The Kenya Airports Authority (KAA) has sunk into a Sh4.2 billion net loss for the year to June 2023, hit by a Sh5.4 billion payment to a joint venture of Chinese contractors. The payment is part of an out-of-court settlement over the cancellation of a tender to build a second terminal at Jomo Kenyatta International Airport (JKIA) nine years ago.
The loss is a major setback for KAA, which made a net profit of Sh43.3 million in the last financial year.
The state agency had contracted a joint venture of two Chinese firms – Anhui Civil Engineering Group (ACEG) and China Aero Technology Engineering International Corporation (Catic) – to build a second terminal at JKIA, but the project failed to take off, leaving KAA with liabilities.
“During the year the Authority (KAA) held negotiations with the contractor Anhui Construction Engineering Group Co Ltd (ACEG) for a final mediation settlement on their claim of Sh17.6 billion,” said KAA.
“The parties agreed to a full and final payment of Sh614,328,659 and a write-off of Sh4,792,805,324.69. The write-off was approved by Cabinet.”
KAA’s latest payment pushes the total payment to the contractor to Sh9.6 billion.
Auditor-General Nancy Gathungu has, however, questioned the payment saying KAA did not provide evidence confirming that the transaction was approved by the Cabinet.
Ms Gathungu added that the Cabinet Memorandum on the final settlement of the agreement was not provided for audit review even though a copy of the memorandum had been dispatched to the Accounting Officer by the Solicitor-General.
“In the circumstances, the legal status of the arbitral award, validity, and completeness of the write-off could not be confirmed,” she said.
The Auditor-General also said that KAA’s write-off was done without heeding the advice of the Attorney-General.
Ms Gathungu said KAA did not follow the advice to initiate relevant steps to record with the Arbitral Tribunal and the ICC Secretariat that the subject matter at arbitration had been fully and finally settled by way of mediation between the parties so that a consent arbitral award is issued.
She added that KAA ignored the Attorney-General’s advice to obtain from the Chinese contractor a certified copy of an Order from the Chinese Court duly translated into English and confirming that the suit(s) relating to the Advance Payment Guarantee(s) has been withdrawn by consent of the contractor.
Kenya had paid Sh4.2 billion for the construction of the terminal, known as Green Field Terminal, which was to be located within the JKIA grounds between 0.75-1.5km east of Terminal 1.
The new terminal project included a second runway and was to cost Sh56 billion.
KAA, however, cancelled the tender in March 2016, citing material differences between the terms of the request for proposal (RFP) and the construction contract.
Spooked by the cancellation of the contract, the joint-venture firms demanded an initial compensation of Sh17.6 billion which was later reduced significantly to Sh9.6 billion. The Chinese contractors had demanded that KAA pay them Sh2 billion for the preparation of the bill of quantities (BQ), Sh2.4 billion in extra costs, and Sh708.2 million being 16 percent value-added-tax(VAT).
The Chinese contractor also slapped KAA with a Sh500 million claim in interest and penalties for delayed payment of VAT. It also sought Sh5.6 billion comprising the balance of the contract for BQ, extra cost claim, VAT, and interest and penalties, bringing the total claim to Sh17.6 billion amid threats of dragging the dispute to the International Court of Arbitration for payment.
