Several African governments are launching airlines and many of its citizens seem to only take pride in planes carrying their country’s name hovering the skies.
Normative feelings of nationalism seem to have clouded the economic judgment of the rational citizenry.
For Kenya, it took around 20 years for it to covert the State-owned airline into a strong profit-making entity only to be mismanaged again.
If you want to be a millionaire, start with a billion dollars and launch a new airline."
This quote by Richard Branson about the big risks in operating an airline seems lost to many Africans. Several African governments are launching airlines and many of its citizens seem to only take pride in planes carrying their country’s name hovering the skies.
Normative feelings of nationalism seem to have clouded the economic judgment of the rational citizenry.
For Kenya, it took around 20 years for it to covert the State-owned airline into a strong profit-making entity only to be mismanaged again. Now there is a proposal by Cabinet to consolidate Kenya Airways #ticker:KQ and Jomo Kenyatta International Airport (JKIA), so as to provide the struggling national carrier with external revenues.
As good as the deal may sound, there are red flags that expose this deal as a reward and not a privatisation deal stinking of corporate welfarism.
First, according to a recent article in Daily Nation, government plans to put JKIA ownership and management under a holding company that will be 100 per cent owned by KQ in a concession deal that will run for 30 years.
Now privatisation through concession basically means that government hires out its infrastructure, equipment and assets to a private firm. In this case, Kenya Airways is a private company (publicly listed) and so government relinquishing ownership of JKIA (a government asset) in a concession deal is wrong.
A concession deal should be constraint to only moving the management function and responsibility. If government intends to relinquish ownership, a trade sale has to be made and the right procedure be followed.
This is one of the reason why transparency and accountability policies were designed, to tame such predatory private interest of corporate welfarism – rewarding corporates with public assets.
Second, in many privatisation deals governments heavily rely to a great degree on the technical and financial calculation offered by entities putting bids. But in this KQ-JKIA deal, KAA is singularly contracting Kenya Airways meaning government is not able to choose from a competing pool of bids on the best way of developing the airport that’s economically rational.
Therefore, this concession deal should start from the first stage of privatization which is commercialisation - re-organising a government body into an enterprise operating as a profit making commercial venture.
Currently, JKIA operates under Kenya Airport Authority and should therefore be disentangled and operate independently where an audit of all its assets, contracts and running infrastructure extension projects is done to ascertain its true value and direction of development before government gets into the KQ concession talks.
Third, the spirit of this KQ-JKIA deal is to monopolise the Kenyan skies. The risk associated with this monopolisation is KQ imposing exorbitant charges to competitors operating through the airport raising airport fares, decreasing at the same time the air traffic.
One of the ways to mitigate this risk is commercialisation before handing over the airport so as to prevent unjustified asset revaluations or regulatory structural changes that many burden airlines competing with KQ.
Last, governments get into concession deals because it relives state budget of costs for more infrastructure development, as well as transfer or decrease risk of building “white elephants.”
This is because the private player is the one who assumes the full economic risks and responsibilities connected with the investment and its operations. Unfortunately, Kenya Airways heavily indebted and doesn’t have the financial muscle to mitigate such risk as well as guarantee modernisation investment development of the airport.
It’s also important for government to take heed of the fact that taxpayers have heavily invested in JKIA for years now and would wish to see their return on investment back, which is the best negotiated concession fees and efficient management of the airport assets. KQ does not pass as that concession licensee to guarantee that.
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Note: The results are not exact but very close to the actual.
