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27 March, 2023

Section I: Privatization Bill 2023

Recently, the Kenya Cabinet approved the Privatization bill 2023, which is set to replace the Privatization Act 2005 if approved by the parliament. The new bill is set to address the inhibiting legislative and regulatory framework provided in the privatization Act 2005 that led to long processes of approval of SOEs for privatization. Other key objectives of the bill include;

  1. Encourage more participation of the private sector in the economy by shifting the production and delivery of products and services from the public sector to the private sector. Furthermore, broadening the base of ownership in the Kenyan economy by encouraging private ownership of entities,
  2. Improve the infrastructure and the delivery of public services through the involvement of private capital and expertise,
  3. Generate additional revenue for the government through proceeds from privatizations and reduce the demand for government resources by non-strategic SOEs,
  4. Improve the regulation of the economy by reducing conflicts between the public sector’s regulatory functions and commercial functions, and,
  5. Improve the efficiency of the Kenyan economy by making it more responsive to market forces and enhance the development of the capital markets in Kenya.

The key provisions that have been amended include;

  1. Establishment of the Privatization Authority: The new authority shall be responsible for advising the government on aspects of the privatization of SOEs as well as the implementation of the privatization programme. The authority will be headed by a chairperson appointed by the President,
  2. Privatization programme: A new programme shall be formulated by the Cabinet Secretary for the National Treasury and approved by the cabinet, specify the SOEs identified and approved for privatization and serve as the basis point upon which privatization shall be undertaken,
  3. Identification of entities for privatization: The Cabinet Secretary for the National Treasury shall identify and determine the entities to be included in the privatization programme, taking into consideration the need to avoid privatization that may result in an unregulated monopoly, the expected benefits to be gained from the privatization and sustainable development and protection of the economy.
  4. Approval of the privatization proposal: Upon preparation of the privatization proposal, the authority, with the concurrence of the Cabinet Secretary for the National Treasury, shall approve it. This is a major change from the current process, which entails different levels of approval, including consideration and approval by the parliament. Under the proposed bill, the privatization authority will have the sole power to identify a public entity for privatization, prepare the privatization proposal and approve it, thus removing ambiguity with respect to the role and functions of parliament.
  5. Methods of Privatization: The bill proposes three methods of privatization;
  • Through the initial public offering of shares which shall be undertaken in accordance with the capital markets act,
  • Through sell of shares by public tendering, a new method proposed in the bill will involve publishing the notice of invitation to tender on the sale of shares in the Government tenders’ portals or on the Authority’s website and in at least two newspapers of nationwide circulation. Upon closure of the tendering period, the tender evaluation committee shall prepare an evaluation report containing a summary of the evaluation and comparison of tenders which shall be approved by the Board with the concurrence of the Cabinet Secretary for the National Treasury and
  • Through sale resulting from the exercise of pre-emptive rights.

Section II: The goals of Privatizing State-Owned Enterprises

  1. Fiscal benefits

Privatization has often been recommended by international organizations such as International Monetary Fund (IMF) and World Bank as a strategy of fiscal enhancement. In the medium term, it is a way of raising capital while reducing huge subsidies and bailouts to loss-making SOEs that weigh on the government budget. According to the public debt management report 2021/2022, the government's outstanding guaranteed debt to SOEs stood at Kshs 145.4 bn as at the end of June 2022. The SOEs that had been issued guarantees include Kenya Electricity Generation Company (KENGEN) (Kshs 34.0 bn), Kenya Ports Authority (KPA) (Kshs 33.5 bn), and Kenya Airways (KQ) (Kshs 77.8 bn). In particular, KQ defaulted on the loan repayment forcing the government to intervene, and the cabinet gave approval for government to repay the loan arrears on behalf of KQ, thus weighing on the government budget. 

  1. Effective control

Privatization has been widely used as a way of improving the performance of SOEs. As the control of the entity is shifted from the public sector to the private sector, exposing it to a competitive environment forces it to maximize returns and production. Furthermore, the company will be compelled to report in a standard format to investors on a regular basis and are susceptible to analysis and criticism from investors and analysts, as such encouraging corporate efficiency.

  1. Development of capital markets

Privatization of SOEs is one way of encouraging participation in the stock market by individual investors as well as attracting foreign direct investment and stimulating the development of the private sector and financial markets in general.

Section III: Privatization Strategies and Procedures

  1. Public Offers

Privatization through public offers is one of the widely used methods to transfer ownership of SOEs to the private sector. It is mostly preferred since it promotes wide ownership as all members of the public are invited to participate in the offer. However, one drawback of this method is the difficulty in pricing the issue due to relatively little information available to the government or its advisors as to the likely demand of the shares.

  1. Tenders

Pricing privatization of SOEs is usually a hard task, as such tenders are used to help in collecting the market’s collective estimates of the value of the SOEs. Therefore, this method helps the government to maximize revenue as it is a superior way of estimating the value of the company compared to an individual investment banker's estimates.

  1. Exercise of Pre-Emptive Rights

This method entails giving the existing shareholders the right but not the obligation to purchase additional shares in the future issue before they are offered to the public. The method is useful as it shields investors against dilution of their shares in the future by giving them the first priority during additional issuance of company shares.

Section IV: Recommendation and Conclusion

While the proposed bill is positive, we recommend allowing for sale by direct negotiations where an IPO, public tender and pre-emptive rights all fail to achieve privatization. We also recommend the government embark on measures to improve the operating efficiency of the cash-strapped SOEs to make them more attractive to investors during privatization. As a result, the government will be able to raise a decent amount of revenue from the privatization and use the proceeds to enhance public service delivery. However, in our view, the removal of the parliamentary approval stage in the privatization of SOEs might lead to a lack of transparency due to a lack of enough oversight and, as such, may limit public participation. All issues considered, we expect upon ratification of the Privatization Bill 2023 by the Parliament, the government will be able to expedite the privatization process and easily offload the non-strategic SOEs that continue to burden public expenditure. We also expect the move to spur new listings at the Nairobi bourse, which will increase activity and diversify the bourse’s offerings which will subsequently attract foreign investors.

Disclaimer: The views expressed in this publication are those of the writers where particulars are not warranted. This publication, which is in compliance with Section 2 of the Capital Markets Authority Act Cap 485A, is meant for general information only and is not a warranty, representation, advice or solicitation of any nature. Readers are advised in all circumstances to seek the advice of a registered investment advisor.

For more information, please see our report on Privatization of State Enterprises, & Cytonn Weekly #12.2023