World Bank should tread carefully on RVR sanction

Last week’s revelation that Emerging Capital Partners (ECP) group — long-awaited American investor in troubled railway concessionaire Rift Valley Railways (RVR) — had withdrawn its interest in the company was the biggest and most strategic investment flop in recent times.

That announcement blew up in smoke any hope of ever getting the Lunatic Express line back on course even as the clock ticks on the 90-day termination notice that the Kenya Railway Corporation, the supervisor of the concession, issued on March 31.

It has since emerged that the World Bank’s recent investigations — launched in the wake of alleged tax fraud by senior management and with the knowledge of some directors — into the company’s affairs was the Achilles heel. 

The audit produced a report that implicated some of the company’s directors and senior management in fraudulent activities, including Karim Sadek, Hassan Massoud, and former chief executive Carlos Andrade.

The report concluded that it was more likely that the individuals participated in criminal tax evasion and that they faced possible sanctions at a personal level.

It is for this reason that interested parties in the RVR deal, including potential investors such as ECP, were surprised at the World Bank’s departure from its own findings and ultimate decision to let the individuals named in the report go scot-free and to instead propose sanctioning RVR and all its related entities.

Besides, RVR owes the World Bank ($300m) and other global lenders billions of shillings that this blanket sanctioning would put into jeopardy in the event that the business ceases to continue as a going concern.

The only conclusion one can make is that perhaps the World Bank takes solace in the fact that its loans are guaranteed by the Kenyan government and therefore should RVR cede business by whatever cause, the Kenyan public through the Treasury will pay up.

The decision to blacklist RVR had the effect of offering the company’s directors the unusual lifeline, which they readily ratified at a board meeting that took place two weeks ago.

Note here that the board still has some of the people the audit had found complicit in the alleged fraud and that independent directors Titus Naikuni and Brown Ondego, who served as chairman and vice-chairman respectively, resigned last year, leaving partisan interests in control.

It was therefore bordering on the ridiculous to learn that Mr Sadek — one of the individuals named in the World Bank audit report — effectively sat and may have even chaired the meeting that rubberstamped the impending blacklisting of the company instead of individuals.

The decision to throw RVR under the bus has cast a shadow over the Egyptian firm Qalaa Holdings and its record at the railway operator since it took over as the controlling shareholder about seven years ago.

Its directors and senior staff have effectively sidestepped responsibility over what has happened on their watch and instead put the livelihoods of RVR’s 4,000 employees at risk. 

What comes out of the board’s decision to ratify the World Bank’s recommendation to punish the company instead of individuals is a clear demonstration of a breakdown in governance at RVR and use of the board to pursue narrow, selfish interests.

The decision to blacklist the company has gross effect on its future prospects. Like ECP, no rational investor would put his money in a business that cannot secure financing from the World Bank or any institution related to it during the entire duration of the sanctions.

It is even frightening for the shareholders to imagine that they can still sell the ailing company with these new sanctions on its neck. This decision means that RVR and its 4,000 employees — excluding indirect beneficiaries — are being put in trouble to save six individuals mentioned in the report.

This therefore begs the question as to what is in it for the World Bank. To millions of Kenyans the World Bank is an institution that is governed according to globally accepted management and ethical standards and with the expertise and information to make rational decisions.

For Qalaa and its directors in Nairobi, protecting their relationship with the World Bank with whom they have other business interests across Africa and Middle East takes precedence.

Further, by seeking to blacklist RVR, the World Bank is running away from taking its share of blame in fraudulent transactions since it sits on the board of Africa Railways Limited (ARL), which is a holding company for RVR raising the question as to why it did not play its oversight role adequately.

The bottom-line is that no investor is going to join a company that is already lame and further crippled by sanctions. No one is going to invest at least $300m (Sh30 billion) without approaching a financing institution for funding. 

It is for this reason that the Kenyan government’s intervention in this matter is needed. It must demand that individuals who committed fraud and tax offences be dealt with according to the Company’s Act CAP 460 and held accountable rather than the entire company.