State resigned to lose Sh21b in Kimwarer, Arror scandal

Friday, July 26th, 2019 07:03 | By

The government appears resigned to lose the Sh21 billion already paid to Italian company CMC di Ravena for the stalled construction of Kimwarer and Arror dams, People Daily can report.

In a legal advisory, the State Law Office also warns that the country’s obligation to pay outstanding amounts remains binding and enforceable, and as long as the balance remains unpaid, it will continue to accrue interest.

A letter from Solicitor-General Kennedy Ogeto, the firm does not have the capacity to deliver the projects. He subsequently advises the government to terminate the current contract and procure a new one.

“It’s apparent that the lead contractor is facing financial distress. It is also clear that the second contractor never submitted a formal bid and was never evaluated financially, technically nor legally,” he says.

Widely spread

Interestingly, the letter, dated May 27, 2019, and addressed to the acting Permanent Secretary, Ministry of East Africa Community and Regional Development, Margaret Mwakima, is copied to suspended Treasury Cabinet secretary Henry Rotich and his Principal Secretary Kamau Thugge. 

It is also copied to the Attorney General Kihara Kariuki, Aden Mohammed (East Africa Community and Regional Development CS) and Kerio Valley Development Authority (KVDA) managing director David Kimosop.

Rotich and Thugge were on Tuesday charged with various counts of alleged fraud involving the two dams, while Kimosop was said to be out of the country and is yet to surrender to the authorities.

The Kenyan government has already paid Sh11.5 billion to the contractor in advance settlement and part-payments for work that is yet to begin. (See separate story).

“In light of the foregoing, Government of Kenya may consider terminating the current contract and call the advance payment and performance guarantees,” said Ogeto. 

This, however, may not be possible because the government can only enter into a new venture with the consent of the Italian contractors, who have already left the ground.

“The Government of Kenya will, therefore, have to procure a new contractor to undertake the projects with the approval of the lenders herein since the facilities agreement was by way of a financing tied to Italian contractors,” the Solicitor General notes. 

Ogeto’s letter came to the fore on the same day that Water and Sanitation Cabinet secretary Simon Chelugui told Parliament the Kenyan taxpayer risks losing the Sh11 billion due to the imminent termination of the Itaare Dam project in Nakuru County by the same company.

Chelugui said the construction of the Sh40 billion dam had stalled after the Italian contractor filed for bankruptcy at home. The dam was expected to provide more than a million people in three counties with water.

Kimwarer and Arror dams were initiated in 2015 as mega projects that could change the lives of Elgeyo Marakwet County residents and parts of the North Rift. The initial cost was given as Sh46 billion but was later inflated to Sh63 billion.

However, four years later, there is nothing to show for the billions of shillings sank into the project. A visit to the two sites shows no sign of construction even after advance payments of Sh19.7 billion as at January 2019. The money was paid as commitment fee, insurance and other costs. 

According to the Director of Public Prosecutions, Sh11 billion was paid upfront for insurance while Treasury borrowed another Sh4.6 billion to pay interest in advance on the principal amount.

The Solicitor-General gave his opinion after the parent ministry sought to know whether the government should continue to implement the projects with the contractor in light of the alleged financial distress being raised by CMC di Ravenna.

Land impasse

The ministry also sought advice on how the government could resolve an impasse on the land earmarked for the projects so that they could proceed. The ministry also wanted to know options open to the government on the implementation of the projects. 

The Solicitor General noted that there was “an absolute, irrevocable and unconditional contractual obligations on the part of the borrower (Kenya)” and that the obligations under Financial Agreements remained due and outstanding regardless of whether the commercial contracts have been performed or not.

Ogeto says the country’s obligation to the finance parties was independent of the obligations of the parties to the commercial contract. 

“Any negative effect on the commercial contract has a direct bearing on the financial agreements as the financing agreements were negotiated and constituted as a government-to-government loan and had been raised for the purpose of financing goods and services under the commercial contract,” the letter reads.

According to an investigation report, on April 5, 2017 a joint venture of two Italian companies, Cooperativa Muratori & Cementisti-CMC Di Ravenna and Itinera S.P.A, executed a construction agreement with Kerio Valley Development Authority (KVDA) for the construction of the dams.

On December 4, last year, CMC di Ravenna was admitted by Court of Ravenna in Italy for bankruptcy procedures under Italian Insolvency Law.

Following the bankruptcy, Ogeto says that Kenya could terminate the contract, quoting the law on conditions of contract, FIDIC 1999, which compels an employer to terminate a contract if the contractor becomes bankrupt or insolvent, goes into liquidation, has a receiving or administration order made against him, compounds with his creditors, or carries on business under a receiver, trustee or manager for the benefit of his creditors.

The advisory now seems to be water under the bridge because the contractor has since left the site and 16 top Kenyan officials have been charged over the two controversial projects.

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