President Ruto revives Sh63bn Arror, Kimwarer dams projects

President William Ruto with Italy's Sergio Mattarella at State House, Nairobi on March 14, 2023.

Photo credit: Dennis Onsongo | Nation Media Group

A series of embarrassing and potentially expensive happenings around the Arror and Kimwarer dam projects have now become the stepping stone for President William Ruto to revive the multibillion-shilling projects through negotiations with Italy.

Pricey insurance premiums, the risk of losing a claim by Italian contractors at the International Court of Arbitration and potential sanctions for Kenya reneging on international commercial contracts may have played a huge role in President Ruto’s decision to revive the projects.

The events, coupled with President Ruto’s past insistence that the projects were targeted as part of a political war with his predecessor, Mr Uhuru Kenyatta, have now aligned to give the Kenya Kwanza administration a foundation for completing construction of the dams.

Government lawyers had reportedly advised Kenyan authorities that the Italian contractors had a strong case about cancellation of legitimate commercial contracts.

The advisory prompted National Treasury officials in then President Kenyatta’s government to open secret negotiations with the Italians, who are understood to have initially demanded Sh80 billion, and had pocketed Sh10 billion, as Kenyan officials tried to negotiate downwards to Sh40 billion.

Initially budgeted at Sh63 billion, the two dams were relegated to the expansive cabinet of white elephant projects in September 2019 when then President Kenyatta cancelled the Kimwarer project and said that Arror had been grossly overpriced.

The two projects in Elgeyo Marakawet County, Mr Kenyatta held, were conduits for embezzlement of public funds. Just two months earlier, the Directorate of Criminal Investigations (DCI) had arrested then Treasury Cabinet Secretary Henry Rotich alongside 15 other government officials.

Mr Rotich, former National Environment Management Authority (Nema) boss Geoffrey Mwangi Wahungu, and former Kerio Valley Development Authority managing director David Kimosop are among those charged with the alleged loss of Sh55.8 billion.

They were charged with several fraud and abuse of office counts, the claim being that they facilitated theft of billions intended to finance the two dams, as authorities sought international arrest warrants for CMC Di Ravenna — the bankrupt Italian contractor that was hired to build the two dams.

Prosecutors said no work had been done at the dam sites despite the Italian firm having won the contract over five years earlier and some Sh19 billion having been paid out by Treasury. With yesterday’s deal to revive construction of the dams, these corruption cases seem set to collapse like dozens others involving Dr Ruto’s allies that have been withdrawn on grounds they were politically  motivated.

The Sh34 billion Italian-funded Itare dam project located in Kuresoi, Nakuru County, also stalled in 2018 after the contractor, CMC Di Raveena, filed for bankruptcy in Italy. All along, Dr Ruto, then the Deputy President, insisted that the drama surrounding the dams was a political gimmick aimed at humiliating him and denting his hopes to become President in the 2022 poll.

Complex loans

The two dams were to be financed through complex loans from privately-owned lenders, but whose involvement was facilitated by the Italian government. Sace Gruppo CDP, an insurance firm owned by the Italian government, covered Kenya in the event of default.

Kenya had paid Sh14 billion to insure the loans against default. By April 2021, Kenya was on the verge of becoming a global laughing stock on account of the collapsed projects.

Loans taken to build the dams were defaulted and conditions that would have seen Sace cover Kenya’s liability had been breached.

Three companies hired to build the dams — Cooperativa Muratori & Cementisti-CMC Di Ravenna Societa Cooperativa (Italy), Itinera SPA and CMC Di Ravenna-Itinera JV SCPA — had sued Kenya at the International Court of Arbitration seeking compensation for the contract cancellations.

CMC Di Ravenna Societa Cooperativa had partnered with Itinera SPA and together they formed a consortium that operated as CMC Di Ravenna-Itinera JV SCPA.

In law, those are three separate legal entities and were collectively demanding Sh11 billion for the contract cancellations. At the time, Kenya was in a strange political space.

President Kenyatta and his deputy, Dr Ruto, had fallen out. Kenya had a President who could not fire his deputy as per the law, and a deputy who did not want to resign from the working environment he often described as toxic.

In documents filed at The Hague-based court, the three Italian entities claimed that President Kenyatta had made them collateral damage in his political war against Dr Ruto.

Kenya’s political feud was now playing out on the global stage with the risk of becoming grounds for a multibillion-shilling compensation penalty, a tab that Kenyan taxpayers would ultimately be the ones to pick.

“Claimants find confirmation that they fell victim to a political struggle for power between the President ... and his deputy President ... the latter being a vocal supporter of the projects…While the two belong to the same party, Mr Ruto is expected to run in the 2022 presidential elections and challenge Mr Kenyatta’s faction,” the court papers stated.

At the time the Italian firms sued, Kenya was five months in default of loan repayments, as an instalment of Sh19.6 billion was pending. President Kenyatta’s administration opted to trigger the insurance cover that was to see Sace step up in the event Kenya defaulted on the loans.

Sace then dropped the bombshell — it could not repay the loans because contractors hired for the projects had not been paid and Kenya had also defaulted on premiums that would have kept the insurance cover active.

To activate the insurance cover, Kenya needed to pay the contractors. To wriggle out of the contracts, Kenya needed to pay. To proceed with the contracts, Kenya needed to pay. Either way, tax payers were destined to pay billions for the projects.

The Kimwarer project was scrapped for being technically and commercially unfeasible and some of the loans in relation to the project were subsequently scrapped.

Past correspondence between Sace and Kenya seen by Nation indicated that the latter, in 2021, sought a refund for insurance premiums paid towards covering loans in relation to the Kimwarer project.

It is unclear whether the refunds were ever paid. Finance and corporate experts have in the past revealed that such projects are insured at a maximum cost of 1.5 per cent of the project value. Sace charged Kenya 17.5 per cent of the project cost, which means that taxpayers paid 15 times more than the market rate for such insurance policies.

Interestingly, the Italian firms claim in their suit that the Arror and Kimwarer projects were donor-funded and should not have been charged nearly Sh400 million in taxes.

Kenya, in response to the suit at the International Court of Arbitration, claims that the contractors violated several laws that contributed to the contract cancellation. At the time, Solicitor-General Ken Ogetto asked the court to order the Italian firms to pay Kenya damages for the alleged legal violations.

On Tuesday, President Ruto announced that he had successfully brokered a deal to end the dispute.

The stalled Arror, Kimwarer and Itare dam projects will resume in the coming months following the deal between Kenya and Italy to withdraw court cases surrounding the projects, President Ruto said.

The development is part of multibillion-shilling deals spanning different sectors including water, security, health, trade, education, urban development and climate change inked between the two countries on Tuesday.

Speaking after a bilateral meeting with Italian President Sergio Mattarella at State House, Nairobi, President Ruto said the process of withdrawing the court cases has begun will be completed in a month.

He explained that the Kenyan government will withdraw cases filed against the involved firms — CMC Di Ravenna- Itinera JV — and the Italian government while the contractors will also withdraw the cases filed against the Kenyan government. Further, the Head of State pointed out that financing for the projects is going to be restructured.

He explained that the revival of the construction of the dams, together with other water and sanitation projects, are critical to Kenya’s agenda on food security and climate action.

“The process of sorting the matters in court has started in earnest and we are going to clear the court issues in the next one month. We should be able to go on with the construction of these dams in a matter of months,” said the President.

At the same time, the Italian government committed to advance Sh14 billion (100 million euros) in grants and soft loans covering projects in agriculture, development of micro, small and medium-sized enterprises, housing and urban settlement, health, the digital super highway and creative economy.