Kenya has pulled out of a capital markets integration project meant to make trading in shares across East Africa cheaper and faster, citing irregularities in tendering for the $3.8 million software.

The other EAC member states — Rwanda, Uganda and Tanzania — will proceed with the interconnection as Kenya consults over the alleged irregularities. Burundi, which does not have a securities exchange, is expected to link up to the interface when it launches one.

Kenya’s capital markets regulators have reservations about the quality of the software being purchased and whether it will be compatible with the Nairobi Securities Exchange’s clearing and settlement system. They are also concerned about the capacity of the vendor to deliver on the project.

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The decision by Kenya, the most developed capital market in the region, with the NSE being among the top five bourses in Africa, to sit out of the initial phase of the project raises doubt about its success.

The EastAfrican has learnt that the tender was awarded to Infotech, a Pakistan-based software firm based on terms of reference that had not been approved by the region’s Sectoral Council of Finance and Economic Affairs.

“The pre-budget meeting of ministers of finance agreed that the project can be implemented with the other four partner states as Kenya undertakes consultations,” an EAC report to the Council of Ministers released on May 30 shows.

“We were advised by the capital markets authorities of the region that there were issues with the company that had been identified to provide the software. We want the contract to be cancelled and the process to start afresh, but the EAC Secretariat has indicated the project will go ahead, so we have decided not be part of the process,” said Kenya’s Cabinet Secretary for the National Treasury Henry Rotich.

It is understood that the EAC Secretariat signed the contentious contract without the involvement of key stakeholders.

“We just found out that the contract has been signed,” Mr Rotich told The EastAfrican.

“The IT solution is in the final stage of procurement... The main issue was how the procurement was done. Kenya looked at the process and felt that there was some work that needed to be done before we select the vendor of the IT solution but the other members decided they would move forward with the person identified so Kenya stepped back,” said Paul Muthaura, acting chief executive of Kenya’s Capital Markets Authority.

“We have written to the EAC Secretariat expressing our concerns and we are still waiting for the feedback,” said Geoffrey Odundo, NSE chief executive.

The integration of the region’s capital markets is in line with the provisions of the EAC Common Market Protocol, which provides for free movement of capital in the region.

The software was to link the trading platforms of the NSE, Uganda Securities Exchange (USE), Dar es Salaam Securities Exchange (DSE) and Rwanda Stock Exchange (RSE) so that they run as a single market in real time.

The connection would allow investors to buy and sell shares of companies located in different EAC countries without necessarily going through different brokers.

It would also reduce the time it takes to trade in cross-listed shares from more than 30 days to as low as three days, according to market analysts.

Latest data from the stock markets shows that the NSE controls huge investor wealth, with a market capitalisation of $22.86 billion, followed by Tanzania ($11.08 billion), Uganda ($7.85 billion) and Rwanda ($4.14 billion).

People privy to the details of the tender documents say that while the Council of the Finance Ministers approved the contract based on the terms of reference, which split the project into three components, the World Bank—the key financier of the project — collapsed them into one.

It is feared that the action by the Bank may have locked out some bidders.

The project involves acquisition and installation of an information technology platform, the Smart Order Routing System, linking the clearing and settlements systems of securities trade among the EAC member states.

It is part of a wider World Bank-funded EAC Financial Sector Development and Regionalisation Project 1 (EAC-FSDRP1), which seeks to support the establishment of a single financial market among the EAC member states.

Initial phase

The EAC-FSDRP1 was initiated in 2011 by the EAC Secretariat in collaboration with the World Bank and runs through two back-to-back projects over a nine-year period. The initial phase covers 2011 to 2014 and the second phase 2014 to 2019.

The first phase, which is funded by a World Bank grant of $16 million, is set to be completed by June 30 due to a delay in its implementation plan, implying the  second phase will begin in the next financial year (2015/2016).

According to sources the technical working groups of the capital markets and the Insurance and Pension Committee of the EAC resolved  that the  tender be cancelled  to pave the way for  further consultations, but their  decision was overruled by the Council.

When contacted, the World Bank said the procurement process was entirely managed by the EAC Secretariat and its role was purely advisory.

“Procurement under this project was managed entirely by a team at the EAC Secretariat in consultation with the five partner states. The World Bank Group’s role in the process was primarily advisory and to ensure that the process was in full compliance with the World Bank Group’s procurement guidelines,” said Peter Warutere, senior communications officer, at the Bank’s Kenya office.

The EAC Secretariat had not responded to our enquiries by the time of going to the press.