The Gaping GDC hole
Milking Kenyans: How geothermal billions are going up in
Giving one excuse after another and sequestered in faraway land, a Chinese firm walked away with Sh1.4 billion of Kenyan’s money without breaking a sweat in a geothermal deal gone awry.
It is a story no one want’s to talk about, a pointer to run-away losses in a sector shrouded with secrecy
In a brazen act of disdain for the Kenyan taxpayer, a foreign contractor pocketed Sh1.4 billion advance payment and left a parastatal in the energy sector high and dry, gasping for breath.
It is a familiar story; contractor plucked from distant lands, signs up an externally funded multi-billion shilling project, painfully obtains an advance payment guarantee from a bank, gets paid a quarter of contract price, bizarrely recalls the guarantee, delays to mobilise for works, contract expires and taxpayer is left with a festering fiscal wound.
It is the story of Hong Kong Offshore Oil Services Limited (HOOSL), a company contracted by Geothermal Development Company (GDC) to drill 15 to 20 geothermal wells in Bogoria-Silali in Baringo in April 2016.
The multitude of geo-wells were to add swell to the megawatts Jubilee government needed to power its manufacturing sector agenda and hence create jobs for millions of unemployed youth.
Advance payment
Three years later in 2019, GDC has nothing to show for the billions sunk in so far except frustrations, to the point of writing panicky letters to the Attorney General and Governor of Central Bank of Kenya as reality dawns that they may have been played.
A report prepared for GDC board by three General Managers- Beatrice Kosgei (Legal Affairs), Stephen Busieney (Finance) and Stephen Kangogo (deputy Manager Drilling) peels layers of a possible fraud involving a local bank and in which the Sh1.4 billion advance payment guarantee was recalled after the bank affirmed it and soon after payment was received by the Chinese.
The tell-tale signs were there from the very start.
According to the report, just two months after the contract was signed, on June 17, 2016, the contractor wrote to GDC making a strange request to substitute the bank guarantor with an insurer.
We wish to formally request for the advance payment guarantee to be issued by way of an insurance guarantee issued by an AA Rated international reinsurer such as Swiss Re in the format prescribed in the contract.
Vice Project Manager Pan Huazhong wrote
GDC flatly rejected the request on July 8, 2016 and after waiting for three months wrote to HOOSL on October 6 asking them to submit the payment guarantee within 30 days.
“HOOSL responded to this letter on October 8, 2016 by informing GDC that they are working on the issuance of the guarantee with a local bank. Subsequently, on October 20, 2016, HOOSL sought an extension of the timeline for submission of the guarantee by additional 60 days,” the report says.
GDC went on to accept this extension which was to lapse on December 20, 2016. A few days to the deadline, however, HOOSL wrote again to seek further extension by two months; that is up to February 20, 2017. The company again agreed but marked it as the final extension.
It had no clue what awaited it.
February came and passed, no guarantee. Instead the company sought additional extension but GDC was not going to budge.
A stalemate ensued until June 2, 2017 when, quite out of scope, the contractor submitted the advance payment guarantee of USD 14,629,952 from Stanbic Bank Kenya Limited and which was to expire on December 1, 2018.
Shortly thereafter, the bank through its authorized officers Penrose Musita and Chrispine Mwaura confirmed the guarantee and GDC proceeded to facilitate the processing of payment through the Ministry of Energy and Treasury.
The advance payment was paid out to HOOSL on September 19, 2017. Six days later, HOOSL confirmed receipt of the funds in perhaps what was the last of its polite letters to GDC.
“We confirm that HOOSL has received all the advance payment as the contract between GDC and HOOSL for Baringo-Silali project GDC/CPP/OT/003/2014-2015. Thanks for the support.”
Well laid, Ready for mounting,
Kutombwa proper, bila lube,
On the month they confirmed receipt of Sh1.4 billion advance payment, Chinese contractors visited the Baringo site where they were to drill 15 to 20 geothermal wells for production of electricity.
They found a well-laid site only awaiting their touch and magic before hundreds of megawatts of energy start churning from beneath.
An article posted on the website of Hong Kong offshore Drilling Services (HOOSL) says they held a meeting with GDC top officials among them the CEO, general manager and business manager where they agreed that drilling would start “at the end of September.”
“The opening ceremony will be held on the day of the drilling, and the leaders of both sides will be present,” the piece states.
By that time, and to the appreciation of the Chinese, GDC had already completed the construction of the well site, done all necessary pre-drilling work, organized for a well site water supply and constructed roads leading to the site.
Essentially, everything was ready for the arrival of the rigs, their mounting and drilling operations to start.
HOOSL had during this meeting claimed that its rigs and staff were ready to come and that they took responsibility for “timely delivery of equipment to Kenya.”
Let the games begin!
With money already with the Chinese, GDC proceeded to issue the contractor with a three month notice to mobilise starting on January 15, 2018.
Mobilise meant transportation of the rigs- the massive machines that do the actual drilling into the earth’s subsurface- from China to Baringo for start of drilling operations.
Instead of going on an overdrive to deliver the machinery, HOOSL simply confirmed receipt of the notice and proposed a meeting with GDC in China to discuss the rig mobilization and amendment of the contract.
Soon thereafter, it pulled a shocker.
“On March 9, 2018, HOOSL rejected the issued notice to mobilise stating that it was not validly issued,” the report says.
Apparently, HOOSL had relied on a slight breach by GDC which required designated representatives to act on behalf each of the parties to the contract.
In the breach, the CEO of GDC- who had been communicating with Huazhong for long- had issued notice of mobilization instead of the appointed representative, Mr Kangogo.
But the company was not going to be bogged down and easily corrected itself- issuing a fresh notice through Kangogo on March 20, 2018. Six days later, HOOSL was up again with another hold-up; they wrote to GDC saying the rigs which it had hoped to mobilise were no longer available.
These are the rigs the GDC had inspected prior to signing the contract as part of due diligence. In the new twist to the story, HOOSL wanted to be allowed to use substitute rigs which they claimed to be similar to the ones inspected but which GDC had not seen.
They also wanted GDC to hire components of the alternate rigs for them. Again GDC rejected the proposal on April 19, 2018. Soon thereafter on June 23, the notice to mobilise expired without a single machine from the Chinese on site.
Give us back our money!
Three days after the expiry of the notice, GDC wrote to Stanbic seeking payback of the moneys advanced.
“The bank, in an informal meeting, claimed that HOOSL had written to it stating that there was mutual consent with GDC to have the guarantee recalled, which position is false and amounts to misrepresentation and fraud as GDC, the beneficiary of the guarantee, did not in any way authorise the recalling,” the report adds.
The report says GDC met with HOOSL on August 8, 2018 and made it clear that the contract would not go on before its monies were reinstated. The Chinese on the other hand stated they would not manage to reimburse the monies.
With no money coming back from either the Chinese or the bank, GDC swallowed its pride and reluctantly agreed to use of alternate rigs subject to another round of due diligence on the alternate machines.
Again, HOOSL threw spanner in the works when they refused to fund the due diligence they had occasioned.
“The proposal for use of substitute rigs is HOOSL’s proposal hence HOOSL should meet the cost. HOOSL is categorical that they will not meet the cost of the due diligence as it is a requirement by GDC that inspection of rigs be undertaken before mobilisation to the project site,” the report adds.
An impasse ensued following which the financier, KfW, a German state-owned development bank decided to break the ice and fund the doggone trip to China.
They too, had no clue what awaited them.
As GDC was preparing to dispatch two inspectors to China, HOOSL wrote a letter informing the company that one of the rigs was not available for inspection.
As GDC absorbed the shock, the Chinese wrote another letter on November 1, 2018 asking the company to proceed for due diligence of the remaining rig within the next 9 days otherwise it would be rigged down – disabled – after that.
Tired of the cat-and-mouse games, GDC wrote to HOOSL on November 16, 2018 giving them 14 days to remedy their default in mobilisation. Two days earlier, GDC had written the last of its series of letter to the local bank asking it to pay up the guarantee.
Fifteen days later on December 1, 2018, the payment guarantee expired and with it the hopes of recouping the money.
Meanwhile in Baringo, the auxiliary drilling machinery GDC had assembled for the big project remained parked for years in the yard, unused, accumulating dust and corroding.
Kenyans were, once again, left Sh1.4 billion poorer.
Mayday: Where is your physical location?
After braving a yearlong generous indulgence by GDC ahead of payment, Chinese firm changed tack on cashing the Sh1.4 billion advance payment.
In the place of GDC demands that they begin work, the Chinese were demanding Sh1.7 billion in mystery compensation. In the process, GDC figured out that they did not even know the company’s official physical location in China.
Four years after inking a multi-billion shillings energy deal and paying Sh1.4 billion to a Chinese firm account, Geothermal Development Company did not know the physical location of the company in China.
A fresh trove of documentation obtained by Sunday Standard lifts the lid on the bizarre naivety on the part of GDC officials leading to the staggering amounts lost to Hong Kong Offshore Oil Services (HOOSL) in the energy deal gone rogue.
The Chinese firm’s letterheads were devoid of proper contacts – just a telephone line and a fax number – and officials insisted on emailing official letters.
And at one time, a HOOSL official wrote to GDC CEO Johnson Ole Nchoe asking him to download an internet chat platform for official communication. For a multibillion shilling deal, it could not get more casual than that.
“Please provide us with official registered physical address in China as earlier requested in our email dated April 13, 2018,” Stephen Kangogo, GDC’s representative in the contract who also serves as deputy manager drilling operations, wrote on June 4, 2018.
This was exactly four years since GDC wrote to the Chinese firm notifying it of award of tender to drill 15-20 geothermal wells in Baringo-Silale.
There is no evidence that the request for registered physical location was ever responded.
In the trove of communication, different GDC officials addressed their HOOSL counterparts with different physical addresses, at different times.
For instance, while Kangongo and Nchoe used the physical address of China Resources Building, 13th floor off No. 26 Harbor Road Room 1303 in Wanchi, Hong Kong, GDC’s Legal Affairs General Manager Beatrice Kosgei used Room 1318-20 Hollywood Plaza 610, Nathan Road Mongkok, Kowloon HK China
In the company’s website, the company’s physical address is given as No 58 Changliu Road, Pudong Shanghai PR China.
In the communications, HOOSL’s Company Secretary located in Pan Africa House on Kimathi Street in Kampala, Uganda would be copied.
In the October 11, 2018 HOOSL communication vouching for internet chat, Huazhong dressed down Kangogo over what he termed as delays on the part of GDC to approve alternate rig specifications send to them over a period of two months.
“HOOSL is suggesting that the MD download a software of WeChat to discuss the next step in the group of HOOSL and factory, we applied a number for him to log in. HOOSL is looking forward Mr Johnson attending the group and discussing the details,” he wrote.
The frustration and threats imminent in the letter was culmination of the Chinese company’s sustained pressure turning over project delay blame to GDC.
This was after braving a year-long generous indulgence by GDC to provide an advance payment guarantee.
No sooner had the company been paid the Sh1.4 billion and notice given to mobilize than they changed tack and started to roll it over on GDC.
They accused GDC of not providing them with rig site infrastructure information, occasioning a four-year delay in which the rigs they had mobilised corroded and their manufacturer confiscated their Sh1.7 billion deposit for manufacturing them.
“Regretfully, even though HOOSL constantly inquired about the project process on meetings and letters to confirm the time of spudding in, GDC still couldn’t confirm and have barely notified water system process as agreed on a monthly basis,” Huanzong wrote in a March 26, 2018 letter.
He complained of receiving “several emails” from different GDC people asking for custom charges, others asking to be subcontracted for the project and others sending mobilisation letters which confused them.
“Considering the company’s risk, HOOSL has to consider the GDC’s performance as the project has been shelved.”
To GDC’s shock, HOOSL said they would be claiming Sh1.7 billion as compensation for the loss suffered over the four year period, a delay they had never talked about before.
They also demanded re-negotiation of the commercial contract saying the existing one was no longer viable.
They protested GDC’s move to supply it with auxiliary drilling materials, saying they will “not use any material procured by other parties” on account of ensuring the quality of the wells they were to drill.
GDC denounced the claims as baseless, with Nchoe saying HOOSL was fully appraised and that the water supply system had been long synchronised for the arrival of the rigs. Further, Nchoe denied GDC had any contractual dealings with the rigs manufacturers.
“HOOSL dealings with the manufacturer is exclusive of GDC. We require HOOSL to mobilise and not the rig manufacturer who we have no contract with. HOOSL has the obligation to deliver the rigs as per the contract,” Nchoe wrote on May 28, 2018.
With the situation getting thicker with every letter, Nchoe also categorically rejected the substitution of the rigs.
A day later, Huazhong was back at it with another letter attaching pictures of the substitute rigs and which he said were identical to the rigs that had passed due diligence. He also had something else up his sleeve.
He suggested that GDC goes to China for second due diligence but if not possible, issue it with a letter of exemption. GDC declined.
In late August, HOOSL wrote to affirm that the substitute rigs did not actually belong to them as had been implied but were rented for a period of three years. They also gave GDC a September 5 deadline to accept the rigs or they be moved to other projects.
Wasted time
This was not all for they also had another piece of news for GDC relating to the man the firm had been corresponding with:
“From September 1, 2018, Mr Gary Zhang will resign from HOOSL, new General Manager Jason Feng will take office.”
September 5 came and GDC remained defiant, with Kangogo firing another letter to HOOSL which in turn responded on September 11 trashing his interpretation of the mobilisation clauses of the contract and daring him to bring it on.
“Please note Clause 1.1 is solely the definition of mobilisation and the scope, and Clause 17.8 is the definition of notice of both parties, it is irrelevant to HOOSL’s obligation to write to accept or reject the mobilisation notices,” he said.
HOOSL accused GDC of acting unilaterally, threatened they should take responsibility of the two failures to mobilise and accused them of wasting time:
“The meeting held on September 7 was to start at 9am, but GDC delayed the meeting to 10:30am like always. HOOSL is trying to get used to GDC going back on their words and waste of time.”
There was no end in sight.
Between a rock and a hard place; which way GDC?
Caught in between a bank reluctant to honor a Sh1.4 billion guarantee, a contractor unwilling or unable to do the works, GDC is lost between massaging the contractor until he shows up on site or pursuing a costly legal onslaught against the bank
Beaten in its own game, Geothermal Development Corporation is latching onto a paltry Sh585 million performance bond for all the troubles it has gone through in the Sh5.8 billion contract with a Chinese firm.
And even the bond, placed with the Industrial and Commercial Bank of China (ICBC) – is lapsing on 30th this year. There is also another looming deadline, and it’s related to the German financiers of the project.
“Despite all the efforts made in good faith by GDC, HOOSL has been unable to mobilise to date thus putting the implementation of the Baringo-Silali project in jeopardy. Key to note is that the loan agreement is lapsing in August 2019,” a February 13, 2019 GDC report moans.
The failures cited by GDC are sharp contrast to the prowess of the contractor as depicted in their website where it describes itself as China’s “leading integrated oilfield services and petroleum equipment provider.”
It also says it is a “comprehensive oilfield service company which integrates design, field operations such as drilling, completion service, drilling technique, equipment supply and rentals, logistics and warehouse.”
It says has nine drilling rigs, two work over rigs, thirteen logging units, two cementing units, five oil/gas testing units and over 1000 multinational staff.
“Till the end of 2014, HOOSL has succeeded in drilling more than 300 wells of gas and oil,” it says.
But now faced with inability to start operations and a bank that has failed to honor a validly issued Advance Payment Guarantee, GDC is stuck between a rock and a hard place.
At the heart of the dilemma is whether GDC should terminate the contract altogether with the risk that comes with it and dependent on the actual provisions of the contract.
Besides consulting the Attorney General, the financier of the project, the German financiers of the project have to be consulted.
In late January 2019, GDC wrote to the AG seeking advice on whether to proceed and institute legal proceedings against the bank for non-payment of the guarantee.
“Subsequently on February 8, GDC received concurrence from the Office of the Attorney General to appoint an advocate from our panel to institute the legal proceedings against the bank procurement for such advocate is done in accordance with the procurement law,” a report to the board says.
The bank told the Sunday Standard that it is committed to honor its obligations. However, the statement had with it a rider that they were committed to meeting any obligations they had entered into “whilst operating within agreed terms.”
“With regard to the subject Advance Payment Guarantee, the Bank is aware that there are ongoing discussions between the parties involved aimed at resolving the same,” the bank’s Senior Manager, Marketing and Communications- Willis Angira told the Sunday Standard.
He said that in the public interest, “the Bank is committed to supporting the parties in this resolution process. “
“As you may appreciate, we are guided by the principle of confidentiality and are therefore unable to comment further at this time,” he added.
A separate trove of communications involving the Office of the Attorney General, the bank and GDC points to a murkier legal tussle case should GDC take that route.
A March 6, 2019 letter by the Solicitor General Kennedy Ogeto to Governor of Central Bank Patrick Njoroge comes to explaining why the bank has failed to honor the guarantee.
“The Stanbic Bank vide letter dated July 12, 2018 responded to GDC indicating that the bank had uncovered elements of inappropriate conduct, misrepresentation and fraud around the claim by GDC.”
“They therefore requested to be furnished with the contract, particulars of breach, reasons why GDC provided a triplicate instead of the original APG and the exact amount of the claim arising from the breach,” Ogeto’s letter says.
In the letter, Ogeto says the guarantee issued by the bank was on demand and not conditional. He also said the bank had, in the guarantee, waived all objections and defenses. An earlier letter by Attorney General Paul Kihara turned the focus on GDC.
“It is imperative for GDC to confirm to this office whether the contractor had been given notice for failure to duly perform the contract and a demand requiring them to fulfill their obligations under the contract,” Kihara said.
He also asked GDC to confirm if it had satisfied the conditions on encashment of the APG as spelt out in the contract “so as to avoid any possible counterclaim by the contractor.”
Stanbic has never denied issuing the guarantee whose copy is in our possession. On February 21 this year, Stanbic CEO Charles Mudiwa wrote to GDC CEO Johnson Ole Nchoe acknowledge the request to pay.
“As we have previously stated, we are considering your previous demands made to the bank. In the meantime, we kindly request you to with-hold any further action to allow for exhaustion of ongoing discussion’s.”
Besides the legal action, GDC can also decide to hang on with HOOSL, accept the alternate rigs and hope that the company will not pull another one to further delay commencement of works. It can also allow HOOSL to reassign the contract or terminate the contract altogether.
Finally, and in the words of Nchoe’s recommendation to the board, “other than procuring afresh another contractor, GDC to present a works proposal to KfW requesting to be financed as the drilling contractor.”
The board is still considering these proposals.
Board fingers CEO over Sh1.4 billion loss
For presiding over a failed bid to get the Chinese on site, board wants CEO Nchoe out but CS Keter won’t hear any of it in yet another stand-off at the energy parastatal. Who will blink first between the CS and the board?
The handling of the Sh1.4 billion loss to Chinese firm is one of the reasons cited by Geothermal Development Company in opposing renewal of CEO Johnson Ole Nchoe’s contract with the parastatal.
In letters obtained by Sunday Standard, GDC chair Gershom Otachi told Energy CS Charles Keter that Nchoe had helped matters the fact that he inherited the project from pervious management notwithstanding.
The board say Nchoe’s management of the contract had been far from satisfactory; with unending blame game between the contractor and GDC, irregular and inconsistent board appraisal on the progress of dispute resolution.
“Overall, the board members are of the view that the management, led by the CEO, has not acted in a prudent, consistent and timely manner to ensure success of the contract,” a board letter to Keter says.
Plucked from a Liberian firm where was rebuilding the country’s electricity network, Nchoe was appointed GDC CEO on April 1, 2016 for a three year term. Before moving to Liberia, Nchoe had previously worked as Chief Manager, IT & Telecommunications at Kenya Power until 2013.
At GDC, he was taking over a fully government-owned special purpose vehicle tasked with developing steam fields and selling geothermal steam for electricity generation to KenGen and to private investors.
But now further to the Sh1.4 billion issue, the board complains of undeclared company losses, massaged profits, spiraling tax liabilities now at Sh4.7 billion, multi-billion project delays stretching back to 2014 and assets worth Sh3.6 billion left to waste away in the field.
In their long-winded justification on why John Ole Nchoe must leave the organization with “immediately” effect following the expiry of his three year contract at the firm, the board also cited under-utilization of company resources among them five out the seven rigs owned by the corporation and abandonment of wells.
Keter had demanded a detailed understanding of an earlier board recommendation against Nchoe, including formula and procedure used to rate him as well as how they individually scored him- the latter which they have rebuffed.
“At the 172nd Special General Meeting of the Board of Directors held at KAWI House on February 18, the board resolved to recommend to you that his term NOT to be renewed as per a copy of the resolution annexed hereto,” the earlier letter dated February 25, 2019 to CS Keter says.
In their response to Keter’s demands, the board accused the current management led by the CEO for failing to create a single additional revenue to the current steam sales to KenGen from the Olkaria wells.
“When they met, the board noted increase in accumulated tax liabilities from Sh.6 billion in 2016 to Sh4.7 billion in 2018. This is among the issues they are taking up with Keter besides the doubts they now have on the company’s alleged profitability,” a source privy to the deliberations of the board said.
The board is also faulting the CEO’s leadership for the failure of the ambitious Menengai 105 Megawatt geothermal project which was awarded way back in 2014 to three companies, each billed to generate 35 MW.
Owing to delays in sorting out land ownership in the project area, delays in providing partial risk guarantees to the three companies and other forms of delays, the three companies have not commenced construction for the contracts signed in 2014.
In sharp contrast, other parastatals that have a role in the project have long done their bit including Kenya Electricity Transmission Company which has already put up a power evacuation line and a substation.
The board is also said to be irked by the management’s inability to explain itself on various audit issues regarding company assets as well as the failure to arrest the ongoing waste of resources.
The other bone of contention is alleged insubordination in a number of matters among them the signing of Collective Bargaining Agreement signed between GDC and its union workers.
In the matter the management is said to have sidestepped Salary and Remuneration Commission in signing the CBA and despite a board resolution to obtain a “no objection” approval from the commission ahead of signing.
They are reported to have ignored a November 2018 board human resource committee freeze on new employment, ignored board guidelines on internships and attachments and delayed implementation of an approved staff mortgage scheme.
“Overly, the burden for all these issues rests with the CEO. The board does not feel that the CEO takes it seriously and consequently they do not feel he has the requisite drive to work with them,” added the source.