The World Bank has called for urgent reforms in Kenya’s state-owned enterprises (SOEs), warning that current subsidies and governance practices distort competition and limit economic growth.
The lender, on Monday, emphasized that while SOEs often receive state support for valid reasons, spillovers into commercial operations can undermine productivity and the private sector.
“SOEs often get state support for good reasons, but when subsidies spill into commercial operations, they distort competition,” the bank report notes, highlighting the need to ring-fence public-interest subsidies so that SOEs compete fairly.
According to the report, Kenya’s policy framework currently gives SOEs significant advantages over private competitors.
These include direct financial transfers and subsidies from the government, insulation from market and profit discipline, and a lack of functional separation between commercial operations and public service obligations.
Between 2019/20 and 2023/24, both recurrent and capital transfers contributed to this competitive imbalance.
Other structural issues compound the problem. “Financial performance targets [for SOEs are] not benchmarked against the private sector, with limited consequences if not achieved,” the report states.
Furthermore, line ministry officials often sit directly on SOE boards, creating conflicts of interest between policy goals and commercial objectives. This situation leaves room for cross-subsidization and weak accountability.
The World Bank report outlines key recommendations to address these challenges.
It calls for enhanced governance, clearer accountability, and stronger linkages between government transfers and SOE performance.
Specifically, it advocates for separating commercial and public service activities, discontinuing transfers to commercial SOEs, and strengthening performance contracting.
In addition, legal and regulatory reforms are recommended for SOE loan guarantees.
“Strengthen legal and regulatory frameworks governing SOE loan guarantees by establishing and enforcing clear eligibility criteria,” the report says.
These reforms, combined with pro-competitive laws, could significantly increase growth and employment opportunities in Kenya.
The report also highlights the broader economic impact of reforms. Procompetitive regulation in critical input sectors, such as electricity, transport, telecommunications, and professional services, could enhance value-added growth in dependent sectors, including health, accommodation, and retail.
This is expected to increase labor compensation growth by up to two percentage points per year, which the report equates to around 400,000 new jobs annually.
Kenya’s gross operating surplus ratios (GOSRs) further reaffirm the need for reform.
The report notes that Kenya’s GOSRs are higher than international benchmarks and continue to grow across most sectors.
High GOSRs, while reflecting company profitability, indicate that excessive market concentration could be limiting competition and the efficiency of resource allocation.
A sound approach to competition, the report argues, requires three key pillars: opening markets through pro-competitive sector regulation, ensuring competitive neutrality to level the playing field, and enforcing effective competition laws.
This includes tackling anti-competitive behavior by firms, reforming government interventions that discriminate against private competitors, and controlling state aid.
“The goal is to minimize collusive outcomes, reduce the cost of competing, and promote a level playing field for all firms,” the report stresses, emphasizing that competition-friendly regulation can unlock higher productivity, stronger GDP growth, and broader economic inclusion.
With Kenya’s average real GDP growth hovering at modest levels, the report highlights that reforming SOEs and pro-competitive regulation could boost annual GDP growth across sectors by up to 1.4 percent, creating better-paid jobs and strengthening overall economic resilience.
As Kenya looks to expand its private sector and accelerate growth, the World Bank’s recommendations provide a roadmap for ensuring SOEs support rather than stifle economic dynamism.
