10 December 2018

Kenya: Puzzle of Kenya Pipeline's Sh61 Billion Expenditure

As five Kenya Pipeline Company officials head to court today to answer to charges relating to the Sh1.9 billion Kisumu Oil Jetty scandal, detectives have shifted their focus to the Sh13.1 billion requested by Energy Cabinet Secretary Charles Keter for the State corporation in 2016, increasing the money at the corporation's disposal to a whopping Sh61 billion.

The detectives want to unravel how KPC absorbed such a colossal amount of money within a year, especially since none other than National Treasury Cabinet Secretary Henry Rotich had raised doubts on the corporation's capacity to spend the extra cash -- but still went ahead and approved the funding.

As early as September 2016, five months after the appointment of Mr Joe Sang as the new managing director at KPC, Mr Rotich had written to Mr Keter about irregularities at the State firm.

"In several instances," he wrote, "contracts were awarded without an approved budget, contrary to the Public Finance Management Act, 2012 and Public Procurement and Asset Disposal Act, 2015".

Why Mr Keter did not act on this issue and went ahead to help raise the annual budget of KPC to Sh61 billion, equivalent to the yearly expenditure of the much larger Ministry of Health, is not clear.

ARRESTS

Also not clear is why Treasury raised the red flag on the requested amount but still went ahead to approve the supplementary budget.

It had noted that KPC had no "internal absorption capacity", and that some figures had been exaggerated.

On Friday last week, officers from the Directorate of Criminal Investigations arrested Mr Sang, company secretary Gloria Khafafa, head of procurement Vincent Cheruiyot, procurement manager Nicholas Gitobu, and general manager in charge of infrastructure Billy Aseka.

And with those arrests, the scandal of Kenya's richest cash cow started to unfold.

They will today face nine counts of abuse of office and theft of over Sh500 million during construction of the Kisumu jetty.

Detectives say that, while the project was budgeted to consume Sh1.4 billion, KPC management paid an extra Sh500 million without approval.

"This is the only one we have concluded. We shall be lining up more charges as investigations continue," Director of Criminal Investigations George Kinoti said.

BUDGET

Details of this supplementary budget, which gave birth to the KPC scandals, are contained in a letter dated September 21, 2016 from Mr Rotich to Mr Keter, who had about a month earlier, on August 18, sought the National Treasury's approval for Kenya Pipeline to get a supplementary budget of Sh13.1 billion for the financial year 2016/2017.

Part of this budget was for the now controversial Kisumu jetty, which remains moribund until Uganda agrees to build a similar one on its shores.

Although Mr Rotich approved the budget, he observed that KPC did not have capacity to absorb the amount.

"A substantial portion of the approved FY 2015/2016 budget was not absorbed during the year due to unclear reasons. There is therefore need for KPC to demonstrate that there is internal absorption capacity for the additional expenditure during the FY2016/2017."

At the time, KPC had an approved total budget of Sh48.2 billion, and the additional Sh13 billion meant the management had at their disposal Sh61 billion for both recurrent and capital expenditure.

The amount dwarfs the Sh25 billion that had been given to the National Youth Service, and which gave rise to incessant scandals.

MALL

The budget included the building of a Sh142.5 million "shopping mall with banking facilities" at the Eldoret depot.

Treasury was taken aback by this request, and Mr Rotich said there was "need for justification" for this "one-stop shop".

It appears Treasury had foreseen a scandal brewing in the oil jetty expenditure, which had included an estimated 50 per cent "cost escalation" from the initial provision of Sh1.36 billion in 2012, when the initial estimates were done.

Mr Rotich told Mr Keter that such projections were "beyond the observed inflation during the four-year period".

Again, Treasury wondered why the Scada software, which monitors the integrity of the pipeline, was being allocated Sh1 billion, way over the approved budget of Sh153 million in 2016/2017.

Records show that on January 29, 2016, technology firm Siemens had won the tender, and on April 15, 2016 agreed on the contract draft with KPC.

But before KPC could sign on the dotted line, there was "concern" that the Scada system from Siemens was a duplication of the Delta V supplied by Emersom Ltd for the new pipeline.

OIL SPILL

Siemens lodged a complaint at the Public Procurement and Administrative Review Board but lost the case after KPC argued that the "scope had changed".

Whether that was the reason KPC was seeking Sh1 billion is not clear, but Treasury seemed to lament that "this was an increase of 653 percent".

Other requests included an additional Sh110 million to help clean-up after the Thange oil spill in Makueni.

But while granting the concurrence for approval, Mr Rotich also sent a note to Mr Sang to remind him that it was his responsibility, as the managing director and accounting officer, to ensure the prudent management of financial and non-financial resources at KPC.

Two years after Mr Rotich's note, Mr Sang and his management have found themselves between a rock and a hard place.

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