NYONG'O: The Mawingu Plan that fathered Adani

Just like Adani’s privately initiated proposal, the Mawingu Plan was complex and opaque.

Coming at a time when KQ was basking in its pride; bold, high-flying and posting profits, its top leadership had this aggressive demeanour that they could not fail.

These corner-office breeds made headlines in business magazines and were willing to break the rules with incredible daring and flair. And so the Mawingu Plan was set as the next altitude.

Unfortunately, like Icarus, they flew too high. Scandal set in, and soon these once-feted and envied corporate leaders found themselves falling hard and fast.

While in this second part of the series the focus is on the Mawingu Plan, the broad intent is to shine a spotlight on Adani.

Upon reflection, if the failure of the Mawingu Plan was the endpoint of the wrong path, then in Adani’s PIP is necessary to reject it in toto and change course radically. We as a country, must start completely over from scratch.

After 60 years of independence, 68 universities and counting, a polity of high intellect, Adani has nothing to offer Kenya but another mega scandal. We have competent local capacity to do projects right.

Presently they are masquerading as masters of their domain with lofty projections but the subscript in their PIP is littered with crystal clear indicators of impropriety.

Look, for the Greenfield Project, the country received over 100 applications from firms vying for the contract.

Today we have been coerced into considering only Adani as a fait accompli. This kind of project is the ideal candidate for competitive bidding to realise value for money.

Adani cited the length of time it would take if competitive bids were called for; 18 months they said, but JKIA has been crying out for modernisation for the past 35 years.

What harm would 18 months do? Past lessons from for instance the Mawingu Plan have taught us how to prevent such disasters in the future. The future is now. We must prevent this one now.

How the big picture in the Mawingu Plan ignored the little details?

Linked to the Greenfield Project on JKIA expansion, KQ launched the Mawingu Plan in 2011. The plan was proposed in 2010. The objective was to increase the number of the airlines’ destinations from 53 to 115 in 77 countries in six continents by 2021.

It meant growing its fleet to 119 aircraft from 42 then. And the only way to do this was by use of special purpose vehicles – touted as normal industry practice globally.

Today KQ has 34 planes plying the skies nationally and internationally but with a debt outlay that does not relate to its fleet size.

One way of understanding this is to look back on the Covid-19 health crisis when all flights were banned but airlines still had to service their loans. They made losses.

The slow resumption called for fleet standardisation to maximise revenues and at the same time reduce costs.

KQ needed to create a fleet that was suitable to its service structure seen in the choice of aircraft type according to planned flight distance and cost incurrence.

Optimising the service structure would result in cost incurrences tracking revenues. But for KQ notwithstanding the pandemic, costs have continued to climb compared to revenues especially those related to debt service.

This takes us back to the structure of the Mawingu Plan that was hatched at a time when KQ was profitable. The continued rise in fixed cost which largely constitute finance costs, points to a massive rip-off by the corner office breed who were in bed with their political counterparts. While SPVs are well-meaning processes for acquiring assets in the industry, in the case for KQ the motive was ulterior.

The plan was to have KQ buy planes at twice the price through loans without making the KQ executive liable though they were the ones using the aircraft while hiding the identities of those who were digging this debt hole on their behalf.

It was a deal that reeked of corruption. It all went catastrophically wrong. Eleven per cent of KQ’s revenues presently are spent in servicing leases that are double the worldwide average of five per cent

Fleet growth strategies by airlines. The role of SPVs

To understand the pitfalls of the Mawingu Plan, we take a deep dive into how airlines grow their fleet. Leasing is the preferred approach with four out of 10 of all commercial aircraft worldwide on lease according to Simpleflying.com. Direct ownership of the aircraft is an alternative to leasing giving the carrier more assets that adds value to the business and provides them with options for raising liquidity in case of financial difficulties.

When KQ was 100 per cent government-owned, the second option was applied in fleet growth. The third option is similar to a hire-purchase agreement. It has a much longer term, is more complicated with layers in the transaction process but in the end the airline can buy the aircraft when the lease expires.

Depending on the number of planes ordered, discounts in the region of 50 per cent of the prices listed have been recorded.

Notably, the type of customer (credit ratings matter), number of aircraft ordered, and order terms play a significant role in aircraft prices. Historically, Ireland has been the global home of leasing and the dominant leasing companies based there are Aercap, Avolon, and GECAS.

With better credit ratings than most airlines and their ability to consolidate orders in bulk, they are able to secure big discounts from the two dominant manufacturers Boeing and Airbus which they pass on to their clients.

It is in leasing that SPVs are used. The financial engineering of leasing is complicated but in simple terms, the circumstances of the airline, market conditions and tax and accounting concerns determine the most appropriate lease on a case-by-case basis.

The airlines purchased by lease act as a security through a separate legal entity which investors buy into.

The SPV is a regular source of revenue over the period of the lease for the investors. In the event of revenue shortfalls, investors have the right to repossess the aircraft.

The financial operations of the SPVs are not reflected in the financial statements of the airline in what is called off-balance sheet accounting. This is how KQ got itself into a mess.

When the revenues expected by investors are below expectations, the leased planes can be impounded anywhere they land.

This fear confronts KQs top management daily and it is easy to see why it is constantly on the drip of state bailouts. The math isn’t difficult.

As I have said each leasing case is unique. With good credit ratings, a lease agreement of ten years, a down payment of 3 to 6 months and monthly payments as a percentage of the value of the aircraft and you are in business.

Use a well-established leasing company to reduce risk and the business will generate profits consistently.

While KQ’s performance was wanting, based on this we can estimate how many aircraft KQ should be owning from state bailouts and its current level of indebtedness if it did things right. For example, leasing a Boeing 787 will cost a million dollars a month; to date according to the Auditor General, the cumulative state bailouts to KQ as of June 30, 2023, was  Sh55.374 billion.

KQs negative equity position is at Sh123.6 billion; not yet insolvent but precarious. This raises the question of why does it have a higher debt and fewer aircraft to date than when it commenced the Mawingu Plan.

The Senate inquiry and KQs SPVs

Though the leasing market is dominated by Aercap, Avolon, and GECAS based in Ireland with better credit credentials overall and an ownership structure that is in the public domain, KQ chose to implement lease acquisition through two SPVs called Tsavo and Samburu.

This was acknowledged in an official position statement released by the Chair of its Board Michael Joseph dated  May 9, 2023.

For Tsavo the position statement read “In 2010, KQ sought a financing facility to facilitate the acquisition of 6 Boeing 787 Dreamliners, 1 Boeing 777-300ER and 1 GEnx spare engine.

As a result, a Special Purpose Vehicle (SPV), Tsavo Aircraft Financing LLC, was incorporated by the financiers JP Morgan Chase Bank, Citibank NA, and Afreximbank.”

For Samburu, the statement was “KQ also sought another facility to acquire ten (10) Embraer E190 aircraft. Samburu Limited, another SPV, was incorporated to borrow the funds from a syndicate headed by Standard Chartered Bank to acquire the Ten (10) Embraer E190 aircraft. Other partners in the syndicate included China Development Bank, Trade Development Bank, Nedbank Int’l Ltd and Afrexim Bank.”

Recollect that its investors who put their money into SPVs; these investors can be any number.

Who were these investors? Why not use established leasing companies with better credit ratings bulk orders, better discount terms to reduce the cost of servicing the leases? Were these two leasing companies only created for KQ meaning higher costs? Were they credit-rated? These questions deserve answers for the simple reason that KQ lease service costs are double the global average.

While SPVs enable airlines to acquire aeroplanes, SPVs have also been used in off-balance-sheet schemes to hide debt and toxic assets.

In publicly listed companies, SPVs may create the impression that a company’s stock price is increasing when they are not.

One famous case is Enron, a US energy, commodities, and services company that used SPVs to deceive the investing public that its stock was performing well when it was not.

Enron’s actions in the use of SPVs were fraudulent and its top management were found culpable.

By 2011, KQ had grown its revenues to $1.077 billion from $320 million in 2002.

It became a target for the network of corruption. Not surprisingly, preceding the roll out of the Mawingu Plan, KQ went for rights issue in March 2012 to raise approximately Sh20.68 billion for funding the pre-delivery payment to aircraft manufacturers in connection with the acquisition of nine Boeing 787 Dreamliner Aircrafts and ten Embraer 190 aircrafts before the SPVs were put into action.

However, during the Senate hearing by the Select Committee of which I was the Chair, it emerged from the submissions that more SPVs were created in addition to Tsavo and Samburu. As I have already explained, the financial complexities in capital leasing allow for an SPV to be taken for one or a number of aircraft. The advantages of the latter are obvious in lower lease servicing costs but for the former, the only rational is legalized corruption, a distant cousin of budgeted corruption.

Submissions by KALPA

Kenya Airline Pilots Association submitted that the KQ top management had acquired aircraft that were not suitable for the African routes. They gave an example of the acquisition of twenty-six Embraer aircraft, fifteen of which were always on standby.

KALPA stated that the Embraer aircraft had a capacity of ninety passengers but experts have stated that these aircraft could only comfortably carry sixty-five passengers.

KALPA were also concerned over the ownership of the 777-2OO and 777-3OO, because the airline had previously informed the pilots that these aircrafts were fully owned by KQ.

The pilots however suspected that these were on lease and the leasing costs were not sustainable plunging KQ into debt and the evident liquidity crisis.

KALPA also suspected that the procurement process was compromised with the possibility of fraud revealed in the overpricing of goods and services, beyond prevailing market rates.

The SPV for the acquisition of the Embraer aircraft was registered in the Cayman Islands in the Caribbean with a pre-delivery payment financing structure.

The corrupt acquisition of these aircraft, through this SPV caused losses to KQ amounting to billions. The companies involved in these deal(s) could not be traced, though registered in the Cayman Islands.

Still on the Embraer controversy, in 2010 KQ top management stated that it had only bought one aircraft of the type but a further search on airlines.com revealed that KQ had bought another Embraer the same year.

It was formerly operated by FinAir from 2006. It was bought as a new aircraft, but records showed that it was second hand and it did not feature in KQ’s lists of aircraft. Was it re-sold on the Dark Web?

In the purchase of the Boeing 737 300, the Senate Committee was informed that this was done by an SPV called Simba Finance Limited, which was incorporated by Ex-Im Bank in Bermuda.

The SPV held the title to the aircraft pending the completion of the loan by KQ. The transfer of this title to KQ once the lease term was over appeared dodgy.

The choice of the location of the SPVs was justified as low cost, tax havens with quick turnaround times in setting up an SPV.

From KALPAs submissions, a number of SPVs were set up in the Cayman Islands namely Amboseli, Twiga, Masai Mara, Samburu and Simba. Failure to target a lease/ownership ratio of 50/50 exposed KQ badly with its over-dependency on leases.

KALPA in conclusion submitted that KQ lost money in the Mawingu Plan by buying too many aircraft and then parking them at JKIA.

Other wrong decisions that contributed to the losses were in fuel hedging, and staff policies that failed to motivate. The breed was now managing by crisis.

Submissions by external auditors

Submissions by KQ’s external auditors then Deloitte & Touche for the financial years from 2OO4 to 2O1O stated that Project Mawingu was very ambitious but fleet modernization was necessary to reduce operating costs.

Deloitte advised KQ that the implementation of the open skies policy by the International Air Travel Association would open it to competition and thus put the Mawingu Plan at risk.

KQ responded that it was aware of the risks involved since they were alert to the adoption of the policy which would open the Kenyan airspace to other airlines. Overall the auditors observed that KQs debt levels were becoming unsustainable.

Three borrowing facilities to finance the purchase of 10 Embraer aircraft and pay for the pre-delivery deposits for the Embraer and 9 Boeing787 Dreamliner aircraft were the contributors to the high debt compared to the current revenues.

Inferences and concluding

In government and government-owned entities, there is an unwritten adage that when a process is moving too fast, then rules are being broken and it is headed in the wrong direction.

When a process is moving too slowly, then the right procedures are being followed and it is headed in the right direction. The Mawingu Plan was to be implemented in 10 years, too fast. It failed.

Now we have Adani that is being railroaded down the throats of Kenyans, too fast. One of the conditions in the scheme is locking out the development of any other airport to the exclusion of JKIA.

This means that Kisumu, Mombasa, and Eldoret airports (or any other airport) will freeze on any development prospects for the next 30 years. This flies in the face of devolution and the Constitution which is the hallmark of our governance structure.

In developed nations and a great many other countries, the development of local infrastructure is the mandate of the sub-national government or the local authority.

In the USA for instance, cities within the states have the right to issue financial debt instruments to develop the areas they govern. Suffice it to say, if Kisumu County found a strategic investor who wanted to develop the Kisumu International Airport as a hub in the Great Lakes Region, the Adani deal would veto it.

This is a constitutional attack on the character of devolution, the bedrock of our sovereignty. It demands legal action.

Finally, between KQ’s Privately Initiated Investment Proposal submitted in 2018 that wanted to consolidate all aviation assets under a Kenyan company, serve KQ better and enhance its revenues through services offered at JKIA and the Adani PIP, I am with KQ.

My call is a call to all patriotic Kenyans that we must resist this modern-day neoeconomic invasion by Adani.

We must support KQ as our own even when it takes two steps forward and one step backwards by reviving its PIIP.

Adani does not have the interest of Kenyans but their determination seems to draw boldness from within. Corruption is at play.