Cane being ferried

Privatization of state-owned companies has been an important instrument of industrial re-organization in Kenya in the past ten years. A beacon of the positive outcome of privatization or the auction of state-owned firms has been Kenya Airways, resulting in improved corporate performance, employment and equity markets. Nevertheless, the idea has not always been a success story, as in the case of KQ, since it has worked well in some quarters and failed to flourish in others such as in the sugar industry.

While privatization and de-regulation measures have had profound impacts in the ownership and structure of major companies around the world, Kenya is yet to realize the full potential as authorities work round the clock to allow private companies run businesses on behalf of government. This is why the Executive once again successfully lobbied for the extension of the Common Market for Eastern and Southern Africa (Comesa) sugar import quotas for one year. The fundamental economic case for privatizing state-owned sugar factories is pegged on the assumption that change in ownership leads to improved enterprise performance.

This is the fourth time that the sugar millers were lucky to ride on the excuse that they were not yet ready for privatization, in spite of the sugar industry’s Sh10.4 billion in debt. Arguably, investors are always driven by profits.

As such, no investor would be attracted to a company whose balance sheet is at the crossroads. No wonder the local sugar millers through the Executive had to lobby for more time to restructure the sub-sector, ostensibly to make it more competitive and attractive.

This is a rather dramatic reversal of public policy, which could be a good idea, but even as the government mulls over plans to stop running the sugar business and let the private sector take over, questions abound as to what it is doing now to salvage the industry from the huge debts choking the sector.

Over the decades, the government has continued to accumulate a legacy of state assets. The Kibaki and Raila coalition was at the forefront in calling for their divesture, with the motivating reason to accomplish this through the government’s sale of the companies it owned.

Some countries privatize because they are told it is a condition to obtain loans from entities such as the International Monetary Fund (IMF) and the World Bank. Others choose to privatize because they want to raise money for their treasuries. Why privatize? Kenyans need to ask the question. Do we sell off our firms because we want to raise money for Treasury? Do we privatize to improve the companies’ efficiency and make them globally competitive? Do we privatize to please the IMF and World Bank or for just for vested ‘political interests’?

It is important to note that while privatization can result in greater “efficiency,” it also causes job losses. The greatest concern is how the state will handle the affected workers. Transferring enterprises to the private sector and the introduction of competitive product markets can change organizational structures, alter owner and manager objectives and improve economic performance.

Questions have been asked as to whether privatization really brings profit and efficiency when firms retrench workers at short notice. Pointedly the private sector often makes decisions to fire people while government are afraid to do so for political reasons.

In other circumstances, managers ready the mills for privatization, by making new business plans or making job cuts ahead of privatization or state sell-offs in a process called “corporatization.” This means the government has to take stock of the company assets and liabilities and how profitable it is or could be.

Interestingly, the government is always careful with the auction process and gauges the public mood before it acts. It may choose to sell 100 per cent of its ownership in a company (full divesture) or it may decide to keep a stake (partial divesture). This is what the Deputy President William Ruto did when he was the Agriculture minister in the Kibaki/Odinga government. Ruto played safe and acted in accordance to established auction rules, allowing for at least 51 per cent of government shares to be sold and giving up managerial control. The reasoning was to assure the public that the state would closely monitor the country’s strategic interests, reinforcing the argument that Ruto meant well for cane farmers and was sorry for the debts. Unfortunately, he was axed from the docket before the farmers and the millers could taste the sweetness of his actions.

Will Uhuru Kenyatta’s Agriculture Cabinet secretary act fast to seal the haemorrhage of these massive debts by either turning them into equity, writing them off or using other viable and lawful means to clean the mortgage balance sheet of the sugar factories? Kenya may decide that for the firms to compete abroad effectively, once they are sold, it would be better to keep them in one piece rather than spin off different directions. Even so, privatization comes with both “positive and negative spillovers.”

For instance, the state may resort todirect sales to large investors. This crop of investors, usually, a private or group of companies, bid against each other to buy the firm. The process may be open, with the highest bidder taking it all, or the state may choose to review potential buyers on a case-by-case basis. This is the process the government used in 1996 to privatize Kenya Airways at a time when it was almost collapsing. The state moved very fast to insulate the firm from the effects of hyperactive global competition. Consequently, it sold 77 per cent of its shares in the airline in a series of competitive auctions. Royal Dutch Airlines (KLM) bought 26 per cent of the carrier and local investors the remainder. Competitive bidding is likely to bring the government the most revenue from the sale. Direct sales is also cheaper for it provides technological and managerial expertise than offering for sale on the stock exchange market, which often involves marketing and other costs.

However, there are the “negative spillovers” of direct sales as in the case of sale through initial public offering (IPO). It may be unpopular since the public has no chance to get a stake in the company as they did in Safaricom and KenGen. In addition, focusing on one person may generate public discord that “the government is selling its jewels, often to foreigners.” Since shares are not issued or sold, this method does nothing to help the stock market.

The reason many prefer sales done through IPO is the ability to help develop the stock market  and make the process more transparent where the public  sees who buys what and at how much, what arguably one cannot establish in other forms of  sales such as mixed sales or concessions.

In mixed sales, the state sales direct to strategic investors followed by IPO often held six or 12 months later. Mixed sales advantage may allow strategic investors to put much needed reforms and realize profits over a short period, while concessions may allow the state to give up ownership of companies in certain sectors, especially where there are monopolies like Kenya Power, water or infrastructure development.

In conclusion, it is worth noting that owning an asset though does not mean the state has to manage it, hence the sale of the rights. The concern is that the state has to push the investors, especially if they are foreigners, to reinvest profits in the company than only repatriate them abroad - what economists call ‘decapitalization.’ We want our companies and economies to develop and resemble those of the industrialized nations.

By Kepher O Akong’o

The writer Kepher43@gmailcom is a social scientist and a media consultant who comments on topical issues.