What you need to know:
- The company did not have any such capitalisation at the time of the application.
- Its records indicated that at December 31, 2007, it only had assets of Sh10 million “and very thin capitalisation.”
- A year later, it had Sh25 million assets and Sh17 million in cash.
- In the geothermal sector, this is counted as peanuts and was not worth any discussion
The energy sector is full of brokers and speculators, and that is how one shell company came to prospect for geothermal in Suswa — in the hope that they could raise money with our resources and revamp their briefcase outfit.
This is the story of Canadian company WalaM Geothermal Inc, which has been asked to pay the government more than Sh650 million after it lost a case in which it had sued the State demanding to have its licence, revoked in 2012, reinstated.
It all started in February 2007, when Maherab Walji, a Canadian born in East Africa, was introduced to Energy Minister Kiraitu Murungi by a former Principal Geologist at the Ministry of Energy, Fred Mbatau. Mbatau wanted the Canadian to submit a letter of interest for his company, WalAm Energy, to get the geothermal concession around Mt Suswa, a lucrative field for energy prospectors. Initially, he wanted some other sites around Naivasha but since these were not available, he was told by the Minister that he would get Suswa.
What the Minister did not know, and if he knew he never said, was that this was a briefcase company that had meagre assets and a thin capitalisation. While phase one of the exploration was to cost Sh25 million, the second phase, drilling of two exploration wells, was to cost Sh825 million. This money, Kiraitu was told, was to come from the directors and their business associates.
What we now know is that the company, which would later sue the State for billions of shillings, did not have any such capitalisation at the time of the application. Its records indicated that at December 31, 2007, it only had assets of Sh10 million “and very thin capitalisation.” A year later, it had Sh25 million assets and Sh17 million in cash.
Counted as peanuts
In the geothermal sector, this is counted as peanuts and was not worth any discussion. But somehow, officials at the Energy ministry kept engaging the firm.
Today, it is not clear why a license was issued at the same time as the Authority to Explore. But what we know from the records is that the Energy Permanent Secretary Patrick Nyoike was “asked by Minister Murungi to facilitate issuance of the geothermal resources authority and licence for WalAm”. Nyoike said Kiraitu had considered, perhaps mistakenly, Walji’s application to be for a licence, although, actually, it was for an Authority to Explore. But the hidden card all along was that the Canadian wanted to use the Suswa letters to raise money, float an initial public offer and, perhaps, make millions of dollars without drilling a single well.
To do that, he was pushing the Ministry of Energy to grant him a binding Power Purchase Agreement which would have guaranteed investors and other interested parties that, indeed, he had covered the entire agreement. But that is not how the PPAs are awarded in Kenya, as he would later find out.
As Nyoike would later tell an International Tribunal that was hearing the dispute, “that was what they wanted, but they were not granted that”.
Why a company that did not have any financial backing was given such a contract remains one of the most intriguing questions on how our natural resources are the playground for speculators. Walji did not have a proper understanding of what would be required in order to negotiate and conclude a Power Purchase Agreement.
Just a minnow
At one point, Nyoike asked him whether his company was capable of delivering before it was granted a license. He had apparently realised that WalAm was, in his own words, “just a minnow”, and in his statements to the Tribunal he said he had dealt with similar companies.
From the days of Anglo Leasing, briefcase companies are known to sign contracts with the government and later sue for billions of shillings after their contracts are cancelled for failure to deliver. A proper stage had been set and had Attorney-General Kihara Kariuki not defended this case, it would have ended up like the other Anglo Leasing cases.
In a letter dated August 2, 2007, Walji told Kiraitu that his company had accepted “all the terms”, even when he knew that he did not have a PPA. This was an anomaly that was noted by the Tribunal: “WalAm could have rejected but did not the terms of Authority to Explore, or could have sought only to explore... and not accepted the licence.” Although WalAm did not get a commitment on a PPA from Kiraitu, it went ahead with the project, hoping to make demands later, and if not, sue.
The reason they walked into this contract was that they wanted some kind of evidence of Kenya’s intent to give a PPA, which was to help them get financing. That was thwarted by the minister, and perhaps with a reason.
With the License, Walji then asked the ministry to provide him with surveys and data relating to Suswa and Nyoike asked KenGen’s Edward Njoroge to provide the same. The data was handed over by June 2008. But even after getting this data, Walji still did not have money to carry out the project and had only appointed Mbatau as his contact person and operations manager in Kenya. He was also looking for a project consultant and had retained GeothermEx. With no money to pay for the GeothermEx proposal, dated January 2008, it was only released to Walji in August.
“There is a question as to whether the engagement of GeothermEx and the delayed signing was occasioned by WalAm’s late payment of the deposit (of Sh3 million) necessary to ask GeothermEx to initiate work,” noted the Tribunal while wondering whether Walji had money to carry out this Suswa project.
Unwilling to fund project
But, finally a Laing of WalAm and a Granados, the GeothermEx drilling manager, went to Suswa in November 2008 and held discussions with Ministry of Energy officials, including Nyoike. By then, some of Walji’s directors had expressed their unwillingness to put money into the Suswa project, meaning it was coming a cropper.
Three months after that Suswa visit, WalAm wrote to Kiraitu seeking for a meeting “for three hours” to commence PPA terms and “conclude the government and WalAm intent”. That meeting, though not with Kiraitu, took place in March 2009 and was attended by officials of the Ministry of Energy and Kenya Power. During the meeting, WalAm emphasised that the next step was drilling, that drilling required funding, and that funding required a PPA.
But after failing to meet the Minister, Walji wrote a letter dated February 2009 lamenting frustrating “delays and lack of motivation in Kenya.” All this time, he was putting the blame and everyone else apart from his finances.
He would later meet with Njoroge of Kenya Power to discuss tariffs and the terms of PPA, and also with Chief Geologist John Omenge. But it was Nyoike who would tell WalAm what they were now feeling: “It is expected that WalAm obtained the licence to develop the Suswa Geothermal Prospect on full understanding that the company has the necessary financial and technical capability to fulfil the power development. The Ministry cannot therefore determine the project costs for WalAm or engage in entering Power Purchase Agreement (PPA) with WalAm unless steam wells have been drilled.”
WalAm had been told by its consultants, GeothermEx, that it had to first drill wells to prove the productivity of the reserves. While GeothermEx were confident that they could drill full diameter wells without drilling exploration wells, they could not predict the productivity of the wells.
When asked what they had found, Walji could not tell Njoroge whether Suswa had geothermal resources in commercial quantities and now said, in a letter dated April 14, 2009, that he needed $23 million for the job and not the $8 million he had submitted to Kiraitu when his application for Authority to Explore was accepted. In essence he had given Kiraitu unrealistic figures.
What we now know, and the Tribunal held as much, was that “WalAm did not have the finance available to undertake either exploration drilling or full diameter well drilling of the kind recommended by GeothermEx”. More so, it did not have a prospect of raising those levels of investment from existing shareholders, directors or business associates.
That is why they wanted to blackmail the government to obtain a PPA which they could use to obtain financing. In their meetings at the Ministry of Energy, they insisted that PPA was critical to their ability to raise the relevant financing, but nobody on the Kenyan side, at least by March 2009, agreed to give them.
Later on, Nyoike told off WalAm and rejected their demand for a PPA. It would later emerge that WalAm did not even have the $8.25 million of private equity at the time of application for an authority to explore. Indeed even in December 2011 WalAm was seeking to raise $3 million in order to cover expenses sufficient to enable negotiation and conclusion of a PPA.
They never provided a work programme to the minister until February 2011 and he expressed dissatisfaction with the lack of progress on Suswa. Walji apologised to Kiraitu as Nyoike threatened to take away WalAm’s licence since it had not drilled any well.
Finally, Kiraitu cancelled licence and the company took Kenya to the International Centre for Settlement of Investment Disputes. Last Month, Kenya won this case, but we had wasted lots of time with a broke company.