2018 CENTRE FOR TRADE POLICY DEVELOPMENT RESEARCH WING PRODUCTION
Zambia is moving towards the reestablishment of a national airline with the aim of boosting its tourism and export sectors. There appears to be a number of good reasons why the government and other stakeholder are pushing for the relaunch of Zambia Airways but many critics believe the move is politically motivated, economically unsound and a misplacement of priorities. In this opinion piece, CTPD considers some important questions which need to be answered around this policy debate. In doing so, both supporting and opposing views will be presented; highlighting the possible pros and cons, before giving our opinion on the matter.
What exactly is a National Airline?
A National Airline, also called a National Flag Carrier, is an airline owned by or strongly identified with a particular nation. Such an airline enjoys special privileges in international relations because it is an extension of the nation to which it belongs. It must be noted that a country can establish a national airline with or without the need to be a majority shareholder in the company. If Zambia was to own 55 percent stake in an airline, the airline would be deemed a national airline by virtue of ownership. This notwithstanding, the reality is that a national airline is really one that is identified with a particular country and not only owned by it, forinstance, the Kenyan Government’s shares are below 20% in Kenyan Airways and the Mauritian Government has about 15% in Mauritian Airways (Nkonde, 2017). These are among many examples of Public Private Partnerships (PPPs) which have established national flag carriers.
What are some of the reasons behind the reestablishments of Zambia Airways?
The move towards the reestablishment of Zambia Airways was initiated by the late president, Mr. Michael Chilufya Sata. He appointed a technical committee comprising of Zambia Airforce staff, former Zambia Airways staff, and civil servants from the ministries dealing with Transport, Commerce, Finance, and Tourism (Nkonde, 2017). This Technical committee presented the following as possible benefits for the reestablishment of Zambia airways before the Cabinet in 2014:
(a) Gains in the Tourism Industry
It was documented in the Technical Committee’s report, that the demise of Zambia Airways in 1994 left a big void in the local aviation industry, giving leeway to mainly foreign airlines to explore the investment potential of the country. As a result, this situation affected the various sectors of the economy such as tourism and agriculture. It was proposed that the national airline would bring gains in many strategic sectors of the local economy especially the tourism sector through boosting tourism arrivals, via reduced local and international transportation costs and thus help in realizing the 1 million tourist annual arrivals target (Kabaila, 2014). According to the Ministry of Tourism and Arts (2015), out of 53.3 million tourist arrivals in Africa, Zambia only receives about 1.7 percent of this number In terms of contribution towards GDP, Zambia’s Tourism sector contributes about 3.4 percent to GDP with total annual earning of about US$ 400 million in the year 2015. There is therefore scope for significant improvements in this sector.
(b) Increase in Non-Traditional Exports
The withdrawal of British Airways from Zambia, which provided transport for most of the country’s Non-Traditional Exports (NTEs) such as fresh fruits, vegetables and flowers, negatively affected Zambia’s NTE export potential (Kabaila, 2014). Zambia’s Non-traditional exports declined from about US$ 2.4 million in 2014 to about US$ 1.9 million in 2015 (ZDA, 2016). The decline in NTEs was attributed to an increase in the cost of production due to high shipping costs, among others. It is highly anticipated that the rebirth of the national airline will help ignite this sector and stir up activities such as agro processing and value addition solely for the export market (Kabaila, 2014).
(c) Employment Creation
The Technical Committee also highlighted that the resurgence of the national airline would also create employment and increased contributions to Gross Domestic Product (GDP) through foreign exchange earning which would in turn strengthen the kwacha against other international currencies (Kabaila, 2014). The liquidated Zambia Airways had about 1, 200 employees and thus there may be potential to generate even more employment this time around (Mwale, 2015). The presence of a national airline would also help in returning the country’s pilots and technical staff that have left for greener pastures abroad.
What are the reasons against the establishment of Zambia Airways?
A number of stakeholders including Civil Society Organizations, leading economists, and opposition political parties have raised concerns with some strongly condeming government’s intention to re-establish an airline. The following are some of the reasons why many believe the setting up of Zambia Airways is a blunder in the making:
(a) Opportunity Cost
The economic concept of opportunity cost is the basic postulation that resources and time always have alternative uses and thus using them for one purpose implies that they cannot be used for another purpose. The fact that government does not possess an unlimited supply of funds implies that using US$ 30 million in setting up Zambia Airways would mean that some other projects will be deprived of both the funds and attention of the State. The questions therefore are; Is there something else that can be done with US $30 million which would yield more benefits than the projected benefits of the national flag carrier? Is the setting up of the airline in line with government policy towards fiscal consolidation and prudent debt management? Is this move going to benefit the general poor population?
Some critics believe that the money can be better spent on expanding the agricultural sector seeing that the Democratic Republic of Congo (DRC), for example, is a ready market for Maize and other products. Spending on improving medium scale value addition factories or on loans for entrepreneurs seems to be a more viable alternative to a number of local businessmen (Chisala, 2017). In other words, Zambia has numerous more pressing needs at the moment to dedicate it money and efforts to the airline business in search of the merge of national pride and tourism gains.
(b) Huge sustained industry losses
The African Airline Industry is simply a complex business and characterized by huge losses. It has been projected by the International Air Transport Association (IATA) that the African airlines will make a combined loss of about US$ 100 million in 2018 (Chishala, 2018). If this projection comes to fruition, Zambia risks losing its investment among these losses. Industry losses or profits are computed by summing up all profits or losses of the players, in this case airlines, in the industry. A situation of huge industry losses means that the majority of the airlines will be making losses in 2018. This is not surprising because currently, all African national airlines apart from Ethiopian Airlines are making losses. These include Air Namibia, Air Botswana and Air Zimbabwe. South African Airways (SAA) has been bailed out several times due to sustained losses. In 2017, the South African government announced that it had provided funds to help repay loans of about US $ 176 million to Standard Chartered in order to keep the airline afloat (Chishala, 2107).
(c) Trend towards Privatization
The Aforementioned huge industry profits have triggered a recent weave of privatization in the African airline industry. The Botswanan government decided to start privatizing its national airline, Air Botswana, after giving up on supporting it from the treasury. African governments have opted to privatize their national flag carries due to the cost of bailing them out. The Government of South Africa recently used National Reserve Funds (NRS) meant for exceptional expenditure to bail out its National airline after doing so several times using other forms of government funds. SAA is said by experts and rating agencies to be a threat to the South African economy. Consequently, SAA is headed for privatization because of its deteriorating financial position (Sanchez, 2016). According to Debrah and Toriotich (2005), Kenyan Airways faced managerial and financial problems from the period it was set up until its privatization.
(d) Potential Political interference
National airlines have been said to fail because of political interference in their management. According to experts, the ingredients of failed national airlines include the following: a blotted workforce, overpaid staff, low productivity, appointment of incompetent managers, acquisition of wrong aircrafts and overcapacity or competition saturation (Nkonde, 2017). A number of local analysts believe that the setting up of Zambia Airways is politically designed to advantage the party in government. They predict the use of the airline to transport government official at subsidized rates or no cost at all during elections for campaigns and personal businesses, the employment of unqualified party carders into important position in the management of the airline leading to overcapacity and government interference in the purchase of airplanes (Chishala, 2017). If these predictions turn out to be true, CTPD foresees the airline becoming grossly inefficient and projects that it will definitely begin to make losses in the already loss prone African airline industry.
How does Zambia wish to set-up and operate the new National Airline?
According to the then acting Minister of information, Mr Stephen Kampyongo, the government of the republic of Zambia (GRZ) seeks to set-up the air line through a partnership with the only African National airline currently making profits, Ethiopian Airline. The choice of the partners is indeed commendable since it is expected that this airline has sound management and business strategies. Under this partnership, the government of Zambia will have 55 percent stake in Zambia Airways while the Ethiopian Airline will have the other 45 percent. However, it is not clear exactly how much will be spent on the relaunch of Zambia airways.
There minister of Transport and Communication, Mr Brian Mushimba, stated on December 19th 2017 that cabinet agreed to set aside US $ 30 million for the project in 2018 but later clarified, more than a week later, that the US $ 30 million will be the total equity contribution for the two equity holders. The Zambian government will contribute US $ 16.5 million (55 percent) while Ethiopian airlines will contribute US $13.5 million (45 percent) during the first year. Following the latter explanation, the Zambian government will only spend US 16.5 million during the first year because this will make up 55 percent of the total US $ 30 million project. This 55 per cent equity shareholding by GRZ will be held by the Industrial Development Corporation (IDC).
Mr Stephen Kampyongo also stated that the government will not interfere in the operations of the airline. He explained that the government observed the mistakes of the past which led to the failure of Zambia Airways and will therefore not be involved the running of the new face Zambia airlines. Zambia has spent over US$ 1 billion since 2012 in its efforts to develop the aviation industry. The setting up of the airline is just one aspect of this broader vision which has seen massive expansion and facelift projects targeting airports and runways throughout the country. These include the Kenneth Kaunda and Copperbelt International airports expansion projects aimed at making Zambia a Southern African Hub for aviation transport.
CTPDs opinion on plans to relaunch Zambia Airways?
Having considered the proposed and perceived benefits and possible challenges in re-establishing Zambia Airways, our opinion may be in order. The Centre for Trade Policy and Development thinks that although the idea to have an airline is not a bad one, it actually does offer an opportunity to grow some of the sectors already highlighted in this piece, the timing is wrong. There is need to expand the tourism sector and improve Zambia’s foreign currency earnings. Furthermore, the Zambian government has chosen a strategic and reputable partner for the setting up of the airline. It must be noted however, that the African airline business is complex and has been experiencing industry losses.
CTPD also think that the country is currently facing pressing challenges that need to be prioritised because of their far-reaching consequences, key among these include the following
(a) Zambia’s Public Debt situation
The Zambian government set aside about US $1.4 billion for repayment of both its external and domestic debt in 2018. This amount is greater than the allocation to health infrastructure and school infrastructure combined. The huge debt that Zambia has is indeed robing the nation of the much needs improvements in many sectors. In light of this, it may seem prudent to reduce government borrowing in order to reduce allocations to debt servicing. This notwithstanding, Zambia wishes to borrow about US $ 2.1 billion in order to finance the 2018 national budget and thus add to the existing US $10 billion public debt (US $ 7.2 billion external debt and US $ 3.8 billion domestic debt) (Mutati, 2017). CTPD thinks that relaunching Zambia airways will create an avenue for further borrowing in the event that the airline makes losses.
It must be noted that a great portion of Zambia’s external debt will be maturing between 2020 and 2024. The redemption profile for public debt from 2016 to 2021 is maintained at around US$280.0 million per annum. However, in 2022 and 2024, public debt service is projected to quadruple to about US $ 1 billion per annum due to maturities of the three Bonds issued on the international capital market. Thereafter, debt service smoothens and is maintained around US$120.0 million per annum, that’s assuming no huge borrowing between now and 2022. In other words, Zambia will be paying an average of US $ 1 billion dollars per year towards its debt from 2022 to 2026. Stakeholder have long advised the government to setup a sinking fund to help with these forthcoming repayments but no funds have been set aside. The investment in a National airline is therefore untimely and misguided.
(b) Unclear Source of Funding
There is no direct allocation in the 2018 national budget for the reestablishment of Zambia Airways. Although the Zambian government allocated at total of about US $ 90 million to international airport, it is not clear whether the funding for Zambia Airways will be derived from this amount. According to the minister of Finance, Mr Felix Mutati, the said allocation is meant for the completion of the Kenneth Kaunda International Airport and the Copperbelt International airport construction works. If the required US $ 16.5 million is gotten from this line item in the budget, the two projects risk not being completed in 2018. The government should prioritize the finalization of infrastructure projects which they have already commissioned.
(c) Terms of the Stakeholder agreement
The stakeholder agreement between the Zambian government and Ethiopian Airlines stipulates that the Zambian government will be a majority stock holder. This will both increase the power of the Zambian government in the management of the airline and also reduce the incentive for success on the part of Ethiopian Airlines. Owning a majority stake in the airline and promising to eliminate interference is simply not palatable. If this move is indeed economically motivated, there is no need to be a majority stockholder when owning less stake is more prudent, makes the government realize all its economic goals and indeed less risky. If the government interferes in the management of the airline, history may repeat itself.
(d) Type of Aircrafts bought
According to online media and other news platforms, In July, 2017, the government of Zambia is cited to have completed a deal for the purchases of 5 Russian made Sukuhoi Super jets 100 (SSJ100) airplanes at an approximate cost of about US $ 30 million each (Lusaka Times, 2017). The Jets, to be delivered to Zambia in early 2018, include 4 jets with 98-passenger capacities and 1 VIP jet meant for the President. These jets are simply too big to be used for local travel in Zambia for the first year before embarking on international travel. Owing to the fact that Jet fuel is more expensive in Zambia as compared to other neighbouring countries, it is highly doubtable whether Zambia Airways will succeed. In passing, it must be noted that the cost of relaunching Zambia Airways has been greatly underestimated. The government should have also added the over US $150 million used in purchasing the jets and clarified that the US $ 16.5 million is only and equity contribution meant for setting up operations in 2018.
In conclusion, it is our opinion as the Centre for Trade Policy and Development, that the move to relaunch Zambia airways at this time is a bad investment decision, it is actually more of a blunder than a blessing. We foresee the costs of owning an airline, for Zambia’s case, outweighing all perceived benefits. Zambia needs to focus on pro-poor policies which will benefits the majority of its people. Politically motivated investments such as this one will end up reducing government allocations to key sectors like health and education. In light of Zambia’s huge debt and soon maturing Eurobonds, the government needs to pursue fiscal consolidation and not expanded government expenditure on new projects.
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