Road to Triton scandal was paved with good intentions

When Kenya Pipeline Company (KPC) was in 2006 declared the second-best performing State corporation, one man was at the centre of the glory.

In just two years, Mr George Okungu had transformed the parastatal from a loss-making and debt-ridden cash cow for corrupt State officials and wheeler dealers to the star performer of all government agencies.

The National Rainbow Coalition (Narc) government had in its manifesto promised to turn around all parastatals into profitable agencies after decades of rampant looting and nepotism under the Moi regime.

The quick turnaround of KPC from Sh5 billion in the red to a Sh2.1 billion pre-tax profit was definitely not a mean feat.

And so when an elated Mr Okungu rose to give his acceptance speech at the Kenyatta International Convention Centre (KICC) on December 6, 2006, he knew the right buttons to press.

Efficiency and profitability

"Our focus has been running a healthy core business, adherence to strict and transparent procurement procedures and budgetary controls, financial management and cost containment measures and various management reforms and innovations geared towards efficiency and profitability," he said.

Mr Okungu was the second managing director to be appointed to head KPC during the short time the Narc administration had been in power.

His predecessor, Dr Shem Ochuodho, whom he had deputised for two years, was kicked out in 2004, after just a year into the job, on suspicion of corruption.

Dr Ochuodho, a founding member of the National Alliance (NA), which gave birth to Narc, had been a fierce campaigner of the coalition but lost his Rangwe Constituency parliamentary seat in the 2002 elections, which kicked Kanu out of power.

Presumably — as a reward for his work in the campaigns— Narc appointed him to the MD’s position at KPC immediately after being sworn in.

Revolving door of MDs

Within just a year, Dr Ochuodho found himself at the centre of an ill-conceived debt financing deal with Triple-A-Capital, which saw KPC lose Sh837 million and led to his exit.

His two predecessors, Mr Linus Cheruiyot and Mr Ezekiel Komen, had also been kicked out in quick succession for similar reasons, creating a revolving door of MDs at KPC that goes on to date.

It was in these circumstances that Mr Okungu took over KPC in 2004, after deputising Dr Cheruiyot for some years and then missing out on a chance to rise to the helm of the company when Dr Ochuodho was brought in.

“For many years, looting was the culture at KPC. I came in with a commitment to plug the leaks and streamline the company,” he told the media when KPC started showing signs of recovery under his stewardship.

At that point, everything seemed to be working in Mr Okungu’s favour.

The economy was rapidly growing, creating a surge in demand for petroleum.

Luckily for him and his firm, the Narc government had set good policies aimed at turning around the fortunes of parastatals.

Triton scandal

As he was basking in the glory, the new MD did not know the seeds that would lead to his eventual downfall, courtesy of the Triton scandal, had been planted years before by his predecessors.

A confidential forensic investigation report about the scandal, which the Nation has obtained 13 years after 126 million litres of fuel imported to the country vanished through the Triton scandal, shows Mr Okungu discovered something was amiss in 2008. This was a whole four years after the petroleum products started disappearing right under his nose.

“George Okungu presented what appears to be a credible portrayal of his conduct that the Collateral Financing Agreement (CFA) implementation took place before he came in as MD,” says the investigation report by PWC.

“Nothing ever came to his attention that things were not as they should be in relation to KPC’s management of the CFA until December 2008, when he received a letter from KCB,” says the report.

A CFA is a financing agreement that allows a lender to take up ownership of property that has been offered as collateral and sell it to recover at least a portion of what the borrower was loaned.

Using property to protect a loan against default allows consumers and businesses to obtain funds they might not otherwise be able to receive.

At that time, KCB had discovered that it had lost colossal amounts of money through a CFA it entered with Triton, which enabled the company to purchase petroleum products that were sold without its knowledge.

This prompted the bank to write to KPC demanding an explanation.

Origins of the CFAs

The assumption of power by Narc and the rapid economic growth in the early years of the administration came alongside a steep climb in global oil prices.

Most developing countries were also enjoying economic growth.

The Organisation of the Petroleum Exporting Countries (Opec), a group of 16 nations with the greatest oil reserves, which produces 60 per cent of the petroleum traded internationally, had failed to match an unprecedented surge in global demand.

Reduced supply

During this period, other non-Opec countries, due to their own internal issues, also reduced supply.

For example, Venezuela in 2006 cut sales to oil marketer Exxon Mobil due to legal wrangles.

Iraq ceased exporting crude oil due to the US-led war sparked by the toppling of dictator Saddam Hussein.

Oil-field workers in Nigeria went on strike in March of that year, then in May all production of oil in the West African country stopped after militants attacked its oil fields. This cut from the global oil supply about 2.36 million barrels per day, which the West African country used to produce.

In the UK, a majority of Scottish petroleum workers suddenly quit on April 27, leading to closure of the North Forties pipeline, which is used to evacuate about half of the United Kingdom’s North Sea oil production.

At the same time Mexico, which was the world’s 10th largest oil producer, was faced with a decline in production at its Cantrell oil field.

Global prices rise

These challenges contributed to a rapid acceleration in the global price of oil, which shot to USD147 (Sh14,700) per barrel by mid-2008.

Kenya’s situation was unique because, not only did the country record an escalation in demand for petroleum due to good economic growth, but this increase in thirst for fuel products was taking place when global crude oil prices were rising rapidly.

Additionally, the Kenya Petroleum Refinery in Mombasa, which catered for 40 per cent of the local demand, was finding it hard to process the eight million litres of petrol it was supposed to produce daily.

To sort out this problem, the government allowed oil marketers to compete for a tender that would allow them to access petroleum products at the same price from the international market.

Open tender system

They would then sell the products to other companies. This system, which is still in use today, is known as the open tender system (OTS).

Local oil marketing companies (OMCs), however, found themselves lacking the financial might to compete with multinationals in the tendering process.

In order to fix this hiccup, KPC started requesting banks to finance the OMCs that had won these tenders, using the petroleum they bought as collateral.

This is how the idea of CFAs was conceived. It would later form the basis of the Triton scandal.

Letters of credit

Under the scheme, lenders that agreed to finance the OMCs were supposed to issue letters of credit committing themselves to pay for usually up to 80 per cent of the petroleum products being imported.

The petroleum would be held by KPC and only released with green light from the financiers once the OMCs had identified a customer for the consignment and the customer had agreed in writing to pay within 14 days.

Additionally, the Kenya Revenue Authority’s (KRA) Customs Services Department had to be notified of the sale and the importer made to pay all the required taxes before any petroleum could be released.

The net effect of this arrangement was that local oil marketers were enabled to play on a level playing field with multinationals in bidding for petroleum using the OTS.

This kept the commodity flowing uninterrupted and at the right price into the country and to the end consumers.

Personal gain

On the face of it, this sounded like a great idea. It still is, but the first lot to implement it wanted to subvert it for their personal gain.

In fact, things went wrong from the very first day.

“Although the CFA was introduced in 2004, negotiations with banks began in 2003,” say investigation files.

“The initial investigations were conducted by the former MD, Mr Cheruiyot, while the first CFA agreement was with Triton and was signed by Dr Shem Ochuodho,” Mr George Okungu is said to have told investigators on being questioned about his role in the scandal.

On being asked why Mr Cheruiyot negotiated such a huge commitment on behalf of KPC, Mr Okungu said that was apparently his style of doing things.

This allegation was contradicted by Peter Mr Mecha, who was the Operations Manager at that time.

While Mr Mecha told investigators he played no role in setting up the CFA agreement, he averred that it was Dr Ochuodho who authorised the CFA agreements.

He further explained that it was Mr Yagnesh Devani, the CEO of Triton, who sold the idea to Dr Ochuodho.

“Furthermore, Mr Okungu, who was the then Deputy MD, was also involved,” claimed Mr Mecha to investigators.

With these conflicting statements from the then KPC management, it is difficult to tell who played what role and who let the country down.

Undue advantage

What is clear is that Triton was given undue advantage over other players even before the implementation of the CFAs began.

At that time, Triton was a very small player in the petroleum industry, with less than one per cent market share.

The industry rule at that time was that oil marketers get apportioned space at the Kipevu Oil Storage Facility (KOSF) in proportion to their market share.

“At the end of 2007, this stood as follows – Kenol/Kobil 22.4 per cent, Shell 21.8 per cent, Total 21.2 per cent, Chevron (Caltex) 13 per cent, Oil Libya 7.3 per cent, National Oil 2.4 per cent and independents including Triton 11.5 per cent,” says an analysis of the situation at KOSF at that time by the African Centre for Open Governance (Africog).

Yet, despite having less than one per cent market share, Triton was able to get up to half of the entire storage space at KOSF on more than one occasion.

With such a huge allocation of storage space at KOSF, Triton signed two agreements with KPC in order to help it further its objective of becoming a mega player in the industry through speculation and without investing even a single cent.

“The first of these two agreements (the CFA 2004) is called ‘Transport and Storage Side Agreement Number 1. It states that KPC would agree to permit Triton to use its oil stock held in KPC’s system as security for money advanced to Triton by a third party to enable it pay for products purchased before receipt of the sale price,” says one of the agreements as filed in a London court.

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