Columnists

Dams saga revealed due diligence flaws

rotich

Treasury Cabinet Secretary Henry Rotich. FILE PHOTO | NMG

As it turned out, the public statement that Treasury Cabinet Secretary Henry Rotich put out the other day in response to the raging Arror and Kimwarer dam scandals merely served to show just how people who negotiate foreign loans on our behalf have lost the plot, always busy committing us to opaque financing arrangements.

We are in a time and place where we should now insist that the National Treasury publishes the full details of the loan agreements for the Arror and Kimwarer dams, including details on all creditors involved in funding of the projects and the terms of the loans.

I will start with the facts as disclosed in the statement by the Treasury CS. First, he disclosed that a syndicate of four international banks - led by Italian bank Intensa Sanpaolo SPA and including BNP Paribas Fortis, Unicredit SPS, and Unicredit Bank AG - were involved in lending us the money for the two dams.

But the more pertinent disclosure in Rotich’s statement is that this first set of creditors only catered for a very small proportion of the funding- a mere 12 percent of the funding- with the bulk of the money coming from elsewhere.

Yet in attempting to disclose where bulk of the money for the project came from, the statement by Mr Rotich was way short on details and facts. At paragraph 9 of his statement, the minister disclosed that 87 percent of the financing for the two dams was from ‘the government of Italy through its export credit agency, SACE.

This disclosure raises more questions than answers. As the export credit agency of the Italian government created with the purpose of promoting exports and jobs for Italian contractors working abroad and considering how export credit agencies-in general operate, it is unlikely that SACE would deviate from its mandate to directly lend to Kenya nearly $400 million for the dams as implied in the statement.

Neither is it likely that Arror and Kimwerer dams have been funded directly by the Italian government as implied by Rotich’s statement. Bilateral governments usually don’t lend money directly to funding projects, especially arrangements involving commercial creditors and export credit agencies. If anything, were it the case that the Italian government was directly funding the dams through grants, the agency we would have been hearing about would have been Italian Agency for Development Co-operation (Aics)- not SACE.

What is my point? It is that from the statement by the Treasury CS, it seems that the project has two separate funding sources. The first is the syndicate of four banks led by Intensa Saopolo account for a mere 12 percent of the total financing arrangements of the two dams.

The second source of funds: creditors whose names remain undisclosed despite the fact that we have been told that they account for 87 percent of the financing of the dams.

Agreements

In the name of transparency, SACE and the Italian EPC contractor must be made to table agreements with all creditors catering for 87 percent of the financing for the two dams. We want to scrutinise all these agreements to examine the credentials of these shady lenders and to make sure that we do not end up with another Anglo Leasing mess.

The scandal of the two dams offers lessons on the risks associated with vendor- negotiated financing deals. When you allow a foreign contractor to negotiate for you a finance facility, do for you feasibility studies and designs, thus allowing them to perform the dual roles of both building the dam and arranging for the financing for you, you will have created space for EPC contractors to negotiate open-ended deals and created opportunities for kickbacks.

The argument by sections of the political elite that because projects by international lending agencies such as the World Bank and the Africa Development also provide for large provisions for advance payments, it is not fair to isolate Arror and Kimwarer for criticism. This argument does not hold any water. How often do you hear of a case where a project financed by a credible lender had made advance payments to a broke EPC contractor? In this case, they released billions in advance payments to an EPC contractor before conducting due diligence to determine its financial capacity. Kenya will start paying loans for a project that exists only on paper.