Kenya sells ‘crown jewel’ of state assets to raise cash

Kenya is hoping that its biggest sell-off of state assets in nearly two decades can fund new infrastructure spending and change a political outlook still clouded by last year’s deadly demonstrations against proposed tax increases.

The government is selling a $1.58bn stake in telecoms and fintech group Safaricom, considered the “jewel in the crown” of state assets, to provide seed capital for a national infrastructure fund due to be launched in Nairobi this week.

The planned sale to South Africa’s Vodacom, which is sharply dividing opinion in the country, is indicative of the tough choices facing many African governments as development aid dries up, debts rise and tax boosts stifle the growth needed to defuse a demographic time bomb.

In an interview with the Financial Times, John Mbadi, cabinet secretary for the national treasury and economic planning, strenuously defended the plan.

The government was constrained by its external debt burden, which soaks up more than 40 per cent of state revenues to service, said Mbadi, whose role is equivalent to finance minister.

Borrowing more was not an option to fund spending, he said, emphasising the urgent need for funds to be channelled into food security and power generation.

Meanwhile, raising taxes was untenable. Last year President William Ruto was forced to back down on planned tax rises when youth protesters came close to overrunning parliament, clouding the political climate to this day.  

“For this economy to be able to create enough jobs that we need for our youth, you need about 7 per cent-plus GDP growth [annually],” Mbadi said. Kenya is currently growing at about 5 per cent a year, according to official statistics.

“You cannot realise this without heavy investment in infrastructure . . . and you cannot with the kind of fiscal space that we have today.”

The infrastructure fund would “crowd” investment from the private sector to fund energy, transport, irrigation and an airport overhaul, said Mbadi.

“We have to come up with innovative, creative ways” to maintain the pace of development, he said.

The government will dilute from 35 to 20 per cent of its stake in Safaricom, Kenya’s largest company by market capitalisation and a pioneer of financial inclusion through its digital money transfer subsidiary M-Pesa. An upfront payment in lieu of future dividends will raise an additional $309mn for the Kenyan treasury.

Vodacom, the South African subsidiary of the UK’s Vodafone, which is already the largest shareholder in Safaricom, will raise its holding to 55 per cent, paying a premium of about 24 per cent over the past six months’ weighted average share price. It does not, however, intend to launch a full takeover.

The remaining quarter will remain floated on the Nairobi stock exchange, where it dominates daily trading.

Analysts and politicians are divided on the merits of the sale, which requires legislative and regulatory approval.

Deepak Dave, former chief risk officer at the regional Trade and Development Bank, said the deal was good for Vodacom, giving it full control of a cash-generative subsidiary and opening up the possibility of a lucrative spin-off of M-Pesa. He was sceptical about the value for Kenya.

“The disposal of a commercial, dividend-generating, liquid and therefore leverage-worthy investment, to place money in a fund which plans investment into illiquid equity is bad strategy,” he said.

“And that assumes a state with a 60-year record of fiscal and investment mismanagement can be trusted somehow to get it right,” he added.  

Mbadi said the infrastructure fund would be commercially and professionally run and would design and “de-risk” projects to attract private sector investment.

Proceeds from further divestments, including a stake next year in the Kenya Pipeline Company, which transports petroleum products, will also flow to the fund.  

The Safaricom sale is especially sensitive because of the strategic place the company holds in Kenya’s economy.    

It is “the linchpin of the nation’s digital transformation”, argues the Fintech Association of Kenya, an umbrella group representing the finance and technology sector.

The M-Pesa mobile money platform, launched in 2007, now processes transactions worth nearly two-thirds of Kenya’s GDP and reaches more than 80 per cent of adults in the country.

“It’s safe to say Safaricom’s wellspring of mobile money is like a high-yielding cow generating steady milk for Kenyan households,” the association said.

The deal ensures the government retains influence on the board, Kenyan jobs are protected for three years and there is continuity in branding. But the fintech association argued national interests should also be protected with a golden share.

“Safaricom is not any ordinary company. It operates critical national infrastructure,” it argued in a post on LinkedIn.

Among hundreds of state-owned enterprises, others of which will be sold off in what promises to be the largest privatisation programme in nearly 20 years, Safaricom is Kenya’s most profitable, providing dividend payments equivalent to around $140mn a year to the state.  

“There is an argument that Safaricom is the jewel in the crown,” said Aly-Khan Satchu, a veteran Kenyan investor. But the government had to do something to raise funds, he argued.  

“They tried to raise taxes and people were on the street — there was no tolerance for that strategy. When debt is increasing with the velocity it was, it gains its own momentum.”

“This is very clever,” he said.

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