How tycoon with dubious Kenyan past got entangled in Tanzania’s mega scam

Few people received top dollar construction contracts from the Kenyan government in the 1990s like business tycoon Harbinder Singh Sethi.

Born and raised in Iringa, a small town in Tanzania’s Southern Highlands, Sethi arrived in Nairobi in the 1980s.

At that time, the idea of tenderprenuership was still new in Kenya. But for a man who had founded his first company at 19, he knew at an early age that he could make a fortune from lucrative multi-billion shilling construction contracts from government entities.

Sethi quickly understood the Harambee spirit building up in Kenya and would from time to time show up at public functions to give ‘generous donations’. His donations would grab media headlines and endear him to government officials.

But it was not until after Ruaha Concrete Co Ltd, a firm he founded together with his siblings, was caught in scandals that his business activities in Kenya started receiving attention.

A 1997 report by the Auditor General found that Ruaha irregularly received a contract from Kenya Pipeline Company (KPC) to build a 9km access road. Despite this, the construction was still rocked by serious delays, large cost overruns and poor workmanship.

The project cost shot up two and a half times from Sh197 million in February 1995 to over Sh510 million by June 1998, when the road was finally completed. The auditor recommended that Ruaha Concrete be blacklisted and investigated.

Tax fraud

This was just the beginning of the making of Sethi.

His other company, Pan Africa Builders and Contractors, (Pabco), landed a lucrative contract from the cash-rich National Social Security Fund (NSSF). The contract valued at nearly Sh2 billion would see him build houses, apartments and a shopping centre on the Fund’s Kitisuru Estate in Nairobi. The project was also delayed and scaled down to Sh822 million.

During its handover to the fund some time in February 2007, it emerged that NSSF had not settled the remaining Sh1.3 billion. Sethi went to the High Court demanding the difference. The court ruled in his favour, awarding his company Sh668 million ($7.4 million), plus costs and accrued interest. But eventually, the firm agreed to receive Sh590 million as settlement.

It would later be discovered that the firm had defaulted paying Sh260 million in taxes to the Kenya Revenue Authority (KRA). That is when the Parliamentary Public Investments Committee (PIC) blacklisted Mr Sethi, recommending that he should not be allowed to undertake construction work anywhere in the country.

Very little of him has been heard from that time until last week when he was dramatically arrested alongside another businessman and arraigned in a Tanzanian court after he was named in the biggest scandal to hit the neighbouring nation. Sethi is now at the centre of the 20-year-old ‘Tegeta Escrow Account’ scandal spanning three Tanzanian administrations, but action has been accelerated in the John Magufuli regime.

The scandal that claimed Tanzania’s Attorney General and top government officials got messier after Tanzania’s parliament recommended that its prime minister takes political responsibility for the scandal.

The Tanzanian parliament also asked for the sacking of two Cabinet ministers, including former executive director of UN-Habitat Prof Anna Tibaijuka. Tibaijuka has, however, insisted that the Sh100 million ($1 million) she received from VIP Engineering and Marketing was just a donation. For Sethi, it is his other company, Pan African Power Solutions Tanzania Limited (PAP), that was part of the deal that has caused him arrest.

Together with businessman James Rugemalira of VIP Engineering and Marketing Tanzania Limited (VIPEM), Sethi has been charged with six counts under economic crimes, including among others, conspiracy to defraud the Tanzanian government of over Sh14.2billion (Tsh306 billion). Tanzanian authorities said more people, mostly government officials who in one way or another facilitated the biggest theft involving state funds in the country’s history are expected to be hauled to court in the coming weeks.

Sethi’s arrest brought to a climax the grueling episode that had at various times dominated the country’s media headlines. A full hearing by a parliamentary panel began in the 1990s during President Ali Hassan Mwinyi’s term.

It all started in 1994 when the Independent Power Tanzania Limited (IPTL), a consortium of Merchmar Corporation of Malaysia and VIP Engineering, a local company, signed a memorandum of understanding (MoU) with Tanzania Electric Supply Company (Tanesco), the state owned power firm for the supply of electricity to the national grid.

Overpriced deal

The MoU was signed after acute power shortages hit the country due to persistent drought. After floating invitation for emergency solutions, Tanesco picked diesel turbines financed through foreign aid.

This is what saw the birth of a joint venture between Mechmar Corporation (owning 70 per cent shares) and VIP Engineering (30 per cent) to form IPTL to do the job.  IPTL continued negotiations with Tanesco and in June the following year, a 20-year power purchasing agreement was signed for the firm to build a 100 MW slow speed diesel (SSD) power plant at Tegeta, in the outskirts of Dar es Salaam at the cost of Sh16.8 billion ($163.5million).

This included an engineering procurement and construction contract (EPC) worth Sh13 billion ($126.39 million).

The initial “reference tariff” of $4.2 million per month plus 3.25 US cents per kWh of electricity actually produced were set on the understanding that the final tariff would depend on actual costs incurred.

But as these proceedings were taking place, and without informing Tanesco, IPTL entered into agreement with another entity, Wartsila, to build a cheaper medium-speed diesel (MSD) plant. Wartsila’s bid increased the cost by 33 per cent, from $85.7 million to $114.2 million.

Trouble started when Tanesco requested full documentation from IPTL on actual costs incurred in order to negotiate final power purchase tariffs, which was finally produced in February 1998.

Two months later, Tanesco issued notice of default to IPTL for unilateral substitution of MSD facility. The wrangle culminated in Tanesco’s unsuccessful attempts to negotiate a lower tariff reflecting the actual cost to IPTL in building an MSD plant — as opposed to the SSD plant as contracted initially.

Later that year, Tanesco requested arbitration before the International Centre for the Settlement of Investment Disputes (ICSID) after IPTL failed to justify the cost structure and other incidental payments.

In February 2001 ICSID found that IPTL was overpriced by $23.5 million, but also ruled the contract still stood since Tanesco was aware of the switch from SSD to MSD. In January 15, 2002 IPTL started supplying power to the national grid for 13 US cents per unit. Then abruptly in March, VIP Engineering petitioned the High Court of Tanzania to wind up IPTL.

Tanesco began disputing IPTL capacity charges in 2006, forcing the two sides to again seek arbitration at the ICSID.

Following this dispute, both IPTL and Tanesco agreed to open an escrow account at the Bank of Tanzania (BoT), pending the determination of the arbitration.

In 2008, Mechmar Corporation, the Malaysia-based company which owns 70 per cent of IPTL, was placed under receivership for defaulting on a loan it borrowed to buy the Tegeta power plants. In the following year, following the 2002 winding up petition filed by James Rugemalira, the High Court of Tanzania placed IPTL under the receivership of the Administrator-General.

Meanwhile, the Malaysian High Court and later on British Virgin Islands High court revoked an attempt to sell Mechmar Corporation’s 70 per cent stake in IPTL to a company called Piper Link registered in the British Virgin Islands.

Piper Link was represented by Sethi, according to a report compiled by former Tanesco Chief Legal Counsel Godwin Ngwilimi.

Then, in 2010,  Sethi entered the fray and claimed that he had bought 70 per cent of IPTL from Merchmar and went on to take over the management of the company. This bid failed due to the winding up petition filed by Mr Rugemalira, the minority shareholder, who owns 30 per cent of IPTL.

Three years later, Rugemalira agreed to sell his 30 per cent stake to Sethi’s company PAP for $75 million. PAP placed claim to the escrow monies in the Bank of Tanzania (BoT) the following month, but faced legal hurdles including concerns raised by BoT over the allegation that PAP had not registered the purported sale of the 70 per cent stake with the Business Regulatory and Licencing Authority (BRELA).

Another concern by BoT was for PAP to show proof that it lawfully acquired 70 per cent stake of IPTL.

The sought documentary proof for this was presented the same month (October 2013) by PAP to Tanzania Revenue Authority (TRA) that showed Mechmar sold its 70 per cent stake to Piper Link for TSh6 million ($3,663). The documents also showed that two weeks after the purported transfer of shares, the British Virgin Island company sold those shares to PAP at the price for $300,000.

At the end of 2013, BoT finally transfered escrow funds to PAP’s accounts at Stanbic Bank after clearance from the Attorney General’s office as well as the Ministry of Energy and Minerals.

In another development in February 2014, ICSID ruled that Tanesco was indeed overcharged by IPTL and ordered the two parties to re-calculate the tariff and report back to the court in May 2014. However at that time, the escrow account had already been emptied and officially closed.

In the following month, Parliament’s Public Accounts Committee (PAC) directed the Controller and Auditor General (CAG) to launch an investigation into the process leading to what it saw to be crooked withdrawal of money from the escrow account.

Forged documents

The ensuing CAG Report established that Sethi’s PAP did not legally acquire 70 per cent of IPTL from Malaysia-based company Merchmar.

CAG also established that all money in the escrow account was supposed to be paid back to Tanzania Electric Supply Company (Tanesco) because the state-owned power firm had been overcharged a total of TSh321 billion by IPTL between 2002 and 2012.

According to the CAG report that was read in Parliament by PAC, Mr Sethi had presented forged documents to the Tanzania Revenue Authority (TRA) and Business Registration and Licencing Authority (Brela) in an attempt to hide the dubious nature of the transactions.

Other sources claimed that Mr Sethi and his son own 50 per cent of PAP, while the rest is owned by another company called Simba Trust that is said to be incorporated in Australia.

The entire deal smelled a rat because at the time of the purported sale of shares, IPTL had power plants located in Tegeta, Dar es Salaam, worth millions of dollars plus cash totaling USD250 million - including $122 million sitting idle in an escrow account that was under the custody of the Bank of Tanzania (BoT).

What prompted a parliamentary probe was the stark incongruity: 70 per cent of IPTL being acquired for only $3,750 (TSh6 million) and a few weeks later, 30 per cent of the same company being bought for $75 million (TSh120 billion).