Briefcase businessman who took over Railways without paying a cent

South African businessman Roy Puffett (left) with Transport Minister Ali Mwakwere (middle) and John Byabagambi, Uganda’s Works minister, at the launch of Rift Valley Railways in Nairobi.  PHOTO | FILE | NATION MEDIA GROUP                                                                                                             

There is some good news coming from the metre-gauge railway. The Nairobi-Nanyuki line is undergoing some serious rehabilitation. But this is not about Mwisho wa Reli (rail’s end), as Nanyuki was christened, but about the previous classic failure to turn around the metre-gauge line.

It was a scandal. Sometime in 2005, a little-known man from Pretoria arrived in Nairobi to cut a multimillion-dollar deal. Few people in Kenya had heard of Roy Puffett. Soon, he attracted the attention of the media because he was a smooth talker, wore bespoke suits and had all that hubris that accompanies a man with a perfect sales pitch.

On the second floor of Block B at the Kenya Railways headquarters, then man perched at the echelon of our railway system. He was – or so we thought – the Steve Jobs or Lee Iacocca of the century-old rail that was nearly dead.

Privatise railway

Kenya and Uganda had agreed to privatise the railway and rescue it from the jaws of death and whoever won the deal would have been given a 25-year contract to run the business from October 2005.

Mr Puffett had heard of the deal and cobbled together a consortium that would include his company, Sheltam Rail Company based in Port Elizabeth, Tanzania’s Mirambo Holdings and Kenya’s Prime Fuels (K) Ltd as the main shareholders. Sheltam had 61 percent shareholding, Primefuels 15 percent and Mirambo 10 percent. South African private company Comazar held 10 percent while a South African trust, CDIO, had four percent shares.

Revival promise

During his presidential campaign, Mwai Kibaki had committed to revive the railway network after more than 20 years of neglect and underinvestment. The government had also approached the International Finance Corporation, the World Bank subsidiary that supports private-sector ventures in developing countries, for guidance on how to privatise the railway. That is how bidders were invited and Puffett’s Sheltam Rail Company and India’s Rites were qualified for the next phase.

Sheltam won and all that was to go wrong did.

The prequalification rules had specified that the successful bidder should have at least $35 million (Sh3.7 billion at current exchange rate) working capital but, as Parliament was later told, Sheltam had a negative working capital of 398 million rand (Sh2.5 billion at current exchange rate) – meaning its liabilities exceeded its assets.

Lost job

Mr Puffett had started out as a service engineer at General Motors and lost his job after the closure of the locomotive servicing division. He started a one-man company that specialised in repairing locomotives for private companies. He named the company after his two daughters, Shelley and Tamaryn.

The company grew from the back of a caravan to own several (motive power) engines hired to haul wagons in South Africa. That was all he knew about railways.

How he convinced both Kenya and Uganda to hand him the age-old railway is not clear. In the consortium, Mr Puffett had told those entering into the deal that they would have shares in a new company known as Rift Valley Railways (RVR).

Evolution starts

And that is where the convolution starts. It starts with two Nairobi businessmen who agreed to sell their company, Blue Bell Ltd, to Sheltam Railway. The directors of Blue Bell were listed as Philip Luseno and Julius Ng’ang’a, who held one ordinary share each of Sh100 in the company.
On November 4, 2005, as Mr Puffett negotiated the Kenyan deal, the two Kenyans sold their stake to him and resigned, paving the way for Mr Puffett and a Mr Wesley Kruger to become the new directors. They changed the name of the company to Rift Valley Railways Holdings Ltd and got a certificate of change of name on November 7, 2005. The Kenyan businessmen were paid millions of shillings.

It was after winning that concession, and on the eve of the handover of the railway assets, that the Treasury realised that Mr Puffett could not pay the $5 million (Sh538 million) annual operation fee up-front. That night at the Treasury, officials spent hours trying to come up with a new deal that could fit Mr Puffett’s predicament. If anyone was to smell a rat, this was the occasion but there was no time to abort the deal.

An extension

“We never informed governments that we could not meet our financial obligations, nor was the concession agreement redrafted to our benefit. Only an extension of 45 days was given in order to finalise outstanding shareholder issues,” Mr Puffett later told a South African paper.

Initially, Sheltam had the backing of Grindrod, a listed South African freight and shipping company. Mr Puffett had held meetings with Grindrod managing director Ivan Clark and they agreed to form a special purpose vehicle known as Sheltam Rail Grindrod, Limited owned on an equal share basis.

Grindrod had the money, and Mr Puffett had the mouth and Kenyan connections. But, as Grindrod director Dave Rennie later remarked, his company “conducted a high-level due diligence into the dilapidated railway when Sheltam was given preferred bidder status” and “decided not to back the concession”.

Complex web

When his main partner pulled out, Mr Puffett did not disclose this until the eve of the launch. There was also a complex web of shareholding and, certainly, the Kenyan authorities were, perhaps, dizzied by the structure of various companies registered in 2005.

The companies that had emerged, but with no capital base, were Rift Valley Railways Kenya Ltd, Sheltam Rail (Pty) and Sheltam Trading CC (both of South Africa) and RVR Investments (Pty) of Mauritius. These were, indeed, shell companies intending to run a company with assets worth $808 million (Sh87 billion), according to Ecorys Nederland BV, which was contracted by the Kenya and Uganda governments to value the assets of the railway system.

The other problem was that by the time Mr Puffett was signing the deal at the Kenya Railways headquarters, he had not yet concluded the shareholding agreement with two major shareholders in the winning consortium, Mirambo Holdings and Prime Fuels Ltd.

While Kenya was to receive $3 million (Sh323 million) and Uganda $2 million (Sh215 million) before the handover, Mr Puffett actually took over the running of the railways without paying a cent.

What we now know is that after he settled at the Nairobi railways headquarters, he registered a management company, RVR Investments (Proprietory Ltd), which was to enter into a management agreement with Rift Valley Railways Kenya Ltd, equivalent to two percent of monthly revenues.

This way, Mr Puffett would make money and pay his company, whether the railway made a profit or not. In essence, he had not made any money, but he started rebranding the wagons with his logo.

Shareholders’ agreement

In January 2006, Sheltam purported to exclude Mirambo and Primefuels from the consortium and from participation in the RVR on the grounds that they had failed to sign a shareholders’ agreement when asked to. Mirambo and Primefuels contested this, arguing that the document they had been asked to sign did not comply with the terms of the earlier consortium agreement.

The shareholder battles started to hurt RVR even before it started operations and that explains, partly, why the project started on the wrong footing. With a railway in his hands, Mr Puffett started selling his company to the highest bidder. He approached Egyptian private equity firm, Citadel Capital, who acquired a 49 percent stake in Sheltam Railways, which then owned 35 percent of RVR.

17.5 percent

Citadel Capital managing director Karim Sadek promised to inject more than $150 million (Sh16 billion) in the Kenya-Uganda Railways in five years through their subsidiary, Ambience Ventures Limited. In that arrangement, Ambience Ventures was to own a 17.5 percent stake in the consortium.

Another entrant in the deal was Kenya’s private investment company TransCentury, which acquired a 34 percent stake in RVR.

TransCentury was founded by Makerere-trained Zeph Mbugua, UK-trained chemical engineer James Gachui and another Makerere chemistry graduate Eddy Njoroge. It became a roaring success in reviving dead companies. But, after almost burning their fingers at Castle Brewery Kenya Limited project in Thika, they started taking boardroom control of the companies they invested in.

At RVR, Mr Puffett at first allowed them to own a 20 percent stake but when they desired more, he sold the other stake to the Egyptians, who then sought to push everyone out.

Holding company

TransCentury had by then registered TC Railway Holdings Limited in Mauritius as the holding company of Safari Rail Company Limited and had invested $11 million (Sh1 billion) in the firm.

Meanwhile, RVR had no money and required Sh15 billion to turn it around.

Finally, TransCentury, after protracted wars, sold its stake to Citadel for Sh3.8 billion and left. Its chief executive, Dr Gachau Kiuna, told the media they did not lose any money but, certainly, they lost face after pumping in Sh581 million in 2010, another Sh740 million in 2012 and Sh924 million in 2013.

The exit of TransCentury left Citadel, now known as Qalaa, to run the show – or burn their fingers.

Corruption sanction

With an 85 percent stake, they have not had a good run and have been looking for buyers.
The world Bank had put a lot of faith in this project that could have turned around the railway infrastructure. But when they started investigating RVR, they found that cartels had lined up.
Finally, they sanctioned three companies, Africa Railways Logistics Limited, Africa Railways and Rift Valley Railways Kenya Limited, for corruption.

The $287 million (Sh 31 billion) modernisation programme had not resulted in the purchase of new trains as claimed by the owners of the railway. They had instead bought second-hand locomotives. Large sums of money also flowed out as management fees.

Mr Puffett blamed everyone else but himself. Railway properties under Kenya Railways were grabbed, stocks sold, wagons disappeared and wanton looting continued. Nobody seemed to care.

Let us now hope that the latest efforts will bear fruit and that cargo can be hauled via these two ribbons – unless they are stopped by another scam.

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 @johnkamau1