Foreign firms in bitter fight for Sh150 billion road project

Tender wars have rocked what is expected to be Kenya’s most prestigious road project, the 187 kilometre Nairobi-Nakuru-Mau Summit highway, which is expected to cost more than Sh150 billion.

Two consortia of foreign firms are locked in a bitter battle for the lucrative road tender, which will be the first to be constructed under the Public-Private Partnership (PPP) programme.

NON-TRANSPARENT

A consortium of four foreign companies – African Infrastructure Investment Fund 3 Partnership, Egis Projects S.A, Mota-Engil-Engenharia E Construcao Africa, S.A and Orascom Construction – which lost the bid to construct the road has appealed the decision of the Kenya National Highways Authority (KeNHA) to award the tender to its rival.

On Friday, the Mota-Engil consortium, as the four companies call themselves, appealed to the PPP petition committee over KeNHA’s decision of February 27 to award the tender to Rift Valley Connect consortium (RVC), which is composed of Vinci Highways, Meridian Infrastructure Africa Fund and Vinci Concessions.

In its letter of complaint, Mota-Engil accuses KeNHA of “engaging in a non-transparent bidding process … by cloaking the entire evaluation process in secrecy and intrigue to the extent that its fairness and impartiality are highly questionable and its outcomes irredeemably inconsistent with fair process to the bidders.”

While announcing the winner of the tender, KeNHA designated RVC as the “preferred bidder” and Mota-Engil as the “reserve bidder” – just in case the former fails to undertake the project for one reason or the other.

At the heart of Mota-Engil’s complaint is a claim that RVC will pay much less taxes to the government over the 30-year period during which the road will be under concession.

TAX PROJECTIONS

RVC submitted the lowest bid at Sh159.5 billion, while Mota-Engil quoted Sh194.9 billion. However, it was later found out that both companies had used a wrong formula in computing their income tax obligations to the government.

RVC’s computation saw it understate the income tax projections by more than Sh30 billion over the 30-year concession period while Mota-Engil’s calculations led it to overstate its obligations by more than Sh1.6 billion.

When this issue was brought to the attention of both parties, the RVC argued it could only cover the tax deficiency by increasing the overall cost of the project by a similar margin.

However, this proposal contravenes the PPP Act of 2013, which prohibits an increase in pricing of a bid during the negotiations process. The Act only allows for a reduction in bid price during this stage.

However, KeNHA brushed aside the many concerns raised about the huge tax variation, saying it was a “minor deficiency” that could not be allowed to stop the tendering process.

COUNTER OFFER

On November 13, 2018, Treasury Principal Secretary Kamau Thugge wrote to KeNHA Director-General Peter Mundinia about the concerns raised by the PPP committee that evaluated the tenders.

“Upon deliberation, the committee observed in the RVC bid proposal is not a minor deficiency or anomaly … and further, that without resolution, the anomaly would place the project company in negative cash-flows for a significant period of the contract, impairing overall deliverability of the project,” said Mr Thugge.

The PS also informed Eng Mundinia that the counter-offer made by RVC after the issue of the tax deficit was raised would constitute a modification to the bidder’s proposal, which is illegal.

“That acceptance of a counter offer would confer on RVC an unfair competitive advantage … tax matters are matters of law, and not capable of waivers,” he said.

He then instructed Mr Mundinia to reconvene the proposal evaluation team to reconsider the findings of the PPP committee and resubmit a revised evaluation report.

Mr Thugge’s position was echoed by Intercontinental Consultants and Technocrats limited (ICT), the transaction adviser for consultancy services for the project.

EVALUATION

ICT concluded that both firms, RVC and Mota-Engil, had contravened the applicable tax laws. “On one hand the tax calculations by RVC are not in accordance with the Income Tax Act as advised by the KRA and on the other hand, the Audited Financial Model of the Mota- Engil-led consortium had provided for extra taxation payments than is required as per the income tax,” the firm said in their detailed analysis of the two bids.

As a result of the peculiar situation, the firm suggested that the KeNHA could reject the two bids, but noted this could create negative sentiment among investors and the lenders, which could hamper Kenya’s efforts to attract foreign interest in future PPP projects.

In his reply to PS Thugge, KeNHA director-general Mundinia said his team had noted the errors in tax computation for both bidders at the evaluation stage, but had decided to waive them.

“This decision was guided by the provisions of clause 29 (2) of the PPA Act which confers the authority to be guided with principles of transparency, free and fair competition and equal opportunity,” he wrote to the PS in his letter dated November 23, 2018.

He said the evaluation committee found that RVC had not contravened any law “because it provided for taxes under the thin capitalisation rule though with misinterpretation in its application,” and proceeded to award the tender, thus sparking the present row.

DANGEROUS ROAD

In their petition, the Mota-Engil consortium wants Kenha’s decision to be declared irregular, unfair, and unlawful, and now wants it to be declared the “preferred bidder”.

The Nakuru-Mau Summit highway is one of President Uhuru Kenyatta’s flagship infrastructure projects after the Standard Gauge Railway.

The project will involve expansion of the 187km Nairobi-Mau Summit Road into a four-lane dual carriageway from Rironi in Limuru to Mau Summit in Nakuru County. Toll stations will also be erected along the highway.

Further, the contractor will rehabilitate the 58km Mai Mahiu-Naivasha Road and maintain the Nairobi 28km southern bypass, as well as the Gitaru-Rironi segment, whose upgrade is ongoing under the James Gichuru-Rironi Road Project.

It is anticipated that the completion of the Nairobi-Mau Summit Road will reduce the road carnage that witnessed on the highway and which has claimed hundreds of lives over the years.

In 2014, the Hertfordshire-based Driving Experiences ranked the 130km stretch between Nairobi and Nakuru as the fourth most dangerous road in the world due to the numerous accidents that have happened on the highway. For example, in December 2016, a tanker ferrying toxic chemicals hit a vehicle and exploded in a ball of fire, killing more than 40 people.