Recent reactions to the privatization efforts in Kenya have taken one of two main threads. The first consists of protestations against the unregulated ways of the Nairobi Stock Exchange, and especially the conduct and freedoms of stock brokers. The second, and especially with regard to the Safaricom and Kenya-Re divestitures is dedicated to pre-IPO irregularities.

As always there is an element of political grandstanding and a healthy pinch of populism involved in the protests, all with a sprinkling of jealousy from a political class that would likely be adopting the same measures if it was in office.

It is this seeming consensus among the political class - with the left abdicating as always- that has resulted in the absence of a national discussion on the giving away of property that is communally held. The millions of Kenyans who are losing their wealth as it is traded for a song on the Nairobi bourse are neither consulted, nor aware of the repercussions of their unwitting generosity. As evinced by the Finance Minister's recent insistence that he was going ahead with the Safaricom IPO regardless of anyone's protestations; the political class is itself not in the least concerned about any objections to its will. Needs must when the devil drives declares the undemocratic spirit that animates the privatization drive.

Still, immoral and corrupt are harsh words, so one may ask if such words are at all justified. We use them, quite simply, because these privatizations are neither necessary nor just. They accomplish a reverse Robin Hood effect- robbing the poor to feed the rich, and the merry-men in this case are impassioned not with altruism but with a selfish greed that threatens the entirety of the national interest. But it is not just at Moi's or Kibaki's malfeasance that we protest, nor at the anarchy at the Nairobi Exchange. The injustice we speak of would still persist in the adjusted context of a better regulated NSE and a resolution of the Mobitelea situation. The problem is the institution of privatization itself.

Proponents of privatization often rally behind the shibboleth that governments ought not to be in the business of owning enterprises, an idea that has been so sufficiently propagated that it is not questioned even by those for whom its danger is only too real. Instead, like lemmings we lunge forward, entrenching a culture of transferring massive public treasure from the ownership of 35 million people (most of them desperately poor) to at most 500,000 Kenyans of middle or high income.

The common extenuation underpinning privatization is the idea that there is a link between the ownership of a company and its performance. Believers in this idea (it is an article of faith), will say that government ownership is itself a recipe for inefficiency and ultimately for failure. State ownership they argue prevents market functioning by creating unfair conditions for other market players as state firms enjoy a better playing field, one where they can access a limitless pot of funds and are insured against failure by state bailouts. They also state that the political executive, eager to ingratiate itself with the public will follow inefficient economic practices, compelling parastatals into sustaining bloated staffs, or taking on white elephant projects, or suffering subjection to political appointees. State corporations- often monopolies- it follows are condemned to inadequacy because they are not motivated by profit, but by the whims of the political class. The support of the state serves in these cases to preclude public enterprise from experiencing the market motivations that would whip non-state firms into shape or condemn them to an exit of the market.

private pain

In addressing the arguments above, it becomes clear that they are all based at least partially on irrefutable fact. However that these ideas exercise an enduring domination over our economics and serve so persuasively to force us to sell the family jewels is shameful not just because we ought by now to have come up with locally tailored solutions to these situations, but also because it has been proven around the world that there is another way, one that has been followed to trailblazing success.

Inefficiency and a failure to deliver quality to the consumer is a consequence not of ownership but of uncompetitive market conditions and poor management. Dismissing the illusion that state ownership is in itself harmful, allows us to deal with the real causes of failure in parastatals, as has been done to great success in Singapore, China and New Zealand. These curses are not exclusive to state-owned companies; history is littered with the corpses of firms like Enron, WorldCom and Parmalat which failed for similar reasons in spite of their being private.

Monopolies are undoubtedly bad for any market. In the modern world however few monopolies are entrenched in law, the culprit that sustains them is oppressive barriers to entry. The KenGen and KPLC offerings served in no way to diminish the grip these firms have on the national market, nor improve service delivery to the mwananchi. Our economy continues to be weighed down by heavy energy costs, an unimaginative power generation regime and the frequency of blackouts. A little competition would no doubt serve as a great incentive to price drops, an improvement in infrastructure and greater variety for consumers. Without the urging of competitors, and with a diminished duty to the public interest, these firms still have no reason to take such measures as would ensure that energy provision improved. They are in essence the same old monopolies, only that they now remit a section of their profits into private hands.

beauty can be public too

It is such barriers to competition, more than anything else that are depressing the Kenyan economy- which continues to fall in global rankings for business friendliness. To illustrate consider the business friendliness of Singapore- the world's number one free-market but also the home of state-owned Temasek, parent of Singapore Airlines and PSA International, a major shareholder in Standard Chartered and the major shareholder of Australia's second largest Telco, Optus. Through its truly diverse holdings, Temasek in this way hedges and arbitrages the Singaporean exchequer's dependency on National Tax remittances to raise the living standards of the Singaporean citizen; and buffet it against all manner of crises.

Moans about poor postal services are a global norm, but Australia's state-owned postal company is not only one of the most efficient Posts in the world, it is also among the most efficient companies in Australia paying half a billion dollar annually as dividends to the state. There are numeous other examples around the world that prove that state ownership -even when a regulated monopoly- can not only be successful, but that it is also a very attractive means of generating income. Last year, Dubai's Dubai Ports World successfully bought out British giant P&O in the shipping business. Are you a fan of Arsenal FC? Why, everytime you look on Fabregas's shirt, or the breathtaking glory of the Emirates Stadium you are looking at the success of a public corporation. Just last week, the Qatari Investment Authority ( a state firm) put in a bid for ownership of that bastion of free-markets, the London Stock Exchange. Quite clearly, it is possible to have state ownership in a free-market economy.

state property

What then of the matter of political interference? Again, this is not unique to public corporations. Principal-agent problems are to be found across the economy. To deal with them in our parastatals, it is now necessary that we establish in law the complete autonomy of all state corporations; that the state instructs such management to respond simply to market signals and the longer term interest, and gives it the freedom to act in this way. Neutral industry regulators would then ensure that this pact is adhered to and that state firms enjoy no advantage at all over private ones. If such a company needs capital for growth and development, it must approach the market through the sale of corporate bonds like a privately run firm would. There must be no access to 'soft budgets'.

Further, in creating a fair market such a firm would not enjoy any advantages with the taxman unavailable to its competitors, or any political protection from its duties to utilities or to the courts. If such a firm underperformed, its management and its board must be made to pay the consequences, and if such failings are found to be integral then the company must be withdrawn from the market-place, liquidated like any private firm would be.

Its management would be headhunted from the common pool of talent in the manner of any other company, transparently and in accordance with the firm's best interests. Such management would doubtless need to be rewarded based on performance, perhaps even by contracts that allow participation in profits, but this must be done without infringing on the integrity of the firms' share ownership. This is not even a radical notion, many of these provisions already exist in Kenya, as under the concession at Kenya Railways or the management contracts at Kenya Airways and Kenya Power and Lighting or the success of private sector CEOs at Kenya Commercial Bank. All that is required for their strict enforcement, is that the private sector complain harder and if need be take the state to court when it reneges on its pledge of neutrality.

wanted; new ideas?

Kenya is by all measures a desperately poor country. Even starker than its poverty is the massive and growing chasm that exists between the life experience of our poor and our rich. As we aspire to create a democracy, one where justice and fairness account for something, is it fair that we are re-distributing away from the poor what is clearly community wealth? Is it right that we are doing this at a time when the majority of the people are unable to participate in these offerings? Are our poverty eradication efforts boosted by measures that impoverish the majority of our people and reward those who are already better off? Would it be fair that a dead parent's estate is distributed among his progeny, but that such distribution is allowed only among those who can afford to pay the lawyer's fees?

To add to the injustice of the share-firesales, is the tragedy of our peculiar experience, where privatized companies continue to enjoy the privileges of monopoly and market domination. Even after divestitures, there is often no incentive in the market to nudge former state-owned firms towards better products or lower prices. There is no chastisement for poor service delivery. A cursory look at water and electricity prices bears this point out clearly, consumers continue to suffer intermittent supply at exorbitant prices.

The other deleterious effect of our privatization is that it provides an alternative channel for wealth transfer without creating any new wealth for the country. Where we should be concentrating our energies on initiating start-ups that would create jobs, we are instead obsessing over sharing out what really is stolen property. So capital that would be planted into the economy, that would turn out jobs and trade products, is instead returned to the endless sport of watching the electronic board and betting on shares.

all that she wants

Worst of all, even those 500,000 odd who participate in the divestitures will not usually keep their shares too long. Often enough retail investors quickly abandon stock positions soon after the IPOs, collecting their profits and meaning that we will soon wake up to a country where a shadowy cabal of business moguls controls, either directly or through their control of investment companies, the bulk of our economy. They used to call that feudalism, and last I heard it was not too pleasant.

We do have to invigorate what are often loss-making companies that are also poor at serving the public. But we need not be lazy or unimaginative. As our recent experience has shown, privatization is in itself no solution. Privatizing without any structural reform of the sectors these firms serve will only serve to perpetuate their monopolies but in this case under private ownership. Wisdom would be keeping these companies public, invigorating them and ensuring they are working to reduce the budget deficit and our colossal debt. Where our energies would be best applied is the removal of the structural barriers to entry that deter start-ups and remove competition from the marketplace. State corporations have a role to play in our development, not just as providers of valuable services, but also as generators of much needed financial resources; a subject we will deal with in our next article.