LETTERS: Why KQ should not revert to State ownership

The history of state-owned enterprises has been that of political interference, poor corporate governance, over-staffing and continuous bailout plans where funds are put into bottomless pits.

This is why most African governments have resorted to privatising state-owned enterprises so as to build more vibrant and efficient private sector entities. The foregoing provides the basis for my response to Peris Tobiko’s article published in the Tuesday September 3,2019 edition of the Business Daily newspaper and titled “Why Kenya Airways should not have been privatised”.

The state is mandated to provide public goods where there is an element of non-excludability of the good and non-rival consumption. Whereas many governments have made deliberate decisions to own airlines as strategic national assets; the forte of mismanagement has been continuous government guarantees for debts issued by such airlines and consequent bailout plans when faced by financial distress.

Even with the exchequer pumping money into such enterprises and attendant opportunity costs in funding provision of core public goods, there has been no improvement. The question is why? Are the tenets of corporate governance elusive in government owned enterprises?

The reason Kenya Airways was privatised at the beginning was major financial and managerial challenges the airline had. This is synonymous to challenges every other state-owned enterprise is facing in Kenya. Whereas Kenya Airways was the first national airline to be privatised in Africa, other state- owned carriers in Africa have faced similar challenges as KQ prior to its privatisation. In Ghana, the national carrier; Ghana Airways; was shut down in 2005 after the government refused to rescue it from staggering debts. South African Airways (SAA) has faced challenges that have prompted government bailout. Despite massive pumping of funds into the airline, it still remains in the red. As per the International Civil Aviation Organisation Secretariat, the privatisation of government-owned airlines was one of the ‘pre-eminent transformations in air transport.

The secretariat found that the motives for airline privatisation were ‘highly diverse’ and ranged from ‘purely economic considerations’ including the improvement of ‘operating efficiency and competitiveness’ to a more ‘pragmatic desire to reduce the heavy financial burden imposed by state-owned airlines on governments. Globally, reversals from private sector ownership to increased state ownership has failed in the past. The most notable is Spanair and Malev Hungarian Airlines, which ceased their operations after reverting to state-owned enterprises. This effectively meant loss of government aid provided from state coffers.

Whereas the country may want to emulate countries like Ethiopia, which runs air transport assets – from airports to fuelling operations – under a single company, using funds from the more profitable parts to support others, it must address other issues such as governance and political interference which are the Achilles heel for most of the state owned enterprises in Africa and particularly in Kenya.

The subsidies provided by the government may render the airline competitive in terms of its pricing. However, how do we tackle issues of transparency and accountability in management, governance, financial reporting and sustainability? In Europe, most of the state-owned airlines were privatised with a handful remaining under substantial state ownership. Reason is massive capital requirements by the state owned airlines and poor financial performance.

In Ethiopia, chronic foreign currency shortage, lack of adequate corporate reforms, and the reduction of the role of government in areas where the private sector can participate as well as the debt threshold of about 59 percent of the GDP has forced the government to allow the sale of a minority interest to domestic and foreign investors in Ethiopian Airlines.

The underlying factors within the context of managing state owned enterprises appear a similar story in Africa; the story of mismanagement, inefficiencies and political interference. Whereas the proposal to revert Kenya Airways to a state owned enterprise looks feasible for now, whatever the structure adopted as proposed; how this can be sustained in the face of ensuing confounding factors remains a big question.

Let us not make opening of airspace to other players an issues of reasons to revert to state ownership. With the efforts to bolster Intra-African trade, protectionism will not aid in survival of firms. Good management practices, minimal interference from political actors, enhanced efficiency and competitiveness will aid in overall sustainability of state owned enterprises like Kenya Airways.

Roba Adan Certified Investments and Financial Analyst and a PhD Candidate.