Streamline stamp contract bids

The world over, the procurement contracts of tax stamps and banknotes tend to be marred by corruption allegations. I have been reading about sensational corruption allegations surrounding the procurement of excise tax stamp contracts in Nigeria, Brazil, Zambia, Malawi and the Philippines.

It seems to me that the reason these contracts are always dogged by tales about bid-rigging and irregular dealings is that the money at stake always runs into billions.

Rent-seeking elites in Africa love these types of deals because you can negotiate backhanders to last you a lifetime since these are usually multi-year framework contracts where prices and terms are negotiated to cover long periods.

When a political transition is happening, the stakes get higher. The scrambling for ringside seats around the feeding trough gets intense as the new kids on the block plot to reap their share of the spoils.

Here in Kenya, our biggest problem is not the scrambling per se; rather, we are very poor at negotiating framework contracts with multinationals. We allow long-serving incumbents to easily tie our hands with uncompetitive and exclusionary dealings that end up limiting our access to other international service providers.

We easily fall prey to the tactics of long-term incumbent contractors who are always scheming to drive rivals out of the market and to commit us to sole-source relationships.

Enough of theory. I make these opening remarks to a discussion about the Sh17 billion digital stamp printing contract between Kenya Revenue Authority (KRA) and the Swiss conglomerate Sicpa Solutions Ltd that has been running since 2015 and was supposed to have expired last year. This is a pertinent issue; even President William Ruto has commented on the subject several times.

At this year’s Taxpayers Day celebrations, President Ruto raised his concern about what he characterised as the inordinately low number of tax stamps sold in Kenya. According to him, Uganda sells nine billion tax stamps annually, Tanzania 7.2 billion and Kenya a measly 2.9 billion. In his own estimate, Kenya should be selling between 10 and 12 billion stamps a year, given the size of its manufacturing sector.

Fake stamps

Hardly a week later, the President was on the subject again while addressing a high-level meeting of the Kenya Manufacturers Association at a Nairobi hotel. Then, he remarked that Kenya sells more fake stamps than genuine ones.

Fake tax stamps are big business in Kenya. It is how traders get rich from selling counterfeit beer, alcoholic spirits, cigarettes, cosmetics, bottled water and juices. Hardly a month passes before you read a story in the media reporting how a raid by KRA officers had intercepted thousands of rolls of counterfeit excise stamps at a warehouse in Nairobi, Nakuru or Mombasa.

In one incident in February, newspapers reported the confiscation of rolls of excise stamps of an estimated value of Sh750 million. In September last year, a woman who was suspected to be part of a criminal network said to be peddling fake stamps made in China was arrested on her arrival at JKIA.

Clearly, we are at a point where we must now accept that the current regime of producing and monitoring tax stamps is not serving us optimally. We have a window to float a fresh competitively procured contract.

The history of the relationship between KRA and the incumbent contractor has been a classic case of a camel in a tent. In 2013, Sicpa won against seven other international service providers. Three years later, the contract was varied and a totally new deal was granted to the company—this time without competitive bidding.

The single-sourcing issue was to morph into an explosive controversy after another. There were multiple inquiries and audits by parliamentary committees, the Public Procurement Appeals Tribunal, the High Court and the Court of Appeal. But as it turned out, the conclusion was that no law was broken.

Things have been even smoother for the Swiss company after the contract expired in 2020. In July, then-Attorney-General Paul Kihara wrote to KRA to advise them about a special condition in the contract that allowed the contractor to continue providing services beyond 2020.

Come May last year, the parties quietly signed a new deal with three major provisions. One was that Sicpa commit to handing over equipment and technology to KRA for free. Another was that the parties sign a maintenance contract containing exclusive contracts to supply ink, stamps and spare parts.

This is a classic study of how long-standing contractors exploit incumbent advantage to keep rivals away. The government should open up the stamped contract to other international bidders.

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