How State officials bungled Anglo Leasing contract negotiations and cost taxpayers’ billions of shillings

Kenya: The Government may be compelled yet again to pay another Anglo Leasing-type claim should one of the key architects of the now infamous scheme decide to go to court to seek payment for unpaid debts running into billions of shillings.

Companies associated with Mr Deepak Kamani took up 13 of the contracts that now form part of what is referred to as the Anglo Leasing scandal.

Seven of the contracts were stopped and the monies that had been paid out as commitment fees to the contractors were refunded to the Exchequer. Three were completed while three others are listed as partially complete by various official reports.

Court proceedings

But unlike Mr Anura Perera — whose two companies, First Mercantile Securities Corporation and Universal Satspace went to court in Switzerland and the UK and got judgments compelling Kenya to pay them Sh1.4 billion last month — Mr Kamani has largely operated from the background, preferring negotiations to court proceedings.

But sources within his defence team say Kamani, who appeared before officers of the Ethics and Anti-Corruption Commission a fortnight ago, is increasingly growing impatient.

This, it is said, is as a result of his being frustrated by some Government agencies and the slow pace of progress in the completion of the cases, which might make him consider going to court to compel the Government pay some of the outstanding amounts.

Business Beat could not reach Kamani for comment, but the lawyer acting for him in the Anglo Leasing case, Mr Paul Nyamodi, said legally, the contracts that his client signed with the Government that were never cancelled are still in force.

He said Kamani was interested in seeing justice prevail and did not rule out going to court to seek the delayed payments.

“There are many ways of settling such issues and going to court is one of them,” said Mr Nyamodi.

National Treasury Cabinet Secretary Henry Rotich, however, has said the Government would not pay any other claim associated with Anglo Leasing after the uproar that greeted revelations that the State had paid the two firms associated with Mr Perera Sh1.4 billion. 

He said Treasury would instead “mount a strong defence” against the claims.

But Business Beat has obtained documentation showing the Government may find it nearly impossible to mount any credible defence should Kamani decide to sue for compensation.

This is due to the gaffes and serious lack of oversight on some top Government officers who were entrusted to oversee the successful execution of some phases of the projects.

Security equipment

A good example is one of the projects that involved the supply of security equipment to the police by a company called Sound Day Corporation.

The deal was to cost the taxpayer $30 million (Sh2.6 billion) and was dated April 9, 2002, but  was only partially completed before the Government balked out of the deal.

The contractor was, however, issued with two promissory notes worth $3.9 million (Sh339 million). A promissory note is a written agreement to repay a debt and is legally enforceable.

The deal was to be financed through an agreement with Apex Finance Corporation of Switzerland.

Although the outstanding amount may appear deceptively manageable, the devil, as the English say, was in the details.

The crack is in the fine print of the agreement where the Government agreed to pay an annual interest of six per cent per annum on any unpaid debts, and 0.5 per cent of the total outstanding amount per month as punishment for any delayed payment.

This means that the Government has been accumulating an annual interest of Sh20.3 million per year for the past 13 years on the amount. This brings the total annual interest payable to Sh264 million.

During the 156 months the debt was not paid, it attracted interest at the rate of 0.5 per cent per month (Sh1.7 million monthly). In total, the monthly charges have hit Sh264 million.

This brings the total amount payable to Sound Day Corporation on account of the issued promissory notes to Sh867 million.

Serious defence

A similar project dated November 19, 2002 in which the Prisons department was to be supplied and fitted with a modern communications solution referred to as Prisons Telecommunications Network by a company called LBA Systems Limited was also partially completed, but has a payment-due tag of 6 million euros (Sh660 million).

Going by the financing terms agreed for the deal, the payment attracts an annual interest of Sh40 million, which adds up to Sh520 million of unpaid interest for 13 years.

It also attracts a monthly punishment of Sh3.3 million, which comes to Sh515 million for the 156 months of breached payment.

In total, payment due in respect of the Prisons project stands at Sh1.7 billion.

Any projections or attempts to mount a serious defence as Rotich plans could be undermined by past actions of former Government officials who validated the various phases of the projects.

For example, the promissory  notes that were issued to LBA Systems for the Prisons telecommunications project were endorsed by the then Attorney General Amos Wako in a legal opinion dated February 25, 2003.

“In my opinion, each Promissory Note constitutes an unconditional promise made by the government of Kenya, engaging to pay on demand, at a fixed and determinable future time, the sum stated in each Promissory Note to the order of LBA Systems Ltd.

“Each Promissory Note is valid, binding and enforceable in accordance with its specific terms,” wrote Mr Wako.

Through a letter dated December 7, 2005, the then Permanent Secretary in the ministry of Home Affairs, Mr Erastus Mwongera, in what could amount to the Government taking blame for a backfiring project, wrote to Wako to notify him about the suspension of the second phase of the Prisons project.

In his letter to the AG, Mr Mwongera acknowledged that part of the reason for the suspension was due to bottlenecks erected by the Government, including “delays in tax exemptions of several goods, including 12 towers together with accessories”.

“This has resulted to huge demurrage charges, which have so far accumulated substantially,” said Mwongera, who also reminded the AG that the project was under investigations by anti-corruption authorities.

Prove corruption

Rotich justified the Sh1.4 billion payment by the Government to the two firms associated with Perera, saying it would have prevented the country from floating a Eurobond meant to raise up to Sh176 billion.

While defending himself against accusations that he did not do enough to save the country from demands to pay more money to Anglo Leasing architects, Attorney General Githu Muigai said he should not be blamed for the scandal.

“The people who signed the contract have never been prosecuted,” he said. “How then were we to prove corruption? We know the people who signed it!”

He also denied allegations that Government lawyers had deliberately mishandled the cases involving the two companies, leading Kenya to lose them in the London and Geneva courts.

“Any allegation that these cases were being mishandled for an ulterior motive ... nothing could be further from the truth. Nothing could be more libelous of my officers, of my office and of myself,” he said.

Catastrophic action

Although Kamani has not come out clearly to state whether he will go to court or not, any legal action from him would be catastrophic as it could force the Government to reallocate funds from other projects to settle his claim, especially if he chooses to go the way Perera did.

There has been uncertainty over how Kenya plans to fund its massive Sh1.8 trillion Budget after Rotich only gave hints of expected tax raises, giving rise to speculation the country could find itself borrowing from the international market to fund deficits.

Failure to pay debts that are enforceable by law may lead to a poor credit rating. A downgrading can have the immediate effect of making a country’s borrowing more expensive.

To pay or not to pay could be a difficult decision for the country to make, but what is clearly coming out of the trails of communications in our possession is that past governments lacked the money to pay for the completion of some of the projects, and some officials were lackluster in doing due diligence.

The Government exhibited a glaring case of lack of finances when in 1999, in a letter dated November 23, it wrote to the managing director of LBA Systems of Scotland, requesting a rescheduled payment plan.

“Please refer to your letter of September 30, 1999 on this matter. We have considered your proposal for alternative payment schedule and are committed to proceeding with this phase to maintain continuity for the project.

“However, due to current financial constraints of the Government, the Treasury has directed that we ask that you consider adjusting the schedule of payment,” wrote the then Permanent Secretary in the ministry of Home Affairs, Heritage and Sports, Mr Joshua Terer.

Financial constraints

The financial constraints would later continue to the early 2000s, leading to a slackening of progress on some of the projects.

But beyond these constraints, there are indications that the Government and its officials may have trusted some of the companies that would later be associated with Anglo Leasing too much based on their successful completion of some earlier projects.

Documents in our possession show that the relationship between Sound Day Corporation of England, which was later awarded the tender to supply a significant portion of security equipment to the police force, first signed a supply contract with the Government in 1998.

The contract was for the purchase of four units of Mi-17 helicopters and related spares and parts at a contract sum of $36 million (about Sh3.1 billion at current exchange rates).

On August 8, 1998, the Government also signed a financing agreement with Apex Finance Corporation to provide it with the amount that was required to finance the acquisition of the four helicopters, spares and parts.

Just like it would later turn out with the Anglo Leasing projects, conditions for the financing agreement stipulated that the Government was to pay Apex Finance a commitment and management fee amounting to three per cent of the loan amount.

The credit was to attract interest at the rate of six per cent per annum. In the event of default, the Government was to pay the financier additional interest at the rate of 0.5 per cent per month on the overdue payments.

But unlike in Anglo Leasing where some projects were never delivered, the four helicopters were supplied in pairs in June 1999 and August 2000.

The letter authorising payments to the supplier was signed by the then Permanent Secretary to the Treasury, Ms Margaret Chemengich, on the authority of former minister for Finance, Mr Simeon Nyachae.

kkwama@standardmedia.co.ke