Kenya Insights

Tag: Ormat technologies

  • Fleecing KPLC: US Authorities Alarmed Over Extraordinary Profits Made By Ormat From Struggling KPLC

    Fleecing KPLC: US Authorities Alarmed Over Extraordinary Profits Made By Ormat From Struggling KPLC

    American Independent Power Producer (IPP) Ormat Power is on the spotlight in the US for booking outsized gains from Kenya, just days after the President appointed a taskforce to investigate power producers.

    The company’s filings to the Securities Exchange Commission of the United States of America says a huge percentage of income comes from Kenya Power. The utility firm has been struggling to pay Ormat and as of July 2021, it owed the independent producer Sh4.3 billion.

    “A substantial portion of international revenues came from Kenya and, to a lesser extent, from Honduras, Guadeloupe and Guatemala and other countries. Our operations in Kenya contributed disproportionately to gross profit and net income,” the energy firm said in SEC filings.

    Profitable firms

    The company earns twice more than Kengen per megawatt hour. The taskforce investigating power prices advised that all IPPs should slash their tariffs to match state owned Kengen. Kengen is one of the most profitable firms in the region.

    An analysis by the Wall Street Journal owned newsletter Daily Grant says, “ultra premium represents the secret sauce of that windfall. Zachary Truesdell the former MD at Matador Global Management estimated to Grant last year that Ormat earned $94 per megawatt/hour of power provided to Kenya Power, more that double the $45 paid to Kengen.”

    In the SEC filings, the company acknowledges receiving a letter from Kenya’s Parliament to explain the nature of its dealings with Kenya Power, but says it was not about negotiating tariffs.

    “In July 2021, Ormat received a letter from the Kenya National Assembly with a request to respond to various questions and to provide materials regarding our Olkaria complex operations and its PPA. Ormat is engaged in conversations with the Kenya National Assembly to respond to their requests,” said Ormat to the US regulator and investors.

    This web of activities and pricings are an eye opener into how private and foreign players could be charing consumers of their hard earned money through ultrahigh power tariffs.

    The company’s revenue from Kenya has improved from 15 per cent of total revenue last year to 17.5 per cent of the total revenue in 2021. “As of June 30, 2021, the amount overdue from KPLC in Kenya was $43.5 million of which $13.2 million was paid during July 2021. These amounts represent an average of 77.2 days overdue,” the SEC files say.

    Ormat said it believes it will be able to collect all unpaid revenue in Kenya. This belief, it says, is supported by the fact that in addition to KPLC’s obligations under its power purchase agreement, the company holds a support letter from the Government of Kenya that covers certain cases of KPLC non-payment. This includes cases such as where caused by government actions/political events.

    Fixed payments Additionally, the company continued to experience certain curtailments in the first and second quarters of 2021 by KPLC in the Olkaria complex. The impact of the curtailments is limited given that the structure of the PPA secures the vast majority of the Company’s revenues with fixed capacity payments unrelated to the electricity actually generated.

    Due to the high amounts paid to IPPS and high system loses, Kenya is grappling with sky-high electricity prices that continue to keep the cost of living high, while pushing investors out of business which in turn keeps unemployment high.

    In an interesting twist in the sector however, Kenya Power announced last week that it has bounced back to profitability, with Sh1.5 billion in net earnings for the year ended June 30, 2021 compared to a Sh939 million loss last year.

    A detailed analysis from the grants is as below;

    Clean energy is a relative term. Let’s review the peculiar case of Ormat Technologies, Inc. (ORA on the NYSE), the 56-year old, Nevada-based firm that manufactures and installs small geothermal power plants.

    As geothermal energy is both far greener than conventional fossil fuels and represents a reliable, baseload power source (unlike intermittent wind and solar energy), the company is a darling of the prospering environmental, social and governance-focused investment movement.

    Ormat is ranked in the 77th percentile of CHub’s ESG ratings aggregate of 25,208 companies compiled by 787 data sources, topping the average rating of its alternative energy peers, while
    Morningstar bestows a “low” ESG risk rating on the company. ORA is likewise the apple of Wall Street’s eye, trading at 50 times consensus estimates of 2021 earnings per share and six times expected full-year revenues.

    Shares are, however, up just 5% including dividends since Grant’s Interest Rate Observer had its bearish say back on March 6, 2020. Over that time, the S&P 500 has returned 56%.

    The starring role of Kenyan operations in the Ormat story presents a major potential vulnerability. Namely, Kenya delivered 16.4% of revenues through the first six months of 2021, up from 15.7% in the year ago period, and “contributed disproportionately to gross profit and net income,” notes Ormat’s most recent
    form 10-0 filed in early August.

    Ultra-premium pricing may represent the secret sauce for that windfall. Zachary Truesdell, then managing-partner at Matador Global Management, estimated to Grant’s last year that Ormat was earning around $94 per megawatt hour (MWh)
    of power provided to local customer Kenya Power & Lighting Co. (KPLC), morethan double the $45 MWh rate for state-owned geothermal competitor Kenya Electricity Generating Co.

    That disparity has drawn some unwanted attention. This spring, Kenyan President Uhuru Kenyatta convened a task force to scrutinize all power purchaseagreements involving Kenya Power, following the revelation that independent
    power producers (IP’s) were enjoying rates far above those charged by the KenyaElectricity Generating Co. Upon the completion of that review last month, Kenyatta ordered the halt of all power purchase agreements still under negotiation and established a team of auditors to supervise KPLC, while replacing the country’s energy minister. Energy costs in the country will drop by as much as 33% thanks to those enhanced controls, Kenyatta’s office asserts.

    In its 10-Q filing, Ormat acknowledges receiving a letter from the Kenya National Assembly in July requesting information and materials related to its business practices there. For its part, Ormat tells Almost Daily Grant’s that it has not been approached by the Kenyan government regarding a renegotiation of its rates, and that its prices are
    “significantly’ ” lower than those charged by other firms in Kenya.

    Operational risks extend beyond the durability of that lucrative Kenya-based revenue stream. As that 2020 Grant’s analysis pointed out, chairman Isaac Angel served as CEO of Lipman Electronics Engineering Ltd. prior to its 2006 acquisition by Verifone Holdings, Inc. for $793 million in cash and stock. Thanks in part to financial irregularities at Lipman, Verifone was subsequently forced to
    fork over $95 million in a class action lawsuit, a setback which led to the resignation of Verifone’s CFO.

    Then, too, current Ormat CEO Doron Blachar previously served as chief financial officer at Israeli construction firm Shikun & Binui, a company that is now under formal police investigation for bribery. That inquiry is reportedly focused on Kenya and Guatemala, two of Ormat’s most important markets.

    A March 1 analysis by Hindenburg Research alleges that the company routed energy assets through Guatemala via an undisclosed related party, which in turn transferred energy rights to the two senior government officials who approved
    Ormat’s deal to operate in the country. While the company website boasts that its geothermal plants are “powered by nature,” Ormat’s “lucrative international contracts appear to be powered by a slew of payments to senior government
    officials,” Hindenburg writes.

    In March, the company condemned Hindenburg’s report as “inaccurate and filled with innuendo in an attempt to mislead investors about Ormat.” Apart from those allegations, a report last year from local news service NewsZetu asserted that Kenya Power is “broke,” and “technically insolvent,
    .” as net profits collapsed by 92% over the 12 months through June 30, 2019 compared to the
    prior year period. The slow-paying KPLC owed Ormat about $30 million as of the end of July, the 10-Qnotes. That’s equivalent to 37% of 2021 consensus net income.

    Billow Kerrow the former Senator of Mandera has termed it as a “Shame and fleecing Kenyans.”

    In a previous article we did on Kenya Insights and in which we largely relied on the Hindenburg damning report, Ormat came at us with legal demands claiming the publication had some errors, they however didn’t dismiss the entire content.

    In the Hindenburg Report titled ‘Ormat: Dirty Dealings in ‘Clean’ Energy’ it made damning  allegations on the firm’s operations in Kenya saying that;

    • Ormat’s operations in Kenya contribute “disproportionately” to the company’s bottom line, generating an estimated ~41% of the company’s FY 2020 net income. Its customer is the Kenya state power company.
    • A politically-connected businessman admitted to us that he “opened the doors” for Ormat in Kenya and got the go-ahead for the project after an in-person meeting with the Kenya Power boss (who was later charged with corruption) and former President Daniel Arap Moi, widely regarded as one of Kenya’s most corrupt leaders.
    • We present documents showing that Ormat paid contractors in Kenya tied to corrupt government officials, including one run by the son of the former President Daniel Arap Moi along with others run by his documented front-men.
    • The head of the Kenyan state-backed utility who oversaw the original contract with Ormat, as well as the energy minister at the time, were later found to have demanded millions of dollars in bribes to allow international power companies to do business in Kenya.
    • Two former CEOs of Ormat’s Kenyan customer (the state-backed utility) were subsequently arrested in 2018 and more than a dozen top managers were arrested or accused of crimes relating to corruption.
    • The same state utility customer, responsible for driving Ormat’s “disproportionate” financial success in the country, is reportedly “broke” and “technically insolvent”, posing another threat to Ormat’s most lucrative market.

    In sharp reaction, Ormat denied the accusations in a letter to Kenya Insights, “unsupported contentions about third parties such as the “Mugwe firm” and its portfolio, former and current Kenyan presidents and their purported associates, and KPLC managers. These statements are a blatant attempt to sully Ormats reputation through “innuendo” and misleading reporting.”

    Ormart dismissed the allegations against them in the report terming it as a mere “opinion paper” that intends to influence and manipulate the price of a listed stock.

    In their letter, Ormat demanded we publish the following, “Ormat’s Olkaria facility in Kenya is the first and only privately funded and developed geothermal project in Kenya. The project was developed consistently with best market practices at the invitation of the Kenyan government. This project has been widely applauded as a successful
    major Kenyan achievement that has resulted in competitively priced renewable energy. The Company is committed to operate with full transparency with all governmental agencies and
    conducts business with integrity and according to the highest ethical standards in all regions in which it operates    .”

    Kenya Insights complied with the demands and gave the firm a right of reply to the report and allegations. In a letter to Ormat, we asked pertinent questions;

    Letter to Ormat

    For clarifications so that we don’t have to clash again, the editorial will need answers to some questions that perhaps laid ground for the previous ‘misunderstanding’ so kindly pass over the following questions to your client as we have assigned another writer to follow up on this story that we shall publish as a retraction for the previous. Note that our concern is OrPower is at the center of investigations by the parliament and in the good of public, a whole story need to be told not just a PR article:

     

    1. Block & Leviton LLP, a US national securities litigation firm, in March announced that it is investigating Ormat Technologies, for potential violations of the federal securities laws. What’s the reaction to this?

     

    2. Hindenburg Research said Ormat paid contractors in Kenya tied to corrupt government officials. The report widely accuses the management of links to corruption and bribery not only in Kenya but other countries as Honduras. We’d like to get the overall view of the company on this particular report and more specifically to the Kenyan context.

     

    3. OrPower has been accused of exploiting Kenyans with exorbitant prices. For instance, it’s alleged that KPLC buys Sh23 per kilowatt hour yet it can buy the same at Sh0.50 from KenGen. Infact, some are saying that it’s a possibility that cartels in the sector are purchasing power from KenGen at Sh0.50 and offloading to Kenya Power at Sh23. Is this a fact? If so what’s the justification for the high price and direct answer to those claiming it’s exploitation given that Ormat is the second largest producer after KenGen.

     

    4. Recent losses at Kenya Power and expensive electricity bills to consumers have shifted focus to lucrative deals signed between Kenya Power and IPPs. Do you think as a producer this is where the back lay?

     

    5. We’re requesting for the details of operations at Olkaria and agreements or any other relevant document you can avail to us as a matter of openness and integrity.

     

    6. Is it true that the US department of justice is investigating unfair pricing between Kenya Power and Ormat Technologies which was allegedly forwarded by OECD?

    Worthy to note that, we sent the letter on 29th September and a month later and as of the time of publication, we haven’t gotten a reply from Ormat and we can’t tell why they decided not to reply.

    While Ormat distance themselves from bribery allegations, in Kenya some state officials are bragging of having given them a life kick. Disgraced former Geothermal Development Company (GDC) CEO Dr Silas Masinde Simiyu who was also accused of abuse of office and failing to ensure proper management of public funds and fired, has been bragging to anybody who cares to listen that he was behind the successful tendering of Orpower 22 Limited, Sosian Menengai Geothermal Power Limited and Quantum East Africa Power Limited for the Menengai Geothermal Project.

    The Kenya Power and Lighting Company PLC (Kenya Power) recently announced a profit before tax of Kshs.8.2 billion for the period ending 30th June 2021, representing a 216% YoY growth compared to a loss before tax of Kshs.7.04 billion. The strong performance was mainly driven by growth in sales and revenue, as well as a double digit reduction in costs and expenses.

    In the immediate to medium terms, Kenya Power is undertaking deep seated reforms aimed at driving down the cost of power to the end consumer in order to spur social and economic growth, make the business more efficient and agile, and the energy sector more sustainable.

    “The Board recognised that a continued unbalanced approach towards power purchase agreements posed a systemic risk to the sector and the economyas a whole while exposing consumers to high electricity bills. In mitigation, it undertook a collective stakeholder approach to resolve these issues which resulted in the report of the Presidential Taskforce on the Review of Power Purchase Agreements which has made far reaching recommendations which we have started implementing,” noted the Chairman of the Board of Directors, Vivienne Yeda.

    The task force unearthed how Kenya was getting ripped off by IPPs.

    Electricity consumers in Kenya have been paying heavily for the weakening shilling, the latest review of Power Purchase Agreements (PPAs) shows.

    The report by a presidential task force to look into power deals between Kenya Power and Independent Power Producers (IPPs)  shows the country is paying Sh31 more per dollar for a deal entered when the US currency was trading at Sh72 in 2001.

    ”Most of the PPAs executed between the off-taker and IPPs in the country are denominated in foreign currency,” the detailed report reads in part.

    According to the task force set up by President Uhuru Kenyatta, the government bears the responsibility to make dollars or euros available, while the off-taker covers any exchange rate fluctuation risks as well as inflation, by passing the additional cost to the consumer.

    For instance, Tsavo Power signed a dollar-denominated power agreement with Kenya Power in 2001. The currency was trading at Sh72. Today, the dollar is trading at a high of Sh111, Sh29 more.

    The deal between the two companies, however, expired last month.

    Rabai Power on other hand is now earning at least Sh22.40 more per dollar for the deal signed in May 2010 when the US dollar was trading at 107.63.

    The contract which expires in May 2030 means the power producer is likely to reap more as the shilling slides further against the US dollar. The shilling was trading at Sh111 on Monday.

    Ormat is also under the same exchange program.

    Kenya Power is currently forced to shoulder an extra Sh7.60 per dollar to repay the power producer. This is likely to increase as the shilling further drops against the greenback.

    According to the report which is now under implementation stage, the life of a PPA averages 20 years and the exchange rates between the Kenya shilling and the US dollar/Euro is bound to change significantly over the twenty (20) years.

    The task force has recommended renegotiation of some of the power deals, suspension of expensive ones, and termination of ongoing negotiations.

    The report calls for a need to develop locally denominated PPAs to promote use and adoption in local power contracts.

    ”The Taskforce recommends that all future PPAs should be denominated in Kenya Shillings. Stability of local currency will enhance bankability of projects,” the report reads.

    It adds that a monetary policy implementing agency will be required to ensure stable macroeconomic stability to avoid fluctuations in the local currency and erosion of the real value of money.

    ODM leader Raila Odinga has called on the government to review contracts between Kenya Power and independent power producers (IPPs).

    Speaking in Naivasha yesterday after a meeting with local leaders, Raila said the only solution in addressing the high cost of electricity in the country lies in reviewing all power contracts between the utility company and the independent producers.

    The former premier accused the independent power suppliers and unnamed individuals of fleecing the country through expensive deals signed in unclear circumstances.

    Part of the recommendations in the John Ngumi led report by the, Presidential task-force on Power Purchase Agreements is that power purchase agreements with especially both diesel and renewable energy producers is that their tariffs should match Kengen tariffs.

    Matching Kengen tariffs means that most of them will slash their tariffs by half. However Kengen is one of the most profitable companies in Kenya and in the region, meaning the proposal is not that bad.

  • Short Seller Believes That Ormat Technologies Is Engaged In “Widespread And Systematic Acts Of International Corruption”

    Short Seller Believes That Ormat Technologies Is Engaged In “Widespread And Systematic Acts Of International Corruption”

    Foreign Corrupt Practices Act scrutiny can arise in a variety of ways. Although not common, occasionally (see here for a prior example) a short seller (generally speaking an investor hoping to profit if a company’s shares fall) alleges that a company is engaged in corruption.

    Recently, Hindenburg Research issued this lengthy report suggesting that Ormat Technologies (a Nevada-based geothermal power company with shares traded on the New York Stock Exchange that owns and operates power plants in Kenya, Guadalupe, Guatemala, Honduras and the United States)”has engaged in what we believe to be widespread and systematic acts of international corruption.”

    In pertinent part, the report states:

    • Immediately prior to their work at Ormat, several senior Ormat executives and directors worked at Shikun & Binui, a leading Israeli construction company. Shikun & Binui was recently charged by Israeli prosecutors with bribing officials in what are now two of Ormat’s key markets, Kenya and Guatemala.
    • Ormat’s General Counsel & Chief Compliance Officer, along with an Ormat director, are under pre-indictment in Israel. This is a formal stage of prosecution just prior to indictment. Ormat has apparently chosen not to disclose that the two are currently in the midst of a criminal prosecution. Both still serve in senior oversight roles at Ormat.
    • Ormat CEO Doron Blachar’s immediate prior work experience was serving as CFO at Shikun & Binui. The CEO during Blachar’s entire tenure at Shikun & Binui was arrested in 2018 over the above-referenced bribery allegations. It is unclear whether Blachar faces eventual risk of indictment as well.
    • International electricity projects contributed to 70% of Ormat’s 2020 net income—the vast majority of which is comprised of Kenya, Guatemala, and Honduras. We have uncovered evidence tying Ormat to corruption with senior government officials in this lucrative international business.
    • For example, multiple former Ormat employees and business partners have revealed how Ormat routes sales of energy assets in Guatemala through an undisclosed related party entity. Guatemalan corporate records corroborate these claims.
    • The entity shares an address with several Ormat subsidiaries and was set up by a former Ormat senior employee-turned “independent” consultant who answers directly to senior Ormat leadership, according to the former employees.
    • Official corporate records show that the same Guatemalan entity funneled energy rights to two senior government officials who were responsible for approving Ormat’s original deal in the country; the former head of the Mines & Energy Ministry and the former head of the state utility company.
    • We believe this is direct evidence tying Ormat to corruption with senior Guatemalan government officials.
    • Another Guatemalan Mines and Energy Minister, who was in office when Ormat was later  awarded major improvements to its contract, was fired and charged with corruption by the United Nations-created anti-corruption commission. He is currently on the run with an outstanding international arrest warrant.
    • Ormat’s operations in Kenya contribute “disproportionately” to the company’s bottom line, generating an estimated ~41% of the company’s FY 2020 net income. Its customer is the Kenya state power company.
    • A politically-connected businessman admitted to us that he “opened the doors” for Ormat in Kenya and got the go-ahead for the project after an in-person meeting with the Kenya Power boss (who was later charged with corruption) and former President Daniel Arap Moi, widely regarded as one of Kenya’s most corrupt leaders.
    • We present documents showing that Ormat paid contractors in Kenya tied to corrupt government officials, including one run by the son of the former President Daniel Arap Moi along with others run by his documented front-men.
    • The head of the Kenyan state-backed utility who oversaw the original contract with Ormat, as well as the energy minister at the time, were later found to have demanded millions of dollars in bribes to allow international power companies to do business in Kenya.
    • Two former CEOs of Ormat’s Kenyan customer (the state-backed utility) were subsequently arrested in 2018 and more than a dozen top managers were arrested or accused of crimes relating to corruption.
    • The same state utility customer, responsible for driving Ormat’s “disproportionate” financial success in the country, is reportedly “broke” and “technically insolvent”, posing another threat to Ormat’s most lucrative market.
    • In Honduras, Ormat charges the state energy company roughly the same rate as end customers pay, virtually guaranteeing a loss for the state. These rates make no economic sense.
    • The power agreement assumed by Ormat in Honduras was signed within days of other uneconomical agreements that were signed by the then head of the state utility, who is now under investigation for corruption relating to those agreements.
    • We found that an opaque Panamanian entity with no public presence, formed the day after the Honduran coup, registered to unnamed nominee directors, was inserted into the deal. We have submitted a FOIA request to a U.S. agency and are awaiting imminent release of records relating to the entity.
    • Ormat’s Honduran plant operates in Copan, known as drug cartel territory. A Honduran congressman told us “You can’t operate in Copan without paying the cartels, the gangs or corrupt politicians – and sometimes all three.”
    • We found that Ormat’s contractor in Honduras was raided by authorities on suspicion of being a front company for drug cartels. Its owners are in jail awaiting trial.”

    In response to Hindenburg’s report, Ormat issued this statement:

    “Hindenburg is a self-proclaimed short seller who we believe stands, along with its clients, to realize significant gains in the event that Ormat’s stock price declines.

    Hindenburg’s claims are inaccurate and filled with innuendo in an attempt to mislead investors about Ormat.

    We have been providing clean renewable energy in Kenya, Honduras and Guatemala for many years, supporting local communities. Our facilities are financed by numerous leading multinational banks, which conduct extensive due diligence on the Company and its operations prior to entering into lending agreements. We are committed to conducting all of our business according to the highest ethical standards, and we have clear policies in place to ensure our people and our partners act accordingly and consistent with all applicable laws and regulations.

    The Company is aware of claims being investigated in Israel regarding Ravit Barniv, an Ormat Board member, and Hezi Kattan, the Company’s General Counsel and Chief Compliance Officer. The claims involve Ms. Barniv’s and Mr. Kattan’s work at another company, prior to joining Ormat. Those claims remain subject to a governmental hearing that may take time to conclude and Ormat is monitoring the process closely.

    On February 24, 2021, the Company’s Board of Directors determined that, at this time, it would be prudent to transfer the responsibility for the Company’s compliance function to other members of the Ormat management team until these issues are resolved. In addition, Ms. Barniv told the Board of Directors that she believes that investor attention should be focused on Ormat’s strong performance and future prospects. Accordingly, she has decided not to stand for reelection at the upcoming Annual Meeting expected in May.

    Ormat is a global leader in geothermal energy. As the only vertically integrated company in our industry, Ormat is uniquely positioned to serve customers from plant design to supply and development of geothermal, recovered energy, and energy management and storage solutions.

    Ormat’s Board of Directors and leadership team are confident in the Company’s strategy. Our strong performance shows that we are on the right path for long-term success and to continue the Company’s growth trajectory. We are focused on capitalizing on our momentum – even in light of the COVID-19 pandemic – and will continue to serve and act in accordance with our values, high ethical standards and in our shareholders’ best interests.”

    Upon release of the Hindenburg report, shares of Ormat dropped and as predictable as the sun rising in the east and dogs barking, plaintiffs’ firms representing shareholders began to mobilize.

    On March 1, 2021, before the market opened, Hindenburg Research published a report entitled “Ormat: Dirty Dealings in ‘Clean’ Energy.” According to the report, the Company “has engaged in what we believe to be widespread and systematic acts of intentional corruption,” adding that it “expect[s] the blowback to these revelations to be severe, threatening Ormat’s contracts in its most lucrative markets.” The report alleges that Hindenburg “uncovered evidence tying Ormat to corruption with senior government officials,” and “direct evidence tying Ormat to corruption with senior Guatemalan government officials” further noting “Ormat paid contractors in Kenya tied to corrupt government officials.”

    On this news, Ormat’s stock price fell $1.00, or 1.1%, to close at $84.67 per share on March 1, 2021, thereby injuring investors.

    The same day, after the market closed, Ormat responded to the report and acknowledged that “[t]he Company is aware of claims being investigated in Israel regarding Ravit Barniv, an Ormat Board member, and Hezi Kattan, the Company’s General Counsel and Chief Compliance Officer.” Though the “claims involve Ms. Barniv’s and Mr. Kattan’s work at another company, prior to joining Ormat,” the Company announced that it would “transfer the responsibility for the Company’s compliance function to other members of the Ormat management team until these issues are resolved.”

    On this news, Ormat’s stock price fell $1.68, or nearly 2%, to close at $82.99 per share on March 2, 2021, thereby injuring investors further.

    Immediately, The Law Offices of Frank R. Cruz announced an investigation of Ormat Technologies, Inc. (“Ormat” or the “Company”) on behalf of investors concerning the Company’s possible violations of federal securities laws.

  • Bribery Scandal at Israeli Construction Giant Blows Cover Off Its Business Practices in Africa

    Bribery Scandal at Israeli Construction Giant Blows Cover Off Its Business Practices in Africa

    Police: ‘Picture arises of S&B systematically bribing gov’t officials with tens of millions of dollars for years’

    February 2016, Nairobi, ostensibly just another day at the office. Dan Shaham, manager of the Kenya branch of SBI Infrastructure, a member of the Shikun & Binui construction group, summoned accountant Shai Skaf to his office.

    Unusually, the blinds were closed, and on the desk was a file bound in red that Skaf hadn’t seen before.

    Shaham locked the door, praised Skaf for his work, implied that he had a bright future with SBI and told him it was time for him to “join the family”. Then he gave Skaf a top-secret mission: Compare the figures in the red file with other data, which he had to take home, not show the family, and keep under lock and key.

    The red file contained double books. In short order, Skaf realized he was looking at documentation of bribes to officials in east Africa, he claimed in his lawsuit against the company in 2017.

    Two days after that, Skaf says, he told his boss he wouldn’t cooperate, and was advised that he’s a spineless sissy. “When in Africa, be African. They all give and take bribes,” Shaham yelled at him, according to Skaf, and reportedly also said, “Why do you think profitability here runs at 40% and in Nigeria, 65% and in Israel, 4%?”

    Skaf claims to have confided in CPA Ruby Lazarov of the accounting firm of BDO Haft, SBI’s auditor, visiting the Nairobi branch. To his shock, says Skaf, Lazarov reportedly said that he’d known of these things for years and it’s the norm in S&B’s activity. According to Skaf, Lazarov specifically mentioned Nigeria, Uganda, Guatemala and in the past, the Ivory Coast, but added that the volumes of graft in Kenya were relatively minor.

    At some point unidentified parties began threatening his life, Skaf says – and in August 2016, he was beaten to within an inch of his life and threatened with a knife. The frightened accountant went back to Israel the next day. Lazarov was arrested in late February 2018 in connection with the alleged corruption.

    Most of S&B’s projects in Africa are governmental. Following an amendment of Israeli law that came into force in 2010, bribing foreign officials is just as illegal as bribing Israeli ones.

    Skaf claims Lazarov counseled him to look the other way and said it wasn’t a practice peculiar to East Africa but a “familiar, deeply-rooted practice backed by the company’s internal auditor, board audit committee, the company’s legal department and even reaching Ofer Kotler,” S&B’s former CEO.

    Kotler led the company from 2007 to 2015 and, with Lazarov, was also detained, as was S&B’s internal auditor, Abraham Admoni, and the CEO of S&B Switzerland, Rony Paluch. Ravit Barniv, who chaired S&B from 2007 to 2012, was questioned and sent to house arrest. Skaf claims to have warned Admoni and Paluch about graft, in vain.

    It seems at this stage to be one of the most egregious corruption cases involving a publicly-traded Israeli company. If not for the media swirl surrounding Netanyahu, the S&B case would probably have made front pages, especially as the company is controlled by billionaire Shari Arison, who also controls Bank Hapoalim.

    Shari Arison at the President's conference in 2011

    Shari Arison at the President’s conference in 2011.

    Police suspect that eight people, current and former executives at S&B, were involved in, or knew about, methodical bribery of government officials in several African countries to get infrastructure projects.

    “I’m not surprised it reached the levels of Barniv and Kotler,” said an equity analyst who knows the company. “Solel Boneh Overseas (Engineering Services) is the most substantial, profitable company in the S&B group. Profitability in Africa, particularly in Nigeria, is phenomenal. For years when asked, company managers would explain that Africa involves higher risk, but obviously that can’t explain the huge profits. The issue of ties in government always floated there in the background. The 2016 financial statement relates that infrastructure activity in Nigeria stopped because of a change in government, and the new government was halting payments to contractors. Somebody who knows the company joked that it was simply taking time to obtain the private bank account numbers of the new rulers.”

    Solel Boneh began working in Africa in the 1960s, a time when Israeli companies were starting to work on the continent with the encouragement of the Israeli government. Then Solel Boneh was controlled by the Histadrut labor federation.

    In the last 20 years, SBI projects in Africa have usually been sponsored by the World Bank and various UN bodies. The contract is made with the state but the international institutions are the ones that in practice transfer the money from the government to the company. At least part of the current affair, it seems, stems from the World Bank’s discomfort with S&B’s behavior. That is implied in a statement S&B made to the Tel Aviv Stock Exchange when the affair broke out. It reported that the World Bank was probing S&B’s projects in Kenya.

    After Skaf’s lawsuit arrived, S&B and its Swiss subsidiary, through attorney Pini Rubin of Gornitzky & Co., which is close to Shari Arison, tapped the European Institute of Certified Public Accountants to conduct an internal investigation.

    Strange as it may sound, S&B wants to shake off the Israeli connection to the affair, and as far as the parent company is concerned, it shouldn’t have been investigated by the authorities in Israel, despite the anti-graft law. That version suggests that if there was corruption, it is a Kenyan-Swiss affair and the people involved are not Israeli residents, but former Israelis.

    “It’s a separate company with a separate board, most of which is Swiss,” says a source near S&B.

    “There are Israeli names but they aren’t actually Israelis, they’ve been living abroad for years. The company in Switzerland is materially a foreign company. It operates in Africa and its management and control aren’t in Israel. It doesn’t matter if its profits ultimately reach Israel. What, could a company that receives the profits upstream be a partner in crime, if, heaven forbid, any was committed?”

    Clearly, Israeli authorities think otherwise. On February 20, Amit Michles, the detentions judge presiding in Rishon Letzion, referred to the World Bank probe (from confidential information for his eyes only) was known. The police representative at the hearing told the court that the affair concerns the years 2008 to 2012 but now there is new evidence regarding the present.

    Two days later at a remand hearing for additional suspects, the police representative said, “A miserable picture arises of S&B systematically bribing government officials with tens of millions of dollars for years, and more, around the world, all to increase its profits. In some cases S&B defrauded banking institutions affiliated with the UN, institutions established for noble purposes such as developing infrastructure in developing countries. If the suspicions turn out to be true, the damage caused to the State of Israel’s image will be hard to estimate.”

    ‘The bastards changed the rules’

    All the suspects vehemently deny the allegations. But some may yet argue that, as Shaham allegedly told Skaf, “that’s how things have always worked in Africa.” Indeed, at a remand extension hearing of Yehuda Elimelech, who managed Solel Boneh Overseas until 2011, his lawyer hinted that until 2010, there had been a certain culture to S&B’s operations in Africa. When the graft law was enacted in 2010, Yehuda asked for a legal opinion about it out of a genuine desire to instill the new norms, she said. Michles answered that the evidence does not support that claim.

    Many Israeli companies operate in the third world and traditionally the government ignored the culture of corruption there. But that’s been changing; note the charges against mining magnate Beny Steinmetz regarding alleged graft in Guinea.

    “This is a case of ‘the bastards changed the rules,’” says an executive in infrastructure who knows S&B. “Once, bribery was the standard, the norm. But now these countries want to be part of the normal world, and the international institutions, the UN and World Bank, are keeping closer watch.”

    We tried talking with past and present directors at S&B, and the few who would talk, off record, claimed to have known nothing about graft in Africa.

    Shari Arison’s public-relations machine paints S&B as a company that does operate for profit but has green and ethical values. The fact is that most of the company’s profits stem from the third world. S&B’s EBITDA for 2016 totaled 606 million shekels, of which Africa contributed 65%.

    Market sources suspect the affair could hurt the company, especially given the high proportion of its profit stemming from Africa, which implies that it will have to change strategy. The company’s stock has fallen over 20% since the story broke out, reducing its market cap to 2.6 billion shekels. It could fall more if only because of the uncertainty, says an equity analyst. He doesn’t see the company quitting Africa, noting that it has projects in process; but it will have to rethink its strategy for the third world in general.

    The Arison Group commented: “As published, S&B is fully cooperating with the investigation and hopes it ends soon on a positive note, as the company has zero tolerance for improper conduct. The group does and will operate to instill high standards of values in everything it does and in every area of its investments. We hope the group’s 27,000 workers and managers in Israel and around the world will continue to work with added value for the economy, society and the environment.”

    S&B commented that the claims arise from a lawsuit by one former worker of a foreign group company operating partly in Africa and following that, the company itself contacted European enforcement agencies (where the company resides) and is conducting its own investigation. It added that its companies have always operated by a strict ethical code based on leading international standards and has no tolerance for improper conduct. The company said it could not comment on the claims raised by the police and in the article because of the investigation in process.

    Ormat Technologies

    Immediately prior to their work at Ormat, several senior Ormat executives and directors worked at Shikun & Binui, a leading Israeli construction company. Shikun & Binui was recently charged by Israeli prosecutors with bribing officials in what are now two of Ormat’s key markets, Kenya and Guatemala.

    Ormat’s General Counsel & Chief Compliance Officer, along with an Ormat director, are under pre-indictment in Israel. This is a formal stage of prosecution just prior to indictment. Ormat has apparently chosen not to disclose that the two are currently in the midst of a criminal prosecution. Both still serve in senior oversight roles at Ormat.

    Ormat CEO Doron Blachar’s immediate prior work experience was serving as CFO at Shikun & Binui. The CEO during Blachar’s entire tenure at Shikun & Binui was arrested in 2018 over the above referenced bribery allegations. It is unclear whether Blachar faces eventual risk of indictment as well.