Revamp Kenya’s investment negotiations

A man at Lake Turkana Wind Power. FILE PHOTO | NMG 

By BITANGE NDEMO
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Summary

• The news that the government has paid more than Sh7 billion in penalties to investors behind the Lake Turkana Wind Power project is the latest example of badly negotiated deals that end up exposing the taxpayer to huge losses.
• The payment may be legal. But in terms of opportunity cost, payment of a contractor claim running into billions for no value or service is a national scandal.
• According to the arrangement with the investor, Lake Turkana Wind Power was to build the power plant.
• The government, through the State-owned Kenya Electricity Transmission Company (Ketraco), was to build the transmission line.

The news that the government has paid more than Sh7 billion in penalties to investors behind the Lake Turkana Wind Power project is the latest example of badly negotiated deals that end up exposing the taxpayer to huge losses.

The payment may be legal. But in terms of opportunity cost, payment of a contractor claim running into billions for no value or service is a national scandal.

‘How Kenya paid Sh7 billion for non-existent power’ was the headline of a story reported by the Daily Nation yesterday. We lose billions in taxpayer money every year in payment of claims and pending bills arising from poorly negotiated contracts and lopsided agreements with investors.

Here is a brief background to this saga.

According to the arrangement with the investor, Lake Turkana Wind Power was to build the power plant. The government, through the State-owned Kenya Electricity Transmission Company (Ketraco), was to build the transmission line.

It was a 430-mile high-voltage transmission line running from Loiyangalaini in Marsabit County to a substation in Suswa in Narok County, which is the country’s main interchange for electricity coming from the West of the country.

As the parties were negotiating, the investors calculated that there was a high probability that the building of the power line would be completed faster than the transmission line.

Which is why during the talks, they forced an arrangement to cover themselves against delays in completion of the transmission line.

To cover themselves further, they bought an insurance from the African Development Bank (AFDB) to cover them against failure by the government to pay the penalty for delay in completion of the transmission line.

The stage had been set for payment of the billions.

I blame the parties who were negotiating on the government’s behalf because the arrangement they entered into amounted to gifting the investors a blank cheque.

Why do I say so? Because anybody who looked at Ketraco’s records of completing projects seriously would not have put their signature on such a pact.

Did these guys look at the problems and difficulties the State-owned company was experiencing with land acquisition and with securing way leave?

This was a transmission line that was going to traverse many counties.

Indeed, land acquisition was going to be problematic because the right of way was going to be 428km long and 60m (metres) wide.

Worse, the construction of the line was to result in involuntary displacement of thousands of people.

I ask again: Why couldn’t those negotiating for the government ask the investors to buy an insurance or seek other forms of risk guarantees? Why were we going out of our way to give this project so much accommodation since the policy of the government at that time was not to give sovereign guarantees to investors?

If the parties negotiating on behalf of the government had taken their time to study the problems and the trends in acquisition of land and way-leave for large infrastructure projects in this country, they would not have signed on the dotted line.

PAYMENT COMPLAINTS

Worse still, events that followed during the construction of the transmission line – perhaps coincidentally — only worked to favour the investor’s interest and to ensure that it scooped billions in penalties.

In the middle of the construction of the transmission line, sub-contractors started complaining that Ketraco’s contractor — Isolux of Spain— was not paying their invoices.

Months later, and even as signs showed that Lake Turkana Wind Power was hurrying to complement construction of the power plant, Isolux was declared bankrupt in its own country, Spain.

The penalties under the agreement with the governor had crystallised. We need to strengthen our capacity in negotiations with investors.