A Case Study in Privatization
The privatization of Kenya Airways was the first-ever privatization of an African airline. The sale of a major state-owned asset is usually a highly charged political event, and the two-year process by which 77% of the shares of Kenya Airways were sold to a broad array of private investors was no exception. From the outset the press and public of Kenya speculated as to how and when the process would fail, and which interests would profit from that failure. Yet the privatization was carried out successfully.
Privatization and the formation of cross-border alliances are trends in the airline industry and in many other industries.
A basic question for both policy makers and the public is "why privatize?" Important answers, which must be evaluated based on economic reasoning and the facts of the case, are:
* Privatization "raises revenue" for the government;
* Privatization improves corporate governance;
* Privatization provides the basis for a competitive industry.
The benefit for this privatization:
They compared performance for three years preceding privatization and three years after privatization with the year of privatization as the benchmark. They found significant increase in:
* Efficiency in resource utilization
* Capital Expenditure (capital expenditure to sales)
* Dividend payout
The gains from privatization were used for recurrent expenditure; as such there was no positive effect on public debt. The stock of public debt continued as the government continued to borrow to salvage other ailing parastatals. The debt servicing cost continued post privatization not only because of the debt assumption and conversion, but also as a result of new debt commitment for other parastatals. Since Kenya Airways’ assets were valued higher than their book value, one can argue for some gains to the budget.
By: Fandy Suandy