How project to network Posta Kenya saw taxpayers lose Sh1.2 billion

 Posta Kenya money loss

From left: Samuel Bundotich, Christ Obure and Francis Chahonyo in court on March 4, 2015.

Photo credit: File | Nation Media Group

Sometime in March 2002, during the dying days of the Kanu regime, a man named Michael Alan walked into the office of the post-master general Francis Chahonyo. He had a business proposal, nay, a deal. His company, Spacenet, could connect the more than 900 postal offices in Kenya with satellite networks. Alan was a salesman.

Chahonyo, who hailed from Vihiga, listened to the man with a deep American accent. He, perhaps, loved the project. Then, he reached out to his friend Musalia Mudavadi, the man who had brought him into the inner circle of Nyayo-era politics, where sleaze within national institutions was at an all-time high.

Mudavadi was then the Minister for Transport and Communications and post offices fell under his docket. Five months after meeting Chahonyo, and on July 11, 2002, Alan had signed the single-sourced Sh950 million contract on behalf of Spacenet to provide the VSAT communication equipment.

Deal signed

July 2002 was a busy political month since Kenyans were busy debating on who would be President Moi’s successor. Every politico seemed to be in a hurry. And on this date, July 11, President Moi had announced that his successor would be picked among the four Kanu vice-chairmen “or any party member”. That is when the Spacenet deal was signed.

And with that, Kenya had walked into yet another Anglo-leasing scandal and would end up paying Sh1 billion for a phantom project. The sad part is that nobody will ever pay for the collapsed project.

On Friday, former Finance minister Chris Obure, former Transport PS Sammy Kyungu and former secretary, Ministry of Finance Samwel Chamobo Bundotich were set free over their role in this scandal, with the magistrate, Ann Mwangi, arguing that though they had all been involved in the transaction, the trio did not directly benefit from the funds and acted in good faith.

To rescue his junior, once the scandal became public, Mr Mudavadi had turned up in court as a witness. He convinced the court that they all had followed the laid down procedures. That is how they walked away – but the taxpayer too walked away minus Sh1 billion.

The story of this project is a sad one of how Kenya has been run down. How our billions are paid away at the stroke of a pen.

Shortly after Mr Chahonyo met the American tenderpreneur, records indicate that he reached out to Mr Mudavadi who on May 9, 2002, wrote to Mr Obure telling him that he had commenced discussions with Spacenet Inc for the development of the Postal Corporation of Kenya (PCK) networks. Since Spacenet was an American company, it had claimed that it could access some medium-term financing from the US government. In his letter, Mr Mudavadi wanted Mr Obure to confirm his willingness to negotiate and enter into a financing agreement with Spacenet.

Unpaid arrears

But then, there was one problem. On May 23, 2002, the US Embassy in Nairobi informed Mr Mudavadi that the US Export-Import Bank would not finance the PCK network project since Kenya had unpaid arrears from another project.

But the project never died. During this period, the Postal Corporation had been exempted – by design or by fluke – from the Audit and Exchequer Public Procurement Regulations of 2001 and that is how it could afford to single-source this project.

At the Ministry of Transport, Mr Mudavadi had brought up to speed his PS, Mr Kyungu – a man who rose through the ranks from a school headmaster. It was Mr Kyungu, who asked Spacenet to submit the draft contract documents for the project to him together with the draft financing agreement. These were sent to Mr Kyungu on May 31, 2002 and submitted to Attorney-General Amos Wako on June 6, 2002 for legal opinion.

In his cover letter, Mr Kyungu said this was a project between the Ministry of Transport and Communication and Spacenet Inc/Universal Satspace (North America) LLC. Mr Wako appears to have approved the project on July 11, 2002, the day Mr Kyungu entered into a contract with Allan, on behalf of the US company, at a price of USD11.8 million (Sh1.2 billion).

Dummy company

In the hurry to strike a deal, perhaps before the General Election, nobody noticed that Spacenet Inc was more of a dummy company. It was actually a paper subsidiary of Gilat Satellite Networks, with a registered office in Israel, and which hawked itself as a company whose objective was the “development and marketing of satellite and hybrid network products”.

On the same day Mr Kyungu signed the contract, Mr Bundotich, for the Ministry of Finance, entered into a financing agreement with First Mercantile represented by Anurath Gunawerdana. In the agreement, First Mercantile indicated that it was based in Geneva. But it was not. It also had dummy directors, Ninos Yamakis and Yiannakis Yiannaros.

What we know is that this company had been registered in the British Virginia Islands on December 11, 2000 by Anura Perera and was originally known as Consolidating Forfeiting Limited. In the hurry, again, nobody checked the background of this company.

Anglo Leasing

Perera was well-known in the corridors of power and his name later featured in various single-sourced deals connected to Anglo Leasing and which were unearthed by John Githongo, after Kanu was kicked out of power.

In the agreement, the officials committed Treasury to pay the purchase price of the equipment and that First Mercantile would be the guarantor of the total purchase of up to Sh1.2 billion. The money was to be paid in various tranches and Treasury was to reimburse First Mercantile the money it had paid Spacenet. Kenya had also agreed to pay a late interest rate of 8.75 per cent and that if it breaches on the payment clause, First Mercantile was entitled to demand the whole debt together with any other sum due.

What was most perplexing is that while PCK had authority to sign the deal as a parastatal, and with Mr Mudavadi’s approval, the parent ministry decided to take over and had the Treasury guarantee. The reason has never been explained and is one of the grey areas of that contract.

As it emerged later, the financing meant that the Kenyan government would transfer money from the Treasury to Perera’s First Mercantile in order to finance Spacenet Inc’s contract. Thus, none of these two companies had their own money. It had been agreed that on the day Treasury signed the deal with First Mercantile, it would pay the company $929,250 “on signature”. Thus, First Mercantile would use this money to pay Spacenet Inc and then demand reimbursement as a financier. In total, there were to be 12 tranches of $987,250 payable every three months between February 15, 2003 and November 15, 2005. The total was $12,716,250.

Sloppy deal

Why Kenya decided to sign such a sloppy deal has never been known. None of the companies that had walked into Treasury and the Ministry of Transport and Communication had capacity to do the job. On September 1, 2002, Spacenet Inc transferred its rights and obligations to a sister company, Gilat Satellite Networks which then sub-contracted the manufacture of the equipment for PCK to Alldean Satellite, which was owned by Anura Perera.

And this is where the problem is: Perera owned First Mercantile, the company which guaranteed payments and the company sub-contracted to make the equipment. In essence, Treasury had given money to First Mercantile of Perera to make payments to another Perera company.

This emerged in the Swiss Judgment in which the Kenya government was forced to pay First Mercantile the total amount it claimed to have paid for the contract. It was also noted that Perera was paying school fees for Mr Kyungu’s daughters, Angela and Hellen, who were enrolled at North Hampton University. The payments were made through Perera’s Emerick Finance Company between November 2003 and September 2005.

Big question

And the big question that has never been answered is: If First Mercantile was a dummy company with no assets, how was it acting as a guarantor for the deferred payments? And secondly, if Treasury had the money to pay on signature the first batch for the manufacturer of the VSAT equipment, then why go through some briefcase companies?

In this complex arrangement was that any “breach of contract” and delay in payment was to attract an 8.7 per cent penalty. It was John Githongo, as Mwai Kibaki’s PS for Ethics and Governance who first blew the whistle on some payments that were being done while no work was being done. The satellite project was one of them. The Kibaki government stopped any further payment to the Moi-era contract and Perera commenced legal proceedings in Geneva.

In Geneva, Mr Wako tried to enter a preliminary objection by arguing that First Mercantile did not have powers to sign the contracts and that the two companies – Spacenet Inc and Gilat - did not hold necessary licences to supply telecommunication services. This was rejected by the courts. It emerged that in the contract, the signatories had agreed that Kenya would not invoke any irregularity in its own procedures as grounds of defence. Kenya tried to argue that the deal involved corruption and that it was exaggerated.

Finally, Kenya had to pay for a satellite project that never was. We financed a finance company to finance a project done by the same trader’s company and later had to pay him for breach of contract. Meanshile, PCK satellite project remains dead – but nobody has been found culpable. And as one singer said, Kenya ni nchi ya ajabu!


[email protected] @johnkamau1