On Monday 9th October, President Ruto signed a new privatisation bill into law, setting the stage for a new phase of privatisation of state companies.
This new state-sponsored law replaces the 2005 law, which created the current Privatisation Commission, which will now be replaced by a corporate entity called the Privatisation Authority. The idea behind its composition, and the new privatisation process, is to speed up the process by removing bureaucracy, especially in stages that required parliamentary approval and input.
This should be great news for both local and foreign investors eager for a stake in the state enterprises on offer, but there are still likely hurdles ahead.
One, is transparency.
The signing of the new law coincides with the latest (in the latest) Telkom debacle. Just days before the president signed the bill, Cabinet had tried to reverse the last-minute buy-back of a strategic investor’s majority shareholding, which was completed in the final days of the previous government, in Telkom. Later, it announced a new strategic investor, who observers quickly noted seemed to have a thin and recent digital footprint and an unknown investment portfolio.
This suspicion is partially rooted in the history of privatisation in telecoms sector, and how the governments and politicians of the day skirted laws. Telkom’s initial privatisation, for example, was finalised just weeks to the 2007 elections and was done outside the previous law, which had been in operation for two years. But the Finance Minister had delayed operationalising it, which meant that by the time a Privatisation Commission was appointed in early 2008, the deal was done.
It also wasn’t the original deal, which had begun with structural changes which saw Telkom cede its shareholding in Safaricom to the government, and its staff numbers cut from 17, 000 to 3, 200 to reduce the wage bill. The original plan was to bring in a strategic investor with a minority stake and float about 23 per cent of the telcos shareholding at the NSE; by the end of the deal, this had changed to selling a majority stake to the investor.
Other than these loopholes, which seem to have doomed Telkom’s privatisation from the start, among the investment consortium was an “unknown” company in the form of Alcazar Capital, which had been registered in Dubai just months to the deal, as an investment unit of Kuwaiti logistics firm Agility, but that wasn’t immediately clear at the time. This news of an “unknown” investor fed into the fear that individual politicians and bureaucrats were directly using the privatisation process to line their pockets.
The previous year, it had become public that a shell company called Mobitelea Ventures had been part of the initial privatisation deal between the government and Vodafone in Safaricom. To date, no one knows who the real beneficiaries of the 12.5 percent in that consortium- which translated to 5% of Safaricom- were.
Another, is the logic of privatising state enterprises to raise revenue and then having to prop them up financially when they face headwinds.
The best example here is Kenya Airways, which was partially privatised in the mid-1990s. A World Bank document from 2008 about the success of that deal looks strange today. In it, the institution’s finance arm, the IFC, which had been an advisor in the deal, says that the “airline has made profits since.” This was true at the time, but its recent loss-making history has seen the government nearly double its shareholding in the airline and significantly reduce KLM’s shareholding, while propping it up financially since its fortunes dipped.
The airline’s second biggest shareholder today is a consortium of lenders who agreed to convert their credit into equity, in a deal guaranteed by the government, to give the airline a new lease of life. In the end, all the government seems to have bought with Kenya Airways is time.
The story is almost the same in several other previously owned state enterprises such as Kenya Railways, Uchumi Supermarkets, and Mumias Sugar. This raises the question of what happens when state companies such as Kenya Meat Commission (KMC) and Kenya Ports Authority (KPA) that are on the current privatisation list struggle after the likely deals and/or listings.
Such enterprises are not just simple commercial entities, they are also critical national assets whose failures would drag the government back to drawing from the exchequer to keep them afloat. There are likely to be political and bureaucratic hurdles as well, as has been the case in KPA, whose privatisation plans have been on and off since at least the mid-1990s, or the KMC, which has been run by the military since 2020.
The announcement of a new and more efficient privatisation phase is great news for local and foreign investors but it remains to be seen whether President Ruto’s administration can avoid some of the mistakes of its predecessors, and boost investor confidence by creating sustainable value in the long-term.
