What you need to know about Kenya's Privatisation Bill

Treasury Cabinet Secretary Prof Njuguna Ndung’u at a press briefing on November 10, 2022. PHOTO | DIANA NGILA | NMG

A new Privatisation Bill seeks to allow the Treasury to exclude Parliament from approving the sale of State-owned firms in changes aimed at shortening the approval process for the sale of government assets.

The State-backed Bill comes at a time when the government has announced plans to sell a number of State-owned firms through the Nairobi Securities Exchange (NSE) this year.

President William Ruto said his government would bring to the bourse through initial public offerings (IPOs) between six and 10 companies, urging the private sector to also list at least five companies to boost the Nairobi bourse.

Here is a guide to the Bill that has caused some discomfort in some quarters.

Kenya's privatisation agenda

The privatisation agenda was first introduced during the Kibaki era which saw the gazettement of the Privatisation Act 2005.

The agenda had been brought up in order to reduce the demand of the State corporations on the Exchequer, amid diminishing external financing — loans and grants.

Donors were no longer willing to lend funds to poorly managed State corporation projects, which are operated efficiently by the private sector in other countries.

Privatisation was also expected to curtail increasing debt repayments by the Treasury accruing from non-viable development projects.

What is the privatisation process?

With the approval of the Cabinet Secretary for Treasury, the authority will consider privatisation through IPOs to enhance transparency and openness in the disposals or through sales resulting from the exercise of pre-emptive rights, where the company shareholders are granted the right to have the first option to buy shares when there is an issuance with the procedure guided by the entity’s charter documents.

The new Bill has removed methods like liquidation and leasing that had been suggested in the 2005 law.

What are the objectives of privatisation?

Privatisation of parastatals is expected to reduce the public sector’s participation in the economy and shift this to the private sector.

This is expected to reduce reliance on government financing during budgeting. It is also set to generate additional revenue for the government and encourage private ownership of entities in the economy.

The listing will also deepen liquidity on the bourse while boosting turnover in the market that has recorded an IPO drought for years.

What it’s the role of the Privatisation Authority?

The Bill has proposed the establishment of the Privatisation Authority to advise the government on all aspects of privatisation of public entities, implement the programme and guide on the act.

The board shall receive any grants, gifts, donations or endowments on behalf of the Authority.

What is the process after an entity has been selected?

The authority shall prepare a privatisation proposal on the entity stating the financial position of the entity to be privatised, recommended method of privatisation and the estimated costs of implementing the proposed privatisation.

It will also offer proposals on dealing with the employees directly affected by the proposed privatisation, including benefits. It will also direct Kenyans on how they can participate in the transaction.

Who are eligible for buying the parastatals’ shares?

Kenyan and foreign individuals and entities are allowed to buy the shares as long as it does not affect other existing laws that impose restrictions on participation by foreigners.

The Treasury will, however, put a minimum level of participation by Kenyans in any form of privatisation employed. Other government-owned entities are not allowed to buy the ownership unless they carry out investment as their core business.

Social security funds, the compensation fund, the superannuation fund, the insurance fund or the endowment fund under government control are allowed to purchase shares for the benefit of their contributors.

What is the plan for the privatisation gains?

Any proceeds from the sale of a direct government equity holding shall be paid into the Consolidated Fund.

Gains from the sale of a State corporation’s equity holding shall be deposited in a special interest-bearing account established for that state corporation in order to protect the erosion of the balance sheet of the state corporation.

The earnings will then be used to liquidate the debts of the state corporation, pay the costs of financial and organisational restructuring of the State corporation, and capital investments by the state corporation.

The money will also be used to cover the costs incurred by the authority in the privatisation, however, should not exceed five percent of the earnings from the transaction.

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Note: The results are not exact but very close to the actual.