De La Rue’s new licence to print money, while laughing all the way to the bank

Monday April 4 2011

Employees at a currency printing firm. The De La Rue deal is just awaiting signatures. Photo/FILE

Employees at a currency printing firm. The De La Rue deal is just awaiting signatures. Photo/FILE 

By JAINDI KISERO

British currency printer De La Rue International has almost concluded negotiating a deal that if approved will grant it exclusive rights to produce Kenya’s currency notes for the next 10 years.

Sources say that two local legal firms contracted by the parties to draft agreements have completed the work and that the deal is now merely awaiting signatures.

The negotiations, which are shrouded in secrecy, have been going on for more than three years.

But what is emerging now is that although the stated objective of the negotiations was to set the stage for a joint venture deal where the government would purchase a 40 per cent stake in the De La Rue’s local subsidiary, located in Nairobi’s Ruaraka Estate, what is under discussion is an arrangement that will give De La Rue exclusive currency contracts.

Lawyers close to the transaction have intimated that De La Rue has insisted on an arrangement where the share and purchase agreement can only be signed after the simultaneous signing by the Central Bank of Kenya of a currency printing contract for 10 years.

Another condition is that the government must grant De La Rue an Export Processing Zone licence that comes with liberal privileges, including exemptions from VAT and Customs duty on imported inputs and equipment, income taxes, stamp duties and withholding taxes on payments to non-residents.

Apparently, the parties have agreed that De La Rue’s local business is to be transferred to a completely new company co-owned by the government and De La Rue on a 60:40 basis under the management of a five-member board — three directors from De la Rue and the remaining representing the government.

Indeed, at issue are complex negotiations involving simultaneous signing of multiple agreements including a joint venture agreement, a business transfer agreement, a share purchase agreement, a know-how agreement and a pricing agreement.

The parties are also negotiating articles and memoranda for the proposed venture.

Last week, Investment Secretary Esther Koimet, who is leading the negotiations on behalf of the government, refuted claims in the press that the deal was about to be concluded.

In a conversation with The EastAfrican, she said the transaction will have to be approved by the Cabinet before it is implemented.

Clearly, this is going to be one of those rare occasions where a transaction that has progressed to the level of engaging and paying transaction advisers for in excess of three year — besides hiring lawyers to draft legal agreements — is taken back to the Cabinet.

The usual practice is that the Cabinet deals with broad policy approvals.

Still, these latest developments have added a new twist to the shenanigans that have been playing out for the past five years.

Indeed, the big issue surrounding the joint venture negotiations is that they have served to deny the Central Bank of Kenya the opportunity to enjoy not only more competitive prices but also new generation notes that had been negotiated under a competitively tendered project in 2006.

The background to the saga is the following: In January 1993, Kenya signed a 10-year contract giving De La Rue an exclusive deal to supply bank notes. The minimum order under the contract was 170 million pieces of bank notes each year.

The current saga started when the administration of President Mwai Kibaki took over in 2003.

It became apparent that weeks before Kibaki was sworn in as President, the administration of the Central Bank of Kenya had hurriedly signed a new deal with De La Rue entering into a new 10-year contract.

In March 2003, former finance minister David Mwiraria cancelled this contract and ordered that a new one be floated under the rules of international competitive bidding.

When the procurement was concluded, De La Rue International PLC of the UK emerged top among five international currency makers who had also bid for the lucrative contract.

Incidentally, De La Rue’s local subsidiary did not bid.

In May 2006, after winning the competitive and much cheaper bid, De La Rue signed a three-year contract to print 1.71 billion pieces of bank notes at a cost of $51. 2 million.

The cheaper new generation notes were to be issued beginning June 2007.

As a matter of fact, De La Rue PLC was given a down payment of $25 million to start supplying the new notes.

As it turned out, the competitive contract for new generation notes with De La Rue PLC was not to see the light of day.

An intriguing behind-the-scenes battle ensued between powerful forces who were bent on blocking the new generation notes deal and Central Bank technocrats who wanted the new contract to run. At the end of it all, the interests supporting the local subsidiary won the day.

The upshot was that even as the Central Bank was waiting to receive the new notes, and having made the down payment to De la Rue PLC, the Treasury informed the Central Bank to halt the plans to receive the new generation notes as the government was considering buying shares in the Ruaraka-based subsidiary of De La Rue.

Technocrats at the Central Bank protested.

“We are of the view that the bank will lose out on the advantages of competitive pricing and the superior specifications under the new generation agreement,” said the bank’s secretary, G.M Gikonyo, in a letter dated November 2, 2007.

He added: “It is not clear why the joint venture is to bind Kenya with the existing generation bank notes which are more expensive compared with new generation notes.”

The cautions from the technocrats were ignored.

Instead, former finance minister Amos Kimunya crafted a Cabinet paper making the case for the purchase of 25 per cent of shares of the Ruaraka plant by the government.

Following Cabinet approval, the Treasury appointed Commercial Bank of Africa as transaction adviser and to preside over negotiations with De La Rue.

With the new generation deal having been halted, and discussion on any new tenders suspended by the government until completion of the joint venture negotiations, De La Rue has had a field day — winning one short-term contract after another without having to face competition.

In March 2009, the Finance Committee of parliament recommended that the government should seek to buy 40 per cent instead of 25 per cent stake as had been recommended by the Cabinet paper.
In the circumstances, the parties decided to start fresh negotiations.

The stage had been set for De La Rue to clinch more short-term contracts.