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How Chinese firm walked away with Sh1.4b without breaking a sweat

By Nzau Musau and Julius Chepkwony | Mar 31st 2019 | 5 min read
By Nzau Musau and Julius Chepkwony | March 31st 2019
A Geothermal development Company steam well in Menengai, Nakuru County.

In yet another brazen act of disdain for the Kenyan taxpayer, a foreign contractor has pocketed Sh1.4 billion advance payment and left a parastatal in the energy sector high and dry, gasping for breath.

It is a familiar story; contractor plucked from faraway lands, signs up an externally funded multi-billion shilling project, painfully obtains an advance payment guarantee from a bank, gets paid a quarter of contract price, bizarrely recalls the guarantee, delays to mobilise for works, contract expires and taxpayer is left with a festering fiscal wound.

It is the story of Hong Kong Offshore Oil Services Limited (HOOSL), a company contracted by Geothermal Development Company (GDC) to drill 15 to 20 geothermal wells in Bogoria-Silali in Baringo in April 2016.

Advance payment

Three years later in 2019, GDC has nothing to show for the billions sunk in so far except frustrations, to the point of writing panicky letters to the Attorney General and Governor of Central Bank of Kenya as reality dawns that they may have been played.

A report prepared for GDC board by George Muya, General Manager, Strategy peels layers of a possible fraud involving a local bank and in which the Sh1.4 billion advance payment guarantee was recalled just after payment had been issued and the bank affirmed it.

The tell-tale signs were there from the very start. According to the report, just two months after the contract was signed, on June 17, 2016, the contractor wrote to GDC requesting the advance payment but also pleading to be allowed to offer a guarantee from an insurance company rather than a bank.

GDC rejected the request on July 8, 2016 and three months later on October 6, wrote to HOOSL asking them to submit the payment guarantee within 30 days.

“HOOSL responded to this letter on October 8, 2016 by informing GDC that they are working on the issuance of the guarantee with a local bank. Subsequently, on October 20, 2016, HOOSL sought an extension of the timeline for submission of the guarantee by additional 60 days,” the report says.

GDC went on to accept this extension which was to lapse on December 20, 2016. A few days to the deadline, however, HOOSL wrote again to seek further extension by two months; that is up to February 20, 2017. The company again agreed but marked it as the final extension.

It had no clue what awaited it.

February came and passed, no guarantee. Instead the company sought additional extension but GDC was not going to budge. A stalemate ensued until June 2, 2017 when, out of scope, the contractor submitted the advance payment guarantee of USD 14,629,952 from the bank and which was to expire on December 1, 2018.

Shortly thereafter, the bank confirmed the guarantee and GDC proceeded to facilitate the processing of payment through the Ministry of Energy and National Treasury. “The advance payment was paid out to HOOSL in September 2017 which HOOSL confirmed receipt on September 25, 2017,” report says.

Three month notice

With money already with the Chinese, GDC proceeded to issue the contractor with a three month notice to mobilise starting on January 15, 2018. Mobilise meant transportation of the rigs- the massive machines that do the actual drilling into the earth’s subsurface-  from China to Baringo for start of drilling operations.

Instead of going on an overdrive to deliver the machinery, HOOSL simply confirmed receipt of the notice and proposed a meeting with GDC in China to discuss the rig mobilisation and amendment of the contract. Soon thereafter, it pulled a shocker.

“On March 9, 2018, HOOSL rejected the issued notice to mobilise stating that it was not validly issued,” the report says. Apparently, HOOSL had relied on a slight breach by GDC which required designated representatives to act on behalf each of the parties to the contract. In the breach, the CEO of GDC had issued notice of mobilisation instead of the appointed representative, Stephen Kangogo.

The company corrected itself and issued a fresh notice through their designated representative on March 20, 2018. Six days later, HOOSL was up again with another hold-up; they wrote to GDC saying the rigs which it had hoped to mobilise were no longer available.

These are the rigs the GDC had inspected prior to signing the contract as part of due diligence. In the new twist to the story, HOOSL wanted to be allowed to use substitute rigs which they claimed to be similar to the ones inspected but which GDC had not seen.

They also wanted GDC to hire some components of the alternate rigs for them. Again GDC rejected the proposal on April 19, 2018. Soon thereafter on June 23, the notice to mobilise expired without a machine from the Chinese on site. Three days after the expiry of the notice, GDC wrote to the bank which had issued the guarantee seeking payback of the moneys advanced.

“The bank, in an informal meeting, claimed that HOOSL had written to it stating that there was mutual consent with GDC to have the guarantee recalled, which position is false and amounts to misrepresentation and fraud as GDC, the beneficiary of the guarantee, did not in any way authorise the recalling,” the report adds.

The report says GDC met with HOOSL on August 8, 2018 and made it clear that the contract would not go on before its monies were reinstated. The Chinese on the other hand stated they would not manage to reimburse the monies.

In the confusion, GDC reluctantly agreed to use of alternate rigs subject to another round of due diligence on them and with the hope it may solve the standoff. Again, HOOSL threw spanner in the works when they refused to fund the due diligence they had occasioned.

“The proposal for use of substitute rigs is HOOSL’s proposal hence HOOSL should meet the cost. HOOSL is categorical that they will not meet the cost of the due diligence as it is a requirement by GDC that inspection of rigs be undertaken before mobilisation to the project site,” the report adds.

An impasse ensued following which the financier, KfW, a German state-owned development bank decided to break the ice and fund the doggone trip to China. They too, had no clue what awaited them. As GDC was preparing to dispatch two inspectors to China, HOOSL wrote a letter informing the company that one of the rigs was not available for inspection.

As GDC absorbed the shock, the Chinese wrote another letter on November 1, 2018 asking the company to proceed for due diligence of the remaining rig within the next 9 days otherwise it would be rigged down -- disabled -- after that.

Tired of the cat-and-mouse games, GDC wrote to HOOSL on November 16, 2018 giving them 14 days to remedy their default in mobilisation. Two days earlier, GDC had written the last of its series of letter to the local bank asking it to pay up the guarantee.

Fifteen days later on December 1, 2018, the payment guarantee expired and with it the hopes of recouping the money. Meanwhile in Baringo, the auxiliary drilling machinery GDC had assembled for the big project remained parked for years in the yard. Kenyans were, once again, left Sh1.4 billion poorer.

Out attempts at contacting the Chinese company fell flat as the Chinese phone number provided on the website did not go through.

The company does not have an email address on its website. It however provides a fax number for communication.

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