Author: Kenya West

Members of Nairobi County Assembly are sensing a foul play in the assembly’s car loan and mortgage scheme accounts that have been non operational for over an year.

Raising the point ODM’s and Kilimani MCA Moses Ogeto said the accounts have been closed without satisfactory explanation. “I wish to request for a statement from the Chairpersons of the Public Accounts Committee and the Loans and Mortgage Committee regarding the closure of Assembly Mortgage and Car Loan Account.” Said Ogeto.

Ogeto further went to reveal that he had information that the scheme was being used by certain unmentioned individuals to mint money from the MCAs. “ The assembly passed the Public Finance Management Act, Nairobi City County Car Loan and Mortgage Fund Regulations of 2017. However, there are allegations that this scheme which was intended to improve the general welfare of the Members and staff has been diverted to serve particular interests of some individuals.”

Under the scheme, every ward representative is entitled to a Sh3 million mortgage and Sh2 million car loan in accordance with a 2014 presidential directive.

The MCAs now want to know particularly why the initial account for the scheme was closed and a new one opened in the same Co-Op Bank. Key issues raised; The justification that led to the opening of the new Co-operative Bank Account No.0011141232417504 and the signatories thereof; the amount currently in the said account and the  for closure of the Mortgage and Car Loan accounts.

The MCAs also want to know Whether Cooperative Bank Account has been observing prevailing Treasury bill rate from 4th April 2016 to date.

Hon. Mary Mwami who’s in the loan’s committee asked for three weeks to report back to the house with the bank’s statement but Mr. Ogeto couldn’t take it, “this statement is about treasury prevailing rates which has never been exercised.” “This account you can just walk to Cooperative Bank and you get the statement and we know how much they have been depositing and how much has not been deposited to this account.” He concluded.

The investigations they believe is going to unearth and answer underlying questions.

According to a city hall source talking to Kenya Insights the web goes deep and could shock many. “This thing goes back to the days when Ole Magelo speaker was still the speaker, thorough investigations will reveal the phases of people in this scheme going up to the treasury, CBK and City Hall cartels, bank managers and fund management firms.”

This is not the first time the car mortgage scandal is coming to the surface.

In June 2018, journalists were barred from covering a meeting on the car loans for Members of the County Assembly.

County Assembly Clerk Jacob Ngwele was being grilled by the assembly’s watchdog committee over the irregular transfer of Sh45 million meant for the ward representatives’ car loans.

This happened as detectives from the Directorate of Criminal Investigations (DCI) raided City Hall in search of documents to shed more light on the matter. The sleuths were also probing double payment of contracts, unexplained expenditures and ‘unscrupulous’ deals.

Journalists were asked to leave the chambers immediately the clerk arrived for questioning by Public Accounts Committee chairman Wilfred Odalo. Committee clerks were also asked to step outside. The secrecy of the deal had all indications of a lot to hide from the public.

According to a special report by Auditor General Edward Ouko on the Nairobi Assembly’s car loan scheme fund, Sh45 million was irregularly transferred to five other accounts for unexplained purposes

“A review of the funds cashbook revealed that the money was irregularly transferred in 2016-2017 from the fund account to various accounts without approval of the county executive committee member for finance. Consequently, the county assembly was in breach of law,” read the report in part.

Ouko went ahead to clarify that the red flag was raised since the activity was contrary to Section 116 of the Public Finance Management Act 2012.

In response to the queries, Ngwele submitted that the fund started operations in  June 2014 with an initial amount of Sh254 million. A further Sh40 million was received in the period under reporting.

Cornered Ngwele admitted he irregularly reallocated Sh42 million meant for MCAs car loans.

His excuse was least satisfactory, Ngwele told the Public Accounts Committee that he used the money to pay MCAs’ salaries and imprests.

“I breached financial procedures. Treasury delayed releasing cash meant for salaries so I used the cash set aside for car loans to pay MCAs. However, after receiving the money from the Exchequer, I deposited it back to the loans fund account,” said Ngwele.

Nominated MCA Sylvia Moseiya questioned why the office of the clerk took long to deposit the money back to the loans account.

“We need measures to ensure the clerk does not do what he did again,” said Moseiya.

Of interest was the fact that he transferred the money from the loans fund account to the operations account without approval of finance executive as required by law.

The Auditor General faulted Ngwele for failing to write to the then finance executive Gregory Mwakanongo for approval before he moved the money.

“We agree that the money was returned but was there approval? You might not have committed an illegality but you definitely committed an irregularity by going against the PFM Act,” the Auditor General noted in his report.

Our City Hall source also allege that Co-Op bank made Ngwele the mandatory signatory to the account. “These are very serious allegations that the bank must be brought to book for if indeed it can be ascertained because it is illegal.” “Ask yourself why they closed the account and opened this one in question? Let the bank give all the statements back to the original account and see what you’ll find out.” Source talking to Kenya Insights on condition of anonymity continued.

We’re told Ngwele allegedly traded with a notorious fund management firm to tunes of millions where money in injected to the firm, trades, profits made then initial capital injected back to the holding account but Kenya Insights can’t independently verify this.

Investigations should therefore be able to reveal who the key players in this scheme are, how much they benefited from, where they invested and possibly recover the money back to the public since that would be clear theft. Authorities should also determine if the bank worked within the recommended guidelines and if any policy was breached then a ruthless punishment should be meted as well.

Coincidentally, suspended county clerk Ngwele who was appointed under questionable circumstances has since been reinstated by the court.

The report is set to be tabled in two weeks. Kenya Insights will update you on any development.

Kenyans are now accustomed to corruption cases that never seem to end, each and everyday the headlines are splashed with prints of billions lost. Billion has even lost its value in Kenyans faces who’ve been numbed by corruption.

A parliamentary investigation has concluded that the Sh63 billion leasing of medical equipment for counties was a “criminal enterprise” designed to enrich a few individuals but fell short of naming those responsible.

Senators recommended all public officers found culpable of illegalities in the Managed Equipment Service (MES) procurement, which they said was done “in the furtherance of the adverse commercial interests” at the expense of Kenyans be prosecuted and barred from holding public office.

The report by the Senate ad-hoc Committee said that, although the programme had a noble goal to help the public access quality healthcare, the persons involved “from start to finish implemented the project in a manner that violated the very constitution and the sacred principles it was originally conceived under.”

According to the report tabled in the House Tuesday, the project signed at State House Nairobi in 2015 had a pre-determined outcome as the suppliers of the multi-million equipment were well known by Ministry of Health officials even before tenders were advertised.

The Ministry of Health went on a buying spree despite a needs assessment confirming that counties lacked adequate capacity to absorb the equipment.

Some of the equipment was either overpriced, substandard, delivered late, or not delivered at all and the committee recommends that private firms as well as individuals found culpable of illegal acts in procurement should be barred from doing business with both levels of government.

“As a matter of fact, the committee has established that the MES project was a criminal enterprise shrouded in opaque procurement processes and that the Ministry of Health relied on a faulty tool to justify a pre-determined outcome in relation to the award of tenders that likely resulted to impudent use of public Finance Management Act that forbids wasteful expenditure,” reads the report.

“The MES project is the only project where conditional grants meant for county governments and appropriated under the County Allocation of Revenue Acts are unconstitutionally paid directly to the Ministry of Health instead of being deposited in the respective County Revenue Funds contrary to Article 207 of the Constitution,” the report further reads.

To amend this, the Committee recommends that money meant for the project should be deposited to the County Revenue Fund as required by the Constitution.

The tenders of the project were awarded to Shenzhen Mindary Bio Medical electronics Co.Ltd, Esteem Industries,M/S Sysmex Europe, GMBH, Bellco S.R.L, Philips Medical Systems Nederland BV, GE East Africa Services Limited.

Behind the tendering lay a heap of controversies and consultants dragged into the mud.

IMK Advocates

IKM Advocates were brought in to provide legal advice on the optimal MES procurement approach (PPP vs. PPDA). IKM would then recommend a PPDA that would ultimately cost more than the original PPP.

The law firm headed by CS Paul Muite and managing partner Mr James Kamau told the parliamentary committee that MoH appointed their firm for the provision of legal transaction advisory services from a panel of prequalified law firms with the approval of the Office of the Attorney General and Department of Justice (OAG & DOJ). As per their testimony, their services were lawfully singlesourced under section 32 of the Public Procurement and Disposal Act, 2005 (now repealed) which was the applicable law at the time.

In retaliation, the committee observed in a Special Audit of the MoH Accounts for the FY 2015/2016, the Auditor General had raised queries regarding the unprocedural manner in which the MoH single advisory services from IKM Advocates under the MES Project. With regard to the direct procurement of IKM Advocates for MES legal transaction advisory services, the Committee observed that the MoH failed to satisfy the legal requirements set out in section 74 of the PPDA Act 2005 (now repealed) by failing to demonstrate that IKM Advocates were the only persons capable of providing legal transaction advisory services under the MES Project, and that there lacked reasonable alternatives.

The Committee observed that the direct procurement of IKM Advocates contravened section 74 (3) of the PPDA 2005 (now repealed), as the procurement of the MES equipment was not so urgent as to render competitive procurement methods for legal advisory services impractical.

IKM Advocates admitted to having had ‘informal’ engagements with the MoH in respect of the MES Project prior to the execution of their service level agreement or approval of the AG. According to IKM, these engagements were aimed at understanding the MES project and the services that they were required to provide.

According to IKM Advocates, their initial scope of work entailed the following; advising on the optimal procurement structure for the MES Project; drafting, negotiating, amending and finalizing the MES Contract including all related schedules; drafting, negotiating, amending and finalizing the intergovernmental agreement to be concluded between MoH and each County government, including all related schedules.

According to IKM Advocates, their role in the procurement processes in the MES Project was confined to drafting the template MES Contract whic h was attached to the tender documents. The firm submitted that the MoH conducted the entire tendering process, and that they were not in any way involved in the identification, evaluation or selection of the MES bidders. Further, IKM Advocates submitted that they had not had any contact with any of the successful bidders prior to the tenders being awarded.

According to IKM Advocates, the final commercial close MES contracts were signed d contracturing a signing ceremony at State House on 6th February 2015 with the approval of the Attorney General (OAG) & Department of Justice(OAJ). According to their testimony, they were not made aware of any objections raised by the OAG & DOJ in respect of the contracts.

IKM Advocates, received a total of KShs. 48,881,063.90 (excluding taxes) from the MoH. The cost was cumulative and included payment for services rendered to the MoH during their informal engagements.

However, on 23rd April, 2015, the OAG & DOJ granted approval for the extension of the mandate of IKM Advocates for additional scope services such as;

-providing guidance to the contractors on preparation of their technical schedules and collating and contractualization of the same upon receipt and approval by MoH;

-review of and negotiating further mark-ups and comments to the MES Contracts submitted by the contractors so as to arrive at Financial Close MES Contracts;

-review of contractor term sheets and financial solutions and negotiation on the same and finalization as part of the Financial Close MES Contracts;

IKM Advocates testified that their extended mandate was funded as a ‘donation’ by the five MES contractors on a pro-rata basis, as follows:

• Shenzen Mindray Biomedical Electronics Co (China): USD 75,000.00 (equivalent to KShs. 7,575,000.00 at KShs. 101 to the USD);
• Esteem Industries Inc. (India): USD 50,000.00 (equivalent to KShs. 5,050,000.00 at KSHs. 101 to the USD);
• Bellco SRL(Italy): USD 50,000.00 (equivalent to KShs. 5,050,000.00 at KSHs. 101 to the USD);
• Philips Medical Systems Nederland BV USD 170,000.00 (equivalent to KShs. 17,170,000.00 at KSHs. 101 to the USD);
• GE East Africa Services Ltd USD 600,000.00 (equivalent to KShs. 60,600,000.00 at KSHs. 101 to the USD);

Unprocedural Engagement of IKM Advocates by the MoH

The committee observed that Contrary to the provisions of AGs’ circular dated 3rd May, 2010 (Ref.AG/1/2010) which required all client ministries to consult and seek a pproval of the AG before retaining the services of private advocates, the MoH irregularly engaged the services of IKM Advocates prior to the approval of the AG, or the execution of a service level agreement.

Services rendered by IKM Advocates during this ‘ informal’ engagement period were highly consequential and included a legal opinion that presumably informed the decision by the MoH to vary the legal framework of the entire project from a PPP to a procurement model; and, draft contracts that were attached to the MES tender documents. The MoH paid IKM Advocates KShs. 48,881,063.90 (excluding tax) being the cumulative cost for services rendered. Contrary to the law, according to submissions by IKM Advocates, the payment included the cost of services rendere d during its ‘informal’ engagement with the ‘MoH’.

Conflict of Interest

The Committee observed that while IKM Advocates denied having had any relationship or contact with the successful bidders, by their own admission, GE and IKM Advocates had had a existing client advocate relationship from 2010 at the time of its engagement as legal transaction advisors to the MES Project. The Committee further observed that according to the testimony of IKM Advocates, at the time of their engagement, the MoH was aware that they were on GEs’ panel of lawyers. However, neither the firm, nor the MoH declared this conflict of interest to the OAG & DOJ.

A conflict of interest between the two entities was subsequently demonstrated by the fact that IKM Advocates sub sequently went on to draft Government Letters of Support for GE East Africa Services Ltd (and Philips Medical Systems Nederland B.V.) that were manifestly different from the other MES contractors.

IKM Advocates further exhibited bias in favour of GE by pursuing the issuance of an enforceability opinion from the OAG & DOJ in the exclusive interests of the GE contract.

Further to the above, the Committee finds that despite having participated in the preparation and drafting of the tender documents which exp ressly limited the eligibility of bidders to original equipment manufacturers, IKM Advocates omitted to advise the MoH that GE were not in fact original equipment manufacturers and that they therefore did not qualify to participate in the tender.

Based on the foregoing, the Committee came to the irresistible conclusion that, in fact, the very coming of IKM Advocates into the MES Project may have been solicited or otherwise influenced by GE.

Unethical Conduct by IKM Advocates

The Committee observed that IKM Advocates acted unethically by accepting ‘donations’ amounting to USD 945,000.00 (KShs. 95,445,000 at KShs. 101 to the USD) from parties that they were supposed to be acting against i.e. the MES Contractors.

Further to this, the Committee observed that the aforementioned ‘donations’ collected by IKM Advocates from the five MES contractors was almost double the KShs. 48,881,063.90 it had received from the MoH on whose behalf it was supposed to have been acting.

The Committee noted that according to their own testimony, and as per their terms of reference, IKM Advocates played a role in “ … drafting, negotiating, amending and finalizing the intergovernmental agreement to be concluded between MoH and each County government, incl uding all related schedules”.

In the face of the findings of irregularities in the conduct of the IKM Advocates, the committee has made the following recommendations:

1. The EACC and other investigatory and prosecution agencies are also urged to investigate the process of procuring the legal consultants entire conceptualization and implementation process.
2. Further, the EACC is urged to investigat who advised the MoH in the e the circumstances under which contractors to the MES project made donations that went towards legal fees to IKM Advocates and to report its findings to the Senate within 60 days; and, further, to investigate how the contractors raised money to IKM Advocates who were MOH Advocates in the transaction and whom was the money billed.
3. The committee further urged EACC to investigate and establish whether the consultancy fees were billed against the counties.

Cummulatively, IKM Advocates received Sh144,326,063 from the scandalous deal.

Betting powerhouse SportPesa has been sucking revenues out of its lucrative Kenyan market by paying billions of shillings to a software development company it owns in the UK – an arrangement that has significantly reduced its tax bills.

An investigation by Finance Uncovered and the Daily Nation has found that the British company, SPS Sportsoft, has been providing software services to SportPesa’s Kenyan operation, Pevans East Africa, which some experts believe is a staggering mark-up of more than 400 per cent since 2017.

According to its annual statements, SPS billed Pevans £42 million (Sh5.5 billion) for “IT and services” over two years alone.

Yet its UK costs were so low that its total pre-tax profits in that time were £33 million (Sh4.3 billion), a profit margin of 77per cent.

The arrangement could have reduced SportPesa’s profitability in Kenya, where the firm would be taxed at 30 per cent, and shifted the revenues to the UK, where corporation tax is just 19 per cent.

At the same time, SPS has also relied on the provisions of a 43-year old ‘double taxation’ treaty between the UK and Kenya to massively reduce its British tax bill.

It has enabled SportPesa to build a profits reserve in the UK of £22 million (Sh2.8 billion), according to its 2018 accounts – its most recent filing – a nest egg that could be used to invest in its business or to pay dividends to the firm’s shareholders.

SportPesa said it had a “revenue share” arrangement between its UK and Kenyan companies and that it was standard practice for the online betting industry. The company said it abided by all legal and accounting principles.

But tax experts have raised questions about the pricing arrangement.

An official at the Kenya Revenue Authority (KRA) said after reviewing SPS Sportsoft’s financial statements, there appeared to be clear “overcharging”.

SportPesa’s business activities are fully compliant with all tax and legal frameworks in the countries and regions in which we operate.”

A SportPesa spokesperson said: “It is factually incorrect to suggest that Pevans East Africa has been overcharged by SPS Sportsoft. SPS Sportsoft’s software development and operational costs are in line with industry norms.”

“SportPesa’s business activities are fully compliant with all tax and legal frameworks in the countries and regions in which we operate.”

SportPesa lost its Kenya betting licence last July before it announced it was withdrawing from the country last September in response to what it called “the hostile taxation and operating environment in the country”.

Since being founded by Bulgarian investors in 2014, SportPesa has recorded phenomenal growth by tapping into a craze for online betting among Kenyans and the ease of micro-payments through mobile money services.

Having established a dominant position in Kenya, in 2017 it signalled its global ambitions by signing a major shirt sponsorship deal with English Premier League club Everton FC.

It also opened a new European headquarters in the iconic Liver Building on Liverpool’s waterfront. To facilitate its UK operations, SportPesa created a new corporate structure with the main entity being SPS Sportsoft, which now employs 70 people.

SPS is owned by SportPesa Global Holdings Ltd, another UK company, which collects all the profits recorded in the UK, and which in turn is largely owned by the same shareholders as Pevans.

From Africa to Europe

The SportPesa bosses decided that SPS would provide software services to Pevans, allowing it to transfer money from Africa to Europe. The funding for this European set-up would come almost entirely from Kenyan gamblers.

But tax experts who have reviewed the companies’ accounts believe there are concerns about the level of profits being recorded in the UK. Determining precisely what SPS does to earn its revenues is key.

According to SPS’s website, the company is a “growing global technology and entertainment group focused on sport and entertainment news”.

Its annual accounts say SPS “provides IT and services related to the procurement of associated IT” for customers. These were exclusively its own sister companies, principally Pevans East Africa in Kenya.

In the 21 months to December 2018, 97 per cent of its £43.5 million (Sh5.7 billion) revenue was derived from Pevans.

After Finance Uncovered posed a series of questions to SportPesa, it engaged one of the world’s biggest corporate advisory firms, FTI Consulting, to help provide answers. Finance Uncovered was told: “Gaming software platforms are typically provided on a software as a service (SaaS) basis.

“Competitive platform provision from established, reliable global providers is in revenue share terms and varies in the ranges between 15 per cent and 50 per cent revenue share contribution. “This revenue share is in line with industry best practice within the lowest possible limits to ensure compliance with the transfer pricing principles in both the UK and Kenya.”

This suggests that whenever punters in Kenya place a bet, they access a software driven gaming platform, which SportPesa says has, at least in part, been developed or is overseen by SPS in the UK.

As a reward for this service, a significant percentage of that bet could be allocated to the British company.

SportPesa declined to say how and where the gaming platform was provided in the hugely successful period before it created the UK company in 2017.

The issue of ‘transfer pricing’ is crucial in the fight to ensure multinational companies pay fair levels of tax.

Many multinationals have in the past been able to legally manipulate the prices they charge their own companies in different countries to shift profits out of higher tax jurisdictions.

When they do this, companies are meant to set a “comparable” or realistic price for intra-group trading abiding by a so-called “arm’s length principle”.

Finance Uncovered asked SportPesa to provide more details of its internal charging mechanism. But it declined to comment.

If SPS had developed its own proprietary software, it would be possible to see this recorded as an intellectual property (IP) asset on its balance sheet.

But its filed accounts for 2017 and 2018 do not show any such asset. This suggests it is buying software from elsewhere before possibly managing or adapting it in some way and then reselling it to Pevans in Kenya for an extraordinary mark-up.

Finance Uncovered also approached some of the world’s leading accountancy and consulting companies, including KPMG and Deloitte, for expert insight into how such transfer pricing mechanisms might operate in the online betting industry.

None were willing to help.

A SportPesa spokesman said: “Payments to SPS Sportsoft by its sister companies are governed by transfer pricing policies, which have been reviewed by the relevant tax authorities.”

A betting executive with experience in both the UK and African markets said there was some sense in SportPesa’s explanation.

He said: “Most betting operators I know use a platform built by somebody else, and will pay them a licence fee for doing so. Licence fees are done on a revenue share basis, and most deals I have seen would be in the 20-30 per cent revenue share range.”

But asked whether one company in a betting group would normally source software at low cost on behalf of another company in the same group and then charge a 400 per cent mark-up on it, the executive said such practice was questionable.

Fair tax campaigner Richard Murphy, visiting professor of accounting at Sheffield University Management School, reviewed SPS’s financial statements for this article. He said: “Software as a service requires substantial upfront investment of effort and risk, for which a developer would expect a return of maybe 20-25 per cent. But it doesn’t look like that’s the case here because the UK software company started up after the Kenyan operation began.

“This does not look like a software developer or even owner in that case; it looks more like a software reseller at an extraordinary mark-up of 400 per cent or so.

More cheaply

“That is way beyond the normal boundaries of possibility for software as a service. It poses the simple question as to why this software could not have been bought vastly more cheaply by the operating companies in Kenya? “

Tommaso Faccio, who spent eight years as a transfer pricing adviser at Ernst & Young and then Deloitte in the UK, also reviewed the SPS accounts.

He said: “If SPS has developed its own unique software product in the UK or acquired it from a third party with a significant investment, then I would agree that a 15 per cent revenue share agreement could be appropriate. But as the company does not have any intangible assets such as IP recorded in its 2018 accounts, it could be simply buying software services from someone else and reselling it. In that case, a ‘cost-plus’ deal, with a 15-20 per cent mark-up on its UK costs, makes much more sense. Otherwise, why would the Kenyan company pay tens of millions of pounds a year to SPS as revenue share when it could just buy the software services directly?”

The analysis of the SPS accounts also revealed a further twist.

Despite recording £33 million (Sh4.3 billion) in pre-tax profits in the UK since 2017, the company has paid just £658,000 (Sh85.5 million) in corporation tax to the British exchequer, Her Majesty’s Revenue and Customs.

Although its tax bill from HMRC was £6.4 million (Sh858 million) for the period, it was able to offset almost all of that by making use of the 1977 Double Taxation Treaty between the UK and Kenya.

Such treaties are common and were designed to help companies legally avoid paying taxes on the same revenue streams in different countries. In SportPesa’s case, every time Pevans in Kenya pays SPS in the UK, KRA charges a 15 per cent withholding tax.

Pevans then pays that to KRA, and SPS is then able to present a ‘tax paid’ certificate to HMRC.

The amount of withholding tax paid is deducted from the HMRC bill. In 2018, the bill from HMRC was £2.9 million (Sh377 million). SPS then presented certificates from Kenya showing £3.1 million (Sh403 million) paid in withholding tax. That meant SPS actually received a small tax credit from HMRC.

It also meant SPS’s post-tax profits were £11.9 million (Sh1.5 billion), almost all of which was then transferred to SportPesa’s UK holding company in the form of dividends.

A SportPesa spokesman said: “No director or shareholder of SportPesa or its affiliate companies has to date received dividends in their individual capacity from SPS Sportsoft or from SportPesa Global Holdings. Inter-company dividends declared and paid by SPS Sportsoft have been re-invested into various sections of the business to drive growth.”

On tax, they said: “SportPesa’s business activities are fully compliant with all tax and legal frameworks in the countries and regions in which we operate. SportPesa paid USD63 million in taxes to the KRA in 2018 – which was equivalent to 32 per cent of its revenues that year. SportPesa, in the same year, was awarded the Top Taxpayer and Compliance Award by the KRA.” They did not provide a breakdown of what taxes make up these headline tax amounts.

Mr Jason Braganza, a Kenyan development economist and tax programme director with the pro-bono legal charity International Lawyers Project, said SportPesa was benefiting from a double taxation treaty written in 1977, well before the rise of the digital economy and the more complex transactions it poses.

He said: “It is in need of reviewing and updating to conform to the international standards. “Online transactions and the treatment of digital services for digital economy activity provide significant loopholes for multinational companies.

“It is a timely reminder for developing countries to review and renegotiate their tax treaties with developed countries.”

A KRA spokesperson said due to ongoing court disputes with SportPesa on separate matters, they could not comment.

A spokesperson for the HMRC said they did not comment on individual companies.

The 2019 financial statements for SPS and SportPesa Global are due to be released publicly in the UK at the end of this year.

Financials for Pevans have never been released because the company is under no obligation in Kenya to do so. It declined to share them with the Daily Nation and Finance Uncovered.

 * Lionel Faull is chief reporter for Finance Uncovered. This article was developed with the support of the Money Trail Project and first published on Nation Africa.

Kenya Insights has received complaints from parents of sister schools Crawford International and Makini Schools which are both owned by a South African firm, ADvTECH, a private education group.

We’ve weighed on both cases and the complaints are synonymous with the firm’s management taking the punches for being too dismissive and not listening to parents who’re part of the school.

Frustrated parents have reached to this writer in a bid to raise the matter as they’ve managed to compromise the mainstream media from highlighting their plights and fear that the schools could sink with their money.

Crawford School sits in Kiambu’s Tatu City. It has its set of troubles between the management and parents and this will come later.

Parents of Makini Schools in Nairobi are a worried lot given the precarious state of affairs at the institution under the leadership of South African investor Advtech.

That Makini has enjoyed a rich education legacy in Kenya spanning 40 years cannot be gainsaid.

As an academic giant, the school has produced top students in the Kenya Certificate of Primary Education (KCPE) over the years.

Admired by Kenya’s middle and upper classes and some foreign expatriates for its discipline and as one of the few upmarket schools that offer the 8-4-4 system, the Makini brand has grown exponentially to the envy of its competitors.

In the recent past, however, the institution has been embroiled in vicious take-over wars, acute leadership gaps, a cavalier attitude of new managers and a gradual shift of focus from academic excellence to profiteering, at whatever cost.

So bad is the state of affairs at the school that the new owners, Johannesburg Stock Exchange (JSE) listed Advtech, have deployed a propaganda machinery to cover up serious financial shortcomings in their home country.

The big question among parents is: Who will come to their rescue if the foreigners vanish?

A summary of the genesis of Makini’s troubles is in order. All seemed well until May, 2018, when the original owners sold the school to a UK company—Scholes Ltd—with little information to the parents.

Between late 2019 and early this year, the Scholes, apparently unable to run the school, sold it to Advtech. So, in less than two years the school ownership has changed hands three times.

As worrisome as the change of management has been within this short period, parents are intrigued by calibre and high turnover of the top leadership of the school.

A quick online search on the qualifications of the executive director, Martin Sharman, shows he has a wealth of experience in retail sales and zero experience in education matters.

The communication director, Katya Nyangi, lacks the requisite professional qualifications in either communications, education or any relevant field and was previously supporting the previous owners with domestic errands.

Sharma and  Nyangi, who are employees of Scholes and Makini, have single-handedly been running the show and issuing incongruent instructions with no regard to school heads, the new owners (Advtech) or parents’ concerns.

Currently the school is going through a serious crisis. Different levels of managers are making decisions, issuing contrasting instructions and pulling in different directions at the instigation of Advtech, Scholes (who never exited the scene) and Makini Schools. Interestingly, all the owners and top managers – Advtech and Scholes, including Mr Sharma— operate from outside the country.

While the new owners are completely unknown to the parents, their financial standing and attitude towards parents raises more questions than answers.

As of June 2019, Advtech was rated as highly indebted where its liabilities outweighed it assets by more than Sh36 billion.

An article by the Wall Street Journal on Advtech’s balance sheet gives a stern warning that its debt obligations pose grave risks to its business.

These fears over indebtedness have created an aura of pessimism and doubt among parents on Advtech’s capacity to run the school.

Aware of its financial standing, the company recently rolled out an e-learning programme at school in the guise that it was free only for them to force parents to pay for it.

Makini’s e-learning is the epitome of an “off-plan learning” model where parents are forced to pay Term Two (May –August) fees now, with a promise to give a proper education once actual learning resumes.

Although, and in good faith, parents accepted Makini’s offer, they fear the faceless Advtech with their debts could run away with their money which averages about Sh1 billion a year.

The parents are aware of pyramid schemes orchestrated by crafty and broke foreign companies such as CMC Di Ravenna that was contracted to construct the Kimwarer and Arror dams only for this to turn out to be a pyramid scheme.

Makini parents are not ready to be part of the statistics.

Efforts by the Parents to ameliorate the situation at the institution with the new owners has been futile and obstinately rejected.

In their latest communications the company stated that it has no obligation to take into account parents’ concerns when levying new charges and that their decision was final.

The parents-teachers association (PTA) committee had rejected demand for fees citing earlier reassurances by the private school that e-learning lessons would be provided to the pupils for free.

Former World Bank chief economist and colleagues from two European universities have published a long-awaited research in which they show that global aid to poorest countries like Kenya, is instead being retransferred to offshore havens.

The research was done by Penny Goldberg, a World Bank chief economist, who resigned two weeks ago from her job when the leaks about the research emerged. The other colleagues are — Jørgen Juel Andersen of BI Norwegian Business School and Niels Johannesen of the University of Copenhagen and CEBI. The final contributor to the research was the World Bank’s Bob Rijkers.

The research titled “Elite Capture of Foreign Aid: Evidence from Offshore Bank Accounts”, was done for the World Bank, but then the findings proved too embarrassing for publication. The researchers were reportedly not allowed to share its contents. Penny Goldberg decided to leave her job, and the whole document is now published on her website.

Kenya Insights reviewed the 46-page document and it gives grim reading. Reviewing data of 22 countries including Kenya, the team shows that aid granted by the World Bank is falling into the wrong hands.

“After aid to a country increased, money departs for offshore havens,” reads the research in part.

The other countries in the research are Rwanda, Uganda, Tanzania, Burundi, Zambia, Afghanistan, Armenia, Burkina Faso, Eritrea, Ethiopia, Ghana, Guinea-Bissau, Guyana, Kyrgyz-Republic, Madagascar, Malawi, Mali, Mauritania, Mozambique, Niger, Sao Tome and Principe, and Sierra Leone.

The research document is rather complicated. The research used quarterly information on aid disbursements from the World Bank, to these 22 most aid-dependent countries, in combination with Bank for International Settlements banking statistics, which cover the flows between the country receiving the aid and havens such as Switzerland, Luxembourg, the Cayman Islands and Singapore, where secrecy and asset protection are paramount.

For comparison, the research also looks at flows between the recipient country and Germany, France and Sweden — places not as vaunted for their banking secrecy. Scenarios that you would expect to lead to higher inflows and outflows, such as wars or financial crises, are excluded.

For the case of each country, the research shows how much much money moved out from the state coffers, immediately it arrived from the World Bank.

For Kenya’s case, the annual World Bank disbursement is 1.1% of GDP.

The researchers shows that in their investigation, $1,277m exited Kenya and was deposited in offshore havens. During the same period, $1,784m left Kenya for non-offshore havens. This means $3.1b left Kenya in a very short period of time.

For offshore deposits of money from Kenya, the researchers found a quarterly increase of 2.0% in deposits for offshore havens, but the deposits in non-offshore havens reduced by 0.4%.

For Uganda, the researchers discovered the opposite from Rwanda. They found $73m was deposited in offshore havens, while $188m left Uganda for non-offshore regions.

In Tanzania, the money leaving the country’s coffers to be hidden away, is exorbitant. During the period that the researchers investigated, $145m left Tanzania for offshore accounts. However, a whooping $437m was deposited in non-offshore havens.

For the smallest economy in the East African Community (EAC) region, Burundi, $103m was ferried out of the country to offshore accounts. At the same time, just $19m was swindled off to non-offshore regions.

What is clear is that Kenyan elites prefer hiding most of their money in those deeply secret havens where no one will ask questions. While, Ugandans and Tanzanians are fine with stealing the World Bank cash and sending to places that dont tolerate spoils of theft from poor countries.

There was a problem that the researchers admit in the paper. For instance, it was impossible for them to tell who exacy in terms of names, is moving the funds out of the country, with the statistics used, only counting the total flows per quarter between countries.

While there have been different leaks over the years showing how money was flowing from poor countries to Switzerland, Luxembourg, the Cayman Islands and Singapore, it is the first time Rwanda has been highlighted. It is particularly shocking as the data comes from inside the World Bank, which has repeatedly given a clean bill of health for different aspects of Rwanda

On section 13, appendix A of the Standard Gauge Railway (SGR) contract titled “Supply and installation of the facilities. Locomotives and stocks for the Mombasa – Nairobi Standard Gauge Railway Project”, the exorbitant cost of the white elephant project are laid bare. The appendix A is titled Non-Binding Bill of Quantities.

It is 44 pages of pure theft. Nonetheless, the rip-off in these pages were covered in the first article and as such, I’d like to move to another section and delve into the parts about the grass that costed Sh1 billion to show what the media left out.

I will come back to Section 1, Appendix A later on, albeit briefly.

As Kenyans are glued on combating Covid-19 pandemic which has killed exactly 50 Kenyans as per the time this article was published, many people are forgetting that neighboring countries constructed their equivalent of SGR at a lesser cost.

The over Sh400 billion that Kenya has borrowed and used in all the routes of the SGR (Mombasa – Nairobi – Naivasha etc) was enough to construct a dual lane electric train system.

Many people have forgotten that as the debate raged about a diesel vs electric trains, the ever PR-ready and greedy government went ahead and signed a $240 million (Sh24.4 billion) loan to electrify the SGR.

The move was a costly afterthought meant to rival Tanzania and Ethiopia’s SGR.

However, the blunder is that the money was channeled through an incompetent parastatal by the name Kenya Electricity Transmission Company Limited (Ketraco). 

Fernandes Barasa-led parastatal had signed the contract with a Chinese-government owned multinational China Electric Power Equipment and Technology Company Limited (CET) two years ago and the works was supposed to begin.

What happened?

Mr Barasa wrote an opinion piece on a local daily saying that the project was viable but then Managing Director of Kenya Railways Corporation (KRC) Mr Atanas Maina had contradicted him stating that ‘the govt does not have the resources to transform the railway from diesel to electric’.

Ketraco on its part had stated that they will use the money to build 14 substations between the cities of Mombasa and Nairobi on a transmission line with a transfer capacity of “1,500 megawatts (MW) which is 200MW shy of the current national demand of 1,700MW”. 

In all these, no one could explain how Ethiopia had built its 750 Kilometre-long SGR line at a cost of $3.4 billion (Sh346 billion), whereas Kenya’s 472-kilometre-long line had gobbled Sh447 billion.

‘Chop my money’

Though most people have forgotten that SGR is a white elephant whose construction coupled with other blunders and mismanagement by the Jubilee regime now threatens to cost us important installations such as the port of Mombasa, kenyainsights.com would like to keep the conversation alive.

Well, on Section 7, also titled Non-Binding Bill of Quantities, the first page shows the description of the entire page and their costing to be preliminary and supervisory/support services, site clearance and topsoil stripping, earthworks, protection work for railway and structure, culverts and drainage works, passage of traffic, temporary work and structure, bridge works, track laying work, and finally building of railway station, management office and subsidiary house.

The total cost of these is given as over Sh201 billion.

Generally, most of the Chinese employed to construct the SGR lived like kings, for example on provision of furnished houses for the employers (China Road and Bridge Corporation – CRBC) and senior staff, the taxpayer coughed up a whopping sh30 million. 

KenyaInsights.com will now share a picture of the rest of the page for you to do your own calculations.

In the second page on the continuation of preliminary and general supervisory/support services, Sh30 million has been set aside for the senior engineer to be ‘spent on’ an unspecified item ‘in whole or part.

It is in this section that we get to see that indeed the engineer’s office was given Sh3.6 million for ‘mobile and telephone charges’. To make matters worse, a temporary accommodation for the engineer was allocated Sh7.6 million.

How much is a simple event like a launch of SGR should cost? Answer, in this section, the contract shows that the budget was Sh20 million.

In the Earthworks section, the famous cost of the billon shilling grass emerges; the exact amount is actually Sh1,090,704,240.

The above section coupled with Section 13: Appendix A reveals the shocking theft that happened while constructing SGR. The claims of inflated costs are no longer claims as the ealier article and this one has shown.

It is even imperative to remember that the African Union High Representative for Infrastructure Hon. Raila Odinga recently revealed in a TV interview that the coalition government under former President Mwai Kibaki and him had negotiated a lower cost that was revised upwards when UhuRuto came into power.

“Before we left government with Mwai Kibaki, we awarded SGR tender to a company at USD2.5billion. But when jubilee came in in 2013, they canceled the tender and awarded it back to the same company but at USD4.5billion. Obvious inflation of figures”-Raila Odinga, said in an interview in January 2020.

Environmental impact assessment and other blunders

The Environmental and Social Impact Assessment (ESIA) for the SGR project was carried it by a Kenyan firm Africa Waste and Environment Management Centre (AWEMAC); the worst part in the report is that   only 217 people were interviewed as Key Informant for the public participation.

The study was rushed and appears to be a formality on the part government of Kenya and their Chinese cronies. The project that had its cost revised upwards would go on and nothing could stop it.

China Road and Bridge Corporation (CRBC), the contractor, in a bid to hide crucial information from the public made the Kenyan government sign confidentiality clauses in the controversial contract making it “sensitive and private”.

By the end of this year, Kenya is expected to have repaid at least Sh50 billion of the exorbitant Chinese loan.

The loan, whose interest is 3.6 percentage points above the six month average of London Inter-Bank Offered Rate (Libor) which serves as an international benchmark, is to be repaid in 15 years with a grace period of five years.

“The railway has been sold as a commercially viable project, that is, it would pay for itself…I maintained that the railway could not pay, and that the debt would be paid from the public purse. This has now come to pass”. David Ndii repeated this statement that he made in 2014 in 2018 in a hard-hitting article titled, “SGR by the numbers: Some Unpleasant Arithmetic”-  David Ndii, Managing Director for Africa Economics

The current one year Libor rate as of December 20, 2019 is two percent, a pointer that the loan comes with an interest rate of 5.6 percent.

This is expensive compared to other concessional loans, especially from the World Bank. Kenya recently agreed a Sh75 billion loan with the World Bank whose interest and other charges stand at two percent annually—matching the Libor rate.

Treasury data tabled in the National Assembly show that loan payments to Exim Bank of China will increase to Sh84.3 billion for the 2020/2021 and Sh111.4 billion in the 2021-22 financial years.

SGR accounts for the largest share of Exim Bank of China loans to Kenya including the Sh150 billion used to build the Nairobi-Naivasha line which has failed to attract business.

In perspective

The government has been forcing truckers out of jobs in order to make arm-twist businessmen to use the SGR. The issues surrounding the Inland Container Depot (ICD) in Nairobi has escalated and recently the Ministry of Transport announced that all cargo going to Western Kenya and the region must be offloaded at the newly built Naivasha ICD.

However, it seems highly unlikely that SGR which runs at a cost of over Sh1 billion per month is going to break even, despite these maneuvers. 

Even as SGR made losses this year, its costs of operations continue to rise.

SGR which is run by China Communications Construction Company (CCCC) raked in sh13.5 billion against Sh18 billion per year.

CCCC has also been accused of importing foreigners who are paid exorbitantly than Kenyans on an already strained train service.

At this point in time, over 50,000 truck drivers and turnboys, according to the ESIA report, are staring at job losses. Jubilee govt, even going by the way they’ve behaved up to now, seems to have had no agenda for the people.

Mombasa is said to be turning into a ghost town, thanks to the job losses.

Finally, even as Kenyans continue to grapple with COVID-19, job losses, waning incomes, and corruption, questions about the money borrowed to finance electrification of SGR linger because, a year after the loan signing, Ketraco was caught up in a scandal that Sh14.2 billion is said to have been lost through fraudulent payments to landowners.

Bank of India is facing a staff revolt over the manner in which a senior manager is handling employee issues. They are also unhappy that the bank’s headquarters in India has ignored their complaints. We have learnt that frustrated staff are plotting industrial action to protest the move by a manager, Vinay Nagar Upkari, to unilaterally convert their Christmas bonus for 2019 into loans to be deducted from the salaries.

They have also accused Upkari of being anti-Christian and treating his juniors as slaves. Back and forth correspondence between staff and the management has not alleviated the staff’s concerns, forcing them to consider a strike or go-slow. On January 7 2020, Upkari authored a memo informing the staff that “Competent authority has decided that henceforth, installment with respect to Christmas advance to be included under loan deductions for computation of staff loan eligibility”.

This communiqué did not go down well with the staff, who responded, through a letter addressed to the Head Office in Mumbai, under the title: Unethical and Biased Approach of Vinay Nagaraj Upkari (AGM, CE Office, and Nairobi) for local (Kenyan) employees of Bank of India, Kenya Centre. “We would like to draw your kind attention on our email dated 13th January 2020 and 14th February 2020. We are feeling sorry to say that despite knowing all the facts by all the 03 emails, the bank has not taken any action against Mr Vinay Nagar Upkari. He is an anti-Christian person and treating us very badly like his slave, as we are not the employees of Bank of India. He has issued a circular on 07th January 2020 without having any authority for deduction of Christmas advance installment for the purpose of calculation of deductions in other loans as it never happens in the history of Bank of India, Kenya Centre.”

Another issue is the flooding of Kenyan branch with ill-qualified Indian expatriates at the expense of well qualified Kenyans. “Bank of India has flooded the India based officers at the cost of trained and professional local employees. chief manager (IT) and the senior manager (operations) have no professional qualification for their respective post, (they are simply general banking officer from India) while, the trained IT and HR persons are easily available in Kenya,” the letter further stated.

The staff also accused Upkari of flouting Central Bank of Kenya regulations. “Johannesburg branch (South Africa) is functioning under Bank of India, Kenya Centre and Mr Upkari is doing audit of Johannesburg, branch (South Africa) for a long time and enjoying the foreign trip(s) every quarter and getting all the remuneration at the cost of local con-current auditor (Local employee of Bank of India) at Bank of India, Kenya Centre. Normally, this concurrent audit should be done strictly by local concurrent auditor only.” “It is important to note that a compliance officer of the center cannot be a concurrent auditor.

He has violated the norms of Central Bank of Kenya and Reserve Bank of India. While doing concurrent audit of Johannesburg branch (South Africa), he used to put his comments and observations as auditor and at the same time he is recommending as risk and compliance officer for closure of audit reports/remarks (which were audited by him) to competent authority, which is the gross violation of guidelines and more important thing that he is doing at the cost of local con current auditor of the Kenya centre.

The reputation of the center/ industrial rotations is at stake. Hence, you are once again requested to take immediate action in this regard.” We could not get a comment from the management as the MD said he would seek clearance from their headquarters first before responding. He spoke through a spokesman, which leaves a lot to be desired.

It’s highly likely that if you’ve seen the giant billboards in many streets here in Kenya, you’ve certainly noticed the brand. Arguably the most prolific force behind the billboards is identified as Magnate Ventures, a company ran by a highly reclusive billionaire Stanley Kinyanjui, who started it in 1998.

The entrepreneur is among President Uhuru Kenyatta’s close friends, whom he hangs out with in private and was a part of the clique that came together in 2017 to sponsor his reelection bid that saw over Ksh1 billion raised in one sitting.

He was one of the conveners of the Friends of Jubilee Foundation that was was bent on coming up with funds to oil the Jubilee Party’s bid to retain power.

Magnate Ventures describes itself as the pioneer of outdoor advertising; billboards, street signs, hoardings and event branding in East Africa, with operations based in Nairobi Kenya.

According to its website, it commands a 50% market share in Nairobi, 40% in Mombasa, 60% in Kisumu, 63% in Eldoret and 57% in Nakuru, and boasts over 1,200 billboards.

Kinyanjui runs the company alongside his younger brother, Robert Kinyanjui, as reported by How We Made it In Africa Magazine in 2013.

While the profile beams of glamour, scandals are creeping in. EACC is now following leads and investigating claims that the company had been evading taxes in the last 7 years.

According to a whistleblower report sent and received by EACC, Magnate has evaded upto Sh3B in taxes. “I’m aware that that fir a period of at least 7years, Magnate Ventures has undeclared it’s income by understating the number of billboards owned.” Reads the report obtained by Kenya Insights.

It continues, “Magnate Ventures owns over one thousand (1,200) billboards countrywide. However, in a deliberate attempt to gain a tax benefit, Magnate Ventures has been declaring that it owns about 100 billboards in Nairobi while the true declaration is contrary to their declaration.”

The report goes further to implicate the Nairobi’s Governor Sonko, “all this has been done with the full knowledge and connivance of the Nairobi Governor Sonko and the planning department at Nairobi County whom have participated in sharing our bribes given by Stanley Kinyanjui of Magnate Ventures. This has resulted in the loss of over Sh3B in taxes to the people of Kenya.” Reads the report to the EACC.

Kinyanjui is however not new to fraud claims, last year, the president’s close ally was linked to faulty Sh600m airport security tender. At JKIA, DCI sleuths probed how a multimillion tender for supply of scanners was awarded to Magnate Ventures Limited, which supplied faulty machines.

Kenyans will be curious how this case goes now that KRA claims to tighten the noose on tax evaders and reportedly rewarding whistleblowers handsomely. We will be following and update you on how everything goes. The letter was received by the KRA commissioner Investigation and Enforcement Department in 27th April, 2020.