Adani Deal exposes Lawyers' ignorance

 Even before they were red-inked, Kenya's Adani Infrastructure development deals had generated more heat than sense. The calls for their rejection began in mid-October when a Senator alleged in the Senate  that the International Airport in Nairobi “had been sold.” He did not provide any evidence to back his claim.

Soon the hysteria spread like a bush fire with all sorts of people decrying the alleged sale. At the same time, Adani inked a contract to build electricity transmission lines on a PPP basis. This outcry, which many observers suspected to be a political red herring, exposed the level of hypocrisy or ignorance of the legal profession in Kenya.

The Law Society of Kenya rushed to court seeking to stop the alleged sale. What the LSK did not tell us is that the Airport deal was at the proposal stage—that it had just entered the ground floor of a five-floor process. A proposal faces many landmines on the way and can fail at any point before a contract is signed. For instance, the discovery of credible evidence of corruption can scuttle a deal at any point, even after it is signed.

That the legal profession wanted the proposal to abort raised serious doubts regarding its competence should it be called upon to offer advice. Few, if any, Lawyers in Kenya understand the intricacies of international finance. This is frightening as the country, cannot rely on local Lawyers to advise on a contract of this scale. They do not understand the difference between a PIP (a privately Initiated Project), and a Publicly Advertised Project (PAP).

Neither do they understand what is involved. Immediately after the cancellation, critics of the government, led by the LSK and a Senator, demanded to know how much Kenya is likely to lose. In PPP projects, the investor sinks money at his own risk. 

It is noteworthy that no single Lawyer in Kenya bothered to investigate an allegation that Kenya Mortgaged the Kenya Ports Authority’s assets to the Chinese Exim Bank to get a loan for the Standard Gauge Railway, a few years back. Even The Controller and Auditor General misled the Public on the same, accusing the KPA management of not revealing this in its financial reports.

The contentious contract was a supply-or-pay contract between Kenya Railways and KPA. It required the Ports Authority to ensure that 40 percent of all freight is transported through the Railway or pay the Railways Corporation the shortfall in Revenue arising from this failure.

Many PPP Projects in Kenya are PIPs. Among these is Africa’s largest Wind Power generator, the Lake Turkana Wind Power which generates 300 MW of wind power. Other Projects generating wind power fall in this category.

Here, the investor does the feasibility and the necessary due diligence and then approaches the executing agency with a proposal. The agency then seeks authority to work on the proposal from the PPP Authority. The work begins with studying the proposal and then carrying out due diligence. At this stage, the proposal must check all boxes defined by the PPP authority.   This is the first landmine, as the local officials seek to verify the financial muscle of the investor, Experience, legal identity, and compliance with the laws where it operates. Should any box not be checked, the proposal is rejected.

 A PAP on the other hand is initiated by the government and advertised publicly. The government could carry out the feasibility study or can require the winner to do it themselves.  All respondents have to meet the set criteria before work starts on it. Unlike the PIP, the PAPs follow strict Procurement processes including competition.

Given these procedures, it was a complete surprise that a Law firm would demand the list of all applicants to the said PIP. It is noteworthy that Africa50, an infrastructure development arm of the Africa Development Bank, AfDB, is set to sign a similar deal to build 271 KM of electricity transmission lines on similar terms.

It was for these reasons that the process was still going until the US Department of Justice indicted the Directors of the Adani group of corruption.  That was the only unknown in the Adani deal.  It was credible and actionable evidence that the Adanis were not clean. This led to the cancellation of the due diligence for the JKIA proposal, and the cancellation of the 374 KM –US$737 million, electricity contract.

There is an anti-corruption clause in the PPP contracts in Kenya –whether PIP or PAP- that allows the government to cancel a deal at any stage. It was this clause that did the Adani deals in.

It is notable that the indictment also led to the cancellation of a US$600 million bond in the financial market in India. It is also noteworthy that the indictment also bled the Adani group stock of US$31 billion in value.

It is therefore preposterous for the supporters of the former DP in Kenya, Rigathi Gacagua, to claim that the deal was canceled under pressure from the US. The Kenyan deal was canceled the day the information about the DOJ indictment became public.

Before the cancellation Adanis had signed a 30- year Contract to build operate and Transfer (BOT), three transmission lines worth uS$737 million.  It had also floated a proposal to modernize and upgrade JKIA.

The cancellation sends Kenya back to the drawing board as it still needs to invest in reliable Power transmission lines. The question that is yet to be answered is; given the hot air being spread around regarding these projects, will any other investor risk venturing into the Kenyan market? Are we shooting ourselves in the foot?