Ideas & Debate

Let us debate merits and demerits of parastatals sale

The choice to privatise should consider broader
The choice to privatise should consider broader societal implications. FILE PHOTO | NMG 

At the heart of the Kenya parastatals reforms debate is a fundamental question: Can privatisation solve the crisis? Rather than engines of development and providers of essential goods and services, most parastatals in Kenya have become synonymous with mismanagement, corruption, wastage and bureaucracy which has greatly undermined the delivery of their mandates.

As a result, the government has had to bail them out frequently, either by providing cash injections or treasury-backed guarantees on loans to keep them afloat. At a time when parastatals’ reforms discussion is on the lips of many, privatisation, private-public partnerships and parastatal consolidation and merging are some of the reform options floated.

The debate about the profoundness of privatisation of parastatals is not new in the public service in Kenya. However, this debate has gained ground in recent years where the government has been caught in a dilemma between the growing fiscal burdens of subsidising financially distressed parastatals and at the same time manage strong public and employee resistance to either a restructuring or sell-off of the parastatals.

Often the outcome has been to let the parastatal operate until it becomes bankrupt. At this point, when the financial distress of the enterprise becomes obvious to all involved, a strategic investor is then engaged to take a significant stake in the parastatal and ensure the continued operation of the enterprise.

Proponents of privatisation have advanced several arguments in support of sale of parastatals. The first argument is hinged on the assertion that leaders of parastatals are not shareholders hence have little motivation to ensure long-term profitability and sustainability of the enterprises resulting in inherent inefficiencies.


The second argument is that parastatals, operating under government protection and motivated by political pressures rather than sound business sense, have little drive to innovate and manage costs, which results in poor service delivery and unsustainable operating costs. The third argument advanced is that privatisation opens the market to competition necessitating continuous improvement on service delivery.

Fourthly, it has been argued that the government can also raise revenue from the sale of state-owned assets and channel the proceeds to other developmental priorities. Their conclusion is that the government should abandon the country’s parastatals to private enterprise and allow the forces of the market to raise social welfare.

But the fundamental question that is rarely asked is, what is usually the primary reason for government to set up a parastatal? Is it not as an implementing agency for government policies and strategies?

Despite the strong arguments fronted by the privatisation proponents, there is little empirical evidence to support the privatisation agenda. From experience, most parastatals fail because of corporate governance issues that put self-interests first and professionalism last.

The argument that incentive and monitoring framework in the private enterprise is better than in the public sector is not entirely true. Numerous cases where managers in private firms have been often driven to maximise current share prices over preserving the long-term interests of the firm and the broader economy can be cited. While privatisation can, sometimes, be the only option to salvage distressed parastatals, it should not be used as a one-stop shop idea for resolving the parastatal crisis. Historically, parastatals have been sold cheaply to foreign investors or domestic cronies with close links to government ending up in accusations of corruption and collusion.

Additionally, the sale of parastatal results in a one-off cash injection denies the government, and by extension the public, the opportunity to continuously generate revenue from potentially profitable parastatals. A profit-only-driven system does not necessarily mean Kenyans gets more for their money. In any case, it may as well mean someone gets to make more money off Kenyans. It is sad that decades of neo-liberalism have, somehow, corrupted our capacity to think in non-economic terms.

We have accommodated the ideology that all spheres of our life should be organised as markets and that government should be run like a business. It is wrong to try to reduce complex social goods or services to a series of commercially and contractually defined transactions.

The choice to privatise should also consider broader societal implications. One of the most damaging outcomes of privatisation is its effect on employment. A case example is the privatisation of coal mining in the United Kingdom in 1985. A decade after the UK’s miners’ strike of 1985, more than 200,000 jobs were lost because of coal privatisation, creating the largest British industrial conflict of modern times. While it makes sense for the government to continually assess the returns it achieves on its investment in commercial enterprises, the bigger discussion today must revolve around the approach to rationalise the value represented by our non-commercial public enterprises especially the ones offering public goods and services.

This would ensure that the current crisis is resolved while remaining committed to the principle of parastatals playing a developmental role and pursuant to the progressive philosophy of de-commodifying basic goods and services. Until we have a serious parastatal reforms discussion which explores possibilities to maintain, privatise or liquidate a parastatal, billions of Kenya’s public assets risk having their fates decided by a populist ideology rather than rational principles.

The writer is Senior Advisory Consultant EY.