New evidence has emerged of how a bitter dispute between Sheltham Rail of South Africa and its partners in the Rift Valley Consortium almost scuttled last Monday's signing of the agreement for the concessioning of the Kenya Railways Corporation.

The EastAfrican has learnt that only two days before Transport Minister Chirau Ali Mwakwere and the South African company signed the contract sealing the deal, a major disagreement arose between Sheltham Rail Ltd on the one hand and Mirambo Holdings and Prime Fuels Ltd on the other, over the terms of a shareholders' agreement that the parties were supposed to have concluded before sealing the agreement with the government. Mirambo and Prime Fuels thereupon pulled out of the consortium.

According to the original arrangement, Mirambo and Prime Fuels between them held 25 per cent of the shareholding of the consortium; while Sheltham and Comazar Ltd, both controlled by a South African businessman, Roy Puffet, between them had 71 per cent (Sheltham 61 per cent and Comazar 10 per cent). 

The third shareholder in the company was CDIO Institute of Africa Development Trust of South Africa with 4 per cent.

Prime Fuels and Mirambo are Tanzanian companies. They agreed to part ways with Sheltham at midnight on Friday, January 20.

Curiously, this major change in the ownership of the consortium was not disclosed during the sealing of the deal.

In a conversation with The EastAfrican, Vishal Agarwal, the transaction adviser, played down the significance of the pullout by these two critical members of the consortium, pointing out that Sheltham, which is the lead investor in the transaction, is capable of delivering the deal.

He explained that the arrangement all along was that the structuring of the ownership was the responsibility of the lead investor.

Still, the pullout by the two major partners means the running of the strategic utility has been ceded to a group controlled by one individual ? Mr Puffet.

It has also left the privatisation open to accusations of being without the participation of local investors.

Speaking to The EastAfrican, Javier Calvo, who represents the International Finance Corporation (IFC) in the transaction, insisted that the threshold for local ownership stipulated in the bid documents had not been breached.

He argued that both Mirambo and Prime Fuels Ltd had presented themselves as local companies, while they cannot technically qualify to be described as Kenyan companies.

"These are companies owned by offshore outlets that cannot be treated as local investors," he argued.

It now remains to be seen how the signing of the deal in Kenya impacts on the agreement with Uganda, which is still stuck in court.

The fear is that the bad blood between Sheltham and its partners may precipitate undercurrents and spill over into lengthy litigation in both Kenya and Uganda.

This is why it should be no surprise that the parties were not even willing to wait for the conclusion of the case that Kenya Railways pensioners have filed against the deal.

Indeed, the signing of the deal between Mr Puffet and Mr Mwakwere was concluded with lightning speed, with the parties exploiting a legal loophole to proceed with the ceremony.

It all started on Wednesday the week before Transport Permanent Secretary Gerishon Ikiara hurriedly convened a meeting to discuss how to circumvent a court case that had been lodged by Kenya Railways pensioners against the management deal.

Those who attended say that when the meeting started, the lawyer for the transaction, Prof Albert Mumma, was the first to be invited to address it.

After taking the meeting through what had transpired in the High Court of Kenya, Prof Mumma pointed out that although the date for hearing the pensioners case had been extended, the injunction halting the process had not.

He concluded therefore that there was nothing to prevent the government and the Kenya Railways Corporation from signing the agreement. 

This position was also supported by Deputy Solicitor-General Muthoni Kimani, who was also in attendance.

Mr Calvo informed the meeting that he had been in touch with Sheltham, who had indicated that they were in principle ready to sign the agreement immediately the government confirmed its willingness to do so.

He also reported that the South African investors had expressed concern that the court case had increased the risk profile of the contract considerably, pointing out that there was now a greater likelihood that other suits could materialise to frustrate efforts to close the deal.

He reportedly informed the meeting that Sheltham was working on a possible handover date of June 15 this year ? that is if Uganda will have signed its agreements by February 26.

Mr Calvo reported a discussion he had had with a senior Treasury official who had reportedly suggested the possibility of delinking the Kenya and Uganda concessions in order to have closure in Kenya in case there was an unforeseen delay in Uganda.

With everybody having agreed that the way to go was to sign quickly, the Treasury representative at the meeting advanced a different view.

According to those who attended the meeting, the Director of Reforms at the Treasury, Solomon Kitungu, said that signing the agreement hurriedly was not a solution because there was nothing to stop the parties from going to court to stop the signing of the interface agreement.

Mr Kitungu insisted that rushing the signing of the contract was likely to embarrass the government, arguing that it was likely to give the impression that the government was not acting in good faith in the proceedings before the court.

He reportedly also told the meeting that a hurried sealing of the deal was likely to create resistance among workers.

Finally, he reported to the meeting that PricewaterhouseCoopers had expressed reservations, saying that Sheltham would be forced to pay fees to IFC if the agreement were signed before the effective date.

According to the agreement signed last week, Sheltham will be required to pay the government an entry fee of $3 million that is to be paid as follows:

First, $1.85 million will be payable to the Kenya Railways at closing of the deal.

Second, $1.15 million will be paid on behalf of Kenya Railways to IFC, which is the transaction adviser to the government.

After they take over, the South Africans will pay a variable annual concession fee to KRC, which is to be computed as a percentage of gross revenue at the start of each year, adjusted for inflation.

Other conditions of the contract include a requirement that Sheltham invest at least $5 million per financial year in providing the services.

In addition, Sheltham has an obligation to move 1.8 billion net-tonne kilometres of freight by year two of the concession. By year five, it must move 2.6 billion net-tonne kilometres.

But the agreement allows Sheltham to breach these benchmarks so long as it can demonstrate that failure to meet the target was a direct result of circumstances beyond its control.

See also:

AllAfrica.com: January 31, 2006

Two Partners Walk Out of Kenya-Uganda Rail Operator

JAINDI KISERO
Nairobi

The EastAfrican has learnt that only two days before Transport Minister Chirau Ali Mwakwere and the South African company signed the contract sealing the deal, a major disagreement arose between Sheltham Rail Ltd on the one hand and Mirambo Holdings and Prime Fuels Ltd on the other, over the terms of a shareholders' agreement that the parties were supposed to have concluded before sealing the agreement with the government. Mirambo and Prime Fuels thereupon pulled out of the consortium.

According to the original arrangement, Mirambo and Prime Fuels between them held 25 per cent of the shareholding of the consortium; while Sheltham and Comazar Ltd, both controlled by a South African businessman, Roy Puffet, between them had 71 per cent (Sheltham 61 per cent and Comazar 10 per cent).

The third shareholder in the company was CDIO Institute of Africa Development Trust of South Africa with 4 per cent.

Prime Fuels and Mirambo are Tanzanian companies. They agreed to part ways with Sheltham at midnight on Friday, January 20.

Curiously, this major change in the ownership of the consortium was not disclosed during the sealing of the deal.

In a conversation with The EastAfrican, Vishal Agarwal, the transaction adviser, played down the significance of the pullout by these two critical members of the consortium, pointing out that Sheltham, which is the lead investor in the transaction, is capable of delivering the deal.

He explained that the arrangement all along was that the structuring of the ownership was the responsibility of the lead investor.

Still, the pullout by the two major partners means the running of the strategic utility has been ceded to a group controlled by one individual - Mr Puffet.

It has also left the privatisation open to accusations of being without the participation of local investors.

Speaking to The EastAfrican, Javier Calvo, who represents the International Finance Corporation (IFC) in the transaction, insisted that the threshold for local ownership stipulated in the bid documents had not been breached.

He argued that both Mirambo and Prime Fuels Ltd had presented themselves as local companies, while they cannot technically qualify to be described as Kenyan companies.

"These are companies owned by offshore outlets that cannot be treated as local investors," he argued.

It now remains to be seen how the signing of the deal in Kenya impacts on the agreement with Uganda, which is still stuck in court.

The fear is that the bad blood between Sheltham and its partners may precipitate undercurrents and spill over into lengthy litigation in both Kenya and Uganda.

This is why it should be no surprise that the parties were not even willing to wait for the conclusion of the case that Kenya Railways pensioners have filed against the deal.

Indeed, the signing of the deal between Mr Puffet and Mr Mwakwere was concluded with lightning speed, with the parties exploiting a legal loophole to proceed with the ceremony.

It all started on Wednesday the week before Transport Permanent Secretary Gerishon Ikiara hurriedly convened a meeting to discuss how to circumvent a court case that had been lodged by Kenya Railways pensioners against the management deal.

Those who attended say that when the meeting started, the lawyer for the transaction, Prof Albert Mumma, was the first to be invited to address it.

After taking the meeting through what had transpired in the High Court of Kenya, Prof Mumma pointed out that although the date for hearing the pensioners case had been extended, the injunction halting the process had not.

He concluded therefore that there was nothing to prevent the government and the Kenya Railways Corporation from signing the agreement.

This position was also supported by Deputy Solicitor-General Muthoni Kimani, who was also in attendance.

Mr Calvo informed the meeting that he had been in touch with Sheltham, who had indicated that they were in principle ready to sign the agreement immediately the government confirmed its willingness to do so.

He also reported that the South African investors had expressed concern that the court case had increased the risk profile of the contract considerably, pointing out that there was now a greater likelihood that other suits could materialise to frustrate efforts to close the deal.

He reportedly informed the meeting that Sheltham was working on a possible handover date of June 15 this year - that is if Uganda will have signed its agreements by February 26.

Mr Calvo reported a discussion he had had with a senior Treasury official who had reportedly suggested the possibility of delinking the Kenya and Uganda concessions in order to have closure in Kenya in case there was an unforeseen delay in Uganda.

With everybody having agreed that the way to go was to sign quickly, the Treasury representative at the meeting advanced a different view.

According to those who attended the meeting, the Director of Reforms at the Treasury, Solomon Kitungu, said that signing the agreement hurriedly was not a solution because there was nothing to stop the parties from going to court to stop the signing of the interface agreement.

Mr Kitungu insisted that rushing the signing of the contract was likely to embarrass the government, arguing that it was likely to give the impression that the government was not acting in good faith in the proceedings before the court.

He reportedly also told the meeting that a hurried sealing of the deal was likely to create resistance among workers.

Finally, he reported to the meeting that PricewaterhouseCoopers had expressed reservations, saying that Sheltham would be forced to pay fees to IFC if the agreement were signed before the effective date.

According to the agreement signed last week, Sheltham will be required to pay the government an entry fee of $3 million that is to be paid as follows:

First, $1.85 million will be payable to the Kenya Railways at closing of the deal.

Second, $1.15 million will be paid on behalf of Kenya Railways to IFC, which is the transaction adviser to the government.

After they take over, the South Africans will pay a variable annual concession fee to KRC, which is to be computed as a percentage of gross revenue at the start of each year, adjusted for inflation.

Other conditions of the contract include a requirement that Sheltham invest at least $5 million per financial year in providing the services.

In addition, Sheltham has an obligation to move 1.8 billion net-tonne kilometres of freight by year two of the concession. By year five, it must move 2.6 billion net-tonne kilometres.

But the agreement allows Sheltham to breach these benchmarks so long as it can demonstrate that failure to meet the target was a direct result of circumstances beyond its control.