Costly burden taxpayers will bear if Adani-JKIA deal flops

Labour Cabinet Secretary Alfred Mutua addresses aviation workers on September 4, 2024 at JKIA, Nairobi.  [Edward Kiplimo, Standard]

Kenyan taxpayers could face substantial costs if there are disruptions or terminations related to the Adani-Jomo Kenyatta International Airport (JKIA) deal.

The agreement between  Adani Airport Holdings Ltd and the Kenya Airports Authority (KAA) specifies that any interruptions caused by court actions, parliamentary decisions, or protests following the feasibility study will require Adani to be compensated for losses and anticipated profits.

If protests persist or if Parliament enacts laws detrimental to the Adani-JKIA deal, Adani will seek compensation for damages, lost returns, and investment costs.

The agreement designates such protests or government-controlled disruptions as "Material Adverse Government Actions (AGA)," which could negatively impact the company's operations or profitability.

AGA refers to any act or omission by any government entity in Kenya occurring after the signing date that materially affects Adani's ability to exercise or perform any of its material rights and obligations under the agreement and/or the costs or profits associated with such performance, limited to the circumstances specified in the head of terms agreement," states the confidential document.

Updated after a joint call on August 23, 2024, but dated August 13, the terms permit Adani to terminate the deal and demand compensation for damages, lost returns, and investment costs if the government fails to protect its business.

“If the Material Adverse Government Action is ongoing and prevents a party from meeting most of its obligations for six consecutive months, either party can terminate the agreement due to ‘Prolonged Material Adverse Government Action,’” explains the agreement.

According to the 75-page document, termination of the agreement due to the government's default or prolonged material adverse government action will see Adani get compensation covering 100 percent of the debt, 150 percent of adjusted equity, redundancy payments, subcontractors' break costs (up to an agreed amount), and transfer costs, including stamp duties, transfer taxes, and registration fees for returning the airport to the government.

The government agrees to shield Adani from losses, liabilities, costs, and claims arising from breaches of the agreement, defective rights to the airport site, and third-party claims for death, injury, or property damage due to the grantor's negligence.

Any civil commotion, boycott, or political agitation by Kenyans that prevents the collection of airport charges by Adani for more than seven days in a year will also be compensated.

The agreement stipulates that disputes will be resolved through international arbitration “in London, but the hearings will be held in Mauritius’’.

Other actions leading to compensation include changes in laws, regulations, or policies that make it more difficult or expensive to operate.

“Only cargo operations, fuel uplift, and ground handling services shall be regulated under the existing concession order. All other charges will be non-regulated,” Adani said.

If a legal change prevents Adani from fulfilling its obligations for six months or makes performance illegal, it is deemed an "event of default," and taxpayers will compensate.

The deal allows Adani to terminate the contract and receive compensation for acts of rebellion, riots, civil commotion, terrorism, or political sabotage occurring in or caused by Kenya.

“If the government does not provide Adani with the necessary permits within 60 or 90 days, it will compensate,” the terms indicate.

 Adani can hold the government responsible and seek compensation or terminate the contract if it violates the agreement by failing to address breaches within 60 days, missing payments, rejecting the agreement, losing rights, enacting legal changes hindering performance, or making false statements.

If a government agency fails to grant or renew a permit needed for Adani to fulfill its obligations within the specified timeframe, this constitutes a default, and Adani has the right to terminate the lease with compensation.

 Adani will be compensated for government misconduct, gross negligence, pre-existing environmental conditions requiring remediation, and discovery of antiquities on the airport site. Compensation will be reasonable, transparent, and designed to maintain Adani’s financial position.

The form of compensation may include lump sum or installment payments, reduced concession fees, increased airport charges, or other agreement amendments.

At termination, Kenya must pay the total outstanding amount for the approved working capital facility, including winding-up, prepayment, and breakage costs, based on financing agreements, excluding unapproved refinancing, with payments reduced by any deducted amounts.

Kenya Airports Authority and Adani will discuss a special loan for the project, with terms to protect banks.

The government will be responsible for all costs and expenses related to fulfilling its obligations under the agreement, obtaining necessary permissions for the airport site, ensuring vacant and unencumbered possession of the site, acquiring required rights of way and easements, and remediating any existing environmental issues.

The government will assist Adani in applying for tax exemptions, and Adani will pay an annual concession fee of $50 million to the government, payable quarterly in advance, the same amount JKIA has been paying annually.

This will be increasing by 10 percent every five years. The airport transfer is set for November.

If a force majeure event occurs, the government and lenders will share the airport's revenue, with lenders paid first. The government may waive Adani's fee if it can't be paid due to the issue. Delays caused by such events will extend project deadlines, but either party can terminate the agreement if the issue lasts over six months. Each party will cover its own costs, with no liability for losses or damages.

Adani will provide government entities with free access, licences, or lease rights at the airport for reserved services such as customs, immigration, health, and security. Space will be allocated for these services.

Adani expects a 16 percent profit from airport operations and must provide security to ensure project commitment.

If the government restricts or closes the airport for public interest, Adani is entitled to relief and compensation for losses or costs and may be temporarily excused from obligations, while failure to renew this security allows the government to claim the full amount.

The agreement explains that if a Material Adverse Government Action has occurred and continues, either party may terminate the agreement if such action prevents a party from performing substantially all of its obligations under the agreement for six consecutive months.

Adani will access the JKIA inventory and negotiate with lenders on standard terms, including cure and step-in rights. Adani will invoice the government for utility use outside reserved areas and ensure fair loan terms.

The government will set airport charges for the first three years and amend laws for IATA collections. Adani demands a Kenyan government letter of support for termination payments and other provisions.

KAA and Adani will sign agreements for rights transfer and ensure government-owned airlines pay fees. Adani will manage aeronautical and non-aeronautical revenues and adjust charges every three to five years based on costs.

The government must meet conditions precedent, including approving airport charges and transferring permits. If conditions aren't met within six to 12 months, Adani can terminate and seek compensation. Costs over $5 million are recoverable, and land lease applications will be processed.

During the interim management period, the government can't alter contracts or property. JKIA employees will move to Adani, which will manage the airport and cover all costs and risks.

Adani may subcontract services, propose charges for a 16 percent profit, and set final charges within 90 days.

Adani will be required to create a Human Capital Management Plan and training programmes every five years. Adani can use current assets as collateral and raise independent financing, with any excess over a 30 percent debt-equity ratio treated as debt.