Revealed: Contents of Kenya Airways deal that handed McKinsey billions

Kenya Airways flight at the JKIA in Nairobi. Photo WILLIS AWANDU
Consultancy firm McKinsey and Company demanded to be paid in advance in order to provide services to Kenya Airways in a controversial contract that saw it earn hundreds of millions of shillings before it got down to work.

According to a memorandum seen by The Standard on Sunday, the firm was to earn at least Sh1.7 billion in the first 18 months of the contract as standard costs alone.

For the first three months, Kenya Airways (KQ) was to pay a fixed fee of $800,000 (Sh80 million) a month. This was to be charged twice a month, an arrangement that saw the airline part with at least Sh40 million every two weeks.

This was to happen between mid-November 2015 until February 2016. Afterwards, it was to earn $1,500,000 (Sh150 million) every month for the next six months beginning March this year.

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It was then to scale it down to $500,000 (Sh50 million) a month for another 12 months. This brings the fixed charges to Sh1.7 billion in the first 18 months.

In that period, there were to be other charges such as performance fees that were not explicitly defined in the contract and which were to be calculated based on other metrics such the value of initiatives executed.

“This fee will be charged twice a month at the beginning and mid of each month. These payments are immediately due,” the contract adds.

The contract says that unless Kenya Airways had sufficient cash funds available for the whole time of their programme, the airline was to pay in advance.

“All invoices are payable within 15 days of issue. These payment terms apply in case KQ is in stable financial condition; otherwise section ‘cash advances and prepayment’ is applicable,” the contract reads in part.

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Prepayments are done in advance before a service is rendered. At the time it was starting its programme, Recovery and Transformation Services (RTS), the contract said the airline was operating with ‘significant negative monthly cash flows and had a negative equity balance.’

Restructure the business

The fee structure to be earned by the company took effect mid November 2015. The firm was to perform its work for 26 months until December 2017.

“This means that the terms, conditions and fee structure under this arrangement will stay in place (and fees payable) for the entire period irrespective of our level of on-ground resourcing,” the contract reads in part.

The contract was signed by KQ CEO Mbuvi Ngunze and the former Chief Finance Officer (CFO) Alex Mbugua.

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McKinsey and Company was represented by Max Falckenberg, a senior partner at McKinsey RTS. Other signatories were McKinsey director Bill Russo and McKinsey principals, Sebastian Gimenez and Hugo Espirito Santo.

Initially, the consultancy firm was to deploy a team of between seven and ten members for the first three months of the contract. Then it was to scale them down to a team only dealing with the management after 18 months.

“The programme is designed to support Kenya Airways in their effort to restructure the business and help to overcome the current crisis,” the memorandum reads.

However, invoice billings seen by this paper last week show that McKinsey has earned Sh2.3 billion in last six months, at a time airline is struggling to remain afloat.

It has been drawing about Sh43 million as weekly fee since March this year. This has emerged as one of the most expensive consultancy bills in Kenya’s corporate scene even as management continues to defend itself against concerns that it may not be getting value for money.

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KQ boss Mbuvi Ngunze said in an earlier interview that he cannot comment on the specifics of the contract because of privacy clauses but maintained the company had been awarded the contract competitively.

“The contract was competitively done and its implementation is overseen by the board. I cannot speak on the specifics of the contract. They bid for the tender and I cannot disclose the details,” Ngunze said.

KQ insiders say the firm bills for its services in dollars and the weekly fees are hurting its cash flows given that it is currently running its operations largely on debt.

In addition to the weekly fees, the company also bills the airline for various services among them performance and professional fees.

For instance, an invoice number 127CM dated September 19, 2016 of Sh43.5 million (USD 435,000) was received by the airline for ‘implementation stage weekly fees.’ Similar invoices were entered in March, April, May through to September.

On August 14, the firm invoiced a Sh46.4 million for professional fees. Similar fees were entered for December, January and February. There have been about 40 different invoices entered in the period. The  largest invoices were in July and September when it billed Sh290 million and Sh600 million, respectively, as performance-based fees.

McKinsey was brought in after KQ made cumulative losses of Sh52 billion in the last two years, throwing the national carrier into its biggest financial distress in the last decade.

Obtain waivers

In a bid to stem the losses, the airline has had to take painful decisions and had to sell some of its assets to free up money in order to meet its daily obligations.

So far it has fired almost 100 employees in its restructuring plan known as Operation Pride that aims to send home about 600 workers. It is also preparing for the second phase of sackings that will see mark the second round of employees leaving.

The company has Sh142 billion in debt and it says it is now negotiating with the lenders to obtain waivers for non-compliance with certain financial covenants as at March 31, 2016.

KQ put up on sale a prime plot in Embakasi and has also sold a parking slot in London. It has also sold several planes and leased others. The airline says it will take action against those who caused it losses as found by a forensic audit by Deloitte

KQ Chairman Dennis Awori declined to reveal the names of the people mentioned in the report or the key findings unearthed by the forensic auditors.

kenya airways (kq)McKinsey and CompanydeloitteKQ Chairman Dennis Awori