How do you ensure strategic assets are protected during privatisation?

This week, CEO of the Privatisation Commission Joseph Koskey responds to your questions

1. In the early 1990s, Kenya adopted the Structural Adjustment Programmes (SAPs), as suggested by the Bretton Woods institutions. However, most of the first companies to be privatised under this plan, including the Kenya Flourspar Company, have since folded. Many economists have blamed these donor-initiated programmes for most of our economic challenges. What went wrong and is privatisation still the way to go? Komen Moris, Eldoret

The programme was anchored on the government policy paper on Public Enterprises Reform and Privatisation of 1992. The woes that afflicted Kenya Fluorspar Mining Company were not related to its privatisation but the company shut down its operations over what it termed as “owing to the depressed demand and reduced price of fluorspar in the world market.” And as to whether privatisation is still the way to go, indeed it is. Privatisation enhances the role of private sector in the economy and reduces the demand of resources on the Exchequer by public enterprises.

2. Among the 26 public entities listed for privatisation, I find KenGen, Kenya Pipeline Company (KPC) and certain aspects of the Kenya Ports Authority (KPA) so strategic to our national security that they should not be left in individual hands. How do you ensure that our key strategic assets are protected? Dennis N. Kinyua, Nairobi

KenGen, Kenya Pipeline Company and certain aspect of Kenya Ports Authority were among the 26 public corporations listed in the Privatisation Programme approved by the Cabinet in December 2008 and gazetted in August 2009. In formulating a privatisation programme for consideration and approval by Cabinet, the commission considers the desired benefits of the privatisation in line with the provisions of Section 18 (2) of the Privatisation Act 2005 which requires that each of the transactions in the approved privatisation programme must meet certain desired benefits including reduction of the demand for government resources by the entities, improvement of the regulation of the economy by reducing conflicts between public sector’s regulatory and commercial functions, improvement of the efficiency of the economy by making it more responsive to market forces, broadening of the base of ownership in the economy and the enhancement and development of the capital markets. The above benefits notwithstanding, it should be noted that before the Cabinet grants approval to include an entity in the privatisation programme, it will consider all aspects related to national security, health and environmental protection.

3. In privatisation, the Treasury and the line ministries must first give an approval for the transaction to go on. Investors, especially foreign ones, seem not to be comfortable with the bureaucracy involved where sometimes they are arm-twisted to give bribes. How do you want to correct this? Dan Murugu, Nakuru

The privatisation process is guided by the Privatisation Act, 2005. The Act prescribes a process that is all-encompassing to ensure that it is open, transparent and beyond reproach so as to protect the public interest.

The commission acknowledges that the privatisation process is lengthy due to the requirement for multiple approvals hence delaying implementation. However, this was designed to guard against any potential arm-twisting and/or manipulation of the process. This notwithstanding, the commission has initiated a review of the Privatisation Act to make the process less bureaucratic but with due caution not to compromise transparency and inclusivity.

4. When the Jubilee administration came to power in 2013, one of its first acts was to form a task force to look into the many parastatals. Eventually, the team came up with the Mwongozo platform on parastatal reforms. What role, if any, was the Privatisation Commission going to play in the implementation of recommendations? Henry Mumo, Machakos

The commission, being a State corporation, is bound by the Mwongozo code of corporate governance which espouses the principles and guidelines of corporate governance. The commission does not play any specific role in the implementation of the task force recommendations but some of the entities in the privatisation programme were affected.

5. My feeling is that Privatisation Commission has underperformed in executing its mandate. The Commission did not conclusively privatise any of the 26 entities that it was charged with selling on behalf of the government. What are you doing to change this? Raphael, Obonyo, Nairobi

As indicated earlier, the privatisation process as stipulated by the Act requires multiple approvals by various stakeholders, most of which are not within our control, thereby causing unwarranted delays. Further, the implementation of devolution and unbundling of functions between the national and county governments has had an effect on the commission’s operations with county governments demanding a say in the privatisation of entities that fall within their respective counties. The resultant consultations have slowed the pace of privatisation.

It should be noted that the commission completed phase one of the privatisation of Kenya Wine Agencies Limited in August 2014 and phase two is currently underway. The privatisation of other State-owned entities including the public sector owned or controlled sugar companies is currently on course.

6. Successful privatisation requires competent government with low levels of corruption. What are you doing to ensure privatisation processes are open and transparent, free of political interference and corruption? Raphael Obonyo, Nairobi

As indicated earlier, the Privatisation Act, 2005, provides safeguards that ensure that the process is open, transparent and verifiable and hence free from influence. To further enhance openness and transparency of the process, Section 30(2) of the Act requires publication of a proposed privatisation in at least two newspapers with national circulation at least twice. Additionally, we have initiated review of the Act to give the commission exclusive power and autonomy to carry out its mandate effectively.

7. Sir, in the arduous task of looking for strategic investors to run the five sugar companies, how do we ensure we do not end up with Mickey Mouse investors? Ken Ochieng, Kisumu

There will be adequate due diligencnies can compete to become strategic partners as set out in the criteria to qualify to be a strategic partner.

Another critical factor is the need to attract a strategic investor with adequate operational autonomy to commit the resources that are required to rehabilitate and modernise the factories. This will enhance their competitiveness and ensure timely payments and adequate returns to the farmers and the rest of the players in the sugar production chain.

8. Regarding the proposed privatisation of the five sugar millers, your commission said there was political interference thus making the process difficult. Thereafter, the commission said a report was ready. We have not seen it. Can you make the whole exercise transparent by publishing the bidders, both local and international, so that stakeholders can do their own due diligence? David Okello, Nairobi

The commission in a press release a while back alluded to a report being ready. This was in respect to one of the several preliminary reports (deliverables) from the transaction advisers; in this case, the inception report. This was received. Currently the transaction advisers are on the ground carrying out detailed due diligence (financial, legal, technical/operational) on the sugar companies. Thereafter we will invite bidders for expression of interest (EOI); a process that will be conducted in an open and transparent manner.

9. How does the Privatisation Commission view the government’s efforts to welcome and promote foreign investment which are in direct competition with a number of government-owned entities that are on the deathbed and require strategic investors to revive them? Francis Njuguna, Kibichoi

The Privatisation Commission being one of the implementers of government policy fully supports the government’s effort to promote foreign direct investment in the country. In fact, one of the desired objectives of privatisation is the improvement of infrastructure and the delivery of public services by the involvement of private capital and expertise. Additionally, section 29(1) of the Privatisation Act stipulates that both Kenyans and non-Kenyans are eligible to participate in any privatisation and so any foreign investor is free to come on-board as a strategic investor in any State-owned entity.

10. How long does a single privatisation process take? I ask this because some entities like the five sugar millers, Consolidated Bank and some government-owned hotels have been talked about for years. Why the inordinate delays? Bramwell Endovo, Bungoma

The commission came into being in 2008, and two years later there was the promulgation of the new Constitution that introduced the devolved system of governance. Implementation of the privatisation programme slowed down as functions of the two levels of government were unbundled. This period was followed by the work of the task force on the rationalisation of State-owned enterprises in 2014 that required privatisations to be held in abeyance so as to avoid a clash or duplication of processes. The approval to proceed with privatisation was granted in April this year and transactions are now well on course.

11. What recourse does the commission have in case a strategic investor fails to achieve the results? Joy Wanjiku, Mlolongo

Using the privatisation of the five public mills as an example, the privatisation strategy was formulated based on comprehensive due diligence and options analysis that took into account the needs of each of the companies, the privatisation objectives outlined in the Privatisation Act and lessons learnt from previous privatisations.

The proposed structure ensures operational autonomy for the strategic partner which is necessary to attract the investment required to rehabilitate and modernise the factories. However, this does not offer them absolute control over the company as all major non-operational decisions will be subjected to shareholder reserved matters. The ring-fenced shareholding by farmers and employees ensures continued protection of their interests through participation in the shareholder meetings. The approved strategy is informed by all the experiences of the past and is structured with a focus to mitigate any weaknesses experienced in the past.

12. In completing the privatisation of the five sugar companies, will the shareholding structure be redone to incorporate county governments? Will you harmonise your work with the sugar task force report already presented to the President? David Okello, Nairobi

The approved privatisation options recommend sale of 51 per cent stake to a strategic investor, 24 per cent to farmers and employees and the balance of 25 per cent will be retained by the government. The county governments will be involved in the implementation of the 24 per cent to farmers and employees whereas the retention of the 25 per cent stake by government is a matter that will be agreed upon between the national and county governments through Inter-Governmental Relations mechanisms in place and the Intergovernmental Budget and Economic Council. We confirm that the commission will harmonise its work with the sugar task force report once it is published.