The Kenya Pipeline Company (KPC) paid a Lebanese contractor Sh2.85 billion as penalty and interest in the financial year ended June 2024, contributing to a 44 percent dip in its cash reserves, new disclosures showed.
The State-owned firm said in its latest annual report that interest and penalties were paid to Zakhem International Construction (Kenya) Limited concerning construction of a new oil pipeline from Mombasa to Nairobi between 2014 and 2018.
The settlement was based on a consent entered between KPC Limited Management and Zakhem on September 25, 2023, in a suit filed at the High Court.
The payment to the Lebanese firm, added to the Sh7 billion dividend payout to Treasury saw KPC’s cash reserves drop to Sh6.52 billion from Sh11.73 billion. In the prior year, KPC paid Treasury Sh5 billion.
“This decline can be attributed to the payment of dividends to the National Treasury and the settlement of a long legal dispute with one of the oil marketers,” said Joe Sang, managing director at KPC in the latest annual report.
In the 2023 consent, KPC agreed to pay a sum of $69.68 million (approximately Sh9.01 billion) comprising $48.14 million (approximately Sh6.22 billion) as sums owed to the contractor and $21.55 million (approximately Sh2.78 billion) interest calculated at six percent.
KPC contracted Zakhem to construct a new oil pipeline from Nairobi to Mombasa at a cost of $484.5 million (approximately Sh62.65 billion) inclusive of taxes.
The job was initially scheduled to be completed within 18 months from the date of the contract on July 1, 2014. However, it ran into delays occasioned mainly by change of design specifications by the project engineer and omitted works in the initial contract. The project was completed after 48 months.
The delays saw Zakhem apply for five extensions of time claims amounting to $204.5 million (approximately Sh26.44 billion). This was disputed by the project engineer, occasioning the appointment of an independent expert scheduler to assess the claims and recommend the payable amount.
The scheduler recommended a payment of Sh5.69 billion. Although both parties agreed on the amount, the Directorate of Criminal Investigations (DCI) directed KPC management in a letter dated July 26, 2019, to suspend all deals relating to the contract pending investigations.
As DCI investigations were ongoing, the contractor sought legal redress in the High Court where a partial ruling was made on June 16, 2020, in favour of the contractor. The parties subsequently agreed to the Sh2.78 billion as an out-of-court settlement fee.
Auditor General Nancy Gathungu says justification for the stoppage of all payments, and delays in the conclusion of the investigations which occasioned interest and penalties of Sh2.78 billion could not be ascertained.
However, KPC says it could not settle the payments as there was a directive from the Treasury to clear with the DCI first.
