Commentary

Story by JAINDI KISERO

THERE IS NO SUCH A THING as free lunch. Why are stock-brokers and investment bankers offering to give the Government advisory services for Safaricom’s initial public offer (IPO) for free?

There is more than meets the eye in this whole business, because we all know that IPO advisory services are very time-consuming assignments.

Which consultant is prepared to spend hundreds of thousands of shillings flying specialised investment bankers in and out of Nairobi, conducting a due diligence on the company, preparing a prospectus, pricing the issue, marketing the IPO, managing share refunds and then charging zero for all these services?

The point here is this: If, as the Government, you find that contractors are willing to offer you a service at no cost, you must know that somebody else is going to pay for it. And, even if something appears to be free, you must remember that there is always a cost to society.

When the bids for the IPO advisory services were opened last week, all the major stock-broking firms had put in ridiculously low bids. The consortium led by Rennaissance Capital offered to give the service for zero, while other major players put in bids as low as five cents.

Although the Government is yet to announce the winner, I can almost predict with certainty that whichever way it goes, the announcement will be greeted by bitterness from the length and breadth of Nairobi’s stock-broking community. Yet the support of the broking community will be critical to the success of the largest IPO in the country’s history.

In my view, the root causes of the problem we are dealing with here are the intrinsic weaknesses in the system of procuring IPO advisory services. The process of selecting winners is too discretionary and decisions made almost arbitrarily.

How else can you explain the fact that even a complete greenhorn, a stock-broking house with no known experience in handling IPOs, can score the highest marks during tender evaluation? Indeed, this unpredictable environment is what is forcing companies to quote these ridiculously low bids.

Due to the arbitrariness of the procurement system, we have a situation where private companies such as Access Kenya, Scangroup and Eveready Ltd will pay dearly for IPO advisory services, while the Government will get the services for free.

In many instances, it leads to total confusion. For instance, during KenGen IPO, we ended up with a situation where one set of advisers was being paid millions of shillings while another team was offering its services for free.

IN RETROSPECT, THE CONTROVERsy about book-building that nearly derailed the KenGen IPO was partly caused by tensions between these two sets of advisers. In theory, we learn that the best way to tell that a procurement process is not transparent enough and that your bidders are groping in the dark is when the quotations vary astronomically.

Yet this is what has been happening in the procurement of IPO advisory services. For instance, during the KenGen IPO, we had a case where one bidder quoted Sh22 million for lead transaction advisory services while the highest, a consortium of local and foreign investment banks, quoted a massive Sh288 million for the same job. The gap was just too wide to make any sense.

It was also during this IPO that we witnessed the first zero-bid. How can one person offer to do a job at zero and another at Sh288 million?

In my view, this type of thing happens because the terms of reference for IPO advisory services tend to be crafted in such vague terms as to lead bidders to interpret the scope and price of the job differently. The upshot is that those charged with the responsibility of evaluating bids for IPO advisory services are encouraged to award marks arbitrarily.

The Safricom IPO has already generated a big controversy with a group of politicians calling for its postponement. The Treasury should not make the situation worse by procuring the IPO advisory services in a manner likely to provoke more controversy in the capital markets.

Because we accepted a zero bid during the KenGen IPO, we cannot now turn around now and say that a zero bid is illegal. You cannot keep shifting goalposts. You must be seen to be even-handed.

And, it is not enough to insist that the advisers you select for the job are qualified. You are likely to get much more mileage and support in the market if the majority of their peers also agree that they lost fairly.

In the medium term, the Government must hasten to establish a functioning privatisation commission.