KPC managers defied board in Sh400m payout

Kenya Pipeline Company (KPC) managers defied the oil firm’s board and paid the Lebanese firm that built its new Mombasa-Nairobi pipeline an additional Sh400 million for multiple contract variations of the project design.

A special audit of the company, whose CEO and top managers were arrested last Friday, shows the KPC paid Sh1.4 billion ($14,053,403) to Zakhem International Construction for the contract variations that arose from change of design specifications.

The KPC had paid the contractor Sh1 billion by the time the board issued the directive but a special audit of the company’s books found that the State corporation continued paying the claims that were, at the time, subject to a parliamentary investigation.

Eight variations were raised during the construction of the Sh48 billion pipeline and the KPC paid Sh92.9 million ($929,287) above the approved amounts.

The audit also found that the company hired its employee, the general manager, infrastructure and projects, as the project engineer, contrary to the requirement that such a role be performed by an independent expert.

“Eight variation orders with a cost of Sh3.8 billion ($38,109,717.12) were submitted by the engineer in relation to Line 5 pipeline project,” Auditor-General Edward Ouko says in the special audit report on the procurement and implementation of Nairobi-Mombasa pipeline, commonly known as Line 5.

The audit, which was ordered by the National Assembly's Public Investments Committee (PIC) and tabled in the House, found that the KPC management approved $17,445,638 (Sh1.7 billion) of the total $38,109,717 claims that the project engineer submitted.

Out of the total amount approved, the KPC tender committee handled $12,471,734 (Sh1.2 billion) or 71 percent while the Attorney-General approved the remaining $4,973,913 (Sh497.4 million) or 29 percent.

“An analysis of the variation costs approved by the tender committee revealed that 73 percent of the variations arose from change in design specifications by the engineer, resulting to additional works, while 27 percent of the costs arose from omission of works in the initial contract,” Mr Ouko says in the report.

Mvita MP Abdulswamad Nassir, who chairs PIC, has summoned the KPC management to appear before it this week to explain the irregular payments arising from the hefty variations.

“We will be summoning the KPC management next week (this week) to explain these huge variations and why the contractor, Zakhem International, was paid over and above what the tender committee and the Attorney-General approved,” Mr Nassir said.

Mr Ouko’s report has indicted the KPC management led by Joe Sang, who resigned last week and was arrested on Friday, for flouting Section 47(a) of the Public Procurement and Disposal Act, 2005, which requires any amendment to a contract resulting from use of open tendering or an alternative procurement procedure to be approved in writing by the tender committee of the procuring entity.

Mr Ouko says out of the eight variations amounting to $17,445, 638, five were approved by the tender committee fully.

The committee approved $2,282,256 (Sh228 million) in relation to variation number one but additional payment of $929,297 (Sh92.9 million) was made in relation to the same, resulting in total payment of $3,211,847 (Sh321 million).

“There was no documentary evidence that the over-expenditure of $929,297 (Sh92.9 million) was approved,” Mr Ouko says.

The tender committee also approved $1,670,245 (Sh167 million) of variation number three, whose total value was $4,761,777 (Sh476 million) and rejected the balance of $3,091,531 (Sh309 million), related to retrospective claims, as per Section 27 (2) of the Procurement Act.

The management then sought the advice of the Public Procurement Review Board, which recommended the matter be taken to the Attorney-General (AG).

“Based on advice received from the AG on September 6, 2017, KPC approved variations amounting to $3,091,531. But, the AG advised that in future the tender committee approve the variations before they are acted upon,” Mr Ouko says.

The audit found that variation number seven totalling $1,882,382 was forwarded to the AG after it was rejected by the tender committee and the management later adopted the variation based on the AG’s advice.

The audit showed that variation number eight worth $4,165,745 relating to mainline and booster pump for Kenya Petroleum Refinery Limited had been approved despite postponement of its implementation.