A Comparison of the financial performance of State-owned enterprises (SOEs) and privatized enterprises in Kenya

Abstract

In response to the financial burdens and budgetary constraints caused by SOEs in many developing countries, the World Bank and the International Monetary Fundadvocated privatization as a panacea to these economic problems. In 1991, Kenya embarked on a comprehensive program to privatize 207 SOEs and by 1996, 141 had been privatized. However, the process has slowed down as the new NARC government maintains that it will take time to restructure the SOEs before privatizing them. The main objective of this study was to determine whether privatised enterprises perform better than public enterprises during the same period of time. The profitability of the enterprises privatized by 1996 through public flotation of shares was compared with that of SOEsduring the period 1996-2001 both years inclusive. The rate of change in return on equity and return on assets over the six year period for both groups were also compared, The differences in the meanswere tested for significance using the t-test. The findings of this study indicate that the return on equity of the Privatized Enterprises is significantly higher by more than 80% that of SOEs. There is a decline in the profitability of both the SOEsand the Privatized Enterprises over the six year period. The return on equity of SOEsdecreasesat an average rate of 181.17% compared to the average rate of change in Privatized Enterprises of 11.77%, which is more than ten times. However, the difference is not significant. The study concludes that the Privatized Enterprises have a significantly higher return on shareholders' wealth than the SOEsover the six year period. Although the rate of change in the return on equity for both groups is not significantly different, the shareholders' wealth of Privatized Enterprises is more stable than that of SOEs over the six year period. Therefore, the study supports privatization and recommends that the Kenyan government should pursue the process while creating the necessary conditions for privatisation to achieve the expected economic development and growth.