comments from the general public. Salient among the features of the Bill are: –

  1.   Definition of privatisation

The Bill defines privatization as a transaction that results in a transfer, other than to a public entity, of the shareholding in a public entity.

  1.   Guiding Principles

The implementation of the Bill shall be guided by a number of principles including transparency and accountability, cost-effectiveness, national values and principles as espoused by Article 10 of the Constitution, among others;

  1.   Expansive Role for the CS, National Treasury

The Cabinet Secretary for Treasury has been tasked with the general coordination and oversight of the privatisation bill as well as offering general policy direction on matters related to privatisation;

  1.   Privatisation Authority

It establishes a Privatisation Authority whose functions relate to advisory, facilitation and implementation of matters relating to privatisation. The members of this authority include a chairperson who is a presidential appointee, representatives by the CS, National Treasury and the Attorney-General, four appointed members, a Managing Director of the Authority and a Corporation Secretary;

  1.   Privatisation Programme

A privatisation programme outlining the entities identified and approved for privatisation shall be in place. The Cabinet Secretary, National Treasury shall formulate this programme and submit it before Cabinet for approval. This programme shall as well be published in the Kenya Gazette;

 

 

  1.   Objectives of Privatisation

The bill outlines the objectives of privatisation to include among others, to increase private sector engagement in the economy by shifting production and delivery of goods and services from the public to the private sector, improve infrastructure and public service delivery by enlisting private capital and expertise, minimise demand for government resources;

  1.   Methods of Privatisation

Methods of privatisation have also been listed to include Initial Public Offers (IPO) and sale of shares by public tendering among others;

  1.   Participants in Privatisation Bids

The bill brings out clearly who may participate in the privatisation bids and allows both citizens and non-citizens to do so. The CS, National Treasury, though may direct the Authority on limitation;

  1.   Technical Advisory Committee

The bill also indicates that during a privatisation process, the Authority may constitute a technical advisory committee comprising of representatives from the National Treasury, the Authority, Ministry responsible for the entity being privatised, Attorney General and any other relevant representative. A technical advisory committee shall operate on an ad hoc basis depending on the needs and technicalities of the proposed privatisation;

  1. Records

The bill requires the entity undergoing privatisation to retain up-to-date business records and books of accounts, an up-to-date register of all fixed assets and further required to document all its legal and other obligations;

  1. Dissatisfaction and Review Processes

The bill also gives room for expression of dissatisfaction regarding a privatisation programme. Such a person may file an objection and if the person is aggrieved by the determination of the Authority on an objection, he/she may appeal to the Review Board and further appeal to the High Court;

  

  1. Role of Parliament

Under the miscellaneous provisions, the Privatisation Authority is mandated to submit to the Cabinet Secretary a report detailing all actions carried out in each fiscal year under the program which shall then be presented to parliament by the Cabinet Secretary.

Take-Away

The intent this bill presents is indeed noble. There are quite a number of government-owned enterprises that are making losses rather than being profitable to the state. Turning these loss-making entities into profitable enterprises would save the country huge sums of money while also presenting opportunities to raise revenue. This corresponds with the aspirations of the government of the day, whose manifesto proposed an Infrastructure Fund. The initial capital of this fund is to be deduced from the proceeds of privatisation.  The rationale for this is indeed logical, as the government seeks to progressively reduce the financing of commercially viable infrastructure projects from the budget.

The President has consistently stated the importance of reviving Kenya’s economic prospects and fortunes. According to reports, the taxman has been requested to collect at least Kshs. 3 trillion by the end of the year. Cutting government spending, including but not limited to the salary bill, is one of the budgetary measures. It appears that measures are being taken across the board to improve financial integrity, and possibly the need to privatize institutions becomes inevitable. Noting that President Ruto’s administration has committed to privatising between 6 to 10 government-owned firms in the next 12 months, the bill therefore provides a more accommodating framework that will hasten privatisation and ease the company listing structure. 

Some of the state owned-enterprises that have been earmarked for privatisation include Kenya Pipeline Company, Consolidated Bank, Development Bank of Kenya, Kenya Ports Authority, Kenya Meat Commission, the five sugar-milling companies-Sony, Chemelil, Muhoroni, Miwani and Nzoia, alongside a number of hotels where the government has shareholding status. 

There has been jittery on the bill proposing to ignore the approval of Parliament in the privatisation process. On one hand, Parliament may not have the expertise or capacity to engage in state-owned enterprises portfolio management, and on the other the role of Parliament in public finance management, alongside its role in effecting checks and balances, may not be easily downplayed. This is one of the areas that, probably, the drafters of the Bill may need to clarify. 

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