IndustryAnalysis |
Public Private Partnerships
PPP – Public Private Partnership Definition A cooperative venture between the public and private sectors, built on the expertise of each partner, that best meets clearly defined public needs through the appropriate allocation of resources, risks and rewards – The Canadian Council for Public-Private Partnerships
PPPs in the Development of Airports The private sector is generally acknowledged to outperform its public counterpart in the areas of technological capacity and innovation, human skills, efficiency and capacity to mobilize resources. But a successful symbiotic combination of both sectors can work wonders all round, including in the aviation industry, argues Aviation East Africa Chairman ERIC MWANDIA 2|
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ately the media has been awash with stories about governments in East Africa touting huge airports development projects. We hear of the Bugesera International Airport project in Rwanda; of Nairobi’s new green-field airport terminal in Embakasi. There has even been talk of international airports in Narok, Taveta,
PHOTOGRAPHY | JONATHAN KALAN
The partnerships are a continuum depending on the degree of private sector involvement in terms of resources and risks.
Kigali International Airport, be at the same time planning in addition for a completely new airport the size of Jomo Kenyatta International Airport? Similarly, JKIA itself is in the throes of a massive expansion, so why would the authorities be looking at creating a new and much larger facility nearby? This growth is not just restricted to Africa. Indeed, the growth of air travel and related infrastructure is even higher in Asia and South America. Nakuru and Thika. In Tanzania, there are advanced plans for a massive expansion and refurbishment of the major airports across the country. Bole International Airport in Addis Ababa is also in the middle of phased expansion. The list, it seems, is endless. So what is going on here? For example, why would Rwanda, already currently significantly upgrading
Behemoth
To take a hyperbolic example not too far away, whilst we all marvel at the huge Dubai Airport, recently completed and reportedly handling up to 4-5 million passengers a month, apparently there are plans under way to build a new terminal with a capacity of 160 million passengers per annum, a veritable behemoth. In tandem with the growth in
Similarly, JKIA itself is in the throes of a massive expansion, so why would the authorities be looking at creating a new and much larger facility nearby
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airports there is a burst of growth among East African airlines, with each of Air Uganda, Rwandair and Kenya Airways announcing ambitious growth plans. For example, Kenya Airways expects to increase passenger numbers five-fold from the current six million to 30 million by 2015. That is true ambition. Surely this is all not just hot air or are we into another period of constructing white elephants with governments trying to out do each other to massage inflated national egos? To illustrate the answer to this we need to go back 40 years ago. Kenya had just been awarded the headquarters secretariat of the new United Nations Environment Programme (UNEP), the first time a UN headquarters was located in the developing world. One of the key Turn to P12 January 2012
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IndustryAnalysis |
Public Private Partnerships
From P11
draws of Nairobi was location (in marketing, as they say, it is location, location, location), but to add value to that Nairobi then had something quite remarkable for a Third World African country – a working infrastructure. The roads had not yet gone to pot. The Moi era and its depredations were still years into the future. Of course now infrastructure, infrastructure, infrastructure has become the mantra for development planners, a key driver in the surge for progress and the growth of our nations. Kenya was ahead of the curve. A key part of of this working infrastructure was Kenya’s connectedness to the world by both telecoms and by air transport. Indeed this connectedness eventually enabled Kenya during that time to build a thriving economy as a major tourist, conference and diplomatic hub. So we see that air connectivity, good airports, good airlines, are useful if not essential for nations such as the East African countries that have got ambitions in development. But we also know that our nations are not only living from hand to mouth, we also know that they need a massive dollop of assistance from donors to stay on course.
Billions
So where will the money come from to build these massive airports? Indeed, some of these projects require gigantic investment by any standards; for example, it is estimated that to build JKIA from scratch at current rates it would cost in the order of billions of dollars. With all our competing requirements to provide other essential services to our citizens, it is unlikely that our government will have such sums to spare. What to do? Well, what does a business do when it needs to finance a project? If we do not have adequate internal funds, then we must borrow. But, as we all know, every business and country has a limit to its borrowing capacity. Borrow too much and soon the debts overwhelm the countries’ capacity to pay. A quick look at Greece will show what sort of turmoil can result from overextending your country with too much borrowing. Clearly every internally generated shilling and every borrowed shilling
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With all our requirements to provide essential services, it is unlikely that our government will have such sums to spare
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has many too many competing needs for which it is required. But there is another option. To illustrate this let’s consider the situation in some other sectors, Education and Health, for example. No government, developing and developed, has the capacity to meet all the education and health requirements of every one of its people. Thankfully, there is the private sector. A large share of the capacity needs of these sectors is actually delivered by the private investor. Of course neither a university nor a hospital is anywhere near an airport in terms of scale and complexity, but really this just a question of quanta.
Taken as a whole, the participation of the private sector in health and in education is quite impressive, albeit made up of a large number of small quanta.
Growth
Well, it is really not very different in aviation and certainly private money has already done very much to uplift the rate of airline growth. One need only look at growing airlines such as Kenya Airways, Precision Air, Air Uganda, Jetlink and others, some of which have shown remarkable growth. But how does the interested investor get involved in the construction of airports?
PHOTOGRAPHY | JONATHAN KALAN
The Wherewithal Factor So where will the money come from to build these massive airports? Indeed, some of these projects require gigantic investment by any standards; for example, it is estimated that to build JKIA from scratch at current rates it would cost in the order of billions of dollars. With all our competing requirements to provide other essential services to our citizens, it is unlikely that our government will have such sums to spare.
The private sector is generally acknowledged to outperform its public counterpart in the areas of technological capacity and innovation, human skills, efficiency and capacity to mobilize resources. Whereas it may be quite obvious that the profit motive has allowed the private sector to hone its efficiency and to make better use of the available technological and scientific capital, it may not be so clear to an East African that a company is capable of mobilizing financial resources better than our own governments. The reality is that, in contrast to the situation in Africa, where the government is the driver of the economy, in developed nations it is
the private sector that controls the lion’s share of the economy. It is the private sector that the banks trust to manage financial resources best. Finance, technology, superior human resources and efficiency, these do indeed present powerful factors for the effective implementation of successful large scale-projects. And what would the investors want in return? As always, investors will invest their money where they can get a good financial return. The attraction of the return is a function of the length of the period during which the investor is licensed to operate the completed Turn to P15
January 2012
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IndustryAnalysis | Public Private Partnerships Public Private Partnerships PHOTOGRAPHY | JONATHAN KALAN
From P13
facility (good international practice now limits the duration an investor is given to recoup his investment to not more than 30 years) and the level of fees that he is allowed to charge. Here then is the primary conflict that must be resolved – the investor is driven by the profit motive and wishes to charge as high fees as possible to maximize profit, whereas the government is concerned (usually) with the benefit of its citizens and requires that services be made available at reasonable quality and price.
Access
In a sense the problem is less acute in the development of an airport than, say, the case of the construction of a toll road. If one charges too exorbitantly for use of a toll road, the poorer users will not be able to use it and it is the already privileged who will further benefit. This is an inversion of government’s natural wish to favour the less advantaged and close the gap in access to resources. In airports, the burden is a lot lighter and it is likely to be shouldered by the corporate organization and the already privileged anyway, a kind of luxury tax, a pay-per-use mode. Air travel, unlike road transport, is usually not subsidized anyway and users already have to pay the full price. An efficient private facility may actually end up cheaper for the end-user. In the end though, investors do not build facilities for just anyone.
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The investor will take a long hard look at the country, its governance culture and its economy. The cost of financing and the end services is heavily dependant on perceived risk. He needs to know that, indeed, 20 years from now he will still be peacefully recouping and profiting from his investment, that the country is stable, that his contract is enforceable and that the new lot of ministers in the next government is not going to going to shake him down for handouts under some dodgy pretences. On this score
several East African countries may need to do a lot of convincing to the PPP investor. Nevertheless investors have shown a certain appetite for investing in infrastructure. Recently, the Nairobi Motorway Group, a special vehicle company, and consortium Strabag of Austria and the huge Israeli construction company, Housing & Construction Holding (HCH), Israel’s largest infrastructure company, contemplated a multibillion dollar undertaking to build toll roads in Nairobi that only became unstuck when it was effectively blocked by the private sector arm of the World Bank.
Partnership
Public Private Partnership (PPP) is the name given to the partnerships between private investors and government entities. These partnerships can have varying levels of participation in terms of finance, risk and ownership by the two parties (see box). Are there any examples of PPP development of airports in East Africa? Well, private investors have been crucial over the years to the growth of Wilson Airport, which grew at one time to become the busiest airport in Africa in terms of aircraft movements, even though most of the aircraft using the airport are small, classified for purposes of general aviation. Turn to P16
January 2012
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PHOTOGRAPHY | JONATHAN KALAN
From P15
And then there is the JKIA Cargo Centre. This Centre is currently the largest aviation cargo hub in Africa. Most of its capacity has been developed by private investors. In Tanzania, even before the Government created the Tanzania Airports Authority, it boldly decided to hand over for private development and management the country’s second airport, Kilimanjaro International Airport to a new specialpurpose company, the Kilimanjaro Airport Development Company (KADCO).
Kilimanjaro
Our correspondent Jonathan Kalan gives his impression of the airport in another story in this issue and interviewed the KIA Managing Director at length for our inaugural Cover Story. The shareholders included Mott Macdonald, the South African Infrastructure Fund, Interconsult and the Tanzania Government. At KIA, the investors exited and the Government used its preemptive rights to acquire 100% shareholding in the company. This puts KADCO in the same type of structure as the Airports Company of South Africa (ACSA), a private company with minority private shareholding, the bulk of the shares held by the South African Government. Nevertheless, the KADCO
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experience provides some useful insights on the utility of PPPs as a solution to airports development. In Nigeria the local terminal of Murtala Mohammed International Airport (MM2), Lagos, is run by a private company, BiCourtney Limited. Of course, all this is a far cry from the proposed green-field Build Own Operate model proposed for some of Burgisera and Nairobi’s New Greenfield terminal. Nevertheless over 50 major airports worldwide are managed by private companies. Some of these airports were actually developed as green-field projects by private
companies. A prominent example of this is Bangalore Airport in India. If our planners are determined to go the whole PPP route they may need to go quite far to learn all the lessons, but, as we have seen, we don’t need to get unnecessarily concerned or vexed about the issue, there is a cultural track record in Kenya and elsewhere in the region of private sector participation in the development of the aviation sector. The terminology maybe new and the application more intense, but this track record puts us in good stead to manage these projects confidently and successfully.
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AirportReview |
Kilimanjaro International Airport
So says MARCO VAN DE KREEKE, the Dutch expatriate Managing Director who first arrived at Kili on September 11, 2001, in this wide-ranging interview with Aviation East Africa Special Correspondent JONATHAN KALAN in which Public/Private Partnerships (PPPs) are analyzed with reference to the strategic management choices that have faced one East African airport over the past decade
‘Kilimanjaro Airport probably one of the best in the industry’ AVIATION EAST AFRICA: Could you tell us your professional background? VAN DE KREEKE: Actually I have an engineering degree in agriculture; agricultural land use planning. We have to plan our land use to the square metre of course. With that degree, I came to work at an airport right after I graduated. The airport wanted to expend building the runway et cetera, so we were in the middle of all kinds of environmental impact procedures and all that Q: Where did you study? A: I studied in Boston University. In the agricultural world it’s quite renowned, but, of course you’ve probably never heard of it. I then
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did some airport runway work in Maastricht in the southern parts of the Netherlands; a small regional airport. So I rose into more managerial positions. After a number of years I managed to run the company… Q: You started in the runway? A: I started more or less in the planning department, planning the extension of the airport as a project manager and as the positions came up, moved to managerial positions. So working for about seven other years and then I went to work abroad for a number of years. So this environment network, this opportunity came up – to be the airport manager of Kilimanjaro Airport. Kilimanjaro Airport had privatized just a number of years before then and somehow
during privatization, they had chosen to have a Dutch, given the airport management, they had been used to having a Dutch airport manager and although they didn’t continue the contract with Emson Airport because they were way too expensive, they continued to look for a Dutch professional somehow in that same network and that’s when they found me. I had never been in Africa and not knowing anything about the continent, I packed my bags and left for Kilimanjaro Q: Which year was this? A: This was 2001. The day I got my contract was September 11. It’s a weird day to get your contract to work in an airport, because a lot of things changed and being an airport
PHOTOGRAPHY | JONATHAN KALAN
manager, more or less the operations manager at the airport, a lot of things for me changed as well. So those years, I was really involved with the operations side of the airport; airport operations, security et cetera.
takes your bag, when the plane lands, they clean and load and offload, they make flight plans. All the logistics around flying, that’s done by a handling company and I managed that company in Maastricht
Q: And what were your qualifications to be an airport manager, based on the work you had done with the other airports? What was the level of things you were working on previously?
Q: What was the name of that company?
A: In the airport I worked before in Maastricht I was a project manager, then I managed as general manager in the handling company at the airport. They more or less take care of the logistics at an airport. So when, as a passenger, you come to an airport, somebody checks you in,
A: Master Handling Company. So I had quite a lot of knowledge of airports of course and the number of years of managerial experience, same kind of size. That company was about 100 people and over here there were about 150. I guess they thought I was qualified enough to do the job. I got a two-year contract and when that ended, I went back to Holland. Also found a lady, who’s now my
wife, so we decided to move back to Holland. Q: You met her here or in Holland? A: I knew her before but when living here – she still lives and works as an airhostess in KLM and so on her flights over here, she would say, ‘hey I’m in Tanzania’ and so we would meet and one thing led to another. But it seemed at the time that it would be a lot easier to move back, so we did. I did a few small jobs in Holland but quite sooner, I got to talk to an airport in de Privy. I don’t know if you ever heard of the Netherlands Antilles, a group of islands in the Dutch colony. One of those islands Turn to P20 January 2012
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AirportReview |
Kilimanjaro International Airport
From P19
was also looking for a manager for the airport. So I got to talk to them. It took a long time; it took about eight months from when I first talked to them to when I got a contract there. But that was my next thing and it was quite nice. Small Island, 15,000 people – so it was a small village, but an interesting airport. It was the technical stop for KLM flights into South America. So their flights to Peru and to Ecuador make a technical stop first and then move on. Four KLM flights a day really in a village with 15,000 people, that was quite interesting Q: Was it more laid-back than Tanzania? A: I wouldn’t say it’s more laidback, Tanzania is laid-back; a lot easier for us. The official language in that island is Dutch. Most of the people at the airport, my managers, were actually educated in Holland. They had their higher degrees and college degrees in Holland. So it was a lot easier to relate and to function and also there was a large European Dutch community. But socially it was easy and yes it was a laid back, nice life. So we worked there later for three years. My youngest daughter was born there, it was good luck. But after three years, it was time to move on again and I immediately landed at an interim job at the airport I worked for before Maastricht. They had a bit of a managerial problem and needed an interim manager so I moved back there because I was looking for a job. The difficulty about this kind of life and this kind of job is I work on contracts, so there is no security for work Q: Is there a lot of jobs available in your position? A: No, and especially not abroad as an expert. Let’s face it; more developed countries will have their own people who will develop into the job so looking for expert managers is not very tough, as opposed to countries like this where it’s more difficult to find the right people. So came back to Maastricht, worked there for a little bit more than a year and then, through my networks, I heard that they were looking for a managing director at
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Kilimanjaro Airport. I very officially formally applied, went for two rounds of interviews, finally got the job and then decided to pack up again and leave for Tanzania. It was a big step because by then there were four of us, the first time I was alone, but now there’s four of us: To back up and move to Tanzania, quite a step. Q: What year was that? A: That was 2009, two-and-a-half years ago. Q: So then you ended up here? A: I then ended up here, where I still am, this time as the Managing Director. Q: Is it a short contract or is it a longer one? A: Again, a three-year contract, so it will end mid- next year. Q: So tell me a little bit about Kilimanjaro Airport Development Company. A: KADCO was founded in 1998. There was a wave of privatization really in Tanzania. Privatization was the hard thing to do. I think it was the breweries, the banks, Kilimanjaro Airport and at some point, not much later, it was Air Tanzania, although they didn’t call it privatization. They would say Partnerships with the Private Sector. Also this privatization of Kilimanjaro Airport, the partners
were Mott McDonald, which is a British consultancy firm who held the majority of shares, South African Infrastructure Fund, now Brian Macquarie Group, which is very well known in the aviation industry because they own and manage a number of airports, there was a local entrepreneur from Dar es Salaam (InterConsult Ltd, a Tanzanian engineering firm) who held a small share and 30 per cent shares were still held by the Tanzanian Government. They took over management of the airport on a concession; let’s say a rental agreement for 25 years. They hired Dutch airport management and more or less, in those first couple of years, reorganized the airport and did a lot of cosmetic improvements to the airport. It was hard days; I came here in 2001, so I know a little bit of that history. The company then existed for two or three years. Passenger numbers were just over 200,000 per year and in such an industry, that’s small, it’s very small. As a government rolling industry and a difference, of course, of locations and local environment, as a rule you would say an airport below a million passengers per annum is very difficult to run on a profitable basis. The investments in hardware, in the runway, the building and all the equipment you have runs into the millions and to earn enough on airport operations, to start paying for those costs, you need to have a certain volume and of course those costs don’t go up when the volume goes up.
PHOTOGRAPHY | JONATHAN KALAN
They found a buyer, a British company called Omniport. Omniport runs a number of airports, among which is Norwich Airport in the UK. The Tanzanian Government however had to approve that sale from the private shareholders to this new private shareholder. It was very hesitant to do that and after some time of negotiations, about two years, the private shareholder became a little bit impatient, put some pressure on the situation, after which the Tanzanian Government decided to take back the shares, buy the shares being sold by the shareholders, to be able to choose themselves what to do with KADCO and who the new partner would be. Q: So this happened in 2004 or when was that? So you need a minimum base point and 200,000 is way too low. Twenty-four is the number of years this airport company operated at a loss. Still I think quite a lot of things improved, but it was hard work. Traffic grew quite well and a number of improvement projects have been done in the meantime and overall communication equipment, standby generators for the whole airport that were installed, but a lot of that was done with either grants or soft loans from the World Bank and European Investment Bank Q: How did it come to be run back up? What was the situation before? Was the airport doing well, was it doing bad, was it okay? There was a wave of privatization. How did it sort of come about then? A: It’s a very good question and difficult for me because I wasn’t there in those days. Why KADCO, why Kilimanjaro Airport was chosen to be privatized, there is no documentation and there is very few people who can tell the story. I know more or less the founding fathers, or a group of British entrepreneurs who had connections to the major shareholder, which is Mott Macdonald; I know one of them grew up here in Tanzania. I think his father in the colonial era was a District Commissioner. He grew up here, had a dream about moving back to Tanzania, doing business and it was in the aviation industry. So, as far as I can recall, but this is not the official history
of the airport, he made everybody enthusiastic for the plan to privatize Kilimanjaro Airport. Probably at the same time, that is one of the problems of this privatization. A contract was made; concession agreement was made whereby the Government gave this airport to the private parties to operate at a certain annual concession fee which wasn’t very high. It was more or less a symbolic fee, which made sense because the airport would run a loss, everybody knew. But I think the expectations of everybody around this company, the Government and the public, was to see a lot of large investments in the airport and in the company which private parties were very hesitant to do because it was already running at a loss and the choice to put millions into a company which you wouldn’t recover that investment for the next decade or so, was a difficult choice to make. So I guess, in their initial agreement, they had not made very clear who was responsible for which investments. The infrastructure was given to KADCO as a symbolic fee. It’s an interesting question of course, who was responsible for the maintenance of all that infrastructure. Is that the owner giving it out at a single rent, or is it the tenant who takes over 25 years and then has the obligation, the responsibility to maintain the infrastructure? And I guess they never agreed, which led to a decision by the four shareholders to step out. This was not their cup of tea. They wanted to sell their shares.
A: Probably the idea to sell the shares started in 2007 and in 2009, they came to an agreement to sell back the shares to the Government. I was actually hired by the Board of Directors, which was still persistent on the kind of chairman they were looking for. Q: So, for a time, the shares were bought back by the Tanzanian Government and it was no longer a partnership anymore? A: That is still the case. September 2009, the majority of shares were bought back by the Tanzania Government and the situation lasts until today. Early 2010, the Government also bought back the small share of the local Tanzanian entrepreneur that I mentioned before. So the Government [for] two years now, owns again 100 per cent of the shares of KADCO. Q: So you mentioned one of the difficulties that it was unclear who would invest and who would maintain and so that was one of the challenges. What are some other difficulties that you experienced in the initial years you were here with the publicprivate partnerships? A: Just after the Government bought back the shares, there was a lot of talk about this and people were referring to it as the failure of the Turn to P22
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AirportReview |
Kilimanjaro International Airport
From P21
privatization of Kilimanjaro Airport. And I reacted to that a number of times, saying, “I think that we cannot call this privatization a failure. On the contrary, I think if you talk to people in the Tanzanian aviation industry maybe even the East African aviation industry, they will all agree that Kilimanjaro Airport is probably one of the best maintained and best running airports in the industry, so this privatization I think was a success. However, the ultimate goal of seeing private investments in that airport infrastructure did not succeed, did not happen. And why was that? It’s a financial model. It has to be financially viable, of course, for private industry to invest. So, what was the challenge, probably the only challenge, the airport was simply too small, the volume at the airport was too small and therefore the income was too small to generate enough money to do major investments. We were growing out of that situation really. On a personal note, I left the airport in 2003, I came back in 2009 and, in the meantime, traffic had doubled. In six years’ time, traffic had doubled. Even in 2009 and 2010, when the whole world actually went down and a lot of airports saw their traffic going down, we remained stable at least and this year we seek to harness growth in the international passenger numbers we grow again by 50 per cent, which is to double again in six years’ time. On domestic traffic, we’ve increased by 70 per cent just because we take a lot of traffic from Arusha Airport which has had some problems over the last year. I said that passenger numbers in 2001 when I came here were just over 200,000. We’ll probably reach 650,000 this year. So it’s a tremendous growth in a number of years and we are slowly getting to a point where we will be able to stand on our own feet and then it is also very viable to look of course for another public-private partnership, because it is interesting for the private industry to invest in something that will make money. And that’s the key thing. It must be interesting; the private industries will not throw money away. They might have a long-term view and they might be interested to invest in airport infrastructure, but there must be a possibility to make money in the
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it’s just a more sensible model to run a niche company but also to run an airport. I’m not sure about the US airports. A lot of them are still governmentowned. In Europe, at least the airport authority is more or less a standalone, entity being stateowned. Amsterdam Airport, for example, which usually ranks among the top three airports in the world in terms of quality and it’s the third or fourth largest airport in Europe, and it’s state-owned. The City of Amsterdam owns the majority of shares, but they run it as a company. They are getting a profit, which is good. How airports were run here in Tanzania, except for Kilimanjaro Airport, and are still run, is through one government organization, which is the Airport Authority. Q: This was set up after KADCO could come about?
long run, of course, and that is the key element. Q: You mentioned the growth of traffic to almost 650,000; definitely an acknowledgeable achievement. What are some other acknowledgeable achievements you’ve had in that span of time at the airport? A: Well, like I said, I think we are recognized by the aviation industry as an efficient, neat, modern airport; as an efficiently run airport. Even you said, driving here is quite a nice experience. So, part of the success would be more efficient management and it’s not so much to boast about,
A: Yes. Before it was all within the Ministry and then at some point they set up the Authority, which I think is a good step and it does a good job but still, for my colleague who manages Dar es Salaam Airport, it’s much more difficult to officially manage his airport, because, for all his decisions, especially investment decisions, but even others, he has to seek approval from higher authority so it’s running it as a government agency. It’s just a more complex model and therefore less fast, less efficient and I think that has been proven worldwide and also here. So that is probably the biggest accomplishment. We have just accomplished another one. I hope next week to witness the signing of a grant agreement between the Tanzania and the Dutch governments whereby the Dutch Government will grant 50 per cent to the financing of renovation of the airport. It’s a project of 35 million dollars. That, for us, is a lot of money. It’s a problem that we have dragged along for about 10 years and a lot of money has to be spent in maintenance and overhaul. If you look at the picture behind you, you see a lot of asphalt and that is going to cost a lot. To renovate most of the asphalt, not even the runway, that has to be perpetual, but the rest of the asphalt is 15 million dollars.
PHOTOGRAPHY | JONATHAN KALAN
Q: Over how long? A: That has to be done now in one go. It’s one project. It hasn’t been renewed in the 40 years of existence of this airport and it’s still in a remarkably good condition, given that fact. But now it needs to be taken off. As you maintain roads, you take off the top surface of about 12 centimetres and you put a new layer of asphalt there. But it’s so much asphalt that doing that costs 15 million dollars; only that. We’ll also build some new infrastructure. Renovate the old ones, build some new ones and we’ll renovate and expand the terminal building, which is now very quickly becoming too small with our tourism growth. So the biggest achievement, I would say, but it’s after the private parties left, but still KADCO, as a more or less independent entity, secured that loan to renovate the whole airport and we are now big enough finally to finance a big part, because as I said, 50 per cent will be granted and the other 50 per cent will have to be found by ourselves and we’ll be able to do that out of the running income, out of the running budget of the airport. We’ll be able to finance the 50 per cent of the 35 million dollar investment. So that’s where the airport came, really in a short time span, and that’s why I say we are now in a different era whereby it might be very interesting again to think of the possibility of private partnerships.
Q: So the planned development of Kilimanjaro International Airport at 35 million dollars . . . tell me, what else it’s going to be used for in maybe five years? A: I hope within the next two, two-and-a-half years from start to finalizing that project. It’s renovating runways, the taxiways, the air pad, the terminal building and it will consist of an overhaul of the drainage system. The airport was built 40 years ago and the drainage system was really basic. The Dutch Government financing later gave a lot of attention to environmental issues as well, so that’s why those elements are also taken into consideration Q: And is there a terminal expansion or something like that? A: Yes. We’ll not build a new terminal, but we will renovate and expand the existing one. We’ve set aside a budget of like seven million dollars to do the terminal building and we see ample opportunities with that money to be able to renovate the existing terminal and then increase capacity for the next ten years. Q: And do you have any advice on other prospective airport concessions, airport authorities or PPPs in this region? A: I think out of the analysis that we’ve had like what maybe went wrong or happened to KADCO
there are a few lessons. One is, be extremely clear from the beginning what you expect from each other. I think in the case of KADCO, the expectations of the different parties differed. I’m not saying they were wrong, but they differed. So you have to be extremely clear what you expect of one another. And then it should immediately be clear whether this PPP is financially viable or it’s not and it must be financially viable because otherwise it might not work. Private partners will only invest if there is a profit to make and that profit must be reasonable. One reason private partners may come aboard is probably because they might have the knowledge, but mostly it’s because they have the ability to invest. They will only do so if they can make some money. The government side of the PPP must be aware that the private partners want to make some money. So the contract between the two must be clear on all those aspects. They must be clear on who is responsible for what, for maintenance of existing infrastructure, but what I’m saying is that it’s very interesting to maintain airport infrastructure. It’s not difficult, it’s not rocket science, but it’s a lot of work because you have to detail all the elements of the airport management. And of course in different models, if you look at Europe, if you look around the world, there are models whereby the state, the authorities, will actually stay with the infrastructure as their property and their responsibility to maintain and just give out the management of the airport to a management authority and then you are seeking for experience, for efficiency, which is probably an okay decision. I would expect, in this region, governments are looking much more for investors, people who actually want to put money into it because it’s difficult for governments to set money aside for infrastructure development. So then you are looking at a different kind of partner. You have to look for partners who actually have money to invest, who have a very long- term view because getting your money out of airport operations takes a long time. Turn to P24
January 2012
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Kilimanjaro International Airport
From P23
Q: How long does it usually take to recoup an investment in this region? A: I don’t think you can put a number on it, but if you build a runway, let’s take the basic element that you need for an airport – a runway – you build it for almost a lifetime I would say, but the basic investment in a runway will be millions already. So, by definition, you need a long time, usually it will be like20 years, to recoup that investment and it’s the same with all the other investments that are done in the terminal building in the equipment that you need or the technical bit. It’s usually 20 years or more and that’s why you see also that, all over the world where airports are being privatized, that it’s always long-term contracts. We are almost talking about 25 years. The same was done for KADCO, but, within that time, there must be money to be made. Q: And is the Tanzanian Government looking to sell the shares of KADCO or are they looking to holding on to them now that they’ve got the partnership with the Dutch Government? A: I can’t tell. As far as I’ve been informed, there is a study on several options and one option would be to look for new partners for PPP. Another is retaining it. Maybe it will run quite well as it does today and indeed we will be able to invest with KADCO as a government entity running that airport. Maybe we should keep it the way it is. Q: Is it making money for the Government now? A: Yes, we are making a profit; we have been for the last six or seven years, I think. Yes, we are making a profit, but we still pay only a symbolic fee to the airport for that infrastructure. So more or less infrastructure we have for free, although the investment we do now doesn’t make it free anymore and now we have to finance the investment, but yes, it’s making a little bit of a profit although so far all the profits have remained in the company and we re-invest in the airport.
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Q: And would you recommend a PPP model for a green-field airport? A: Absolutely. Because building of a green-field airport is a huge investment and I can imagine that, in this region, governments can use all the money they have. If private partners hope to invest that kind of money in that infrastructure, why not? But again, it’s only feasible when there’s a market, but anywhere where there’s no market will be extremely difficult. Let’s face it, the only big markets in the region are in the capitals. Even Kilimanjaro Airport, although it’s growing quickly and is a big tourist destination, it’s still a small airport; 650,000 passengers, in Europe we would call that a regional airport. Q: Do you think there’s a big enough market to build another PPP or government will just have to seek money? Will there be enough of market for the private
sector to actually invest in a green-field airport? A: Again it depends where. Suppose you want to build another airport on the other side of Nairobi, it will absolutely be viable to ask the private partners to build the green-field airport if you promise to close down JKIA and they get all the revenue. Definitely, the market is big enough. If you want to build it anywhere in-between Mombasa and Nairobi, it’s no – because there is a market. Extremely simple. Q: And aside from the financial investment from KADCO into the airport, what additional resources have been acquired to keep things running? A: Well, so far, you get a lot of the investment work done with either grants or aid, but again that is all money put into it. But what you need to successfully and efficiently run an airport, you need a lot of money, of
PHOTOGRAPHY | JONATHAN KALAN
course you need an organization and you need experience in that. Q: Does KADCO have experience or consultants or things like that to keep things running? A: No, actually I’m the only expert here. We have a very good organization, quite efficient and there are some training institutes in Dar es Salaam and in Nairobi, training people working in the aviation industry. We do get some assistance from abroad in running this airport and then we are now mainly on business development, which was a fairly new thing for KADCO. We are heavily under-serviced because we only have a few airlines that use this airport and we have, by market research, found out that a lot of the passengers are actually destined for northern Tanzania, coming via Nairobi and maybe coming via road. We just took the numbers from Namanga border and you can exactly see the nationality of people passing there and the total numbers. Q: Which country preferred flying versus driving? A: It’s again a super market-driven thing. To Nairobi, there’s a lot more airlines flying, so you can get a direct flight out of London to Nairobi and because of competition, it’s a lot more cheaper. Fares to Kilimanjaro are relatively high just because of
defective runways served and the airlines operating from here can keep their fares high because the plane will leave for anywhere. So there is more demand than there is supply and we need to attract more airlines to this airport because the market is there. We’ve been able to analyze what we call the linkage – so how many people fly via Dar es Salaam or fly via Nairobi to get to the northern circuit, to get to Arusha and we’ve been able to establish what the total market is, where people are coming from, what the biggest source markets are. In other words, where do people come from who want to fly to Kilimanjaro? I can go to Chan Airlines and try to convince him to operate a flight to Beijing from Kilimanjaro airport, but they would never fill the plane, everybody can understand so that will not happen. So, in order to effectively talk to an airline, you need to present a business case within your network that you have the ability to fill a plane with people from this, this, and this. This is the biggest source market et cetera. For us, for example, the biggest source market, the place where the most people who want to fly come from, is Lamu. Then there’s Paris and Frankfurt, standard big destinations in Europe. In the United States it’s New York, Boston and Toronto. So we’ve analyzed that whole market and so we can present to airlines a business case. ‘This is your market that you can capture and,
with a certain frequency, this is the amount of people you could actually carry on your plane and the average fare you could make and this is the profit’. That has become, over the last decade or so, a real industry in itself. There’s business development in the aviation industry and the experience and knowledge of that in this region is not very high. For example, we get from abroad, we get consultants, that’s interesting, very promising, actually. I’m pretty sure within the next year, year-and-a-half; we’ll be able to see two additional airlines coming to Kilimanjaro. Q: Yes. And how has investment benefitted the airport and the community including passenger and cargo performance? You said the passenger increase is a result of KADCO’s advancement over the years. Management of cargo, service quality, any other matrix that has impacted the surrounding community? A: Well, the airport itself, apart from doing social responsibility projects et cetera, which, as KADCO, we try to hold a good relationship with the neighbouring communities, but the airport itself is fairly limited in its impact to the surrounding communities in that it provides jobs for quite a number of people and the busier we get the more that is. For your idea, we at KADCO employ about 200 people total at the airport. You can see by the number of airport passes we give out. So that’s about the impact in the region and the more business, the more people, the more the growth but that’s just a few hundreds. The big impact of an efficient airport operation is on the region. The doubling of traffic that we have seen over the last decade or so means that double the amount of tourists come to this region, spend their money and stay in hotels and that’s a multiplier which is huge. There is actually reason why we get this money from the Dutch Government. It’s not just that about the Government liking Kilimanjaro Airport so much, this fund that we get the grant from is aimed at infrastructure projects with a purpose. So we have had to prove in our application that by investing in Turn to P26
January 2012
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AirportReview |
Kilimanjaro International Airport
From P25
PHOTOGRAPHY | JONATHAN KALAN
this airport, we would actually help develop the region and therefore work on helping the poor and less privileged. So, by definition, yes it does a lot for the region. You’ve been here before, haven’t you? I had a gap in-between so I saw how tremendously it’s growing. Arusha has also doubled in size I think in the meantime and definitely you’ll see a lot of development now in Arusha and a lot of people also developing, so I think it’s very important. Q: And are there any numbers in cargo performance as well? A: Yes. The cargo is a little more problematic for our airport. Most of the cargo we have is outbound cargo, so it is exports that are being produced in this region and the exports that I’m talking about are very similar to Nairobi, where it’s mostly fresh products. Cut flowers, some vegetables, some fruits, but all are fresh products that are being grown here. There are some big flower farms in this region. What they produce will be transported out of Kilimanjaro Airport in the belly of passenger aircraft. As you may know, a passenger aircraft still has some capacity apart from passengers to also take some cargo and this KLM flight which is taking off here every day to Amsterdam will always be filled with flowers, fruits and vegetables; as much as it can carry, but the rest is being tracked in Nairobi mostly and flown from there because, unfortunately, the total produced in the region is not big enough to get full cargo planes. So all the growers together might produce enough to fill one or two cargo planes per week but it’s a fresh product; they need to move it every day, otherwise it’s not fresh anymore. So that’s a bit of a Catch-22. They are not big enough so they have to track it to Nairobi and that makes it more expensive, more difficult for them to expand really, so they are always competing to Nairobi and it’s difficult to get out of this catch. So the cargo traffic follows passenger traffic. If we get another airline flying to Europe, we’ll definitely get more cargo traffic via the airport because it can lift that. Unfortunately, the region is too small for full cargo planes.
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Actually there were people here yesterday discussing plans to in the future try to get smaller cargo aircraft ferrying them within the region. So, you can have a smaller aircraft maybe picking it up here and bringing it to another hub like Nairobi or Istanbul. Trying to develop that hasn’t come yet. So the cargo traffic over the last decade when KADCO was here has increased, but only with the increase of passenger traffic. Q: And lastly, do you think it will be necessary for KADCO to go back to PPP or do you think it is okay? What’s your feeling on that because you seem to be working on both scenarios? A: True. I believe it is very important to continue running this airport as an independent entity. Like I said, it’s a model that we’ve seen almost all over the world and within Europe and in state-run airports. That’s a good and efficient model. Onus of this entity should be whether it should be government or private partners or a combination of the two. It’s more a question of financing and of necessary investments than it is of pure airport management. I think, over the last two years, where we have functioned as a state- owned company, the airport was managed just as well as the years before. If the Government plays its role as a
shareholder and at the same time as an authority, of course we have to be checked as well if we do everything safe and secure, but the Authority plays its role very well . . . they keep those things separated, then there is no problem by keeping it where it is, by keeping the Government as a shareholder. However, if we want substantial and additional investments, there might be opportunities here to develop a lot more than just this airport. There might be opportunities to develop more in terms of processing industries. We have a lot more space here and there’s interest; we might be able to develop more tourism-related business right here, which now has concentrated always on Arusha. It could very well be established for a part at this airport. Somebody flying in, actually flying out to Europe, driving out from here, transfer centres; there’s business opportunities but they all take knowledge but also investment, which I think could benefit from private investors, private involvement. So that would be probably a good model. But it’s a choice, it’s a strategic choice of government; what do we really want? To just have an efficient piece of aviation infrastructure, per se, need private involvement if you want, foreign investors, that would be better. I think it’s a good model, especially for here.