Why Kenya risks losing Sh20b after throwing out airport mega project

President Uhuru Kenyatta unveils a commemorative plaque at JKIA Greenfield terminal.Looking on his wife Margaret (right), former Prime Minister Raila Odinga (second right),Najib Balala

Kenyans risk losing up to Sh20 billion in a raging high-stakes battle sparked off by the controversial cancellation of the Greenfield Terminal project.

The project, located at the Jomo Kenyatta International Airport (JKIA), was designed eight years ago to make Nairobi a premier aviation hub for Africa.

The government has issued a vacation notice to the contractor, China National Aero-Technology International Engineering Corporation to (Catic). According to the notice, the contractor must vacate the site by April 11. In the same notice, the government declares the Sh56 billion contract “null and void”.

The proclamation by the government, at a time when the contractor had issued a notice requiring that Kenya Airports Authority (KAA) complete financing arrangements to enable the full commencement of works, has now opened the door for an epic legal battle as both parties dig in for a fight.

When KAA made an announcement earlier in the week terminating the contract, they said the decision had “been occasioned by prevailing operational, economic and financial dynamics, which have been on a downward trend over the last three years”.

“The JKIA hub currently has capacity to handle 7.5 million passengers per annum. In the last financial year, the facility handled 6.5 million passengers,” the government said.

Null and void

“The ongoing re-organisation and modernisation of JKIA has expanded capacity in the new Terminal 2 by an extra 2.5 million passengers and the soon to be opened Terminal 1A will increase capacity by an additional 2.5 million passengers. When this is added to the original capacity of the airport’s 2.5 million passengers in 1978, the total installed capacity rises to 7.5 million in 2016 against an actual passenger number of 6.5 million, leaving an excess capacity of one million. It is envisaged that by the time the modernisation of Terminal 1B, C and D is done, JKIA’s total handling capacity will increase to a peak of 10.5 million passengers per annum.”

In the letter to Catic, the contractor, that followed the announcement and which The Standard on Sunday has seen, the government stated that the project had become null and void.

Catic, is a Chinese state-owned corporation.

The vacation notice by the government, which also demands that the contractor reimburse all money paid out so far amounting to more than Sh4 billion, is likely to trigger a high-octane legal battle stretching from Nairobi to Beijing. When the rubber hits the road, KAA will be hard hit to explain how it has  pronounced a contract to be null and void after signing it, approving payments, allowing the contractor on site and engaging with financiers.

The contractor is demanding Sh4 billion in addition to the Sh4 billion already received.

Following the cancellation, Catic intends to seek further compensation for loss of business and anticipated profits which the Kenyan taxpayer will have to pay should the wind blow the contractor’s way when the matter goes for arbitration.

High interests

If the contract provisions are enforced in the contractor’s favour, KAA may not undertake a similar project for the next six years without Catic’s prior approval if they are to engage another contractor, according to the terms of the contract seen by The Standard on Sunday.

This week, Transport Cabinet Secretary James Macharia said in a television interview that the government expected a refund from the contractor. Macharia, however, said there were legal issues that would be negotiated by lawyers from both sides.

“There are issues where counsel for both sides need to sit and agree whether indeed we had genuine contracts or not,” he said. “But those are issues which we shall leave to the legal counsel to determine.”

The variance of positions is clear. According to Macharia, there’s “only a hole” to show for the time the contractor has been on site.

But last month, the contractor wrote to the government stating that it had so far carried out preparatory works to the tune of Sh8.7 billion, which includes mobilisation of personnel, construction plant and equipment, payment of requisite insurances, construction of access roads, fencing and installation of CCTV surveillance system for the site.

It is envisaged by aviation experts that should the contract be terminated, the total payments due and penalties for cancellation could approach Sh20 billion; a third of the initial cost without the project.

The contractor says designs for architectural, structural, mechanical, electrical, ICT and related requirements are complete to the tune of 75 per cent in addition to preparatory excavation works.

“Works carried out to date amount to over Sh8.7 billion. To date, you have paid us Sh4.3 billion,” says the contractor in the March 3 letter to KAA.

In addition, the contractor puts KAA on notice that the hiatus was costing Sh45 million in overheads per month.

The contractor alludes to intrigues surrounding the project: “We have continued to perform our obligations under the contract in good faith, incurring costs of labour and materials only to be met by indecisiveness, action delayed or withheld payment. The Greenfield project is dangerously behind schedule,” says the contractor.

Catic argues in the letter that it was the mandate of KAA to seal the deal on financing and “our role was limited to expediting the process”.

Documents show that Catic introduced two possible financiers — The Africa Development Bank and China Development Bank — to the KAA.

Initially, government interest in the project was high that when President Uhuru Kenyatta visited China in August of 2013, a meeting was held with the President of the China Development Bank where it was agreed that financing arrangements for the project would be fast-tracked.

Subsequent meetings between the two institutions have ended up in a long-winded conundrum which culminated in the announcement this week that the government was, after all, terminating the project.

Legal battle

So badly have the two parties fallen out that the government is now challenging the validity of the very contract it signed and wanted executed. 

It is basing its argument on a dispute about whether the construction cost included 16 per cent VAT or not, foreign currency application, and demands by the financier that Treasury supports the borrowing by guaranteeing the loan in what is known as a sovereign guarantee.

KAA also argues that there are certain inconsistencies between the contract and the law that end up making it null and void.

“Given that the inconsistencies go beyond what was permissible under the procurement rules, the construction contract is considered void ab initio, which means that the construction contract is treated as being invalid from the outset, i.e. never existed. Being a null and void contract, neither KAA nor the contractor has any rights under the construction contract,” says the letter from KAA to the contractor.

The letter from KAA then demands that the contractor vacates the premises by April 11 and refund all money so far advanced.

State House Deputy Chief of Staff Nzioka Waita is also anticipating a legal battle over the cancellation at the core of which is said to be high-powered business and political interests.

Rigorous tendering

On his Twitter handle, he wrote this week in response to a query, “Matter will go to arbitration”.

Catic entered into contract with the KAA after a rigorous tendering process which was preceded by a master plan that was designed to lift JKIA to one of Africa’s foremost aviation hubs.

Although the government now says the contract is void, it was approved by key government institutions, including Attorney General Githu Muigai, then Transport and Infrastructure Cabinet Secretary Michael Kamau, the Cabinet and KAA Board of Directors before it was eventually signed on November 13, 2013.

President Kenyatta subsequently launched the project on December 3, 2013 where he said he expected to open the new facility within three years.

“We want to make JKIA the most convenient, comfortable and secure airport in the region; to make Kenya the most attractive air hub in Africa,” the President said when he broke ground for the new terminal in the days when the sun still  shone on the project.

The contractor immediately moved to site but the progress of the project was immediately hampered by financing arrangements.

As part of the tender, a contractor was required to introduce a financial institution with the capacity to lend KAA the requisite amount of money to complete the project.

The loan would subsequently be paid from a fund built from charges levied on passengers using the airport over time and would not be directly passed on to the taxpayer. As part of the plan, the government approved the increase of passenger levy from $20 to $40 (Sh2,000 to 4,000).

KAA now says that refurbishment of existing facilities, some of which are prefabricated, should meet the necessary demand in the foreseeable future in its justification of the termination of the project.