Columnists

Tie State agencies to governance that delivers growth

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Uchumi supermarket along Agha khan walk Nairobi on January 12, 2020.Weak corporate governance practices have been long attributed to the challenges faced by SOCs. FILE PHOTO | NMG

Summary

  • SOCs however became the subject of many reforms across the world towards the end of the 20th century.
  • A wave of neo-liberal ideas and free-market capitalist policies called for their mass privatisation, purportedly to improve quality, efficiency, and financial performance.
  • The privatisation process was also viewed as an opportunity to unbridle the control of poorly managed SOCs from the grasp of corrupt bureaucrats, and to provide many developing countries with much needed funds.

Many governments across the world hold ownership stakes in companies operating in a range of business and commercial sectors, such as agriculture, hospitality, manufacturing, and transport to mention a few.

State-owned corporations (SOCs), as they are often referred to, can either involve 100% control by the government over a company’s governance and operations or a part thereof can be in the hands of private-sector investors and their appointed directors.

There are several legitimate reasons for SOCs. Some operations are crucial for national security, such as the manufacture of defence equipment and maintaining key infrastructure (e.g. bridges, airports). Governments also control companies that provide essential goods and services that may otherwise be less appealing to deliver on a country-wide basis, or too costly if left to the private sector e.g. basic healthcare provision, mass transit, and postal services. Governments can also own companies with intention of generating profits to contribute to the public purse.

SOCs however became the subject of many reforms across the world towards the end of the 20th century. A wave of neo-liberal ideas and free-market capitalist policies called for their mass privatisation, purportedly to improve quality, efficiency, and financial performance. The privatisation process was also viewed as an opportunity to unbridle the control of poorly managed SOCs from the grasp of corrupt bureaucrats, and to provide many developing countries with much needed funds during periods of liquidity constraints, often at the behest of Western advisors.

In Kenya, the World Bank and IMF encouraged the government to divest several SOCs resulting in over 100 privatisation transactions. It was argued that the SOCs’ had turned into a money pit that continually drained public resources due to inefficiencies, poor budgetary habits and downright embezzlement. These problems were associated with weak corporate governance practices, including crony-based appointments of top management, corruption, lack of effective monitoring and outright impunity.

At the point of publishing this article, the Inspectorate of State Corporations website, which was last updated in 2018 indicates that there are currently 220 SOCs operating in Kenya. Yet reliable sources estimate that this number could be as high as 300. That notwithstanding, it is no secret that the performance of many SOCs has consistently been below par. Several entities are facing bankruptcy while others have already been placed under receivership.

Kenya, however, is not unique in this regard. In many parts of the world, weak corporate governance practices have been long attributed to the challenges faced by SOCs. Often, their top leadership, including board of directors, is appointed based on crony relations as opposed to meritocracy. Many of the appointed individuals also lack appropriate management skills, while others disregard corporate governance regulations with impunity. Whilst privatisation can help to overcome such challenges, it takes away the privileges associated with SOCs.

More research is needed to understand whether there are some better performing SOCs that we could learn from, before considering privatisation as a last resort.

If these and other failings in the corporate governance framework for Kenyan SOCs can be addressed effectively, these entities can play a major role as drivers of economic growth, especially noting concerns that aid and investment flows to African countries could be significantly affected by the ongoing COVID-19 pandemic.

For instance, SOCs can serve as job creators and catalysts of development in marginalised regions of the country, which might be less attractive to private firms. The government can also utilise SOCs to demonstrate how the rest of the corporate sector can contribute to climate change mitigation and other sustainability efforts.

Besides fulfilling a domestic agenda, SOCs can also pursue cross-border investments in neighbouring or other foreign countries consequently boosting government income and contributing to building of Kenya’s soft power through corporate diplomacy. The presence of many Chinese SOCs in Africa, including Kenya, is a classic example of how state entities can internationalise and achieve such objectives.

Well-governed SOCs can also be formidable competitors to the often too narrowly-profit-oriented private firms, whose operations attract social and environmental concerns around the world.

Kimani and Soobaroyen are lecturer and professor at University of Essex, UK.