Privatization of public assets in Kenya shrinks future revenue for the national budget

Wealth worth about Sh 100 billion which belonged to the public eight years ago is today in the hands of private individuals including foreign companies and groups of rich individuals who are well connected economically and politically.

The most notable is the sale of 30 percent of government shareholding in the Kenya Electricity Generating Company (KenGen). The March 2006 KenGen Initial Public Offer saw the government raise Sh 7.8 billion. Barely four months after the KenGen IPO, the country in December 2006 started selling its 18 per cent stake at the Mumias Sugar Company through a secondary offer where it raised Sh 4.32 billion. The the nation of Kenya was the sugar miller’s majority shareholder with a controlling equity stake of 38.4 per cent. But following the sale of some 91 million shares, the people’s shareholding was reduced to just 20 per cent.

The Mumias deal was followed by the sale of 40 percent national stake in Kenya Re-insurance Corporation through an IPO where Sh 2.3 billion was raised. The July 2007 deal saw the nation dispose 240 million shares that belonged to us.

Then came another transaction in November 2007 where the nation sold 51 per cent of Telcom Kenya’s shares to France Telecom for Sh26 billion. Telcom deal saw thousands of Kenyans loss jobs inorder to make the organization generate profit for the buyers.

The Telcom Kenya and Kengen deals were followed by the nation’s offloading of its 25 percent stake in the Kenya’s largest mobile phone service provider and the regions most profitable company; Safaricom. The IPO which saw 10 billion shares that belonged to the public sold was the biggest in the market and saw the nation cash Sh 51 billion.

Before the April 2008 IPO, Safaricom was jointly owned by the government at 60 percent and Britain’s Vodafone, 40 percent.
The appetite to dispose public assets did not fizzle even after the State pocketing the Sh 51 billion from Safaricom. In June 2008 liquidated another Sh 1.4 billion through the sale of 58 million more shares it was entitled in the Kenya Commercial Bank rights issue offer. A rights issue offers existing shareholders additional shares, usually at a discount. The shareholders were being given one new share for every nine held.

“It was a difficult decision to take. However, we currently have many pressing demands on the budget. For this reason, the Government has opted to trade its rights and realise a return for the tax payer,” the then Finance Minister Amos Kimunya had said during the official launch of the rights issue. At the same time, the Kenya sold the Grand
Regency Hotel at Sh 2.9 billion in a state-to-state deal with Libya that Kenyans described as too “sweet” to pass up.

The handing over of the Kenya Railways Corporation where Kenyan and Ugandan people were expecting to liquidate $5 million (about Sh400
million) also falls under this long list. Despite handing over the running of he Kenya-Uganda railway for 25 years to the South African firm, Sheltam Rail Corporation, which leads the consortium called Rift Valley Railways (RVR), details are emerging that the concessionaire did not have the money to pay.

Today, the Kenya has lined 26 other state firms for sale this financial year alone. According to a list tabled in Parliament towards the end of last year, Kenya wants to dispose these public assets to meet the Sh168 billion 2010 budget deficit this fiscal year. The country had planned to raise at least Sh6 billion by June 2010.

On sale include the national fuel distributor Kenya Pipeline Company (KPC), giant milk processor, New Kenya Cooperative Creameries (New KCC), Kenya Meat Commission (KMC) and sections of the Kenya Ports Authority (KPA).

Kenya is also planning to divest itself of its 70 per cent stake in the public power generator KenGen and its stake in sugar firms Chemelil, Nzoia, Sony, Miwani and Muhoroni.

The list also includes Karbarnet, Golf and Sunset hotels, Mt Elgon Lodge, Kenya Safari Lodge, and the hotels under Kenya Tourism Development Corporation (KTDC)— International Hotels, Kenya Hotels, Mountain Lodge.

The country also intends to sell its 22.5 per cent stake in National Bank, its 48.8 per cent ownership in Consolidated Bank and 89.3 per cent stake in Development Bank.

Interestingly, despite the selling her assets, the national debt continues to go up. In February last year, Parliament received shocking details indicating that each of the country’s 38 million persons including a baby born last night is indebted to the tune of Sh 27,000. In total, Kenya was at that time indebted to the tune of close to Sh 1 trillion; the internal and external debt stood at Sh972 billion as at December 2008.

External debt stood at 515 billion which is 53 percent of the total debt while internal debt stood at Sh 466 billion or 47 percent of the total debt. Only 35 percent of these debts were under public entities while the rest were under the central government.

The figures today could however be much higher as the Kenya has borrowed heavily in the last 8 months to deal with the food crisis in the country. For example, the nation in January 2009 passed Sessional Paper No 1 of 2009 in order to borrow a further Sh 7.9 billion from US department of agriculture to deal with food crisis.

The figures indicate that we violated our own rules- Section 6 (1) of the External Loans and Credit Act which puts the total external indebtedness at any give time at Sh 500 billion but quickly moved in to push the Sh 500 billion limit to Sh 800 billion.

It is evident that despite liquidation of more and more assets, Kenya’s public debt continues to sore putting the future generation in much more economic risk.

The people of Kenya argument is that the selling of State Corporations has improved corporate governance.
“The divestiture programme has resulted in improved corporate governance practice as vital business decision-making and management instruments are placed in the hands of the private sector,” president Kibaki said on July 16 last year while meeting the business community in Dar Es Salaam, Tanzania.

Another argument for privatization has been to enable ordinary Kenyans own part of the big companies. But the truth of the matter is that the rich and political wheeler dealers have ended benefiting most.

A fact that is lost to Kenyans is that profits made by these companies will now end up in the pockets of few able individuals other than support finance of public services. In the long run, this will only translate in higher taxes.

Some of these assets sold were posting impressive profits each financial year. For example Safaricom, the most profitable firm in East Africa, posted a pre-tax profit of Sh19.9 billion pre-tax profit in the financial year ending that ended March 31, 2008. The Kenyan people and Vodafone Kenya, who were the only shareholders before the IPO pocket Sh2 billion as dividend. Kenya got Sh 1.2 billion as the nation was the majority shareholder. For the year ending March 31, 2009, Safaricom posted a profit of Sh 15.3 billion with Sh 4 billion going to the new share holders as dividend. Analysis at trading of Safaricom shares at the Nairobi Stock exchange reveals that since December, 2008, the shareholding of foreign corporates has been on the rise, increasing by 5.62 per cent as at December, 2009, while that of local corporates and local individuals has decreased by 1.93 per cent and 3.72 per cent respectively within the same period. This means that the dividend payment as time goes by will be paid mostly to foreigners.
In 2006, Kengen posted a profit of Sh 1.7 billion and Sh 1.7 billion in the following financial year.

It is these profits which Kenyans had been relying on after release of dividends to fund health care, education, infrastructure and other crucial services apart from borrowing and tax collection.

It simply means that as the government continues to dispose these assets, it will be forced to borrow more both locally and internationally to finance its budget.

Meanwhile, the few who are able to buy these assets will continue amassing wealth through shares acquisition and dividends hence widening the gap between the rich and the poor in the country.

Privitisation has also led to massive job losses for ordinary Kenyans. For example Telkom Kenya retrenched about 9, 000 people in 2007 and it has continued to do so in the subsequent years bringing the total number to about 15,000.

The lesson here is that while profit for the investors sole, taxation on individual workers falls because of the fall in the total number of workers employed. This in essence means less tax collection (Pay As You Earn) by the government.

Lessons from other countries are that privatization is a bitter sweet tablet for any nation that undertakes it.

In Britain, British trade unions have always been opposed to the removal of state monopolies from the public sector. They have always argued that monopoly tends to favour the powerful and rich at the expense of the weak and poor.

Since 1994 the Italian government has sold equity stakes in some 75 large state enterprises, in the process raising over $125 billion-more than any other country during the same period.

The principal benefits of Italian privatization have been dramatic increases in the size and efficiency of Italy’s stock markets and in the safety and stability of its banking system. Despite such improvements, however, privatization has failed to bring about the increased competition in key industries and lower prices for consumers its planners originally envisioned. Here in Kenya, we saw the country desperately try to set up national oil to counter the insatiable thirst for profit by the oil companies that triggered runaway inflation threatening to bring the economy to the knees. It was not lost to many that the nation had hitherto sold off some of the oil interests to the profit hungry investors

Lessons from the global economic recession are that private companies were the hardest hit with share prices tumbling at the world stock markets. The governments were indeed forced to use tax payers’ cash to bail out these multinational which were on the verge of collapse.

Currently, the Government of Malaysia is under pressure to buy back all shares of PLUS Expressways Bhd which it does not already own and take over its existing asset backed liabilities. The government is also under pressure to acquire from the concessionaires several other highways.

The argument is that the government and the public will collect more money from the highways if it buys back from the concessionaire instead of waiting for the expiry of the agreement in 2030.

Kenya is presently contemplating to also put under concessionaire some of its highways and it should learn from countries like Malaysia and its own experiences with the Rift Valley Railways.
After the wave of de-privatisation of water services facilities that started across the world two years ago, municipalities in Europe are now buying back the electricity utilities they sold to private investors in the late 1980s and early 1990s.

In Germany for example, numerous city and regional governments have already ended the privatisation of the electricity facilities, or are in negotiations with the private owners.

“The local governments are now convinced that municipal utilities are public goods that belong to state hands,” Christoph Goebel, mayor of Graefelfing town was quoted last month as saying.

In Ottobrunn, another town on the periphery of Munich, the local government has just grounded a city-owned electricity provider. It says “the selling of the municipal utilities to private companies, which only obey the shareowners’ interest, has proven to be a mistake.”

In the federal state of Bavaria alone, some 2,000 licences for municipal utilities given to private companies 20 years ago are due to end this year. Most cities are unwilling to extend these licences, according to mayors and law counsellors. Instead, city governments are planning to take back the management of electricity and water facilities.

The city governments are only belatedly following the advice of economists and local activists. These are the hard lessons Kenya ought to learn from and avoid grave mistakes that may push ordinary Kenyans into high levels of poverty.
Ends/..

Mwangi Waituru
Principal, The Seed Institute
National Coordinator, Global Call to Action against Poverty Kenya
waituru@gmail.com

—
IT IS IN OUR HANDS