13 April 2012

Kenya: The Currency Saga and the De La Rue Partnership


Sometime in 2006, Treasury officials were surprised when Central Bank of Kenya officials came up with a strange request.

They wanted to take possession of Times Tower, the current home of the Kenya Revenue Authority. Completed in May 2000, the 140 metre structure that is the tallest in East and Central Africa, was originally meant to house the Central Bank and came equipped with deep underground vaults and an adjacent seven-storey banking complex. But it was the vaults, the Central Bank men were interested in.

According to the construction engineers who built it, Howard Humphreys Kenya Ltd, the 38-storey Times Tower complex is "designed to resist earthquakes and to repel all forms of forced entry into the main vaults. Foundations comprise two deep basements sitting on a reinforced concrete raft varying in thickness from 0.9m to 3.0m." But by the time of its completion, the then governor of Central Bank Micah Cheserem decided he did not want it as it was too big for his staff.

His biggest department, Exchange Control, had been dismantled by the repeal of the Exchange Control Act effective 27 December 1995. What was not not clear to Treasury, is why CBK now wanted to reclaim Times Tower. In 1995 as Exchange Control Department ceased to exist, a new state corporation, the Kenya Revenue Authority, came into existence combining department such as Income Tax, Customs and Excise, VAT among others.

KRA was given Times Tower and in exchange, gave up the Income Tax Building at Milimani which was given to the High Court. "They came here saying we want our building back," said the Treasury official who did not wish to be identified. "We told them (CBK), government doesn't work like that. And we said to them, if you want space, you identify space, you come you tell us, we acquire it and you construct."

But CBK was insistent it wanted Times Tower for reasons that would only become clearer later. Enter Thomas De La Rue, the currency printer that has been printing Kenya bank notes at its Ruaraka Plant since 1994. There is a ritual that every new Finance Minister pays a visit to De La Rue within months of his appointment. Amos Kimunya had just succeeded David Mwiraria as Finance Minister and went around to see the De La Rue plant. It was as he was leaving that De La Rue bosses commented about how sad it was that they would soon be closing shop in Kenya.

Following the passage of the Public Procurement and Disposal Act of 2005, De La Rue could no longer be granted exclusive 10-year contracts to print Kenyan bank notes. Instead, CBK floated an international tender worth Sh2.7billion for printing of 400million units of new generation currency. De La Rue, a UK-based firm dating back to 1838, had first come to Kenya on the invitation of the Central Bank of Kenya in 1991. "De La Rue's presence here in Kenya started in 1991 when the Central Bank of Kenya, approached us and asked us if we would be interested in establishing a bank note printing factory, here in Kenya really with the primary aim of producing bank notes for Kenya rather than importing them from abroad," Mark Crickett, the commercial lead for De La Rue, Kenya said during a recent briefing.

With the loss of exclusive currency printing contracts, it no longer made sense for De La Rue to maintain a factory in Kenya as they could easily print any orders they won at any of their other plants. When the tender was floated, De La Rue won. The international tender was in itself a comedy of errors of sorts. First, the CBK team, according to Treasury, bungled the first tender by opening the financial bids before the technical ones.

Typically, technical bids are opened first to ascertain the ability of the bidder to deliver on the contract before looking at pricing. That process had to be cancelled and the contract was tendered afresh. International firms from UK, France and South Africa participated. De La Rue opted to print the new generation Kenya bank notes in its Malta factory. "The reason for that was essentially because there was no benefit given in that particular tender to producing those notes here in Kenya. So there was no recognition of the strategic benefit that could accrue to Kenya from producing the notes here."

The notes were to be printed and delivered to the port. "That contract was ex-Mombasa," a Kenyan De La Rue employee told The Star. "Essentially, we would print ship it and Central Bank picks it from there." Currently, De La Rue holds bank notes in its factory vaults and delivers them to CBK on demand. It also doesn't have to print a consignment all at once. "That would have been one single order," the De La Rue staffer said. With 400million units of currency coming its way, CBK panicked: there was nowhere to store the consignment. Hence, the strange request to Treasury to take back Times Tower as the building has sufficient vault space to keep the bank notes.

Additionally, the new currency would have been delivered in an election year 2007 which according to government sources, was not a good idea. In 2007, the new generation contract was cancelled and the government proposed to enter into a joint-venture with De La Rue. In the interim, Mark Crickett of De La Rue says, the new generation contract was converted to some interim orders of the old generation notes. The joint-venture will see government pay 5million sterling pounds (Sh650million) for a 40 per cent stake similar to Sri-Lanka where De La Rue has a similar JV with the government.

De La Rue says independent valuations priced it at around 15-18 million pounds. "In terms of the JV process, the structure is that, all of the operating assets, all of the equipment, all of the buildings, all of the sales contracts and all of the people who work for De La Rue Currency and Security Print will be transferred into a new company, De La Rue Kenya EPZ," Crickett said. "The buyer does not want to buy into any historical liabilities which may be present in the old company."

Finance Minister Njeru Githae has said he will probe the valuation of De La Rue. "In their books their assets were valued at Sh1.1billion and in the valuation report they were valued at Sh2.8billion so again we are trying to reconcile those assets," Githae said. "If the assets are Sh2.8billion as in the valuation report, we will go ahead, if they are less, we will not go ahead.

Githae said a technical team will also establish the state of equipment at the plant amid accusations by some members of parliament that the government would be buying into obsolete equipment. "Yes its true to say that the machinery here is not brand new but obviously capital equipment of this type does have a relatively long life and bank note industry is quite mature and quite well established," Crickett says. "The equipment we have in Ruaraka is perfectly capable of producing the highest quality bank notes which you see circulating in the world today."

De La Rue staffers drop hints that both the sterling pound and the euro have at one time in the last decade been printed at Ruaraka. Even as the government determines the value of the deal, De La Rue is clear it will only retain its Ruaraka plant if the JV goes head. Group Director for marketing communications Rob Hutchison who was in the country last week said. "We we have a responsibility to our shareholders so if there wasn't a business case to retain our operation here in Kenya then that would be an option and that continues to be an option." The company says beside the fact that it is a good investment for the government, the Ruaraka factory is a critical national infrastructure and assures of security of local currency manufacture.

Indeed, in the 1960s according to CBK governor Njuguna Ndungu, a ship carrying Kenyan bank notes was hijacked and the notes found themselves in European capitals perhaps explaining why, after the recent resurgence of Somali piracy, Kenya was found to be among the very few countries in the world that have an anti-piracy law. Ndungu on his part, surprised everyone recently, when he said CBK would not be bound to 10-year contracts with De La Rue. The reserve bank is currently studying submitted designs for new bank notes that under the new constitution are not supposed to bear any portraits.

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