Kenya Presidency (Nairobi)

15 May 2014

Kenya: Government Statement On the Settlement of Two Foreign Judgement Debts Against Republic of Kenya - First Mercantile and Universal Satspace

Photo: Trust.Org
Kenya's Attorney General on the spotlight over Anglo-Leasing payments.

document

GOVERNMENT STATEMENT ON THE SETTLEMENT OF TWO FOREIGN JUDGEMENT DEBTS

AGAINST REPUBLIC OF KENYA: FIRST MERCANTILE AND UNIVERSAL SATSPACE

I. BACKGROUND TO THE PROBLEM OF THE SECURITY CONTRACTS

1. The start of the "Anglo Leasing Scandal" was the contracting of a loan in December 2003 by the Department of Immigration which was then under the Office of the Vice President and Ministry of Home Affairs. The purpose of the loan was to enhance security by modernizing the issuance of secure passports and purchase of security equipment for use at Kenya's borders.

The procurement process was however abused and a company going by the name "Anglo Leasing and Finance Company Ltd" was awarded the tender and Ksh93.0 million paid up-front. This became public on 4th May 2004 when the matter was raised in Parliament. Subsequent review revealed that in the external public debt database, there were a total of 18 contracts similar to the one arranged by the Anglo Leasing and Finance Company Ltd and from then on these loan contracts were labeled "Anglo-Leasing".

2. Investigations revealed that the contracting of loans similar to "Anglo Leasing" had been going on in the Government for a long time. In August 2004, the Ministry of Finance suspended payments of all the loans similar to Anglo Leasing and instructed the Controller and Auditor-General to carry out a special audit.

3. The Public Accounts Committee (PAC) also investigated the matter and on 30th March 2006, its chairman tabled the report on "Special Audit on Procurement of Passport Issuing Equipment". The report was adopted by Parliament on 4th April 2006. It covered all the 18 contracts and recommended that all contracts that had not been commenced should be terminated while those which had commenced should be renegotiated with strict adherence to the procurement regulations and procedures. It also recommended investigation and prosecution of all implicated.

4. The Controller and Auditor-General completed his report which was tabled and adopted by Parliament in May 2006. The findings of the report by Controller & Auditor-General were that:

- Procurement laws and regulations were violated

- The projects were overpriced

- In some cases no loans were extended by the creditors and the Government of Kenya (GoK) was paying interest on its own funds.

The report recommended that professional valuation of works, goods and services to determine value for money. It also recommended that Government of Kenya negotiates with the creditors.

5. In January 2007, the Ministry of Finance contracted an independent firm, PricewaterhouseCoopers (PwC) to conduct forensic audit and valuation of the contracts. In July 2007, the PwC revealed irregularities including

- (i) breach of the law as it relates to public procurement and public financial management

- (ii) gross over-pricing of works, goods and services (iii) evidence of pre-financing (i.e. up-front payments)

- (iv) possible financial risk exposure to Government on issued Promissory Notes and

- (v) evidence of corruption and abuse of office.

6. From the PwC and other previous reports, it emerged that there were

- (i) Cancelled Contracts

- (ii) Fully Paid contracts and

- (iii) Partly completed contracts. It was further noted that thirteen

(13) contracts were signed during the Kanu regime while five (5) were signed during the NARC administration.

II. STATUS AND PROPOSALS FOR RESOLUTION OF THE SECURITY

CONTRACTS

7. The estimated value of the projects are based on the valuation work done by PwC in 2007. As indicated earlier, the contracts are grouped into three broad categories of

- (i) Cancelled Contracts

- (ii) Fully paid contracts and

- (iii) Partly completed contracts. Details of each are presented in paragraphs 9-11.

8. Cancelled Contracts: Four (4) contracts with a value of Ksh 18.9 billion were cancelled when the Anglo-Leasing Scandal broke out and the money that had been paid amounting to Ksh 1.0 billion was refunded. The four contracts are shown in the table below:

Contract Name Purpose Contractor/Financier Refund Ksh million

1 Forensic Sciences Laboratory for CID Construction of Forensic Laboratories and supply of Forensic equipment Forensic Laboratories Ltd/ Anglo -Leasing and Finance Ltd 375

2 Security Vehicles for Kenya Police/ Silverson Establishment Lease purchase of 994 Security vehicles and assorted spares Leyland Exports/ Silverson Establishment 73

3 Kenya Police Law & Order (E-Cops) /Infotalent Supply, installation and commissioning of the Police Computer Project Infotalent Ltd 509

4 Immigration Security & Document Control System (ISDC) Secure Passport, Visa issuing and border control systems. Anglo Leasing and Finance Ltd 93 Total Refund 1,051

9. Fully Paid Contracts: Three (3) contracts with a value of Ksh.6.8 billion had been completed and the money paid out.

10. The three contracts are shown in the table below:

Contract Name Purpose Contractor/

Financier Project valueKsh million

1 Kenya Prisons Security & telecommunication Project Phase 1 Supply, installation and commissioning of a dedicated security communication network LBA Systems Ltd 1,845

2 Kenya Police Airwing Support Project 1 Supply of four helicopters to Police Airwing Sound Day Corp /Apex Finance Corporation 2,700

3 Kenya Police: Supply of Security Equipment Addendum 2 Supply of Police Security equipment. Sound Day Corporation 2,250

4 Total 6,795

11. Partly Completed Contracts: Eleven (11) contracts with a total value of Ksh 30.6 billion are at various stages of completion.

a) There are six (6) contracts with a value of Ksh 16.6 billion that pose greatest risk to the Government of Kenya. It is estimated that the Government of Kenya has a claim of Ksh4.0 billion on these contracts as shown in the table below:-

Name Purpose Contractor/ Financier Amount for Recovery (Ksh m)

1 Kenya Police: Supply of Security Equipment Addendum 3 Supply of Police Security equipment. Sound Day Corporation. (1,057)

2 Kenya Police Airwing Support Project 2 Technical service to the Kenya Police Airwing helicopters Apex Finance Corporation (126)

3 National Early Warning Security System (NEWSS) for Meteorological Department Supply and installation of an early warning system for meteorological department. LBA Systems Ltd. (1,050)

4 Kenya Prisons Security and Telecommunication Project Phase 2 Supply of Prison Security equipment. LBA Systems Ltd. (522)

5 Multi-channel Security Telecommunication System for Administration Police Supply, installation and support for secure communication for Administration Police and Provincial Administration Globotel Ltd/ Midland Finance Ltd (1,071)

6 Modernization of Police Equipment and Accessories Supply of police equipment and other accessories Sound Day Corp/ Apex Finance Corporation. (184) Total (4,010)

b) Five (5) contracts are in the category of partly completed contracts. Settlement has been reached in two (2) of the contracts.

- The two (2) settled contracts are shown below.

Name Purpose Amount paid

1 Project Nexus (Defence Command Centre) Construction of a command and control center for Defence Successfully negotiated €14m (Ksh1.54 bn) paid

2 Naval Ship -Oceanographic Survey Vessel Construction and delivery of a Naval Vessel. Successfully negotiated €34m ( Ksh 3.74bn ) paid

- The two (2) contracts which have been under litigation/mediations and which are now subject of court awards are shown below.

Name Purpose Judgement amounts

1 Broadband Network - PCK VSAT Equipment / First Mercantile Securities Corporation (FMSC) Supply for telecommunication equipment for networking all the post offices. Judgment :$8.3m (Ksh 722m)

2 Bandwidth Spectrum and Network Operation/ Universal Satspace (USS) Supply of bandwidth spectrum and service for ten years Judgement: $8.1m (Ksh705m)

- One Project, under National Intelligence Services (NIS) was not valued due to national security considerations.

III. BACKGROUND TO THE TWO JUDGEMENTS

12. For the two cases which have been under litigation judgements have been entered against the Government of Kenya in Geneva, Switzerland, and in London, UK. The details of the cases are as follows:-

a) Broadband Network Project(First Mercantile Securities Corporation)

The facts of this case are as follows:

- The project involved supply of VSAT equipment by Spacenet to connect all the post offices in Kenya. First Mercantile Securities Corporation (FMSC) guaranteed payments for the supplied equipment.

- On 12th August 2004, the Government of Kenya suspended payments for this project when it was listed among the so-called "Anglo-Leasing" projects.

- Arising from the suspension of payments, in January 2006, First Mercantile Securities Ltd filed a claim of US$12.7 million plus penalty interest at 8.75 % p.a. against the Government of Kenya in Geneva Court of First instance.

- On 14th May 2009, the suit was determined against Government of Kenya for $6.0 million (Ksh516 million).

- The Attorney General lodged an appeal but this was defeated in November 2012 and a judgement of $10.1 million (Ksh 868 million) was made against the Government of Kenya.

- This amount continues to attract interest of $1,413 per day beginning 6th December 2012.

- The amount due for payment, including accrued interest and cost as at 24th March 2014 is $10.7 million (Ksh 920 million) and the claimant hassought Registration of Judgement in the High Court in London to compel Kenya to pay or else proceed with attachment proceedings.

- The Government also received a notice of attachment of Government Mission assets in Geneva due to non-payment.

- The Government also received a demand letter for payment of the judgement debt giving 24th March, 2014 as the final deadline after which the claimant will start enforcement proceedings.

b) Bandwidth Network Project ( Universal Satspace)

The litigation on this project is related to (a) above and the facts of the case are as follows:

- Universal Satspace signed an agreement with the Government for provision of bandwidth and network management for 10 years for all the post offices under project (a) above.

- As with the case of First Mercantile payments were similarly suspended. After suspension of payments on 12th August 2004, a suit against the Government was filed in London in July 2006, seeking US$12.3 million.

- Protracted suit terminated in the case being referred to mediation pursuant to the English civil rules of procedure to resolve the issue.

- Mediation in Nairobi in February 2013 agreed on payment of $7.6 million (Ksh653 million) by the Government. After waiting for 10 months to be paid as agreed the claimant went to court in London on 20th December 2013 and judgement was upheld and Kenya was expected to pay $7,874,431. (Ksh 677 million) being principal of $ 7,600,000 and interest of $ 274,431) by 17th January 2014 inclusive of costs of £60,000.

- This amount continues to attract interest at 8.75% per annum which translates to $1,665 per day beginning 21st December 2013.

IV. NEGOTIATIONS TO RESOLVE THE ISSUE

13. Following these judgements and threats to Kenyan assets, the fiscal risk involved, the continued loss to the Republic on account of accrued interest on the judgements as well as the Attorney General's advice to reach a negotiated position, the Government has held negotiations with the claimant's counsel and has settled on Government to pay US$16.4 million negotiated down from US$18.8 million.

V. RATIONALE FOR PAYMENT OF THE JUDGEMENTS

14. The Government's decision to settle the judgement debts is premised on

- (i) protecting Kenya's economy on account of rising interest rates occasioned by domestic borrowing due to constrained access to international borrowing

- (ii) protecting Kenya's reputation as a country that meets its contractual obligations and adheres to the rule of law

- (iii) protecting Kenya's assets abroad, and

- (iv) maintaining and improving Kenya's credit rating currently at B+.

15. Specifically, the following are the risks posed by non-payment of the judgement debts.

a) Enforcement of judgements/attachment of GOK assets

It is important that the Government honours the court awards to forestall attachment of Government assets abroad.The claimant has applied to international courts seeking to enforce the judgement in both cases and attach Government assets abroad. The settlement will also protect Kenya's reputation as a country that meets its contractual obligations and adheres to the rule of law.

b) There is no further recourse to appeal the rulings

The Attorney General as well as an independent international legal firm Dentons of UK, has advised that there is no legal avenue left for the Government apart from settling the payments.

c) Stoppage of the sovereign bond process

This period coincides with the proposed issuance of the first international sovereign bond to finance the Fiscal Year 2013/2014 budget.

The issuance cannot take place unless all obligations related to the court awards are paid. The claimants have threatened to have international courts attach the bond proceeds until the judgement debts are settled.

d) Fiscal risk

The stalled bond process means the 2013/2014 budget cannot be implemented and expenditures and services will have to be drastically scaled down.

e) Higher Costs to the economy

It is estimated that the annual costs of non-settlement would be Ksh21 billion, being the cost of higher interest rates on domestic borrowing both for the public and private sectors. Therefore, given that the cost of paying the judgement debts is Ksh1.4 billion, this means that the benefits of settling them outweigh the costs of non-payment by 15 times. In addition, by paying the KSh. 1.4 billion, the Government unlocks the KSh. 130 billion from the sovereign bond.

In addition, a rise in domestic interest rates would lead to credit crunch to the private sector resulting to stymied investment, lower economic growth, increase unemployment and poverty. This would not help us achieve our Vision 2030 which is predicated on a stable macroeconomic environment.

f) Negative impact on sovereign rating

The negative impact on the Kenyan economy would also adversely affect our rating by such international rating institutions as Standard and Poor's, Moody's and Fitch Rating. It would also negatively impact on Government's access to financing by other creditors including the traditional concessional lenders.

g) Reputational Risk

Stoppage of the bond process will cause a major setback and embarrassment to the Government and transaction advisers. The stoppage would irreparably injure Kenya's reputation as it prepares to launch its debut bond. This bad reputation will be difficult to cure in the medium to long term and will affect every Kenyan-based business trying to engage in international commerce. A high premium will always be factored in the prices for such transactions.

h) Interest charges on the judgements It is also noted that whether Government pays the two judgements or not, interest charges on the judgement debts will continue to accrue as follows.

- For the First Mercantile case @ US$ 1,413 (Ksh122, 931) per day since 6th December 2012.

- For the Satspace case @ US$ 1,665 (Ksh 144,855) per day since 20th December 2013.

This translates to penalty interest of Ksh 96 million per year.

VI. CONCLUSION

Resolution of the outstanding judgement debts is crucial in order to alleviate the risks to the Kenyan economy. The Government has exhausted all judicial options to forestall payment of the judgement debts and the way forward is for the Government to settle to minimize further loss as the outstanding awards continue to accrue interest. It is therefore imperative that these debts are settled.

Government has today, therefore, authorized the Cabinet Secretary, National Treasury, to pay the judgement debts with immediate effect. Anglo Leasing has been a thorn in the side of Government for a long time.

As Chair of the Public Accounts Committee when he was opposition leader, the President investigated the matter, and he agrees with the views of a majority of the Kenyan people on this. That's why it has taken long to make a decision on the current situation.

But the President has had to make a painful decision on what is the greater evil: either the money or put the country's economy at risk. By making this payment, the President is not legitimizing what her and many Kenyans believe to have been a series of fraudulent transactions.

Therefore, the President has ordered fresh investigations into the cases. Kenya now has a fully constituted Ethics and Anti-Corruption Commission which can and should take this process forward. There are also other agencies, including parliament, that could play a role.

It is now up to these responsible agencies to ensure that Kenyans get restitution. Our institutions failed Kenya in these cases previously. Kenyans would not welcome further failure in the context of these cases.

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