KenGen’s curious tender award

Geothermal development projects are increasingly becoming the focus of anti-corruption authorities. 

This should not be a surprise because, as we learn in contemporary anti-corruption theory, massive infrastructure projects carry some of the largest corruption risks.

Indeed, the government is currently in the process of rolling out one of the largest geothermal development programmes in Africa.

The projects are mainly being implemented by the Kenya Electricity Generating Company (KenGen) and Geothermal Development Company (GDC). But in terms of delivered projects KenGen would appear to be way ahead.

Under the government’s massive electricity investment programme, which aims at connecting 5,000MW of new electricity to the national grid by 2017, KenGen alone has been given a target of producing 700MW. It has so far connected 280MW of power to the national grid under this programme.

Perhaps what captures the massive scope of KenGen’s own geothermal project is the equipment and resources which it has purchased and deployed.

At the Olkaria and Eburru geothermal fields, KenGen has deployed a total of eight rigs — three of them purchased from China and the remaining contracted from Great Wall Drilling Company, a Chinese firm.

The contract for provision of drilling services and materials for 80 wells at Olkaria was awarded to the Great Wall Drilling at a cost of $450 million (Sh45 billion).

Clearly, the capital outlays are massive and the opportunities for making big bucks very wide.

With a single geothermal rig costing in the region of up to $30 million (Sh3 billion), Kenya’s geothermal wells drilling programme has opened wide opportunities for lucrative procurement deals.

Yet for local suppliers, what would appear to be attracting interest and stiff competition are deals involving provision of logistics services, especially the lucrative contracts for moving rigs between wells and various locations.

Perhaps because geothermal contracts of the scale being implemented right now have no parallels — and since there are few benchmarks for comparing prices and contract terms — the trend emerging is a situation where prices and terms  being contracted by KenGen and GDC vary widely.

This is so even where the suppliers of the services and equipment are the same.

For instance, controversy has been raging over the circumstances under which GDC contracted Bonfide Clearing and Forwarding at Sh42 million per rig move.

In the market, there are rig move contracts priced as low as Sh19 million each.

At KenGen, a fresh controversy has exploded with details showing how the public listed company awarded a Sh240 million rig-move contract to Bonfide without a written contract.

Documents seen by the Sunday Nation show that an audit initiated by the KenGen board asked why the contractor was allowed to work for the public listed company for one-and-a-half years on the basis of a mere “handshake contract”.

In a confidential report to the board, the auditors arrived at the conclusion that payments worth Sh106 million made to Bonfide during the period of the audit were null and void.

“There has never been any contractual agreement between KenGen and the contractor for over one and a half years,” said the report.

But what is a rig move contract and why do they cost so much?

It involves moving and dismantling of rig components and accessories from a finished pad to a new pad.

The typical contract specifies both the number of rig moves and the duration of the contract.

But what is emerging, however, is that despite the fact that these are huge contracts worth billions of shillings, the typical document is loosely crafted with fine print that can be invoked to allow the contractor to continue providing services long after the contract period has expired.

Even where the validity period for the letter of award may have expired, the contractor can still come back and claim that he is yet to complete the number of rig moves under his contract.

OPAQUE DOCUMENTS

When the Sunday Nation went through one such contract, the distinct impression was that these were opaquely crafted documents, which not only open huge loopholes for irregular price variations, but also allow contractors to negotiate open-ended contracts, creating opportunities for backhanders.

According to the paper trail, KenGen awarded the controversial contract for rig move services to Bonfide on August 10, 2012 after a competitive process. The letter of award was dispatched on the same day.

The letter states that Bonfide was to be paid Sh3.9 million to move rigs between well locations within a distance of  6km at Olkaria and be paid the same amount  for rig moves between a distance of 4km at the Eburru geothermal fields.

The letter of award also stipulates that after being formally signed, the contract would run for two years.

But KenGen made it clear that the letter of award was not a contract.

“The notification of award shall not constitute the formation of the contract until one is finally signed,” wrote KenGen’s supply chain manager Patrick Kimemia.

How the company was allowed to continue working and receiving payments even after the award letter made it clear that a formal contract had to be signed remains a riddle.

The KenGen auditors would later note that “there is no legal basis on which the rig move services have been rendered”, questioning the payment of Sh106 million.

“We are also exposed to risk of sanctions by the Procurement Oversight Authority or prosecution for violation of the Public Procurement Act,” said the auditors.

Several fundamental questions of contract law arise. On what basis and circumstances can a company release payments to a contractor when it does not have a written contract with the party?

If something goes awry along the way, how do you enforce a “handshake contract”? If the contractor damages the expensive drilling equipment during transportation, how do you get compensated?

“Handshake projects” generally leave huge loopholes for illegal variations of contract prices, and create opportunities for corrupt payments.

In a conversation with the Sunday Nation, KenGen CEO Albert Mugo admitted the irregularity, which he attributed to a lapse on the part of the company’s legal and supply chain management departments.

FORMAL CONTRACT

He, however, said that the situation had since been regularised and that KenGen signed a formal contract with Bonfide in February 2014.

Mr Mugo denied that the company was financially exposed, stressing that reports by internal auditors needed to be treated as management tools meant to improve systems.

He said that on being appointed managing director in January last year — and after the audit report was discussed by the board — the matter had been laid to rest.

Still, the big question is whether a contract on the basis of which payments have already been released can be signed in the manner KenGen has done — and thus given retrospective effect.

Indeed, the deal with Bonfide has created other problems for KenGen. What emerges from the paper trail is that upon expiry of the two-year period whereby Bonfide has been providing services without a written contract, the legal and supply chain department of KenGen, believing that the arrangement had expired, went ahead and advertised a new tender for supply of rig-move services.

In March this year, the technical evaluation committee processed the tender and came up with a shortlist of five companies: Transeast Ltd, Tradeline Express Ltd, P.N. Mashru, Acceler Global Logistics Ltd, and Oil Field Movers Ltd.

Bonfide did not participate in the tender. Four months later, KenGen is yet to award the tender ostensibly because Bonfide has threatened to sue on grounds that the contract had not lapsed as the 22 rig moves had not been completed.

Bonfide says it has only done seven rig moves.

Apparently KenGen is not planning to award the tender. Indeed, Mr Mugo told the Sunday Nation that the tender should not have been advertised in the first place.

Which begs the question: when KenGen was advertising the tender, is it not just the case that its legal and supply chain departments knew that the contract with Bonfide was invalid? Are we to believe that the supply chain department acted in ignorance?

And considering the views expressed by the company’s internal auditors on the agreement, did a legal contract exist by the time KenGen was floating a new tender for rig move services?

Bonfide did not immediately respond to written questions sent to its chief executive.