Why it’s a tough time for Kenyan corporate sector
Lewis Njoka @LewisNjoka
An evaluation of State corporations by the National Treasury paints a grim picture of their future prospects.
In a statement on Thursday, the National Treasury said it conducted a financial evaluation of state corporations based on the services they provide. Out of 18 corporations of evaluated so far, only four were found to be profitable, while the rest were in dire straits.
“State Corporations are facing financial shortfalls or liquidity gaps – the 18 State corporations have an estimated cumulative financial shortfall of about Sh70 billion annually over the next five-year period,” said Treasury Cabinet Secretary Ukur Yatani.
The evaluation intends to analyse State corporations and make a decision on which ones are worth keeping and which ones should be privatised or dissolved in a bid to rationalise government spending.
The Kenya Broadcasting Corporation, East African Portland Cement Company and Posta were classified as insolvent and could face budget cuts as Treasury moves to reduce the strain on government resources.
This even as the Consolidated National Government Investment Report for the 2019-20 financial year shows that out of 247 State corporations, 127 made either losses or have huge deficits.
Among the biggest loss-maker State corporations was Kenya Railways Corporation whose losses surged from Sh8.47 billion in 2019 to Sh24.2 billion in 2020.
Private couriers
For East African Portland Cement Company, trouble started when mismanagement saw the firm suspended from Nairobi Securities Exchange (NSE) in 2012 but returned quietly. Things have, however, never been the same since.
Last Friday, the firm managed to trade only 100 shares at the NSE at Sh7.30 each, confirming its bad state.
Last week, a court allowed former contract workers at the firm to attach seven bank accounts of the company to recover Sh1.3 billion in salaries owed to them.
The troubled cement manufacturer has been in the market for a buyer for some 2,076 acres, which shareholders voted to sell at an extraordinary general meeting in September 2019, in a bid to rescue it from insolvency following years of mismanagement of what was once the jewel in Kenya’s cement sector.
For Postal Corporation of Kenya, it is changing technology which has led to a dip in the number of letters being sent in recent years. This underlines the precarious position of this State corporation.
Kenyans have largely turned to private couriers and electronic messaging services that are faster and more convenient. Last year, Posta made a loss of Sh1.2 billion.
The Consolidated National Government Investment Report says some of the other poor performers during the period include Kenyatta National Hospital, which registered a deficit of Sh2.05 billion, South Nyanza Sugar Company (Sh1.45 billion) and Kenya Post Office Savings Bank (Sh1.44 billion).
The bad tidings have also hit the private sector with an analysis of Kenya’s business environment revealing that tens of once profitable companies have either collapsed or become unprofitable in the last decade resulting in loss of thousands of jobs. For many of the companies, the downturn started long before Covid-19 struck in early last year.
This despite statistics showing that Kenya posted a largely impressive growth over the period, pointing to a myriad of factors which may have led to the woes of the companies.
Knocked out
Between 2010 and 2019, Kenya consistently posted a Gross Domestic Product (GDP) growth of above five per cent except in 2008 and 2017 election years when it dipped to 0.2 and 4.6 per cent respectively.
During that period, TransCentury Limited, Housing Finance and Home Afrika, saw their share prices dip from over Sh30 in 2013 to below five shillings and have currently wiped off millions in investor wealth.
TransCentury had earlier indicated it needed to exit the NSE to tap new capital from private equity funds that it would only invest as a non-listed business. But in May this year, the company announced that it had abandoned the delisting plan.
If it had gone ahead with the plan, it would have closed the chapter on TransCentury’s decade as a publicly traded firm, during which it lost Sh12.6 billion, or 95 per cent, of its market value.
The firm’s losses surged to Sh3.93 billion in 2019 compared to a net profit of Sh468.26 million in 2010 shortly before it made the move to list at the bourse.
If TransCentury had delisted, it would have joined other firms, including oil marketer KenolKobil and CMC Holdings, that have gone private in recent years, mostly through takeovers.
Samuel Nyandemo, a senior economics lecturer at University of Nairobi, says many businesses are not well structured to withstand market shocks, let alone a major disruption such as the Covid-19 pandemic.
“Some of the businesses were knocked out of the market. They were not competitive enough to survive,” he said.
In the banking sector, three lenders, namely Chase Bank, Imperial Bank and Dubai bank, were placed under receivership for varying reasons between 2015 and 2019 leaving thousands of depositors counting losses.
Garissa Town MP Aden Duale recently blamed the collapse of the banks on weak oversight by the Capital Markets Authority (CMA), an allegation the regulator has denied.
“The estimated total losses of innocent Kenyan investments due to the negligence of CMA in terms of regulation is approximately Sh36.8 billion,” Duale said.
The retail sector has also suffered, with major local and international brands biting the dust. Nakumatt, Uchumi, Tuskys, Shoprite and Choppies either collapsed or quit the local market in the last five years.
While most of the troubles are being linked to the pandemic, it is important to note that even before the pandemic reached Kenya in March last year, many companies that employed a large number of semi-skilled employees had begun scaling down operations signaling a challenging business environment.
In 2019, Finlays flower Company laid off about 1,700 workers, following in the footsteps of Karuturi which retrenched over 2,000 workers in 2016.
Shut down
In the same year, soft drink brand, Softa, closed down citing frustrations in the market, a move that saw about 10,000 direct and indirect employees lose jobs.
The country has also witnessed the flight of Foreign Direct Investment with some multinationals either quitting or selling some of their brands.
Inflows to Kenya dropped by 18 per cent to $1.3 billion (Sh140 billion), despite several new projects in information technology and health care, said United Nations Conference on Trade and Development (UNCTAD), compared to Sh200 billion out flows from Kenya.
Consumer goods manufacturer Unilever scaled down its operations in the country significantly and sold its margarine business to KKR, an American private equity firm. Earlier in 2014 another multinational Cadbury’s, ceased manufacturing locally.
Deacons East Africa, an international brand, shut all its Kenyan chain stores in 2019 ending a 60-year presence.
Similarly, Tullow Oil has scaled down its operations in the country and was until September 2020 considering quitting the Kenyan market.
Its operations were last year hit by the pandemic with the firm threatening to invoke a force majeure – which is cited when unforeseeable circumstances that prevent someone from fulfilling a contract happen — threatening to scatter operations in Kenya.
Other notable brands that have either announced redundancy in the recent past include Sportpesa, Sameer Group, Eveready and Silverstone air.
According to the Kenya National Bureau of Statistics (KNBS), 1.7 million Kenyans lost jobs between March and June last year. This excludes thousands who lost jobs before the pandemic.
However, it is not all gloom as firms like Safaricom exhibit bullish growth. The telco even aims to expand beyond the borders after bidding winning a multi-billion license in Ethiopia.
“It is a safe risk for Safaricom if they have to go out to grow… they have the capital for it.
Ethiopia is a big market and I believe they have a chance even though it may take them time to break-even in the initial stages of infrastructure deployment,” says Michael Mburugu, an economic expert and a partner at PKF, a regional body for accountants and business advisers.
In a telephone interview, Mburugu noted that Safaricom will aim to ride on its Kenyan success story to grow its presence in Ethiopia – a market where penetrations particularly in the telecommunications space are multifarious.
This year, the Treasury unveiled an ambitious Sh3.6 trillion budget and projects the economy will expand by 6.6 per cent in what would outpace the projected global rate and that of Sub-Saharan Africa.
This will, however, come at a huge cost with 30 per cent of the entire budget going to deficit financing.
Big Four projects
While growth plummeted to 0.6 per cent last year as key sectors like tourism and related services collapsed at the onset of the Covid crisis, recovery has started this year.
Further, funds were designated for a raft of signature projects initiated by President Uhuru Kenyatta in his legacy development programme dubbed The Big Four agenda.
Uhuru has presided over a rapid increase in public borrowing. Total debt stands at 70 per cent of GDP, up from about 45 per cent when he took over in 2013.
The government has to raise its debt ceiling of 9.0 trillion shillings ($83.49 billion) in the next financial year, the Treasury says, after raising it again in late 2019 and the government will be hard pressed to get funds to plug in a stimulus to spur serious growth any time soon.
