Did State conduct due diligence on wind power line contractor?

Lake Turkana wind power project
Did the Government carry out due diligence when it was shopping for a contractor to build one of the largest power transmission lines?

This is one of the questions that has cropped up on several occasions over the last one year whenever officials from the Ministry of Energy tried to explain how one of the largest wind farms in Africa continues to stay idle more than a year after its completion.

The 300-megawatt plant in Marsabit County could have come in handy over the last two years when Kenyans had to grapple with higher power bills as thermal generators stepped in to bridge electricity generation gap, following a reduction in hydro-electricity capacity.

The Ministry through the Kenya Electricity Transmission Company (Ketraco) in 2011 hired a Spanish firm to build a 428-kilometre line between Loiyangilani and Suswa.

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The line was to connect power from the Lake Turkana Wind Power (LTWP) plant in Marsabit to the national electricity grid at Suswa.

The firm, Isolux Corsan could however not deliver the project on time, despite having more than five years to mobilise resources and deliver the project by end of 2016.

If anything, it has left a string of bills that the Kenyan taxpayer and electricity consumers have to foot.

The country has to pay Sh5.7 billion to investors of LTWP, a negotiated penalty for failure to have the line in place in 2016 as agreed as among the condition for the company to up the wind power plant.

Kenya also has to source for Sh12 billion upfront to complete the project by August, failure to which it will pay Sh1 billion per month penalty to LTWP until the line is in place.

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Isolux Corsan was in a shaky position for a number of years and went burst July last year when it filed for bankruptcy.

The firm had for more than a decade been chalking up debt to finance its expansion but by 2016, it was struggling to meet debt obligations.

It had to undertake a complex and painful restructuring that led to lenders taking up 95 per cent shareholding in a debt for equity swap.

Original shareholders were left with a five per cent stake. The company in a statement last December said it has over 2 billion euros ($2.1 billion) in restructured debt.

Before that, the firm had been gotten into loss-making territory since 2012 and had been getting worse to the point that as of December 2016 reported a 1.3 billion Euro loss.

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Isolux Corsan was dogged by issues from the onset. While the firm was awarded the contract for the project in 2011, it was not signed until 2014.

By the time Ketraco and Isolux executed the contract, the Spanish firm had already started experiencing financial woes, where it was finding it difficult to service debts and had already started making losses.

While a long process of land acquisition has partly been blamed for the delay in the commencement of the project, difficulties in mobilising resources by Isolux that also led to delay in the start of the project could have been a pointer for Ketraco to perhaps pull the plug on the contract.

“The ministry did not carry out due diligence. A company from Spain comes into the picture and said they have the money and capacity to undertake the construction of the power line. At the time of being given a contract, the company was already going belly up. They delayed to a point it was frantic,” said Ledama Olekina Senator, Narok County and a member of the Senate Committee on Energy.

“The Government also accepted certain conditions that put the country at a disadvantage whereby Spanish Government would fund the project on condition that a Spanish company would get the job.”

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When pitching for a contract, a company has to undergo an evaluation of its financial position.

This would enable the contracting entity to establish whether the firm has the financial muscle to mobilise resource as well as raise red flags if there are any at all about the company’s financials.

Getting funding

Energy Principal Secretary Joseph Njoroge said Ketraco undertook this evaluation. He added that among the conditions of getting funding for the project from Spain included getting a contractor from the country.

“We had a credit payer scheme whereby the (Spanish) Government recommended a contractor,” he said on why Kenya accepted conditions such as having a Spanish firm undertake the job.

“The implementing agency (Ketraco) was supposed to conduct due diligence, which was conducted.”

He attributed the fall of the firm to a recession in Spain between 2008 and 2010, which affected a number of companies in the countries.

“Remember that Spain underwent recession and it affected quite a number of these contractors and the contractor that we are talking about must have been a victim of that challenge,” said Njoroge.

The filing for bankruptcy that resulted in Ketraco terminating the contract has also seen Kenya losing the Spanish funding for the project.

This will mean that Kenya now has to make arrangements for finance the project to a tune of up to Sh12 billion. The project was initially expected to cost Sh15 billion.

Ketraco Chief Executive Fernandes Barasa has in the past defended the agency from having knowledge that Isolux may have been facing financial difficulties at the time of giving it the multi-billion-shilling contract.

He said Ketraco had done due diligence and that Isolux started experiencing problems after the award of the contract, which he said was due to rapid expansion in other countries.

“At the time of the doing financial evaluation, there were no indications of bankruptcy. If you look at the cause of their receivership, it was because they invested in foreign markets and this came after they were contracted to work in Kenya. We had looked at their position and projections and they were sound,” he said.

Ketraco has since handed over the project to a new main contractor, a consortium of two Chinese firms, NARI Group Corporation and Power China Guizhou Engineering Company, which has committed to complete the project by August 31 this year.

It has also taken a hands-on approach to overseeing the project including supervising and directly contracting firms for segments of the power line where construction works were yet to begin.

The contractors previously reported to the main contractor Isolux Corsan. 

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Isolux Corsanwind powerMinistry of Energy