NAIROBI, Kenya, Mar 19 – The Treasury was on Monday put to task to explain whether the government would get value for money if the Central Bank of Kenya (CBK) concludes a currency-printing deal with Thomas De la Rue AG of Switzerland.
The Public Accounts Committee (PAC) led by chairman Boni Khalwale heard that the government wants to invest £5 million (Sh650 million) to purchase a 40 percent stake in a new company to be known as De La Rue EPZ Kenya Limited which is a subsidiary of Thomas De la Rue AG.
According to Investment Secretary Esther Koimett, the new company will be created by hiving down operating assets valued at Sh3 billion belonging to Thomas De la Rue Currency and Security Print Kenya that has been operating in the country since 1992.
“The transfer of assets from De La Rue Currency and Security Print Kenya into De La Rue EPZ Kenya Limited is happening under the Transfer of Business Act Cap 500 and when that happens, the PS (Permanent Secretary) to the Treasury (Joseph Kinyua) will buy 40 percent of the new company. That transfer of assets is a condition precedent to the PS signing the share sale and purchase agreement,” explained Koimett.
A share capital £2 million will also be injected to give the new company money to run its operations.
At Sh650 million, the committee however observed that the country would be paying for more than what the stake was actually worth. In addition, they objected to the currency printing firm’s decision to include land that was leased to it by CBK for 30 years in its assets.
This, they pointed out, meant that De La Rue was selling off the land that belongs to the government.
Acting Finance Minister Robinson Githae who was accompanied by his PS (Kinyua) however defended the structure.
“We thought that we could get the best of the two worlds; that is get a new company that is already operating with qualified staff and start with no liabilities. We also felt that the price of £5 million was reasonable,” he stressed.
The firm, which was initially registered as Thomas De la Rue Kenya Limited had a 10 year contract to print currency for CBK which it did until the agreement expired in December 2002.
A new 10-year deal was signed but was cancelled a few months later in March 2003 when the NARC government came into power to allow for competitive international bidding.
In addition, the government then believed that the Central Bank was paying a fee that was three times higher than what it would have paid had the process been opened to competitive tendering.
However, De La Rue still won a three- year tender to print 1.71 billion pieces of bank notes even after the process was opened up in 2006 at a cost of $51.2 million. The new notes were to be issued beginning June or July 2007.
Instead of printing the currency in their Ruaraka-based facility, the firm opted to produce them in other countries where De La Rue International has subsidiaries citing the low cost structure and a comparative advantage.
Further, the firm announced its decision to deliver all the pieces at one go, raising a storage and security challenge for the bank. Thus the contract was once again cancelled.
By this time, a deposit of $25 million had been paid to the firm and the committee wanted to know whether this was refunded.
Githae however explained that the two parties (CBK and De La Rue) agreed that while there would be no cost implications on the government for reneging on the deal, the money would be used to finance any short term currency requirements that CBK would request from time to time.
Since 2003, the country has not had a long term contract on currency printing with Central Bank placing orders as and when it needs to replace defaced or condemned notes.
Githae however could not explain whether the money has since been exhausted and whether the government has forked out more cash for currency printing.
This state of affairs saw De La Rue International contemplate closing down its factory where currency printing accounts for over 90 percent of the operations, as there was no guaranteed business to sustain its operations.
The government pleaded with the firm not to close down fearing that about 300 employees would lose their jobs and that the country would lose tax revenues and foreign exchange that the factory generates.
But with the negotiations for the new deal being on table, the committee felt that the country would inherit obsolete printing technology should the agreement go through.
But while voicing his opposition to the deal, Khalwale argued that the old machines would be unable to print notes with the kind of features that the government was envisaging.
“That technology has been outdated to the extent that the newer and more secure notes in the international markets cannot be produced by that what they have at Ruaraka,” he argued.
The committee was of the view that the country should not tied itself down to a deal that would in the long run be costly for the country but should instead consider other options such as floating tenders for the business when the country needs some notes.
The team is expected to grill CBK officials on the same in coming weeks although it has not indicated when it will release its findings.