Who is benefiting from the millions paid for Lamu Port corridor project?

Saturday May 21 2011

Lamu is experiencing a construction boom due to the multi-trillion Lamu Port-South Sudan–Ethiopia Transport (Lapsset) corridor project

Lamu is experiencing a construction boom due to the multi-trillion Lamu Port-South Sudan–Ethiopia Transport (Lapsset) corridor project  

By jaindi kisero jkisero@ke.nationmedia.com

Even before any ground is broken for the proposed Lamu Port corridor, the project is turning out to be yet another scheme to bilk taxpayers billions of shillings in over-priced feasibility studies and inflated salaries.

And although the government made Japan Port Consultants renegotiate the price of their consultancy in March, Kenya is still obliged to pay a whopping Sh1.98 billion for a nine-month job, most of it involving desk studies.

According to documents seen by the Sunday Nation, in a project analysis last year the Treasury concluded that the service to be provided by the contractors was worth only Sh587 million.

In fact, the feasibility study on the projected Lamu Port corridor — that is said to include a second port on Lamu island, an airport, a railway link to Ethiopia, an oil pipeline to Sudan and resort cities — is turning out to be the most expensive ever carried out in Kenya.

According to the documents, the country was about to pay a much higher price had the Treasury not balked and Transport minister Amos Kimunya not questioned the price tag.

According to the proposed personnel cost schedule, drivers, a site secretary, clerk, typists and other unnamed staff were to receive a total of Sh300,000 a week, or Sh1.2 million a month, while a janitor and guards would together earn Sh1 million a month.

The list of professionals and experts to be contracted was also padded to create more staff than required for a nine-month exercise.

In a May 13, 2009 agreement signed by Transport Permanent Secretary Cyrus Njiru and Tatsuo Wako, the president of Japan Port Consultants, Kenya committed to pay a whopping Sh3.04 billion for the study.

And even though JPC agreed to negotiate the price downwards by 35 per cent, that has only fueled suspicions that the project had been deliberately padded to allow the Japanese firm and their local partners and agents to earn billions of shillings in economic rent.

Even more puzzling is the fact that JPC readily agreed to grant the government a major discount without demanding that the scope of the project be scaled down.

When contacted by the Sunday Nation, Dr Njiru defended the costing, saying the price was a reflection of the complexity of the assignment and the fact that it involved multiple projects.

He said all the issues raised earlier about the manner in which the project had been procured had been addressed.

He said the project involved much more than desk studies since surveys had to be carried out over the long distance between Lamu and Lokichoggio in Turkana district, the path that an oil pipeline would ostensibly follow.

In addition, he said, the consultant was to produce detailed designs for three shipping berths in Manda Bay on Manda island. The entire grandly conceived corridor project is expected to cost Sh22 billion.

Handsome profit

Perhaps the most telling sign that the project was grossly over-priced is the fact that even with the 35 per cent discount the Japanese firm is still calculating that it will be able to make a handsome profit and at the same time pay sub-contractors engaged earlier at prices negotiated long before JPC would be forced to lower the price.

Kohei Nagai, the Nairobi-based representative of Japan Port Consultants, declined to comment, citing confidentiality. The JPC website www.jportc.co.jp, make no mention of the Lamu Port corridor feasibility study contract.

A set of questions from the Sunday Nation elicited a letter from their lawyer threatening legal action if this newspaper publishes a story that portrays their client in bad light.

Dally & Figgis advocates says their client would sue for damages if “an article or material containing a defamatory or inaccurate statement” concerning JPC were published.

But the company’s explanation for its remarkable generosity is contained in a letter to Mr Kimunya dated March 16, 2011, in which their president, Mr Wako, says they gave Kenya the huge discount because the government was broke.

“We were advised by the Treasury that the funds available were not sufficient to cover the initial contract price,” Mr Wako said.

He added that they were told that if JPC did not agree to reduce the price, no payment would be made to them in the near future. He said JPC was not prepared to engage the government in litigation.

Away from public scrutiny the Lamu corridor project has been the subject of disagreements pitting top officials of the ministries of Transport and Finance, with the Treasury maintaining that Kenya was not getting value for money from the Japanese consultants.

All centres of political power have been involved in the push and pull game, from the Transport ministry to the Treasury and the Office of the President, played against a backdrop of persistent claims that a member of an influential political family was responsible for the political pressure exerted on the Treasury to release billions of shillings to the consultants.

The progress of the feasibility study illustrates how grand projects can be designed to create gaping loopholes for the siphoning off of public funds.

Although there is so far no firm evidence documenting acts of corruption, it is clear that had Treasury not resisted this project from the beginning, Kenya would have lost even more money through the contract.

The paper trail shows that since the study’s inception, the inclination of senior bureaucrats at the Transport ministry was to put pressure on the Treasury to release a large part of the total contract price to the consultants in the very early stages.

Cash flow plan

In a January 29, 2010, long before the contract was signed, the Transport PS, Dr Njiru, presented the Treasury with a cash flow plan for the project while applying to the Exchequer to release Sh1.57 billion to the consultants.

According to Dr Njiru, the money would cover the consultants’ work and costs between February and June 2010; Sh1.52 billion would go to the project, and with the balance of Sh50 million going for operational costs.

“The cash flow requirement is based on the assumption that the consultancy work will be commissioned mid-February 2010,” he said.

Investigations by the Sunday Nation found that the Treasury’s resistance to the project began the moment the PS’s letter was received. The following questions were raised:

First, Treasury officials argued that desk consultancies, as opposed to civil contracts where contractors have to buy expensive equipment, did not require such large payments of mobilisation fees.

Secondly, the Treasury demanded a clear activity schedule spelling out deliverables and timelines for the contractors.

“We consider it necessary to understand what the amount of Sh3 billion is made up of,” said an expert at the Treasury tasked to look at the project.

Still, the biggest turning point was to come last September when Mr Kimunya replaced Chirau Ali Mwakwere as Transport minister.

Ironically, Mr Kimunya was taking over a project to be funded by money generated from the controversial Sh2.5 billion sale of the Grand Regency hotel to Laico, a Libyan company, when he was Finance minister. The money was being held by the Treasury for the project following a presidential directive.

Available documents show that Mr Kimunya blew the whistle on the cost of the feasibility study in a letter dated September 21, 2010, when he requested that the Treasury conduct a fresh audit of the project to determine whether the study was value for money to the taxpayer.

Were sensational

The results of the Treasury analysis were sensational. It emerged that major lapses were committed right from the tendering stage.

Even though the Transport ministry had published a public tender for the consultancy contract in the newspapers, Japan Port Consultants were not made to compete on price with other bidders.

This situation came about because the procurement was based on what is technically referred to as “a quality-based system” where the bidder with the best technical proposal is invited by the tendering body to negotiate a contract on the basis of his financial proposal.

Thus, Japan Ports Consultants were awarded the contract without financial evaluation.

Treasury also found that although the Japanese firm had expertise in designing ports, no evidence was submitted to indicate their competence in railways, airports, oil pipelines, oil refineries or resort cities.

In a letter dated November 30, 2010, Head of Public Service Francis Muthaura wrote to the ministry of Transport directing that the project, said to be close to the President’s heart, be renegotiated.

JPC initially resisted the move. At a meeting on February 28, negotiations deadlocked, forcing Mr Kimunya to intervene by summoning the company president to Nairobi for negotiations. It was at this meeting that the Japanese company offered Kenya the 35 per cent discount.

On March 14 Dr Njiru wrote to the Treasury to release Sh1.49 billion to JPC, which he said was the outstanding amount the Japanse needed to complete the study.

“The consultants have requested that the outstanding payments be made immediately to prevent further losses on costs already incurred,” he said.

The Sunday Nation has learnt that the Treasury has said it will only release Sh500 million to JPC in the current financial year.

If this amount is added to the Sh500 million released to the Japanese consultants last year, it means that Kenya will have spent a total of Sh1 billion on the feasibility study by the end of the year.