It’s a welcome lesson on how to privatise and avoid huge debts

Tuesday November 7 2017

National Treasury

National Treasury Cabinet Secretary Henry Rotich addresses participants during the launch of the Sector Working Groups on September 15, 2017 at the KICC. We have borrowed way beyond our means. PHOTO | DIANA NGILA | NATION MEDIA GROUP 

By JAINDI KISERO
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I read somewhere how the Australian Government recently sold the Port of Melbourne to a consortium of domestic institutional investors composed mainly of super pension funds for a princely sum of $9.7 billion (Sh1tn).

The big money raised from the sale will be deposited straight into a special fund earmarked for financing infrastructure projects.

In other words, not even a cent will be spent on recurrent expenditure --- salaries, debt service or on maintenance and management of government operations.

PRIVATISATION
What these Australians have achieved in this single transaction got me reflecting on how we have struggled for so many years to deliver a successful privatisation transaction.

I recalled the 25-year railway concession where we transferred temporary ownership of a critical national asset to an entity out of South Africa by the name Sheltam Ltd.

We learnt our mistakes much later after realising that the entities we were dealing with were a bunch of vulture-like funds, whose only interest was to milk the asset dry.

SAVINGS

Even after changing the shareholders, despite the fact that the transaction was being shepherded by international institutions, including the International Finance Corporation of the World Bank, the experiment failed miserably.

It collapsed in less than 10 years, leaving the government empty-handed.

The other lesson I have learnt from Australia is that to be successful, you must be able to fund infrastructure from long-term savings raised domestically.

We are very poor at raising long-term domestic savings. We tried floating infrastructure bonds.

RECURRENT BUDGET

But unlike the Australians, the money we raised did not go into a special fund.

We did not introduce institutional arrangements and laws to ring-fence the money from being spent on civil service salaries.

Some of the monies we raised from infrastructure bonds ended up funding the recurrent budget, paying salaries and servicing domestic debt.

The third weakness I see when I compare our situation to Australia and other developed markets is the lack of a strong institutional and legal framework to handle projects and mobilise long-term savings to fund infrastructure.

PRIORITY PROJECTS

The trend you see today is that countries are creating autonomous institutions, including infrastructure promotion agencies and banks, to conceive and deliver projects.

What do we have hear? Several years ago, we introduced a Public and Private Partnership (PPP) law complete with a directorate.

This bureaucracy is domiciled at the National Treasury.

Under the Act, a list of national priority projects must be published and updated annually.

Yet over five years since that Act came into existence, not a single PPP project has reached financial closure.

The list of priority projects published on December 2012 has never been updated.

Clearly, the capacity to roll out and implement projects is one of our weakest links.

SYNDICATE BONDS
Do we have the means to raise long-term money to finance infrastructure projects domestically?

This is a pertinent issue because the trend you observe today show that we are funding infrastructure projects with very expensive Chinese loans.

For example, to build the SGR between Mombasa and Malaba, we are borrowing $10 billion from the Chinese Exim Bank.

We have accumulated too many syndicated loans, including the Euro bond.

The argument can be made that we do not have the capacity to raise the big billions, as the Australians did from selling their port.

PENSION FUND

But when are we coming up with inventive ways of mobilising our pension fund industry to use the resources they sit on to funding infrastructure?

Mark you, the pool of capital with the retirement benefits industry is estimated at $10 billion.

It all end ups being invested in government paper and paying civil service salaries.

There is yet another aspect of the Melbourne Port transaction, I find relevant to our situation.

ASSETS

When you look closely, what the Australians have done amounts to what techies refer to us asset recycling.

The government identifies a mature asset it owns and sells it to raise money to build future infrastructural assets.

I am not suggesting that what is good for Australia must be good for Kenya.

But when are we going to start thinking about recycling some of the mature assets the government currently owns?

Just imagine the billions the government would raise for infrastructure spending if it were to sell it’s 40 per cent stake in Safaricom.

We need to start a conversation around the viability of raising money for funding infrastructure from selling and concessioning some of the mature assets, which the government owns.

We have borrowed way beyond our means.