Cliffe Dekker Hofmeyr: Does Privatization Serve the Public Interest?

By Remie Otieno

Plans to privatize some of Kenya’s loss making entities like national carrier Kenya Airways (KQ), Kenya Postal Corporation (Posta) and Mumias Sugar Company Ltd among other parastatals, have been on the cards for years now – but experts privy to the tedious tasks involved in the privatization procedure, now believe such plans may continue to remain just that, plans.

Sammy Ndolo, the managing partner at Cliffe Dekker Hofmeyr discusses why privatisation and its importance to the Kenyan economy.

Excepts:

Que: What is the process of privatization and how does it impact the Kenyan economy?

Ans: Privatization is the process by which assets owned or controlled by Government are transferred to a private person primarily through a sale of shares or assets.

The process starts with the publication by the Cabinet Secretary for finance in the Kenya Gazette of a programme containing the assets that are eligible for privatization and the Privatization Commission is tasked with developing proposals to achieve the sale.

Further approvals by the Cabinet and the National Assembly as well as publications in the newspaper and the Kenya Gazette must be undertaken before the sale can be concluded.

Government owned entities are generally considered to be inefficient and wasteful and privatization usually seeks to facilitate and catalyze growth, create sustainability and maximize profitability of the entity, the relevant sector and the economy more broadly.

Que: What are the common challenges being faced in various sectors

Ans: The common challenges faced by state corporations in various sectors include bloated workforce, poor and mismanagement of resources resulting in unmanageable debt, limited government funding, complex slow decision making processes and procurement methods, and overlap and duplicity of functions.

Que: Is there a legal backing that can accelerate the process?

Ans: The privatisation process is a chronological step by step action baked into the Privatisation Act and the ability to accelerate the process is limited. The privatization option that allows for most flexibility is the public offering of shares but the government entities are in many instances unable to meet the conditions for a public offering of shares given the challenges they face.

Other options that can allow an acceleration of the process include a rights issue to existing shareholders or a balance sheet re-organization where the government shareholding in the entity is reduced when it does not take up the new shares.

Que: What are the legal challenges making it difficult to close the process faster?

Ans: As noted above, the privatisation process under the Privatisation Act requires that the Privatisation Commission follow a lengthy and detailed process before the sale can be implemented. This results in the process being time consuming and puts off private investors given the uncertainties it presents.

This is also impacted by the retirement of Commissioners and their absence delays the implementation of the privatisation program.

The poor financial and management state of the government entities also usually results in a mismatch in price between what the investors are willing to pay and what the government expects to receive. As such, there is difficulty in finding suitable investors willing to pay a premium for the assets sought to be privatized.

Ques: Which legal opportunities can public entities ride on to get a lifeline?

Ans: Public entities on the privatisation programme and that are solvent and well managed can consider the option of making a public offer of shares as this provides the greatest flexibility under the Privatisation Act. Such entities can also consider a rights issue.

A financially distressed or insolvent government entity can also consider the option of balance sheet restructuring or liquidation to facilitate the sale of assets while getting relief on repayment of outstanding debt.