18 April 2017

Kenya: Looming WB Blacklist Costs Rift Valley Railways US Suitor

Photo: The Nation
Locomotive engines at an RVR yard in Mombasa in September 2014 (file photo).

An American firm that was negotiating to buy Rift Valley Railways from Egypt's Qalaa Holdings withdrew its interest in the deal after the World Bank signalled its intention to blacklist the rail firm over massive corruption that was revealed in an audit report last year, the Business Daily can now reveal.

Emerging Capital Partners (ECP), a private equity firm, terminated the negotiations after it became clear that the bank had decided to punish the company -- instead of the directors linked with graft in the audit.

This makes it hard for any future owners to access funding from the World Bank or any other commercial lenders.

Sanctioning a company instead of individuals is usually undertaken where the particular malpractice was found to have been discussed and agreed at a full board level or with the knowledge of all directors, but this was not the case with RVR where specific individuals were found to have been complicit.

The World Bank's decision came after a review of the rail operator unearthed a well-orchestrated corruption scheme, where executives bribed government officials, cooked books of accounts, evaded taxes, and created briefcase companies as corporate veils to squander a $22 million (Sh2.2 billion) loan from the International Finance Corporation (IFC) -- the World Bank's private sector arm.

The loan was to buy 20 locomotives in 2014 and 2015 but RVR officials devised a scheme to lease the trains at inflated costs from a third party and share the spoils.

The decision to sanction RVR comes after the World Bank's Integrity Vice-President's (INT) office named six executives at the railway operator as the key architects of the corruption scheme.

"The report indicated that it was more likely than not that the individuals participated in criminal tax evasion and that they faced possible sanctions at a personal level," said a former senior RVR official.

Kenya on March 31 issued a termination notice to RVR, accusing the operator of failing to pay more than Sh600 million concession fees for the year to December 2016, missed cargo haulage targets, and failure to maintain railway assets as agreed in the 25-year contract.

RVR is controlled 80 per cent by Egyptian private equity firm Qalaa, with the remaining fifth held by Uganda's Bomi Holdings and international finance institutions (IFIs).

Qalaa had late last year opened talks with a consortium led by ECP to dispose of their entire stake in RVR.

The six RVR bosses named in the World Bank ethics probe are Karim Sadek (transport MD at Qalaa), Hassan Massoud (non-executive director), Carlos Andrade (ex-CEO), Bong Yoon (chief financial officer), Sammy Gachuhi (general manager), and Fabio Steffler (ex-chief operating officer).

The World Bank assessment found that the six executives inflated the cost of locomotives and bribed Kenya Revenue Authority (KRA) officials to avoid paying VAT amounting to Sh377.4 million on the engines.

They were also accused of obstructing the forensic audit through delays, failure to make crucial documents available, and asking employees not to co-operate with the lender's staff.

RVR bosses secretly diverted the World Bank cash to lease locomotives from the East African Rail and Handling Logistics at the rate of $30,000 (Sh3 million) each for the first three months and $25,000 (Sh2.5 million) for the next 81 months.

The terms were amended in February 2015 to a flat rate of $30,000 (Sh3 million) per month for the entire 84 months in the contract.

"When making this request, RVR management already knew that the disbursement funds would not be used to purchase the locomotives as the contract had been transferred to ARLL on May 23, 2014," the World Bank report says.

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