Shadowy ‘sweet’ deal that got Githongo into endless trouble

What you need to know:

  • Kenya finally lost the case and after mediation in February 2013, it was agreed that the Treasury should pay $7.6 million (Sh653 million) to the shadowy companies.
  • After waiting for 10 months to be paid, the claimant went to court in London in December 2013 and judgement was upheld.

  • Kenya was expected to pay $7,874,431 being principal of $7,600,000 and interest of $274,431) by January 17, 2014, inclusive of costs of £60,000.

 If you have been following the monumental scandals in our midst, they all seem to follow the same script: An unsolicited offer, a press conference, a budgetary allocation, and faceless fellows — the kind of ghosts that got John Githongo into trouble.

Once these deals are concluded, they later read like a page from a Le Carre spy thriller.

SNOWBALL

This is the story of a sweet deal that was crafted to ostensibly rescue an ailing postal corporation and how it ended up in a fiasco. It is one of the scandals exposed by former Ethics and Governance Permanent Secretary Githongo.

It all started when the once giant Kenya Post and Telecommunication Corporation was dissolved, and split into three entities: Telkom Kenya Limited, Communications Commission of Kenya and Postal Corporation of Kenya.

In January and February 2002, the three institutions shared their assets. That is the time a man who we now know as Michael Alan walked into the office of the Postmaster General Francis Chahonyo, a man who was once at the helm of Post Bank Credit Ltd. At that time, Post Bank Credit was the free-for-all financial institution and political titans competed on who would pull off a bigger heist.

Alan, who claimed to be Africa’s sales manager for US company Spacenet Inc, with a registered office in McLean, Virginia, had a proposal, nay a multimillion-shilling offer. Suppose he installed satellite communication systems linking all the post offices in Kenya? On the table, it looked like a sweet deal.

If Chahonyo had dared check, he would have realised 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 development and marketing of satellite and hybrid network products. In the back seat were several tenderpreneurs, who included the Kamani brothers, who are still fighting in court to clear their names.

At that time, various dummy companies, fronted by the Kamanis and another vicious tenderpreneur, had lined up in Kenya, each with a multi-million-dollar proposal that would later snowball into what is generally known as Anglo-Leasing scandals.

SHADOWY

With a proposal on hand, Chahonyo reached out to the man who had appointed him — then Minister for Transport and Telecommunication Musalia Mudavadi. Both come from Sabatia constituency. A tribunal that heard the matter in Geneva was told that Chahonyo informed Mr Mudavadi about the Postal Corporation’s intention to build a Very Small Aperture Terminal (VSAT) network connecting all its offices countrywide. By this time, no due diligence had been done to ascertain whether this company could deliver.

That July, as the Daniel Moi regime was slowly coming to a close, Mudavadi wrote to the Minister for Finance, Chris Obure, and told him that his ministry had commenced discussions with Spacenet Inc for the development of the postal network.

To get some hearing, Spacenet had lied that it intended to fundraise for the project from the US Export-Import (Exim) Bank, an institution started to secure exports for American companies. The firm had claimed in a letter that it had received “medium term financing” from the US government but the American Embassy in Nairobi, on May 23, 2002 wrote to Mudavadi informing him that the Export-Import (Exim) Bank would not finance the Postal project owing to arrears unpaid by the State.

However, the project never died. By this time the Postal Corporation had been exempted — by design or by default — from the Audit and Exchequer Public Procurement Regulations of 2001 and that is how it could afford to single source this project — brought to it by a shadowy company.

The next to join the fray was Sammy Kyungu, a man who rose through the ranks from a school headmaster to a Permanent Secretary. It was Kyungu, then Mudavadi’s Permanent Secretary, who asked Spacenet to submit the draft contract documents for the project to him together with the draft financing agreement. These were sent to Kyungu on May 31, 2002 and submitted to Attorney General Amos Wako on June 6, 2002 for legal opinion.

SCANDAL

But by the time Wako’s legal opinion was being sought, the US Embassy had already said that Exim Bank would not fund the project. Interestingly, Kyungu told Wako that this was a project between Spacenet Inc/Universal Satspace (North America) LLC and the Ministry of Transport and Communication. The reason was that Postal Corporation was broke, anyway.

Four months after Mr Alan had appeared in Chahonyo’s office, and on July 11, 2002, he received a contract worth $11.8 million. This was not publicised and by this time, Kenyans’ focus was on the acrimony within Kanu after Moi announced on that day that his successor would be picked among the four Kanu vice-chairmen “or any party member”.

Thus, Spacenet Inc or rather Mr Alan had a contract “for the supply and installation of satellite telecommunication equipment in 980 post offices in Kenya and a price of $11.8 million (Sh1.2 billion)”.

But Spacenet Inc had no money to finance the project. It was at this time that the Ministry of Finance, represented by Samuel Bundotich, entered into an agreement for the financing of the purchase contract with First Mercantile Securities Corporation, which indicated that it was based in Geneva. But it was not. This company had been registered in the British Virgin Islands on December 11, 2000 by Anura Perera and was originally known as Consolidating Forfeiting Limited. But again, nobody raised the red flag.

What the financing meant was 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.

Let me unpack this scandal. First Mercantile was to be repaid as follows: $929,250 on signature; followed by 12 tranches of $987,250 payable every three months between February 15, 2003 and November 15, 2005. The total was $12,716,250.

CONTRACT

Although Kenya was financing this contract, it was also agreed that it had the duty “to obtain all necessary permissions, registrations, agreements and waivers”. It also gave warrant to First Mercantile that it had all the powers to enter the contract and that in case of a breach, First Mercantile was entitled to “serve a notice of breach on the government mentioning the case of non-performance”.

To understand this, First Mercantile, though penniless, was to act as a guarantor for the deferred payments. This was a complex arrangement but the trap was in the “breach of contract” and any delay in payment was to attract an 8.7 per cent penalty.

Whether the government officials knew, when signing the contract, that Spacenet was just a dummy company and was not even a manufacturer of satellite equipment is not known.

What we now know from records is that on September 1, 2002, Spacenet transferred its rights to Gilat Satellite Networks (Holland BV), which subcontracted the manufacture of the postal satellite equipment to Perera’s Alldean Satellite Network, previously known as Gilat Alldean.

What does that mean? It means that the Kenya government had given money to Perera’s First Mercantile, to finance a Perera company to supply the Satellite equipment.

To make the matter more complex, Gilat Alldead assigned provision of labour and transport to yet another company, Gilat Alldead Africa whose shareholder was Nairobi-based businessman Pritpal Thethy.

EXILE

As the payments started flowing into First Mercantile, Pereira’s company, Emerick Finance and his George Phynomel Foundation started paying university school fees for Mr Kyungu’s two daughters, Angela and Hellen, who were studying at North Hampton University. This, the Swiss court ruled, did not amount to corruption.

“Those payments took place as a result of a collection of funds for the girls, organised on May 17, 2001, when Anura Perera agreed to be responsible for Angela and Hellen Kyungu’s school fees,” a French court was told.

The fall of Kanu and the change of guard at the Treasury had brought in new faces. But mega scandals in government are usually inherited and carried forward.

The appointment of John Githongo as the Permanent Secretary for Ethics and Governance in January 2003 brought on board an incorruptible tsar. It was Githongo who first blew the whistle on payments that were being done yet no work was being done. The Postal Corporation satellite project was one of them. It was hard for the government to extricate itself from a contract that had left it in a weaker position.

As the Anglo-Leasing row picked tempo, forcing Mr Githongo to resign in January 2005 and move to self-imposed exile, the Mwai Kibaki government also stopped any further payment to this Moi-era contract.

But five months after Githongo quit, the Information PS and Treasury PS were served with notice of a breach in the financing agreement and that October 7, 2005, Perera commenced legal proceedings in Geneva.

NON-EXISTENT

It was this case that exposed the Kenyan government officials and their ignorance.

While Mr Wako tried to enter 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.

The final argument by Mr Wako was that the purchase contract was “overvalued” and that the entire project was a white elephant since 615 of the 980 post offices that were to be equipped with satellite equipment did not have sufficient power supply.

While the anti-corruption commission sought the collaboration of Swiss Federal Justice Department and they raided offices owned by First Mercantile, taking off with a tax file and an electronic file, the Swiss Federal criminal court declared the documents “inadmissible”.

The Kenya government, through Muthoni Kimani, told the court that it suspected acts of corruption and that the contracts were signed by non-existent companies.

HUGE COST

Indeed, First Mercantile lawyer, Robin Luiser, told a Geneva Court that the Swiss-based firm “had no employees and carried on no business”.

During these cases it emerged that the man behind the entire deal was Perera — the financial beneficiary of First Mercantile. A man who travelled on an Irish passport, he told the court that he formed the company in December 2000 together with his wife Ghazala Perera. He created the Geneva branch in order to take the Kenyan case there.

Besides owning First Mercantile, Perera also owned Gilat Alldean — which had been subcontracted by Tel Aviv-based Gilat Satellites Networks.

Kenya finally lost the case and after mediation in February 2013, it was agreed that the Treasury should pay $7.6 million (Sh653 million) to the shadowy companies. After waiting for 10 months to be paid, the claimant went to court in London in December 2013 and judgement was upheld. Kenya was expected to pay $7,874,431 being principal of $7,600,000 and interest of $274,431) by January 17, 2014, inclusive of costs of £60,000.

Finally, it paid, to avoid being blacklisted. It was a huge cost for a moribund project that never took off. But do we ever learn?

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