How Kenya lost millions in suspect maize supply deals

Senior government officials awarded a South African firm a multi-million shilling tender to supply maize in a process riddled with irregularities.

Taxpayers shelled out millions of shillings to pay for extra charges attached to the deal, part of a controversial subsidy scheme that nearly led to food riots.

The World Bank says the economy lost up to Sh23 billion during the period when the programme was implemented. That means the scheme ranks as the biggest reported scandal during the tenure of the grand coalition.

The lucrative contract handed to South African firm Afgri Trading Pty Ltd to supply 75,000 metric tonnes of maize is now the main focus of investigation by the government, the Sunday Nation has learnt.

A report by PricewaterhouseCoopers (PwC) auditors found there is a strong possibility the deal was tainted with fraud.

Cost of transaction

In an elaborate scheme, top Kenya government officials allowed the firm to ship the maize out through the port of Maputo in Mozambique rather than through Durban in South Africa--a decision that significantly increased the cost of the transaction.

Noseweek, a South African investigative magazine, has been following the transaction and has made fresh revelations that indicate Kenyan taxpayers may have lost far more money than was initially reported.

The magazine said Kenyan officials agreed to buy maize from Afgri at $430 a tonne (Sh27,950) at a time when the price for South African white maize was $250 (Sh16,250 — the exchange rate to the dollar at the time was Sh65).

Calculated against the amount the National Cereals and Produce Board (NCPB) says it paid for the 75,000 metric tonnes of maize, Kenyan taxpayers paid an extra Sh877 million for the controversial maize.

The Ministry of Public Health ruled that some of the maize was contaminated after inspecting it when it arrived in Mombasa.

The Kenya Anti-Corruption Commission (KACC) is investigating the circumstances under which Afgri won the supply contract which came at a severe cost to taxpayers.

“We are following up the issues raised in the PwC forensic audit report before we hand over our report to the Attorney-General,” KACC spokesman Nicholas Simani said.

He said the process was taking longer than expected due to the commission’s involvement in separate investigations into a number of scandals, including the controversial purchase of cemetery land by the Nairobi City Council.

According to the PwC report, numerous mistakes were made in the procurement process through which three million bags of maize were to be imported.

Most of the mistakes benefited the Durban-based firm, Afgri Trading Pty Ltd. The company was initially awarded a tender to supply 18,000 tonnes of maize worth Sh491 million on July 25, 2008, without tendering. According to the PwC report, “the contract was signed by (NCPB managing director) Prof Gideon Misoi, witnessed by (NCPB legal secretary Ms Ann) Kamau and initialled by (Office of the Prime Minister administrative secretary) Caroli Omondi and (NCPB chief accountant Cornel) Ngelechey”.

One week after Afgri was unilaterally awarded the multi-million-shilling contract, the firm took part in a larger tendering process to supply another 55,000 tonnes of maize.

The firm missed the July 31, 2008 tender deadline. But on August 1, it wrote to the NCPB indicating they had attached a “revised offer” to supply 60,000 tonnes. According to PwC, this contract was flawed because it was filed after the deadline.

In a further breach of the procurement process, Afgri officials appear to have drawn up the contract themselves. Normal procedure would require that the document be prepared by Kenyan officials.

“It is not clear what discussions were held, if any, between Afgri and NCPB that triggered their sending a revised offer,” the auditors reported.

“We are unable to ascertain how Afgri knew that their offer would still be considered, considering they must have been aware of the urgency of the matter from their discussions with the negotiating committee. It is also likely that Afgri were aware of the deadline for closing the procurement process and awarding tenders, and as such it remains unclear why Afgri seems to have rightly assumed that their offer would be considered anyway.”

This irregular varying of deadlines was not the last favour Afgri got from top Kenya government officials involved in the deal. The tender committee had indicated they should supply the maize at between $422 (Sh27,430) and $430 (Sh27,950) a tonne.

But on August 5, 2008, Prof Misoi wrote to the office of the Prime Minister requesting approval for a new price of $452 (Sh29,380) quoted by Afgri in their contract.

The audit report noted that “Mr Omondi from the office of the Prime Minister appears to have approved the price variation (Afgri’s second contract) that could have had potentially material cost implications to government within a day of receipt of the request from NCPB.”

Mr Omondi could not be reached by the Sunday Nation to comment on this story. But he told PwC investigators that there was pressure to deliver the maize urgently and that the PM was out of the country at the time, which is why he approved the request.

PwC recommended that KACC and the Criminal Investigations Department further investigate those assertions.

The subsidised maize scheme was approved at the first Cabinet meeting of the grand coalition government on May 16, 2008.

The plan was aimed at stabilising maize flour prices that had shot up due to production shortfalls triggered by a prolonged drought and the post-election crisis.

Technocrats had advised the government to follow the remedy applied during such crises in the past: open up the market to the private sector by allowing a duty waiver on imported maize and allow millers to purchase maize from the strategic grain reserve.

This advice was ignored by the Cabinet. Instead, ministers decided to try something that had never been tried before. The government would import three million bags of maize, then sell it from the strategic grain reserve to millers.

The Cabinet directive was to be implemented by the permanent secretaries in the office of the Prime Minister and the ministries of Agriculture, Finance and Special Programmes. An ad hoc committee was set up to help in the implementation.

According to the PwC report, the method the government chose opened the way for well-connected businessmen and government officials to make millions of shillings, while exacerbating the situation by selling the stocks they purchased at an exorbitant price to millers who passed on the cost to consumers.

These policies saw maize flour prices shoot through the roof, nearly triggering food riots in the country.

A report by the World Bank, Still Standing: Kenya’s Slow Recovery from Quadruple Shocks, criticised the policy.

“General subsidy programmes, like the one attempted in late 2008, tend to be expensive and to not efficiently target the intended populations,” the report says, while estimating the public lost an estimated Sh23.4 billion in subsidies and taxes foregone during the period when the scheme was implemented — between May 2008 and March 2009.

Most of the losses were incurred when the NCPB was allowed to sell strategic reserve stock to millers at a fixed price. Numerous politically connected middlemen took advantage of the arrangement and sold their allocation to millers, a situation which edged prices up.

But investigations indicate government officials had a role in making the scheme less efficient due to lapses in the conduct of negotiations with the companies bidding to supply maize.

According to the current edition of Noseweek, Kenyan officials agreed to a deal where Afgri would export the grain through Mozambique, further pushing up costs.

Hubert Jarlet, the chief executive of Afgri, defended the decision to use the the port of Maputo, saying it was taken due to lack of export slots for bulk grain at the port of Durban.

But the magazine quotes an independent grain exporter casting doubt on this explanation saying the Durban harbour has a large capacity for loading grain and a rigorous inspection scheme on the quality of the grain.

Quantity supplied

The quantity of grain supplied is another issue that auditors have suggested should be investigated. The NCPB awarded Afgri a tender to supply 55,000 tonnes. But both parties signed to a contract to supply 60,000 tonnes.

Eventually, Afgri supplied Kenya with 64,206 tonnes. This exceeded the contractual quantity by 9,206 tonnes, which is valued at Sh263 million. Mr Omondi told auditors this variation was done in consultation with Mr Francis Muthaura, the head of public service.

Reached on the telephone, Mr Jarlet said he had not seen the PwC report and could therefore,not comment on its findings. He said “a number of assertions (made about the contract) are not accurate” but requested that specific questions ben sent to him by email. He did not respond to them.

The maize scandal provided an early test for the grand coalition government put together following the post-election violence in 2008.

Mr Omondi and office of the Prime Minister Permanent Secretary Mohamed Isahakia stepped down after the PwC report was published.

President Kibaki subsequently suspended them together with permanent secretaries Romano Kiome (Agriculture) and Ali Mohamed (Special Programmes), and NCPB officials Misoi, James Boit (sales and marketing manager) and Robert Langat (general manager).