Will sale seal Kenya Pipeline leaks, pay dividends?

Plans to privatise Kenya Pipeline is being seen as strategic move to strengthen the company and seal gaps that have seen its dealings flagged by the auditor general in recent years.

This is part of President William Ruto's push to sale at least 35 state companies as part of a fundraising effort to bridge the growing public debt, currently rallying towards the Sh11 trillion mark, after hitting Sh10.6 trillion in September.

It comes on the back of conditions from the IMF and World Bank which have since 2021 piled pressure on Kenya if it was to access loans.

These include offloading of bailout- dependent State Owned Entities and merging those with duplicate roles to cut on spending and reduce fiscal deficit.

Overall, the government plans to privatise up to 350 state firms, which will include both profitable and strategic agencies, and loss making corporations that have over the years remained on the exchequer bailout.

The move was in early December stopped by the court, but President Ruto is determined to drive through the plan, noting that the entities impose significant financial burden on the national budget.

Kenya Pipeline Company is among few entities that pay dividends to the government, alongside the likes of Safaricom, KCB and KenGen.

In December 2020, it paid a Sh2.7 billion dividend to the government as its revenues for the financial year 2018/19 grew by 13.7 per cent to Sh31.5 billion, from Sh27.7 billion the previous year.

Total revenues would then drop to Sh26 billion before picking to Sh27.9 billion in 2021, when profit after tax closed at Sh1.6 billion.

With a total asset value of Sh142 billion as of June 2021, before the acquisition of the Kenya Petroleum Refineries Limited and completion of key projects, privatisation of the company, among other state agencies, is seen as a major step towards increasing their productivity and earning the government more.

“It is a double edged sword, could go either way depending on the manner in which the privatisation is carried out and the corporate governance structures put in place thereafter. For loss making entities, privatisation may just be that shot in the arm they require to spring back to profitability,” independent economist, Clifford Otieno, told the Star.

But again this depends largely on the turnaround strategies that would be put in place, he noted.

“On the other side, privatising key strategic entities without putting in place measures to curb monopolistic tendencies might be bad for business in the sectors that rely heavily on the strategic entities,” said Otieno.

Data analyst and financial expert Mihr Thakar has termed privatisation as a good method to reduce the potential for future losses, where the efficiency of government is low and corruption is high.

“It is therefore cheaper to privatise while an entity has the capability of attracting a market capitalisation linked to a positive Net Asset Value, than to bail out an entity that is insolvent in the future,” Thakar said, referring to the general privatisation plan.

Independent dealers have backed the privatisation saying it will improve efficiency.

"Privately run entities perform better than most government run agencies so we expect better services. However for the pride of owning a national asset, that will be gone," Kenya Independent Petroleum Distributors Association (Kipeda) Chairman, Joseph Karanja, told the Star.

The independent dealers have traditionally depended on major Oil Marketing Companies to import products, after which they buy in wholesale for their small outlets across the country.

There are more than 1,200 licensed independent dealers countrywide accounting for about 45 per cent of products sold in the entire market.

The Petroleum Outlets Association of Kenya (POAK) is however concerned over handing over full ownership of KPC to a private entity.

"It has its pros and cons, the pros is that private capital and management might make KPC even more efficient and versatile," POAK national coordinator, John Njogu, said.

"We are however weary of having a strategic asset like the pipeline and petroleum distribution network at the the midstream being in the hands of private players 100 per cent."

According to Njogu, the government should consider a KenGen model where it retains majority stocks, but allow the private sector to come in as well.

While KPC has remained profitable over years, there have been concerns of revenue leakages and insider dealings that have in the past seen loss of product.

In its latest report on Kenya Pipeline’s financials for the year ended June 2021, the Auditor General flagged up to nine key issues as it gave a qualified opinion, meaning the financial statements contained material misstatements or omissions.

Among them were unvalued property, plant and equipment where the financial statement had given a net value of Sh97.2 billion.

However, several assets comprising freehold land, buildings, fibre optic cable and motor vehicles with a book value of Sh7.4 billion could not be confirmed.

There were also unsupported trade receivables running into billions, unsupported staff loans and advances which could not be explained and long and outstanding and unsupported prepayments.

The Auditor General has also questioned bank and cash balances of Sh2.5 billion which were held in 14 local banks in both local and foreign currency and cash, as at June 2021.

Review of the bank reconciliation statements revealed a receipt in the bank statement not in the cashbook in respect of NCBA balance of Sh12.7 million which had been outstanding since 2018/19 financial year.

Further, the bank reconciliation statement for Cooperative Bank account reflected uncleared items amounting to Sh1.4 million comprising of a receipt of Sh2.3 million and a payment of Sh978, 082 dated November 23, 2020, which were never recorded in the cashbook.

“No explanation was provided for long delays in recording the transactions. In the circumstance, the accuracy and completeness of bank and cash balances of Sh2, 462, 154, 764 could not be confirmed,” OAG said.

Kenya Pipeline’s board is also said to have waived penalties for products that had overstayed in its storage facilities, in favour of four Oil Marketing Companies without approval from Treasury.

This was despite the OMCs being billed and invoiced with revenues being recognised in the company’s books.

Penalties amounting to Sh495.9 million were waived by the board in a meeting held on May 18, 2021.

There have also been issues of un-procedural procurement of consultancy services, security services, un-procedural recruitment and promotion and unexplained expenditure, amid other gaps.

Privatisation is expected to streamline operations at Kenya Pipeline, with possibilities of an Initial Public Offer similar to Safaricom’s 25 per cent stake in 2008.

KPC, which is responsible for the storage and transportation of petroleum products, runs a 1,795-kilometre pipeline between Mombasa-Nairobi-Nakuru-Kisumu and Eldoret, with capacity to handle about 14 billion litres of petroleum products.

It has partnered with the private sector in fuel product handling, including giving Africa Gas and Oil (AGOL) a dedicated pump and pipeline facility at its Changamwe pump station (PS1).

Billionaire Mohammed Jaffer, who is also the founder of Proto Energy Limited under which Pro Gas is sold, a sector that few private companies have dominated, owns AGOL.

Sixty percent of what is handled by KPA is sold in the local market while the remaining 40 per cent goes into the transit markets mainly Uganda, DRC and South Sudan.

It has eight major depots and pump stations, operates the new Sh40 billion Kipevu Oil Terminal in Mombasa and the Kisumu Oil Jetty. KPC also owns the Morendat Institute of Oil and Gas.

Privatisation of the company is expected to expedite the company’s ambitious plans of expanding into the region, with LPG and Liquefied Natural Gas (LNG) on its cards, after venturing into fibre optic business as part of business diversification.

“In the next 50 years, 2075 and beyond, we will have diversified this business in the region and the continent,” Sang said.