Privatisation talk: The devil is in the detail

Bell ringing ceremony at the National Stock Exchange (NSE) 55 Westlands Rd, Starehe ,Nairobi on November 1, 2021. [David Gichuru,Standard]

Privatization was an early slogan on Kenya Kwanza's lips in its first days, though its campaign manifesto mentions it once, in the context of an Infrastructure Fund to support long-term asset building needs from surplus privatisation proceeds. Public-private partnership (PPP) is an emerging catchphrase, yet mentioned only twice - for water and sports - in the manifesto.

But the 2023 Budget Policy Statement (BPS) offers the unstated feeling that these buzzwords are central to an IMF-supported Kenya Kwanza fiscal consolidation agenda framed around the modern notion of a political, not technical, set of medium-term fiscal rules dependent on faster revenue than spending growth that delivers the enhanced fiscal balance we need to better manage our debt.

Yes, as I have said before, the devil still lies in the economic detail, but it is possible to envisage a Kenya Kwanza that gets this right, especially on our spending side. Is this a good time for old school reflection? We once prepared "whole of government", multi-sectoral public investment programs - PIP - not today's reluctant listing of capital/non-capital projects in a hurried database.

In those days, the PIP was our single source of the capital budget. It fed smoothly into the annual budget process, at a time when the world busily discussed the concept of the integrated budget as the answer to the colonial traditionalism behind today's recurrent and development budgets. To be clear, our development budgets are not capital budgets but the sum of our local and donor-funded projects; as likely to be capital as they are recurrent, including donor-funded payrolls.

I digress, but this was before this old thinking disappeared with Poverty Reduction Strategies then MTEF and Ifmis. Believe it or not, there was a time we actually thought longer. As job creation, service delivery and development agents, parastatals were the economy's commanding heights; privatisation and liberalisation were unthinkable before we suddenly needed structural adjustment.

During our 2003-2007 economic recovery, 20/20 hindsight suggests that Kibaki emphasised on a return to these basics - getting parastatals back to performance first, not cheaply selling them off.

The nostalgia ends here, so let's get back to the subject of privatisation today. As readers are aware, the National Treasury recently published a Privatisation Bill to transform, simplify and accelerate how we pursue this process. Public participation on the Bill has been ongoing across Kenya this past week, with a final session planned for Nairobi on Tuesday, February 7. This date is also the deadline for submission of written comments to Treasury. But let's start a bit bigger.

Excluding Sessional Paper No 1 of 1986 - which framed our current liberalisation and growth agenda - there are a couple of policy documents that help us to start. The more recent and familiar one is the 2013 Report of the Presidential Taskforce on Parastatal Reforms in Kenya. Using the recent Vision 2030 as its marker, it envisaged today's parastatal as a growth and development enabler, a builder of Kenya's capacities and capabilities, a citizen-focused service provider, a jobs generator either directly or indirectly and a creator of partnerships beyond our borders.

While referencing Kenya's history of divestiture from, and privatisation of, parastatals, and offering a peek at the state of the privatisation program at the time, its main recommendations focused on reducing the total number of government-owned entities from 262 to 187 of which 55 were state corporations split between 34 purely commercial and 21 commercial but strategic entities, plus 132 state agencies comprising 62 executive agencies, 25 independent regulatory bodies and 45 research institutions, public universities and tertiary education institutions.

The report also proposed new classifications to cover county corporations and county agencies. All would be overseen by a brand-new Government Investment Corporation (a holding company under the National Treasury) and a National and County Agencies Oversight Office backed by an omnibus Government Owned Entities law to supersede all existing parastatal statutes.

Let's just say that, ten years later, we still have between 247 and 262 parastatals today, depending on whose numbers you believe. It seems that we lost a holistic parastatal reform opportunity here. And a better prioritised and sequenced privatization would been a big part of this opportunity.

The lesser-spotted document is the Policy Paper on Public Enterprises Reform and Privatization crafted in 1992 but amended in 1994, then 1998. It was issued by the then Finance Ministry's Department of Government Investments and Public Enterprises (DGIPE - which still exists in today's National Treasury) - together with the Executive Secretariat and Technical Unit (ESTU).

If I was to stop this article here, an update of this paper would provide holistic background to our planned privatization - and the current bill - even if further updated for any relevant data, ideas or details contained in the 2013 Task Force Report above (why don't we ever learn from history?).

Let's tease out a couple of highlights. The first thing they recommended was to split the 240 commercial public enterprises at the time into two: 33 strategic enterprises in which government ownership would be retained, and 207 non-strategic enterprises that were candidates for privatization. We will walk slowly here. Strategic enterprises would remain within DGIPE's ambit under what was titled the Public Enterprise Reform Program (PERP). Non-strategic enterprises would fall under a Parastatal Reform Program Committee (PRPC) supported by ESTU.

From this framing, the 33 strategic enterprises were placed under PERP, with five with significant impact on the economy selected for deep restructuring. Several were later also approved for private sector participation once regulatory and commercial functions were logically separated.

Some 45 of the 207 non-strategic enterprises were selected for the first privatisation phase. The remaining 162 non-strategic entreprises were placed under PERP for "performance improvement" prior to privatization at in a subsequent phase. The paper details important principles such as a commercial, self-sustaining orientation in competitive markets under PERP while purchasers under the privatization programme would not be offered market protections or monopoly powers.

Importantly, however, the privatisation menu included liquidations, receiverships, sale by pre-emptive rights, public floatations, competitive bidding, management/employee buyouts and partial divestitures. Between 1992 and 2002, roughly 160 parastatals were "privatized" including 39 tea factories, although the impact was seen as sub-optimal in exchequer terms (Sh11 billion raised).

Between 2003 and 2008, privatisation happened in the case of six entities, comprising four IPOs - Kengen and Mumias in 2006, Kenya Re in 2007 and Safaricom in 2008 - plus Kenya Railways concessioning in 2006 and the first of now-renationalised Telkom Kenya's strategic sales in 2007.

This followed Narc's 2005 privatisation law (the law before this current bill) and draft policy (sessional paper). The policy's view by then was only 14 parastatals were classifiable as strategic.

More recently, a 2020 independent comparative study commissioned by the current Privatisation Commission (PC) across nine middle and high income countries against Kenya's experience observed common challenges in privatization's branding, objectives, due diligence and valuations as well as arrangements on planning, timing and sequencing, skills/expertise and labour relations.

The PC's own latest publicly available annual audited report for 2021 highlights the negative impacts of not having a fully-constituted board in place, which hampered due diligence completion on 16 transactions and business valuations for nine. The harsh reality is that this privatisation shortlist has been stuck at 25-26 candidate entities for the past decade, since the 2013 Task Force.

This is the lengthy overall context to any discussions on the current bill. From my take on previous experience, it might need a 1990s-style overarching public enterprise reform and privatization policy framework, or a NARC-equivalent privatization sessional (policy) paper to accompany the draft bill, as background documentation that might be available to Cabinet and then Parliament. But success also needs Kenya Kwanza to generate implementation goodwill beyond documents.

Indeed, my non-legalistic impression is the draft bill offers better logic than the current law. There is a nice flow to how it presents clauses on privatisation programming, pre-requisites, methods, proposals, implementation and sign-off. With policy backing, we could avoid current concerns about Parliament's exclusion from vetting individual entity proposals if the overall program is captured in the policy (as was the case before) and annual/regular reporting to the house remains.

One area that departs from current institutional arrangements is the possibly oversized role of the Treasury Cabinet Secretary when we have an Authority with a Board (the current Commission is a board with staff like our constitutional commissions which tend to mutate into dual-executives). Yet, privatization needs a strong Executive hand to guide it (the current design missed this) even accepting that in our presidential system, the president is the only elected minister in Cabinet.

In conclusion, the law is a good start, back-up policy might help but it is implementation that will matter. And there is a limit to our ability to legislate for ability, and more critically, motivation. That's my quiet take, but you have a chance to offer yours in person or writing by next Tuesday.