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Social business model can save State firms

By Njoroge Wanjihiah | May 19th 2020

The recent clamour around privatisation after the approval of the sale of government stakes in leading hotels in Nairobi is neither new nor novel.

Privatisation in Kenya started in the early 1990s after government identified 207 non-strategic State-owned entities (SOEs) that were to be privatised. About 33 strategic entities were to be retained, but restructured.

The privatisation of SOEs was a key policy under the Stabilisation and Structural Adjustment Programme (SAP) championed by the World Bank and the International Monetary Fund (IMF) in the 1980s.

Without belabouring the intricate particulars, SAPs were conditional loans extended to countries experiencing economic crises, which required borrowing states to implement a raft of policy changes such as the reduction of government expenditure, reduction of domestic consumption, privatisation, among others.

As a result, a wide array of SOEs went through the privatisation process in different sectors, ranging from energy, aviation, and telecommunications to manufacturing and retail. 

Innumerable inferences have been made on the performance of the companies’ post-privatisation by scholars who have either been proponents or opponents of the idea.  

Indeed, a look at the companies in the different sectors exhibits the rift in the two schools of thought, with some entities showing tremendous growth, while others have fallen short of expectations.

However, depending on whatever end of the prism you choose to view this from, one thing remains inarguable - that the underlying principles of the privatisation agenda are noble and with the best intentions for the country at the core.

Privatisation is, however, a delicate process and the process and/or procedures employed should be optimal to ensure it results in the appropriate counterparties. Only then will the envisaged privatisation benefits be realised.

Before the formulation of the Privatisation Commission (PC) in 2005, divestiture was spearheaded by the Parastatal Reform Programme Committee, which struggled with weak processes, resulting in accusations of corruption. It is further captured that these challenges were as a result of the inadequate legal framework, or lack thereof, necessary to guide the process.

This necessitated the formulation of the PC, which was established under the privatisation Act (2005), with the mandate to formulate, manage and implement the privatisation programme.

Since its inception, it has successfully overseen privatisation largely through strategic sales and IPOs, although it has also not been spared criticism.

Its critics have pointed out that in its 15 years of existence, it has only managed to deliver a handful of transactions despite gobbling up huge sums of taxpayers’ monies. 

In July 2013, the president appointed a Presidential Task-Force on Parastatal Reforms (PTPR).

The Abidakir Mohammed-led task-force presented its report that had a raft of proposals. Key among them was the financial sustainability of SOEs.

Consumer exploitation

The task-force rightly began with indicating the need to categorise SOEs into profit SOEs and not-for-profit SOEs, with nonprofit entities comprising executive agencies, universities, tertiary institutions and independent regulators.

And profit SOEs were indicated to be further categorised into strict commercially-run entities purely on business for profit purposes and commercial entities with strategic government functions such as Kenya Power. This, in my view, is a correct admission that not all SOEs should be privatised.

To arrest this situation and avoid replication of such failures in other sectors, the government should consider prioritising the privatisation proposals made by the PTPR task-force.

And to avoid the exploitation of consumers, the government may adopt innovative structures that provide some level of regulation to the privatised entities.

One option that comes to mind is a hybrid of the underutilised social business model championed by Nobel Peace Prize Laureate Muhammad Yunus. Social businesses are ideally non-loss, non-dividend-paying companies that address social problems.

These businesses, unlike conventional businesses, reinvest all their profits in a bid to expand their reach and quality of the products and services with the owners of the businesses being only entitled to a maximum of their initial capital. 

- The writer is an Assurance Associate at EY. The views expressed herein are not necessarily those of EY  

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