a. Overall trend

Real GDP growth declined steadily from 4.3 percent in 1990 to 0.5 percent in 1992 and 0.2 percent in 1993 (Chart 1, Table 1). This development reflected a prolonged drought, compression of imports, political turmoil related to the transition to a multi-party democracy, and a decline in investment. In 1994, real GDP grew by 3 percent, in response to the economic reforms pursued since early 1993 and the return of normal weather conditions.

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KENYA: Real GDP Growth, 1989–94

(In percent)

Citation: IMF Staff Country Reports 1995, 133; 10.5089/9781451821031.002.A001

Sources: Data provided by the Kenyan authorities; and staff estimates.1/ Includes agriculture, forestry, and mining.2/ Includes manufacturing, construction, and utilities.3/ Includes all services.

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The Kenyan economy is relatively diversified. During 1989-94, the share of the primary sector in GDP (essentially the agricultural sector) was reduced from 31 percent to 28 percent. The secondary sector (manufacturing, construction, utilities) remained stable at about 20 percent of GDP; a slight increase in the share of the manufacturing sector, to nearly 14 percent of GDP, was offset by a decline in the construction sector to about 4 percent of GDP. Finally, the share of the tertiary sector increased from 50 percent to 53 percent of GDP; the financial sector and other services (including government services) contributed to the increase in the tertiary sector share.

b. Agriculture

In 1993, the agricultural sector as a whole performed poorly for the third year in a row, and real value added in the sector declined by 3.5 percent. This poor performance was caused by unfavorable weather and rising costs of production due to inflation and the depreciation of the Kenya shilling. The performance was particularly poor for food crops such as maize, wheat, and paddy rice (Table 7). In 1994, the agricultural sector registered a major turnaround and grew by 5 percent, helped primarily by the return of favorable weather conditions. Large increases in world coffee prices helped sustain coffee export earnings, while the appreciation of the currency weakened other agricultural exports. The performance of agriculture over the period was enhanced by the liberalization of marketing and pricing of a number of crops, favorable external market conditions for tea, coffee, and horticultural products, improved price incentives (including retention of foreign exchange earnings), and reductions in import duties on some agricultural inputs.

Tea production recovered strongly in 1993 and remained stable in 1994 with 209,000 tons sold to the Tea Marketing Board. It is the largest agricultural production in Kenya and accounts for 35 percent of the value of total agricultural production (Table 8). Tea is also second behind tourism in foreign exchange earnings (US$301 million in 1994), and accounted for 20 percent of exports of goods in 1994. Kenya is the world’s third largest producer of black tea, and accounts for 15 percent of the world market. A number of factors contributed to the favorable performance of the tea sector in 1993: the “short rains” prior to the drought had been sufficient to maintain production in the early part of 1993; rural access roads were improved; and the tea sector was liberalized, with the introduction of dollar-based tea auctions. Smallholders account for slightly more than 55 percent of total production. The yield in tea production by smallholders has been stable since 1990, at about 75 percent of the yields realized by large estates (2,817 kg per hectare). The areas cultivated for tea production have increased by 9 percent since 1990, to 106,000 hectares in 1994.

After a period of sustained decline from the 1980s to 1993, the coffee sector turned around in 1994, with nearly 82,000 tons of coffee delivered to the Coffee Board of Kenya, compared to 77,800 tons in 1993. Coffee is Kenya’s second largest agricultural production with 22 percent of total agricultural value in 1994 and the third largest foreign exchange earner (US$233 million) behind tourism and tea. It accounted for 16 percent of exports of goods in 1994. The gradual recovery of coffee prices since 1991 and coffee trading incentives have helped revive the coffee industry. ^1/ Auctions of the Coffee Board of Kenya have been denominated in foreign exchange since October 1992. A new payment system was implemented in March 1993, providing direct payments to cooperatives according to the lots purchased at the auction. ^2/ As a result, coffee farmers have benefited from higher revenues, and the lag between the deliveries of cherries and payment has been considerably shortened. Milling was also liberalized in December 1994, breaking the monopoly of Kenya Planters Cooperative Union (KPCU). Cooperatives continued to dominate coffee production in 1993/94, accounting for 52 percent of the marketed crop, while large-scale commercial farms accounted for the remainder. The productivity of cooperatives, however, declined by about 40 percent between 1990 and 1993, to 347 kg per hectare, whereas the large-scale farms were able to maintain much higher yields at about 935 kg per hectare. Cultivated coffee areas have been fairly stable since 1989/90 and covered 158 thousand hectares in 1994.

The livestock sector accounted for 18 percent of the total value of agricultural production in 1994, the third largest sector. Marketed milk production increased by 13 and 4 percent in 1993 and 1994, respectively, to reach a level of 258 million liters in 1994. This increase in milk production reflected in part the liberalization of the milk industry in May 1992. Sales and purchases of milk were liberalized; consumer and producer prices were decontrolled; and competition in the processing of milk was allowed. As a result, the Kenya Co-operative Creameries (KCC) has lost its monopoly on the marketing of milk and milk products. Deliveries to KCC have declined, while firms registered by the Kenya Dairy Board (KDB) have increased their share to 15 percent of total deliveries.

The sugarcane production increased by 8 percent in 1993, but declined by 16 percent in 1994, to 3.3 million tons. The reduced production in 1994 was precipitated by large imports of sugar in response to the liberalization of the economy. This resulted in Kenyan sugar factories taking a long time to clear their sugar stocks and reducing their purchases of sugarcane.

Maize and wheat productions dropped by 25 percent and 42 percent in 1993, respectively. These dramatic declines were caused by unfavorable rainfalls, high fertilizer prices, and low quality of the marketed seeds. The prolonged drought had also discouraged planting, reducing the hectarage under cultivation of maize. In 1994, production of both maize and wheat recovered as a result of good weather conditions, lower input prices, and the complete liberalization of grain marketing (see Section II.4). Production of wheat increased by 44 percent to 105 thousand tons in 1994, though this level was only equivalent to 53 percent of the 1991 production. The production of maize for the crop season 1994/95 was 34 million bags, the highest since 1991/92 and nearly twice the 1993/94 production.

The production of fresh horticultural products for export stagnated in 1993 and increased by 5 percent in 1993/94, to 65,200 tons. A series of measures to boost the sector were taken in the 1994 budget, including the removal of import duties on fertilizers and greenhouse sheeting, and tax exemptions on tools and inputs of the industry. In addition, the monopoly of Kenya Airfreight Handling Limited (KAHL) on cool storage was removed through the licensing of private cool stores at the Nairobi international airport in October 1993; the handling services of KAHL were reorganized in March 1994 and its handling fees were reduced at the same time. Exports of horticultural products earned US$115 million in 1994, and followed tourism, tea, and coffee in terms of foreign exchange earnings. Although the export potential is high, the development of this sector remains constrained by inadequate air cargo and storage capacity, as well as high freight costs.

c. Manufacturing

Kenya’s manufacturing sector is relatively developed and diversified by African standards. The manufacturing sector saw a number of fundamental changes in its operating environment in 1993-94. Full liberalization of imports in May 1994 exposed manufacturing industries to increased competition. At the same time, the virtually complete liberalization of the exchange and trade system, removal of export taxes and licensing, and rationalization of the import tariff structure, all contributed to improved incentives for export production.

Following a broad-based growth of 4-5 percent in 1990 and 1991, the output of the manufacturing sector grew by about 1.8 percent in each of 1993 and 1994 (Table 10). In 1993, the lower output growth was concentrated in agro-based sectors (such as food processing) and in sectors dependent on imported inputs (such as electrical machinery and transport equipment). The performance of the agro-based sectors reflected the drought and the import-dependent sectors were adversely affected by the scarcity of foreign exchange and the depreciation of the Kenya shilling. For 1994, economic liberalization, coupled with the appreciation of the Kenya shilling, resulted in massive importation of finished products and reduced demand for the domestically produced goods.

Within the manufacturing sector, food processing remained stagnant in 1993 and 1994, as a result of the continuing unfavorable weather conditions and increased foreign competition in 1994. Similarly, the beverages sector was stagnant in 1993, when breweries were operating below capacity as a result of poor weather and the scarcity of foreign exchange. This stagnation in beverage production was offset to some extent by a favorable performance in the tobacco sector due to improved production incentives to farmers. In 1994, the tobacco sector registered a slight growth as a result of increased exports to the Preferential Trade Area, while the beverages sector declined by 7 percent as a result of foreign competition in the domestic market.

The textile industry resumed its expansion in 1993, reflecting considerable investment in the sector in the preceding years. The appreciation of the currency in 1994 resulted in increased foreign competition and a contraction of the industry by 25 percent. The clothing sector also was hurt by a surge in imports of low cost garments following the import liberalization, and its output declined by nearly 45 percent over the period 1993-94.

Production in the petroleum and other chemical sector declined by 2.6 percent and 3.3 percent in 1993 and 1994, respectively, reflecting in part technical problems at Kenya Petroleum Refinery Ltd. (KPRL) and the foreign exchange crunch in 1993. The paper industry output also declined by nearly 14 percent in 1994.

All other manufacturing sub-sectors have experienced some output growth in 1993-94. The plastic industry continued to benefit from technological advances and grew by 12 percent in 1993-94 as a result of a shift in demand toward this sector (such as PVC pipes, plastic shoes, and plastic floor tiles). The glass product sector also recorded substantial growth during the period and the production of cement was boosted by increased exports to Uganda and Tanzania, while domestic consumption of cement declined.

d. Construction

Following some expansion in the early 1990s, the construction industry stagnated during 1993-94, owing to rising costs of construction materials, a slack in private sector construction activity, and cuts in government construction projects. The overall cost index for building and construction rose by 52 percent in 1993. In particular, the price of cement increased by 80 percent. The overall cost index for building and construction increased by only 6 percent in 1994.

The private sector plays a vital role in the provision of housing and other building facilities, accounting for about 95 percent of the value of all completed buildings in Kenya. The value of completed buildings in 1994 was equivalent to 15 percent of the new building plans approved during the period, a slight decline compared to 1993. New building plans approved in 1994 increased by 25 percent in value (Table 11). The Central Government’s expenditure on housing represented less than 2 percent of the approved budget on development expenditure, channeled mainly through grants and loans to the National Housing Corporation (NHC).

e. Energy

Seventy percent of the energy consumed in Kenya is in the form of imported petroleum. The balance is provided by local energy power from hydro and geothermal energy sources and some imports of electricity from Uganda. In 1993-95, the per capita consumption of energy recovered to its 1990 level and reached the equivalent of 110 kg of oil, resulting in a national energy demand equivalent to 2.9 million tons of oil.

There was a slight decline in domestic demand for petroleum products in 1993 (Table 12). This decline was mainly attributable to lower economic activity, and was reflected in lower demand for kerosene, diesel, and fuel oils. In contrast, as a result of reduced prices and relief flight missions to Somalia, the demand for aviation spirit and jet/turbo fuel went up in 1993. In 1994, total petroleum consumption went up by about 10 percent, driven by an increase in the demand for jet fuel by nearly 40 percent. Excluding jet fuel, the consumption of petroleum products increased by 3 percent. With the liberalization of the petroleum sector in October 1994 (see Section 4), private oil companies and the National Oil Company of Kenya (NOCK) can import freely, either in refined form or in crude form for refining at the Kenya Petroleum Refinery Ltd (KPRL).

Electricity is second to petroleum fuels as a source of energy. It is produced by the Kenya Power Company (KPC) and the Tana River Development Authority (TARDA), under the management of Kenya Power and Lighting Company (KPLC). The power-generating companies sell electricity to KPLC, which is responsible for the transmission and distribution. The generation of electricity comes from hydroelectric sources (87 percent), thermal-based diesel power (6 percent), and geothermal plants (7 percent). There has been no private sector participation in the electricity area, although the Government has decided to allow private sector power generation in the near future.

Demand for electricity mainly derives from the commercial and household sectors, with large industrial and commercial users accounting for slightly more than 50 percent of the total demand. Local demand for electricity increased by 6.2 percent in 1993, while net electricity generation increased by 5.6 percent in 1993 as a result of improved water levels in some large dams. This implied a continuation of the recent trends, with demand for electricity outstripping generation and resulting in frequent blackouts, notwithstanding imports from Uganda. In 1994, electricity production increased by 4 percent, reflecting the return of normal rains and an increase in thermal-base diesel power generation by 60 percent as a result of the completion of rehabilitation of the Kipevu thermal station.

f. Tourism

Tourism performed well in 1993. The number of arrivals went up by 6 percent, to 826,000 visitors, and recorded an increase for the first time since 1990. This recovery resulted from an increase in visitors for holidays by 12 percent, reflecting the improved competitiveness of Kenya as a tourist destination in 1993. Holiday visits accounted for 82 percent of arrivals, while business visitors and transits accounted for the remainder.

The tourism sector continued to grow by about 5 percent in 1994, to 863,000 arrivals, but the number of visitors for holidays stagnated at its 1993 level. Moreover, there was a reduction in the number of visiting days and hotel occupancy declined by 17 percent. This rather unsuccessful tourist season reflected new emerging tourism markets in the African region, adverse publicity on the local security situation, and the appreciation of the Kenya shilling.

g. Other sectors

The transport sector recorded some expansion in 1993 and 1994. Air transportation grew and the completion of the extension of the oil pipeline to the Western Region in early 1994 resulted in increased activity of the Kenya Pipeline Company (KPC). Throughput at the port of Mombasa also increased in 1994 as a result of the need for the provision of emergency food supplies to neighboring countries, including Rwanda. This increase in activity was achieved in spite of considerable delays in cargo handling at the port associated with inefficient management, coordination problems with Kenya Railways, and start-up problems with new import clearance procedures.

The financial sector was the only sector to show significant buoyancy in 1993-94. Benefiting from higher interest rates, real value added in the financial sector increased by 8 percent and 7 percent in 1993 and 1994, respectively.

a. Consumption

Total consumption declined by 4 percent in real terms in 1993. This decline resulted from a contraction in private consumption by 7 percent, partially compensated for by an increase in public sector consumption (Table 3). The increase in public consumption reflected an increase in primary recurrent expenditures of the General Government as well as burgeoning expenditures in a number of public enterprises. Private consumption weakened as a result of the stagnant economy and in particular of the loss of incomes in the agricultural sector (which provides the livelihood for 80 percent of Kenya’s population).

In 1994, private consumption increased by 12 percent in real terms, reflecting the restoration of macroeconomic stability, the increase in real GDP, and the appreciation of the Kenya shilling. As public consumption continued to grow at about the same pace, total consumption increased by 11 percent.

b. Investment

Total investment was virtually stagnant in real terms in 1993, with an increase in stocks matched by a decline in gross fixed capital formation (by 4 percent). Recovery in stocks partly reflected speculative stock-building of imported raw materials and intermediate goods. The stock building was most pronounced in the chemicals and non-electrical machinery sectors. Fixed capital formation declined for the third year in a row and reflected a compression of both public and private investment. Private capital formation was affected by the scarcity of imported capital goods, the depreciation of the Kenya shilling, the tightening of domestic credit, high interest rates, and depressed demand for domestic goods. Public investment declined as central government development expenditures were cut. Within the overall decline in investment in 1993, there were significant sectoral differences (Table 6). Significant real increases were recorded in transport (38 percent), electricity and water (46 percent), manufacturing (7 percent), and other services (10 percent), while investment in the construction and government sectors fell by more than 40 percent.

In 1994, fixed capital formation expanded by 21 percent. This increase occurred primarily in the transport and government sectors but also in most sectors of the economy, particularly in manufacturing. The completion of the extension of the oil pipeline to Western Kenya was the main contributor to the increase in investment in the transport sector.

a. Prices

The rate of inflation, as measured by the composite Consumer Price Index (CPI) for Nairobi, remained high through most of 1993, exceeding 50 percent in the 12-month period ended September 1993 (Table 14). Exchange rate adjustments, most notably the two large devaluations in March and April, appear to have been the most significant factor driving inflation in this period, with monetary aggregates expanding broadly in line with inflation (Chart 3). Beginning in October 1993, inflation appeared to decelerate, reflecting the stability in the exchange rate as well as a favorable supply response in production. ^1/ Monthly inflation registered an average 1.3 percent per month in the last quarter of the year, as compared to an average 4.6 percent in the first nine months.

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KENYA: Price Developments, December 1992 - June 1995

Citation: IMF Staff Country Reports 1995, 133; 10.5089/9781451821031.002.A001

Source: Data provided by the Kenyan authorities.1/ The exchange rate Index corresponds to the Ksh per US dollar rate.

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Pressures reemerged in January 1994, with monthly inflation rising from 1.6 percent in December to 5.1 percent in January, in this case reflecting the sudden surge in the monetary aggregates as well as sharp increases in food prices, the latter driven by the adverse impact of drought as well as the ongoing price liberalization in the maize market. As a result, inflation reached a 12-month peak of 61 percent in January. Thereafter, monthly inflation began to decelerate sharply, bringing the 12-month inflation down to 28.7 percent in June 1994 from 41 percent a month earlier. Inflation continued to decelerate to below 7 percent in the 12-month period ended December 1994, and 0.3 percent in June 1995. Several factors accounted for this declining trend, including the relatively tight monetary policy against an apparent increase in money demand, nominal appreciation of the Kenya shilling owing to a relatively comfortable foreign exchange position as well as high interest rates, a reduction in excise duties and import tariffs, and the positive supply response, most notably in the manufacturing sector. Food prices also benefited from the bumper grain crop that followed the good long rains in 1994.

In general, the pattern in the composite index throughout was broadly matched by its food and nonfood subcomponents (Chart 3). Consumer price indices for the other three major urban centers (i.e., Mombasa, Kisumu, and Nakuru) also indicated similar trends with the CPI for Nairobi (Table 15).

b. Wages

Average monthly earnings in the formal sector of the economy increased by 14 percent in 1993 and declined substantially in real terms. Average earnings in the private sector increased at a faster pace than those in the public sector at 17 percent and 11 percent, respectively.

In the private sector, the highest wage increase was observed in agriculture (22 percent), followed by building and construction (19 percent). The transport and communications sector had the lowest increase in wages, with an increase of only 10 percent. The highest private sector salaries were earned in business services, finance, and transport and communications. The agricultural sector had the lowest salaries, reflecting the large share of casual labor in this sector working at the minimum wage.

In the public sector, average earnings for teachers rose by 11 percent in 1993, reflecting the implementation of the final phase of a graduated schedule for wage increases (by the Mbithi Salary Review Commission). For civil servants in Central Government, the wage increase was 8 percent. Generally, wage levels are higher in public enterprises than in other areas of the public sector.

In 1994, average earnings in the private sector increased by 17.9 percent, reflecting revisions of collective agreements and general adjustments in wages to compensate for the inflation that prevailed in 1993. The highest wage increase occurred in the banking sector (46 percent). Public sector average earnings increased by 18.4 percent in 1994. Central Government’s wages increased by 15.9 percent, while earnings for employees of the Teachers Service Commission increased by 20 percent, reflecting upward revisions of wages and other employee benefits effected during the year.

c. Employment

The labor force of Kenya was estimated at 11 million in 1993. The rural labor force accounts for about 80 percent, with small-scale agriculture and pastoralist activities providing most of the rural employment. Outside these activities, total employment was estimated at 3 million in 1993, equally divided between the formal and informal sectors. The informal sector is mainly urban and covers all semi-organized and unregulated activities largely undertaken by self-employed persons as well as small employers in open markets or street activities. The informal sector has been an important source of employment growth throughout, with an average annual increase of 16 percent during 1990-94.

Employment in the formal sector increased by about 1 percent in 1993. This was driven by growth in private sector employment (nearly 3 percent) while public employment declined slightly. Private sector employment accounted for 54 percent of the formal sector employment, with the largest share employed in agriculture (26 percent). This was followed by community, social and personal services (22 percent), manufacturing (19 percent), and trade, restaurant, and hotels (14 percent). Public sector employment has been declining since 1991, reflecting Government’s efforts to reduce the civil service.

There was a significant increase of nearly 4 percent in formal private sector employment in 1994. Public sector employment was broadly unchanged, with an increase in the number of teachers (5 percent) offset by reductions in Central Government and parastatals employment.

a. Revenue policy

Since 1992/93, the authorities embarked on a major effort to reform the whole system of taxation in order to broaden the tax base, lower the tax rates, improve the efficiency of tax administration and ease the burden of taxation for the economy, while offsetting the resulting temporary revenue losses by new revenue measures. Along with this general trend, however, the Government had to resort several times to ad hoc measures to raise resources needed in extraordinary circumstances, or to safeguard the deficit targets under considerable expenditure pressures.

The tax reform efforts in the period of 1993/94 and 1994/95 resulted in the following changes:

♦ Income taxes. The top marginal income tax rate was reduced from 40 to 35 percent (not including the drought levy), along with broadening of income tax brackets by 30 percent, and expanding reliefs for single and married taxpayers by 50 percent. These measures served to offset some of the erosion of real income due to the high levels of inflation experienced in previous years and to reduce the tax burden on the low income earners. A withholding tax was introduced on the original issue discount on financial instruments. Significant improvements were achieved in the income tax administration, including implementation of the installment and self-assessment tax system and making the full value of employee benefits subject to tax, as well as expanded use of personal identification numbers (PINs)--among other things, in such new areas as vehicle registration and in relation to self-employed people not trading under a business name. A temporary drought levy was in force in 1994/95, composed of an additional 2.5 percent charged on corporate income and on income of individuals in the highest tax bracket.

♦ Foreign trade taxes. The maximum import duty rate was reduced from 50 to 45 percent (and further lowered to 40 percent under the 1995/96 Budget law), with a significant reduction in the number of items in the top band and rationalization of investment incentives. Export duties were eliminated. The preshipment inspection (PSI) was strengthened in May 1994 to secure proper classification and valuation of goods for customs purposes to guard against undervaluation of imports. The PSI proved its effectiveness in 1994/95--according to the authorities’ estimates, it helped to raise customs revenues on non-oil imports by more than 20 percent.

♦ Value-added tax. The maximum VAT rate was reduced from 40 to 30 percent together with a reduction in the number of VAT rates and expansion of VAT coverage to construction, automobile parts, and equipment repair and rental. The number of goods subject to VAT at the retail level was increased from about 390 to some 1,400. At the same time, taxation of major petroleum products (premium and regular gasoline, aviation gasoline and automotive diesel) was shifted from the VAT to excise taxes to reduce the VAT offset.

♦ Other taxes. Changes in other taxes included introduction of a road maintenance levy, i.e., an earmarked levy on automotive fuel for funding road maintenance; abolition of the refinery throughput tax; elimination of taxation of kerosene; and lower excise taxes on soft drinks and beer by 5 percent.

The new Kenya Revenue Authority (KRA) became operational in July 1995, as a central body for the assessment and collection of income taxes, VAT, customs and excise duties and a number of other levies and charges. It is expected that KRA will serve as a vehicle for improving tax administration, in particular regarding more effective collection of taxes, and provision of better services to taxpayers to make compliance of the tax laws simpler and cheaper. Increased remuneration and funding, and easy dismissal are expected to improve professionalism and motivation of the staff, as well as the transparency of the tax collection.

b. Revenue trends

The composition of budgetary revenue shifted significantly during 1993/94 and 1994/95 (Table 17). The share of tax revenue increased from 83 to 87 percent of total revenue, with a corresponding decrease in the share of nontax revenue. The share of excise duties increased by 4 percentage points to 15 percent of total revenue as a result of the above-mentioned shift of several important petroleum products from the VAT to excises. The same amount of receipts was lost for VAT, which additionally suffered from rate decreases and a large accumulation of arrears by the Kenya Posts and Telecommunications Corporation (KPTC). As a result, the share of VAT in total revenue declined from 32 to 20 percent (in terms of GDP, the decline was not so striking--from 7.7 to 6.2 percent). Import duty collections were on the rise from 10 to 15 percent of total revenue, and taxes on income and profits from 29 to 35 percent of total revenue.

During the whole period, the authorities encountered difficulties in collecting taxes from several largest taxpaying enterprises on time. The accumulated stock of tax arrears was reduced from K Sh 9.9 billion (2.8 percent of GDP) at the end of 1993/94 to K Sh 9.3 billion (2.3 percent of GDP) at the end of 1994/95. The composition of outstanding tax arrears changed. In 1993/94, 48 percent of the total stock (or K Sh 4.8 billion) were VAT and telecommunications tax arrears, largely incurred by KPTC, and the rest were corporate tax arrears by Agricultural Finance Corporation, Kenya Power and Lighting Company (KPLC), Kenya Pipeline and several other parastatals. At the end of 1994/95, the share of VAT in the total stock of arrears increased to 77 percent (K Sh 7.2 billion), while the VAT arrears of KPTC more than doubled. Corporate tax arrears that had been incurred in 1993/94 were mostly repaid in 1994/95, but new arrears were incurred by KPTC (which became the largest debtor also in this type of taxation), Kenya Ports Authority, as well as by one large private corporation and eight other companies in smaller amounts.

a. Expenditure trends

Total expenditure and net lending decreased from 35.6 percent of GDP in 1992/93 to 34.0 percent of GDP in 1994/95. The overall expenditure reduction was achieved against heavy pressures stemming from unexpected and unbudgeted outlays. In 1993/94, it was necessary to provide drought relief (primarily in the form of maize) to about 4 million people following the disappointing rains of December-January. The authorities also found it essential to intensify security operations along the Kenya-Somalia border to prevent the inflow of firearms into the country. Extraordinary outlays were also made by the Government to cover losses incurred by the Central Bank of Kenya (CBK) in 1992/93 as a result of irregular transactions. In 1994/95, large drought-related outlays, as well as increased security expenditures for patrolling the Kenya/Somali border continued. The Government granted unbudgeted salary increases for teachers and medical doctors, and had to increase the provisions for the civil service reform to accelerate the retrenchment program. Furthermore, the expenditures were boosted by higher-than-expected transfers to the National Cereals and Produce Board (NCPB) to finance purchases of maize; allocation of K Sh 1.2 billion as development expenditures for the construction of an airport at Eldoret; and an additional provision for improving local authorities’ water facilities.

These outlays were partly offset by the impact of lower domestic interest rates in 1994/95 (5.7 percent of GDP in 1994/95 as compared to 10.6 percent of GDP in 1993/94 and 8.7 percent of GDP in 1992/93). In 1994/95, payments on behalf of parastatals for guaranteed loans were also radically lowered; stricter controls by the Treasury resulted in parastatals meeting more of their debt service themselves. Such savings, however, were not sufficient to achieve the fiscal policy targets. Some budgeted outlays had to be cut, including non-interest, nonwage recurrent expenditures which support operations and maintenance, and in certain development expenditures.

b. Composition of expenditure

The composition of expenditure and net lending was characterized by a gradual shift of resources toward the development budget, with the share of recurrent expenditure in total expenditure decreasing from 82 percent in 1992/93 to 77 percent in 1994/95 (Table 18)--the development part of the budget, however, contained outlays to support NCPB purchases of maize, in the order of 0.8 percent of GDP in 1994/95.

The share of interest payments in total expenditure and net lending reached as much as 36 percent in 1993/94, driven by high payments on domestic debt. In 1994/95, the problem was ameliorated by falling interest rates, but the stock of domestic debt remained large (at 24 percent of GDP at the end of 1994/95).

Wages and allowances fell from 26 percent of total expenditure and net lending in 1992/93 to 24 percent in 1993/94, but rose to 32 percent in 1994/95 when a cash medical allowance for civil servants was granted, followed by salary increases for teachers and medical doctors, partly made retroactive for the previous year (the retroactive payments made in November 1994 amounted to K Sh 1.2 billion or 1 percent of total expenditure). In addition to a safety net provision for civil service retrenchment, the 1993/94 and 1994/95 budgets included allocations for free distribution of food to individuals affected by drought, bursaries for poor students, greater availability of medical supplies in rural areas, and improvements in housing for the urban poor.

As to the functional breakdown of expenditure, the budgetary outlays for social services increased from 9.2 percent of GDP in 1993/94 to 11.1 percent of GDP in 1994/95 (Table 19). Within this category, education gained most of all (from 6.4 to 7.7 percent of GDP), but the share of health expenditures also increased (from 2.0 to 2.4 percent of GDP). The outlays on economic services increased from 7.5 to 8.1 percent of GDP, with the gains distributed between mining, manufacturing, construction, electricity, water and gas supply, road construction and transportation, while the GDP ratio of agricultural expenditures shrank from 3.4 to 2.5 percent of GDP. The authorities’ efforts to contain general administrative outlays resulted in this type of expenditure going down from 5.2 to 4.5 percent of GDP. The outlays on defence increased, though slightly, from 1.5 to 1.9 percent of GDP, due to the above-mentioned unforseen outlays to enhance security on the border with Somalia.

c. Expenditure monitoring

The control of expenditure commitments in Kenya is based on the vote book system designed to keep expenditures within the amounts voted by the Parliament. Accounting officers are required to maintain lists of provisions voted for each item in the budget against which all commitments made during the year are entered. Actual payments for supplies and services received are carried out within the limits of “exchequer issues”, i.e., periodic (monthly or more frequent) transfers of money by the Treasury to ministerial accounts, on the basis of which checks to suppliers are written. The size of exchequer issues depends on the overall cash position of the Government, which is determined by the availability of revenue. If revenue falls short of projections, so are the issues; shortages (“underissues”) are distributed among ministries on a pro rata basis.

This system has intrinsic weaknesses. Accounting officers normally assume that they are entitled to enter into commitments up to the budget provisions for the whole year. After the commitments are made, goods and services are received in due course and the relevant claims scrutinized and passed for payment. At this payment stage, it often turns out that funds available from the latest exchequer issue are not enough to settle all the claims on hand--either because of fiscal tightening for macroeconomic reasons, or just due to a shortfall in government receipts. In this case, an accounting officer has two options: leave the bill pending, or pay without having a positive balance on a ministerial account, i.e., increasing the central bank overdraft. The first way of handling the situation gives rise to pending bills, while the second to expenditure not covered by issues (spending in excess of authorizations).

At the end of 1993/94, the outstanding stock of pending bills amounted to K Sh 4.2 billion, of which K Sh 2.6 billion was in the recurrent part of the budget and K Sh 1.6 billion in the development part. During 1994/95, there was little overall change in recurrent pending bills (although K Sh 1.3 billion was repaid at the beginning of the fiscal year, practically the same amount was then accumulated again). There also was a further accumulation of pending bills for the development expenditure; as a result, the total outstanding stock increased by K Sh 0.7 billion. As to expenditures not covered by issues, the ministries reduced their central bank overdraft by K Sh 1.4 billion for recurrent expenditures, but increased it by K Sh 2.2 billion for development expenditure; consequently, total spending in excess of authorizations increased by K Sh 0.8 billion.

The authorities introduced the following stringent expenditure control system, starting with the 1994/95 budget:

(1) Ceilings to expenditure commitments. The Treasury began communicating periodic expenditure ceilings to all ministries and departments at least two weeks before the beginning of each period. These ceilings are monthly for the recurrent budget and quarterly for the development budget, and cumulative within each financial year so that ministries can spend in subsequent periods what they have saved in the current one.

(2) Returns on pending bills. The Treasury began obtaining monthly returns on pending bills from ministries by the 10th of each month.

(3) Computer linkage of the Paymaster General (PMG) and the CBK. Daily reconciliation of the ministries’ account balances at the CBK and the PMG was established through a link between their respective computer systems.

(4) Measures relating to excess spending. Decisions were taken that any accounting officer responsible for more than two overdrawn checks should be subject to serious disciplinary actions, and the Central Bank should refer to the Treasury checks drawn from a ministry account lacking sufficient funds.

(5) Strengthening the Treasury’s capacities. A unit was created at the Treasury which is monitoring the budget on a monthly and quarterly basis, and reviewing general economic matters.

The efforts to implement these measures in the course of 1994/95 resulted in improved availability and timeliness of information about pending bills and expenditures not covered by issues. However, some of the more practical actions, such as sanctioning of officials responsible for overspending, were not appropriately enforced. The expenditure control mechanism remained not fully satisfactory.

a. Background

In the years following independence in 1963, Kenya’s civil service registered strong growth. At the time of independence in 1963, the civil service numbered about 60,300; by the early 1990s, the number of civil servants had increased to about 270,000. While this growth to some extent reflected a growing population, the share of civil servants in the total population rose from 0.8 percent to 1.1 percent. Also, the wage bill expanded, reaching some 25 percent of total government expenditures on average in 1990/91-1992/93.

Several factors contributed to this expansion of the civil service. First, the strong population growth, of 3.3 percent on average per year in 1980-1993 led to increased demand for public services, in particular health and education. Second, in the post-independence period, the Government sought to improve both the quality and availability of social services for the wider population. Third, when employment growth in the private sector was lagging, the Government stepped in as an employer of last resort; this was reflected in a particularly sharp expansion in the number of government employees at the lower grades. And fourth, there was a widespread lack of central control over hiring practices in individual government ministries, which sometimes led to hiring beyond the number of established posts.

b. Key problems

The expansion of the Government caused a number of difficulties, which hampered efficient service delivery and made the operation of the Government unnecessarily expensive:

♦ the civil service organization became increasingly complex and coordination became more difficult. The number of ministries increased, as did the number of government committees; in comparison with some other African countries, Kenya has a relatively large number of government ministries. Moreover, the expansion was not always harmonized, with the result that different ministries dealt with identical or closely related issues. For instance, several ministries, as well as the Office of the President, have been involved in sectors such as development planning, public enterprises, land use policy, and education;

♦ the wages and benefits were eroded in an effort to tighten fiscal policy, as attempts were made to contain the Government’s personnel costs. Similarly, the health benefits and housing allowances of civil servants -- an important component of the overall remuneration package--became increasingly restricted. These developments were detrimental to the efficiency of the civil service and the recruitment of qualified staff;

♦ as the number of civil servants increased rapidly, by more than 6 percent per annum in 1965-1990, ^1/ problems emerged with regard to over-staffing at lower levels (where the establishment control has been weakest), and inadequate resources for operations and maintenance (to keep the workers productive) and for hiring staff at higher grade levels; and

♦ the resources devoted to personnel management and training have been insufficient, with a resultant misallocation of resources and mismatch between the composition of the actual staff and the staffing needs of individual ministries.

c. Objectives and design of the civil service reform program

In 1993, the Government approved a Civil Service Reform Program (CSRP). This program was spelled out in a Government Paper, prepared with the support of the World Bank. The CSRP is to be implemented over seven years, in several phases. The first phase focuses on the containment of the wage bill through a reduction in the civil service, the development of staffing norms for ministries, improved establishment control, and the rationalization of selected ministries. Subsequent phases will shift the focus toward fundamental reforms in a larger number of ministries and the reform of wages in the public service.

The staff reduction exercise is closely associated with the restructuring of individual ministries, as it will affect the ministries’ ability to carry out their designated functions. From the outset, the program was intended to cover individuals paid directly from the central government budget; in effect, it excluded employees of public enterprises and local governments, as well as teachers. Subsequently, in mid-1994, the Government decided to broaden the program to include teachers, nonacademic staff of public universities, and local government employees. Public enterprise employees were deliberately excluded, as the streamlining of staff structures at these enterprises was being dealt with in the context of the reform of the individual enterprises (see Chapter IV).

The key objectives of the CSRP, as outlined in the Government Paper, were the following:

♦ to help fiscal adjustment by containing the growth in wage bill;

♦ to reverse the decline in efficiency and productivity; and

♦ to strengthen the civil service’s capacity to deliver government services.

To these ends, the strategy contained in the Cabinet Paper sought to: (i) achieve a leaner ministerial structure, with fewer and better organized ministries, and to reorient the Government’s activities toward “core functions”; ^1/ (ii) decentralize service delivery, including by contracting out certain functions to the private sector; (iii) reduce the number of civil servants progressively over time, and strengthen personnel management; (iv) support the downsizing of the civil service by a social safety net; and (v) improve the ethics and public-service orientation of the civil service (inter alia, through the introduction of a Code of Regulations, i.e., an ethics code).

d. Achievements under the civil service reform program

Following the government approval of the CSRP, a National Steering Committee was established to guide the overall direction of the program, and a Civil Service Reform Secretariat (CSRS) was established, under the Directorate of Personnel Management (DPM) of the Office of the President, to handle the CSRP on a day-to-day basis. Good progress has been made in reducing the number of civil service positions and the number of civil servants. However, while the number of ministries was reduced from 33 to 22 prior to the launching of the CSRP, less headway has been made since toward the more fundamental restructuring and streamlining of existing government ministries.

The rationalization of the civil service structure aims to reduce both the number of civil servants and the number of civil service positions by about 16,000 per year over the 1994-96 period. Prior to the inception of the CSRP, the Government had put in place a hiring freeze for positions in the lower grades with a view to start reducing the number of civil servants at these grades while the CSRP was being designed. The underlying notion was that such positions in general were less essential for the running of ministries, but provisions were put in place to ensure that essential positions would remain staffed.

Once the CSRS was established and allocations made in the 1993/94 budget for a social safety net for early retirees, a Voluntary Early Retirement Scheme (VERS) was introduced. The VERS is seen as the central element of the strategy for downsizing of the civil service, and is targeted at the lower-grade groups (i.e., Grades A-G, which constitute about 85 percent of the total civil service). In 1993/94, the budgeted provision for the social safety net associated with the VERS was set at K Sh 1.5 billion; this amount was intended to cover early retirement of 10,000 civil servants. The social safety net, which is administered by the CSRS, has three components: (i) a payment of 3 months’ salary in-lieu-of-notice; ^1/ (ii) a “golden handshake” of K Sh 60,000 (equivalent to about US$1,300 at the January 1995 exchange rate); and (iii) for nonpensionable civil servants, severance pay of 3 months’ salary for every year worked (this payment is intended to ensure equitable treatment with pensionable employees, who would in any event receive a lump-sum payment plus monthly payments).

Between January 1993 and June 1995, nearly 20,400 civil servants have taken early retirement through the VERS program and another 15,800 have departed through natural attrition. During the same period, about 6,700 new civil servants have been recruited, including roughly 4,000 security agents. Thus, over this period, the number of civil servants declined by 11 percent, from 269,300 on January 1, 1993 to nearly 239,800 on June 30, 1995.

Moreover, to ensure a lasting reduction in the civil service establishment, the DPM has sought to reduce the number of civil service positions in tandem with the reduction in actual staff. While this exercise proved relatively simple in the early stages, when the DPM eliminated positions across the board in line with the reduction in staff, it quickly encountered more difficulties, as ministries became concerned about their ability to carry out their designated functions. It was realized that more careful reviews of staffing norms would be necessary to proceed with the program; and ministerial committees, with external technical assistance, were set up for this purpose. As a result, the reduction in the number of positions has been limited to positions left vacant under the Voluntary Retirement Scheme, and more than 20,000 positions were eliminated from April 1994 to June 1995.

Restructuring of government ministries proceeded slowly. While some work toward establishing restructuring plans for certain key ministries had already started at the time the Government approved the CSRP, little actual progress has been made in implementing these plans. Six ministries have now been earmarked for rationalization in 1995-97, in the first phase of the CSRP. These ministries are the Ministry of Health; the Ministry of Finance; the Ministry of Lands and Settlement; the Ministry of Public Works and Housing; the Ministry of Land Reclamation, Regional and Water Development; and the Ministry of Agriculture, Livestock Development and Marketing. Plans are already developed for the Ministry of Health and the Ministry of Agriculture; the implementation of the restructuring plans for these ministries is planned for late 1995/early 1996. Ministerial reform Committees have been established to develop plans for the other ministries.

a. Principles of the reform program

The main principles for reform of strategic PEs were as follows:

♦ the operations of PEs will only include viable commercial activities, except for certain cases where the Government would direct a PE to undertake activities for non-commercial reasons. These non-commercial activities would be retained on a separate operational and accounting basis, accompanied by contractual arrangements giving the PE full compensation for the activities through transparent budgetary provisions. Regulatory functions would be removed from commercial PEs;

♦ the PEs would operate on a self-sustaining basis, and all subsidies (except those intended to cover costs associated with specific activities, referred to above) would be phased out; in particular, all indirect subsidies should be eliminated;

♦ profitability of PEs would be sought through improved efficiency in a competitive environment; to this end, barriers to entry and other protection would be gradually removed to ensure a “level playing field” for private companies and PEs, and the PEs given autonomy in their pricing, staffing, and other business decisions. A governance code--establishing an arm’s-length relationship with the Government--would be adopted; and

♦ PEs that would remain in a monopoly position would be regulated by specialized government bodies, through government review and approval of tariffs, investment plans, and cost containment measures.

b. Institutional arrangements

In support of this strategy, the institutional arrangements for management of the PE sector were changed. The Department of Government Investments and Public Enterprises (DGIPE) was established within the Ministry of Finance; the DGIPE was meant as a caretaker of the Government’s ownership in all PEs, and would exercise oversight of all majority-owned PEs. To give DGIPE clout in its dealings with the PEs, its head (the Investment Secretary) was given the rank of permanent secretary, reporting directly to the permanent secretary of finance. The DGIPE’s tasks fall within three major categories: (i) to design and oversee the implementation of the PE reform process; (ii) to monitor the performance of majority-owned PEs and all other government investments, and to ensure effective PE debt management and PE accountability for all budgetary allocations to PEs; and (iii) coordinating the social safety net schemes associated with staff rationalizations. Performance contracts would be established between the strategic enterprises and Government. Within this framework, the role of PE Boards and management would be to define the corporate strategy and implement personnel and salary policies, pricing, and procurement independently, in line with the general objectives of the respective performance contracts.

c. Achievements under the program

The Government’s general approach to PE reform was defined in the July 1992 policy paper, but specific objectives and policies for individual enterprises remained to be formulated. In the context of the policy framework paper (PFP) for 1994-1996, drawn up in consultation with the World Bank and the Fund, specific objectives and policies consistent with the general approach were articulated. For selected PEs--i.e., those that were the recipients of the largest direct and indirect subsidies from Central Government and those that provide infrastructure services--targets were set for the combined operating profit, as well as for the overall cash flow. ^1/ These targets were set to facilitate the contribution of these PEs to overall macroeconomic adjustment, and were underpinned by actions relating to financial management, including measures to cut costs, raise revenue, and limit external and domestic borrowing. Importantly, the planned cost-cutting measures in all selected enterprises included major staff rationalization. These were planned for implementation in the context of broader restructuring of these enterprises; while the restructuring plans were being put in place, the enterprises would seek to reduce their staff through hiring freezes and natural attrition. Moreover, the PFP provided for the establishment of performance contracts for all “strategic” PEs by June 1995; these contracts were intended to provide a basis for allowing PE management to pursue a commercially-oriented strategy, with autonomy from Government, provided that specified objectives for service delivery and financial performance were achieved.

Concerning the financial performance of the selected PEs, considerable improvement has been achieved in the operating profit since the Government’s reform program was launched. From 1992/93 to 1994/95, the combined operating profit of the five key PEs monitored under the ESAF-supported program increased from K Sh 4.2 billion, or 1.5 percent of GDP, to K Sh 10.8 billion, or 2.7 percent of GDP; most of this improvement occurred in 1993/94 (Table 22). The main turnaround in profits occurred in the Kenya Power and Lighting Company, the Kenya Posts and Telecommunications Corporation, and the Kenya Ports Authorities. The improved profit position to a large extent reflected major tariff increases, appreciation of the Kenya shilling, and other special factors, while substantial improvements in operational efficiency were slow in being effected. Moreover, the PE sector as a whole continued to experience debt-servicing difficulties, and was unable to generate sufficient cash to finance its operations and carry out capital expansion. These problems were caused to a large extent by excessive indebtedness as reflected in very high debt-to-equity ratios and past accumulation of arrears.

The Kenya Power and Lighting Company (KPLC) returned to profitability in 1993/94. It further strengthened its financial performance in 1994/95, when its operating profit more than doubled to reach K Sh 5.0 billion, or 1.2 percent of GDP. This improvement reflected the full year impact of an increase in tariffs by 60 percent in March 1994 and a near doubling of its revenue. KPLC’s staff was reduced by 17 percent between July 1993 and June 1995, to a level of about 8,700 employees. ^1/ The substantial reduction in the staff resulted from a hiring freeze, natural attrition, and the implementation of a Voluntary Retirement Program in April 1994. This program benefited 1,240 employees by end-June 1995. A redundancy plan was also implemented in April 1995 with a view to achieving further improvements in the customer/staff ratio. In addition, in May 1995, a report on the implementation of a reorganization of the power sector was completed, performance contracts for all power sector parastatals were prepared, and the balance sheets of various companies of the power sector were revaluated.

Kenya Railways’ (KR) operating profit increased from K Sh 0.1 billion in 1992/93 to K Sh 0.5 billion in 1993/94. This improvement derived to a large extent from increases in domestic tariffs (15 percent on January 1, 1994, and 10 percent on July 1, 1994), as well as in international tariffs (which were linked to the exchange rate of the Kenya shilling). In spite of this improvement, Kenya Railways continued to have liquidity problems and accumulate arrears on its servicing of government-guaranteed external debt. The implementation of actions to strengthen the performance--such as staff cuts and divestiture of peripheral activities--was also delayed. In 1994/95, KR’s operating profit virtually disappeared. Revenue from freight traffic, which accounts for nearly 85 percent of KR’s revenue, declined by 9 percent. This drop reflected tariff reductions granted by KR to regain customers that it had lost in the process of transporting large amounts of relief food at the request of the Government in 1993/94. The implementation of structural reforms improved substantially in 1994/95. Staff reductions, funded through the sales of land, started in September 1994 and 600 departures were recorded as of June 1995, resulting in a staff of less than 17,300 employees. A policy paper with proposals for financial restructuring and performance contracts was prepared in September 1994 and submitted to the Government for approval. The separation of passenger and freight services accounts was effected in July 1995 and a study on the physical separation of the two activities is expected to be completed by end-1995. KR is also in the process of contracting out all of its locomotive maintenance activities.

The operating profit of the Kenya Posts and Telecommunications Corporation (KPTC) increased from K Sh 4.5 billion in 1992/93 to K Sh 5.9 billion in 1994/95. The cash flow generated by these operating profits was not, however, sufficient to cover the amortization of KPTC’s debt, the payment of its tax and debt service arrears, and its investment program. As a result, the balance sheet of the corporation did not improve over the period and its cash position remained precarious. The increase in profitability reflected an increase in domestic telecommunications tariff by 50 percent in March 1994 and benefited from the appreciation of the exchange rate in 1994 which reduced the costs of international connections, as well as the Kenya shilling value of the external debt servicing. KPTC, however, kept delaying transfers to the Treasury of the VAT that it collected on behalf of the Government. A salary increase by about 35-40 percent was granted in December 1994, which was partially offset by a retrenchment of 7,800 staff during July-December 1994. The privatization of equipment maintenance, block wiring, mobile telephone, directory and terminal equipment supply was substantially implemented, and negotiations on a performance contract started in May 1995. In addition, the separation of KPTC’s postal and telecommunications functions has not been completed as a result of the delay in preparing the necessary legislation.

The National Cereals and Produce Board (NCPB) was the only key enterprise to register a weakening in its performance from 1992/93 to 1993/94. Overall, the operating deficit of NCPB increased from K Sh 1.8 billion in 1992/93 to K Sh 2.5 billion in 1993/94. NCPB purchased substantial amounts of maize at above-market prices in 1994/95 and its operating loss reached K Sh 2.2 billion. As a result of continued operation at a high level of activity, NCPB’s targets for reductions in permanent staff on grain depots operated were not observed.

The operating profit of the Kenya Ports Authorities (KPA) doubled in 1993/94, to K Sh 3.3 billion. This performance resulted from larger volumes of imports passing through the port of Mombasa because of the crises in Somalia and Rwanda, and the drought. KPA also benefited from the favorable effect of the appreciating Kenya shilling on the local currency cost of external debt service. In 1994/95, the operating profit was reduced to K Sh 2.2 billion: revenue declined slightly and expenditure increased by more than 25 percent, reflecting substantial increases in staff and material costs. The structure of the balance sheet also worsened in 1994/95, and severe cash constraints emerged as a result of large increases in fixed assets and stocks as well as a deterioration in the operations of KPA. The productivity of the container terminal was less than 30 percent of international levels, and had fallen from 220 moves per ship per day in 1994 to 170 movers per ship per day at end-June 1995. Handling charges were higher than international levels by 50 percent and containers staying three times longer than in most international ports. Structural reforms implemented included the contracting out of equipment maintenance for three categories of equipments in September 1994 and the completion of a study to evaluate options for the management of the container terminal in May 1995.

Overall, a number of factors contributed to the delays in implementing the reforms of strategic PEs. These factors included: (i) weak management in certain enterprises; (ii) weak capacity and inadequate staffing at DGIPE; (iii) resistance to the reforms within some of the PEs; and (iv) delay in meeting the conditions for securing funding for technical assistance for the program. Also, delays in completing performance contracts precluded a timely transition to a market-based mode of operations.

a. General approach

Privatization, as defined for “non-strategic” PEs under the Kenyan program, involves the sale of government shares in a company, to achieve either a full divestiture of the government share or a minority government share. In addition, as the reform program for “strategic” PEs progressed, it became apparent that the distinction between “strategic” and “non-strategic” enterprises was not always relevant, as the Government decided to privatize (either through contracting out or divesting) a number of functions of “strategic” PEs. In particular, these functions included electricity generation (which has been carried out by PEs under the KPLC umbrella), several telecommunications functions (KPTC), the maintenance of railways equipment (KR), grain marketing (NCPB), and the maintenance of port equipment and handling of goods (KPA).

At the outset of the privatization program, the Government set up institutional arrangements for the privatization process. A Parastatal Reform Program Committee (PRPC), under the chairmanship of the Minister for Finance, was established to supervise the privatization program and approve the timing of sale of each enterprise. The management, coordination, and implementation of the privatization program was vested with the Executive Secretariat and Technical Unit (ESTU), which acts as a secretariat of the PRPC. The principles guiding the privatization include provisions that PEs be divested into competitive markets and that bidding be open to all. To facilitate the privatization process, priority would be given to PEs that require minimal restructuring and that generate a profit. Strict guidelines were established to ensure transparency of the privatization process, as well as the management of privatization proceeds.

b. Progress under the program

Progress under the privatization program has been mixed. On the one hand, the number of enterprises privatized has exceeded the objectives. As of January 1995, 52 enterprises had been divested out of the 211 non-strategic enterprises. ^1/ In addition, the Government divested its holding in the 43 tea factories by April 1995 and completed 18 more divestitures by end-June 1995. Moreover, government shares in National Bank of Kenya, a large commercial bank, were sold in the Nairobi Stock Exchange in October 1994; in effect, the Government’s shareholding in NBK was reduced to less than 50 percent. Finally, a sales memorandum was prepared regarding the privatization of Kenya Airways in March 1995 and expression of interest to buy the airline was received in May 1995.

On the other hand, there have been concerns that the Government may not have received a realistic market price for the enterprises sold, and that the process may have lacked the desired transparency; the majority of PEs privatized (23 out of the 52 divested in January 1995) were sold through pre-emption rights. Moreover, the enterprises sold were all relatively small, and some had not been in active operation prior to the sale; privatization of more prominent enterprises (notably, Kenya Airways) was delayed. To address these concerns, public announcements of the particulars of privatizations, and audits of the proceeds, have commenced. The proceeds have so far been kept in a special account, earmarked for restructuring of PEs to be privatized; the Government is reviewing the procedures, to determine whether the proceeds could be directed toward financing of the budget.