UNPAN028231
UNPAN028231
UNPAN028231
PRIVATISATION IN KENYA
S. Muindi
Kenya's PE Background
In Kenya, as in most developing countries, the period after independence was marked
by a deliberate policy of direct participation by the Government in production and
trade over and above the control structures inherited from the colonial regime. A
variety of social, economic and political objectives were set, including decolonisation,
rapid development, the redress of regional imbalances, increased participation by
Kenyan citizens in the economy and promotion of indigenous entrepreneurship. In
addition to the Government's desire to participate directly in the production and trade
sectors of the economy, private investors (particularly foreigners) sought government
participation in joint ventures to ensure continued government support for such
ventures.
Later, another category of Public Enterprises, Development Finance Institutions,
(DAIS) were created to provide financing for development projects unable to obtain
financing from conventional private sector sources. Similarly, investments made in
enterprises by the Government, in its role as trustee for Kenyans who were not
endowed with risky capital resources or the necessary entrepreneurial skills at the time
of independence, became permanent holdings by the Government due to a lack of a
conscious effort to divest those investments to citizens as they became wealthier and
gained business skills.
During the 1970s, it became increasingly apparent that government participation in the
economy had grown well beyond the Government's original intentions. Furthermore, a
large debt exposure among PEs resulted in increased vulnerability. This caused PEs to
be highly leveraged because of their static equity base. Operating losses and inadequate
returns on investments further eroded the already weak capital bases of the PEs.
The resultant administrative and regulatory interventions introduced to protect the
ailing PEs resulted in a diversion of limited managerial capabilities and resources from
the fundamentally more important areas of policy, infrastructural investment,
development of social services and the management of the economy.
While the creation of the PEs was perhaps appropriate at independence, the changed
circumstances, together with poor performance record of the PEs, have mandated the
need to review continued government participation in them and/or the macroeconomic policy environment, and the sectoral policies as well as enterprise-specific
policies in which the PEs operate.
making the PE sector viable while privatisation and divestiture involve the transfer of a
function, activity, organisation or investment holding from the public to private sector.
has minority holdings. The divestiture is mainly for budgetary resource mobilisation for
the Government.
The process of privatisation is not viewed as an end in itself but as an integral and
visible element of the Government's overall PE reform programme and a progressive
effort to promote productive efficiency, to strengthen competitive forces in the
economy and to support entrepreneurial development.
The foregoing principles are designed to secure autonomy from political interference.
to be sold;
a full body of financial, management and other information will be available for
disclosure to the investing public;
fair and equitable bidding procedures will be established;
criteria for ranking bids will be established and publicised;
bids will be opened in public;
the valuation of the assets and the details of all offers received will be placed in the
public domain.
To promote and ensure the competitiveness of the markets in which privatised
companies will operate, the Government will continue to build upon existing
anti-monopoly legislation and the institutional capacity to implement it in a
transparent manner.
No new PEs will be established in the productive sector, except for investments made
purely for venture capital assistance through the Development Finance
Institutions.
Privatisation/Divestiture Process
The privatisation/divestiture process is perceived as involving two main and distinct
phases. The first phase is preparation and entails a detailed review of the PE, covering
operational, financial and legal issues, in order to determine its current condition,
potential strengths, weaknesses, and financial restructuring requirements, if any. This is
followed by the construction of operational and financial models for the PE to project
likely results under several scenarios. These steps lead to a valuation of the PE as a
going concern, which forms the basis for establishing a range of values that can be used
in negotiations with prospective investors and setting the share price for a public
offering. For comparative purposes, asset valuation is also conducted to ascertain the
value from both a replacement and a liquidation perspective. This phase concludes
with the preparation of a privatisation plan of action that fully documents the results of
all the analysis conducted up to this stage. The action plan also includes a detailed set of
recommendations on how to proceed to execute the transaction.
The second and final phase is execution and entails the implementation of the
transaction. By this stage, all key decision-makers have approved the privatisation
action plan. Tasks to be performed during this stage include, where necessary, the
Methods of Privatisation/Divestiture
There are a number of alternative ways of effecting privatisation/divestiture. Common
among these are:
(i)public offering of shares on the stock exchange;
(ii)sale of shares by private placement;
(iii)negotiated sales;
(iv)sales of PE assets (including liquidation);
(v)new private investments in PEs;
(vi)employee/management buy outs;
(vii)leasing or award of management contracts;
(viii) joint venture: commercial agreement between a PE and one or more business
partners to operate a business;
(ix)franchising: a fixed-term contract or licence to a company to operate a service.
The choice of a privatisation option is often determined according to the following
criteria:
Objectives perused by the Government for each sale.
Record of performance and economic prospects.
Size of the PE and the ability to mobilise private funds.
Institutional Arrangements
In order to achieve the Government's objectives in the PE reform and privatisation
programme, the Government has created a high level policy-making body, the
Parastatal Reform Programme Committee (PRPC), the functions of which are:
to supervise and co-ordinate the implementation of the PE reform programme in
general;
to prioritise and determine the timing of the sale for each non-strategic PE;
References
(i)
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