10 February 2019

Kenya: Storm Over Joho Firm's Lucrative SGR Bulk Cargo Deal

Uncertainty surrounds the fate of lucrative deals that appear to have been granted to two prominent Mombasa-based private logistics firms, including one linked to the family of Mombasa Governor Ali Hassan Joho, a near-monopoly in the transportation of bulk cargo over the Standard Gauge Railway (SGR).

After weeks of investigations, the Sunday Nation can reveal that the Kenya Railways Corporation (KRC) is desperately attempting to reverse the heavily discounted rates granted to Grain Bulk Handlers Limited (GBHL) and Autoport Freight Terminals Ltd (AFTL). A stormy board meeting on Tuesday called for a review of the terms, but it is unclear how this will be done without exposing KRC to legal challenges.

A draft document seen by the Sunday Nation indicates the two companies are to enjoy preferential treatment to transport cargo from Mombasa to Nairobi over a 10-year period at up to 80 per cent discount. This is against the maximum volume discount of 10 per cent allowed in the corporation's tariff book.

Although it only accounts for two per cent of the SGR business currently, the controversial new railway project was supposed to recoup most of the Sh500 billion of taxpayer money that has been so far sunk into it through hefty Chinese loans from the transportation of bulk cargo (also referred as loose cargo) such as cement, fertiliser, steel, klinker and grains, among others.

Autoport is linked to the family of Governor Joho, while GBHL is owned by influential businessman Mohamed Jaffer, who has dominated the handling of grain and fertiliser at the Port of Mombasa for decades.

Based on the draft documents, the two companies have negotiated with KRC into granting them a special rate of $450 (equivalent to Sh45,000) to transport a wagon of loose cargo from Mombasa to Nairobi, down from $2,147 (equivalent to Sh214,700).

SUBSIDISED RATES

According to the KRC tariff book released last December and which took effect at the beginning of January, conventional (bulk) cargo is charged at $0.07 tonne/kilometre.

Therefore, transporting a tonne of cargo over the 472 kilometres from Mombasa to Nairobi will cost $33.04 (roughly Sh3,300). Since a wagon carries 65 tonnes, this translates to $2,147.6.

This is way more lucrative compared to ferrying containers, which are charged at a flat rate of $750 (Sh75,000) both for the 20 and 40 feet containers from Mombasa to Nairobi.

In order to be given the special rate, GBHL and Autoport convinced the KRC board of guaranteed business volumes: GBHL promising to move 4.3 million tonnes (equivalent to 66,153 wagons) per year, while Autoport promised to move 1.6 million tonnes (or 24,615 wagons).

At the rate of $2,147, GBHL is supposed to pay KRC $142,030,491 (roughly Sh14.2 billion) per year to carry the 66,153 wagons of bulk cargo from Mombasa to Nairobi.

However, with the hugely discounted rate of $450, it will only pay $29,768,850 (roughly Sh3 billion) to transport the same number of wagons to the capital city, translating to a difference of at least Sh11 billion.

On the other hand, Autoport would ideally pay KRC $52,848,405 (Sh5.28 billion) to transport the 24,615 wagons it has promised to move. However, with the preferential rate of $450, it will now pay $11,076,750 (Sh1.1 billion), which translates to a difference of about Sh4.17 billion per year.

Over a 10-year period, this will come to $1.23 billion, equivalent to Sh123 billion or roughly a third of the Sh327 billion it cost to construct the railway from Mombasa to Nairobi.

"With the much-subsidised rates, the two firms will enjoy. It will be almost be impossible for any other player to challenge them in the bulk-cargo transportation business," said a senior official in the Transport ministry, who is aware of the contracts but requested anonymity to give background for this article.

At a time when KRC is struggling to bridge the gap between its operating cost and the revenue generated from the SGR, the pair of deals could severely dent the prospects of the SGR ever turning in a profit in the long-run.

STATUTORY FEES

Mr James Macharia, the Transport CS, which is KRC's parent ministry, distanced himself from the discount debacle.

"Those questions relate to the operations of KRC and decisions which may have been taken by the board of management with the oversight of the board. I request that you contact the chairman of the board for comprehensive responses," he said in response to our enquiries last week

Mr Michael Waweru, the chairman of KRC board, said last week that no final agreement had been signed with the two companies, but added that the draft documents had been shared in "error."

"There is no contract and if anyone has one let him produce it," he said.

He added: "The board met on Wednesday (two weeks ago) and we agreed that our customers will be given discount based on their investments and volumes (of cargo) they are handling. We are developing a policy that will guide this and once it is ready we will forward it to the minister for approval. What you have are draft documents that were given out in error," said Mr Waweru, a former Commissioner-General of the Kenya Revenue Authority. This was before the latest board meeting last Tuesday.

The owners and the management of both GBHL and Autoport did not immediately respond to our requests for comments sent out in the last two weeks.

A well-placed source at KRC said that when the board met on Tuesday this week, it resolved to do away with the preferential rates altogether. However, he said, the GBHL and Autoport contracts have already been signed and could cause legal problems to KRC.

In addition to the preferential rates, KRC had agreed to lease two of its key facilities in Nairobi to the two firms for free for a period of 45 years.

First, in mid-2018, it gave GBHL 60 acres from the 900 acres the corporation is acquiring from the East African Portland Cement in Athi River for the development of its (KRC'S) bulk terminal and transshipment facility.

GBHL requested for the land to construct its own logistics centre at an estimated cost of more than Sh10 billion, said a well-placed source at KRC who is familiar with the negotiations.

Since GBHL was going to pump colossal amounts into the construction of the logistics facility, it requested that it be exempted from paying millions of shillings in stand duty, annual rent and any other statutory fees, said our source.

EXLUSIVITY

"The company is investing billions of shillings building that facility from scratch," a source at the company, who spoke in confidence, said in an attempt to defend the deal.

It wasn't long before Autoport followed suit with a similar request.

During KRC's 410th Special Board Meeting on September 26, 2018, the board approved Autoport's application to lease part of KRC's land at the Nairobi Freight Terminal (NFT) in Nairobi South.

The board also agreed to lease to Autoport 26 acres out of the total 36 acres at the NFT for a period of 45 years as from December 1, 2018 subject to the logistics company paying a stand premium of Sh78 million, exclusive annual rent of Sh19.5 million, an application fee of Sh5,000, pegging fees of Sh50,000, three months security deposit of Sh4.88 million and administrative charges of Sh100,000 -- all totalling Sh103 million.

However, during the 415th meeting on November 6 last year, the board was notified by acting managing director Philip Mainga that Autoport had appealed for a waiver of all terms in the letter of offer.

The firm cited KRC's approval of the same to GBHL in leasing the Athi River property as its grounds for appeal. Our sources say that the business and operation committee of the board rejected Autoport's appeal, but the full board in its meeting of December 4, 2018 overruled the committee, thus waiving all fees payable by Autoport as well as granting their request for a preferential rate of $450 wagon as opposed to $2,147.

"Even as they did so, the board did not independently assure themselves of the impact of providing an exclusive discount to Autoport," said a top placed source at KRC who is aware of the negotiations.

But Mr Waweru, the KRC board chairman, said nothing had been agreed on in leasing the properties to the two companies.

"Yes, they have applied to be given these facilities and we are considering their applications based on the volume of business they will bring," he said.

Asked why KRC is surrendering control of a strategic public asset as the terminal to a private firm, he said "our business is not to run ports or ICDs (Inland Container Depots) but to transport cargo."

A source at KRC, who spoke to us in confidence, revealed that GBHL has now written a letter of complaint to CS Macharia copied to Head of Public Service Joseph Kinyua claiming exclusivity for the bulk cargo deal.

"GBHL also feels that Autoport has been given an undue advantage since it is inheriting a running public facility to handle its cargo, while GBHL will be expected to pump in billions of shillings to set up its own facility," he said.

SHAREHOLDERS

Multiple sources at KRC said that although Autoport already has a signed contract, the minutes of the December 4, 2018 board meeting that granted the company concessionary rates had not been confirmed.

But even after the board gave the greenlight to the NFT deal in December, the signing of the contract delayed as officials at the corporation sharply differed over a special condition in the offer letter which Autoport had objected to.

The special condition number four in the letter stated that "The Lesee (Autoport) acknowledges its association with Portlink Logistics Ltd and undertakes to cause to Portlink ... to withdraw the arbitration claim against the corporation and further surrender the subject land to the corporation."

In 2015, Portlink sued KRC for attempting to illegally terminate a contract for a 0.692 acre parcel of land the former has leased from the latter near the Mombasa railway station for 15 years as from August 1, 2013. The matter is still under arbitration. However, sources said that some senior managers in KRC and even in the Ministry of Transport believe that the companies are linked to the Joho family and hence saw a chance to deal with them as one.

But in their letters of objection of the terms and conditions, Autoport requested that issues to do with Portlink be separated from Autoport because they are two separate legal entities.

In January 2016, Kenya Revenue Authority and the Kenya Ports Authority suspended Autoport and another company known as Portside Freight Terminals Ltd over claims of engaging in tax evasion and smuggling of goods into the country.

At the time, the Joho family did not disown ownership of the two companies. Documents held by the registrar of companies indicate that the three companies indeed do have inter-linked shareholders.

The directors of Autoport are listed as Khamis Hamid Khamis and Hamid Salim Sadru Salim, each owning 50 per cent of the company, which was registered on July 5, 2012.

Portlink's directors are Fahmy Hamid Khamis with 90 per cent shareholding and Hafifa Ali Joho with 10 per cent. The company was registered on June 5, 2010.

CLARIFICATION

Portside's directors are listed as Abubakar Ali Joho who owns 75 per cent of the company and Hussein Hamid Khamis who owns 25 per cent. The company was registered on August 21, 2006.

We have established that five of the six directors are related, except Hamid Salim Sadru Salim, who is said to be a long time financial adviser of Abubukar "Abu" Joho.

Hafifa is a sister to the Mombasa Governor, while Khamis Hamid, Hussein Hamid and Fahmy Hamid are his brothers. Abu is the force behind the family's sprawling business empire.

During his first term, Mr Joho vehemently criticised the government's plan to develop dry ports in Nairobi and Naivasha to handle the SGR cargo, maintaining that it would kill businesses at the Coast. However, he has since softened his stand since the March 9 handshake between President Kenyatta and opposition leader Raila Odinga.

However, the manner in which it got the NFT deal has raised eyebrows among the senior management at KRC. From email correspondences reviewed by the Sunday Nation, it seems that senior employees at KRC were not fully in the picture about the Autoport deal as they kept asking their seniors for details and clarifications in order to implement the contract.

Although the offer letter indicated that the corporation was leasing empty ground, the area offered is also an operational area where there are Rail Mounted Gantry cranes. This means the corporation has effectively conceded its operation areas and its equipment to private persons.

In addition, the deal will also undermine the take-or-pay deal that KRC has signed with KPA ensuring commitment to have cargo from the port transported on the railway line to guarantee its use and revenues.

"Giving one player, or a few players, exclusive rights to a national network is courting disaster, the risk of industrial failure if not systemic failures," said our Transport ministry source.

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