Category Archives: Kenya privatization

Understanding the KQ & KLM Partnership

The IFC-led privatization of Kenya Airways (KQ) in which KLM became a strategic partner, and shareholder, in the airline, purchasing 26% of the Kenya government’s shares in the airline for US$26 million, and after which the shares of the company were listed in an IPO, was celebrated as one of the most significant privatization deals for a decade, until Kengen and Safaricom.

But that’s all in question with the recent loss announced by Kenya Airways with quite a bit of blame being directed at KLM for the position in which the KQ finds itself in. What does this entail?

A master cooperation agreement and shareholders agreement were signed between KLM and KQ in 1995, and a codeshare agreement and joint venture agreement followed in 1997.

KLM has seats on the board of Kenya Airways and some of the tenets of master cooperation agreement give any KLM director veto power over KQ decisions on:

IFC celebrates KLM’s investment in KQ

The appointment or dismissal of the Managing Director or Finance Director of KQ
The acquisition or disposal of any aircraft and any other variation in the size and composition of KQ’s fleet. (KQ’s 2012 rights issue IM notes that following the approval of a 10 year business plan in July 2011, KQ’s management embarked on implementing the strategic initiatives for the first five-year period. In particular, the Business Plan envisaged that KQ will acquire 46 aircraft over the period to March 2016.)
The allotment and issue of any shares
Entering into of any co-operation agreement with an airline that is a major competitor of KLM.
Material alteration KQ’s existing route network or material increase or reduction in the capacity on its routes
Material commitment or expenditure on sales and marketing or distribution of KQ’s products and services
Any sale of shares by the Government of Kenya to a major international airline.

Other notes from the IM and media

Global ticketing: In 2010, Kenya Airways became a full global airline partner of the SkyTeam global airline alliance, alongside KLM, having been an associate partner since 2007. KQ is currently the only SkyTeam member with significant operations in Africa. With 14 SkyTeam member airlines, KQ’s passengers can take up to approximately 14,000 daily flights to 926 destinations in 173 countries. (So KLM helped KQ join? Will a break from KLM mean a break from Skyteam?).

Freight: In support of KQ’s expansion into freighter operations through the launch of a dedicated freighter business, the Board of Directors approved the acquisition of 12 freighter aircraft. In February 2012, KQ introduced its first dedicated cargo aircraft, a Boeing 747-400F, to be operated in association with KLM and which was expected to fly twice weekly between Guangzhou, Nairobi and Lagos.

Passengers: This translated article hails Kenya Airways as being a jewel in the crown of KLM: “The investment by KLM Kenya Airways is one that works out well for both parties. Both companies fly each day between Amsterdam and Nairobi which there is a double daily connection..collectively the route has about one million passengers transported per year..

The cooperation agreement was expanded in November 2013: ..the collaboration was extended with the new routes London-Nairobi, Amsterdam-Entebbe / Kigali, Amsterdam-Lusaka-Harare and Amsterdam, and the Amsterdam-Kilimanjaro / Dar es Salaam. Kenya Airways and KLM jointly total around 44 weekly flights with a total turnover of over US$500 million.

However, this week, the KQ CEO said that the “In the context of the revenues and the costs on the routes in the joint agreement venture which we share 50-50, over the last three years, the route has been loss making,” ..and he said the Dutch Airline had since paid them a settlement transaction.

EDIT (2018) From the KLM 2018 annual report to shareholders: Following a debt and equity restructuring of Kenya Airways Ltd., the Group’s stake decreased from 26.73% as at December 31, 2016 to 7.76% as at December 31, 2017 and the Group lost its ability to exercise significant influence on Kenya Airways in November 2017.

Consequently, Kenya Airways is not an associate anymore and has become a financial asset in 2017. Following the implementation of IFRS 9 as per January 1, 2018, Kenya Airways has been included at fair value through other comprehensive income. There have been no changes in the Group’s stake in Kenya Airways in 2018.

EDIT December 19 2020: Kenya Airways and Air France KLM Group have mutually agreed to terminate their Africa Europe Joint Venture Cooperation from September 2021 which had been suspended during 2020 over Covid-19.

Kenya Airways will continue to serve the Europe market through its gateways of London, Paris, Amsterdam with Rome slated for resumption from 2021. These routes will be served by onward codeshares from the Air France KLM group and additionally with our ever-expanding network of European carriers including Alitalia, British Airways, Lufthansa, and Swiss International Airlines amongst others.

Lamu, Kenya and Amu Power – Part II

See Part I of the visit to Lamu with Amu Power

After the morning session with the county officials, we had a chance to visit the planned site of the Amu Power coal plant at Kwasasi, on the mainland. This was my third visit to Lamu in four years, but my first chance to visit the mainland of Lamu County.

The Lamu islands are incredibly beautiful, and once you experience Lamu, you are unlikely to look at Mombasa the same way again. It’s a beautiful place for tourists to visit; boat rides, the endless beaches of Shela, the quaint town with tiny streets, curio shops, friendly residents, ancient buildings, tasty foods served on roof top restaurants, and a world heritage status conferred on the town.

Also for tourists who come to Lamu, unlike travel to Mombasa where they have to contend with at least an hour of traffic around both Jomo Kenyatta and Moi airports, they can fly to Lamu having skipped the traffic bit by using Wilson airport in Nairobi, while in Lamu, there’s no such thing at traffic – as you land on Manda island, walk 300 meters and get on a boat that can get you to a hotel or villa within ten minutes. But while it’s beautiful for tourists, life is not getting better for residents. The boat rides are expensive, unemployment is high, and education is low, and the land has other challenges.

To get to the Kwasasi site, we took a 15-minute boat ride to Mokowe jetty where several taxis were waiting. Mainland Lamu, which borders Somalia about 100 kilometers away, has been in the news over the last two years due to sporadic attacks and incidents, with the most catastrophic being Mpeketoni in June 2014, where 48 people were killed by a terror gang.

The first stop after stepping off the ferry on the mainland was to drive to the local police station to collect some armed policemen that the company had hired for the day. After that it was a long drive over about an hour that covered about 30 kilometers on narrow dry dusty roads. Lamu County is said to have 6 kilometers of tarmac, but this main road on the mainland had none.

Eventually, we got to a Navy base, which also marked the edge of the port area. This was our starting point and we drove along the fence of the navy base, which had a road then away from the fence with satellite tracking devices to pinpoint the coordinates of the corners of the site and this took about two hours to navigate. Amu Power had contracted a landscape architect to produce real life drawings of what the plant would look like in the current environment, and he took several pictures at each corner of the site and strategic points on the road.

The site of the plant was a large plain field with sparse bush. This was a shock as I expected to find warehouse sheds, office and residential buildings to mark the edge of a LAPSSET (The Lamu Port Southern Sudan-Ethiopia Transport Corridor) port city. But the place was sparsely populated and devoid of structures or developments.

This was apparently communal land, but there were sticks in the ground to mark boundaries in some places and burnt bushes in other places presumably for cultivation clearing. In some places targeted for LAPSSET projects, speculators in the area have pushed up the price of land five times in the last few years.

Another shock was seeing many women and girls walking along the road with yellow 20-liter drum, full of water. This is an arid area, with few water points and the role of fetching water is one performed by women who walk long distances. We later stopped at one of Amu Power’s CSR projects, which were a series of water tanks at a central point to which a company lorry delivers water every week for area residents to use. It should not be the business of prospective investors to provide water, but that’s the reality of doing business in many parts of the world, and the water delivery has made life easier, with more to be done.

Amu Power has plans for the construction of a water desalination plant, which will be the first ever, built in Kenya, and the excess of this will be shared with the local community.

We left just before sunset and asked the taxi driver about the ongoing curfew that was in the area. He said it was still in force, but had been relaxed of late.

After we got back to the Island we had a few more talks to recap the day. Earlier, one of the community leaders has talked of the challenges Lamu had faced and why it had remained largely unchanged 50 years after independence with issues like water shortages, transport challenges and lack of roads. He said, while Lamu was poor, there had been resistance to several past attempts to introduce development projects in the area– including a fertilizer plant, the new port (because it would spoil fishing), and wind power in Shela (because it would spoil the water).

The day after the visit, as we prepared to leave and fly back to Nairobi, we started hearing reports of the ongoing attack at the university in Garissa. The full scale of the attack did not become apparent till later in the day.

It is expected that President Uhuru Kenyatta will be in the area in a few weeks to commission the first three berths of the Lamu port that is set to be completed in 2019.

The port, crude oil pipeline, the coal plant in Lamu and Lamu-Garissa-Isiolo Road will raise the profile of Lamu and thus the government’s investments to enhance the security profile of the area. The fringe benefits of this infrastructure will be to open up the Eastern and Northern part of Kenya to development and settlement, the way that the British railway did over 100 years ago between Mombasa and Kisumu.

Clearly, not only is change coming to Lamu, change has to come to Lamu. The LAPSSET projects and the coal plant are about 30 kilometers from Lamu town and the picturesque islands that most people in Lamu are familiar; that’s about the distance from Mombasa island to Diani beach and its possible that the two will coexist and mutually benefit like the South coast neighbours.

Lamu, Kenya and Amu Power: Part I

Earlier this month, I took a trip to the Lamu county at an invitation from the Gulf Energy side of Amu Power, and Gulf are the leading a project that will see the construction of a coal power plant that will generate 980 MW for Kenya.

This is part of an ambitious project by the government to invest in and diversify its future energy generation capacity, from one that’s relied for years on hydropower dams and more recently to diesel, geothermal and wind power sources.

The coal plant to be built by Amu Power is one of several large projects planned by the government for Lamu, and the team from Amu Power has been meeting with various stakeholders over the last few months including sessions with residents of the area, coastal governors, other politicians, and elders.

This one, at the American Centre in Lamu town, saw the Amu Power team meet with their community partners, and local county staff, led by the Lamu county commissioner, district officers and area chiefs, and DO’s. They form a vital link being the government administrators in the community, heading security and intelligence teams, and it was to explain what the company would be doing over the next 3 years.

The 980 MW Coal Plant in Lamu is being built for Kenya’s Ministry of Energy and Petroleum on a build, own, operate and transfer basis for 20 to 25 years. But already, there has been some controversy by some NGO groups who have started a campaign in communities and on social media to stall or discredit the project. By having such sessions with the area leaders, Amu Power were hoping to avoid a repeat of issues such as in Kinangop where residents have delayed a wind power project.

Sanjay Gandhi, a consultant working for Amu Power, explained that coal plants of years past are not built anymore and there is new technology that mitigates the old environmental challenges that come from coal. He noted that all projects have effects on the community, but with good mitigation measures these can be alleviated. The Amu Power plant will be built by Chinese contractors, but to standards set by American institutions. Also the Amu Power offices will be on site and they will live and supervise the plant with full teams of staff for the next 25 years.

Sanjay explained that Kenya needs the electricity and that peak demand has gone up from 899 MW in 2005 to 1,470 MW in 2014, with Lamu town itself still powered by diesel generators. KPLC is adding 200,000 customers every year, and it is expected that peak demand for electricity will reach 5,359 MW by 2017.

Coal is also the cheapest form of energy at 7.5 US cents (Kshs 6.30 per unit) compared to geothermal at 9 C, and solar and wind power 12 C /kwh (Kshs 8 per kilowatt-hour). He said coal is the most cost-effective way of generating industrial power, and once you turn it on, the plant will be able to run for 8 months without turning off. Kenya’s ability to add new hydro dams is diminishing and renewable energy sources like wind and solar power are not consistent enough for industries to run.

The government’s only investment will be a through commitment to buy electricity 981.5 MW of electricity at Kshs 6.3 per unit and the Amu Power plant will be built to handle different types of, whether from Kitui county (where coal has been found), or imported from South Africa, Mozambique, or Indonesia.

Amu Power is planning to complete the plant through 21 months of day and night work; this is after 7 months were lost in court following the government decision to award them the project. They will build on 870 acres of land that the company will lease from Kenya Ports Authority who are buying land from residents in the area, and while actual boundaries have not all been determined, people have been buying and speculating on land value appreciation in and around the site.

They have identified a Chinese contractor to do the work, and the company wants 1,000 local youth to go to the National Youth Service (NYS) for 6 month training to be ready for work in October. They have started with Pate area and plan to find 100 people in each of the 10 Lamu wards to be trained and employed as masons, brick layers, welders, fitters, riggers, electricians – and if the contractor can’t find local people, they will get others from outside the area.

They estimate that the plant will need 2,000 employees on a full-time basis during construction, and 3,000 at peak. Thereafter, there will also be 500 permanent jobs for 25 years, and while early managers will be Chinese, there will be a requirement for each foreigner to have a Kenyan understudy throughout. There are opportunities for the local community to prepare and provide all that is necessary for these workers, such as housing and food in addition to supplying building materials for the construction.

After the talk, there was question and answer session in which local chiefs raised various points of concern including – plans for local fishermen who rely on fish catches for they livelihood, need to re-forest the area, need for completion of school classrooms, need for sea wall rebuilding in some places, a need to train youth in small business skills, the lack of bursaries for school kids, as well as the challenge of combating drugs and alcohol, which were mentioned in the Lamu county development plan. They also raised the issue of controversial payments for land ownership that has happened in some areas of the planned Lamu port.

The county commissioner spoke and appealed to chiefs to look at security in their areas, and talk to people, as ultimately, all Lamu people will benefit from the new Lamu projects. He noted chiefs have a lot of influence and can combat propaganda, as people still believe what a chief says and this has a big impact on communities. He asked the chiefs to look out for issues that concern him including ensuring that no one invades other people’s land, especially with violence, that they curb burning of bushes to eliminate historical land barriers, watch out for illegal cutting of forest trees and ensure that there are no more night weddings / night discos – as they had to put an end to the practice of school girls being married off.

See Part II which includes a visit to the proposed power plant site.

Nairobi Securities Exchange IPO

The Nairobi Securities Exchange (NSE) launched its IPO on July 23. It runs up to August 12, 2014 and they are selling 66 million shares at Kshs 9.50 per share (with a minimum investment of 500 shares costing Kshs 4,750) and the NSE plans to raise Kshs. 627 million (~$7.3 million).

Excerpts from the prospectus and other sources.

The NSE borrowed Kshs 300 million from Kenya Commercial Bank to part finance the purchase of the Westlands building that now houses the exchange. (The interest rate is minus 2 the bank’s base rate). Part of the funds raised from the IPO will be used to repay the Exchange’s mortgage debt.
The Dar es Salaam Securities Exchange has completely divested from the NSE and CDSC.
The NSE has about Kshs 1 billion assets and an EPS of 10.70. They had earnings of 622 million and a profit of Kshs 262 million in 2013. The NSE owns Kshs 20 million worth of Safaricom bonds and Kshs 15 million of Housing Finance ones
The IPO is budgeted to cost Kshs 40.8M
Ahead of the IPO in which 194 million (M) shares are being listed, the Kenya Government and the Investor Compensation Fund each own 6.56 million shares and 22 stockbrokers each own 4.08M shares – for a total of 128.6M shares. 2.5 million shares are reserved for employees of the exchange (The NSE has 38 employees and 5 senior managers).
KRA assessed and charged them Kshs 19m for 4 years of back taxes, of which Kshs 15m has been paid
One of the options the Exchange is contemplating is to establish regional exchanges in Somalia, the Democratic Republic of Congo (DRC), South Sudan and Burundi
The NSE expects to introduce the REITs and ETFs, and there are also plans to introduce the a Derivatives Market this year. The NSE also plans to upgrade of the Automated Trading System (ATS) and the Bonds Trade Reporting System with some of the proceeds from the IPO.

Turning Round the Lunatic Express

A few weeks ago, Rift Valley Railways (RVR) and Citadel Capital had a small media briefing to highlight the state of their investment in a consortium to run the Kenya Uganda-Railway. It was meant to signal an escalation in the marketing the achievements of the consortium but it also highlighted the state of the railway that they invested in about three years ago.

The railways which moved 4.2 million tons in the early 1970s’ when it last got a public investment but had been in steady decline since with increased competition from roads and pipelines. It was then passed on by the Governments of Kenya and Uganda through a concession to new owners who, as it became apparent later, were without money or management expertise – and were down to one working train, and about to pull the plug on the venture.

The new investors, led by Citadel and Transcentury, fundraised through debt and equity and set about rebuilding hundreds of kilometres of rail tracks that were dangerous if trains moved at their regular speeds, refurbishing locomotives and wagons, automating line movements, creating storage facilities, and putting staff succession plans in place. This year they launched a graduate trainee program that will have a class of 20 this year who were selected from 3,400 applicants and will soon install a train simulator for training.

Passenger services are 4% of Revenue

Their concession called for an investment of $40 million in 5 years but it’s taken a budget of $300 million to get where they are today, including $11 million worth of levies paid to the governments every year. They hired a management team from Brazil who engineered similar turnarounds, and there has been some progress in going from 22 days to move cargo from Mombasa to Kampala, to a current average of 8 days. The best performance is 4 days, and their internal goal is to make that period the average by 2015. They are back to moving 1.5 million tons a year, meeting a consortium target with s plan to get to 4.5 million tons by 2016.

But even as they are breaking even, the governments’ of Kenya and Uganda are restless. In recent weeks, the Deputy President complained about the creaking 90-year-old relic known as the Lunatic Express that was built by the British Colonial government, while the Transport Cabinet Secretary believes that with 20 million tons passing through the Mombasa Port, there’s need for five other railways.

There are designs to have a Chinese-built wide-gauge railway from Mombasa to Uganda (to be financed with a 1.5% tax on all imported goods) and another 1,500-kilometre track from a planned new Lamu port all the way to South Sudan.

Even with clients like Total, Hass, Maersk, Coca Cola, Shell, the World Food Program Bamburi, Athi River, and EA Portland cement companies, RVR still have a way to go with proving to other corporates that they are a viable reliable option to the hundreds of trucks that make that daily journey from to and from the Mombasa Port.

Bankelele

Nairobi writer on Banking, Finance, Technology, and Investments