Kenya-Privatization & Private Sector Competitiveness Project

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Project Name Region Sector Project ID Borrower(s) Implementing Agency Environment Category Report No. PID9328 Kenya-Privatization & Private Sector Competitiveness Project Africa Regional Office Privatization KEPE70956 GOVERNMENT OF KENYA Date PID Prepared November 9, 2000 Projected Appraisal Date February 15, 2002 Projected Board Date August 20, 2002 MINISTRY OF FINANCE Address: P.O. Box 30007, Treasury Building, 2nd Floor, Room 230, Harambee Avenue, Nairobi, Kenya Contact Person: Mr. Kitili Mbathi, Investment secretary and Privatization Coordinator Tel: Fax: C 1. Country and Sector Background Declining infrastructure and increasing povertykenya began its post-independence period as one of Africa's economies with the highest potential. Its rich endowment of natural resources, superior infrastructure, and access to regional markets made Kenya an attractive investment site for multinational firms. An array of secondary and tertiary industries developed, helping to fuel an annual growth rate of real GDP exceeding 6 percent during the 1960s and 1970s. That annual growth rate declined to less than an average of 4 percent in the 1980s and to around 2 percent in the 1990s. Today, GDP growth is barely 1 percent. Macroeconomic data indicate that the decline in growth was due to a decline in investment from about 15 percent of GDP in the 1980s to about 10 percent in the 1990s. However, the 70 percent decline in investment efficiency is a much more important factor contributing to the decline in growth. In recent surveys, the private sector at all levels farmers, traders, processors, large and small-scale manufacturers consistently cite major infrastructure deficiencies in the transportation, energy, telecommunications, and water and sewerage sectors as the major factor contributing to Kenya's lost productivity, excess capacity, and declining competitiveness. Similarly, Kenya's ability to attract foreign investment is crippled because of the abysmal state of infrastructure services. Declining investment and growth have resulted in increased unemployment and declining real wages.the government began its privatization efforts in 1992 as part of its structural adjustment program. In this first generation of privatizations there were 168 nonstrategic enterprises out

2 of an original total of 240 operating in the various sectors of the economy. Of the total, 33 enterprises were classified as strategic and not considered for immediate divestiture. Among the strategic enterprises, about 6 strategic, including Kenya Electricity Corporation, Kenya Post and Telecommunication Corporation, Kenya Railways, and Kenya Ports Authority, were restructured. Of the 33 strategic enterprises, two Rehabilitation Advisory Services and Nyayo Bus Service were liquidated, respectively, in 1997 and Today, about 31 strategic and 39 nonstrategic PEs remain in the public sector portfolio. Although significant progress was made during Phase I to reduce the number of PEs, the program itself had negligible impact on the economy. With the exception of Kenya Airways, all the companies were small, and total proceeds represented about 1 percent of GDP. The first-generation program also suffered from the following:fn It was donor-driven and lacked high-level political commitmentn It lacked priority and clear objectives. The focus was on reducing the number of enterprises rather than on creating fundamental changes in the economy by reorienting the roles of the pubic and private sectors and by changing the incentive structures for investment and commercial operation. n It lacked institutional authority, strong management of the process, and transparency. Although institutions were created to privatize and manage the program, many enterprises, especially the holding enterprises, privatized units under them on their own. This undermined the authority of the privatization agency, which led to inconsistent strategy implementation and process. In addition, the program was poorly and unsystematically managed, with unclear and nontransparent processes resulting in misinformation and disinformation with respect to transactions and asset valuation. Many legal issues remain unresolved, and post-privatization disputes continue.gok has embarked on a second-generation program of PE sector reform and privatization with the aim of redefining the role of the state in the economy, reducing the financial and administrative burden of the PE sector on government, improving PE efficiency, and encouraging private investment. In June 2000, the government passed through the cabinet its Privatization Program Strategy and Policy Framework and subsequently discussed the strategy in parliament to raise awareness and build political consensus around an extremely ambitious program focusing on privatization and private participation in all basic infrastructure services. A sessional paper on the privatization program will be published as a centerpiece in the government's overall reform efforts.if successful, the second-phase program to be supported by the subject credit will improve the country's overall fiscal and macroeconomic environment. Approximately 20,000 unproductively utilized PE staff will be shed, and opportunities will be created for their retraining and redeployment in more productive activities. The companies included in the privatization program represent about 10 percent of GDP, but their performance is characterized by low productivity, high losses, and rising debts, which place a concurrent burden on the banking system, public finances, and the balance of payments. Most PEs owe their viability to receiving direct and indirect subsidies from GOK, from the state owned banks especially the National Bank of Kenya by obtaining grants and foreign loans, and by accumulating internal and external arrears. However, because of weak expenditure monitoring capacity in the Ministry of Finance the magnitude of flows cannot be accurately estimated at this time. An International Monetary Fund advisor is expected to be in place by June 2001 to establish a budget and expenditure monitoring capacity for the future.kenya's -2 -

3 indicators for infrastructure services are far below African averages (table 2). The poor and deteriorating quality of infrastructure services has been reported as the most binding constraint to private investment and growth. Utilities are facing major financial and operational deficiencies, their service coverage is extremely limited, and the quality of service is very poor. These services are provided almost exclusively by monopoly state-owned enterprises, which are inefficient and overstaffed. They charge distortionary tariffs, which are, in some cases, insufficient to cover costs, and they operate under stifling regulations, with no incentive for sustainability.source: Privatizing Africa's Infrastructure: Promise and Challenge, World Bank Technical Paper 337, 1996.The program and strategy The Privatization Programme: Strategy and Policy Framework as adopted by the cabinet outlines a clearly defined and time-bound program of privatizations focused on the country's largest and most significant enterprises. The Strategy and Policy Framework adopts additional institutional and process features, overcoming weaknesses identified in the first-phase program. Specifically,n A centralized institutional framework, led by the minister of finance, is empowered to undertake all privatization transactions and to ensure that the privatization policy is enforced consistently and transparentlyn A transparent, competitive divestiture process, including an active communications, information, and public relations effort, will be undertaken with respect to principal stakeholdersn A privatization fund held by the Ministry of Finance and Planning will be subject to regular audit and reports provided to the cabinet, parliament, and any donor depositing monies into the fund.fn The attorney general has issued a legal opinion confirming the adequacy of the legal and legislative framework to permit implementation of the privatization program and has indicated that a Privatization Bill is not necessary. The proposed privatization transactions are summarized as follows:stage 1 (12 24 monthsto be completed by FY 2001/2002)i. Completion of the privatization of Telkom Kenya through the sale of 49 percent shareholding to a strategic partner and commercialization of postal services.ii. Award of a concession for the operation of Kenya Railways through competitive bids to a company jointly owned by domestic investors and strategic partners. Rolling stock for freight and passenger services will be transferred to the concessionaire, while all infrastructure will remain under public ownership.iii. Concessioning of the Container Terminal. The noncore services of the port will be contracted to the private sector for better management and efficiency. Kenya Ports Authority will be converted into a landlord port.iv. Full privatization of Kenya Commercial Bank by a trade sale of the remaining 35 percent government shareholding or part thereof to a strategic investor.v. Full privatization of Kenya Reinsurance Company through trade sale to a strategic investor and floatation of the remaining shares on the Nairobi Stock Exchange (NSE);vi. Partial privatization of Mumias Sugar Company and of Chemelil Sugar Company through floatation of shares on the NSE and, if necessary, the sale of a portion of shares to a strategic investor.viii. Privatization of Agro-Chemical and Food Company, Ltd. (ACFC) by modalities that are under study.stage 2 (18 36 months To be completed by FY 2002/2003)i. Privatization of electricity distribution through Kenya Power and Lighting Company.ii. Partial privatization of Kenya Electricity Generating Company (KENGEN) through an initial public offering (IPO).iii. Partial privatization of Kenya Pipeline Company.iv. Privatization of Kenya Oil Refinery through modalities to be developed.v. Involvement of the private sector in Kenya Airports Authority through the - 3-

4 award of concessions.vi. Involvement of the private sector in the Water Department of the Nairobi City Council through the award of a concession.vii. Privatization of Kenya Seed Company through a sale of shares on the NSE and, if necessary, the sale of a portion of shares to a strategic investor.viii. Privatization of Kenya National Trading Corporation (KNTC) through liquidation. ix. Privatization of Pan African Paper Mills through IPO.x. Privatization of East African Portland Cement Company through the sale of government shares on the NSE. 2. Objectives The project's development objective is to improve the business environment for private sector led investment and growth as evidenced by a higher level of private investment, improved quality, better coverage, and more economic efficiency in the major utility, infrastructure, and financial sector services including telecommunications, water, electricity, transport and in key agroindustrial enterprises. This objective will be achieved through improvements in the regulatory framework, privatization, private participation in infrastructure (PPI), and reduced government expenditures in the public enterprise (PE) sector. 3. Rationale for Bank's Involvement Local actors, the donor community, and the private sector see the Bank as having credibility in the field of privatization, competition, and legal and regulatory reforms. The Bank's experience and involvement in several Latin American and African countries such as Argentina, Bolivia, Mexico, Venezuela, Peru, Jordan, and Morocco are especially valuable. To the extent possible, staff involved in those privatization programs are part of the preparation and supervisory teams for the present project. As such, they will oversee studies, reform proposals, and transactions and guide the development of awareness-raising seminars and the study tour program. In those countries, the Bank has assisted governments in creating a new regulatory framework, establishing new regulatory institutions, and privatizing the public enterprises in charge of utility and infrastructure operations. The Bank also has been involved in the concessioning of railway and port authorities in developing countries and has developed considerable experience and expertise. In the East and Southern Africa region, the Bank is currently supporting the concessioning of railways in Tanzania, Mozambique, and Zambia and has supported the successful concessioning of Malawi Railways and port facilities in Mozambique and Tanzania. The World Bank has also supported the development of appropriate regulatory frameworks both in East Africa as well as in developing economies more generally. By supporting a regulatory reform program and creating a Telecommunications Development Fund, the Bank is assisting the government in attracting private investment to the most difficult and least attractive part of the telecommunications market. Through the Bank's leverage in affecting change in key regulatory areas such as interconnection and tariff policies, the long-term returns on rural subsidies will be sustainable. The Bank has supported GOK's previous efforts in these areas through its policy dialogue, especially in the telecommunications, water, and energy sectors. This project aims to conclude the privatization process of the PE sector in Kenya. It will benefit from lessons learned from the previous projects and changes introduced in the institutional and legal framework to increase the transparency, accountability, and decisionmaking process. The Bank's participation will enhance the credibility of GOK's efforts, particularly -4 -

5 regarding the transparency of the divestiture process and soundness of its regulatory framework. The Bank also could help GOK to design a competitive regulatory framework that maximizes the social benefits of private participation in PEs, while minimizing the risk exposure assumed by government through guarantees and other financial obligations to private 4. Description 1. Capacity-building for privatization (a) Technical assistance and on-the-job training to help GOK design and implement the privatization program; (b) communication program; (c) seminars, conferences, and study tours for parliamentarians and ministers to raise awareness raising and sensitization; (c) PE environmental audits and contingency plans; (d) severance payments and redeployment support to PE retrenched workers 2. Utility sector reform (telecom, water, energy, rail, and aviation). Technical assistance and training to help GOK: (a) implement utility sector reform strategies; (b) develop new regulatory frameworks and strengthen agencies; (c) provide training and outside experts to advise on regulation during the stage devoted to local capacity building; and (d) provide training, technical assistance, and equipment to support the strengthening of Communications Commission of Kenya for regulation of the telecommunications sector 3. Project management Technical assistance, training, and technical support to help the Privatization Implementation Unit carry out sound project execution and implementation of the government's privatization program and strategy 5. Financing Total ( US$m) GOVERNMENT 0 IBRD IDA 53 Total Project Cost Implementation Implementation period Five years, June 2001 June 2006.Executing agencygiven the complexities of the privatization program, the government has streamlined management of the privatization program and vested authority for implementation in a single Privatization Implementation Unit (PIU) within the Ministry of Finance and Planning. The PIU is headed by the investment secretary/privatization co-ordinator, who reports to the minister of finance as the principal government authority for the privatization process. The PIU was created through the merger of the Reform Section of the Government Investment and Public Enterprises (DGIPE) and the Executive Secretariat and Technical Unit (ESTU). The PIU will provide central coordination for the development and clearance of all privatization and regulatory strategies and for the management of all privatization transactions through to completion. The PIU will be responsible for all administrative matters, including the management of procurement and implementation of any technical assistance including investment banks and other experts as relevant. While the PIU is, in - 5 -

6 principle, a merger of two previous departments, its staffing will be almost entirely new, drawing heavily from experienced investment bankers, whose contracts will be financed by the project. Prior to negotiations, the PIU will hire four transactions managers who will be given sectoral assignments to manage and complete transactions. The PIU also will include a highly seasoned advisor, procurement and public relations specialists, and an accountant to be financed by the proposed project. The PIU will be organized into four Privatization Implementation Teams (PITs), each coordinated by a transactions manager and comprising representatives from the sector ministry, the attorney general's office, the management of the concerned enterprise, and the transactions advisors and attorneys and supported by procurement and accounting specialists. The PITs will have full authority to manage the day-to-day privatization process for a given enterprise. Each PIT will be chaired by the investment secretary/privatization co-ordinator.policy formulation, guidance, and oversight of the program will be provided by a subcommittee of cabinet, the Parastatal Reform and Privatization Committee (PRPC), chaired by the minister of finance. Membership of the PRPC will be drawn from both the public and private sectors and will include the ministers of parent ministries responsible for parastatals included in the program, the attorney general, and any other member deemed appropriate. The PIU will provide the secretariat the PRPC. The PRPC will be responsible for determining the timetable of implementation for Stage 2 of the program. The timetable for Stage 1 has already been determined. The PRPC will receive regular reports from the PIU on progress and, when necessary, institute remedial action. The minister of finance will provide regular briefings to the cabinet and parliament. The PRPC had been constituted under the original privatization program but will be revitalized to take a more active role in Stage 2 implementation to maintain the political consensus and consultation between the public and private sectors necessary for successful implementation of the program.the divestiture processthe divestiture process agreed with the government is a combination of three basic principles. n Transparency of the process. Negotiations on the technical aspects of a bid have been separated from financial bidding. While technical negotiations will attempt to even the playing field among the potential investors, the financial bid is not negotiable and will be opened publicly, with the winning bid declared there and then. Transparency International (TI) has been asked to monitor the program by (i) certifying that the general divestiture process and the process for each transaction are transparent, competitive, and appropriate; (ii) supervising the review of investors' technical bids; (iii) supervising the final selection of the winning bidder on the basis of the financial proposal, which, it is hoped, will be televised; (iv) publishing or otherwise advertising publicly TI's opinion that the processes and the selection of winning bidders were fair and transparent. n Appropriate information. Information will be provided to the public at timely and appropriate intervals and will include information on enterprise selection, divestiture strategy, prequalified bidders, bid award, and post-transaction (agreement) information, which will include salient features of the agreement. n Separation of technical responsibilities from policy- and strategy-related responsibilities. While the PIU will be fully authorized to implement the privatization program, strategic decisions such as the privatization and retrenchment strategies will be approved by the cabinet. After cabinet approval, technical implementation will be left to the PIU, which will not have to - 6 -

7 go back for cabinet approval of each and every step. However, feedback mechanisms exist, and both the Ministry of Finance and the sectoral ministries will be fully involved in the process. Consultation, communication, and public relationsgok is preparing for much wider consultation about the program. The sessional paper that catalyzed public debate about the privatization program is being published and will be generally available to the public. The minister of finance has given a press conference, and Kenya's privatization program has been reported on in newspapers throughout Africa. In general there appears to be little confidence in the process. The perception, based on past experience, is that the program is not transparent. Since 1992, attempts have been made to create a general awareness of the concept of privatization and its benefits. However, those efforts need to be greatly vamped up. It was agreed with the government that a communication and public relations strategy will be developed and agreed during appraisal and that a well-funded, professionally managed public relations/communications effort will be financed and implemented under the project. The strategy to be developed will focus on generating confidence in the process: n Providing information on the program and its potential benefits n Educating the general public on the concept of private participation in infrastructure, andn Informing the public about the status of specific transactions. The project also will finance and assist with arranging study tours, best practice seminars, and conference attendance for parliamentarians, ministers and private service providers to help them better understand the process and the benefits of more efficiently provided infrastructure and utility services.labor relations and retrenchment program Agreement is reached on the need to create a task force consisting of human resources staff from the company, communications/public relations staff from the Privatization Implementation Unit, and the transactions advisor for each company to manage information and communications about privatization plans, implications of staff redundancies, guidelines on severance packages, and availability of advisory and retraining support. The structure of the task force is contained in Annex 2.Monitoring and evaluation: A Project Implementation Plan (PIP), Financial Management Plan, and overall Procurement Plan were designed and finalized during project preparation to produce a Project Implementation Manual (PIM). The PIM includes, among others, all periodic reporting, monitoring, and evaluation arrangements throughout the project cycle.financial reporting and auditing: During project preparation, IDA prepared an assessment of the Financial Management Systems (FMS) of the PIU, including a time-bound plan to achieve Loan Accountability and Change Initiative (LACI) compliance. The FMS as well as auditing arrangements satisfactory to IDA will be finalized during appraisal. The project will be audited according to international auditing standards by the Office of Auditor General and/or an independent accounting firm to be selected. 7. Sustainability The project is expected to have a lasting impact on Kenya's business environment by improving the quality of infrastructure and utility services. It will help GOK to improve the competitiveness of the economy by supporting both the implementation of a comprehensive privatization program, including that of major utilities, and the development of competitive market structures through upgraded regulatory systems. By the end of the project, most commercial and industrial PE's will be - 7 -

8 transferred to the private sector and operated under private management. Utilities would be largely liberalized, with several operators participating in different segments of the market, under competitive entry and exit conditions. These achievements are likely to be sustainable.critical factors to enhance the sustainability of the project include (a) GOK's commitment to implement a sound and transparent privatization program; (b) establishment of an effective regulatory framework, with autonomous and financially viable institutions able to operate without interference from political and vested interests; and (c) timely private sector response to new privatization opportunities. 8. Lessons learned from past operations in the country/sector The design of this project draws on the lessons learned from implementing privatization and private participation in infrastructure programs in many countries, including Kenya. These lessons include:government ownership and parliamentary support. Government commitment to and leadership of the privatization program are essential to success. GOK has demonstrated its commitment to these reforms through several actions, including decisive measures to restore the technical credibility and transparency of the program as it launches this second-generation privatization program. By approving a comprehensive Privatization Strategy and Framework at the cabinet level and sending the strategy to parliament for discussion and endorsement, the government has reiterated its support for reform and stressed the need for transparency, integrity, and efficiency in implementing the second phase of its privatization program. Leadership and strong privatization agency, with skilled staff and empowered with appropriate authority to carry out the reform. This lesson has been taken into account by placing privatization and utility sector reform under the authority of the minister of finance who will be accountable for performance and results and who has the support of the president. The project will be executed by a restructured privatization unit, staffed with a strong investments secretary--previously an investment banker--and with transactions managers and advisors hired through a competitive job search. The PIU will be further strengthened through technical assistance. Need to ensure availability of resources to address the social cost of reform. This lesson has been taken into account by funding severance packages for redundant employees from privatization proceeds and/or project resources.need to keep the stakeholders informed and to engage them early in the process. Such information is needed to ensure their active participation in designing the policies and implementing the reform. The main stakeholders are parliamentarians and ministers, the public, and labor. To this effect, the project includes a communication program that will conduct a public information campaign and facilitate public dialogue and participation through the press, through discussion in parliament of the sessional paper on privatization, through specially arranged forums, through the task force for communication to labor, through study tours for parliamentarians and ministers to countries that have successfully privatized and achieved more efficient infrastructure and utility provision through privatization, through concessions, and through other forms of private participation in infrastructure development. Need to ensure a consistent approach between the privatization process, regulatory reform, and capacity/institution building. This lesson has been taken into account by including in the design of the project all of the above aspects as well as by coordinating with other World Bank projects that are supporting the transactional side - 8 -

9 of the privatization process. Specific examples are reforms in the power sector through the Emergency Energy Credit and reforms in the agriculture sector, which will be carefully coordinated with the present project. Regulatory agency independent from political influence and interference. This lesson is facilitated by assisting GOK to design an adequate legal and regulatory framework and by providing financing for capacity building of the regulatory agencies. Since capacity building will take time, the privatization of the utilities subject to regulation will include a transitional period of several years of regulation by contract.in addition the lessons learned in other restructuring and privatization projects in the utilities sector are reflected in the project design. These are:n A clear, predictable regulatory framework is a prerequisite to attracting investment in the sector. Government should create an independent, technical, and self-financed regulatory entity to grant new licenses, solve disputes among operators, and protect the public interest.n Telecommunications investments in rural areas can yield, on average, an adequate and even high economic as well as financial rate of return. Servicing the remotest areas, however, represents higher costs per line and greater risk and therefore may require a subsidy.n Newly created regulatory entities are frequently overwhelmed but have little expertise to draw upon. On-site consultant support and hand-holding during the initial start-up phase have been shown to be very useful.n Experience in Africa has demonstrated that the "privatization" of a water and sewerage services utility is not an objective but only a means to improve the service, and the private service provider schemes cannot be designed independently from the preparation of a water and sewerage services project for rehabilitating and extending facilities and improving policies. These aspects will be covered in detail during the preparation of documents for selecting operators.n Experience also has demonstrated a clear need for intense communication aimed at building a broad consensus on the option selected and implemented and for reinforcing the capacity of owners in their dealings with operators: these are reflected in the project design. 9. Program of Targeted Intervention (PTI) N 10. Environment Aspects (including any public consultation) Issues 5. Environmental Assessment: Environment Category: B (Partial Assessment)The Bank is assisting GOK to develop its private sector and to improve its environmental management and regulatory systems. The 11 enterprises to be privatized include various environmentally sensitive activities such as oil refining, sugar production, and utility services. Moving these enterprises from the public domain to the private sector is not neutral in environmental terms, as it raises the issue of responsibility for environmental impacts from past and ongoing operations as well as the broader concerns of environmental management. Many of the 11 candidates for privatization, particularly in certain industries, may leave behind significant environmental risks or already have caused serious impacts from their production and waste-handling practices. The project recognizes these facts, and during preparation a pre-audit study was undertaken that:n Covered compliance and contingent liability assessments, mitigation, and monitoring proceduresn Focused on environmental impacts associated with air and water quality, solid and hazardous waste discharges, and occupational health and safety issues at the facility under investigationn Helped to rank the enterprises according -9-

10 to the anticipated environmental liability and determine which of the enterprises need to have comprehensive audits and assessments and which need partial and no audit at all prior to their privatization. The pre-audit study included a total of 11 enterprises, slated for privatization by the Kenya Privatization Unit. A full audit and remediation plan will be undertaken under separate Terms of Reference as part of the preparatory work for divestiture. As a result of this study, 8 PEs will require full audits and remediation plans; 1 PE will require a partial audit; 2 PEs which are banking institutions will not require any audit at all (for details, see Annex 2).. This work will be implemented as part of the transaction process for these PEs and prior to their divestiture, with funding provided by the project. The project will also provide funding to cover the costs of preparing the monitoring plans as required. The full and partial audits to be carried out before divestiture should focus on addressing the environmental and social safeguards, consultation and disclosure as part of the implementation process. Such studies should will also provide specific information on the consultation and disclosure process that would be applied and this needs c;lear documentation. Kenya's National Environment Agency will be charged with the responsibility of monitoring compliance. It is envisaged that the environmental management plans for privatized PEs should also include an HIV/AIDS awareness program for employees in accordance with guidelines from the country-wide HIV/AIDS program. Implementation of this component will be monitored by the relevant authorities in the country; The Environment Agency's role will be to ensure that environmental management plans include an HIV/AIDS awareness program and that compliance is being monitored by the relevant authorities. Bank supervision missions should monitor compliance of the plans on the ground and funds should be made available for adequate supervision of the environmental and social aspects. Furthermore, it is envisaged that a training of trainers program be provided to the management of the relevant PEs on good practices of environmental management. It will be based on actual demand and be made part of the environmental audit activities before completion of the privatization process of the PEs. 11. Contact Point: + Task Manager Thyra A. Riley The World Bank 1818 H Street, NW Washington D.C Telephone: Fax: For information on other project related documents contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C Telephone: (202) Fax: (202) Web:

11 Note: This is information on an evolving project. Certain components may not be necessarily included in the final project. This PID was processed by the InfoShop during the week ending August 24,