MPs wrong on KQ planned takeover of airports

The National Assembly’s Departmental Committee on Transport, Public works and Housing has drawn a report that summarises hearings that were held in response to a proposal by Kenyan Airways seeking a partnership with the Kenya Airports Authority. Published in early June, that report recommended that Kenya Airways should be renationalised.

This decision is not the most favourable in the eyes of dispassionate taxpayers but it could have been worse.

If Parliament endorses the decision to renationalise Kenya Airways, taxpayers would bear direct burden for Kenya’s largest financial bailout.

The Kenya Airways CEO, individuals, selected legislators and interest groups admitted that this firm’s financial position is bad.

SCRUTINY

Parliament’s intervention was necessitated by a plan prepared by Kenya Airways which was undisclosed to no one except to KAA. Many of the professional groups including the pilots guild and employees of KAA were at a disadvantage because they commented about a document they did not have a chance to review. That the hearings were allowed to occur when Kenya Airways and KAA had privileged access to information unavailable to others was an atrocity that reflects corporate bad faith.

Parliament should also be blamed for allowing it to continue. This reflects the arrogance of institutions that call for public subvention while holding the same public in contempt. And if this behaviour is excusable, it remains worrisome for its demonstration of fear that the document couldn’t stand external scrutiny.

A common error made by a majority of the public and institutions that petitioned Parliament was the conflation of Kenya’s aviation policy to the financial outcomes of this one firm.

This is illustrated by the curious claim that Kenya’s aviation sector can only be successful if Kenya Airways imitates the management ethos and aviation policy of Ethiopia due to the success of Ethiopian Airlines. In my view, the parliamentary committee didn’t question this absence of logic though a citizen proposed the radical, if sensible, view that the airlines shouldn’t be supported through public subvention but should be allowed to fold in order for government to create another one.

DEBT

What the National Assembly may have feared was that the private holders of the debt would have had to take enormous hair cuts.

In the proposal, Kenya Airways asked for a 30-year concession to take over operations and management of Jomo Kenyatta International Airport (JKIA).

If government acquiesces to this, KQ has proposed an expansion and unhindered investments in the facilities and introduction of commercial activities within the airport.

While this is not a bad, the committee and many interest groups saw through this and read it as one unstable institution passing blame and clamouring to control the most lucrative assets in the sector in order to ensure its own survival. In addition to the undertaking on debt assumption by the public sector, the plan would compel government to change laws that exempt operations of the airline from some taxes and allow for offsetting of any losses from the profits of the Special Purpose Vehicle that would owns both the airline and the airport.

In other words, Kenya Airways sought to have its cake and eat it with tax payers staying close by to absorb losses. My judgement is that this is a very poor incentive for Kenya Airways to ever run efficiently.

The absent plan may not have put it like that, but my reading of the rendition in the report is that Kenya Airways blamed its woes on other actors and unbelievably envious towards Ethiopian Airlines. To the professional credit of the team that prepared the report, the record reflects that without this permission to monopolise management at JKIA, the airline cannot compete and would have to renationalised.

AVIATION

Needless to state, the majority of those who appeared before the committee were opposed to this plan and often in ways that reflected their quest to shape aviation policy to their interest. To start with, adoption of the first option suggested by Kenya Airways would enormously change the institutional character of KAA. It would have surrendered its most lucrative asset, JKIA, and shrunk to a smaller outfit managing all the other airports with little guarantee that it would remain solvent.

During an appearance, the Cabinet Secretary made an argument for economic nationalism, stating that JKIA and Kenya Airways should be viewed as national assets and not as commercial instruments. Lost on the Cabinet Secretary is that the airline is privately owned and that its profits in earlier years were appropriated by its shareholders. As is stands, Kenya Airways is conveniently majority-owned by the government of Kenya to tap into State resources when it makes losses.

This argument for geopolitical reasoning implied that like the Standard Gauge Railway, Kenya’s aviation policy should be about global political posturing and pride.

Some of the claims made to justify the impending bailout is that the aviation sector in Kenya directly employs and supports up to 620,000 people. The report doesn’t comment on the veracity of this but it is doubtable because that would represent more than 20 per cent of all formal sector employment in Kenya. This is especially salient because Kenya Airways employs just 3,700 employees.

LOAN

The aviation industry is a capital intensive industry and, therefore, the argument that saving Kenya Airways, with a turnover of nearly Sh52 billion for the first half of 2018 would save many jobs is dubious economics reasoning and an extremely expensive way to create direct employment even if it was affordable.

In the end, having been infected with the “Regional Dominance” narrative, the committee decided to secure the future of this airline by proposing its renationalisation with taxpayers assuming liabilities contained in the shareholding and a sovereign guarantee of $525 million loan used to buy some aircraft.

MPs also mended the unbroken and imposed the construction of airports in every county into aviation policy. The consequences of this decision will be the subject of another piece.

The writer is CEO, Institute of Economic Affairs