Untold story of a Sh63bn theft scheme planned in high offices

In the boardroom of Kerio Valley Development Authority, greed and impunity met to hatch a brazen scheme to milk national coffers. That scheme has now snowballed into a Sh63 billion monumental scandal.

In a series of errors, fraudulent manoeuvres and insidious tricks, officials at the parastatal, alongside those from the National Treasury, managed to force the taxpayer to borrow money to build two non-existent dams from a hydra-headed Italian company that was fast going broke.

For the first time, the Nation is telling the full story of what went on behind the scenes as the public prosecutor’s office moves to charge those behind the bush-and-thicket scandal.

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Director of Public Prosecution Noordin Haji on Monday ordered the arrest of Treasury Cabinet Secretary Henry Rotich, Principal Secretary Kamau Thugge, and KVDA Managing Director David Kimosop. Others were Susan Koech, PS East African Community, and National Treasury economists Jackson Kinyanjui and Kennedy Nyachiro.

For months now, detectives have been investigating why the National Treasury took a commercial loan from a consortium of Italian banks for the construction of the Arror and Kimwarer dams, and why they added an extra Sh10 billion to the Sh63 billion to cover the risk of non-repayment when a government guarantee would have been sufficient, and free.

Mr Haji and the Director of Criminal Investigations (DCI) George Kinoti camped in Italy last week perusing files related to the contractors’ bank accounts and movement of cash.

In what has turned to be a more complex investigation than earlier thought, the Arror and Kimwarer projects appear to have been a cash cow for several years, with various feasibility studies commissioned, paid for, and then shelved. In this brazen scheme to steal, money simply vanished into thin air.

Or, as the Nation put it when it broke the story earlier this year, billions of shillings were paid for what is no doubt the world’s most expensive thicket.

The inside story of the two projects, which have yet to commence after the parent construction firm, CMC di Ravenna, started facing financial challenges at home, is windy, twisted and complex.

WON TENDER

So complex is the matter that KVDA officials — either by design or default — did not know which company they were dealing with.

Records show that, while CMC di Ravenna South Africa Ltd was the one that bid for, and won, the tender, the contract agreement was signed by another entity known as CMC di Ravenna-Itinera SPA Joint Venture Ltd.

Meanwhile, invoices for advance payments were done by CMC di Ravenna Itinera JV Kenya Branch Ltd and paid to CMC di Ravenna Itinera JV at Intesa Sanpaolo SPA Bank in London.

Each of these is a different legal entity, which illustrates the legal nightmare investigators, who might never recover the money already paid to these entities, have been grappling with.

In government records, the story of the two dams appear for the first time in 1985, when the infamous Turkwel Dam was mooted in the same region.

Turkwel turned out to be the first major kick-back-driven project in Kenya. The contract for its construction was signed in Nairobi in January 1986 by then KVDA chairman Kipng’eno arap Ng’eny and witnessed by then Minister for Energy and Regional Development Nicholas Biwott, the mastermind of many other such mega projects in the country.

At the time, Arror Dam was projected to cost Sh414 million, but due to lack of funds, it never materialised. By then, a feasibility study had already been done by the Italian firm B&B SpA, while a separate feasibility study was done for Kimwarer Dam by G & G SpA.

FEASIBILITY STUDIES

During the Nyayo era, carrying out feasibility studies for projects that would never materialise was one of the main arteries of corruption. These two feasibility studies, completed in 1991, found that the two dams were viable and “technically feasible”. But with no funding from the exchequer or donors, the reports were shelved.

It was not until August 4, 2009 that the matter resurfaced during a Cabinet meeting of the Grand Coalition government of President Mwai Kibaki and Prime Minister Raila Odinga.

The Regional Development ministry, then under Fred Gumo, had tabled a Cabinet Memorandum that contained proposals for the Arror Dam, which, it projected, would cost Sh16.3 billion.

During that Cabinet meeting, Prime Minister Raila Odinga was asked to coordinate the relevant ministries and agencies “and take the lead” to actualise the projects tabled by the various regional development authorities.

While Arror was included in the list of projects in the addendum, Kimwarer was not. It’s not clear at what point it was brought into the picture. What we now know is that three feasibility studies were carried out on the Arror project after that Cabinet approval to seek financing options.

Again, why three feasibility studies were done for a single project is not clear. What is clear, though, is that they cost the taxpayer hundreds of millions of shillings.

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Sources say the only available feasibility study was procured on May 31, 2010 by the Regional Development ministry from Iran’s Naqsh Tarsim Milad Consulting Engineers. It cost Sh934.5 million. The study recommended that an earth-and-rock fill dam was feasible, and that land acquisition would cost approximately Sh237 million.

PROCUREMENT PLANS

The letter of notification was written by then Permanent Secretary Carey Orege and the agreement signed by Ms Naqsh, an executive director at Hojjat Ashouri.

This feasibility study, according to audit reports, was done “without evidence that this procurement was factored in the Ministry’s annual procurement plans and budgets”.

“The studies carried out by Camce of China in 2012 and Ms Wapcos of India are currently missing,” notes the audit.

More so, it was illegal for the ministry to issue a contract on the same day it notified the Iranian firm it had won the tender to carry out the feasibility study, which in essence locked out the competitors from the 14-day period required to lodge complaints.

Still, there is no evidence of a feasibility study on Kimwarer Dam, which is a prerequisite in any tendering procedure.

What is available is a letter referenced MRD/KVDA/8/7/4, dated April 11, 2013, which forwarded a design for Arror Dam to the KVDA managing director David Kimosop.

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Even without a feasibility study on Kimwarer, records indicate that in December 2014 the Ministry of Environment, Water and Natural Resources, then under Prof Judi Wakhungu, issued two requests for proposals for Arror and Kimwarer dams. This was to be an infrastructure concession contract where the contractor would charge a fee to users on a build, operate and transfer (BOT) model.

The government had made it clear to those who were interested that no “sovereign guarantees” would be provided for these two projects, and that the government would only guarantee the terms of the concession agreement.

SOVEREIGN GUARANTEES

But after receiving the bids, the government, on September 2, 2015 made an about-turn and abandoned its original stand by issuing an addendum stating that it would provide sovereign guarantees to the financiers in case the original borrower (in this case, the broke Italian firm CMC di Ravenna) failed to repay. Also, the scope had changed from BOT to EPCF (Engineering, Procurement, Construction and Financing) — in essence a public-private partnership (PPP).

It is now emerging that the tender committee had no right to award these projects under Section 92 of the Public Procurement and Disposal Act and should have done so under the new PPP Act, which came into effect in February 2013.

That means the entire tender notice as advertised in December 2014 was pegged on the wrong law, and that the nine-member tender committee, appointed by Mr Kimosop on March 30, 2015 to evaluate the bids, had no jurisdiction to do so.

The tender committee also lacked the required technical expertise to conduct technical evaluation of the bids. That is why, on March 31, 2015, Mr Kimosop wrote to the Principal Secretary State Department of Water and Natural Resources requesting technical support. The PS, Mr Robinson Gaita, nominated Mr Bernard Kasabuli on April 2, 2015 to join the tender committee.

SINOHYDRO PULLED OUT

It was this tender committee that decided that Arror Dam would be built by CMC di Ravenna of Italy with a score of 95.2 points, while Sinohydro was to take Kimwarer Dam. But after Sinohydro pulled out, KVDA entered into a contract with CMC di Ravenna for the two dams and the government became the borrower for the loan facility, which negated the original financing model. Why the government changed the financing model after it had invited bids is not clear. Initially, the contractor was to secure his own financing.

Sinohydro pulled out of the Kimwarer project after KVDA refused to issue them with an award letter to enable them negotiate with their banks and allow them to submit a financial proposal.

A review of the tender documents now indicates that CMC di Ravenna did not bid as a joint venture of contractors and consortiums as required by the advertisement notice, but the tender evaluation committee overlooked that illegality.

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Records also indicate that there were two different evaluation committees at different stages of procurement except for a Ms Charity Muui, who was the secretary. Why the first team was dropped is now a matter of speculation, but what we know is that, by the time of the evaluation, no due diligence had been done on CMC di Ravenna.

A brief prepared by insiders states that “the tender committee had no powers to approve selection of the successful proposal (or) approve the list of persons qualified to submit proposals”.

But on April 5, 2017, and relying on the tender committee recommendations, KVDA signed two supply contracts with CMC di Ravenna for the construction of both Arror and Kimwarer dams.

However, there was a problem: When KVDA asked for bids in March 2015, the proposal was submitted by the parent company in Italy and its South African subsidiary. But when the supply agreement was issued, it was to a joint venture known as CMC di Ravenna and Itinera SpA.

DUE DILIGENCE

How Itinera SpA came into the picture is not clear, but in the request for proposal, CMC di Ravenna had identified AECOM as its partner in the project. Having signed the contract, KVDA realised they had no financial intelligence on the firm, and to cover up, and decided to carry out due diligence after the fact.

In procurement law, the purpose of due diligence is to confirm that the information given by the bidder in the bid document is true. Why Mr Kimosop, as the KVDA boss, overlooked this crucial process is at the heart of investigations.

Also, the five-member team he appointed, including himself, to carry out due diligence is being investigated. The others are Sarah Muui (chief economist), Tom Mokaya (senior economist), Nevis Ombasa (State counsel), Paul Serem (engineer) and William Maina (procurement manager).

The team travelled to South Africa to carry out due diligence between April 25 and May 3, 2017, long after the contract agreements had been signed for Arror and Kimwarer. According to the Auditor-General, “KVDA had, therefore, already made a decision and entered a contractual commitment and the due diligence process was therefore a formality and was not to add any value to the contractual process”.

One of the emerging queries is which particular entity was appraised since, from records, KVDA has been dealing with four different legal entities: CMC di Ravenna of Italy (which received the advance payment), CMC di Ravenna South Africa Limited (which bid for the tender), CMC di Ravenna Itinera Joint Venture Limited (which signed the contract), and CMC di Ravenna Itinera JV Kenya Branch (which was billing KVDA).

TECHNICAL FINDINGS

Again, carrying out due diligence after two contracts had been signed made no sense, but in its report on legal, financial and technical findings, the team reported that the South African branch of CMC di Ravenna was “profitable” and had “adequate plant and equipment” to undertake the projects.

A special audit of these findings now says the due diligence parameters used were “inadequate” to measure the financial health of the firm in terms of its insolvency risks. While the due diligence team claimed the company had 22 branches and offices spread across the world, it only inspected two projects in South Africa. A later insolvent risk analysis of the CMC di Ravenna financial statement indicates that the company was already “technically insolvent and ought not to have been awarded the tender”.

Investigators are baffled that the bids did not include contingencies. These were included after Mr Francis Kipketch, KVDA’s chief manager Technical, wrote to the MD asking for the inclusion of 10 per cent contingency funds in an internal memo dated April 2016, 2016.

It was during a further negotiation at the Treasury that it was decided that a 10 per cent contingency “for any unforeseen cost overruns” be included, and be utilised upon the authorisation of KVDA. This effectively changed the substance of the tender, another illegality not allowed in procurement. This was done after the tenders had been evaluated and, according to a special audit, “competitors were not treated fairly in the tendering process”.

Documents show that this was approved by the tender committee on May 31, 2016.

With both dams costing $45,620,888, KVDA officials now had an extra Sh4.6 billion, which they could legally use — outside what was in the original CMC di Ravenna bid — without raising any eyebrows. It is this 10 per cent contingency that investigators are now looking at since there was no rationale for setting the contingency fee. They also think it was “unusual” to include this contingency fee as part of the supply agreement.

CREDIT FACILITIES

When the Buyer Credit Facilities Agreement was signed on April 18, 2017 and the project fee converted to Euros, it was said that this was “government-to-government loan”, meaning that the Kenya government was entering into a deal with its Italian counterpart.

But this was not so since National Treasury entered two agreements with BNP Paribas Fortis SA/NV, Intesa Sanpaolo SpA, Unicredit SpA, and Unicredit Bank AG to finance the two projects.

In the two agreements, it was stated that the “Bank Syndicate… will have the benefit of an insurance policy issued by SACE (Servizi Assicurativi del Commercio Estero), an Italian export credit agency. What that meant was that Kenya would pay money to the Italian insurance firm to guarantee the syndicate’s money.

The total amount to be paid for the two projects was EUR94,180,510 (Sh10.6 billion), which was to be drawn as the first utilisation of the loan facility. Treasury CS Henry Rotich had earlier said this was part of the conditions in the financing agreement approved by the Attorney-General before the National Treasury signed it on April 18, 2017.

The agreement was drafted by a London-based law firm, Linklaters, and questions are now being asked why the Kenya government took a commercial loan if indeed this was a government-to-government deal.

Nobody seems to know why a 10 per cent contingency fee was included as part of the loan principal. More so, it is now clear that the difference between the supply agreement and the facilities agreement was EUR134,212,437, meaning that the difference between money set for the project and the money borrowed was Sh15.2 billion.

With the payment of the Sh10 billion to the insurance agency, the balance of Sh4.5 billion was, according to the agreement, to “service interest repayments”.

CONTRACT AGREEMENT

This, again, was unusual since the 10 per cent contingency was not a necessity but the National Treasury had agreed to incur interest in addition to the principal amount rather than pay from State funds.

Part of the controversy is that, already, even before the project starts, a total of EUR94.1 million (Sh10.6 billion) has already been paid as total insurance premiums to cover non-repayment of the loan by the National Treasury.

The other major problem with these projects is that the contract agreement was entered into between KVDA and a joint venture between CMC di Ravenna and another Italian company, Itinera SpA, which had not featured in the tendering process. The letter of acceptance was, however, signed by a South African subsidiary, CMC di Ravenna South Africa Limited, yet the successful bidder was CMC di Ravenna Limited, not the joint venture.

The first advance payment of $33.7 million was paid to a new entity registered in Nairobi, CMC di Ravena/Itinera JV Kenya Branch which did not have a contract agreement with KVDA. This entity was based on the 8th Floor of Westside Towers in Westlands. Another advance payment of $41.6 million was also approved in November 2017.

“It is therefore clear that the company that bid for the tender was not the one awarded the tender and was not the one that was finally paid,” says a special audit.