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Mugoya’s Ksh342m award and the art of cowboy contracting

Saturday March 24 2012
mugoya

Projects such as road construction were a favourite of politically well-connected contractors. Picture: File

One of East Africa’s top property development moguls and owner of Mugoya Construction Company, James Isabirye, a Ugandan national, is in the news again in a saga that has given yet another glimpse into the exploits of the region’s most enigmatic property developer.

He has just negotiated an out-of-court settlement with Kenya’s National Social Security fund in which he has been paid a whopping Ksh342 million for houses he was supposed to construct more than 15 years ago but which did not take off.

But you have to put it all in context in order to appreciate the exploits of this genre of contractors and developers.

Towards the end of former president Daniel arap Moi’s reign, there emerged a group of politically well-connected contractors who came up with clever schemes for making money from the government without doing any work at all.

The NSSF, with billions of shillings lying in its accounts, was a prime target.

If, as a contractor, you had a government project that was for one reason or another cancelled, you were considered to be sitting on a goldmine.

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All you needed to do was to leave a few pieces of derelict equipment on site before walking away.

Meanwhile, you made sure that you waited for as many years as possible before you claimed, in order to pile up interest before demanding compensation from the government.

Chasing these huge claims and facilitating out-of-court settlements became a business unto itself, complete with middlemen who were always at hand to assist the contractors.

Government ministries and institutions with a pool of funds such as the NSSF found themselves spending more money on paying claims, court awards and legal fees arising from these claims than on actual work and new projects.

It was Prime Minister Raila Odinga, then not in government, who popularised the phrase “cowboy contractors” to refer to this genre of contractors and property developers.

In cases involving court awards, it was not uncommon to find that the Attorney General would not prepare a proper defence — allowing the cowboy contractors to get huge awards.

The facts of the case where Isibiyre has just been paid by the NSSF for a project that never took off are as follows:

In 1995, NSSF awarded Isabirye a contract to construct some 265 house in the Karen area.

Like many projects in which he was involved, it was a very big if not grotesque project, deliberately made complex by introducing construction of multiple facilities — an administration block, a club house and a kindergarten.

The project hit a snag after the City Council of Nairobi refused to grant approval for the drawings, arguing that that type of development was not permitted in the exclusive Karen area.

A neighbourhood association, the influential Karengata Group, also put up a spirited fight to block the development.

Consequently, NSSF asked Isabirye not to move to site or do any work until all approvals had been granted.

He did not obey the instructions. The contractor moved to the site, cleared it, did some excavations of the road and went away.

Ten years later, long after the project had been cancelled, he hit the NSSF with a Ksh633 million claim. The matter dragged on in court for years.

Two months ago, he negotiated an out-of-court settlement and was paid a cool Ksh342million.

The pensioner’s fund did not get any value at all out of this.

Isabirye was about to be paid more billions for no work done just as president Moi was leaving the scene in 2002.

Documents seem by The EastAfrican show that in that year, Mugoya hit the government with a massive Ksh1.9 billion claim with respect to a contract he had been awarded under controversial circumstances way back in 1990.

The building that never was

Mugoya had been contracted to construct an office building complex to serve as an annex to the Treasury building. The paper trail shows that the building was to be constructed between the Treasury and the Central Bank of Kenya, in the location currently occupied by the Kenya National Bureau of Statistics — better known as Herufi House.

The contract sum was negotiated at Ksh1.2 billion. But as it turned out, the project did not take off. It had been awarded on condition of availability of funds.

Isabirye waited for a whole 10 years before lodging the Ksh1.9 billion claim in a letter dated April 12, 2001.

When Isabirye’s demand notice reached the Ministry of Public Works, then permanent secretary Erastus Mwongera reacted angrily. “The site is the location of Herufi House and since the premise had neither been vacated or demolished, I can’t see how it could have been handed to the contractor to commence works,” he said in a letter dated June 29, 2001.

Herufi House still stands on the same location today. But Isabirye still demanded the billions, basing his case on the claim that first, he had purchased a crane for the project, had recruited personnel for the project, and had incurred indirect losses running into millions.

The claim for interest alone was a massive Ksh1.6 billion. The Directorate of Public Procurement ruled against the claim, arguing that the agreement had been made conditional on availability of funds.

Luke Obiri argued in a letter dated June 10, 2001, that the project had been abandoned due to lack of funds.

The Attorney General joined the fray, shooting in both directions.

At first, the AG ruled that the claim was not payable. But in a second opinion, dated July 16, 2001, a former chief state counsel, Dan Ameyo, ruled that Mugoya had entered into a valid contract with the government and that the claim was not payable.

It is not clear whether this claim has since been paid.

In Uganda, Isabirye negotiated with NSSF Uganda an opaque arrangement that would allow him to achieve multiple objectives, including offloading land on the worker’s body at uncompetitive prices.

The arrangement would also allow Mugoya to circumvent public procurement regulations

In 2004, the deal provoked public fury after Mr Isabirye was given a 51 per cent shareholding for his contribution of 843 acres of land on Masaka Road worth Ush8.5 billion, but critics said his contribution was worth Ush4 billion.

(Read: Arrest warrant issued for Mugoya boss)

On November 5, 2007, the Constitutional Court ruled that the multibillion-shilling Nsimbe deal was illegal because NSSF had entered the joint venture without clearance from the Attorney General, the government’s legal adviser.

The $225m project for 5,000 housing units was being undertaken by Nsimbe Holdings, a joint venture between Mugoya Estates and Premier Development Company, a subsidiary of the National Social Security Fund.

Mugoya Estates had purportedly contributed land worth Ush8.5 billion for the deal, giving it 51 per cent ownership of the venture, while Premier contributed Ushs8.2 billion to form Nsimbe Holdings Ltd.

(Read: (Uganda's) NSSF unveils bold five-year strategy)

In the deal that started in 2004, NSSF paid $4,561,058 (over Ush8 billion). But allegations of financial impropriety in the transaction were made and the project was suspended on the recommendation of the IGG.

(Read: NSSF Says $9.7m Housing Deal with Mugoya is Clean)

In 2005, the then IGG, Justice Faith Mwondha, declared the project illegal and done in bad faith. Some officials of the Fund were prosecuted and others like the former gender minister Zoe Bakoko Bakoru had their cases dropped after she became a fugitive. She fled to the US to escape prosecution in a case that was riddled with political undertones.

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