How plan to privatise railways became Kenya’s public sector reform nightmare

• Desire to save face traunched the reality that Kenya and Uganda were handing over a national asset in a fundamentally flawed deal

After Mr Roy Puffet ambushed Kenyan and Ugandan government officials with the dramatic revelation that he did not have the $5 million (about Sh400 million) they were expecting — and that a day before they signed a contract that would hand him the running of the Kenya-Uganda railway for 25 years — the transaction team took what had become a standard operating procedure: just bend the rules for the guy.

Months earlier, Mr Puffet had run a well orchestrated media campaign in which he ensured he extracted all the concessions that he needed to sweeten the deal.

He had demanded that the Kenya Government takes over all debts that were owed to the Kenya Railways pension fund. He fought hard to ensure that the government took the decision to fire 6,000 workers at a time when President Kibaki’s government was very unpopular.

The World Bank extended a Sh6 billion loan to pay off the sacked workers. But, despite all these concessions, Mr Puffet turned up with an empty pocket on November 1.

According to experts who have been involved in such deals, it would have been possible to detect that Mr Puffet did not have money right from the start if the due diligence conducted was thorough and if the Treasury had demanded for guarantees that the money is available.

Save situation

To save the situation, the governments and the International Finance Corporation (IFC), which is owned by the World Bank, hastily amended the contracts by introducing two legal devices that would enable Mr Puffet to raise the money required in 30 days before he could be handed over the railway.

There was to be a wet signing on November 1, 2006 and a dry signing on December 1, 2006.

This grace period unleashed a major scramble to raise cash quickly to save the deal. Without this cash, the IFC and KfW (the German government agency that lends to the private sector) were not going to release their money, and this would imperil nearly Sh5 billion ($64 million) in project finance.

Mr Puffet and his financial adviser from PWC, Mr Vishal Agarwal, started by knocking on the usual doors looking for the cash at firms such as major private equity shops and investment houses, but many could not touch the deal — despite the world then being awash with excess money — because either the window to close the deal was too short, or they were put off by the political risk and the shareholding squabbles that plagued Rift Valley Railways (RVR).

With all options drying out, Mr Agarwal reached out to Transcentury, a local investment holding company that had been recently making waves to invest. Transcentury had recently made a series of good deals, starting with its investment in East African Cables, and later putting money into a private equity fund raised by Helios that would buy 25 per cent of Equity Bank for Sh11.2 billion ($150 million).

Though this was one of the biggest and most complicated deals that Transcentury had handled so far in terms of the political risks involved and scale of the asset, they came through with $9 million in the end, and saved the deal — and face — for everyone involved. Transcentury got a 20 per cent shareholding.

By hiring Mr Agarwal, Mr Puffet had made a smart move that would help feed directly into the Kenyan political and business networks. Mr Agarwal was the ultimate insider in the Kenyan corporate finance scene after handling the KenGen listing on the Nairobi Stock Exchange.

This gave him good connections with Ms Esther Koimett, the investment secretary, and Mr Eddy Njoroge, KenGen’s chief and a key investor in Transcentury.

Centum (an investment company controlled by businessman Chris Kirubi) and Babcock Brown (an Australian investment bank that has since hit on a lean patch) also came through with Sh375 million ($5 million) a piece that gave them 10 per cent each of the company.