Newly Proposed State Corporation Reforms: A Necessary Fix or another False Start?
Category: State corporation
By: Jackline Kagume,
The 2025 Cabinet-approved State Corporation Reforms Plan has detailed comprehensive changes in the structure and governance of state-owned enterprises (SOEs) in Kenya. The plan, which involves mergers, dissolutions, restructuring, and declassification of various entities, is framed as a necessary intervention to enhance efficiency and alleviate fiscal pressures. However, beyond the technicalities, it raises significant legal and economic questions about the role of the state in economic activity, public service provision, and the sustainability of privatization efforts.
Privatization and reform of state corporations is not a new idea in Kenya. Historical efforts can be traced back to the Structural Adjustment Programs of the 1980s and 1990s, when multilateral institutions pushed for reduced government involvement in commercial enterprises. The straightforward rationale was that state corporations were inefficient, prone to political interference, and essentially a drain on public resources. Consequently, Kenya privatized several entities, with Safaricom’s public listing in 2008 standing out as a notable success. The move transformed Safaricom into a profitable, globally competitive firm while generating substantial revenue through retained shareholding and taxes. Other privatized entities, such as Kenya Airways have however had mixed outcomes, comprising poor performance aggravated by governance challenges.
The post-2010 period was marked by a stall in privatization efforts, with the government expanding its role in commercial activities. The number of state corporations increased significantly, leading to mounting fiscal pressures as many of these entities became reliant on government bailouts. The Presidential Taskforce established in 2013 recommended reducing the number of parastatals from 262 to 187 to enhance efficiency and reduce the growing financial strain. The Privatization Act, designed to streamline the process has remained largely underutilized over the years, with reports by the Privatization Commission showing that only a handful of entities have been privatized under the Act. More recently, increased fiscal pressures and rising public debt have intensified calls for privatization as a strategy to reduce the government’s financial burden and redirect public funding to critical sectors like healthcare and education.
This peaked in June of 2024, following the public protests against high taxation, poor governance and the rising cost of living. In response, the President announced a series of austerity measures in July 2024, proposing a shift towards fiscal consolidation. This was detailed in the comprehensive Issue of Austerity Measures establishing the basis for restructuring state-owned enterprises. The 2025 Plan issued by Cabinet therefore represents an attempt to operationalize this agenda, but its chances of success are still in question.
The 2025 State Corporations Reform Plan
The 2025 Plan proposes a combination of mergers, dissolutions, and restructuring to streamline the state corporation landscape in Kenya. Forty-three state corporations will be merged into 20 entities, ideally to eliminate redundancy and improve efficiency. Additionally, 25 state corporations will be dissolved, with their functions transferred to the relevant parent ministries to ensure continuity of service delivery. Six corporations will undergo restructuring to enhance their performance and align them with their intended mandates. Lastly, 13 professional bodies and four public funds will be declassified, meaning they will no longer be categorized as state corporations, thereby redefining their governance and funding structures.
The stated objective of these reforms is fiscal sustainability and operational efficiency. In the 2023/24 financial year, government spending on state-owned enterprises amounted to Ksh 478 billion, accounting for 17.7% of the total annual revenue for the year. This expenditure is equivalent to nearly 16 years of funding for Kenya’s Free Primary Education Program. It raises fundamental economic questions regarding whether the government should continue allocating scarce resources to inefficient entities while critical social programs remain underfunded.
In addition to the fiscal concerns, there are public anxieties informed by political economy issues around the governance and operations of these entities. Audit reports by the Office of the Auditor-General have frequently highlighted governance weaknesses in state corporations, including cases of irregular appointments and payments, mismanagement of public funds, and non-compliance with various laws. For instance, the Report of the Auditor General on the Kenya Power and Lighting Company for the year ended 30 June, 2023, queried irregular payment of exit costs to a former managing Director of the Company and multiple allowances paid to employees beyond allowable limits. The report further indicated that 90 employees were appointed in an acting capacity for extended periods, some exceeding five years, without the requisite approvals. Such queries raise concerns about the overall governance of state corporations and effectiveness of internal controls. Without stronger oversight and accountability, these weaknesses could continue to undermine the efficiency and financial sustainability of these entities.
The success of the 2025 privatization plan is far from guaranteed. Several questions remain around transparency and reversibility of the proposed reforms. On the first issue, a major concern is whether the privatization process will be transparent and insulated from vested interests. Past experiences show that this is unlikely.
The second concern around the reversibility of proposed reforms is informed by Kenya’s history of policy reversals, especially when political leadership changes. The question is how to ensure that today’s privatization efforts are not undone by future administrations. A possible solution is through legislative amendments to ensure that privatization is backed by sound legal frameworks that clearly define and limit the government’s role in economic activity. In addition, privatization should be through public listings rather than direct asset sales, for increased transparency and to reduce the likelihood of future nationalization.
Conclusion
For the proposed reforms to be both sustainable and irreversible, Kenya must adopt a rules-based approach to state ownership. This requires the establishment of a clear legal framework that limits government involvement in commercial enterprises, and prescribes principles that would narrowly justify public engagement in business activity. Such principles should include market failure or the protection of essential public goods. A ‘negative list’ explicitly outlining sectors where government participation is prohibited should be entrenched in law to limit state involvement and prevent future governments from arbitrarily creating new state corporations without sound economic justification. Privatization should also be transparent and participatory, with clear mechanisms to minimize opportunities for corruption and political capture. The 2025 Privatization Plan might be a useful start to this process. However, without strong governance safeguards and long-term policy consistency, the reforms risk becoming another short-lived economic experiment.
Photo credits @freepik
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Newly Proposed State Corporation Reforms: A Necessary Fix or another False Start?
| Post date: Wed, Mar 12, 2025 |
| Category: State corporation |
| By: Jackline Kagume, |
The 2025 Cabinet-approved State Corporation Reforms Plan has detailed comprehensive changes in the structure and governance of state-owned enterprises (SOEs) in Kenya. The plan, which involves mergers, dissolutions, restructuring, and declassification of various entities, is framed as a necessary intervention to enhance efficiency and alleviate fiscal pressures. However, beyond the technicalities, it raises significant legal and economic questions about the role of the state in economic activity, public service provision, and the sustainability of privatization efforts.
Privatization and reform of state corporations is not a new idea in Kenya. Historical efforts can be traced back to the Structural Adjustment Programs of the 1980s and 1990s, when multilateral institutions pushed for reduced government involvement in commercial enterprises. The straightforward rationale was that state corporations were inefficient, prone to political interference, and essentially a drain on public resources. Consequently, Kenya privatized several entities, with Safaricom’s public listing in 2008 standing out as a notable success. The move transformed Safaricom into a profitable, globally competitive firm while generating substantial revenue through retained shareholding and taxes. Other privatized entities, such as Kenya Airways have however had mixed outcomes, comprising poor performance aggravated by governance challenges.
The post-2010 period was marked by a stall in privatization efforts, with the government expanding its role in commercial activities. The number of state corporations increased significantly, leading to mounting fiscal pressures as many of these entities became reliant on government bailouts. The Presidential Taskforce established in 2013 recommended reducing the number of parastatals from 262 to 187 to enhance efficiency and reduce the growing financial strain. The Privatization Act, designed to streamline the process has remained largely underutilized over the years, with reports by the Privatization Commission showing that only a handful of entities have been privatized under the Act. More recently, increased fiscal pressures and rising public debt have intensified calls for privatization as a strategy to reduce the government’s financial burden and redirect public funding to critical sectors like healthcare and education.
This peaked in June of 2024, following the public protests against high taxation, poor governance and the rising cost of living. In response, the President announced a series of austerity measures in July 2024, proposing a shift towards fiscal consolidation. This was detailed in the comprehensive Issue of Austerity Measures establishing the basis for restructuring state-owned enterprises. The 2025 Plan issued by Cabinet therefore represents an attempt to operationalize this agenda, but its chances of success are still in question.
The 2025 State Corporations Reform Plan
The 2025 Plan proposes a combination of mergers, dissolutions, and restructuring to streamline the state corporation landscape in Kenya. Forty-three state corporations will be merged into 20 entities, ideally to eliminate redundancy and improve efficiency. Additionally, 25 state corporations will be dissolved, with their functions transferred to the relevant parent ministries to ensure continuity of service delivery. Six corporations will undergo restructuring to enhance their performance and align them with their intended mandates. Lastly, 13 professional bodies and four public funds will be declassified, meaning they will no longer be categorized as state corporations, thereby redefining their governance and funding structures.
The stated objective of these reforms is fiscal sustainability and operational efficiency. In the 2023/24 financial year, government spending on state-owned enterprises amounted to Ksh 478 billion, accounting for 17.7% of the total annual revenue for the year. This expenditure is equivalent to nearly 16 years of funding for Kenya’s Free Primary Education Program. It raises fundamental economic questions regarding whether the government should continue allocating scarce resources to inefficient entities while critical social programs remain underfunded.
In addition to the fiscal concerns, there are public anxieties informed by political economy issues around the governance and operations of these entities. Audit reports by the Office of the Auditor-General have frequently highlighted governance weaknesses in state corporations, including cases of irregular appointments and payments, mismanagement of public funds, and non-compliance with various laws. For instance, the Report of the Auditor General on the Kenya Power and Lighting Company for the year ended 30 June, 2023, queried irregular payment of exit costs to a former managing Director of the Company and multiple allowances paid to employees beyond allowable limits. The report further indicated that 90 employees were appointed in an acting capacity for extended periods, some exceeding five years, without the requisite approvals. Such queries raise concerns about the overall governance of state corporations and effectiveness of internal controls. Without stronger oversight and accountability, these weaknesses could continue to undermine the efficiency and financial sustainability of these entities.
The success of the 2025 privatization plan is far from guaranteed. Several questions remain around transparency and reversibility of the proposed reforms. On the first issue, a major concern is whether the privatization process will be transparent and insulated from vested interests. Past experiences show that this is unlikely.
The second concern around the reversibility of proposed reforms is informed by Kenya’s history of policy reversals, especially when political leadership changes. The question is how to ensure that today’s privatization efforts are not undone by future administrations. A possible solution is through legislative amendments to ensure that privatization is backed by sound legal frameworks that clearly define and limit the government’s role in economic activity. In addition, privatization should be through public listings rather than direct asset sales, for increased transparency and to reduce the likelihood of future nationalization.
Conclusion
For the proposed reforms to be both sustainable and irreversible, Kenya must adopt a rules-based approach to state ownership. This requires the establishment of a clear legal framework that limits government involvement in commercial enterprises, and prescribes principles that would narrowly justify public engagement in business activity. Such principles should include market failure or the protection of essential public goods. A ‘negative list’ explicitly outlining sectors where government participation is prohibited should be entrenched in law to limit state involvement and prevent future governments from arbitrarily creating new state corporations without sound economic justification. Privatization should also be transparent and participatory, with clear mechanisms to minimize opportunities for corruption and political capture. The 2025 Privatization Plan might be a useful start to this process. However, without strong governance safeguards and long-term policy consistency, the reforms risk becoming another short-lived economic experiment.
Photo credits @freepik
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There is a big global debate on tariffs, their effects, and who pays for them, creating misconceptions. The broader trade strategy premised on Tariffs reflects a worldview rooted in 19th-century mercantilism, emphasizing protectionism and an aggressive use of tariffs.[1] The misconception that tariffs aren’t taxes stems from several factors. Framing plays a significant role. Tariffs […]
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