How taxpayers may have paid twice for a Sh48.4 billion project

Kenya Pipeline Company Managing Director Joe Sang during an interview. [Denis Kibuchi, Standard]

Shocking details have emerged, exposing how Kenyan taxpayers may have paid double the cost of constructing the Sh48.4 billion pipeline, Line 5, the nation's second most expensive single infrastructure project after the Standard Gauge Railway.

The murky revelation points to allegations of corruption where the people of Kenya may have paid debts that they never borrowed, poor workmanship, and betrayal of public trust, offering a damning indictment of government complicity, legal loopholes, and a system that allowed graft to flourish with impunity.

A huge trove of secret suspicious documents seen by The Standard offers a never-before-seen picture of corruption and complicity — and how the government let it flourish with impunity aided by the courts and some local law firms as taxpayers' money went down the drain.

Questionable payments are now fueling unending legal battles, leading to multiple recusals of judges and a divided KPC board, all while billions of shillings intended to benefit ordinary Kenyans were siphoned off into private accounts.

At the center of it is Lebanese construction company Zakhem International Construction Limited, headquartered in Cyprus, which won the contract (SU/QT/032N/13) in July 2014 to build the new 450-kilometer pipeline.

This project was intended to replace the aging Line 1, built in 1978, and enhance the nation’s fuel transportation capacity from Mombasa to Nairobi.

Due to the capital-intensive nature of the project, the Kenyan government sought external financing. KPC was to contribute 28% of the cost, while a consortium of six banks was to cover the remaining 72 per cent.

A mandate letter dated July 15, 2015, shows that the six banks — CFC Stanbic Bank Ltd, Citibank, Commercial Bank of Africa, Co-operative Bank, Rand Merchant Bank, and Standard Chartered Bank — agreed to finance the project with a $350 million loan, shared equally among them.

This financing model was approved by both the Treasury and the Ministry of Energy, marking one of the largest commercial bank financings by a Kenyan parastatal without government backing.

At the time of breaking ground, Kenya Pipeline’s Managing Director was Charles Tanui, while the board was chaired by John Ngumi. Joe Sang, the current MD, was a General Manager in charge of Finance and would later take over as MD from Tanui in 2016, becoming the man who would commission the new line in July 2018.

However, recent financial reports from Kenya Pipeline indicate that the corporation is yet to fully repay these banks. Instead, KPC is now also paying two subsidiary banks, Ecobank Nigeria Limited and Ecobank Kenya Limited, which have claimed participation in the financing of Line 5 to the tune of an additional Sh40 billion.

The involvement of these banks remains shrouded in controversy, with KPC and the Kenyan government failing to clarify who sanctioned these payments, despite evidence of ongoing transactions.

According to plaint no. 292 of 2018, admitted at the Commercial Division of the High Court, Zakhem Construction Nigeria Limited says once the Kenyan tender was won on July 1, 2014, to build Line 5, they took a facility in the sum of USD 300 million on behalf of Zakhem International Construction Limited (Cyprus) (which had won the tender) to meet the requirements of the Kenyan contract, which had been awarded by Kenya Pipeline.

The plaintiff further says that Ecobank Nigeria Limited had issued both a tender guarantee and a performance bond on behalf of Zakhem International Construction Limited (Cyprus).

But a mandate letter that brought on board the consortium of six banks obtained by The Standard reveals that, according to the agreement, no other entities were to be involved as mandated lead arrangers, underwriters, or documentation agents, emphasizing that no additional compensation should be paid to any party not included in the original contract.

Currently, the court has had to freeze some $25 million part of the $31.3 million ordered so by a Mareva order, freezing order by Justice Freda Mugambi of August 31, 2023.

The money is being held in the bank accounts of lawyers Ahmednasir Abdullahi and Majanja Luseno and Company, representing Zakhem International Constructions and Ecobank Nigeria and Kenya respectively.

This payment was made despite an active Mareva injunction and High Court Judge P.J.O. Otieno ordered on August 8, 2024, that the funds be preserved pending the resolution of a dispute with a local partner.

The High Court order read: “Let any money subject of the Mareva injunction in force and said to have been paid to the credit of Ms Ahmed Nassir Abdulahi advocates LLP and Ms Majanja Luseno and Company advocates  ...be preserved and not withdrawn or disbursed , pending determination of the applications seeking the setting aside of the Mareva injunction”

To date, no documentary evidence or account statements have been provided, as required by the Kenyan Constitution, to clarify which project was financed by Ecobank Kenya and Nigeria.

On June 24, 2024, the Commission on Administrative Justice (Office of the Ombudsman), tasked with enforcing access to information, wrote to KPC’s Managing Director seeking details of the questionable contract. However, KPC remained uncooperative, citing its right to withhold information on matters still under active consideration. KPC replied to the Ombudsman on July 3, 2024, stating:

“KPC has the right to refuse to provide the requested information if the same significantly undermines its ability to give adequate and judicious consideration to a matter concerning which no final decisions has been taken and which remains a subject of active consideration.”

This financial quagmire appears to have split the KPC board, with Chairperson Faith Boinett and Managing Director Joe Sang leading opposing factions. While some board members support the payments, others are vehemently opposed, further deepening the crisis at the state body.

The construction of the 450-kilometer pipeline, a Vision 2030 flagship project, was intended to improve fuel transportation efficiency from Mombasa to Nairobi. In June 2014, Zakhem Constructions Limited (Cyprus) was awarded the contract at a cost of $484 million (Sh48.4 billion), with the project slated for completion in 18 months. However, delays extended the timeline to nearly four years, significantly increasing the financial burden on taxpayers to its commissioning.

The new pipeline was designed to transport up to 2.6 million liters per hour by 2044, reducing the need for road transportation and its associated maintenance costs. Despite the advanced specifications, the project was plagued by substandard workmanship, leading to numerous disputes and delays.

After securing the Line 5 contract, Zakhem International entered into a subcontract with Oilfields Engineering and Supplies Limited, a Kenyan firm, to execute civil and road works. However, the partnership quickly deteriorated, with Oilfields accusing Zakhem of failing to honor payment agreements totaling over $17 million at the time. Zakhem denied these claims, leading to a protracted legal battle and the establishment of an independent arbitration tribunal.

On June 30, 2021, the tribunal, led by Kyalo Mbobu, ruled in favor of Oilfields, finding that Zakhem had breached the contract. The tribunal ordered Zakhem to pay the outstanding balances and VAT owed to Oilfields, as well as issue a certificate of completion as required by good practice.

Oilfields further obtained Mareva orders, freezing orders, on August 31, 2023, prohibiting Kenya Pipeline from paying out USD 31.3 million to Zakhem International Construction. Zakhem has, on their part, been fighting in court to set aside the award.

But in a certificate of urgency filed on August 1, 2024, in the High Court of Kenya, Commercial Division, senior lawyer Ahmednasir Abdullahi, representing Zakhem International Construction (Nigeria, Kenya, and Cyprus), wants Kenya Pipeline to remit the money to his clients. He admits as saying: "KPC has so far released the sum of USD 25 million only out of the 31.3 payments made pursuant to a decree dated February 16, 2024."

Despite this ruling, the litigation has been marred by frequent recusal of judges, ensuring the case drags on indefinitely.

The Standard has obtained Kenya Pipeline’s 2021 annual report and financial statements. In the report there is no single mention of Ecobank Kenya or Nigeria’s involvement in the construction of Line 5.

The report justifies the additional costs incurred during the construction of Line 5, citing changes in design specifications and omitted works. However, KPC’s own admissions raise questions about the true cost of the project and the legitimacy of the variations claimed by the contractor. 

“The project engineer submitted 8 variation orders totaling $38,109,717 (Sh3,812,877,186). According to KPC, these variations resulted from changes in design specifications and the omission of works in the initial contract. 

Furthermore, the contractor submitted 5 extensions of time claims amounting to $204,511,827 (Sh20,461,408,302). KPC contested these amounts, leading to the appointment of an independent expert scheduler to verify the claims.

In the report, Kenya Pipeline makes this glaring admission: "Until the matters related to the contract variation and extension of time are resolved, it is not possible to confirm that the carrying value of the pipeline reflected in the financial statements as of June 30, 2018, is true and fair."

Multiple judges have ended up recusing themselves from the case following pressure from a section of litigators. Some of the judges that have handled the case before include Justice Abigail Mshila, the late Justice David Majanja, Justice Wilfrida Okwany, and Justice Dr. Freda Mugambi.

An application by Ahmednasir Abdullahi to have the current judge listening to the case, Justice P.J. Otieno, recuse himself as well, was dismissed on August 8, 2024.

The ruling by P.J. Otieno observed on the recusal read in part: “It would be an act of perpetuating the past delay to recuse myself at this juncture when the court has spent valuable judicial resources to take quite substantive proceedings then abandon the same yet for another judicial officer to start afresh.”

To date, it remains a mystery just how many more secrets lie buried along the pipeline’s 450-kilometer route and whether Kenyans will ever truly know the exact cost of constructing the new line.

The Standard sought the response of the managing director on the various issues the document raised. We called Kenya Pipeline Managing Director Joe Sang' for comment yesterday at 4:37pm but the call was dropped. We sent a message immediately after but we are yet to get the responses.

In Part Two of this special report, we will explore how an oil leak in Kiboko, Makueni County, caused an environmental disaster, exposing the poor quality of work by Zakhem International Construction on the new pipeline. We will also reveal how this incident was another scheme to defraud Kenyans and why the affected community is planning a class-action suit against the state.

Additionally, we will expose how the project’s retention money was prematurely released from KPC before the mandatory one-year defect liability period expired, leaving taxpayers to shoulder the repair costs in newly awarded tender to repair the River Kiboko crossing.