Co-op Bank plans IPO despite objections

In spite of consumer inflation driven by rising oil and food prices, the Co-operative Bank will go ahead with its initial public offering (IPO) at the Nairobi Stock Exchange.

There are fears that the IPO will be undersubscribed. Investor disappointment caused by the near-fiasco of the Safaricom IPO earlier this year is still fresh, and could dampen demand for Co-op Bank shares.

The IPO’s lead sponsoring broker has warned against the venture at a time of worldwide economic uncertainty and inflation. Mr James Wanguyu of Standard Investment Bank was quoted last week as calling for the IPO to be postponed till next year. However, Mr Wanguyu has since changed his mind to support the IPO.

Acting Minister for Finance, John Michuki, has also dismissed calls for a postponement of the Co-op Bank IPO.

The Co-operative Bank of Kenya, Kenya’s fourth largest, hopes to raise Kshs10 billion (US$136,900,000). According to a press statement, the money will finance the bank’s mortgage products, information and communication technology infrastructure and expansion of the branch network.

Back in 2006 the KenGen IPO made history by attracting the largest number of individual investors ever seen in the history of the Nairobi Stock Exchange. Economic fundamentals were different back then, with 6% economic growth, a stable political environment, a boom in consumer spending and billions of shillings in remittances from the diaspora.

Today, consumers are hit by inflation rates of close to 30% due to rising prices for fuel, electricity and food. Post election violence after the December 2007 polls has greatly reduced confidence in the economy whose growth rate this year is expected to fall below 4% at best.

Hundreds of thousands of families, which had invested in previous IPOs, were rendered destitute in the violence as farms and property were looted. Political infighting within the ruling elite hasn’t done much to restore investor confidence in the Kenyan economy.

Gloomy economic forecasts have resulted in job cuts among Kenyan industries. Companies are complaining of reduced consumer demand coupled with higher energy prices. Cuts in electricity and water supplies have added to a worsening of the country’s economic situation.

Economic uncertainties, mostly in the United States, have greatly affected the flow of remittances by Kenyans living overseas. Quite a number of them have already lost their jobs. Unlike previous share offerings, Co-op Bank’s IPO is unlikely to attract much interest from the diaspora.

The fiasco that was the Safaricom IPO tarnished the reputation of the Nairobi Stock Exchange. Apparently, planners at the stock exchange, Capital Markets Authority and the Central Depository had greatly under-estimated the logistics of having so many shares introduced at once. Safaricom shares, by themselves, currently constitute almost a third of all shares at the Nairobi Stock Exchange.

To start with, few people got the actual shares they had applied for. Many ended up with so little that their allocations became meaningless as far as investment is concerned. Cash refunds took too long to process; in some cases individual investors waited months to get back their money. There were allegations that brokers were trading with the cash, hence delays with the refund cheques. It was further claimed that the Central Bank of Kenya issued instructions that refund money be released slowly in order to prevent a crash of the Kenyan currency.

And because of the huge number of Safaricom shares, the share price did not shoot up as expected. Indeed, Safaricom shares are currently trading more or less around the IPO price of Kshs5 (US$0.068) a share. The result has been tangible disillusionment among the mass of retail investors.

Co-op bank hopes that its improved performance after a loss-making streak will attract ordinary Kenyans. Furthermore, Co-op is placing huge bets on an enthusiastic response from the co-operative society sector, which is the bank’s core business. Co-op says it has put in place an automated IPO processing infrastructure that will enable it make refunds within a short time.

Co-operative Bank made a profit of Kshs1.7 billion (US$23 million) for the last financial year ending 30th June 2008 and has a target of Shs3.3 billion ($45 million) for the current year.

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Near collapse for 100 year old railway

A railway line between Kenya and Uganda, built by British colonialists a century ago, faces closure thanks to mismanagement, corruption and civil war since independence.

Steam engine on the Kenya - Uganda Railway during the colonial era. Picture by www.internationalsteam.co.uk

Steam engine on the Kenya - Uganda Railway during the colonial era. Picture by http://www.internationalsteam.co.uk

In spite of a burgeoning population in the East African region, and expansion in trade, the Kenya – Uganda Railway is carrying less cargo and passengers today than was the case in 1960 when independence washed across Africa. Hundreds of kilometres of line have been ravaged by vandals after they saw the railway lying idle for decades. Locomotives have been described as, “museum pieces.” The same wagons left behind by the British are still in use today.

Where passenger trains do operate, the schedules are as rickety as the trains. Twenty years ago, the Mombasa to Kisumu line had eight passenger trains a night, with reliable timetables. Today, the passenger service has been cut to two passenger trains a night, if at all. Often, trains break down in the middle of the African bush. A journey that would have taken 10 hours in the 1980s can easily take 24 hours today. Passengers have to travel in darkness as the lighting system broke down long ago. Toilets have been converted into “passenger cabins.”

Regional industries long gave up on trains, in spite of the fact that road transport is very expensive. Delays, pilferage and damages to goods in transit was simply not worth the savings. By July this year, the railway was handling only 7% of regional cargo, a figure described by its management as, “the most that our capacity can handle.” Consequently, the highway between Mombasa and Uganda resembles a convoy as thousands of trucks ferry containers in every direction. The rate of road accidents increased dramatically as overloaded roads simply crumbled under pressure.

With this sorry state of affairs, the governments of Kenya and Uganda implemented a concession plan backed by the World Bank. Under the plan, a private railway operator would run the railway exclusively for 25 years. In exchange, the Kenya and Uganda governments would get annual concession fees. On the surface, it was a good plan because both governments had neither the funds nor the political will to rehabilitate the railway.

However, the plan was doomed to fail. Selection of the private operator – the concessionaire – ran into difficulties as influential forces sought to muscle their way into the potentially lucrative railway sector. By 2006, two front runners had emerged: Rift Valley Railways and an Indian firm linked to Indian Railways. Rift Valley Railways is a consortium consisting of Sheltam Rail, Transcentury Ltd, Centum Investments and Babcock Brown Investments. Sheltam Rail is a South African railway company while Transcentury and Centum represent Kenya’s wealthy ruling elite.

Technical reports indicated that the Indian firm ought to have won the concession. But the Kenyan and Ugandan governments dithered over the matter before finally settling on Rift Valley Railways. By the time the concession documents were signed in November 2006, Rift Valley Railways barely had the funds to revamp a railway system that was on its last legs. However, all was not lost for the Indian firm for it won the Tanzanian railway concession.

Trouble for Rift Valley Railways(RVR) began in January this year. Political and ethnic clashes in the wake of Kenya’s disputed elections brought the economy to its knees. Rioters and militant groups blocked roads and railways. In some places, such as the Kibera slum and in Kisumu, the railway was completely uprooted by supporters of Prime Minister Raila Odinga. Not only did Rift Valley Railways lose hundreds of millions as trains lay idle but it had to spend millions in reconstruction.

In July, staff of the RVR went on strike over poor working conditions, delayed pay and uncertain terms of service. The workers claimed that RVR was not willing to employ them on permanent terms while expatriate staff got huge pay perks. Meanwhile, the Kisumu to Nakuru railway line was closed due to vandalism.

RVR announced that it was bringing into its board two additional shareholders to boost the firm’s management. The two are Primefuels Kenya Ltd and Mirambo Holdings of Tanzania. They joined the existing board made up of Sheltam Rail, Transcentury Ltd, Centum Investments and Babcock Brown Investments.

The closure of the Kisumu – Nakuru line, coupled with the workers’ strike caused a huge pile up of cargo at the Mombasa port. Ships could not dock as manufacturers suffered from delays. Uganda, Southern Sudan and Rwanda – which all depend on Mombasa – protested to the Kenyan government.

This week, Prime Minister Raila Odinga, chaired a meeting that fired RVR’s Chief Executive, Roy Puffet. “The government of Kenya and that of Uganda have decided to give the RVR management three months to do whatever they can to restore services,” said Raila. According to the Standard daily, the meeting also resolved to allow other shareholders into the consortium in order to inject Shs260 million (US$3.8 million) into operations.

More importantly, was the decision to revoke RVR’s exclusivity in railway operations between Kenya and Uganda. This, Raila said, was to allow for the construction of a parallel railway line using the international standard gauge. According to Kenya Railways, the construction of the new line requires about Kshs50 billion ($746 million).

This money will be impossible to get considering budgetary constraints facing the Kenyan and Ugandan governments amidst rising oil and food prices.