Cockar report: Grand Regency transaction was not transparent

Chapter Four of the Report on the Commission of Inquiry into The Sale of the Grand Regency Hotel outlines “other issues considered” by the commission as follows:

Was the Sale of The Hotel a Government To Government Transaction?

It was vigorously maintained by the Governor that the sale of the hotel was in consequence of an agreement arrived at between the governments of Kenya and Libya. His reason for so maintaining was based on the following grounds:

1. The Memorandum of Understanding (MOU), which was the outcome of the official visit by the President of Libya from 4th to 6th June, 2007 had been sent to the governor by the Embassy of Kenya in Tripoli, Libya.

In the MOU there was an expression of desire in both countries to intensify cooperation in various fields of common interest including trade and investment, education, scientific and technical cooperation, transport and communication and energy.

Recent interest shown by Libyan investors in the opportunities available in Kenya was noted, especially in energy as well as hotel and hospitality sectors. There was a reference in the MOU to an expression of interest by Libya African Investment Portfolio (LAP) inter alia to purchase the Grand Regency Hotel, which the Kenya Government had agreed to consider. In our view the MOU was not specifically a directive for the sale of the Hotel.

2. However, what appeared to have enhanced the importance of this MOU, according to the Governor, was the fact that subsequently he was contacted by a Protocol Officer from the Ministry of Foreign Affairs who sent him a press release on the same visit of the President to Libya.

The Protocol Officer later informed him that the Libyan ambassador wished to call on him, which the latter did on 11th September, 2007. The Ambassador during the discussion expressed an interest by Libyan investors to invest in Kenya in general and also in the hotel and indicated that the delegation from Laico would make a follow up meeting to discuss their interest in the Hotel.

On account of the circulation of the MOU, contact by the Protocol Officer and the above visit, the Governor claimed to have concluded that the Government of Kenya had agreed to sell the Hotel to the Libyan investors.

3. The Governor said that Laico was a Government company in Libya under LAP and was registered here as Laico Kenya Ltd. Later, however, he attempted to clarify that Laico was a Libyan Government Company by saying that Laico was a subsidiary of LAP in Libya and Laico was also registered in Libya.

Parent company

As reported elsewhere in this report however, the status of Laico and the relationship with its “parent” Company or the Government of Libya are not clear.

4. The governor reiterated CBK’s position that this was a Government-to-Government transaction because of the MOU and the fact that the Libyan Ambassador had escorted the Laico representatives.

However, it is important to note that no representative of the Government of Kenya was present at any of these meetings, and only CBK officials were present.

The Ambassador did not attend any of the subsequent meetings that were held between CBK and the delegations from Laico. Despite such strongly professed belief of this being a Government to Government transaction, the Governor refused to accept that the Registration of Settlement of 9th April, 2008 in HCCC No.1111/2003 and the Consent Order of 14th April, 2008 in HCCC No. 589/99 had made the Hotel the property of CBK.

KACC had verbally and in writing advised the Governor that the Registration of Settlement of 9th April 2008 had transferred the ownership of the Hotel to CBK, but the Governor insisted that the Hotel still belonged to UHDL and, therefore, was determined to sell the Hotel through UHDL or through the exercise of CBK’s statutory power of sale.

If he held the view that the Hotel was not the property of CBK, but rather was private property belonging to UHDL, then how could he entertain the belief that the Government of Kenya had the capacity to sell this private property?

The Government of Kenya clearly had no basis to get involved in this transaction in any manner if the Hotel was private property.

On his own admission the Governor said that no Government Ministry had been invited or involved during the meetings with the Libyan delegations.

The Minister of Lands, Hon. James Orengo, said he had no knowledge of what was taking place. According to Hon. Orengo the proposed sale of the Hotel had never been considered or discussed by the cabinet, as would be the case in such circumstances.

He said that if the sale was a Government-to-Government transaction the Attorney General or his office would have been involved.

In our view there was no convincing evidence or incident which could have given reasonable ground to consider this a Government-to-Government transaction. Spirited submissions by some of the advocates that the actions of CBK constituted actions of the Government of Kenya did not change the position.

On the other hand the entire evidence of the Governor was brimming with the assertion of this being a Government-to-Government transaction. That would seem to suggest other motives, and to cover these he decided to use the non- existent and unbelievable excuse that the sale was a Government-to-Government transaction.

This excuse enabled him to execute the sale and, with such alacrity and secrecy, get the transfer registered within less than three working days.

Was transaction transparent?

The term Transparent is here used to connote decision-making and actions that are open and accountable as opposed to those that are mired in secrecy and opaqueness.

We have already dealt with the manner in which the documents relating to the transfer and registration were presented at the Lands Department.

The emphasis on speed and confidentiality was unusual and unprecedented to such an extent that the need was felt for a person no less than the Director, Governor’s office, Mr Abuga to personally accompany Mr Adan, advocate for the purchasers, Laico, to the Lands Office when the documents were presented for registration.

As already noted Mr Abuga, apart from his other managerial duties, was the Board Secretary and in charge of Legal Services with several advocates working under him. The reason for the apparently unusual behavior on the part of Mr Abuga is given by him, that he was following the directions given by the Governor himself.

His presence at the Lands Office during the valuation, payment of the stamp duty and finally registration of the transfer was clearly to ensure that secrecy, confidentiality and speed were strictly ensured.

We agree that the sale and registration of properties conducted by advocates are normally undertaken and finalised with a certain amount of confidentiality. No one wants his affairs to be made public and an advocate is expected to take care that the affairs of his clients are not revealed to strangers.

But it is hardly likely that an Advocate of Mr Abuga’s standing will personally take a transfer document to the Lands Office for the purposes of registration and virtually spend two or three days there with each of the officers concerned to ensure that the work involved in the registration proceeds at speed, without interruption and in absolute confidentiality.

The level of secrecy of this transaction was such that even routine correspondence like that applying for consent of transfer and charge the hotel were boldly marked “TOP SECRET AND CONFIDENTIAL”. Our view is that Mr Abuga’s actions do not appear to support transparency in this transaction.

Complex litigation

The Governor explained that on his appointment he found the Bank bedeviled by problems arising from the protracted, costly and complex litigation on the question of the hotel’s ownership and the fact that the CBK had not been involved in its management and had not received a single cent from the hotel’s operation since 1999.

All these factors called for urgent and decisive steps in the interest of both CBK and the general public.

He pointed out that since 1994, CBK had time and again attempted to dispose of the hotel but had been defeated by the injunctive orders issued by the High Court. In 1997, there was a proposed sale at an agreed price of approximately KShs 2.1 billion which failed to go through  after a deposit of Sh210 million had been paid.

The matter was in court for a refund of the KShs 210 million that had been paid. He said that similar interruptions might cause the collapse of this transaction with Laico had made him decide to maintain secrecy from the media and the public and to proceed with expedition after all the necessary details concerning the sale were finally agreed.

The governor said that he had kept the Treasury informed of the developments at every stage and in any case the Permanent Secretary to the Treasury was a member of the Bank’s Board.

The Governor stated that he had also kept briefing the Finance Minister both verbally and in writing though he seemed uncertain how often he had done so. He was emphatic that he had briefed the Minister on several occasions but when pressed on the number of the written briefs he had given the minister he could only refer to the confidential brief.

As for the statement made by the minister in parliament the Governor said that statement was based on the same facts on which his press statement of 22nd April 2008 was made when he handed him the confidential brief.

A copy of this confidential brief was also received by the Director KACC to which the latter had responded in writing on 22nd April 2008.

On the sale of the Hotel the Governor said that as chargee CBK was keen on ensuring the following: (a) that the sale was conducted within the relevant laws and concluded expeditiously, (b) that the Hotel is sold as a going concern in order to protect the jobs of the more than 400 Kenyans working at the Hotel.

Public auction

To achieve the above objective, the purposes the Governor said that CBK had the following options:

(a) Sale by public auction: This the Governor feared would have entailed the services of an auctioneer who would also have been entitled to his commission based on the sale price. Further in public interest auction without any prior negotiations between the parties it would not have been possible to sell the hotel as a going concern.

(b) Sale by Private Treaty by CBK as the Chargee: CBK as the chargee found this the more advantageous option of the two for reasons which the Governor gave as follows:

(i) On the basis of the valuation report of the three valuers CBK was in a position to negotiate a sale price, which was considerably higher than the current open market value of the Hotel.

ii) The Hotel was to be sold as a going concern and hence the security of the jobs of its 400 employees would have been ensured.

iii) CBK would not be obligated to make any warranties to the purchasers in respect of the condition or suitability of the property for any purposes whatsoever.

iv) There was agreement on the terms and conditions of the sale and therefore the transaction would be carried out in a very amicable and expeditious manner.

For the above reasons, the Governor said that CBK had opted to sell the Hotel by private treaty.

We have carefully considered the method adopted by CBK to dispose of the Hotel and the reasons given by the Governor for the adoption of “Sale by Private Treaty” option.

We are unable to subscribe to the Governor’s views on the options available to the CBK.

On the basis of the evidence before the commission, we do not also accept that there were any credible threats to the sale of the Hotel by CBK to warrant proceeding with reckless speed and secrecy in the transaction. As already stated, the major threat had been removed through the Settlement with UHDL and Mr Pattni.

Common knowledge

It is common knowledge that the best price is obtained through offering the subject property to the highest bidder after an open and public invitation to all those interested.

Mr Kittony’s evidence demonstrated that this had been done in past attempts to sell the Hotel. All that Laico would have needed to do to acquire the Hotel was to top the highest bid. The invitation of public bids also obviates the need for auctioneers, and the payment of their commissions would therefore not arise.

As regards the need to preserve the jobs of over 400 employees of the Hotel or freedom from any obligations or warranties towards the serviceability or suitability for the purposes of the business being carried on, we make the following observations:

1) The jobs of the existing work force could have been ensured by advertising the sale subject to preservation of the jobs.

2) Likewise the sale could be made free of any obligation or warranties.

We stress that none of the reasons the Governor gave could either singly or collectively justify the deprivation of opportunity caused to any other party interested in purchasing the Hotel.

Neither does it justify the loss to CBK and the public of the opportunity to earn maximum value from the sale of the Hotel.

No legitimacy

Fear of obstructions to the sale has no legitimacy, because in the first place the owners of the Hotel had already handed over the Hotel to CBK. Mr. Kittony who was said to have a claim had not shown any serious interest either way in the transaction.

One of the Reciever/Managers, Mr. Gichohi, had filed a suit on 3rd July, 2008 against UHDL, CBK and Laico, but we are of the view that his claim would not have thrown CBK into a panic, such that it would rush the sale of the Hotel.

We have considered this matter from different perspectives and find that this transaction was not transparent and further there was no legitimate excuse for it to be executed in such secrecy.

On the other hand all the evidence has established that the hotel had all the while been earmarked to be sold only to Laico and no other party. At every crucial steps, some legal and some not so legal, were taken to ensure the achievement of the sale and transfer of the Hotel secretly and hastily to Laico.

Was the hotel undervalued?

The governor said that at the start of the negotiations he had asked for a price of 53 million US dollars for the hotel but he could not explain from where he had obtained this figure.
He was asked why not 55 million US dollars or 60 million US dollars.

His explanation of how he had arrived at his initial asking price of 53 million dollars was not credible. He said he had added the highest figure to the lowest of the three valuations and that came to 53 million dollars.

The highest valuation before him was from Ark Consultants Ltd, which at Sh70 to the US dollar was equivalent to 31 million US dollars and the lowest valuation was from Value Zone Ltd and was equivalent to 23 million US dollars. But added together the total of these valuations would come to 54 million dollars and not 53 million dollars.

In any case if the intention of the governor was to use the valuation figures to arrive at an average value then the correct arithmetic should have been to divide the 54 million dollars by two, or to have added up the three valuations and then divided the total by three.

That would appear to be the logical way of utilizing the valuation reports to get a meaningful figure from them. Such an absurd explanation from a person of his stature can only mean that the governor was not being truthful as to the source of his figure of 53 million US dollars.

As we stated earlier we found the valuation reports by the three values unreliable and of little help to the commission. The Chief Valuer in the Department of Lands, Mr Anthony M. Itui, had visited the Hotel and valued it at Sh2 billion.

He made it clear that his valuation for purposes of calculating stamp duty only did not include the value of equipment or any other immovables, neither did it include goodwill, profitability and other such considerations.

We also have the evidence of Mr Joseph Kittony who was appointed as the Receiver of the Hotel from 15th April, 1994 to 1st April, 1999.

He said that in November, 1994, the Hotel was advertised for sale in both local and international newspapers. Although a sale did not materialize, the bids indicate that the price obtained for the hotel in the recent sale was approximately what it would have fetched 13 years ago.

When inflation and the general trend of property values over that time is considered it should be clear that CBK did not realize the best value for the hotel. However, the more important issue is the flawed process by which the Hotel was sold.