Privatization: When The Government Sells to The Private Sector

The recent suspension of privatization efforts in Kenya was prompted by a High Court ruling that declared the Privatization Act unconstitutional. The court halted the sale of several key state-owned enterprises following concerns raised by the opposition and civil society groups. These groups argued that the privatization process lacked adequate public participation, thereby violating constitutional principles that mandate government transparency and public engagement.

The ruling presents a significant roadblock to the government's broader plans to offload state-owned enterprises to the private sector, particularly in light of Kenya's economic challenges, including soaring debt and inflation. The administration had aimed to fast-track privatization to rejuvenate the economy, but the court's decision emphasized that national assets, particularly those deemed strategic or culturally significant, should remain under public ownership unless the process adheres to constitutional requirements.

?So, how is it supposed to be done?

In Kenya, the process of privatization must adhere to constitutional and legal frameworks, particularly those set out in the Constitution of Kenya, 2010, and other related legislation like the Privatization Act, 2005 (which has now been replaced by the Privatization Act, 2023). The key steps in the privatization process include:

• Public Participation: The Constitution mandates public involvement in significant policy decisions. Article 10 requires that the public must be engaged in decision-making processes that involve the disposal of public assets. Lack of public participation, as seen in recent court rulings, can render the privatization process unconstitutional
• Government Approval: Previously, privatization decisions required approval from Parliament, ensuring that elected representatives could scrutinize the sale of state assets. However, the Privatization Act, 2023, removed this requirement, placing approval authority with the Cabinet Secretary for Finance. This shift was designed to streamline the process but raised concerns about transparency and oversight.
• Formation of the Privatization Authority: Under both the old and new legal frameworks, the Privatization Authority is responsible for overseeing the privatization process. This body is tasked with identifying companies suitable for privatization and ensuring that the process complies with both financial regulations and strategic national interests.
• Privatization Proposal: A detailed proposal for privatization must be prepared, highlighting the financial state of the company, its value, and the expected benefits of privatization. This proposal must align with Kenya’s economic priorities and government policy objectives.
• Cabinet and Public Oversight: Although the new Act centralizes much of the decision-making with the Cabinet, mechanisms for appeals and objections remain in place. The public can escalate concerns through legal avenues such as the Privatisation Review Board and, if necessary, the High Court.

These steps, underpinned by constitutional principles of public participation and transparency, are intended to ensure that privatization is conducted responsibly and with full accountability to the Kenyan people.

?So, if these steps are followed, who can or cannot bid on these companies?

In Kenya, the process of privatization, including the bidding for state-owned enterprises, is governed by various laws and regulations, notably the Privatization Act, 2023. While this Act lays down the general framework for privatization, certain restrictions and criteria for bidders can also be found in related legislation and policy documents. Here are the key points regarding who can bid:

• Eligibility Criteria

The Privatization Act does not explicitly list restrictions on who can bid, but it provides the Privatization Authority with the discretion to set criteria for bidders based on the specific nature of the asset being privatized. Generally, potential bidders are expected to demonstrate financial capability, relevant experience, and compliance with legal requirements.

?For instance, bidders may need to be registered companies with proven financial records, relevant industry experience, and the capacity to manage and operate the enterprise being privatized.

• Financial Capability

?Bidders must demonstrate adequate financial resources to support the acquisition and subsequent operation of the enterprise. This typically involves providing audited financial statements and proof of funding sources.

?Additionally, the Public Procurement and Asset Disposal Act may impose further requirements on bidders, including limits on the maximum allowable debt-to-equity ratios to ensure that companies are not overly leveraged when bidding.

• Integrity and Compliance

Entities involved in previous corruption or financial mismanagement may face restrictions. For example, the Ethics and Anti-Corruption Commission (EACC) in Kenya has the authority to investigate and disqualify bidders who have been involved in unethical practices or financial irregularities.

Companies may also be disqualified based on legal judgments against them or their owners, particularly if these judgments relate to financial misconduct or violations of procurement laws.

• ?Regulatory Oversight

The Privatization Authority and other regulatory bodies may impose additional conditions or limitations on bidders based on the asset’s strategic importance, market conditions, or national interests. This is particularly relevant for sectors deemed critical to national security or economic stability, where stricter scrutiny must apply.

While the Privatization Act, 2023, does not outline specific restrictions on who can bid for privatized entities, it provides a framework for establishing eligibility criteria. Factors like financial capability, integrity, and compliance with regulatory standards play a significant role in determining which entities can participate in the bidding process.

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