Construction machines at the site of the stalled multi-billion shillings Itare dam in Kuresoi North, Nakuru County on October 8, 2020.

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Treasury in secret talks to pay Sh108bn Arror, Kimwarer dam contractors

Treasury bureaucrats are locked in secret negotiations to pay off contractors hired to build the Sh108 billion Arror, Kimwarer and Itare dams in a bid to qualify for insurance compensation for the cancelled projects, the Nation has established.

The negotiations were called after the Italian state-owned insurer, SACE Gruppo CDP, told the Kenyan government that it must pay contractors hired to build the multi-billion shilling dams before it can receive compensation for default on the mega projects.

The highly guarded talks could see taxpayers sink more billions into the doomed projects, as the Italian firm that was paid Sh14 billion to insure loans borrowed to finance their construction waves fine print in the government’s face.

The Treasury is already five months behind on the first instalment of Sh19.6 billion for loans taken to construct the Arror and Kimwarer dams.

“Therefore, as a preliminary and necessary step to implement any potential solution, it is necessary to have any overdue amount under the SACE facilities repaid beforehand, in order to restore the consequent claims/losses occurred under the SACE insurance policies,” SACE told Kenya in a May 10, 2021 letter seen by Nation.

The three controversial mega dams have already burned a huge hole through taxpayers’ pockets, but the lopsided contracts signed by government officials are set to add salt to injury, as all possibilities on the way forward point to the release of more billions.

To activate insurance policies taken against default, Kenya must pay. To wriggle out of the contracts, Kenya must pay.

Still, not the entire Sh108 billion was covered against default, meaning even if the insurance policies were activated today, Kenya will still pay for the unprotected amounts.

Much like most mega contracts signed by the secretive Kenyan government bureaucrats, only a handful of Treasury officials know exactly how much was insured against default.

The Kimwarer project was scrapped in 2019 for being technically and commercially unfeasible, and some of the loans in relation to the project were subsequently scrapped.

Three projects

All the three projects stalled in 2019 after the contractor, Italy’s CMC Di Ravenna, collapsed under the weight of debts.

The SACE bombshell comes as Kenya fights off a Sh12.6 billion claim from CMC Di Ravenna for alleged unlawful termination of the Arror and Kimwarer construction contracts.

The government is adamant that the Itare and Arror dams will be completed, with the latter now projected to cost nearly half of the Sh25 billion that it was to initially consume.

While scrapping the Kimwarer Dam project, President Uhuru Kenyatta in September 2019 said that the Arror Dam is viable but had been overpriced.

SACE was the financial fulcrum of financing the three dams.

The Italian firm helped Kenya source for Sh108 billion in loans from commercial banks, which were to be repaid over 14 years starting this year.

The Treasury paid SACE Sh14 billion to insure the loans, which means the Italian firm would step in to service the debt in the event that Nairobi defaulted on repayments.

Correspondence between Kenya and SACE seen by the Nation indicates that Nairobi has sought to have the Italian firm refund insurance premiums for loans that were cancelled following termination of the Kimwarer project.

But SACE now wants Kenya to pay the defaulted installment and overdue premiums before it can step up and pay debts that were covered by the insurance policies.

Even if Kenya pays the insurance premiums and the first Sh19.6 billion installments to be in SACE’s good books, taxpayers will still have to fork out billions of shillings for loans that were not covered under the deal.

For the loans that were cancelled owing to termination of the Kimwarer project, Kenya will get a refund of the insurance premiums from SACE.

The insurance deal with SACE has attracted its fair share of controversy.

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.

Insurance policies

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.

As the Treasury negotiates with SACE, the government is also swatting off an arbitration claim by CMC Di Ravenna at the International Court of Arbitration, seeking compensation for termination of their contracts in the Arror and Kimwarer dam projects.

CMC Di Ravenna has filed the claim against the Kerio Valley Development Authority (KVDA), arguing that it was denied access to the construction sites and kept in the dark over the contracts after the Directorate of Criminal Investigations started probing the two projects, and suffered reputational loss owing to graft links under the collapsed projects.

Interestingly, the Italian firm claims that the Arror and Kimwarer projects were aid-funded projects hence it should not have been slapped with nearly Sh400 million in taxes.

CMC Di Ravenna has made the claim in its pursuit of tax refunds, an allegation that raises more questions on the paperwork for the dams project, as Kenyans have been exposed to repayment of expensive loans that will take more than a decade to complete if the borrowing contracts are honoured to the last claim.

“Regrettably, the works suffered disastrous disruption due to the launch of administrative and criminal investigations into the projects, which seemed to have no purpose other than creating political turmoil in Kenya. It is not for the claimants (CMC Di Ravenna) to say which caused the other. What is certain, is that the chaotic situation that ensued created a self-sustaining circle of public misinformation and political pressure on discontinuing the projects, and insurmountable legal and practical obstacles to claimants’ activities,” CMC Di Ravenna says in its filings.

The firm holds that payments agreed under its contracts were also delayed after investigations into the projects started, and it wants compensation.

But Kenya has contested the claim, and wants to be compensated by CMC Di Ravenna, which it accused of colluding with government bureaucrats to defraud taxpayers of billions of shillings.

Pay damages

Solicitor General Kennedy Ogeto says that CMC Di Ravenna violated several laws, and now wants the broke Italian firm ordered to pay damages for the alleged collusion to defraud taxpayers.

Mr Ogeto argues that CMC Di Ravenna entered into a contract for construction before any due diligence had been conducted on the project, which would have revealed that the KVDA did not own the land on which the dams were to be constructed.

He adds that the company failed to get approvals from the National Environment Management Authority and the Kenya Forest Service as required by law, and that it did not conduct sensitisation of the public before signing construction contracts.

The Solicitor General holds that CMC Di Ravenna also failed to ensure third-party oversight of the projects, and failed to obtain a legally required performance bond for the Kimwarer Dam.

The lack of a performance bond, Mr Ogeto says, is enough to void the contract for the Kimwarer Dam.

Sh4 billion paid

More than Sh4 billion paid in advance for the Arror dam was misappropriated and shared among individuals that had no role to play in the construction process, and Kenya wants the money refunded alongside an award of damages.

“In short, the Arror contract and the Kimwarer contract could not be performed at the time of payment of the advance payments as both parties well knew. Notwithstanding this, pursuant to a conspiracy to injure the respondent (KVDA) by unlawful means, the contracts were used as vehicles for the movement of millions of dollars including to third parties who had no legitimate interest in the execution and performance of the said contracts and/or no meaningful work was undertaken in relation to either contract,” Mr Ogeto holds.

Kenya wants an investigation into the money paid to CMC Di Ravenna, and for any funds not used towards construction to be refunded.

Kenya also wants the arbitration panel to decide how much CMC Di Ravenna should be ordered to pay in damages for breach of contract and alleged siphoning of public funds.

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