How Kenya fell for flawed bank notes deal

The Daily Nation can reveal how the Cabinet recently approved a deal that effectively ties the hands of the Central Bank of Kenya into giving contracts to the De La Rue currency printing company, without competitive tendering.

It means that the country may not have a chance of buying bank notes at cheaper rates through  open tendering.

The deal approved by the Cabinet is also manifestly in breach of public procurement  laws and regulations, which prohibit single sourcing except under specific circumstances and  express authority  of the Public Procurement Oversight Authority.

At a Cabinet meeting held on September 13, 2011, members approved a five-page Cabinet memorandum that more or less gives the Central Bank a blanket approval to go ahead and give the British currency printer multiple exclusive contracts for the next 10 years.

Ostensibly, the main objective of the Cabinet memorandum was to give the green light to the Treasury and the Central Bank to conclude ongoing negotiations for plans by the government to acquire 40 per cent shares in De La Rue’s Ruaraka-based local subsidiary.

Valuation of company

What emerges from reading through the five-page document is that the bulk of it mainly deals with technical issues such as valuation of the company, shareholders agreements memoranda and articles of association and a proposal to liquidate the existing company by creating a completely new one to be co-owned by the  government and De La Rue.    

But hidden away in the fine print of the Cabinet memorandum — in the very last pages — is a paragraph that has the sting.

Inserted in the document under the sub-title ‘conditions precedent’, the paragraph reads: “The Central Bank of Kenya must enter into a ten-year bank note printing agreement with De La Rue that must come into force upon completion of the shareholder purchase agreement.”

The Central Bank, according to the Cabinet memorandum, will negotiate the 10-year exclusive deal, separately.

With the Cabinet having approved the memorandum, De La Rue had killed two birds with one stone, namely, bringing in the government as minority shareholder in its Ruaraka-based subsidiary and at the same time get a blanket Cabinet approval for a 10-year exclusive currency printing contract with the Central Bank.

According to the Cabinet memorandum, control of management of the proposed joint venture company will remain in the hands of De La Rue. And the British company will appoint three out of the five directors, allowing it to hold sway in the affairs of the new company.

Whether minority shareholding in De La Rue’s local subsidiary makes strategic sense for Kenya is a debateable point.

But the merits or not of the plans by the government to acquire 40 per cent shares  in De La Rue notwithstanding,  it is clear that the arrangement  serves  the British company’s interests to entrench its long-standing monopoly over the currency printing business in Kenya.

As it is, the Central Bank now has the green light to start negotiating an exclusive 10-year currency printing deal with De La Rue.

How Cabinet members failed to see that the arrangement they were being asked to approve manifestly goes contrary to the requirements of the Public Procurement and Assets Disposal Act remains intriguing.

This new development is but the latest of a long intriguing story on the lengths  the British  multinational has been prepared to go to hold on to a lucrative contract it has monopolised for  over 40 years.

In one Cabinet sitting, De La Rue had achieved what it had all along been quietly lobbying for since Finance minister David Mwiraria cancelled a similar monopolistic arrangement it had with the Central Bank in March 2003.

Under the new Constitution, Kenya must replace all currency notes with completely new bank- notes because the new laws prohibit the use of photographs of the president of the country on the face of bank notes.

Monopoly all the way

Considering that Kenya will be replacing all its bank notes  in order to comply with the new constitutional requirement, De La Rue must be looking forward to much fatter and lucrative currency printing contracts.

Kenya has never floated a competitive international tender for currency notes since the Central Bank was established in 1966.

It has been a monopoly by De La Rue all the way except for the period between 1966 and 1985 when the country’s bank notes were printed by a UK company known as Bradbury & Wilkinson that was later acquired by De La Rue.

The British firm has enjoyed so much support of the political elite in Kenya that during the regime of former president Daniel arap Moi, the company built a full-fledged currency printing factory in Nairobi, the only such facility in Africa. The factory was built in 1992.

The Moi regime also granted the local subsidiary an export processing zone licence, allowing the factory to export its products without paying duty.

More significantly, in January 1993, the Moi regime granted the bank note printer a 10-year exclusive printing contract.

Towards the end of  2002, when  all indications were that  the Moi regime was about to leave the scene, De La Rue moved  quickly  and  signed another 10-year exclusive deal with the Central Bank in the eleventh hour.

That contract was signed on December 5, 2002, hardly three weeks before President Kibaki took over.

It was to take effect on January 1, 2003,   a few days before President Kibaki was sworn in as  the new president.

In the initial stages of President Kibaki’s administration, it seemed that De La Rue had lost its groove with Kenya’s new governing elite.

The strongest sign that political fortunes had changed for De La Rue was to come in March 14, 2003, when the new finance minister, Mr Mwiraria, announced that the government had cancelled the 10-year exclusive  bank note  printing contract it had signed just as the Moi regime was leaving office.

In a surprising move, Mr Mwiraria announced that the tender for printing bank notes would be re-advertised and conducted in accordance with the rules of international competitive bidding.

The minister gave three reasons for cancelling the contract.

First, that the contract had been single-sourced instead of being opened to competitive bidding.

Second, the contract had been extended for 10 years instead of the normal five years.

Thirdly, that since the contract became effective on January 1, 2003, when the NARC government was already in power, the new government should have been consulted.

“There was no reason for the former government to award the contract as early as they did unless there was something fishy”, said Mr Mwiraria in a letter to the then Central Bank governor, Dr Andrew Mullei.

The writing was on the wall. Pundits were predicting that De La Rue had lost political clout with the new governing elite.

The predictions turned out to be totally wrong. Indeed, De La Rue’s stranglehold on the lucrative contract has remained intact throughout Kibaki’s administration,  culminating in  last month’s Cabinet approval of the new 10- year  exclusive contract.

IN THE NEXT ISSUE: How  De La Rue has exclusively enjoyed lucrative interim orders to print Sh1.04 billion  since May 2007.