Extent of Privatization in Kenya and Negative Effect of Privatisation

TABLE OF CONTENTS

1.O INTRODUCTION 3

2.0 PRIVATIZATION PROGRAMME CARRIED OUT BETWEEN 1992 AND DECEMBER 2002 (FIRST PHASE). 4

3.0 PRIVATE SECTOR INVOLVEMENT IN STRATEGIC PUBLIC ENTERPRISE 5

4.0 EVALUATION OF THE FIRST PHASE OF THE PROGRAMME 5

5.0 PRIVATIZATION PROGRAMME CARRIED OUT AFTER DECEMBER 2002 (SECOND PHASE). 6

6.0 OBJECTIVES OF PRIVATIZATION 7

6.1 Improving Efficiency and Governance 7

6.2 Macroeconomic Stability 7

6.3 Broadening Ownership and Capital Market Development 8

7.0 SCOPE AND TIMING OF THE PRIVATIZATION PROGRAMME 8

8.0 THE TIMING OF THE PRIVATIZATION PROGRAM, 2005-07 9

9.0 PRIVATIZATION NEGATIVE EFFECT 9

9.1 Loss of jobs 9

9.2 High tariffs 10

9.3 Social economic objectives 10

9.4 Anti-privatization 11

9.5 Corruption . 11

9.6 Downsizing. 12

9.7 Profit. 12

10.0 REFERRENCES 12

11.0 ANNEXIES 13

1.O INTRODUCTION

According to Sessional Paper No. 10 of 1965 on African Socialism and its application to planning in Kenya, from 1963 when Kenya achieved political independence up to 1979 when a comprehensive review of the State Corporations sub-sector was carried out, the Government's participation in commercial activities grew rapidly and broadly resulting in state dominance in various forms (including monopolies) in many commercial activities. The establishment of the parastatals was driven by a national desire to (i) accelerate economic social development; (ii) redress regional economic balances; (iii) increase Kenyan Citizen's participation in the economy; (iv) promote indigenous entrepreneurship; and (v) promote foreign investments (through joint ventures). The paper also outlined the principles, which guided nationalization under which a few private sector operations were brought under government control. It pointed out that nationalization was only needed (i) when the assets in private hands threaten the security or undermine the integrity of the nation; or (ii) when productive resources are being wasted; or (iii) when the operation of an industry by private concerns has a serious detrimental effect on the public interest; or (iv) when other less costly means of control are not available. The paper indicated that once in government hands the nationalized operations had to operate efficiently, cover costs and earn profits at least equivalent to taxes paid when operating efficiently. It also emphasized the complementary role played by private sector in creating additional productive assets for the country and employment and the need to utilize government resources in areas in which private sector is unable and unwilling to invest.

The Report of the Working Party on Government Expenditures 1979 pointed that (i) the growth in the parastatal sector had not been accompanied by development of efficient systems to ensure that the sector plays its role in an efficient manner; (ii) there was clear evidence of prolonged inefficiency, financial mismanagement, waste and malpractices in many parastatals; (iii) government investments had largely been at the initiative of private promoters with government being brought in either as an indispensable partner or to undertake rescue measures;(iv) many of the parastatals had moved away from their primary functions, especially the regulatory boards most of which had translated their regulatory role into executive one, resulting in waste and confusion; and (v) there was danger of over-politicizing production and distribution through establishment of too many parastatals. The report recommended recommended that (i) the government should act as a creator of favourable setting within which people can develop themselves and the economy; (ii) the government should divest from its investments in commercial and industrial enterprises to transfer active participation to more Kenyans through participation in shareholding; (iii) the government should reduce exposure to risk in areas in which the Private Sector can assume risk without government intervention; (iv) the government should dismantle some of the existing administrative hurdles which discourage private sector initiative and provide needless opportunities for corruption; and (v) the government should reorganize legal and institutional framework regarding monitoring and supervision of parastatals

2.0 PRIVATIZATION PROGRAMME CARRIED OUT BETWEEN 1992 AND DECEMBER 2002 (FIRST PHASE).

Sessional Paper No.4 of 1991 pointed the need to implement privatization and divestiture of State corporations urgently, in view of the managerial problems afflicting the parastatals leading to poor return on government investments, the existence of a larger pool of qualified manpower, availability of more indigenous entrepreneurship to permit private sector led economy and the need for non-tax revenue for the Government.

In 1992 the KANU Government initiated a comprehensive state corporations reform programme whose main objectives were to: (i) shift more of the responsibility for production and delivery of products and services from the public to the private sector; (ii) reduce the demand of the state corporations on the Exchequer; (iii) enhance the returns on Kenyan resources by achieving greater efficiency in both private and public enterprises through greater responsiveness to market signals and commercial criteria; (iv) rationalize the operations of state corporations sector; (v) improve the regulatory environment by selecting more economically rational means of regulation (thereby reducing conflicts of interest between the regulatory and commercial functions of state corporations); and (vi) broaden the base of ownership and enhance capital market development.2.1.3

The Programme began in July 1992 with the issuance of the Policy Paper on Public Enterprises Reform and Privatization in which the government outlined the scope of the programme, the institutional framework and the guidelines and procedures