Jaindi Kisero
27 September 2006
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Nairobi — Five years ago, during the Initial Public Offering (IPO) of Mumias Sugar Company, the Government decided that 30 per cent of the shares would be reserved for farmers.
When the offer opened, the farmers responded in a big way, believing that this was an opportunity to diversify their sources of income. If my memory serves me right, the shares were sold at a discounted price of Sh6 a unit.
A few months after the IPO, the share price at the Nairobi Stock Exchange starting falling rapidly. Before long, Mumias shares were selling at Sh3. The farmers were devastated.
The stage was set for an invasion of Western Province by agents of Nairobi-based stock brokerage firms who travelled to Mumias in large numbers to mop up the shares from the unsophisticated investors.
A story is told of how these agents would travel to Mumias Town carrying blank share transfer forms and the cash to pay the farmers. All that a farmer was required to do was to sign on the dotted line and get the cash for what he was made to believe was "worthless" paper.
Mark you, those were the days of share certificates. The electronic accounts - the so-called CDS accounts - came much later.
As it turned out, some of the farmers sold the certificates at prices way below the prevailing market rate. The visitors from Nairobi would time them when they were most vulnerable - like when they needed cash urgently to pay school fees.
Today, registrars estimate that the 30 per cent stake owned by the farmers has over the years dwindled to as low as 5 per cent. The farmers lost out badly because the market price has since moved upwards to beyond Sh50 a share.
The noble idea of reserving a stake of this profitable company to its most important stakeholder, the farmer, was put in cold storage.
Why did the experiment fail? In my view, it happened for three important reasons: Lack of education, lack of education and lack of education.
These people literally threw share certificates at the farmer without as much as making him understand what stock trading is all about. And they took full advantage of the situation.
Which brings me to a suggestion to the Government as it prepares to sell additional shares of Mumias to the public.
We need to go back to the noble of idea of reserving shares to sugarcane farmers in the catchment areas of Mumias Sugar.
All that is required is for the Government to direct its financial advisers for this project to design a solution which will insulate the farmer from the sharks of the Nairobi Stock Exchange.
I claim no authority in this area, but I think that the idea of creating a sugarcane farmers stock ownership vehicle - an employee ownership plan (Esops), which restricts a farmer to selling shares only to another farmer - should be explored.
Trade and Industry minister Mukhisa Kituyi recently suggested that ownership of such shares be vested in an entity owned commonly by farmers such as a co-operative.
But considering the governance problems facing co-operatives in this country, that proposal is clearly not feasible.
A well-designed farmers stock ownership company where participation is closed to farmers would appear to be more appropriate for Mumias.
It should not surprise anyone that while factories operating under the Kenya Tea Development Agency (KTDA) operate smoothly under the ownership of producers, the cooperative system has imposed on the coffee farmer a governance regime best known for disruptive politics and corruption.
Closed stock ownership schemes are superior. And the trend today is to reserve shares for key stakeholders during offers. This explains the growing popularity of Esops in the corporate world. During the KenGen IP0, 5 per cent of the offer was reserved for the company's employees.
Furthermore, it is today considered good corporate governance practice to allow stakeholders of a company to own a stake in its shareholding.
There are several other positive things about reserving shares of Mumias Sugar Company to farmers. First, it allows the farmers to diversify their sources of income.
As a farmer, you don't have to wait until you deliver your cane to earn an income from your labour because Mumias is a profitable company with a good dividend payment record.
Furthermore, it allows farmers to own a liquid asset, something they can use as security to get bank loans.
If the stake by farmers can increase to as high as 30 per cent as originally conceived by the Government, farmers become anchor shareholders and even demand representation on the board of the company.
Which brings me to an emerging trend in the area of investment banking and financial advisory services.
Competition for advisory services in privatisation has become so intense that the Government is getting services for free.
And, when you look at the figures which some companies are quoting in the tenders, the gaps are so wide as to make the whole thing look arbitrary.
In the KenGen case, one consortium of advisers comprising local investors, surprised everybody when they put a zero bid.
The whole episode generated a great deal of controversy with those opposed arguing that it was not legally feasible to have a binding contract where there was no consideration.
The Government accepted the zero bid because it was the lowest.
Last week, the same group won the Mumias job by outbidding everybody after offering top brokerage services for Sh3 million. This money will be shared by three leading investment banking houses and an international audit firm.
The whole scenario begs the following questions: Are these advisory services worth anything at all? Why is the private sector forced to pay much higher for services which the public sector gets for free.
At this rate, Kenya will enter the Guinness Book of Records as the only country in the world in which you can get investment banking advisory services for free.
Mr Kisero is the managing editor, the EastAfrican.
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