President should order all MoUs with foreign contractors audited

Tuesday July 24 2018

Road construction machines at Gambogi work station in Vihiga County. Counties’ expenditure on development dropped between July 2017 and March this year, data from the Controller of Budget shows. PHOTO | FILE | NATION MEDIA GROUP


I think the media gave short shrift the more significant aspects of President Uhuru Kenyatta’s ‘no new projects’ declaration last week.

For the first time, the President shone the spotlight on the memoranda of understanding (MoUs) and commercial contracts — the two vehicles that Cabinet secretaries, parastatal chiefs and principal secretaries have been using to introduce kick-back-motivated projects through the backdoor onto the government’s spending plans.

What I found most significant in President Kenyatta’s remarks are the following, and I paraphrase: Don’t tell us that you have signed an MoU with a contractor or a commercial contract with a foreign party and, therefore, you have to embark on a new project.

The President should not have stopped at speaking against these shady MoUs and dodgy commercial contracts. He should force all ministries, government departments and parastatals to publish all MoUs and commercial contracts which they have signed recently — especially with Chinese contractors.


Indeed, the President has waded into the space where big money is made today. This is the arena where one of the most viciously fought political struggles is happening — namely; the struggle for opportunity to broker projects negotiated through MoUs and commercial contracts with Chinese contractors.


Segments of the political elite are at each other’s throat over an opportunity to broker big projects. Indeed, being a broker or political linkman for these MoU deals can be extremely lucrative.

To put the issue in the context of the President’s remarks, and to appreciate how the MoUs and opaque commercial contracts introduce projects in the government’s spending plans through the back door, you have to understand the phenomenon known as ‘contractor-negotiated loans’.

How exactly is the game played? A foreign contractor, with his local allies and agents, approaches a CS or parastatal chief with a proposal to implement a project for him and a promise to arrange financing for the new project. An MoU is hurriedly signed between the contractor and the CS or parastatal head.


Then a commercial contract is sign by the ministry or parastatal and the contractor. The National Treasury is only invited at the very end of the deal — to sign financing agreements with Exim Bank of China. That way, a new project funded by the Chinese will have entered the Budget.

This is the point President Kenyatta made when he remarked that parastatal chiefs and CSs were too eager to initiate projects even when older ones were stuck. Here is recent example of such deals.

Recently, we woke up to State-owned Kenya Electricity Company (Ketraco) announcing a Sh25 billion commercial contract with China Electric Power Equipment and Technology Company for electrification of the standard gauge railway. This was after its parent ministry, Energy, had signed an MoU with the contractor.

Isn’t it not just incredible that these Chinese want to commit us to such a massive project by hawking around China Exim Bank loans, and at a time when we are still struggling with how to make the SGR commercially viable?


Which begs another question: Why do the corrupt prefer the route of introducing projects through these shady MoUs and commercial contracts to the conventional methods of procuring projects in the public sector?

First, it allows them to circumvent oversight institutions such as Parliament, Controller of Budget and the Auditor-General.

Secondly, it makes it easy for the powerful to conspire with their foreign cronies to push projects into the spending programme even when the government has no money for a new project.

Thirdly, since the deals can be procured and concluded without subjecting the project to international competitive bidding, the powerful and influential are able to pad the budgets of the project with as much backhanders and kickbacks as they choose.


Indeed, the tell-tale signs usually are in the fact that in the majority of cases, such deals, invariably, have huge provisions for massive advance payments that must be made even before a spade has been lifted.

The fourth reason why today’s oligarch loves such deal is that the projects are opaque.

We all know that debt servicing is a first charge on the Consolidated Fund — meaning that you have to pay debt service first before spending on other appropriations by Parliament.

They love it because repayment of the money borrowed from China Exim Bank is almost guaranteed.

The idea of allowing a contractor the dual role of building an asset and arranging for its financing reeks of utter opacity and corruption.

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