Businessman and co-founder of the IT firm SevenSeas Technology Limited, Michael Macharia, has won a Sh1.6 billion award against the government following a cancelled contract to wire 98 State hospitals.
Retired judge and now arbitrator Aaron Ringera found the State at fault in terminating the Sh4.7 billion contract that demanded SevenSeas Technologies Limited provide the technology component of the Managed Equipment Service (MES) plan.
SevenSeas Technologies was awarded the contract in October 2017. Part of the deal was the provision of teleradiology, which allows doctors in top hospitals like Kenyatta National Hospital (KNH) to read X-rays, CT scans, MRIs and other medical images for the treatment of patients in remote facilities.
The tech firm, of which Mr Macharia owns 60 percent, received a termination letter from the Ministry of Health dated November 18, 2019, indicating that the contract contained several clauses, including the requirement for a government Letter of Support that was not in the original tender documents.
The ministry said the Kenya tech firm, valued at an estimated Sh3.2 billion in 2016, lacked the financial muscle to shepherd the deal despite the company having sunk more than $11.11 million (Sh1.32 billion).
It boosted a unit of Toyota and Dubai-based Abraaj, which was the largest buyout fund in the Middle East and North Africa until its collapse in 2018, as its shareholders.
SevenSeas Technologies Limited protested the cancellation, insisting the State declined to offer a Letter of Support, a security document that gives banks comfort to lend project money to firms or individuals, which is customary in a majority of State projects.
The tech firm says the letter of support hitch made it difficult to secure a loan from KCB Group, triggering the two-year legal suit that underlined the torturous journey of entrepreneurs working on State projects.
"And I have found that the Second respondent (Ministry of Health) was in breach of both payment obligations under the contract and the obligation to provide a government letter of support. Both defaults are material breaches of the Second respondent's contractual obligations," ruled Mr Ringera.
"It was the Ministry of Health's default in providing the claimant with a government letter of support that prevented Seven Seas from achieving completion of the project," he added.
He awarded the firm Sh1.59 billion ($13,288,091) for breach of contract, loss of profits and costs incurred after the cancellation. The tech firm received an additional Sh52 million for costs related to the suit.
The arbitrator heard SevenSeas Technologies sought funding and got offers, including equity financing for the project worth $30.8 million (Sh3.68 billion), which Mr Ringera said was more than the capital required for the health ICT deal.
SevenSeas was betting on the health sector, especially State deals, to make its next billions and a driver of its revenues.
It is a good time to be looking at health.
With an expanding middle-class that is simultaneously plagued by a growing number of lifestyle diseases and communicable illnesses, analysts predicted that Africa would have one of the fastest global growths in healthcare spending in coming years.
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The market also looked fertile as devolved governments put in cash to upgrade rickety hospitals that suffered from neglect from the national government. It used funds from Toyota Tsusho, which had acquired a 9.5 percent stake in the business, to expand its health sector interests.
But the botched ICT deal has left it bitter and injured.
In the suit, the government argued that the contract was entered in a rush, shrouded in secrecy and against established procedures.
The government breached the State rule that demands contracts exceeding Sh500 million get approval from the Attorney General.
The State said Seven Seas did not have a valid performance bond, failed to achieve all the seven milestones in Phase One within the contract timelines and the company had abandoned the project.
SevenSeas tabled a performance bond secured from GA Insurance and insisted that AG approval is needed for projects in excess of Sh5 billion.
Justice Ringera cited the Ministry of Health for contract breach but declined the petition from SevenSeas for a Sh3.4 billion compensation.
The arbitrator said Mr Macharia was owed Sh1.58 billion in unpaid bills and costs incurred before the contract was cancelled. He, however, declined to grant SevenSeas nearly Sh2 billion as lost profits as this was not stated in the contract as a remedy for breaches.
Legal awards against the State for contract breaches, unlawful dismissals, lawyers' fees, human rights violations and other court disputes hit Sh111.99 billion at the end of June last year, highlighting the heavy price taxpayers have to pay for unlawful decisions by officials.
Under MES, the Health ministry signed contracts with five private firms in 2015 to lease specialised equipment like CT scanners to the 47 county governments that manage most medical services, in a deal praised by the World Bank at the time for its ability to be replicated elsewhere in Africa.
The firms in the multibillion shillings leasing deal included China's Shenzhen Mindray, India's Esteem Industries, General Electric and Philips.
SevenSeas Technologies was expected to digitise the 98 hospitals, including the national referral facilities — KNH and Eldoret-based Moi Teaching and Referral Hospital.
This was to allow remote hospitals in places like Turkana to tap expertise from well-staffed hospitals like KNH through telemedicine.
Teleradiologists in KNH could read X-rays, CT scans, MRIs and other medical images of patients in Turkana for treatment in the less staffed facilities.
It's ideal for hospitals facing ballooning costs and a shortage of radiologists.
SevenSeas Technology Limited was summoned to appear before the Senate ad hoc committee investigating the MES project on November 18, 2019, to explain why the project had stalled.
But in a surprise move, the company received a termination letter from the Ministry of Health on the same day, alleging that the contract contains several clauses that were not in the original tender documents.
ALSO READ: CS defends scrapping of Seven Seas contract
"The requirement for an original copy of the GoK Support Letter to be given to your firm does not feature anywhere in the tender documents. It is overtly clear to the ministry that your firm lacks the requisite financial capacity to execute the HCIT contract and has been unable to mobilise any funding without a GoK Support Letter," said the letter attached in court documents.
"In the circumstances, the Ministry of Health wishes to now inform you that the contract for the provision of HCIT solutions has and is hereby terminated forthwith, on account of its illegality, which you as the contractor knew or ought to have known."
The government gives the firm 40 days to vacate the site.