Treasury's Sh100b gamble in Kenya Pipeline sale as jitters mar process

The government last week set the wheels in motion for the privatisation of Kenya Pipeline Company (KPC), launching what could be the country’s biggest Initial Public Offering (IPO) at the Nairobi Securities Exchange (NSE) in over a decade.

The IPO is also a two-in-one sale, with the Kenya Petroleum Refineries Ltd (KPRL) being part of the sale, which, to some extent, complicates the privatisation process. 

The government intends to raise Sh100 billion by offloading 65 per cent of its shareholding in KPC through the IPO that has a completion deadline of March next year. This is double the Sh50 billion that the government raised in the Safaricom IPO in 2008.

The sale is seen by the Treasury as a vital non-tax revenue source over the 2025-26 financial year. However, if it misses the deadline, it could see the government left with a Sh100 billion hole in the budget that is likely to be met through further borrowing. 

Opinion is also divided, with a section of stakeholders noting this would free up KPC to achieve its potential that has been held back by its public ownership. 

The players backing privatisation say KPC has been held back by constraints that are unique to State-owned entities, including a lax culture within the organisation, knowing it has a fallback plan in the government and political interference that keeps its operating costs unnecessarily high.

Privatising it, they argue, will unlock billions of shillings for pipeline expansion and modernisation through private capital. Another side argues that the privatisation would cede control of a key asset to the private sector, even foreign control.

There is also a feeling that it is ill-timed due to poor market valuation, where blue-chip stocks with assets worth hundreds of billions of shillings are valued at just a few billions, a fate that analysts fear might befall KPC once it starts trading at the market.

The Institute of Economic Affairs (IEA) said that KPC, like many State-owned enterprises, exhibits structural inefficiencies that are seen in soft budget constraints, political interference in decision-making, chronic under-investment and organisational slack. 

The institute notes that these distortions have the effect of increasing unit transport costs, constraining throughput and inflating fuel prices for households and firms, generating economy-wide welfare losses in consumer and producer surplus.

“Under public ownership, KPC’s managers face weak discipline: taxpayers absorb losses, pricing decisions are politicised, and investment priorities reflect electoral cycles rather than net present value,” said Leo Kemboi of IEA in an analysis on privatising KPC.

He added that this has often resulted in actual costs exceeding technologically feasible minimum costs.

While KPC has rarely relied on State bailouts, IEA noted this is an option as it is with other State corporations, and because of it, there is organisational slack. If privatised, however, and without the option of State support as a fallback plan, the company would focus on what would help the entity grow, including cost minimisation, innovation, and long-term investment. 

“Empirical evidence from Kenya’s experience with Safaricom, Kenya Electricity Generating Company (KenGen) and KCB reinforces these predictions, showing that privatisation can deliver productivity gains, capital mobilisation, and innovation spillovers,” said IEA.

“Privatisation generates immediate fiscal receipts, reduces the need for subsidies and broadens the tax base. While private shareholders capture part of the surplus, this surplus is created by efficiency gains that would not exist under public ownership.”

Kiharu MP Ndindi Nyoro last week told Parliament that while he advocated for the government staying out of business, he opposes the sale of KPC currently.

This is on account of several factors, including its strategic nature, where he notes even in developed markets, governments are making investments in private sector firms that produce products that they deem as strategic, such as computer chips.

 Rich asset portfolios

He deems KPC as among the assets that might pass as strategic and that the government might want to hold on to. 

He also opposes the privatisation due to the traits he said are being exhibited by the current crop of investors at NSE.

Ndindi noted that despite certain companies having rich asset portfolios, their shares are priced as penny stocks at NSE and, in turn, their market capitalisation is a fraction of their total asset valuation.

This has been to focus on short-term dividend gains. Such include Kenya Power and Kenya Re.

“I am one of the people who would never vouch for the listing of KPC. The current NSE market has been… going up, but the companies listed are grossly undervalued. This issue of KPC will bring excitement, and Kenyans will buy in the IPO, but after the announcement of the full-year results, the share price will collapse. The current investor at NSE is not buying assets; they are buying revenues,” he said, giving the example of Kenya Power, which has a market cap of about Sh26 billion despite assets of over Sh389 billion as of June 2025.

“It might not be viable for the logical investor… the current investor is not buying net assets, they are buying net revenue. Our market is not doing justice to valuation, and listing a company now might not suffice.” While bringing on board a strategic investor would, in Nyoro’s opinion, be a more viable option, he is wary that certain interests might hijack the process, and KPC would end up in the wrong hands.  “Unfortunately, strategic investors cannot work in Kenya where we have a deficit in trust in government,” he said.

  He also noted that the experience in the past has been that while the government has relinquished some of its shareholding, it retained control on the board, appointing all directors. “The government cannot own 35 per cent of the asset and control 100 per cent of the board; the other 65 per cent should be given board positions,” said Nyoro.

 Ken Gichinga, chief economist at Mentoria Economics, said entities such as KPC are strategic and should remain in government hands.

Public enterprise

He noted that KPC is already profitable and relatively efficient, which are the two major areas of transformation the government would be seeking when privatising a public enterprise. “Privatisation typically works well for industries that provide private goods while governments focus on industries that provide public goods,” Gichinga told Financial Standard in a recent interview. 

“In the case of KPC, it offers a public good in the universe of large-scale infrastructure. Given that it provides a public good, especially from an energy security perspective. When you take public goods and privatise them, you also raise the issue of cost. Profits become key because the private sector is driven by profit margins. 

“KPC is profitable and quite efficient as it is. It remains puzzling as to why the government would want to privatise it. I do not think everybody is convinced… what are the goals that the government is trying to meet in privatising it? One struggles to understand the objectives that the government is pursuing.”

Gichinga added that even in developed markets, governments still retained ownership of critical areas such as energy infrastructure, as they are important aspects of sovereignty.  “Countries that are sovereign are independent in four areas: monetary, military, energy and food independence. They tend to protest these the most, even when they are relinquishing other areas to the private sector,” he said.

Gichinga also noted that while there was a need to make NSE vibrant, there are other options for Kenya to privatise. 

“There are far better other areas that can be relinquished to the private sector. There are hotels and conference centres, which are private goods that could also be better offered by the private sector,” he said.

Parliament has okayed the move to sell KPC following a joint report by the Departmental Committee on Energy and the Select Committee on Public Debt and Privatisation, which recommended privatisation.

Different players, including the Capital Markets Authority, NSE and investment analysts, made presentations to the Committees, all backing the privatisation of KPC.  “The NSE and market ecosystem are prepared to deliver a successful, oversubscribed IPO and a healthy post-listing market,” said NSE 

“Kenya’s equities market demonstrates sufficient liquidity, depth and stability to support the successful listing of KPC,” said CMA.“Key performance indicators include rising turnover, improved liquidity ratios, growth in asset under management, strong foreign investor participation and a stable macro-economic environment. These factors create an enabling platform for large, high-profile IPO, with robust local and foreign demand positioning the market to absorb significant new equity issuance while maintaining overall stability.” 

The lone dissenting voice in the Committee’s report is that of the Kenya Petroleum Oil Workers Union (Kpowu). Other than worrying about their jobs post-IPO, the workers were also concerned that Kenya could possibly cede its energy sovereignty to foreigners.

Other concerns raised by the workers include the high cost of petroleum products 

The union submitted that “privatising KPC risks undermining Kenya’s energy sovereignty by ceding control of this vital infrastructure to profit-driven or potentially foreign interests”.

Foreign investors

KPC is also the primary transporter for petroleum products to landlocked countries, including Uganda and Rwanda, and ceding control to foreign investors raises both national and regional energy security concerns.

“If KPC’s storage and transportation facilities are privatised, there is a risk that charges may increase significantly. Such changes could lead to higher fuel costs, which could impact product expenses and the overall cost of living,” the uUnion told the MPs, also noting that “privatisation often results in job cuts, outsourcing and reduced benefits.”

Kpowu also raised concerns about the level of public participation that went into informing the decision to privatise KPC. 

And while the Committees in their report recommended privatisation, they raised concerns about some of KPC’s liabilities, including pending lawsuits amounting to Sh5.75 billion, as well as the unresolved claim worth Sh3.8 billion by residents of Makueni County over past oil spills. 

It also noted that there is potential for loss of Sh192.6 million that KPC had invested in prepping to start construction of an LPG facility at KPRL, with the project having been taken over by Asharami Energy. 

MPs also doubt the timelines. The government expects to complete the sale within six months ending March 2026.  “While technically feasible within 12 months, experience indicates that IPOs of this magnitude can take up to three years to conclude. Failure to factor in timing risks may undermine the fiscal policy objectives,” said the MPs in the joint report.

“There is therefore a need for a clear mitigation strategy to address potential delays and to make provisions for any shortfall in the projected revenues.”

The Committees also asked for clarity about the fate of asset-rich KPRL that was acquired by KPC after the IPO. In October 2023, KPC acquired 100 per cent of KPRL, which had ceased operations in September 2012. KPC had been leasing the facility since March 217.

The acquisition, according to the Energy and Petroleum Ministry, was aimed at expanding KPC’s business operations by utilising idle assets.

This is especially the huge storage capacity at KPRL that has been idle since it stopped refining operations. 

“In the engagement with Treasury and the Energy and Petroleum Ministry, it is indicated that KPRL will be included in the KPC privatisation package, and as such, two government entities will be privatised at the same time. As such, this consideration should influence the valuation of the transaction and the percentage of equity to be offered. A clear statement should be included in the prospectus on how this subsidiary arrangement has been financially evaluated and factored,” said the Committee in the report.

MPs also doubt the timelines. The government expects to complete the sale within six months ending March 2026. 

“While technically feasible within 12 months, experience indicates that IPOs of this magnitude can take up to three years to conclude. Failure to factor in timing risks may undermine the fiscal policy objectives,” said the MPs in the joint report.

“There is therefore a need for a clear mitigation strategy to address potential delays and to make provisions for any shortfall in the projected revenues.”