Government illegally hired a Chinese firm to build SGR, Court declares

The Court of Appeal has declared the Sh500 billion contract between Kenya and China for the construction of Standard Gauge Railway illegal.

Court of Appeal Judges Martha Koome, Gatembu Kairu, and Jamila Mohammed ruled that the government failed to follow procurement laws while contracting China Bridges and Railway Corporation (CBRC) for the project.

During the appeal, it emerged that Kenya Railways Corporation (KRC), which was the implementer of the project on behalf of the government, head-hunted CBRC as a contractor before Kenya and China’s Exim bank sealed a financing deal.

This, the judges ruled, went against the procurement law and the Constitution.

They found that Kenya Railways failed to comply with Article 227 (1) of the Constitution.

The Article dictates that when a State organ or any other public entity contracts for goods or services, it should do so in accordance with a system that is fair, equitable, transparent, competitive and cost-effective.

The judges also found that Kenya Railways contravened section 29 of the Public Procurement and Disposal Act, 2005, which provided for open tendering.

The sections state that in the event the procuring entity decides to go for any other method of procuring goods and services, be it restricted tendering or direct procurement, it ought to obtain written approval from its tendering committee.

Supreme court ruling

Justice Isaac Lenaola, now a Supreme Court judge, had found that the deal between the government and China was not subject to the procurement law.

The Court of Appeal yesterday disagreed.

“We set aside that part of the judgement of the High Court holding that the procurement of the SGR was exempt from the provisions of the Public Procurement and Disposal Act, 2005 by reason of Section 6(1) thereof,” the judges said.

“We substitute therefore an order declaring that Kenya Railways Corporation, as the procuring entity, failed to comply with, and violated provisions of Article 227 (1) of the Constitution and Sections 6 (1) and 29 of the Public Procurement and Disposal Act,” they declared.

The government has completed phase one of SGR from Mombasa to Nairobi that cost Sh327 billion. Phase two to Naivasha cost Sh150 billion. The final phase from Naivasha to Malaba is projected to cost Sh380 billion.

The case was filed by activists Okiya Omtatah and Wycliffe Gisebe.

Kenya Railways former director Atanas Maina had told the court that the corporation hired CBRC as a condition set in the financing agreement between Kenya and China.

The Attorney General had argued that arising from the government to government loan agreement, the SGR project was exempted from the requirements dictated in the procurement Act.

“Based on the foregoing, it is not accurate, as was claimed by Mr Maina, that the engagement of CRBC as the contractor was as a result of dictation by the financing agreement. We conclude, therefore, that the engagement of CRBC was not an obligation arising from the “negotiated grant or loan” agreement for purposes of Section 6 of the Act,” the Appellate Court judges found.

“This is because as indicated above, the contract with CRBC as the contractor was procured long before the financing agreement was entered into. The holding by the learned judge to the contrary is with respect not supported by the facts as set out above,” they said.

China deal

In August 2009, the Ministry of Transport sealed a deal with CRBC that the Chinese entity was to undertake, at its cost, a feasibility study on a railway system between Mombasa and Malaba.

The firm was to also consider the technical details of the project, determine the financing required, and how the project was to be implemented.

The agreement between the ministry and CBRC also provided that the firm would carry out the preliminary design with the ministry’s help. It further stated that after completion and agreement of the design, both sides would proceed to negotiate on the commercial contract for the project.

The feasibility study and preliminary design report were submitted to the Government of Kenya in February 2011 while KRC approved the same on June 26, 2012.

After signing the commercial contract, CBRC would look for sources of funding.

The Chinese firm floated financing options which included direct investment from CRBC. It also suggested buyer’s credit from the Kenya Government and seller’s credit from CRBC.

It also offered direct investment from other financial institutions for other sources that would be identified in the future.

The procurement of CRBC was, therefore, a foregone conclusion from the outset.

Judges noted that this knocked out a possibility of Kenya following procurement procedures which would be dictated by the financing arrangement.

“…whereas there was no clarity at that time how the project would be financed, it was crystal clear that once funding was secured, however that would be achieved, the project would be executed by CRBC. The question of the procurement procedure being dictated by subsequent financing arrangement would therefore not arise,” they noted.

The judges, however, dismissed claims that the government bypassed Parliament and that it failed to factor in the environmental impact of the project.

The activists in their case which was supported by the Law Society of Kenya (LSK) had argued that Kenyans will not get value for money and that the project’s cost was inflated.

Project design

According to Omtatah and Gisebe, the project’s design and supervision of the construction services amounting to US$110 million (Sh11 billion) were duplicated, hence a loss to the public.

This was disputed by the State, which argued that there was no basis for the claim, adding that the project was of benefit to Kenyans.

The activists also argued that CRBC was precluded from entering into the contract for the construction of the SGR having undertaken the feasibility study.

The LSK in its case argued that the government contravened procurement regulations as it never floated an open tender or direct sourcing of the project.

China Road supported the government’s case that the appeal by the activist should be dismissed.

Through lawyer Kiragu Kimani, China Road argued that the case in court was already dead as SGR is already up and running.

“SGR was operational from 2017. What you are being told is to reverse the clock,” argued the firm.