Kenyan government denies existence of US$400m drilling contract with China

Kenyan government denies existence of US$400m drilling contract with China GDC drilling site at the Menengai crater, Kenya (source:
Alexander Richter 8 Nov 2011

Following a controversy about an alleged drilling contract with Chinese Great Wall Drilling, Kenya's government now denies the existence of the drilling contract worth an estimated US$400 million that was previously reported on.

Following the controversy of a US$400 million drilling contract of Kenya’s KenGen with Chinese drilling firm Great Wall Drilling Company, the government now disowned the deal.

The move came as Energy Permanent Secretary Patrick Nyoike faced MPs to shed light on how the Chinese contractor clinched the multi-billion geothermal deal.

Speaking Tuesday when he appeared before the House Committee on Energy, Mr Nyoike said that his ministry was not aware of the deal with Great Wall Drilling Company (China) to sink the wells in Kenya’s bid to boost it power capacity.

“It is a fake contract. I have checked with KenGen, they have never seen it. KenGen does not even have a draft contract. I have checked with Great Wall Drilling Company, they have not seen it. That’s a fake. I don’t know where it came from” said Mr Nyoike.

Mr Emilio Kathuri (Manyatta) flashed a copy of the contract that had been appended to the agreement between Kenya and Great Wall Drilling Company. That copy had the coat of arms of the Republic of Kenya and Great Wall’s logo.

Mr Nyoike confirmed that Kenya had signed a memorandum of understanding, but the sole purpose was to allow China’s Exim Bank to release money for the project. He said that the government had not signed any commercial contract on the matter.

The process of securing a Chinese Exim Bank loan is very different from the typical tied aid project. The first thing the Chinese contractor does is to approach the client directly with a deal and an offer to sign a memorandum of understanding with an implementing agency — a government utility or parastatal, for example.

The next stage is to lobby the Ministry of Finance to apply to Exim Bank for a loan. The larger the Chinese contractor and the bigger the scale and scope of the project, the more the chances that it will be supported by Exim Bank of China. And, companies like Great Wall Drilling, which already have the scale and international experience, usually find it easy to mobilise the Exim Bank to support them in winning contracts.

The MoU, the MPs said, has a figure of Sh40 billion (USD 400 million).

But Mr Nyoike said the government had applied for a loan from Exim Bank in China, but in keeping with the lending policy of China, the government had to demonstrate that it was a Chinese contractor handling the project. He said the government was quietly lobbying that the money be given to the Geothermal Development Corporation for the sinking of the wells.

“If they agree, that’s fine. If they don’t we’ll tell them to give the money to KenGen. We should not reject the money. We need it to improve our power generation,” Mr Nyoike said.

It emerged that the China’s Exim Bank had declined to issue a loan to state corporations citing weak financial muscle. The PS said Kenya’s government had approached China seeking money for the Geothermal Development Corporation, the Kenya Electricity Transmission Company and the Rural Electrification Authority, but the effort failed.

The Bank, Mr Nyoike said, decided to give the money to KenGen, because it already had a Chinese contractor –Great Wall — working in the country. Great Wall had drilled six wells in Ol Karia.

MPs questioned the rationale of valuing 8 geothermal wells at Sh4 billion, yet the six wells were valued at Sh2billion.

Mr Edwin Yinda (Alego Usonga) said the cost ought to come down now that the contractor was already in the country; and also because of economies of scale.”

Source: Daily Nation