How strategic mergers can drive Kenya's economic transformation

There has been debate in recent weeks over the government’s plans to reform various State agencies.

In a country struggling with resources to meet the people’s needs, duplicative government agencies have long drained public resources, and parastatal reforms have reemerged as a crucial policy priority.

The Task Force on Parastatal Reforms, chaired by Abdikadir Mohamed, highlighted inefficiencies, overlapping functions, and unsustainable financial hemorrhages as some of the greatest undoing of most of Kenya’s state corporations and government-owned agencies. Various solutions were proposed by the task force, including restructuring some institutions.

Delays in implementing these proposals have left the institutions dependent on the exchequer. The government is now boldly moving forward with a plan to reorganise these institutions, aimed at reducing waste and improving service delivery.

If the recent success of the Kenya Development Corporation (KDC) is anything to go by, merging institutions is not just a theoretical reform—it is a solution that works. Before KDC, there existed three separate development finance institutions (DFIs) operating in silos. These are the Industrial and Commercial Development Corporation, IDB Capital Ltd, and the Tourism Finance Corporation.

Each had a specific mandate, with the ICDC focusing on industrial and commercial development, the IDB Capital supporting medium- and large-scale industrial projects, and the TFC financing players in the tourism sector. However, their impact remained limited due to resource constraints, inefficiencies, and fragmented strategic direction.

Their merger streamlined operations pooled financial and human resources, and created a more robust entity capable of tackling national development priorities more effectively.

Minimise risks

At its formation, KDC absorbed all the staff from the three DFIs, which helped ensure continuity while leveraging a larger pool of expertise. Additionally, by aligning with the government’s Bottom-Up Economic Transformation Agenda, KDC has diversified its customer base across multiple sectors. This has helped minimise risks associated with concentration, which was a key weakness of the previous DFIs.

While KDC inherited a portfolio with a 78 per cent non-performing loan (NPL) ratio, it has implemented customer-centric solutions that have significantly reduced the NPL ratio. Loans disbursed post-merger have performed well, with a portfolio at risk approaching the industry benchmark of 15 per cent.

The corporation’s revenues increased to Sh1.86 billion in the 2023/2024 financial year, coupled with growth in profitability driven by a 21.9 per cent reduction in expenditure.

Kenya’s case is not an outlier as similar initiatives have been successful globally. A notable case is the United States Department of Homeland Security, established in 2003 by consolidating 22 federal agencies, including the US Customs Service and the Federal Emergency Management Agency. This merger aimed to unify national efforts against threats and has since enhanced the country’s ability to manage emergencies and security challenges.

The 2017 restructuring of Shenhua Group, which was China’s largest coal producer, and China Guodian Corporation, a leading power generator, to form the China Energy Investment Corporation (CIEC) is another example. The merger enabled the combined entity to diversify its energy portfolio by integrating substantial clean energy assets, thereby reducing reliance on coal. According to the Fortune Global 500 Ranking, CEIC is now one of the world’s largest companies, ranking 84th globally in 2024.

Mergers can offer other advantages beyond financial gains, particularly in terms of employee development and organisational growth. Mergers have wrongly been assumed to result in job losses. On the contrary, they can actually lead to job creation and greater job security, and create a robust work environment, offering better chances for professional development.

Kenya cannot afford to sustain redundant and underperforming state agencies. The government is right to take another shot at parastatal reforms. While mergers are not a silver bullet, the KDC case shows that when done right, they can create stronger, more resilient institutions capable of propelling the nation forward.

- The writer is director general, Kenya Development Corporation