DELIBERATE LOOPHOLES Transparency Lessons from the Privatisation of Telkom and Safaricom TheThe privatization privatization of bothof both Telkom Telkom Kenya Kenya Ltd Ltdand and SafaricomSafaricom Ltd Ltd raises raises troubling troubling probity probity issues issues that that willwill inevitably inevitably impact impact on onpublic public confidence confidence in in upcomingupcoming IPOs. IPOs. AcknowledgementsAcknowledgements AfriCOGAfriCOG thanks thanks the the Department Department for forInternational International Development Development (DFID)(DFID) and and the the Open Open Society Society Initiative Initiative for forEast East Africa Africa (OSIEA) (OSIEA) for fortheir their support support of its of work.its work. However, However, the the opinions opinions contained contained in thisin this report report are are those those of AfriCOG. of AfriCOG. AfriCOGAfriCOG is also is also grateful grateful to its to Boardits Board of Directors: of Directors: Stella Stella Chege, Chege, JohnJohn Githongo, Githongo, Maina Maina Kiai, Kiai, Duncan Duncan Okello, Okello, Funmi Funmi Olonisakin Olonisakin andand Gladwell Gladwell Otieno Otieno (ex (exofficio); officio); and andthe the members members of its of itsteam: team: JamesJames Wamugo, Wamugo, Charles Charles Wanguhu, Wanguhu, Anushka Anushka Sehmi, Sehmi, SylviaSylvia Maina, Maina, Prudence Prudence Khamati, Khamati, Maureen Maureen Kariuki, Kariuki, Mike Mike Orwa, Orwa, RosemaryRosemary Tollo, Tollo, Carole Carole Theuri, Theuri, Yvonne Yvonne Owino, Owino, David David Nyende, Nyende, NoreenNoreen Wahome, Wahome, Consolata Consolata Wangechi Wangechi and and Robert Robert Nizigama, Nizigama, for fortheir their dedication. dedication. AfricaAfrica Centre Centre for forOpen Open Governance Governance P. O.P. Box O. Box 18157-00100, 18157-00100, Nairobi, Nairobi, Kenya. Kenya. Telephone:Telephone: +254 +254 20-4443707 20-4443707 / 0737463166 / 0737463166 Email:Email: [email protected] [email protected] WEBSITE:WEBSITE: www.africog.org www.africog.org DELIBERATE LOOPHOLES Transparency Lessons from the Privatisation of Telkom and Safaricom AFRICA CENTRE FOR OPEN GOVERNANCE (AfriCOG) i CONTENTS ABBREVIATIONS v FOREWORD vii EXECUTIVE SUMMARY ix 1. Selling off telecoms 1 Historical background 1 A sector in transition 1 Haphazard restructuring 1 2. Legal framework for privatisation 3 3. The Telkom privatisation 5 Background 5 How Telkom Kenya was privatised 6 Hasty conclusion to Telkom Kenya’s privatisation 6 Change of policy mid-stream 6 Procedural and constitutional misconduct 7 Value for money? 7 Similarities to Mobitelea? 8 4. The Safaricom privatisation 9 Convoluted transfer 9 Mystery investor 9 Public controversy on Mobitelea 10 Heavily oversubscribed IPO 10 Regulatory lapse 11 Vodafone’s evidence 11 Safaricom’s evidence 11 Disclaimer Telkom Kenya’s evidence 12 The government’s evidence 12 All attempts have been made to verify information provided in this publication and to ensure the validity and factual accuracy of all assertions in this report. However, in the event that some information may have been superceded by events AfriCOG welcomes Contradictions in evidence 13 feedback to enable updates of future editions of this publication. ii DELIBERATE LOOPHOLES Transparency Lessons from the Privatisation of Telkom and Safaricom iii ABBREVIATIONS AND ACRONYMS 5. Analysis of the key issues AfriCOG Africa Centre for Open Governance Telkom-Mobitelea-Safaricom saga 14 AG Attorney General AGM Annual General Meeting Emerging evidence on Mobitelea 14 ASIC Australian Securities and Investment Commissions Evidence gathered by the PIC 14 CAG Controller and Auditor- General Financing politics? 14 CBN Central Bank of Nigeria CCK Communications Commission of Kenya Irregularity and impunity? 15 CDMA Code Division Multiple Access Why was Vodafone’s portion of the licence fee CMA Capital Markets Authority treated as a loan? 15 IEA Institute of Economic Affairs Key PIC comments on the Telkom-Safaricom IFC International Finance Corporation privatisation 16 IPO Initial Public Offer KACC Kenya Anti-Corruption Commission Telkom/Safaricom: beyond scrutiny? 16 KANU Kenya African National Union Truth-in-lending reforms? 16 KCC Kenya Co-operative Creameries KENAO Kenya National Audit Office Were investors deceived? 17 KENEXTEL Kenya External Telecommunications Divestiture objectives contradicted 18 KENGEN Kenya Electricity Generating Company Limited More questions than answers 18 KMC Kenya Meat Commission KP&TC Kenya Post and Telecommunications Conspiracy to defraud 18 KRA Kenya Revenue Authority 6. Lessons from the Telkom/Safaricom privatisation 19 KWAL Kenya Wine Agencies Limited 7. Key recommendations 21 KYC Know Your Customer NASD National Association of Securities Dealers Appendix 1 24 NBK National Bank of Kenya Appendix 2 25 NSE Nairobi Stock Exchange NYSE New York Stock Exchange PAC Public Accounts Committee PIC Public Investments Committee PIM Preliminary Information Memorandum PPP Public Private Partnership SFO Serious Fraud Office SGM Special General Meeting SNO Second National Operator SOE State-Owned Enterprise VKL Vodafone Kenya Limited iv DELIBERATE LOOPHOLES Transparency Lessons from the Privatisation of Telkom and Safaricom v FOREWORD n this report, AfriCOG documents the Given the market dominance of the entities privatisation/divestiture of Telkom and involved and the endemic corruption that ISafaricom. “Deliberate Loopholes” describes plagues Kenya, it is perhaps inevitable that some of the lapses that occurred in the privatisation many of these exercises have been shrouded in of Telkom Kenya and Safaricom: the title refers political controversy. From experience, large scale to the deliberate evasions and subterfuges that privatisation is a process that can be particularly created a fertile climate for asset stripping and prone to political corruption, or the theft of public corruption by senior officials whose identity resources to fund elections. Since 2012 portends continues to remain shrouded behind the veil of a particularly hard-fought and conflictual election, secrecy provided by international tax havens and heightened scrutiny against possible abuse of off-shore financial centres. The preliminary findings privatisation of state-owned enterprises with the of this study were presented to Parliament’s Public aim of financing politics would be prudent. Accounts Committee (PAC), which took the matter to the floor of the House. The probity issues arising from the privatisation of Telkom Kenya and Safaricom will certainly AfriCOG’s interest in this area stems from its impact on public confidence in upcoming Initial mandate to build and entrench an anti-corruption Public Offers (IPOs); the process brought to light culture through informed and determined public the unknown risks that investors were exposed action, both in the public and private sectors. to due to the lack of background knowledge Effective privatisation requires a robust regulatory and irregularities in the exercise. Telkom Kenya’s environment. Regulators need to be independent privatisation remains clouded by dissension in delivering on their mandate and achieving and lack of access to information. Following the outcomes that protect the public interest and conclusion of the deal, there was further dispute advance Kenya’s development. However, these between France Telecom and the government of bodies face the constant reality or threat of capture Kenya. by special interests. AfriCOG acknowledges the contribution of the Kenya is currently engaged in an extensive series Civil Society Task Force on Grand Corruption to the of privatisation exercises, with around 23 major origins of this work (see appendices). We also thank public enterprises slated for or engaged in some our dedicated team and Board members for their sort of privatisation. The unanswered questions commitment. surrounding the sale of the Laico Grand Regency Hotel are still fresh in the public’s memory. By We hope this report will contribute to strengthening providing objective information on the privatisation public vigilance over this important area of politics of Telkom Kenya and Safaricom, AfriCOG aims and the economy so that the fruits of privatisation to promote public knowledge and vigilance on are employed towards improving the welfare of other public divestment ventures. Furthermore, ordinary Kenyans, rather than risking fattening the the general public has a huge stake in privatisation bank accounts of a few greedy and unaccountable considering the significant investments that individuals. citizens have made in building these institutions in the first place and the gains that ordinary investors hope to make from their divestiture. Gladwell Otieno Executive Director vi DELIBERATE LOOPHOLES Transparency Lessons from the Privatisation of Telkom and Safaricom vii EXECUTIVE SUMMARY INTRODUCTION SUMMARY OF KEY FINDINGS he Kenya Government is preparing to sell its Key Probity Concerns stake, partial or total, in over 26 corporations Briefly, the privatisation of both Telkom Kenya Ltd by inviting strategic partners (Public-Private T and Safaricom Ltd raises troubling probity issues Partnerships) or by offering shares on the Nairobi that will inevitably impact on public confidence in Stock Exchange (Privatisation). The State-Owned upcoming IPOs:- Enterprises (SOEs) targeted for divestiture include: 1. They occurred outside the Privatisation Act, • Consolidated Bank which was passed, and received presidential • Development Bank assent, in 2005.