Institute for Development Studies, University of Nairobi

Improved parastatal performance is increasingly crucial to the Kenyan economy because of its macro-economic effects and because of the key sectors controlled by parastatals. There is a consensus that the sector has performed poorly in Kenya, especially in terms of profitability and efficiency. In the literature review it is shown that no author has articulated a positive theory of how public firms respond to their environments. This lack of a theory of the firm has weakened policy analysis in Kenya and elsewhere. It is proposed that each firm should be thought of as a coalition between consumers, input suppliers, management and stock holders. The coalition together produces a surplus, with coalition members competing for shares thereof. The performance of a parastatal can thus be characterized by the way this surplus is allocated. A central assumption of this model is that management will behave strategically to appropriate its share of the surplus, rather than passively obeying the wishes of the stockholders. Analysis of a firm's performance then turns into an examination of the mechanisms by which a coalition member can increase its share in the surplus. Policy prescriptions revolve around strengthening or weakening those mechanisms, taking into account the likely responses of other actors in the coalition. There is sufficient richness of experience in the parastatal sector in Kenya that it should be possible, through a careful comparative study, to demonstrate the effectiveness or lack thereof, of various types of controls which have been proposed.