By JAMES ANYANZWA and Macharia kamau

Kenya: The biggest problem with the Government’s participation at the Nairobi Securities Exchange is that it does not know which of two hats to put on when it comes to investing in publicly traded shares.

This split personality is losing the Kenyan taxpayer — you and me — billions of shillings, even as the Government complains that its coffers are running on empty and it has to institute several measures to curb pilferage among its officials.

The first hat the Government can put on is that of a hard-nosed capitalist, out to make the most returns for itself and its shareholders (who happen to be the general public).

And then there is the hat of a regulator, where the Government feels it has to hold significant stakes in certain companies — like KenGen — for strategic reasons.

Putting on this hat means the government will not seek to cash in, even though the price looks good, like KenGen’s did a few months ago when the stock hit an all-time high of Sh17.90.

This split personality type of the government is expected to show itself as soon as the National Treasury debates whether or not to take up additional shares in the listed KenGen and National Bank in the next few months.

The question most taxpayers should ask themselves is if they are getting the full value of their investments in State-owned corporations.

Electricity-generating firm KenGen and National Bank are preparing to raise additional capital from their existing shareholders to shore up their balance sheets and drive their development agenda.

But faced with growing budgetary deficits and other competing financial needs, the Treasury has hinted at the possibility of not taking up its rights in a move that would see its shareholding greatly diluted.

These two firms are only the latest in a growing list of parastatals that the Government has renounced its rights in.

Failure to participate

The Government has a 70 per cent stake in KenGen, and holds 22.5 per cent of National Bank directly and 48.05 per cent through the National Social Security Fund (NSSF).

The failure to participate in rights issues has in the past proved to be a strategic blunder, as in the case of Kenya Commercial Bank, where the Government has over time lost close to 18 per cent of shareholding by failing to participate in the bank’s cash calls.

Its shareholding has reduced to 17.7 per cent from 35 per cent in 2008, which means the Government — and by extension, taxpayers — have lost Sh24 billion that could have been realised if the shares were disposed of at the current market price of Sh47 per share.

While the Treasury argues that it has more pressing needs for its cash, there lies a contradiction: it is forfeiting taking up additional shares at discounted rates that could be sold off at higher markets prices, giving better returns that could be used to meet budgetary needs.

Meanwhile, billions of shillings lie unutilised by different ministries and State departments due to their low absorption capacity

“We are still discussing whether or not to take up these rights because we did not factor them into this year’s Budget,” said Mr Henry Rotich, the National Treasury cabinet secretary.

“There is the issue of priority. We need to allocate money for infrastructure programmes, rather than raising capital to maintain shareholding levels in these companies. We are, however, still discussing and we have not finalised. It is something that is going to take up taxpayers’ money, and therefore requires both parliamentary and Cabinet approvals.”

The unfolding trend has seen the State’s shareholding in another NSE-listed firm, Kenya Power, drop to 50.1 per cent from 69.7 per cent after a balance restructuring following a 2011 rights issue.

Economists are now questioning the modalities of how the Government has handled its shareholding, saying Treasury may be making major strategic blunders that are leaving Kenyans holding the short end of the stick.

Deliver value

While cutting down shareholding and eventually exiting from quasi State-owned companies is not entirely a bad thing, analysts note that divestiture exercises must deliver value for taxpayers.

Mr Robert Shaw, an economic and public policy analyst, feels that Treasury has not necessarily been getting the best deals for the Kenyan public by forfeiting its rights, which he equates to selling shareholding at throwaway prices.

“The Government owns the shares on behalf of the Kenyan people. It doesn’t make sense to shortchange them by selling these shares so cheap. It is important that they are sold at commercial rates.

“I get the feeling that this is a major policy shift, and this is the start of several and we are going to see more of these … this is a significant move by the Government to lessen its stake in a number of State-owned entities,” he said.

He added that the disposal of public assets should be conducted in a transparent and accountable manner, saying disposing of shares at the right time could help bail out the Government in times of financial crisis, as well as bridge budgetary deficits.

“It makes sense to turn some of these Government stakes into cash that can in turn give them some additional money to meet their budgetary requirements. The Government is absolutely short of funds and is running on large deficits,” said Mr Shaw.

“I think the bottom line is that we should get it right, otherwise the future of the exercise will be very difficult. We should have a balance so that we do not sell so cheap, while still making the shareholding attractive and valuable to taxpayers.”

However, according to Mr Kariithi Murimi, an accountant and Patron of the Institute of Credit Management, the Government is fulfilling part of its objectives as outlined in Vision 2030 by divesting from State-owned entities.

He reckons that offloading the shares at a premium in the market is a risk as their prices may not necessarily rise.

“Technically, after a rights issue, the price comes down because you have more shares being offered in the market,” he said.

“Not taking up the rights is also a liquidity issue because if you have to sell the shares to the market, you have to wait for a year for the market to build a price for you.”

Mr John Kirimi, the executive director of Sterling Capital, is also happy with the Government’s move to relinquish its ownership of businesses to the private sector, but cautions that the management and disposal of public assets should be in line with the interests of the public.

Chopped shareholding

“I think it is a very good move when the Government doesn’t take up its rights because it is a way of exiting gradually to ensure a complete transformation. The Government has got so many social considerations, and hence it has to get out of business and privatise,” he said.

And the warning: “But if, for instance, you leave the banking industry to the private sector, then, literally, you leave it at their mercy and you can’t know what is happening. It is, therefore, okay for the Government to be in some of these public interest organisations in a market that is as oligopolistic [non-competitive] as ours.”

Prior to 1988, the Government wholly owned KCB. Through sales of shares at the NSE, ownership progressively reduced to 80 per cent in 1988, 70 per cent in 1990, 60 per cent in 1996 and 35 per cent in 1998.

According to a Kenya Bank Credit Rating report by the Global Credit Rating (GCR) Company, the Government reduced its shareholding in the country’s largest bank by branch network from 35 per cent to 26.2 per cent on the back of a 2004 rights issue that raised Sh2.5 billion.

A second rights issue in 2008 chopped its shareholding to 23.1 per cent and raised Sh5.5 billion in additional capital.

A third rights issue in 2010 generated Sh12.5 billion and further reduced the Government’s stake to 17.7 per cent.

With the Government currently owning an estimated 523.6 million shares in KCB, taxpayers are feared to have lost 17.3 per cent (511.76 million shares) of their investment. In monetary terms, this is worth Sh24 billion at the stock’s current price.

Treasury, however, dismissed fears over the perceived loss of value to taxpayers, arguing that rights issues are designed to raise capital not privatise State-owned institutions.

“When we don’t take up our rights, we don’t lose anything because our shares do not change hands, they remain intact. What simply happens is the dilution of the shareholding because of the increased volume of shares,” Mr Rotich told Business Beat.

But there are concerns that the Government’s influence and capacity to make major decisions on the boards of parastatals may be compromised as its shareholding dips.

“You need about 26 per cent shareholding to make major decisions concerning a company. When you own such a stake, then other shareholders cannot pass anything without you,” Mr Kirimi said.

Level of dilution

According to Mr Francis Mwangi, the head of research at Standard Investment Bank, the level of dilution of the Government’s shareholding in State-owned entities would not significantly impact its influence on the operations of the firms it holds a stake in.

“The Government is trying to reduce its ownership in private companies so that it can deploy its resources in other social programmes and allow corporates to become independent of Government,” he said.

But Treasury’s reluctance to take up its rights at different corporations appears to go against the view held by key State advisors.

A report by the Presidential Taskforce on Parastatal Reforms noted that certain State-owned corporations — in particular Kenya Power and KenGen — are critical and recommended that the Government increase its shareholding in them.

“The taskforce proposes that the Government Investment Corporation — a proposed vehicle that will hold Government interest in such companies as KenGen and Kenya Power — buys more shares in such entities.

“It is noted that Kenya Power and Lighting Company and Kenya Electricity Generation Company are partially privatised and may be candidates for further divestment. It is, therefore, important that any further restructuring of the two entities ensures Kenya’s energy requirements in a manner consistent with the national development goals,” said the Abdikadir Mohamed-led team in an October 2013 report.

“In this regard, it is recommended that the Government Investment Corporation should consider increased shareholding in Kenya Power and KenGen in a manner supportive of national development goals.”

The Government in 2011 increased its shareholding in Kenya Power to 69.7 per cent from 40.4 per cent by converting some debts into equity.

This, however, dropped to 50.1 per cent after Treasury opted not to participate in a rights issue held the same year.

Another lost opportunity is Kenya’s stake in Telkom Kenya, which has over time dropped to 30 per cent following Treasury’s unwillingness to inject more money into what has been viewed by many ICT industry players as a sleeping giant. The telco is constructing the national fibre optic cable backbone.

Debt swap

The Government’s shareholding at the telco has declined over time from 49 per cent when it initially sold to France Telecom, to 30 per cent currently.

This followed a complex debt swap that was part of a plan to save the operator from debts that were estimated to be about Sh51 billion.

France Telecom and the Government in 2012 agreed to convert part of the Sh34 billion shareholder loan they advanced the operator into equity.

But there are questions over whether the French armtwisted Treasury into ceding the 19 per cent. And the elephant in the room is that the French are keen to exit and since they have a majority stake, they will not need to get the green light from the Government to sell the company.

However, the Government has not ignored all rights issues. In 2012, it participated in a Kenya Airways cash call that netted Sh14.49 billion.

After the rights issue, Government shareholding rose from 23 per cent to 29.80 per cent, while that of the other main shareholder, Netherlands-based KLM, increased marginally from 26 per cent to 26.73 per cent.

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