News of a possible $1.85 billion investment agreement between Adani Airport Holdings Limited and the government to develop and modernise Jomo Kenyatta International Airport (JKIA) has recently sparked excitement and debate in the aviation industry.
Given Kenya’s current economic woes, the possibility of large foreign investment in our infrastructure is certainly alluring, but it is important to approach this transaction critically.
Kenya, like a lot of underdeveloped countries, has a big infrastructure deficit. Our airports need to be modernised to accommodate rising demand and international standards, especially JKIA, which serves as our main international gateway. Situations when government resources are limited by high debt levels and slow growth in tax collection, private capital can be extremely important in closing this gap.
But as they say, the devil is in the details. And in this instance, there are several important concerns that must be carefully considered.
The first concern revolves around the process—or apparent lack thereof —in selecting Adani as the preferred investor. Public assets, such as JKIA, are not merely government property but belong to the Kenyan people. As such, any decision to lease or involve private operators in their management must follow a rigorous, transparent, and competitive process.
Usually, this entails transparent bidding, meticulous screening of possible partners, and a concise explanation of the conditions and advantages to the Kenyan people.
One wonders if we are getting the best value possible when there is no obvious competitive procedure in place. Additionally, it creates the possibility of favouritism or corruption, which could result in worse than ideal economic outcomes.
The concept of allocating resources to their highest valuable use is known as allocative efficiency in economics. We cannot be positive that we are reaching this efficiency in the absence of a competitive process.
Transparency and accountability are closely tied to this issue. The parameters of a deal this size should be subject to public review and discussion. This is an issue of economic caution as much as democratic principles. Public monitoring can assist in spotting possible dangers, guaranteeing equitable conditions, and preserving public support for the project. Public-private partnerships may become more successful and stable because of this transparency over time.
Perhaps the most alarming aspect of the reported deal is the supposed 18 percent annual return on investment, presumably in US dollars. This figure is staggeringly high for what is essentially a public utility backed by sovereign guarantees. To put this in perspective, Kenya recently issued Eurobonds at around 10 percent interest. The 18 percent return for Adani represents a significant premium over this already high borrowing cost.
The JKIA expansion is too important to be rushed or conducted behind closed doors. It requires a thorough, transparent process that considers multiple bids, involves public consultation, and results in a deal that truly benefits the Kenyan economy and people.
Only then can we ensure that this critical piece of national infrastructure serves as a catalyst for economic growth rather than a drain on public resources.
Such a high return raises several economic concerns. First, it suggests a potential mispricing of risk. While infrastructure investments in developing countries do carry certain risks, a properly structured deal with government backing should not command such a high-risk premium. This could indicate either a lack of confidence in Kenya's economic stability (which we should address) or an exploitative deal structure.
Second, the Kenyan government and the Kenyan people will bear a heavy financial burden if this return is guaranteed—which it most definitely should not be. Guaranteed returns take away the private operator's incentive to optimize efficiency and may result in a situation like poorly designed public-private partnerships, where revenues are privatized, and losses are socialized.
Third, such large profits might result in increased JKIA user fees, which might reduce the competitiveness of our primary airport in the area. Our entire economic competitiveness, trade, and tourism may all be impacted by this.
An optimal public-private partnership ought to balance the private operator's interests with the public's. This entails splitting the benefits and the risks. Kenya would gain from the private partner's increased efficiency, increased service offerings, and increased revenue. Government guarantees should not be placed on their returns; instead, they should be based on performance.
