Why privatization of state corporations won't benefit ordinary Kenyans

President William Ruto. [PCS]

Operation Linda Jamii has gone to court to challenge the legality of the Privatization Bill, 2023, that President William Ruto recently signed into law. The insatiable appetite for privatization shown by the Ruto administration from its first Cabinet meeting is of concern.

This coupled with the fact and the intention of removing the requirement for parliamentary approval of members of the Privatisation Authority, which was provided for in the repealed Privatisation Act 2005, among other envisaged illegalities. The government’s argument that this revised regulatory framework seeks to improve the efficiency and competitiveness of Kenya’s productive resources leaves much to be desired.

Privatisation gained momentum in the 1980s. Before this, believing that through nationalization they could offer quality and affordable services to their citizens, governments around the world had increased the scope and magnitude of state firms, taking on various tasks that the private sector had previously performed.

But then in the 1980s, there was a shift from public to private management. By the 1990s, this newfound faith in privatization had spread to become a global economic phenomenon. Whereas by the end of the 1980s sales of state enterprises worldwide had reached a total of over $185 billion - with no signs of a slowdown, in 1990 alone, the world’s governments sold off $25 billion in state-owned enterprises - with continents vying to see who could claim the privatization trophy.

The largest single sale occurred in Britain, where investors paid over $10 billion for 12 regional electricity companies. New Zealand sold more than 7 state-owned companies, including the government’s telecommunications company and printing office, for a price that topped $3 billion.

This fever was soon spread to developing countries through conditional loans and grants from the so-called developed countries and organizations they control such as the IMF.  They jumped onto the privatization bandwagon sometimes as a matter of political and economic ideology and at other times simply to raise revenue.  

Presently, the West keeps pushing the privatisation agenda down Kenya’s throat. This is despite the fact that it has not worked as expected in the West. The question, therefore, is: how will privatization benefit Kenyans?  Will it not lead to Kenya suffering the same fate as the West has?

History has the habit of repeating itself, and facts are usually stubborn. When the ‘Iron Lady, Margaret Thatcher, privatised public services in the UK, she promised the British great things.  Instead, 40 years later they started paying more for worse services. Likewise, when public services are eventually privatised, Kenyans will pay more, both as a taxpayer and directly, for government services such as water, electricity, transport, education, and healthcare. The quality of these services will also suffer, as it has done in other places, thanks to privatisation.

There are many reasons for this. First, public services provide us with the essentials of a dignified life, which is a human right, and doesn’t afford the government any luxury of choice. These services are ‘natural monopolies’ where competition doesn’t really make sense. Privatisation, on the other hand, was introduced with the belief in free markets and consumer choice.

Paradoxically, it is implemented as a ‘natural monopoly’. Anyone using SGR, for example, is condemned to use only one SGR. There is no choice; no consumer power; no real market. The closed-door contracts between private companies and governments are usually lacking transparency and public scrutiny.

Second, privatization leads to the wastage of public resources. Instead of using our taxes and bills to improve public services, they are paid to private shareholders in the form of dividends. Additionally, interest rates for companies are higher than they are for governments.

Third, with privatization the drive to maximise profit comes into conflict with the need to spend time caring, or spend money to meet people's needs. In the UK, a study by Oxford University found that outsourcing of NHS services has led to an extra 557 deaths.

Fourth, private companies cherry-pick the profitable bits of service and leave the rest. For instance, bus companies will choose to run buses on profitable routes but ignore poor areas unless the government steps in with a subsidy. 

Fifth, privatization creates a complicated, fragmented, inefficient, and wasteful system where it is not always clear who is doing what. For example, in the energy sector, different companies are responsible for generating, transmitting or regulating power.

Sixth, private companies have wrong incentives, which may not be solely aimed at tackling the problem. For example, companies running private prisons will be paid more if more people are locked up. These mixed motivations may compromise the professional standards of the staff involved in making decisions.

Seventh, privatization brings inadequate regulation. Often there’s a revolving door between people working for the regulator and people working for the companies they are regulating.

Eighth, privatization kills the flexibility characteristic of the government as it adapts to changing circumstances. If an outsourcing contract with a private company needs changing, the government must pay more to make changes or improvements, or to opt out.

Ninth, privatization weakens the public sector by affecting the skills and people available to provide high-quality public services. Consequently, when private companies fail to deliver, the government often doesn't have the time or expertise to force them to keep their promises.

Lastly, since public services are vital, too big and too important to fail, the government usually stands ready with public money to rescue private companies in their hour of need. So, we take the risk while shareholders walk away with the profit.

In that regard, if a government cannot run a small entity such as the road agency, it logically follows that it has failed and cannot run itself. Bringing in privatization is akin to treating symptoms rather than the real problem. 

-Prof Ogola comments on topical issues