Collapse of firm in Bura project exposes taxpayers

India’s IVRCL, the firm hired to complete construction of the Bura Irrigation Scheme, has collapsed before finishing the job, leaving taxpayers exposed and setting up a vicious fight between Kenya Commercial Bank (KCB) and the National Irrigation Board (NIB), which now wants to cash Sh1.1 billion guarantees obtained by the contractor.

WHITE ELEPHANT

IVRCL’s collapse has been revealed in a suit filed by the NIB against KCB, where the government institution is seeking to recover Sh1.1 billion in guarantees IVRCL obtained in 2013 before starting work on the Bura Irrigation Scheme project.

IVRCL has been renewing the bank guarantees every year since.

The Bura Irrigation Scheme is one of Kenya’s oldest scandals, as administration after administration has been pumping billions into the white elephant project for the last 42 years, but with completion nowhere in sight.

The NIB says it terminated IVRCL’s contract, but does not mention the specific date or whether it has hired another firm to complete the job.

KCB has now accused the NIB of fraud, arguing that the government institution knew that IVRCL was undergoing insolvency proceedings in Hyderabad, India, but failed to disclose the information to the lender.

INSOLVENCY

The High Court had, in May, delivered a summary judgment against KCB to pay the Sh1.1 billion after the lender failed to respond to the suit.

But KCB has now asked Justice Francis Tuiyott to set aside the judgment, arguing that it could not file its defence in March when NIB went to court because the court file had gone missing.

The court file was eventually traced and KCB filed a defence. But the NIB has filed a fresh application seeking to strike out the lender’s defence, arguing that KCB’s side of the story has no standing in law.

Justice Tuiyott will hear the case on February 20, next year.

By law, a company undergoing bankruptcy proceedings cannot obtain bank guarantees, but IVRCL somehow managed to obtain the insurance as recently as last year.

For nearly four years, IVRCL has been silently undergoing insolvency proceedings in India, where it obtained a court order barring the NIB from cashing bank guarantees totalling Sh1.1 billion.

GUARANTEES

The NIB hired IVRCL in 2013 in a deal that required the Indian firm to provide guarantees from a Kenyan bank before being advanced any money to start work on the project.

Construction was to take 30 months and cost Sh7.3 billion but, six years later, not much has happened on the Tana River County project.

IVRCL’s lenders, India-based Canara Bank, asked KCB to issue a guarantee to the contractor on its behalf. This meant that if NIB wanted to cash the guarantees, it would write to KCB, which would, in turn, write to Canara. Canara would wire the money to the NIB through KCB.

In June, 2015 — just two years after signing the contract with the NIB — bankruptcy proceedings were started against IVRCL and the Indian firm quickly but quietly obtained a court order barring the NIB, KCB and Canara from cashing the guarantees.

SUBCONTRACTED

IVRCL was determined to be a lost cause and liquidation proceedings started on February 23, 2018.

NIB claims that it only learnt of the insolvency proceedings last year.

“Under the terms of the performance guarantees, KCB undertook to pay upon the NIB’s first written demand and without cavil or argument and without needing to prove or to show grounds or reasons for demand pay the sums specified in the guarantees,” NIB deputy general manager Raphael Ogendo says in court papers.

The parastatal wrote to KCB on June 18, 2018 demanding payment of the guarantees on account of the insolvency proceedings and after learning that the Indian firm had illegally subcontracted its entire contract to another company.

DECLINE

After the NIB wrote to KCB demanding payment of the guarantee, the Kenyan lender demanded payment from Canara. But Canara declined, citing the 2015 court order from India’s courts barring NIB from cashing the guarantees.

KCB then wrote to the NIB on September 4, 2018 arguing that the Indian court order barred it from paying the guarantees.

The NIB says in its suit against KCB that under the contract, the lender was to cash the guarantee immediately upon request.

The State firm adds that it does not need to give KCB any reasons when cashing the guarantee under the contract they signed.

But KCB says that in instances of fraud, it can decline to pay up.