KENYA TO SELL 30% OF PARASTATAL POWER GENERATOR

UNCLAS NAIROBI 001087 SIPDIS SIPDIS DEPT FOR AF/E, AF/EPS, AF/PD, EB/ESC/IEC, AND OES/ENV USAID FOR AFR/EA E.O. 12958: N/A TAGS: ENGR ECON EINV BTIO SENV KE SUBJECT: KENYA TO SELL 30% OF PARASTATAL POWER GENERATOR ¶1. Summary: The Kenyan government announced on March 3 its intention to sell 30% of the Kenya Electricity Generating Company (KenGen),the country's dominant power generating firm, through an initial public offering on the Nairobi Stock Exchange (NSE). The majority of the offered shares will be available to the public and to KenGen employees in this the first IPO on the NSE in six years. The enthusiasm that greeted the IPO announcement indicates tremendous pent-up demand by the Kenyan public for accessible investment products. While touted as a step towards privatization, the government will still retain decisive control over the parastatal after the IPO. The sale should therefore be seen more as a means of raising badly-needed cash for KenGen, and not necessarily as a way to make the much-criticized parastatal more efficient in generating a reliable and reasonably-priced supply of power for the economy. End Summary. -------------- Who's Buying? -------------- ¶2. Finance Minister Amos Kimunya on March 3 announced the government's plan to offload 659.5 million shares, or 30%, of KenGen to local investors through an IPO to be held March 20 through April 12. 22.5 million shares will be reserved for KenGen employees, and the remaining will be available to the public, without distinction between individual and institutional investors. According to Kimuya, the GOK hopes that a wide range of small, individual investors will participate. Initial indications are that foreign investors will also be able to buy-in, through local brokerages, but with some, yet-to-be- announced limitations. The set share price is at Ksh11.90 (US$0.15) with a minimum investment of 500 shares, or about US$82. ¶3. The Capital Markets Authority (CMA) that regulates NSE activity will soon announce the process for applying to purchase shares, and initial indications are that the public is extremely interested. Banks and company-based savings organizations are fielding a huge number of loan requests from "average citizens" who want to participate. According to Chairman and Chief Executive of the Dyer and Blair Investment Bank Jimnah Mbaru, the offer price for the shares makes KenGen initially one of the cheapest listed stocks in Kenya, and he forecasts an oversubscription. James Murigu of Suntra Investment Bank, one of the handlers of the issue, believes all investors will have a fair chance to purchase the issue. ¶4. KenGen's 1,500 employees will have access to 22.5 million shares, or 3.3% of the IPO, and can purchase up to 15,000 shares (worth about $2,460) each outside the public sale. According to Ernest Nakenya Nadome, the Secretary General of Kenya Electrical Trades Allied Workers' Union, KenGen management has already approached a financial institution to advance loans to employees to purchase the shares. Employees are to be advanced loans equal to one year's salary, repayable over five years. Nadome is encouraging his members to purchase more shares outside the allocation from the public issue. -------------- Who is KenGen? -------------- ¶5. KenGen produces about 80% of Kenya's electricity, and manages geothermal, hydroelectric, and thermal power plants. Independent Power Producers account for about 18% of the country's electricity output and the rest is imported. KenGen, along with the monopoly electric distribution parastatal Kenya Power and Light Company (KPLC),are widely criticized for the unreliability and high cost of the country's electricity supply. -------------- Comment: Good Story, But Questions -------------- ¶6. The KenGen IPO looks like a good story. The immediate positive reaction from the public clearly shows a tremendous pent-up demand for small scale investment opportunities. Moreover, if the IPO proceeds as expected, it may well motivate the government to return to the NSE for additional offerings - KPLC and the Kenya Ports Authority being leading candidates. Other private companies might also be motivated to raise capital by going public. ¶7. But a number of questions remain. First, the GOK has not made any announcement on what it plans to do with the IPO proceeds, except noting that it will "diversify Kenya's limited electric energy sources." It is well known that KenGen has been searching for new investors to expand its Olkaria geothermal power system. With regular rainfall problems in recent years, and siltation of reservoirs, Kenya's hydroelectric production is also in need of significant new investment. This infusion of cash may also make KenGen a more attractive and flexible partner for new independent power producers. But the money has to be used wisely and transparently, and past practices at Kenyan parastatals suggest this is not a foregone conclusion. ¶8. Though the KenGen sale is being championed as an example of privatization, the government will still maintain firm control through the remaining 70% shareholding. This gives the government ample room to go back to the NSE to raise more capital while still maintaining control over the parastatal. This begs the question down the road of whether this sale will result in KenGen itself becoming more competitive and efficient in offering what the economy so badly needs: reliable and reasonably priced electricity. Bellamy