Thursday, 28 February 2013

Should SAA be laid to rest or sold?

SAA: Ready for shedding off?
REPORTS IN THE South African press have it that a local private airline will sue the government over the continued bailout of South Africa Airways. 

The Airline, Comair, argues that the bail outs do not comply with; either the domestic aviation transport policy or the law, says the Business Report.

Comair wants a level playing field in the domestic aviation market to ensure that all airlines face the same risks and the same requirements to operate on sound commercial principles.

In the past 20 years, SAA has sunk 22 billion Rand, (US$2.5 billion) with nothing to show for it. And the government last October guaranteed US$576 million in loans over the next two years. The support was granted the airline to recapitalize after being pushed into insolvency by bad financial decisions.

SAA can emulate KQ
In 2004, the airline almost closed down after losing US$1.03 billion in hedge loss after a fuel edge went haywire. The airline had hedged its fuels at a rand’s exchanged rate of 10 to the US dollar. However, the rand strengthened rising even to R6 to the USD. This meant massive losses for the airline. That loss left the airline insolvent.

In addition, it has made operational losses amounting to R3 billion (US$356 Million). Since 2004, the government has recapitalized the airline twice for a total of R10 billion ($1.15 billion). And  last year,it was guaranteed to borrow R5 billion($576 million). 
The private airline argues that the airline makes losses because it does not operate on commercial lines.  It has, “excess capacity, that is under priced,” resulting in losses. Its practices are a double tragedy for South Africa.Apart from being a drain on public  coffers, it has also become the exterminator of the aviation industry. In the last 20 years or so, SAA's unbusinesslike practices have consigned 10 domestic airlines to the graveyard.

 Although it is not clear how the suit will help Comair,it is wake up call to the South African government to face the ugly truth: the airline needs clinical surgery. Either it is allowed to collapse, or it is privatized while the going is still good.

The Chickens are coming home to roost for South African Airways, Africa’s oldest airline. It is the sick man of the aviation industry in Africa kept afloat by artificial life support. The airline has become a sinkhole for the South Africa taxpayer’s money.

 SAA has the highest turnover of Chief executives-having changed six or so boards and chief executives over the past decade. This is a reflection of an unstable business.
The choices facing the South African government are stark: On the one hand, the airline is a strategic asset. But on the other hand it is a drain on government’s coffers. Which do they choose?
Generally, governments are initially reluctant to dispose off loss making state owned enterprises due to policy fears. However, the grim reality is an SOE that lives off government handout has no incentive to operate profitably.  Many have thus to be shed off and left either die or learn to operate profitably. That is the dilemma facing South Africa.
However, in this South Africa is in good company.  Many other governments in Africa and Europe faced a similar dilemma.  And the choices were equally stark. But the right decision had to be made anyway. Some, such as the Nigerian government chose to let the airline die. Others privatised the airlines.

Among these are such large European airlines as Swiss Air, Alitalia and Air France. These airlines were first grounded when they ran into turbulent winds, and later sold to the private sector -and they survived.

 Closer home, Kenya Airways presents the best example of a correct decision taken at the opportune a case in point. In the 1980s and early 90s, it was tagged a strategic asset that could not be privatized. But the grim reality caught with government at the beginning of the second half of the 90s. It was shed off by 1996 and now it is a profitable airline, flying Kenyan colours. The offload began with a marriage with KLM which took a 26 per cent stake in the airline; the public bought another 25 per cent leaving the government a minority shareholder.

It was weaned off government coffers and has learnt to run its affairs including paying dividends to the government. Today, should Kenya Airways need money to recapitalize, it goes to the capital market without seeking government guarantees. SAA can do the same.

The government should thus consider seriously saving the airline from itself by privatizing it while the going is good. That way it shall safe the tax payer money and keep the airline afloat. It should not take the Tanzania route, which resisting the truth until it can be hidden no more.

Friday, 22 February 2013

AfDB driving a low cost-energy model in Africa

A hydro dam under construction:
Expensive ventures

THE AFRICAN DEVELOPMENT BANK, AfDB, is driving a shift in infrastructure financing model in Africa. The change involves unbundling public  sector service provision into several functions inorder to enable  private-public sector partnerships. For instance, electricity generation can be unbundled into; power generation, distribution and transmission functions, each managed separately.

And as a result of unbundling of services, the private sector can now be contracted to provide certain public sector services. These contracts are determined according to the financial risk, urgency in service delivery, economic impact and revenue risk.

In Africa, demand for infrastructure is growing faster than the public sector's ability to deliver. The African Union, for instance estimates that a US$360 billion investment is needed to provide infrastructure up to 2040, that is a whooping US$13.3 billion a year. Of this energy will require an estimated US$45 billion. 

To generate this kind of capital, innovative financing models that involve private sector investment are necessary. The private sector is increasingly being invited to provide public services or goods for a fee. Generally the contracts for what is called Private-Public Partnership last 25-30 years. Here various models are in place depending on the commercial viability of the project in question.

For instance in electricity generation, mobilizing the initial capital to sink in the project have proven tricky. Investors do not have the stomach for sunk in capital as drilling a geothermal well for instance. Even in wind power generation mobilizing initial capital is slow and tedious. This is why the largest wind power farm in Africa, the Lake Turkana wind power project in Kenya (LWTP) is still trudging along with financiers asking for this or that guarantee. This project has been on the drawing board for close to ten years, and is making slow progress.

To fast-track the completion of the projects, a new business model was necessary. Hence the unbundling of state corporations in infrastructure sector. In the new model, government departments retain the policy function. A new Specials Purpose Vehicle, SPV, is created to undertake the implementation function while service delivery is leased to the private sector.

 The model was successfully tried in Kenya's geothermal power development. An SPV, Geothermal development Corporation was created to drill steam wells and cap them in Menengai geothermal project in Kenya's Rift valley. The government borrowed from development Finance Institutions, including, AfDB, to finance the drilling risk.
A geothermal Station: Clean, cheap energy
The corporation will then lease the capped wells to independent power Producers (IPPs) who shall build, operate and maintain their generating capacity which they sale to the power distributor. The funds generated from the sale of power will then be used to service the loans used to drill the wells. Using this model, GDC is now drilling steam wells to generate some 400 MW of geothermal power by 2016. The firm plans to have cumulatively drilled and build steam wells with capacity to produce 2000 MW by 2020, rising to 5500 MW by 2030.
As a result, AfDB, which partly financed the Menengai project, is seeking to introduce the same model in Djibouti, Ethiopia Tanzania and other countries with the eastern rift valley. In Djibouti, AfDB plans to develop a 50 MW power plant in the Lac Assal region. While in Ethiopia and Tanzania, the AfDB is leading in defining a geothermal development road map. In the Comoros, the AfDB has started the identification process for a 20 MW geothermal plant, matching the needs of the archipelago.

This model is gaining popularity among DFIs as it fact-tracks the increase in the stock of public goods and services, eliminate production and distribution bottlenecks in Africa, lower the price of public services. Geothermal power for instance will cost US$0.07 per kWh.

It also ensures that the public exchequer will not be stretched thin by debt servicing in the future. User-fees will be used to service the debts contracted to provide these goods.

Thursday, 14 February 2013

Oil: Kenya's game Changer

Oil Pipeline: Japan interested in the
2000km pipeline from Juba to Lamu

 THE NEWS THAT Kenya’s Oil finds announced only last year are commercially viable is definitely a game changer in Kenya.  The prospecting company, Tullow oil has announced that one of the wells, Twiga South 1 has commercially viable deposits. It has also announced that flow Tests for the Ngamia 1 present “real encouragement.”

Commercial viability means that the Oil quality and quantity in a well can be sold at market rates plus there are enough stocks to run for a few years.
The flow tests show that the well can produce up to 2,850 barrel per day, way above the 500 barrels per day initially expected.  It is not surprise then that the market both in London and Nairobi, reacted with untamed excitement.  In London, Tullow’s shares gained 5.2 per cent, the highest gain in Europe.

The Lapsset Corridor:n Isiolo is a major junction city 
Apart from the potential macro-economic gains, the news has immense development benefits in Kenya. Among these gains are potential forex savings, low general prices and larger profits for the business sector.

According official sources, in the year to November 2012, Kenya spend a staggering US$2.105 billion importing 21.7 million barrels of crude oil. Although the commercially viable output is still a drop in the ocean, the prospect of cutting this this bill significantly is exciting to Kenyans.

Last month, the Oil industry intelligence publication,, branded Kenya a hot spot for oil exploration. It seems now the spot will get even hotter and more aggressive activity in oil expected in the near future.  A local business publication reported last November that oil and Gas exploration brought in US$1.2 billion in FDI. This figure is expected to rise as more players are expected to bid for a piece of the action. 19 exploration blocks are said on the table for auctioning this year.

In addition to savings and FDI generation, the oil prospect raises the potential of some projects that were treated with muted pessimism. The greatest beneficiary of this development will definitely be LAPSSET corridor.

The US$23 billion Lamu Fort - South Sudan- Ethiopia Transport Corridor (Lapsset), is the biggest business venture ever to be undertaken in east Africa and probably beyond. It is a combination of five ventures that were juicy even before the discovery of Oil in the project’s path. Now they will be mouthwatering as the returns are attractive ranging between 14 per cent and 24 per cent for some of the projects.

LAPSSET that will serve an estimated 100 million People in Northern Kenya, Ethiopia and South Sudan comprises of: 1,710 KM of standard Gauge railway line; 880 KM of a standard highway, 1260 KM of crude oil pipeline, 980KM of white oils pipeline, a 120,000 bpd refinery and a 32 berths sea port and two international airports.  According to its feasibility study, it is to be undertaken on a Private- Public Partnership (PPP) basis either through leases or DBFOs.  It also comprises of three resort cities in Lamu, Isiolo and Turkana.

A proto type of Isiolo Resort city
 Finance is a major hurdle in projects of this kind and Magnitude. Although components of the project could be developed on PPP basis, a majority of them, it seems will be developed by the government together with its partners in the east. Even the consultant has recommended that the venture would be viable if private sector were to lease the infrastructure from the government, rather than participate in building them.

 Initially, it was thought that a huge proportion of the components will be developed by government. However, the discovery of oil is likely to raise their profile and attract a lot of investors with deep pockets. Already China and japan have made their intentions clears. Toyota Tshusho, the investment arm of Toyota Motor Corporation has bid for the US$3 billion 2000 KM oil Pipeline from Juba to Lamu. And China has sent signals that it is willing to finance some components.

Even then, there is plenty of activity on Kenya’s second transport and economic corridor over the next 20 years or so. Already, the government has set aside some US$300 million for the construction of the first three- berths at the Port of Lamu.

The three are; a general cargo berth, a bulk cargo berth and a container berth. These three will be used to transport material for the development of the corridor.

The entire port itself will cost an estimated US$3.5 billion. Located on 1000 acres of land at Manda Bay within Lamu, the Port will comprise of 32 berths three of which will be financed by the Kenya government. The other 29 will be built on PPP basis.

A 1,710 KM Railway line from Lamu to Juba in South Sudan will be constructed at a cost of US$8.1 billion according to Kenya railways Corporation,

The line is seen as the beginning of the Equatorial Land Bridge linking the Port of Lamu on the Indian Ocean to the East to the Port of Doula in Cameroon on the Atlantic Ocean to the West. Such a link, it is envisaged, will cut freight travel time by at least two to three weeks and increase shipping lines’ turn-around times and hence their revenue.

The bulk of the entire cost of the Lamu-Transport corridor will fall on Kenya. At the peak of the project, between 2013 and 2018 sources say, it is expected that the Kenyan government will be spending about 6 percent of the country's Gross Domestic Product or 16 per cent of its annual budget on the project. The project is in turn expected to generate an additional five percent increase in Kenya's GDP once operational.

At the time of the feasibility study, had not been discovered in Turkana County. This discovery raises the viability of the project on Kenya’s economy. Some observers are looking at an EIRR greater than 25 per cent.

Sunday, 10 February 2013

Work on JKIA’S Green Field terminal starts this week

A Prototype Aircraft parking Rank

AFTER STALLING SEVERAL times, work on Kenya's greenfield terminal will take soon. The Kenyan President, Mwai Kibaki, will lead the ground breaking ceremony for Nairobi’s green field terminal at JKIA, this Friday.

This will pave the way for the construction work to start soon thereafter.All necessary inputs are in place: Two Chinese firms, Anhui Construction Engineering Group and state-owned China National Aero-Technology International Engineering Corporation will build the terminal jointly with Pascall and Watson Architects. The supervising consultant is also in place and the government has secured the funding. The project will cost an estimated US$653 million.

  The new developments come as a complete surprise to Kenyans for the client, the Kenya Airports Authority, had indicated that the project will begin in November this year. The authority had indicated that the funding negotiations could take a long time. However, it appears like the Treasury took over the negotiations and clinched the deal earlier than expected.
 Since funding was the only hurdle, then analysts think that the project should begin soon after the ground-breaking ceremony.

The terminal will be developed on a design, build, finance, operate and transfer (DBFOT) basis. Construction will last 30 months, meaning terminal shall be completed early in 2016.It will  have a floor area of 172, 000 m2,  the premier hub terminal in Africa equipped for efficient connectivity for transiting passengers. It will have 50 international and 10 domestic check-in positions; 32 contact and 8 remote gates; an apron with 45 parking bays and linking taxiways and a Railway terminal.

The Greenfield terminal, to be developed in two phases, will expand JKIA’s capacity by 12 million passengers to more than 20 million passengers a year in Phase I. It will have a parking capacity- including “remote parking” for 60 aircraft- bringing the total available parking slots over one hundred aircraft. It will also separate the arrival and departure gates.
The terminal complements a five- year plan that began in 2007 to expand the capacity of the airport from 2.5 million people a year to 6 million to date. The previous expansion plan which incorporates the construction of unit 4 of terminal 1 enhanced parking capacity to 37 aircraft up from 20 previously at a cost of US$200 million.

The phase II of the green field will be constructed after the second runway which will connect the green field terminal Phase I. Phase II will expand capacity by the same proportions as Phase I. This will raise the size of JKIA to more than 600,000M2.
Kenya Airways : A rapidly growing customer

The financiers are yet to be named. However, it is understood that the Kenya Airports Authority was in negotiations with two Chinese banks for a concessional financing deal for the project. The financing deal is meant to “protect KAA’s interests.” This means that debt service rate must be serviceable from KAA’s own resources, which now stands at US$85 million a year. This is expected to rises to US$800 million a year by 2020 when   the terminal at JKIA will be fully functional.
The new terminal, once complete will make Jomo Kenyatta International Airport, JKIA, the aviation hub of East and central Africa. In fact owing to its geographical location, Nairobi is the natural aviation hub of Africa. Already the airport is the busiest cargo hub in Africa, handling some 30 Million tones of cargo a year. The cargo is mainly Horticulture and floriculture products from Kenya and the East Africa region.

 Nairobi has become the financial, manufacturing, medical, educational and diplomatic hub in the east and central Africa region. These factors put lots of pressure on the Airport to also modernize and become the aviation hub of Africa.

JKIA is also home base for Kenya Airways, one of the most successful airlines in Africa.
The airline plans to expand its fleet to 107 from the current 39 over the next ten years.

Given such an expansion plan by its natural airline, JKIA would need to expand its facilities to accommodate her. Passenger traffic at JKIA is projected to grow at an average 12 per cent for the next twenty years. It is expected that by 2016, when the green field terminal is expected to be completed, the airport will be handling more than 15 million passengers.
 To be developed on a PPP basis, the new terminal has an internal rate of return of 16 per cent, a feasibility study established. JKIA directly contributes about 10.9 per cent of the GDP, says the authority’s handbook for 2011/2012.

The Airport will be connected to the city by a high speed Commuter railway line. The construction of the railway line is at the tendering stage.