Kenya Airways: IFC Strategic Review and Options Report

Drawing upon its experience and discussions with government officials, Kenya Airways workers and managers, and potential investors,  the IFC drew up and presented for discussion with the Kenya Airways Board of Directors the goals of Kenya Airways privatization and means for achieving these goals.   The report that formed the basis for the discussion is summarized below.
Objectives and conditions of Kenya Airways' privatization

The Government of Kenya has multiple objectives for Kenya Airways' privatization.  Key among these are:

  1. eliminating the drain on Kenya's Treasury which the airline has been in the past, while ensuring that future capital expenditures for expansion of service or refleeting will be drawn entirely from private sources acting on commercial interests;
  2. ensuring that the airline continues to service the public and especially Kenya's important tourism industry with reliable good quality service;
  3. contributing to the general broadening of the base of asset ownership in the country.
Potential participants in the future ownership of Kenya Airways include strategic partners from the international airline industry, a variety of Kenyan financial institutions, employees of the company, the general public, international investors, and the Government itself  -- at least at some level and for some time.  Since Kenya Airways is currently technically bankrupt, strengthening the company's balance sheet through debt restructuring is a prerequisite for attracting potential investors.  Assuming satisfactory implementation of debt restructuring, potential investors made plain that each would apply two basic criteria in making an investment decision:
  1. the extent to which the airline will be run on strict commercial terms, free from any interference that could detract from its viability
  2. the quality and assuredness of a management team able to build on recent successes and to provide internationally competitive standards and controls.
Meeting the first of these depends on creating an ownership structure that is motivated first and foremost by commercial considerations.  The second can best be achieved by securing a lasting operating and management agreement with a successful international airline, based on mutual advantage and objectives.   This may be obtainable through a cooperative commercial relationship or a management contract, but is much more likely to be secured by an equity partnership.

Recommended Process

Once the Kenya Airways Board of Directors has agreed on the overall objectives and priorities for the Company's privatization, it could appoint a small working committee of its members to oversee the entire process and to provide a point of regular consultation with the International Finance Corporation, acting as the Board's advisor.  The first order of business would then be to ensure that the airline's debt restructuring proposals are put into effect without material change as quickly as possible.  Following the Board's decision on the basic elements of the privatization process, the main elements of the process will be:

Subsequent stages of the privatization will be defined and planned in consultation between IFC and the privatization working committee of the Board, but are expected to include further private placements of shares with Kenyan financial institutions, a specially designed employee stock ownership plan, one or more public offerings on the Nairobi Stock Exchange, and the possible offering of shares to international investors.

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