Background Information on State Corporations Reforms

Following the two reviews a number of measures were put in place. One of the measures was the enactment of the State Corporations Act. However, although this was a major attempt to streamline the management of the state corporations, the performance of most of the corporations continued to deteriorate. One reason is the continued reliance on limited public sector financing. The state corporations continued relying on public sector financing which was not adequate to meet all the sector’s needs. They continued to be financed from loans borrowed by the government and/or channeled through them as government equity; loans borrowed by the enterprises on government guarantees which in most cases ended up being repaid by the Treasury when the corporations defaulted; funds provided directly by the Treasury as grants or equity; or through internally generated funds. The internally generated funds were, however, inadequate due to huge debt burdens, tariffs that were below cost recovery levels, over employment, which caused most of the revenue to be used in payment of salaries, non-viable ventures which siphoned away resources from the enterprises, corruption and mismanagement in general. In addition most of the parastatals were under capitalization from the time of incorporation as they were mainly financed from loans without due regard to the establishment of a strong financial base. Most of them also continued to spread their resources thinly due to multiplicity of objectives and poor accountability.
In July 1992, through the issuance of the Policy Paper on Public Enterprise Reform and Privatization, the Government outlined the scope of the Public Sector Reform Programme the institutional framework and the guidelines and procedures for privatizing Public Enterprises (PEs). The Policy Paper identified 240 commercial PEs with public sector equity participation and classified them into two categories:

• 207 Non strategic commercial PEs which were to be privatized; and
• 33 Strategic Commercial PEs which were to be re-structured and retained under public sector control. 

By the end of the first phase of the privatization programme in 2002, most of the non-strategic commercial enterprises had either been fully or partially privatized. At that time, the direction of thinking regarding restructuring and retention of a number of strategic corporations under Government operation and control had also changed due to:

• Inadequacy of public resources to finance the requisite investment in infrastructure facilities;
• The need to arrest continued deterioration in infrastructure services;
• Lesson from other countries which had succeeded in improving their infrastructure services through Public Private Partnerships; and
• Restructuring which resulted in separation of commercial activities from regulatory functions, making it possible to privatize commercial activities while ensuring Government continued presence in the privatized sectors through establishment of strong legal and institutional regulatory frameworks.

Although numerous enterprises were privatized during the first phase, the impact on the economy was limited because:

•  Most of the enterprises privatized under this Phase were relatively small and self-sufficient,
• Most of the large companies were considered strategic and therefore not privatized, and
• The programme had institutional and process weaknesses arising from failure to entrench the procedures and institutional framework in law. 

As a result, the Parastatal Reform Programme Committee (PRPC) eventually became dormant while its secretariat (The Executive Secretariat and Technical Unit (ESTU)),which was the administrative organ, was reduced to a skeleton staff following closure of the World Bank Credit under which it was funded. Lack of clearly defined processes and an effective communications strategy also exposed the Programme to accusation of corruption. There was also limited participation by individual Kenyans in most of the transactions due to the transaction methods applied.

Under the Economic Recovery Strategy for Wealth and Employment Creation (ERSWEC) 2003-2007, the Government implemented a number of key privatization transactions. These included the Kenya Electricity Generating Company (KenGen) Initial Public Offer (IPO), the concessioning of the Kenya Railways operations, Mumias Sugar Company Second Offer, Kenya Reinsurance Corporation IPO, Sale of 51% Telkom Kenya shareholding to a strategic partner and the Safaricom IPO. Through these transactions, the country mobilized over Kshs.80 billion which was used to support the country's recovery and overall development agenda.

Following expiry of the Economic Recovery Strategy for Wealth and Employment Creation (ERSWEC) 2003-2007, Kenya embarked on implementation of a long term strategy, Vision 2030. On basis of Vision 2030 and its First Medium Term plan for the period 2008 - 2020 the Government focused on four priority areas namely:

•  Restoring the economy to a higher broad-based long term growth path with expanded opportunities for all Kenyans;
• Creating employment opportunities for the youth for a more stable and
• cohesive society;
• Reducing poverty and inequality through accelerated regional development; and
• Deepening human capital development efforts to increase productivity and prosperity.

To support the pursuit of these goals, privatization seeks to improve the efficiency and competitiveness of Kenya's productive resources by subjecting more of Kenya's production to market forces, mobilizing investment resources for rehabilitation, expanding and modernizing key infrastructure facilities, developing the capital markets and supporting the budget through privatization proceeds and increased taxes. Government is also expected to earn increased dividends from its remaining shareholding as a result of improved performance following enterprise privatization.