Documents Reveal New Financial Viability and Strategic Risks in JKIA Expansion Plans

Nairobi, September 2024 – The ambitious expansion of Jomo Kenyatta International Airport (JKIA) is under intense scrutiny as new documents reveal significant financial and strategic risks. A cover letter in our possession, alongside the detailed feasibility report submitted to the Kenya Airports Authority (KAA), highlights critical concerns that could endanger the project’s success and long-term viability.

The cover letter, summarizing the feasibility report, outlines key aspects of the proposed expansion of the airport while raising pressing concerns about the project’s financial viability. It highlights the substantial financial commitments required from both the public sector and the Adani Group, bringing into question the overall feasibility of the project.

Amid these revelations, the Kenya Kwanza government has dispatched a high-profile delegation of 16 officials to India for a “due diligence” investigation into the Adani Group’s financial and operational integrity. This mission aims to shed light on the conglomerate’s track record, particularly in relation to its involvement with the controversial Public-Private Partnership (PPP) for the JKIA expansion.

One of the primary concerns is the projected cost of the expansion, which includes constructing a second runway and developing new terminal facilities. The total investment is estimated at over USD 1.6 billion (approximately KES 232 billion), a figure that places significant pressure on Kenya’s already burdened public finances. The country is grappling with a ballooning national debt, pressed by recent nationwide protests over the cost of living, and growing demands for government accountability.

The feasibility study for JKIA’s expansion by Spanish consulting firm ALG presented two procurement scenarios: the “Airport PPP model,” which proposed a 30-year concession for private management of all airport infrastructure, including a second runway, and the “Terminals PPP model,” which restricted private involvement to passenger terminals, leaving runway development under public control.

The Terminals PPP model raised significant financial concerns. With an estimated investment of around USD 755 million (KES 110 billion), the public sector would still be responsible for funding the second runway and taxiways, leading to a negative net present value (NPV) of USD -40 million (KES -5.8 billion) for private investors, according to the documents. This scenario would have shifted the financial burden back to the Kenyan government, requiring the Kenya Airports Authority (KAA) to invest an additional USD 505 million (KES 73 billion) for the runway, further straining public resources.

In February, ALG recommended a “competitive bidding procedure” to “maximize value for the Contracting Authority”. However, despite this expert advice, the Kenyan government opted to proceed with a privately initiated proposal from Adani Airport Holdings Inc in March.

In a cover letter to KAA, the Adani Group states that the PPP model aims to attract private investment and ease financial burdens, although the financial projections heavily depend on optimistic growth forecasts for passenger traffic and cargo volume. It further argues that the project would generate an average EBITDA margin of 64%, offering a positive net present value (NPV) of approximately USD 300 million over 30 years. The Airport PPP model, they insist the project was financially viable, with an attractive return on investment while transferring significant financial risks to the private sector.

Among risk transfer to the private sector include construction, operational, and demand risks. They point out that a comprehensive risk management framework, including impact risk assignment and probability assessments, are in place to ensure effective management throughout the project lifecycle.

The feasibility study also highlights the risks of cost overruns and potential delays. Identified risks include “design flaws, delays in securing approvals, and potential increases in construction costs,” categorized into nine main groups with “over 80 specific issues.”

The report cautioned that construction delays—particularly related to permit acquisition and unforeseen circumstances like archaeological discoveries—could disrupt the project and escalate costs. It further warns that “any delays in the design or approval processes could further inflate construction costs and disrupt the project timeline,” a critical concern as JKIA is nearing capacity and requires urgent expansion.

Further, delays in completing the second runway could lead to “operational constraints and impact Kenya’s regional competitiveness.” The feasibility study also points to potential social equity issues. Given the project’s significant land use and the potential displacement of communities around JKIA, the report says concerns about “fair compensation and resettlement processes” were raised by stakeholders.

The report highlights the need for “thorough public consultation and community engagement” to ensure that local communities are not adversely affected by the expansion. However, the report provided limited evidence of extensive public participation during the planning phases, noting that the absence of clear mechanisms for public feedback and community involvement may “exacerbate opposition to the project,” particularly among those directly impacted.

Transparency and public accountability have also been emphasized in the report, noting the importance of public consultation and stakeholder engagement to gain the support of local communities and other key stakeholders. However, the lack of meaningful public engagement continues to raise questions about the extent to which public input has been considered in the planning phases.

The cover letter also highlights strategic risks that could undermine the project’s success. It points to potential challenges in securing the necessary approvals and permits in a timely manner, warning that delays could lead to increased costs and project overruns.

Additionally, it emphasizes the complexity of managing a large-scale infrastructure project within an operational airport, where construction activities could disrupt ongoing services and negatively impact passenger experience.

Moreover, the study raised concerns about the Kenya Airports Authority’s capacity to effectively manage the PPP arrangement, particularly in areas such as risk allocation, contract management, and dispute resolution. It suggests that KAA would need to significantly strengthen its oversight capabilities to ensure the private partner delivers on its commitments and to mitigate any adverse outcomes for the public sector.

Environmental concerns also featured prominently in the study, focusing on the potential impact of the expansion on surrounding communities and ecosystems. The construction of a new runway and terminal facilities is expected to increase noise pollution, disrupt local wildlife habitats, and potentially displace communities living near the airport. The study called for rigorous environmental assessments and the implementation of robust mitigation measures to address these issues.

The Adani Group says its commitment to national and international environmental standards, including thorough Environmental Impact Assessments (EIAs). They insist that the project design incorporates noise mitigation measures and community engagement plans to minimize any adverse effects on local communities.

Despite its influence, the Adani Group, led by billionaire Gautam Adani, has faced global scrutiny over allegations of environmental degradation and other controversies. The conglomerate has also been embroiled in serious allegations of fraud and insider trading—charges it has vehemently denied, even as the scandals continue to cast a shadow over its operations.

Adani has since registered a local firm named Airports Infrastructure PLC, according to filings with the National Stock Exchange of India. According to the documents, this new subsidiary will be responsible for taking over, operating, maintaining, developing, designing, constructing, upgrading, modernizing, and managing the airports. This development suggests that the deal is already on the runway for takeover.

Read more on environmental abuses: India’s Controversial Adani Group Secures Kenya’s Multibillion Power Project Amid Global Integrity Concerns

As Kenya moves forward with the ambitious JKIA expansion, the feasibility report highlights the necessity for heightened scrutiny and accountability. Concerns about financial risks, environmental impacts, and the project’s long-term viability must be thoroughly evaluated to protect both public and private interests. Ensuring a clear delineation of responsibilities between the public and private sectors, especially within the PPP framework, is crucial to avoid shifting undue burdens onto taxpayers.

With a high-profile team of Kenyan officials currently in India to investigate the Adani Group’s capabilities, the outcome of this mission will be crucial in determining whether the conglomerate can deliver on its promises and address the significant challenges identified in the report.

In light of these issues, Kenyans are increasingly skeptical. Muriaso voiced on X, “Fact-finding mission regarding Adani Holdings’ financial records, amidst the ongoing discussions about the investment in JKIA. Our politicians will find anything to use our taxes. First of all, Kenyans are against the takeover by Adani Group.” Similarly, another X user, Mkenya Mzalendo, commented, “With all the red flags surrounding this Adani deal, the focus should be on protecting public interest, not on expensive trips. This is not the leadership Kenyans deserve.”