Moody’s on Why Ruto’s Privatisation Agenda Might Take a Long Time

President William Ruto signed into law the Privatisation Bill, 2023 – paving the way to privatise State Owned Enterprises (SOE) or better known, as parastatals without bureaucratic intricacies from Parliament.

The privatisation agenda is hinged on reduced revenue transfer to SOEs to increase the fiscal space for other priority spending without increasing the size of the fiscal deficit.

Among institutions slated for sale include the historical Kenyatta International Convention Centre (KICC), Kenya Pipeline Company (KPC) and National Oil Corporation of Kenya (NOCK).

But according to Moody’s in its December Markets Outlook, delivering on, and reaping the rewards of, the privatization agenda “will take a long time and particularly challenging in the current economic climate.”

Also, President Ruto faces political resistance to privatization stemming from rent-seeking and corruption which are part of the reason for the poor financial performance of SOEs, while there are social risks if privatization results in job losses or increased costs for services.

The Conflict of  Interest Bill, 2023 aims to address corruption issues by strengthening public officials’ requirements around wealth declaration.

Privatizing companies such as Kenya Seed Company Limited could also face social and political resistance given its perceived role in ensuring food security.

Additionally, some opposition political leaders have argued that the privatization of companies such as KPC and NOCK would result in higher fuel prices, and oppose the initiative because the government would cede control of strategic assets.

“In any event, privatization programs often exhibit a protracted timeline before manifesting substantial benefits, particularly for asset sales where the process of valuation, finding buyers, and negotiating deals can be lengthy and complex,” adds Moody’s.

The government’s privatization agenda comes amid a challenging domestic economic environment given the depreciation of the exchange rate and tight domestic liquidity.

Kenya has taken several steps to improve its fiscal trajectory since entering an IMF program in April 2021.

These steps include efforts to improve tax collection through compliance and the introduction of new taxes, and curtailing spending, including on fuel subsidies.

These measures are meant to unlock funding from multilateral lenders such as the International Monetary Fund (IMF) and the World Bank on whom the government increasingly relies for external financing.

“Improving governance and oversight of SOEs is a key pillar of the IMF program and important for maintaining support from other multilateral creditors such as the World Bank.”

This is evidenced in a recent move by the IMF in November when it reached a staff-level agreement with Kenya on the sixth review of its IMF program, agreeing to increase funding by about $940 million.

The agreement was followed by a statement from the World Bank indicating that it would make $4.4 billion available for additional lending, taking its total commitments to Kenya to $12 billion.

Moody’s says progress on improving the governance of state corporations, and eventually selling government stakes in certain entities, would positively affect the fiscal balance and government debt.