Questionable land deals put KAA bosses in audit trouble

The Kenya Airports Authority (KAA) risks losing billions of shillings in questionable contracts and land deals that its management has signed with third parties, an audit report on the agency’s finances indicates.

The qualified audit opinion, which auditor-general Edward Ouko submitted to Parliament last week, questions the validity of nearly Sh6 billion non-current assets balance that KAA declared in its financial statements for the year ended June 30, 2012.

Mr Ouko says thousands of acres of land that the authority owns at Nairobi’s Jomo Kenyatta International Airport (JKIA), Embakasi Village, Lokichogio Airport, Wilson Airport and Malindi Airport is at risk of being lost to third parties who have laid claim to it in dubious circumstances.

A qualified audit opinion means the auditors have doubts over the accuracy or completeness of financial statements provided by the organisation under scrutiny.

Top in the list of questionable deals is the 20-year lease agreement that KAA signed with a JKIA-based logistics company and which the leasee has since used to secure a Sh510 million loan from a local bank.

Mr Ouko says the lease agreement was done contrary to Section 19(5) of the KAA Act, which prohibits the authority from charging its property by way of securing a loan unless with the concurrence of the Finance minister.

The audit report also finds the lease agreement irregular because it was signed by a former KAA managing director almost five months after he had left office and there was no evidence that it was discussed by the board.

“Further, there was no guarantee that the proceeds of the loan would be used in the authority’s facility to insulate its interest. Hence, in the event of default, the authority may lose the charged property altogether,” the audit report dated April 17, 2013 says.

KAA’s tender committee had on August 1, 2008 awarded the logistics company a 20-year lease on a build, operate and transfer basis. KAA’s technical oversight committee endorsed the transaction on September 12, 2008, but at the time of drawing the contract, the authority’s management changed the lease period from 20 years to 40 years.

“In addition, the client was given the option of renewing the lease for a further 20 years on application contrary to the approval granted by the tender committee and the tender oversight committee of the board, contrary to the provisions of the Public Procurement and Disposal Act, 2005,” says Mr Ouko.

The audit report raises a number of queries on the financial statements of KAA, which declared a Sh3.4 billion pre-tax profit for the year under review. KAA is under the spotlight for including some Sh5.8 billion described as operating lease in the Sh25,147,492,000 it declared in non-current assets balance.

(Read: Property dealer demands Sh1bn compensation from KAA)

“The operating lease amount, however, excludes a plot measuring 3.29 acres in Embakasi Village, which had not been valued for inclusion in the financial statements as its ownership is apparently in dispute.”

He said a further examination of the lease balance revealed an unregistered parcel of land measuring 0.867 acres and valued at Sh4.33 million which was in the previous year’s statements but was excluded from the balance of Sh5.8 billion.

The audit also found that KAA had excluded from the Sh5.8 billion operating balance an undetermined value of land at Lokichogio Airport.

Mr Ouko questions why KAA made no effort to take possession of a parcel of land at Wilson Airport despite the October 2006 court ruling in its favour.
The High Court ruled that the said parcel is public land belonging to the authority but was irregularly allocated to Total Kenya on July 23, 2003.

The audit further questions the inclusion in the Sh25.14 billion assets balance of a portion of Malindi Airport measuring 0.89 hectares that was allocated to a church and the exclusion of a portion of the same airport measuring 5912.5 square feet at the airport that was allocated to a petroleum company.

“Under the circumstances, the authority’s land is at risk and it has not been possible to confirm that the non-current assets balance of Sh25,147,492,000 is fairly stated as at June 30, 2012,” the auditor general says.

The audit warns that KAA risks losing millions of shillings in payments of damages to contractors of two stalled projects - Embakasi Estate fencing (Sh24.5m awarded in 2009) and Ukunda airstrip fencing (Sh24.8m awarded in 2006) should they move to court.

Markatt Limited, the contractor at Ukunda airstrip, is demanding Sh8.9 million in compensation for alleged unlawful termination of the contract. Work never started for the Embakasi estate fencing project that was awarded to Concept Limited, but the KAA management, for unexplained reasons, has never terminated the contract.

Mr Ouko further says he could not confirm that KAA’s freehold balance of Sh249.27 million of the declared Sh19.27 billion property, plant and equipment balance was fairly stated in its books of accounts. The amount relates to a disputed piece of land measuring 4,674.6 hectares at Nairobi’s Jomo Kenyatta International Airport.

Part of the land identified as LR No. 13512 was allocated to Mlolongo Brothers Association while another portion LR No. 14231 was allocated to Uungani Settlement Self Help Group.

The audit questions the inclusion of the two parcels of land in KAA’s books despite the discovery in 2002 that the two had obtained titles for the disputed land.

KAA in November 2011 obtained temporary court orders restraining the groups from dealing in the land. The authority then moved to the site with bulldozers and demolished property worth billions of shillings belonging to private developers.

“The owners of the demolished properties have sued the authority and both the authority’s and owners’ cases are yet to be determined,” the report says.

Mr Ouko says that by the time of audit, no valuation report was made available for audit verification and the authority had not made a provision for contingent liabilities likely to arise from the disputes.

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