A New Wave of Privatisation: Africa’s Shift towards Economic Transformation and Investment Opportunities
Often touted as a silver bullet to reinvigorate cash-strapped economies, privatisation sometimes fails to live up to expectations, particularly in emerging or transition countries that have young, fragile market institutions.
Africa is no exception. For example, the saga of South African Airways’ privatisation — which sparked months of corruption allegations against the country’s political elite before it was finally approved in August — shows the process is far from straightforward.
Yet privatisation may be essential for those African economies lacking the public resources to keep their loss-making state-owned enterprises (SOEs) afloat, and several African countries are proposing to do just that. In Egypt, the government of Abdel Fattah El-Sisi plans to raise about $3bn through the partial or full sale of 32 SOEs. In Kenya, the government’s Privatisation Bill 2023 is currently going through parliament, while Nigeria’s state-owned asset management company, the Ministry of Finance Incorporated, is drawing up proposals to attract more private capital to shore up the finances of struggling SOEs.
As such programmes proceed, achieving a successful privatisation — one that satisfies as many stakeholder interests as possible — will remain a major challenge for many of the continent’s economies.
Illiquid and overleveraged
Across the region, the challenges facing SOEs are well known. In March 2022, the IMF published a report on almost 300 SOEs in 35 of sub-Saharan Africa’s 45 countries. It found that 40% of them were unprofitable, while the larger companies also tended to be illiquid and overleveraged.
In Nigeria, state-owned energy company NNPC spent $10bn on oil subsidies in 2022 — before recently-elected president Bola Tinubu announced the removal of the subsidy in May. In Kenya, national carrier Kenya Airways defaulted on a Ks77.8bn ($526m) loan in 2022, forcing a government bailout. And in South Africa, the ANC government has faced sustained criticism for its mismanagement of SOEs such as port and rail operator Transnet and state power company Eskom, which are on the brink of collapse.
The reality for many African governments is that they are hamstrung financially and cannot afford to fund their SOEs the way they did in the past. Moreover, the tricky economic situation facing many countries is also a key motivator behind this renewed privatisation drive.
Precarious macro picture
Despite widespread debt forgiveness in the early 2000s by global international finance institutions, a 2022 World Bank study shows that African sovereign debt rose to more than $1tn last year. This was an increase of 183% since 2010, and a rate roughly four times higher than the continent’s gross domestic product growth rate in dollar terms.
“We have a new government that has inherited a huge debt burden,” says Haanee Khan, partner at Nairobi-based law firm CMS Daly Inamdar Advocates. “With that comes the pressure of how to generate income. One option is to push up taxes, but there’s only so much you can do. The other option is to sell off what assets you have.”
Like other regions around the world, Africa’s economies grew more slowly in 2022, at 3.6%, than in 2021 (4.7%). Tighter global financial conditions, rising food and energy prices, and public debt and inflation levels have pushed countries closer to the edge.
Back in May this year, Fitch Ratings downgraded Egypt’s sovereign credit rating from B+ to B. The rating agency said the country’s external financing requirements in 2024 would be “more challenging” due to government external debt maturities of around $7.2bn, up from $4.3bn in 2021. The 2024 figure includes $2.1bn of Eurobond maturities, compared with $800m in 2023.
But a World Bank report on African SOEs advised that, for African governments to derive maximum return from these entities, “[good] prices are best achieved during a bull market”. It added: “If a government aims to target foreign investors, the global economy’s health and the current investor sentiment will likely also influence the timing of the listing.”
Right now, many African governments have neither the luxury of a global bull market, nor a strong domestic macroeconomic environment. This raises the question: given current circumstances, will they be able to derive maximum benefit from these sales?
Boon for local capital markets
It is notable that six of the continent’s 10 biggest economies — Nigeria, Egypt, South Africa, Ethiopia, Kenya and Angola — are presently exploring routes to privatise their SOEs. This offers local and international investors opportunities to expand their reach via entities that often have a significant footprint in their home countries.
One likely winner from this is the local African capital market ecosystem: policy-makers in Egypt, Kenya and Nigeria have all made clear their desire to list their SOEs locally as a way of attracting private capital.
Although liquidity on domestic African stock exchanges is a perennial challenge, taking the listed market route should in theory create a new local investor class and provide fairer pricing of assets. However, this depends on how the deals are structured and what incentives are offered.
Trisha Shah at CMS Daly Inamdar Advocates says in Kenya, a notable proposed amendment to the Privatisation Bill came after consultation with the Nairobi Securities Exchange (NSE). “The NSE suggests that corporate tax rates for newly privatised entities be reduced from 30% to 20%. If this gets approved, it incentivises the private sector to invest in newly privatised entities,” she adds.
Not a silver bullet
But while much of this will likely excite investors, the tone of the privatisation debate has changed in recent years owing to lessons from previous failures. In a 2018 paper, economists Saul Estrin and Adeline Pelletier said: “Private ownership alone is no longer argued to automatically generate economic gains in developing economies. Pre-conditions, especially the regulatory infrastructure, and an appropriate process of privatisation, are important to attain a positive impact.”
So, in place of a simple pro-privatisation drive, how should African governments approach this latest privatisation wave in the short- to medium-term?
Mr Khan at CMS Daly Inamdar Advocates, who was previously in-house legal counsel at Kenya Airways, says: “They need to conduct internal due diligence on all their companies to find out where the issues are. They need to look at restructuring any existing debt so that at the point of sale, they’ve tidied up each entity.
“Doing this will ensure that, rather than wait for the buyer to use that as a basis for requesting a discount, they’ve already cleaned everything up internally,” he adds.