The Star (Nairobi)

21 June 2014

Kenya: Exclusive - How Italian Firm Was Shut Out of Kenya's SGR Project

Controversy is flaring up once more over the construction of the multibillion-shilling Standard Gauge Railway Project, with far-reaching implications for transparency and a genuinely competitive bidding process.

The highly experienced Italian firm TEAM Group has protested that it was ruthlessly locked out of a key Kenya Railways Corporation tender bidding process by top insiders working for cartels.

The Sh324 billion contract to build the Mombasa-Nairobi railway went to two Chinese state-owned enterprises. China's Third Railway and Design Institute Group Corporation (TSDI) will supervise the construction work by the China Roads and Bridges Corporation (CRBC).

The two are closely linked, contrary to Kenya procurement regulations requiring that the contractor and supervisor be independent. In contrast with most tenders, this one took only 20 days to negotiate and finalise, from May 15 to June 3.

The lightning speed of the process has raised eyebrows among those familiar with the usually ponderous, drawn-out process of awarding contracts.

The Italian firm is one of the world's top engineering consultants, specializing in civil engineering infrastructure projects, particularly design and supervision of railway construction.

However, TEAM Group lost out to the Chinese firms in an intricate and, observers say, compromised manoeuvre involving senior KR managers with local brokers and Chinese wheeler dealers.

Contract documents and confidential correspondence seen by the Star show that the Italians were shut out in a massive inside job, orchestrated from within KR's boardroom.

TEAM Group's longstanding policy is to establish local firms with local partners to supply their expertise and services. The result is a far-flung enterprise comprising, among others, TEAM Italy, TEAM UK, TEAM Poland, TEAM Nigeria, TEAM Ghana and TEAM Iran.

The group was looking forward confidently to setting up TEAM Kenya when the tender to design and supervise the SGR suddenly went to the two Chinese entities on May 15 this year.

The two Chinese state-owned corporations will now handle all the work. This deal flew in the face of Section 43 of the Public Procurement and Disposal Act 2005.

Kenyan procurement law and international procurement guidelines specifically require design and supervision work on a construction project of this magnitude to be undertaken by a firm independent from the one doing the main works.

The failure to fulfill the guarantee required by Kenyan law for independent supervision of the works could yet torpedo the SGR project. The deal also disregarded the recommendations of two parliamentary committees. Bidders were kept in the dark and even occasionally misled about the progress of the contract bids.

A CASE OF CORPORATE INCEST:

The relationship between TSDI and CRBC is such a case of corporate incest that it boggles the mind. TEAM Group's infrastructure portfolio includes the execution of Planning, Design and Works supervision of some 2,500km of roads and 20,000km of railways, including Nigeria's first SGR project.

In Kenya, TEAM Group were planning to create about 150 jobs for engineers and skilled technicians as well as a specialized workforce and support personnel.

However on May 15 this year, KR awarded TSDI the tender for "supervision of construction, procurement and installation of facilities, locomotives and rolling stock".

Under this agreement, TSDI is to work with Kenyan firm APEC Consortium, which has co-supervised other infrastructure works by Chinese firms, including the Thika Superhighway.

APEC is an affiliate of APPECC Consulting Engineers, which was incorporated in 1996. APEC was incorporated in 2002 and has participated in various infrastructure construction works by the Chinese.

A huge fraud investigation could delay the start of the SGR project, which ought to be the signature investment of the Uhuru Kenyatta era. TEAM Group has already petitioned the Public Procurement Administrative Review Board on June 6. Their main complaint was the failure to appoint an independent company to supervise the project.

CARTEL CONSPIRACY:

There are several grounds on which the SGR contract could be terminated. Firstly, TSDI and CRBC are so closely connected that it is irregular to the point of illegality for them to be awarded the KR contract.

The procurement laws explicitly require that the contract work be supervised by an independent consultant. TSDI and CRBC are not independent of each other, neither are they even autonomous, as seen in their Articles of Association.

They belong to a cluster of Chinese state-owned corporations that include the China Railway Engineering Corporation and the China Communications Construction Company Ltd.

They are controlled by the state-owned Assets Supervision and Administration Commission of the State Council. Moreover the Chinese entities appear to have altered consortia names, which is illegal in Kenya.

Secondly, TEAM Group was allegedly fed false information by KR managers. For instance, TEAM Group claims that it was duped by KR that there was an extension of the contract validity and bond period.

Kenya Railways now claims that TEAM Group was time-barred because it missed the deadline; that the Procurement Oversight Board lacks jurisdiction in this matter; that the procurement process was duly completed and the contract executed.

KR insists that it is "only fair" for the Procurement Board to protect the "integrity" of the procurement process by striking out TEAM Group's request.

Supporters of TEAM argue that the SGR deal would have had much more credibility, including with the World Bank and other development partners, if its quality control had gone to a top international firm.

IGNORING TWO PARLIAMENTARY COMMITTEE REPORTS:

TEAM Group is understandably aggrieved. The SGR contract is also in contravention of the findings of two parliamentary committee probes. The first is the Public Investment Committee (PIC) Special Report on the Procurement and Financing of the Construction of the Standard Gauge Railway from Mombasa to Nairobi (Phase 1). The second is the Final Report of the Departmental Committee on Transport, Public Works and Housing on the SGR, dated February 2014.

In the PIC report, the most relevant sections for the case that KR has acted illegally are Section 5: Committee's General Observations, pages 74-79; Section 6: Recommendations of the Committee, pages 79-84 and Section 7: Conclusions and the Way Forward, pages 84-85.

In the Transport Committee's final report, the key sections are Section 3: Committee Observations, Findings and Conclusions, pages 42-43; and Section 4: Committee General Recommendations, page 44.

Both committees of Parliament noted that the SGR project had been given a clean bill of health in the submissions made by the Attorney General and the Director General of the Public Procurement Oversight Authority.

However, there was one key requirement that the KR contract as issued in mid-May never met - the appointment of a truly independent supervision consultant for the project.

The PIC report, at 3.0 (i) under Committee Observations, Findings and Conclusions, notes explicitly, "The Committee observed that Kenya Railways Corporation needs to fast track the contracting of an independent supervision consultant to review the designs and work section by section before payments are done to (CRBC) when the project starts. The independent consultant will ensure a high level of independence in analysis of the work done".

CONFLICT OF INTEREST:

KR's award of the supervision contract to two closely affiliated Chinese state corporations, assisted by a Kenyan firm that has worked extensively on Chinese projects, is a textbook definition of conflict of interest. This contravenes the recommendations of the parliamentary reports.

Many observers were surprised by the speed with which the contract was awarded and negotiated. The letter from KR to the Chinese was written on May 15 and the tender was ready for negotiation on May 26.

For a project of the SGR's magnitude, this is astonishingly fast. What is this unseemly hurry between award and negotiation? Why pretend that all the relevant due-diligence agencies were comprehensively consulted?

Was KR's own board ever convened to discuss the points made in the parliamentary probe reports? Where are the minutes of any such meeting?

It then only took four working days, May 26 to the contract signing on June 3, to finalise the contract. How is it possible to review, design and agree on timelines for such a massive project in such a short period?

TEAM Group's detailed complaint is a wake-up call. The cost of building the SGR railway from Mombasa to Nairobi alone is five times the whole cost of the Goldenberg scam. Can Kenya afford not to have an independent consultant supervising the work of China Roads and Bridges on the SGR project?

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