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Rift Valley Railways firm under probe over use of World Bank billions

RIFT VALLEY
By PATRICK MAYOYO | July 2nd 2016
3 locomitives arrive at Mombasa Port. Mitcell cotts clearing agents witness the offloading of the 1st batch of new locomotive engines out of 20 consignments. The 3 locomotives are imported by Rift Valley Railways at the cost of 2.2 billion shillings 12th September 2014. Picture by Omondi Onyango

The World Bank has launched investigations into the purchase of locomotives by the Rift Valley Railways (RVR) Company using a Sh16.5 billion international loan it had helped to arrange.

Investigations covering Kenya, Brazil and Egypt has spotlighted a decision by the the company to buy used locomotives and refurbish them instead of acquiring brand new ones.

The contract signed between RVR and National Railway Equipment Company (NRE) of Illinois, USA, shows that locomotives model GE B23-7 were bought from NRE at $170,000 (Sh17.1 million) each and modified at a cost of $985,000 (Sh99 million) each.

Multiple sources, both within and out of the rail company, confirmed to The Standard on Saturday that this purchase is one of the items under investigation by the World Bank. RVR bought used standard gauge railway locomotives Model GE-23 manufactured in 1977 and modified them for use on a metre gauge railway.

Data from international suppliers of used metre gauge locomotives shows that a single unit of a used locomotive costs between Sh4.5 million and Sh11 million depending on the year of manufacture.

The money used in the purchase of the locomotives was part of the more than $164 million (Sh16.5 billion) loaned to RVR to improve efficiency, standardise its operations, increase market share for rail traffic and improve the company’s competitiveness.

The World Bank has since launched investigations, which is epxected to establish whether or not funds were embezzled in the deal.

The Sh16.5 billion capital financing package was provided in form of a series of loans by European Development Financial Institutions (DFIs) arranged by World Bank Group member, the International Finance Corporation (IFC), which gave $22 million (Sh2.2 billion).

Development Financial Institutions (DFIs) are government controlled entities that often support private sector projects in developing countries using tax payers’ money.

The DFIs involved in the railway deal are Dutch Development Bank (FMO), which gave Sh2 billion; Belgian Investment Company for Developing Countries (BIO), Sh1 billion and KfW Entwicklungsbank (The German Development Bank), Sh3.2 billion. Others are Infrastructure Crisis Facility (ICF) Debt Pool Sh2 billion; African Development Bank (AfDB), Sh4 billion and Kenya’s Equity Bank, which lent Sh2 billion.

The total amount in the capital expenditure package was more than Sh28 billion as the shareholders were to inject a further Sh8.2 billion in equity. The balance of the funding was to be contributed by free cash flow.

On its webste, Qalaa Holding’s, the company that controls and operates RVR, shows that RVR secured another Sh1.8 billion asset financing deal with Standard Bank of South Africa and CFC Stanbic Bank towards the acquisition of the 20 new locomotives from the US as part of a programme to enhance service delivery on the Northern Corridor.

Upon getting the loans, Rift Valley Railways Investments (Pty) Ltd (RVRI) — a sister company of RVR — that is registered in Mauritius signed a management and technical services agreement with a Brazilian company, América Latina Logística (ALL).

The pact assigned ALL the task of providing key support to RVRI’s five-year three-point rehabilitation and investment programme aimed at ensuring long-term improvements in safety and efficiency along the Kenya-Uganda railway.

The plan included buying new locomotives and wagons, upgrading the railway line and investing in the right expertise that entailed substantial investment in Information Technology (IT) systems that included establishing a train’s monitoring computer system.

Used locomotives

It is not clear why RVR opted to buy used locomotives. According to the firm’s capital expenditure plan, the firm had budgeted for DFI’s $60 million (Sh6.06 billion) financing to buy 20 new locomotives.

More questions arise given that RVR bought standard gauge railway locomotives and used a substantial amount of money to modify them to fit on a metre gauge railway.

The contract signed by NRE and RVR shows that the first three locomotives were to be modified at Sh99 million each or $1.15 million (Sh1.1 billion) for the three. Modifying the locomotives was nearly six times the buying price.

It is not clear how much the remaining 17 locomotives cost; the contract between NRE and RVR is silent on this.

However, the agreement states in part: “The modification services costs of the remainder of the 17 locomotives to be in accordance with the scope or overhaul agreed between both parties, which scope shall form part of and be read together with this contract.”

A statement by RVR claims that three “new” locomotives were delivered at the time. It said the deliveries, the latest in the Sh28 billion five-year turnaround programme for RVR, were part of a programme that would see the rail operator add 20 new US locomotives and six rehabilitated engines to its fleet by 2014.

IFC’s Communications Officer in charge of Sub-Saharan Africa Neha Sud confirmed the investigation. “I’d like to clarify that it (the investigation) is not being carried out by IFC, but by the World Bank’s Integrity Unit, an independent unit that investigates issues involving World Bank Group financed projects,” she said.

However, the IFC would not comment on the investigation as that could compromise it, she said. She referred us to the bank’s Integrity Unit, where a spokesperson, who did not wish to be named, confirmed the investigation.

“The World Bank Group is committed to managing fraud and corruption risks in all projects it finances. All allegations are assessed and investigated by the World Bank Integrity Vice Presidency (INT). Findings will be then referred to the World Bank Sanctions system. “

INT’s disclosure policy prohibits disclosing details of investigations to protect the integrity of the process and the security of witnesses, the spokesperson said.

However, our independent inquiries indicate that the World Bank investigations are led by Ms Loretta Dorman, an investigative analyst at the bank’s INT division in Washington DC, and her colleague, Mr Michael Kramer.

Intermediary bank

Interviews with RVR employees, who have been interrogated by the World Bank investigators, show that the investigations are multi-faceted.

“The investigations focus on procurement, financial reporting and the foreign companies awarded tenders by RVR,” one of them said.

On December 10, 2012, RVR signed a contract with Yalda Ltd, trading as Gear Africa, in Mauritius, for the supply of a computer system to monitor trains along the Kenya-Uganda railway. The effectiveness of the system is not clear.

Most payments to Gear Africa were made through an intermediary bank in the US, Deutsche Bank Company America, and yet both Gear Africa and their bankers were based in Mauritius.

However, our investigations in Brazil confirmed that ALL had dealings with RVR. An official of ALL said they had so far not received any inquiries from World Bank officials.

Mr Carlos Correa, speaking on behalf of America Latina Logistica Rail Management Ltd, that is owned by ALL, added that their company had service provision with RVR which they serviced within contractual terms and conditions.

Mr Correa added that ALL does not currently have any contract in force with RVR. America Latina Logistica Rail Management Ltd was awarded numerous contracts by RVR and drew payments running into millions of dollars in training, professional fees and consultancy services.

NRE Assistant Vice-President for International Sales Mike Elbaz confirmed that RVR bought used Standard Gauge Rail (SGR) locomotives, which were modified to fit on a metre gauge railway.

“RVR purchased 20 locomotives from NRE. The locomotives were used and a specific scope of work was dictated by the purchaser and NRE fully complied with it. Initially, these locomotives were for standard gauge application with Bo-Bo configuration. Model is GE-23,” Mr Elbaz said, adding, the locomotives were modified and lightened at NRE facilities in the US. The price covered modifications as per scope of work, and all the 20 locomotives were delivered, he said.

Mr Elbaz confirmed that they had been contacted by World Bank officials over the ongoing investigations against RVR. “There was a brief phone conversation with a lady and a man; I don’t remember their names. I believe they were to visit us and I’m not sure if they did as I could have been travelling.”

Offshore shell companies

RVR is the operator of the Kenya-Uganda railway line, which was privatised under two largely identical 25-year concessions in 2006. It is controlled by Qalaa Holdings, a private equity house in Cairo.

The 25-year concessions agreement signed in 2006 meant that RVR was going to operate both passenger and cargo services between Kenya and Uganda.

Under the privatisation arrangement, the government was going to own all the rail assets while RVR was to maintain the railway line, engines, wagons, workshops and cater for all workers needs.

The RVR revelations come in the wake of the Panama Papers scandal which revealed how powerful individuals and companies are using tax havens to hide wealth and dodge taxes. (Link to Panama Papers story)

A report by the US-based international financial watchdog, Global Financial Integrity, says Kenya lost more than Sh1.1 trillion through trade mis-invoicing between 2002 and 2011.

Trade mis-invoicing refers to the intentional misstating of the value, quantity or composition of goods on customs declaration forms and invoices, usually in order to evade taxes or to facilitate money laundering.

So far, investigations show that the RVR five-year modernisation programme that has gobbled up more than Sh28 billion in loans and equity has not resulted in improved service delivery and efficiency.

According to chief executive officer of the Kenya Ships Agents Ltd, Mr Juma Teteh, RVR is currently only handling less than five per cent of cargo leaving the Port of Mombasa compared to six per cent when Kenya Railways used to operate the line before privatisation.

An inspection of Qalaa Holdings financial statements shows that the firm has created an offshore structure of shell companies which has extracted millions in advisory fees from RVR, despite the railway suffering losses in recent years.

For instance, between 2012 and 2015, Qalaa collected close to half a billion shillings in advisory fees from Africa Railways Limited, RVR’s investment arm registered in the British Virgin Islands. RVR and Qalaa Holdings have remained tight lipped on our questions.

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