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Energy, Treasury ministries disagree over Sh30 billion oil pipeline loan



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Mystery surrounds a Sh30 billion commercial loan for a security system to guard a proposed crude oil pipeline after the Energy ministry confirmed it had been signed while the National Treasury disowned it following enquiries by the Sunday Nation.

Treasury Principal Secretary Kamau Thugge said he was not aware of such a loan despite the Energy ministry, which signed the agreement early last year, maintaining that the contract had been submitted to his office.

Mr Thugge’s position that there was no such loan negotiation deepens the questionable circumstances under which government officials purportedly committed to borrow such a colossal sum of money for security years before the design of the proposed pipeline from the Turkana oilfields to the Lamu Port is submitted.

The Sunday Nation has seen a copy of the commercial contract signed between Rafael Advanced Defence Systems Ltd, an Israeli security systems manufacturer, and then Ministry of Energy and Petroleum under Cabinet Secretary Charles Keter on February 15, 2017 at Nyayo House, Nairobi.

The Petroleum docket has since been moved to the Mining ministry headed by Cabinet Secretary John Munyes.

Petroleum Principal Secretary Andrew Kamau, who signed the contract on behalf of the Kenyan government, did not deny its existence but said it was still being finalised by the Treasury.

Mr Kamau defended the “early negotiations” for the loan long before Kenya’s crude pipeline specifics have been consolidated.

“Yes, the process is at Treasury. We already know the pipeline is 821 kilometres and how many pump stations will be there so there should be nothing wrong with planning its security. Don’t forget the loan is also for the security system for the existing pipeline,” Mr Kamau said.

With the crude pipeline cost projections having been revised down to Sh100 billion, it now means the cost for its security system will be one-third of the total construction bill.

Kenya opted to build the pipeline alone after Uganda dropped an earlier agreed joint plan and went for an alternative line through Tanzania.

Mr Keter, the Energy Cabinet Secretary, has said the loan negotiations had moved to the Treasury after the February signing. He was a witness in the contract.

Mr Thugge denied the existence of such a loan, sending the Sunday Nation back to the Energy ministry.

“It is not true. Recheck with the ministry (of Energy) on the precise status. The financial end of the deal is not with us,” Mr Thugge said.

Documents sent by the Israeli Bank Hapoalim as late as October 2017 however show that Mr Thugge was copied in the communication.

The bank sent a letter of intent to the PS detailing the indicative terms of the loan, including how it will be disbursed and the string of conditions attached to it.

The letter, which was also copied to the Energy principal secretary and Treasury officials Ms Esther Koimett (currently the Transport PS) and a Mr Daniel Kiptoo, expressed the bank’s agreement to finance the project through two buyers credit facilities.

The funding would be available in two tranches. The government would be the borrower through Treasury.

The first tranche would be for $135 million (13.5 billion) for the partial financing of the works to be carried out by the exporter in connection with the execution of a full security plan for the existing Kenya Pipeline Corporation line and design of the security plan and strategy for the crude oil pipeline.

The second one is for the works to be carried out by the firm in connection with the execution and implementation of a full security plan for the crude oil pipeline expected to be ready by the 2021/2022 financial year.

Kenya would only access the second tranche once the bank is satisfied that that money has been used according to the terms set and not later than 15 months from the date it is disbursed.

The loan’s insurance (in favour of the lender) is also tied to another Israeli firm — the Israel Foreign Trade Risks Insurance Corp Ltd.

The loan, whose first date of drawdown was envisaged to be end of March 2018, had several fees attached, including a 0.70 percent (Sh98.4 million) and Sh78.2 million called arrangement up-from fee.

The government would also foot some Sh120 million payable quarterly in commitment fees.

The loan, whose principal repayments were set at 10 years, would attract an interest at six months London Interbank Offered Rate, an international lending benchmark rate commonly known as Libor, plus 2.6 percent per annum.

In the 15-page agreement that Kenyan officials signed in February 2017, the Israeli firm was at liberty to change the construction or design of the security facility in consultation with the buyer, and a dispute arising from the execution of the agreement that fails to be solved within 30 days would head to London to be midwifed by three arbitrators

In December 2017, as Kenya was smarting from a tense repeat presidential election, a team of officials from the Treasury and the Energy ministry were in Tel-Aviv to be taken through an elaborate presentation on the workings of the Israeli bank.

Interestingly, Kenya Pipeline Corporation, who would be the main beneficiary of the first Sh13.5 billion from the facility, was largely excluded in the documents surrounding the loan and the security contract.

In fact, KPC managing director Joe Sang had in a previous interview told the Sunday Nation how the new Mombasa-Nairobi pipeline had been fitted with systems to detect leakage and theft.

“KPC plans to install a segmented leak/theft detection system soon. In addition, a leak detection system will be in place this financial year and KPC is also planning to undertake a baseline intelligent line inspection of Line 5 in August 2019 to boost the Line’s integrity even further,” Mr Sang said.

However, Mr Kamau said the leak detection system would not be a security feature and cannot help, for example, during a terrorist attack.

A ministry technical expert with knowledge on the deal but who spoke in confidence said Kenya had rushed with the deal to prove to Uganda that a security-tight crude pipeline could be delivered.

“A pipeline is largely a buried resource and all you need is a smart leak detection or for any interference with its integrity.

“I think Kenya was only trying to prove a point to Uganda on its secure pipeline capabilities, but at the end of it all the loan, added to that of the construction, will be a heavy burden on taxpayers,” the source said.

Neither the Israeli bank nor the security systems provider responded to our questions for weeks despite numerous follow-ups.