Monday, September 15, 2008



September 15, 2008
The Standard
By Abiya Ochola

Details of why the Central Bank of Kenya tender committee chaired by the embattled Deputy Governor Jacinta Mwatela rejected a money-printing contract leading to her removal can now be revealed.

This has emerged in the midst of a controversy over Mwatela’s appointment as permanent secretary, an offer she has turned down, citing that her five-year tenure at CBK has not expired.

In a confidential memo to the Governor dated November 2, 2007, compiled by the tender board secretary and director of the legal department, Mr John Gikonyo, the Mwatela committee poked holes in the proposed joint venture agreement between the Treasury and De La Rue.

Treasury had, in a letter dated September 28, 2007, requested Central Bank to review the proposed long-term currency production agreement that would run for 10 years.

This action by Treasury was despite another agreement entered into on May 4, 2006, by CBK and De La Rue International for the new generation currency banknotes.

Mwatela rejected the new draft and instead asked Treasury to formally instruct CBK that the Government as a policy, had decided that the new generation banknotes would not be introduced and proceed to instruct the bank to rescind the previous agreement for the new generation banknotes.

"Both the new generation currency banknotes Agreement and the proposed 10-year-Currency Production Agreement cannot be implemented concurrently," said the committee.

From the tone of the comments in the memo, the Bank had not deliberated on the draft with De La Rue but the document had been imposed from certain quarters.

"We are of the considered opinion that the draft currency production agreement prepared by De La Rue is one-sided and exposes the Bank in many areas. The draft requires a thorough and comprehensive review by the parties," reads the memo.

Under Clause 2 of the agreement, it was proposed that the agreement be for 10 years. However the Mwatela committee discovered that there was no provision in the entire agreement catering for the circumstances under which any of the parties could terminate the contract except in respect of insolvency or dissolution of De La Rue.

CBK was to purchase all its banknotes from De La Rue factory in Ruaraka, Nairobi, and the bank was to take delivery of the banknotes ex-works. If the bank failed to take the banknotes within 15 days of notification, storage charges were to be levied.

"The clause provides that De La Rue shall print and deliver banknotes to the bank according to the banknote specifications for the current generation banknotes. In our view, the net effect is that the superior designs and enhanced security features negotiated by the bank and agreed upon by De La Rue for the still-born new generation currency banknotes will be discarded by the parties," says the committee.

Any change in the designs shall require negotiation of the price by the parties.

According to the Mwatela team, the agreement was not a fixed-cost contract and the cost was to escalate annually based on the UK retail price index rate with a capping of 5 per cent per annum.

"It is not clear to us why this clause caters only for upward review and does not contemplate downward review of prices," said the committee.

The draft agreement had incorporated the prices of the interim order agreement as the prices to be applicable but the Mwatela committee was of the view that the pricing should be competitive because international procurement of banknotes through competitive tendering would provide lower prices.

"If the bank agrees to retain the design and specifications for the current generation banknotes and cost escalation, it will lose out on the advantages of competitive pricing and superior specifications enjoyed by the bank under the new generation banknotes," said the committee.

The committee observed that the proposal by De La Rue could have been because the Ruaraka factory was unable to manufacture the new generation banknotes.

"This underlines the need to ensure that the issue of upgrading the factory is comprehensively addressed before the joint venture is finalised," suggested the committee.

Added the committee: "This is to avoid binding the bank to a 10-year-agreement during which time it will not benefit in the ever changing banknote production technology in view of the continuing ingenuity of the counterfeiters."

The bank was to make a down payment of 30 per cent of the sales value of each year’s order. This was to be paid in Sterling Pounds.

Mwatela was of the opinion that there be a provision of a performance bond by De La Rue at the rate of 10 per cent and the down payment be upon receipt of a bankers guarantee.

On liability, De La Rue would not be liable for any loss of profits, business, data or any other indirect, incidental or special damages incurred by the bank or third party.

Mwatela maintained that De La Rue should be liable at all times arising from negligence or breach of contract on its part, servants or agents.

To make matters worse, the agreement did not make any provisions for liability if the banknotes, dyes, plates and other origination materials are lost or damaged while in the custody of De La Rue.

The company would not be liable if the banknotes did not conform to the agreed specifications.

"In our further opinion, there should be provision for the liability of De La Rue if forged banknotes enter circulation as a result of unlawful use of the origination materials in the custody of De La Rue by unauthorised persons," recommended the committee.

On Friday, Mwatela wrote to the Head of Civil Service Francis Muthaura raising the matter of her appointment by President Kibaki in 2003 to her current position by a gazette notice that stipulated her contract was for five years.

Mwatela said her transfer could be linked to her role in stopping the contract that she maintains was irregular and inflated and could see the country lose some Sh2 billion.