Eurobond: A Billion-Dollar Heist And Four Smoking Guns (Part 1)

President Uhuru Kenyatta Photo Norbert Allan
President Uhuru Kenyatta Photo Norbert Allan

RIGHT, hands up if you can think of a bunch of words and figures being bandied about in the media lately that have left you totally bewildered. Give yourself full marks if any of the following came to mind: Eurobond, Sovereign Bond, Syndicated Loan, Consolidated Fund, Offshore Account, GoK/CBK Sovereign Bond Account, Tap Sales, PFM Act, Transaction Advisers, Pre- Negotiated Expenses ……….. blah, blah, blah.

Add yourself a gold star if you admit to feeling similarly dazed by the accompanying numbers, some in dollars, some in shillings, all mixed up: US$2bn, Kshs.15bn, US$1,998,997,763, Kshs. 25bn, US$604,560,737, Kshs.30bn, US$395,439,262, Kshs.17,268,281,135, US$999,052,872, Kshs.34,648,388,180.25, US$999,002,853, Kshs.3,394,492,135.47, US$815,436,932 ………….. Confused? Darn right.

You and me both. And do you know what? We are meant to be confused. As George Orwell, author of the political novella Animal Farm, said, “Insincerity is the great enemy of clear language. When there is a gap between one’s real and one’s declared aims, one turns instinctively to long words and exhausted idioms.” Or in this case, one turns to complicated banking terms and tortuous lists of perplexing numbers.

This cynical piece of pseudo-science being propagated by the National Treasury is as clear as mud, as it is intended to be. It is meant solely to make us so disoriented that we stop questioning something that in truth has not one ounce of credibility.

It is meant to make us believe that a certain nearly one billion US dollars belonging to Kenya has actually been received in this country and put to good use. That is categorically untrue – so let’s just try to unravel all that deliberate confusion a bit, and attempt to get a little closer to the actual picture.

Former CBK Governor Njunguna Ndungu

Let’s start at the beginning

It all goes back to 2010 and 2011, when the Kenya government, with Uhuru Kenyatta running the Treasury (ministry of finance, from where all Kenya’s money is controlled) decided the country was short of cash and needed to borrow a substantial sum. Kenyatta and co made an approach to several international banks and these banks in turn joined up together to deal with the request (in other words, they formed a ‘syndicate’, which simply means ‘a group of businesses’). Standard Bank was the leader of the syndicate and all the banks involved asked their wealthier clients to put up some of the money Kenya needed.

When this money, amounting to US$600 million, was gathered together, it was called “the Syndicated Loan”. Kenya would have to repay it in August 2014. I don’t know what that money was spent on but it might be worth noting that this all happened in the run-up to the last elections. Just saying. Anyway, whatever the loan money was spent on, it obviously was not used productively to generate more cash – because a few months before repayment time in August 2014, it became clear there would be no money to pay off the debt.

So Kenyatta, now president, and his team decided the time was right to look for more foreign money, in an apparent rolling programme of ‘borrow money, borrow more to pay it back, then borrow more money to pay that back, then borrow again to pay THAT back’ and so on – always getting deeper and deeper in debt, of course.

This time, in order to raise money to repay the Syndicated Loan, they decided to go for bonds (known as Sovereign Bonds when they are arranged by a national government) – and in fact to raise a lot more than only the amount required to pay off the Syndicated Loan. A bond can be described simply as an ‘IOU’. The lender loans money to the government, and the government gives an IOU (or ‘bond’) undertaking to repay the money at the due time, with regular interest payments.

Unlike ordinary loans, these bonds are not in danger of suddenly being called in by the lender, at a time when the borrower might find it difficult to repay. They have a fixed repayment date, which is usually quite a long way ahead – five, 10 or sometimes 20 years – and they often also offer favourable interest rates. (Any government getting bond loans and repeating the spiral of borrow and pay, borrow and pay, is in danger of setting up a very big loan burden for successive governments.

Well, we don’t worry about the future in Kenya, do we? Live for the day! Grab what you can!) A great deal of thought obviously went into how this whole arrangement could be spun to allow some people to make a lot of money. Someone had a brainwave that the Public Finance Management (PFM) Act needed to be changed, to facilitate whatever it was they wanted to do. The resulting PFM Act Amendment, brought to and passed by parliament in May 2014, covered a number of issues, but the part relevant to our story is paragraph 50.7(c). The law was amended at this point to allow the finance minister, currently Henry Rotich, to pay expenses incurred in connection with foreign loan arrangements “at source”.

In other words, the money for these ‘expenses’ did not first have to come to Kenya but could be paid out directly from the overseas dollar account set up to receive the money from the bonded loan. In this case, that was an account (otherwise known as an Offshore Account because it is outside Kenya’s shores) that would be opened with JP Morgan Chase in New York.

But we’ll come back to that. When the PFM Act was changed, the amendment was specific about the kinds of ‘expenses’ that could be paid. These all relate to expenses agreed in advance with organisations that help to arrange external loans – to meet their fees, commissions, various agents’ and trustees’expenses and so on. These are known as Pre-Negotiated Expenses.

The law specifically states that these “pre-negotiated expenses [are] associated SOLELY and EXHAUSTIVELY with the borrowing” (my emphasis) of external funds. Neither the original nor the amended law says anything whatsoever about paying off the principal sum of a Syndicated Loan from offshore accounts. Such loan repayments have to come from the central Treasury account and have first to be approved by the government’s Budget Controller, in this case one Agnes Odhiambo.

Suspicious change of heart: Budget Controller Agnes Odhiambo. ‘[She] first announced she had not approved any loan repayment. Who knows what happened next – but something made her later change her mind and come out to contradict herself.’

If she says ‘No’, her word is final. Some in government – maybe because the money from the original Syndicated Loan could not all be accounted for (I’m guessing) – perhaps feared that she would indeed say ‘No’, and then there would be real problems, with no money to pay off the Syndicated Loan when it fell due. (Indeed, a related problem did eventually arise. Odhiambo first announced she had not approved any loan repayment. Who knows what happened next – but something made her later change her mind and come out to contradict herself.)

Anyway, the minister for finance obviously thought that, with this particular amendment to the PFM Act, he could fly by the seat of his pants, leaving a trail of noxious smoke in his wake while flashing mirrors in every direction to blind everyone, and make it appear as if the Syndicated Loan was part of Pre- Negotiated Expenses.

It was not. The minister might have mentioned the Syndicated Loan previously but that does not make the principal sum of the loan part of any Pre-Negotiated Expenses, as clearly defined in the Act. A loan is not by any stretch of the imagination an ‘associated expense’. But the Syndicated Loan was nevertheless eventually paid off illegally from the offshore account at JP Morgan Chase.

Wild and reckless spending

Anyway, to return to our ‘Eurobond’ application. Before it could be made, there was a troubling issue called Anglo-Leasing that needed to be sorted out. As everyone knows, Anglo-Leasing was a scam of giant proportions that has lost Kenya untold amounts of money.

Foreigners involved in it were still demanding more, which Kenya had refused to pay – but as long as this money was not paid, Kenya could not apply for any Eurobond loan. Kenyatta was in government prior to the immediate past elections and he was chairman of the parliamentary Public Accounts Committee when the issue of Anglo-Leasing came up.

PAC under Kenyatta issued a damning report on Anglo-Leasing. But suddenly, on May 15, 2014, to the consternation of many Kenyans, Kenyatta, as president, did a complete about-turn and gave an executive order to the minister for finance to pay off immediately all outstanding Anglo-Leasing ‘debts’, amounting to Kshs.2.7 billion.

Getting cleared for Eurobond was evidently of the utmost importance, no matter what it cost. Even as loud protests were being heard about the scandalous payment to Anglo- Leasing, Kenyatta stood on the steps of State House and emotionally declared how absolutely fantastic it would be for Kenya to apply for the Eurobond loan. It would mean the government did not need to borrow from sources within Kenya, so interest rates would be lower, investment would be boosted, economic growth would be spurred and everyone would be living a wonderful life. Yes, in never-never land perhaps.

Nearly two years later, we are still waiting for this utopia. At the time, the government had an unimaginably huge hole in its budget, thanks to irresponsible spending of money that the country did not have. Everywhere, government officials were consuming resources in a noticeably wild and reckless fashion. There was no productive investment and the government was broke.

It was desperately looking around for a way of keeping afloat. So Kenyatta, as head of a frantic government backed into a financial corner, unveiled the bid for the Eurobond loan as if it was the new messiah. His impassioned announcement worked for a lot of people, who lauded Kenyatta as if …. well, perhaps as if he himself was some kind of new messiah.

Moving on, the government next contracted some so-called Transaction Advisers – in other words, international banks that would manage, on Kenya’s behalf, the process of getting the Eurobond loan set up. A number of banks bid for the job, and JP Morgan Chase, Barclays and Standard Chartered were chosen. All seemed ready to go – but then, right at the last minute, finance minister Henry Rotich dragged the Qatar National Bank into the mix.

Convenient change of rules: Treasury Secretary Henry Rotich. ‘The law was amended allow the finance pay expenses incurred in connection with foreign loan arrangements “at source”.’

Why? I understand former Nairobi Stock Exchange chairman Jimnah Mbaru was the ‘Transaction Adviser’ in the Qatar case. But why was the Qatar bank so important? It is interesting to note at this point that money-laundering (that is, making dirty and corruptly acquired money appear honest and clean) is rife in the Middle East. Just saying. The Eurobond loan was eventually granted. (The bond is called Eurobond despite the fact that it was in US dollars.

For the purpose of understanding this case, the terms ‘Eurobond’ and ‘Sovereign Bond’ are interchangeable.) Kenya had asked for US$2 billion but the lenders were apparently happy, despite the risks involved, to lend more. So they said Kenya could go back again one more time, under the same application, and draw a bit more money. That arrangement is called a Tap Sale – presumably because it’s like a tap that you can turn on to allow some more money to come pouring in, without having to go through the lengthy original application process. Kenya did indeed go back again for a ‘tap’.

The Tap Sale amounted to some US$815 million. But more of that later. In both cases, the money was said to be for infrastructure development and “general budget support”. So, the first lot, the US$2 billion, was paid into an offshore account at the JP Morgan Chase Bank in New York, USA, on June 24, 2014. But just prior to that, on June 19, two Treasury senior assistant accountantsgeneral, Julius Musyimi Kilinda and Teresia Kerubo Nyakweba, had written to the Central Bank asking it to open a US dollar account entitled ‘GoK/CBK Sovereign Bond’.

This was contrary to the law. One can only guess that it was either part of the plan to make things more complicated in trying to find a paper trail to discover what actually happened to some of this money, or a bid to keep control of funds that should have been in the hands of the budget controller. It could envelop and hide any (domestic) borrowing the government did within Kenya, so that it could be pretended that this money had come from the offshore account.

This CBK account had no signatories for two weeks, until Nyakweba on June 27 notified the CBK that Treasury accountant- general Bernard Muiruri Ndungu and Kilinda would be those signatories. Specimen signatures were attached. Ndungu was authorised by Nyakweba and Kilinda, and Kilinda was authorised by Nyakweba and Ndungu. Very convenient. To try to make it appear that opening this account was quite in order, finance minister Rotich has since produced long lists of other accounts the Treasury holds at the Central Bank, saying that he can create whatever accounts he chooses.

He went into a long explanation to the Public Accounts Committee about how the government engages foreign development partners from time to time, and how these development partners sometimes require their money to be kept in dollar accounts at the CBK so they can keep track of expenditure etc. Going on to give the impression of what a marvellous and laudable arrangement this is, Rotich piously told PAC that “these conditions agreed upon between the development partners and the government are made to enhance accountability, transparency and provide an audit trail for the financial development assistance extended to the Government of Kenya”. (What about taxpayers’ money then?

Doesn’t it also require the same standard of accountability?) He continued with more confusing jargon: “It [is] therefore important to appreciate that the necessity to open an off-shore or in-shore or a special deposit bank accounts is dictated by the conditions precedent to access the funds based on specific credit agreements and these accounts are specific to that credit agreement and development project being financed.”

National Treasury PS Kamau Thugge

WHAT? Can you imagine most of our dozy parliamentarians (often with pressing calls and sweeter engagements awaiting outside the office) making head or tail of this – let alone realising that all this rigmarole is designed precisely to pull the wool over their eyes? But Rotich said it himself: the accounts he is able to create are for specific, usually foreign-funded, projects where money must be accounted for. The Sovereign Bond (Eurobond) money was not intended for any such specific project.

It was simply – and by law – destined for the general fund of money available for use by the government. This general fund is established by the Constitution and is called the Consolidated Fund. The clue is in the name. The fund consolidates, or combines, every bit of public money that the government gathers to fund its business – whether that money comes from taxes, loans or wherever other source. Every bit of it. The law is very specific on this. Only an Act of Parliament can authorise keeping any government revenue whatsoever outside the Consolidated Fund. And an Act of Parliament, of course, goes through a clearly defined parliamentary process and must be approved by the requisite House majority.

There was no Act of Parliament that approved the creation of the so-called Sovereign Bond Account at the CBK. It was entirely illegal. The Treasury has laughably tried to excuse this illegal action by saying that if it converted Eurobond dollars into shillings and then back again when it needed dollars, it would lose money, and it was therefore doing Kenya a favour by keeping the dollars in the account. Absolute nonsense! It is not part of the finance minister’s remit to speculate on the exchange market.

We have laws in this country. The highest law of the land, the Constitution, says that all monies received must go straight into the Consolidated Fund. It doesn’t say “except when some bright spark wakes up one morning and says, oooh, exchange rates look good today, I think I’ll do a bit of dealing”. The law says the money goes straight to the Consolidated Fund – and if the exchange rates are a few shillings to its disadvantage when the government wants dollars, too bad! Are we following the laws of this country, or do we just pick and choose the ones we feel like following? Are we a proper law-governed state – or are we a lawless basket case?

Read the last of this two-part Eurobond analysis