The Capital Markets Authority’s recent research paper highlights the crucial role privatisation could play in financial market development, an aspect that Kenya could benefit from.
Privatisation encourages foreign investment, facilitates the equity market, and boosts diversification opportunities for local investors according to CMA’s research paper.
“A remarkable wealth of evidence shows the correlation between financial market development and privatization. For instance, stock market capitalization (trading volume) in developed countries outside the US grew from a little over $US 1.5 trillion ($ 460 billion) in 1983 to more than $US 18 trillion ($ 17 trillion) in 1998, while massive privatization plans were in progress,” the paper reads.
Privatisation introduces into the market new industries thereby increasing diversification opportunities for domestic investors, consequently boosting liquidity levels.
In addition, one of the main features of privatisation sales is the cross-listing of stocks, which means floating a company both domestically and internationally, increases foreign investors’ participation and eliminates the barriers to information against foreign investments.
Kenya’s History with Privatisation
Kenya has in the past experienced positive outcomes through the privatisation effect. The Nairobi Securities Exchange’s analysis of 47 new IPOs and subsequent listings on the bourse between 1984 and 2000 that raised Sh50 billion indicated that successful IPOs by state-owned enterprises created a lot of interested from private companies.
For example, KCB’s 1988 subscription of 327 per cent attracted companies such as Total Oil Company (106 per cent), Standard Chartered Bank (233 per cent), and Nation Printers (113 per cent).
Factors Kenya Should Consider During Privatisation
In order for privatisation to be successful, certain factors have to be considered. CMA’s research paper recommends outsourcing institutional provision, utilising respected NGOs to vet transactions, using offshore commercial arbitration in case of disputes, offering investors cushions against regulatory and contractual risks through international financial institutions, and using regional exchanges to solve the challenge of deficient or small equity markets.
Another factor that the country should consider is using private firms to conduct administrative functions. “For example, British Crown Agents have been contracted to handle procurement on a range of government contracts in a number of low-income countries, including Bolivia and Mozambique. This should speed the contracting process and save money by lowering transaction costs and side payments.”
