Gradual vis a vis rapid privatization and financial performance of privatized companies quoted in the Nairobi Stock Exchange in Kenya

Abstract

Privatization in general refers to the transfer of the provision of services or assets from the public to the private sector. Privatization can be partial (divestiture) or complete where 100% of government ownership is sold out to the public. Privatization of parastatals is one the major elements in the economic reform program being undertaken by African governments. The main objectives of privatization is raising revenues and reducing the financial and administrative burdens that these enterprises impose on the government. Other privatization objectives are to foster economic flexibility and improve access to foreign markets for domestic products and to promote foreign investments. Privatization is a world-wide phenomenon and there has been a rush to privatize SOEs as the vehicle for development. Kenya has not been left behind in privatization of SOEs. The key issue in privatization is how to implement it. In privatization, some governments choose to fully or rapidly privatize while others implement privatization gradually or carrying it out in piece-meal This study therefore sought to assess the rate of transfer of ownership of privatized public enterprises and to assess the relationship between the rate of transfer of ownership and the financial performance of privatized companies in Kenya. This study shows that for companies that followed the rapid privatization, there was a significant increase in all the financial ratios thus improved financial performance. In the case of gradual privatization, there has been mixed results in that they have recorded very low financial ratios after the second divestiture. The study reveals that gradually privatized firms are performing relatively poorly as compared to rapidly privatized. This study reveals a number of potential challenges which include the fact that few companies have been privatized in Kenya through the stock exchange thus the results may not be conclusive. In addition, there was lack of sufficient documented data from the Nairobi Stock Exchange and Capital Markets Authority regarding the pcrccntage of shares the government divested over the years especially in the case of gradual privatization. Another challenge is the frequent change of CEOs in the privatized firms as some firms may have poor performance due to the strategy adopted by the new management. From the findings of the study, it is recommended there is need to ensure that whenever firms are privatized, the government should use the rapid privatization approach since this leads to better performance. It is suggested that further research be carried out on specific sectors of the economy like the banking sector that have been identified and are yet to be privatized. One would research on the implication of unsecured loans in privatized banks whether they were privatized rapidly or gradually.