RVR was incapable of running meter gauge railway, AG tells London court

Attorney General Justin Muturi. [Elvis Ogina, Standard] 

Rift Valley Railways (RVR) was incapable of running the Meter Gauge Railway (MGR), Kenya has told a London court.

In its statement presented by Attorney General Justin Muturi, former AG Prof Githu Muigai and King’s counsel Michael Sullivan, Kenya told the London Court of Arbitration that the firm actually led to the dilapidation of the infrastructure.

Kenya and Uganda are defending a Sh300 billion case filed by the companies behind RVR; the KU Railways Holding Limited and RVR Investments (PTY) Limited.

In his statement, Muturi said that the RVR case was a classic example of how international firms are unfairly reaping from African countries with nothing to show on their end.

“To the great disappointment of the Republic of Kenya, the claimants elected to make the Republic of Kenya a growing statistic in the abuse of international arbitration fora, to sue an African nation for billions of dollars for contractual obligations that were never performed by the foreign investor,” he said.

Kenya and Uganda inherited the system from the colonial government.

In 1998, the World Bank recommended a concession of the 23,50-kilometer gauge railway for Kenya and Uganda Railways.

The deal was awarded to RVR in 2005 and was to run for 25 years.

However, Kenya Railways Corporation (KR) terminated the concession sometime in July 2017 after RVR failed to meet the required standards.

In London, Muturi told the arbitrators that the termination was within the law. 

“Despite the lawful termination of the Kenyan Concession Agreement in 2017, the Republic of Kenya remains dutiful to its obligations under the 1985 Northern Corridor Treaty and more importantly to its obligations to the People of Kenya who above all else are the ultimate beneficiaries or casualties of any Agreement concluded on their behalf,” he said.

Muturi disclosed that there were three cases in Kenya revolving around the contract.

The cases included Civil Suit No. 136 of 2017, Petition No. 56 of 2015 and Appeal No. 11 of 2018 before the Tax Appeals Tribunal.

In the first case, RVR dragged (RVR) the Kenya Revenue Authority to court over a Sh 1.6 billion tax dispute stemming from a dispute about whether the firm was exempted from taxes while running Kenya's old railway between 2013 and 2014.

After KR terminated RVR’s contract to run the old railway system, the latter sued the former demanding a refund of Sh 1.6 billion which RVR allegedly paid as a road maintenance levy.

KRA then came after the firm demanding Sh 1.63 billion in taxes.

In its case before the High Court, RVR argued that KRA’s decision to ask for a colossal amount of money was unfair and illegal.  Instead, it claimed, the court should compel the taxman to take Sh 56 million as withholding tax.

The case stemmed from the tax tribunal which affirmed KRA’s demand.  The demand by KRA is similar to a response by KR in a separate case where RVR sued it, demanding Sh 1.6 billion.

RVR argued that the Treasury Cabinet Secretary had exempted it from paying taxes which KRA now is demanding.

KRA in a letter dated April 24, 2017, demanded RVR pay Sh 1.2 billion, detailing its investigations on RVR and its subsidiaries.

The letter enumerated that two consignments were cleared without import declaration fees being paid. In this, KRA claims it is owed Sh439,487 million. Another Sh227 million is listed “as tax which had not been perfected” contrary to section 38 of tax law.

KRA also laid a claim on 20 locomotives in which it claimed more than Sh660 million in taxes.

It is this letter that KR used to urge the court to dismiss the case by RVR.

The Government’s corporation terminated a 25-year deal in which RVR had been left to run the old railway system. They had signed a concession agreement on January 23, 2006, but the State Corporation terminated the deal on July 31, 2017.

In the tax case, RVR accused the tribunal of relying on extraneous factors while deciding on the case.

“The tribunal erred in law and based its decision on extraneous evidence relying on internal correspondences of the appellant (RVR), erroneous audit reports and advice from consultants to determine the grant of exemption by the National Treasury when such exemption was clearly provided for in law,” RVR lawyer Phillip Nyachoti added.

RVR said it was being condemned for the Treasury’s mistake. It argues that some of the taxes being asked by KRA were pegged on transporting goods to Uganda where it had paid Sh3 billion.

“These services were by the people in Uganda who contracted RVR. These goods, technically speaking did not even enter Kenya because they did not belong to Kenya,” RVR claimed.

Before the Tribunal, KRA claimed that RVR knew what goods were exempted from taxes. It argued that the firm was riding on illegality as the letter by the minister had clearly indicated which of the items it was to bring into the country without taxes.