IPO deal raises doubts on government's privatisation plans

 

The  Kenya Pipeline Company (KPC) initial public offering (IPO) may have raked in the billions the government had targeted from its most pricey state-owned enterprise (SOE). However, it is highly doubtful if the IPO has achieved the broader macroeconomic and legitimacy outcomes that such an exercise should bring to the government.

For context, the IPO, which was running concurrently with the private placement divestiture undertaking for government-owned shares in Safaricom, is the first of many other SOEs lined up for sale to the public or strategic investors. Thus, the success or failure of the two programmes would have far-reaching impacts on any future offering for the remaining enterprises on sale. Furthermore, of all the targeted SOEs, these two are the finest in the state.

Legitimacy failure

Looking at the final uptake of the shares as announced by the Cabinet Secretary for Finance, John Mbadi, on Wednesday, the IPO has failed on its most critical aspect of legitimacy. According to the Institute of Public Finance, a lack of citizen appetite for an IPO of an SOE raises significant legitimacy questions. This reflects a clear gap between government policy and public trust.

Specifically, when citizens are reluctant to participate in the sale of state assets, it signals a distrust in the transparency of the process, concerns over loss of national assets, and scepticism about the efficiency gains of the privatisation exercise. Reflecting on the entire process of the divestiture programme, starting with amendments to the Privatisation Act to ease the process of the sale of SOEs, there has been a general public distrust of the true motives behind it.

There have been conspiracy theories that the programme’s true intent is to offer strategic public assets into the hands of private political and bureaucratic elites. To make matters worse, some of the vocal voices on this theory are former insiders in the government turned ardent opponents, both inside Parliament and within public forums. Seasoned analysts and investors would definitely pay a little more attention to such voices because, sentimentally, markets consider them as privileged sources of insider information.

Comparatively, this conspiracy theory is not entirely out of context when looking at the country’s independent history. In the 1970s, as earlier opined in this column, government insiders used their privileged positions to drive a similar divestiture programme that handed prime state assets to themselves either directly or through proxies. That programme has shaped both capital and wealth distribution in the economy to this day. Besides, the elites of the time have perpetually leveraged their wealth to control political power in the country for the past six decades.

In a twisted sense, President Ruto is considered an outsider to this elite club from the 1970s. He leveraged the poor masses to identify as one of their own to snatch the political power levers from them. Despite being nurtured and having profited from their fortunes for three decades, he has never shied away from invoking his poor background when it is politically convenient for him.

For ardent students of political economy, the issues at play are a fierce battle between old and new money. There are believable traces of evidence that the political and bureaucratic elites of the Ruto administration are attempting a dash race to outdo decades of systematic appropriation of public resources by the country’s traditional oligarchs.

For example, in the past three years in office, several multibillion-shilling scandals have been swept under the carpet with no political or administrative accountability. In addition, multibillion-shilling projects have been contracted outside the established open Public Procurement frameworks, with no discernible desire to resolve weighty audit questions raised by the Public Auditor in the National Assembly.

When public outcries become too much for those in power, the programmes simply mutate and get baptised into other programmes, like the ongoing case of a National Infrastructure Fund. Underneath these glossy projects, the eating continues unabated.

What the architects of today’s plunder fail to grasp is the extent of societal transformations that have happened in the space of time between the 1970s and the 2020s. Let us take a case in point of the outgoing IPO. Despite laying out an elaborate marketing and popularisation machinery backed by billions for transaction advisors and sponsor commissions, the government failed to counter civic engagements on social media against the IPO.

For argument’s sake, let us assume that CS Mbadi’s view that the noise from supposedly illiterate Kenyans is the reason why foreign investors did not take up their allocation is correct. What, then, would explain the failure of oil marketers and KPC’s own employees to take up their allocation too? These are insiders who would know better than the rest of us out here making noise from an uninformed point of view, according to the CS.

Ironically, how would Kenyan retail investors have been expected to invest in the very IPO if they lack basic knowledge on the matter, as the CS puts it? More puzzling is that the very same Kenyans have been offering the government billions for Treasury Bills and Bonds each month, and showed a huge appetite for Safaricom and EABL corporate bonds only months ago.

On a fair balance of evidence, it is very unlikely that foreign and institutional investors would be swayed by noise (in its technical market sense) to shy away from a good investment if they consider it to be so. After all, a significant portion of the so-called foreign investors would constitute Kenyans in the diaspora.

In the case of East African investors, it is already in the public domain that the bailout came from the Uganda National Oil Company after being enticed with two board slots. For the Kenyan institutional investors, it requires no rocket science to understand that state machinery was deployed behind the scenes to force public funds (mainly NSSF) to take up the unwanted shares on offer.

Macroeconomic failure

Theoretically, while the government celebrates a psychological win in meeting its target amount, the IPO remains a cropper in the macroeconomic sense. This is because the success of divestiture programmes through public offerings is not just about raising revenues on the part of the government, but also about growing and deepening a country’s capital market.

Prime IPOs like KPC were a golden opportunity to draw hundreds of thousands of new investors into the country’s capital market. For instance, the Safaricom and KenGen IPOs drew tens of thousands of first-time investors into the market almost two decades ago. The Zidii Trader App, launched with the backing of the entire government machinery, also failed to mobilise small investors into the IPO.

Since the Safaricom IPO, there is much more awareness about the numerous investment opportunities available in the stock markets. The country’s young people are much more informed than CS Mbadi assumes. Yet they rejected the government’s overtures and, in the process, denied the country a great opportunity to deepen its capital market.

Structurally, with such heavy institutional holding in the IPO, there may be very limited liquidity in the shares when it debuts in the market on Monday. This is because every retail investor who may have desired the share got their full application, and institutional investors like the NSSF may find it very difficult to offload the share at a loss should the market decide the IPO was overpriced.

Overall, and in a strict sense, the citizens may be sending a clear message of distrust to the current administration.

Whether this will be transmuted into the ballot come August next year, only time will tell. For now, what is evident is that any future IPOs by the current government are doomed.