Investors in East Africa are keen on a fresh opportunity to invest millions of dollars in the privatisation of some of Kenya’s finest hotels in the coming months, as the country seeks to reduce its ballooning domestic debt.

Kenya plans to sell its stake in 11 hotels, among them the Intercontinental and Hilton Hotels — some of Kenya’s most profitable hotels and part of Nairobi’s architectural landmarks — through strategic partnerships or share issues.

The plan is also hoped to help the country spruce up its tourism sector, one of its leading hard currency earner.

Most of the government hotels managed by the Kenya Tourist Development Corporation (KTDC) have been run down over the years and continue to struggle financially, prompting the government to restructure them through sale to investors. 

KTDC is a government-sponsored development fund that finances construction of hospitality facilities on concessionary terms and holds varying stakes in the hotels on behalf of the state.

News of impending sale of the hotels is said to have excited the market and enquiries from major hospitality management companies and private investors keen to cash in on Kenya’s attractiveness as a major tour destination.

Foreign and domestic investors have deepened their presence in the hospitality industry with the construction of several hotels.

A number of lodges have also been built in the parks and national reserves.

The sale is part of a larger privatisation plan that will affect at least 26 enterprises the government is seeking to divest in an Ksh8 billion ($102.7 million) round.

The proposal to dispose of the ownership to investors was approved by Cabinet last year. The government is now said to be finalising the plans.

Though Kenya said last year that it would in future not rely on privatisation of parastatals as a source of funding as this had proven unreliable, such proceeds should help reduce domestic debt, which has ballooned in the past few months.

Last year, Treasury had factored in Ksh6.6 billion ($82.5 million) from privatisation proceeds to fund the budget but the divestiture plan failed to bear fruit leaving the Government with a huge budget deficit.

According to Central Bank statistics, Kenya’s domestic debt stood at Ksh672 billion ($8.29 billion) last week. 

The Treasury raised its domestic borrowing target for the 2010/11 fiscal year to Ksh120 billion ($1.48 billion).

A Cabinet memo seen by The EastAfrican and drawn by the Ministries of Finance and Tourism details how the government plans to carry out the sale, which could cost at least Ksh6 billion ($7.5 million).

The government embarked on the task in 2008 by inviting tenders for advisory services to help privatise the hotels.

In 2009, the Privatisation Commission picked the transaction team including Dyer & Blair Investment Bank, audit and tax consulting company PKF and law firm Hamilton, Harrison and Mathews.

In the divestiture plan, hotels up for grab include Ark Ltd (5.6 per cent), Golf Hotel (80 per cent), International Hotels — which owns Hilton Hotel — (40.5 per cent), Kabarnet Hotel (98.2 per cent), Kenya Hotels Properties (33.8 percent), Mountain Lodge (39.1 percent) Mt. Elgon Lodge (39.1 percent), and Sunset Hotel (95.4 percent) will be up for grabs.

The government stake in hotels with existing brands and are in good condition — such as Hilton and Intercontinental, Mountain Lodge Ltd (TPS Serena) and Ark Ltd (Fairmont Hotel and Resorts) — will be prioritised for existing shareholders through pre-emptive rights.

“This could also be done through competitive bids if the existing shareholders waive their pre-emptive rights or are unwilling to buy the shares at the minimum price acceptable to KTDC if that price is lower or equal to the valuation by the company’s auditors,” says the Cabinet memo.

“It would be easier to attract a strategic partner with an internationally recognised brand for the hotels currently managed by KTDC subsidiaries once the hotels are separated from the ones currently managed by international brands,” it says.

Privatisation Commission chief executive Solomon Kitungu said he expects the sale to go through before the end of the year.

“We are in the process of building consensus on the sale. This is not easy as you have to reach agreements with existing shareholders,” Mr Kitungu said.

“Most of the companies are ready for this restructuring and I don’t see why this should not go through in 2011, “ he added.

The Kenya Revenue Authority is expected to write off interests and penalties on taxes owed while local authorities will do the same on unpaid rates and land rents.

The hotels owe the government at least $10 million in loans and taxes due.

Past attempts to end KTDC ownership of the hotels have failed amid claims of irregularities and underhand dealings.

The government settled for this method of sale as it would reduce political interference once the facilities are put under the control of a strategic partner.

But the Government foresees pitfalls in the sale of some of the hotels, a situation that could scuttle the privatisation plan.

“Transfer of shares may be opposed if seen to be solely meant to defeat the provisions of the preemption rights delaying the privatisation process,” the Cabinet paper says.

“This option assumes investors would be interested in the whole basket rather than an opportunity to choose and pick the juicy investments which may not be the case.”  

According to the memo, officials settled for the formation of a new tourism investment company to which the KTDC’s shareholding in the financially viable hotels would be pooled together for sale.

This option would affect Kenya Safari Lodges and Hotels, Sunset Hotel and Kakamega Golf Hotel.

“51 per cent of the shareholding of the investment company would be offered for sale to a strategic partner, with the ability to brand the hotels provide professional management and inject funds required to rehabilitate the hotels,” says the Cabinet memo.

“Sale of the remaining KTDC shares through an IPO should meet the government objective of broadening in the economy.” 

For the hotels which have been identified as financially unviable — Kabarnet Hotel and Mount Elgon Lodge — the government favoured a turnaround plan that would also put the facilities under performance contract.

The successful strategic partner in the investment company would be required as a condition of the purchase of the 21 per cent stake, to sign a management contract with KTDC to brand, manage and market the two hotels.

KTDC is to provide funds to rehabilitate the two hotels from the privatisation proceeds.

The commission, which is charged with the sale of public assets, has also set in motion the sale of government’s shares in National Bank, Kenya’s 10th biggest bank by assets and the Kenya Wines Agencies Ltd.

The government holds a 22.5 per cent stake in the National Bank and a further 48.06 per cent through the state-owned National Social Security Fund.

Indebtedness controversy

Efforts to put about five sugar factories in the market for sale, however, have dragged on for years now, owing to controversy over heavy indebtedness.

The millers owe creditors billions of shillings and it now appears that only an executive decision on how to handle the debts, backed by a parliamentary approval, can put the process back on track.

The plan is for the five state-owned sugar companies — Nzoia, Chemilil, Muhoroni, Miwani and Sony Sugar — to sell 51 per cent of their shareholding, with another 30 per cent going to farmers, as the first step on the road to modernising the country’s sugar sector, after a number of false starts over the past 10 years.

Initially, the process was to be completed in 2007, but four years down the line, the country is yet to get the strategic investors to take up the 51 per cent.

Already, due diligence, restructuring and modalities of selling some of the parastatals which are slated for divestiture have been completed.

These are Consolidated Bank Ltd, Kenya, Ports Authority, Kenya Pipeline Company Ltd and the giant milk processor New Kenya Co-operative Creameries Ltd.

Consultancy work on Kenya Electricity Generating Company (KenGen) is slated for completion by the end of next month.

Detailed proposals for the sale of Kenya Meat Commission, East African Portland Cement Company Ltd, Numerical Machining Complex , Isolated Power Stations and the five ailing sugar millers have also received a go-ahead from the Cabinet.