Category Archives: Kenya Pipeline

Oil Pipeline, Economics & Politics

It’s been reported that the oil pipeline from Uganda is going to go through Tanzania, not Kenya. Two forgotten facts about the Uganda oil decision are that; (1) President Museveni of Uganda has been steadfast that he wanted to refine oil in Uganda, not export raw crude (2) Uganda’s oil has been said to be waxy or heavy. This means it would require complex heating to keep it flowing along a complex oil pipeline through the rift valleys and hills – to the coast of Kenya.

M7 poster 2

The cost, insecurity and difficulty of building infrastructure have been cited reasons that Uganda opted to go through Tanzania. Still, Kenya has several LAPSSET projects on the cards including an oil pipeline to go to Lamu where there would be a new highway, railway, coal plant and modern, deep-sea port.

Pipeline Impact

Last year at the TDS Nairobi summit, during the 10th Ministerial Conference (MC10) of the World Trade Organization (WTO), a session was held on local content in extractive (and oil) industries. Some interesting comments there included:

  • It is a legitimate objective for any resource-rich country to try to maximize the value of its resources.
  • If a country puts restrictions on raw exports, it may distort the local economy; it creates artificial demand – and if it is not efficient, local related industries will not survive.
  • Kenya energy expert Patrick Obath suggested that Kenya, Uganda and South Sudan have to talk together and implement projects together for projects like the oil pipeline to be viable. That would also have to happen to get more value-addition from the oil in the countries e.g. can the countries plan to get fertilizer from oil?
  • With mining, you have 20 years of opportunity for local suppliers and jobs, but with an oil pipeline that’s only there in the beginning, then goes away once the pipeline is built (there won’t be many local jobs after, and communities don’t get an economic boom from having an oil pipeline passing through their land..which may lead to some local frustration).

More on Kenya Pipeline:

oil tankers

  • The Kenya Pipeline Company is charged with transporting and storing petroleum products.
  • A (presidential task force on parastatal reforms proposes the Treasury incorporate a holding company known as the Government Investment Corporation (GIC), into which Kenya Pipeline Company should be transferred to determine (its) intended privatization.
  • Meanwhile, Kenya Pipeline is continuing with its projects including replacing the current Mombasa-Nairobi Pipeline.

This time around: Kenya Stockbroker collapse, Report leaks, Credit Reference Live

Time for another this time around post which looks at stories that recur in the business environment

Mars Group Kenya: The an anti-corruption watchdog group is the wikileaks for Kenya, re-publishing hitherto top-secret government reports at their website.

Mars Group research and produce their own reports, but their archives contain a growing list of reports of corruption in Kenya that is worth checking out. This week they have reports done by PricewaterhouseCoopers for the government of Kenya on the collapse of Triton Oil Company and on the misuse of funds for Maize famine relief in 2008. Last month they also released the report on the sale of the Grand Regency hotel. The Triton report shows that:
– At Kenya pipeline company (KPC) the oil collateral agreement was poorly drafted and ambiguous. Also managers had great discretion, procedures were lax /there was inter-departmental conflict (oil was released without verification) and documentation was poor (since documents would get lost at KPC, financers would exchange documents then present them all to KPC at once)
– Triton was aggressive with financing and would arrange for shipment before they got financing. They were stuck at some point and KCB entered into a finance agreement for goods when the ship was already in Kenya
– Bad banking Ecobank have no claim against KPC, while the Fortis claim against Triton is suspect. Also Glencore had stopped financing Triton in June 2008 as they were suspicious about KPC fuel stock claims
– KCB and other financiers did not cooperate with the PWC investigators
– The debt owed to KCB may be substantially lower than KCB claims and they have provided little information to assist in verification of the Triton debt.
– Kenya anti-corruption commission should investigate further staff named in the report

GoK Bond The Government of Kenya is going to raise Kshs 14.5 billion for infrastructure via a third infrastructure bond. How does that compare to a similar bond a year ago?
2009: Kshs 18 billion ($240 million), interest rate 12.5%, minimum bid Kshs 100,000 (~$1,250), maturity 8 years, principal repaid in 2015, 2017, 2021. Funds used for road, geothermal, water projects
2010: Kshs 14.5 billion ($188 million), interest rate 9.75% tax exempt, minimum Kshs 100,000, maturity 8 years, principal repaid in 2016, 2018. Funds used for water, sewer, irrigation, road, and geothermal projects
The 2009 bond was over-subscribed and the only notable difference in 2010 is the lower interest rate offered. The CBK has decided the high cost of loans offered by commercial banks and perhaps by offering the same banks a lower return on government bonds; they will offer more competitive borrowing rates to the public

Credit Reference: February has also seen the licensing of Kenya’s first credit reference bureau – CRB Africa by the bank regulator, the Central Bank of Kenya. Following this, commercial banks have apparently commenced sharing information with the agency. Some of the rules governing sharing of data were highlighted when the credit reference rules were gazetted almost two years ago. These include
– Bureaus may share info only with a customers’ permission (which happens when you sign for a loan)
– They may only share information for business decision making (evaluate credit prospects) and must keep track of all information they share
– Customers are entitled to one free report a year, and within 30 days of a negative referral.
– If a customer complains, and bureau not able to complete an investigation of disputed information within a month, information will be deleted as request by customer
So what information will they compile?
– For individuals: Name Citizenship ID / PIN Postal/ Telephone Credit history (as reported) Court judgments (as reported) Referees
– For companies: Company registration details postal/physical/telephone Credit history (as reported), Court judgments (as reported), Guarantees
Shareholdings/directorships

Stockbroker collapse: This month saw the placing of another stockbroker under statutory management – this time its Ngenye Kariuki Stockbrokers [Last year in March it was Discount stockbrokers that was placed under statutory management]

Despite strong defense from the Kenya Association of Stockbrokers & Investments Banks – KASIB who say the brokers problems were manageable and did not warrant the intervention of the authorities the broker was in a weak financial position.
A summary by Faida Investment Bank, based on the published un-audited results of Ngenye Kariuki showed this
Half year June 2008 versus 2009
June 08 income 35m, expenses, 21 million, pre-tax profit of 10 million
June 09 income 3 million, expenses 10, pre-tax loss of 11 million
Share capital of 50 million, capital reserves of 251 million (which many brokers draw from the sale price in 2006 of Francis Thuo stockbrokers) [and the same amount appears as an intangible asset) at June 2009, the broker had an overdraft position of 63 million and receivable of 127 million which KASIB is laying at the feet of Citibank for withholding funds from the 2008 Safaricom IPO that are owed to several stockbrokers.

KCB Dodges Triton Bullet?

Kenya Commercial Bank released their 2008 financial results over the weekend.

No. 1 but… KCB is now Kenya’s largest bank by bank assets and group assets, though Barclays still has a much larger book of loans and deposits, as well as higher profits.

Also with less than half the assets, Equity may be more profitable than KCB by 2010 if its exponential growth continues.

KCB assets were up 56% and profits 40%, with deposits up 28% and loans up 40% compared to 2007. 2008 was a balanced year for the bank actually performed quite well in Q4.

IPO Killer KCB has effectively delivered the final nail in the coffin of the Kenya Pipeline IPO by suing the corporation for almost $14 million of missing oil. The bank is also leading the case against Triton.

KCB beats expectations A January 2009 analysis by African Alliance pegged a Kshs. 2 billion hit to KCB profit and a pre-tax profit for the bank of Kshs. 2.2 billion – yet KCB managed to report a pre-tax profit of Kshs. 5.3 billion. AA also had an overweight recommendation with a price target of Kshs. 28.85 (at the time KCB was 21) and it looks very attractive at Kshs. 15.5 today.

Q4 watch In the September to December 2008 period deposits were up by 9% and loans by 4% – compared to Q1 loans which were up 4% and deposits 17%. KCB also built up quite a huge cash position with 39 billion (~$500 million) in bank placements at the end of the year.

2009 watch This year the bank has announced, a surprising decision to extend real estate finance to estate developers t the tune of Kshs 250 million (~$3.1 million each) and is also one of the few banks to continue offering personal loans in a very public way with media advertisements

More Nairobist analysis on KCB and KCB and Triton

Analyzing Kenya Pipeline

Pre-IPO Peek at KPC

Kenya Pipeline Company (KPC) is expected to be the next big privatization project to help plug the current Government of Kenya budget deficit. The IPO transaction adviser selection process is already underway for KPC and other state corporations

How much can one glean from audited accounts of the giant company? I got hold of a 2007 annual reports of the company – a rare big glossy booklet that mentions every project e.g. SAP, ISO, fibre optics, refurbishments in Western Kenya, Mombasa, Athi River, with lots of graphs.

KPC still mostly compares itself to other state corporations in terms of goals such as to raise capacity from 440,000 to 880,000 lire per hour by August 2008 – a massive project that later turned controversial and may have cost the last MD (Okungu) his job in January 2009.

Financials
– 2007 revenue of 8.8 billion shillings (~$117 million) (2007 was 8.45 billion and 2003 was 6.5 billion). 2007 Revenue comes from export services (4.3b), local services (3.7b), and 748 million from Kipevu storage fees
– Pre-tax profit of Kshs. 4.3 billion in 2007 (~$53 million)
– Earnings per share was 163 shillings [153 in 2006, 2003 was 29 shillings) – company’s shareholding is made up of 18 million ordinary shares of 20/= par each.
– Dividend paid out of 8.25 per share each year 2007 and 2006
– Cash of 4.5 billion (1.1 billion in 2003) of which 2.5 billion is in Treasury securities (which they only started investing in from 2005)
– Paid 2.2 billion in direct and indirect taxes and was recognized by the Kenya Revenue Authority as a distinguished taxpayer
– Total assets of 20.2 billion shillings (18.7 billion in 2006) – however fuel stocks of 13 billion shillings (384,509 cubic metres) that is owned by marketers is not included in their accounts. [2006 was 36 billion comprising 856,958 cubic metres]
2008 decline: summarized KPC financial accounts show revenue declined by 7% to Kshs. 8.2 billion and pre-tax profit 54% down to Kshs. 2.6 billion in 2008

Auditors: Accounts audited by controller and auditor general, who hired Deloitte & Touche; who said the accounts were ok except to note that 1.2 billion receivables (current assets) include 348 million owed from an unnamed oil company that is the subject for a court case and for which no provisions have been made

Scandals: has been a cash cow for politicians for years with a high turnover of managing directors, manager and directors. Different parts of the report mention Kshs. 967 million pending in lawsuits, 404 million leasehold land unable to develop since it is gazetted forest land, 347 million from Oil Company, 314 million of obsolete spares, and Kshs. 221 million for a finance deal with Triple A that cost the previous MD (Ochuodho) his job. The company also provided Kshs. 382 million of services to National Oil Corp of Kenya (related company as they are both owned by the Government– do they pay all oil marketing fees?

Banking
Bank with NBK, CBA, Stanchart, Co-op. In 2007, they paid off all bank loans (EIB, Stanchart, and CBA) amounting to Kshs. 500 million in 2007, but are still stuck with the 221 million Triple A loan.
– KPC recently signed a syndicated loan of Kshs 8.2 billion with CFC-Stanbic, Barclays, CBA, Citibank, and KCB.

Exports:
– Exports 58% to Uganda, 155 Rwanda, DRC 14% Tanzania 6% Sudan 4% Burundi 3%
– strong shillings bad for export sales
-pricing structure – more expensive at Eldoret and Kisumu means that the company loses revenue if other countries e.g. Rwanda, Uganda remove their oil at Nakuru or Nairobi depots
– 50% of their revenue comes from fuel exports, and With oil being found in Uganda, Sudan, and possibly Congo, is the pipeline capable and adequate to transfer oil from central Africa to the coast at Mombasa?

Others & Non-core activities
– Will Construct an LPG plant with private sector investors (including Kenya pipeline refineries limited, and now-collapsed Triton) in Mombasa at a cost $50 million and one in Athi River at a cost of $13.5 million by Bharat of India
– Other income includes Kshs. 8 million in helicopter income, and also disposed of 120 million worth of helicopters in the year 2007
– 50 million donated to the Ministry of Youth Affairs
– 6 acres worth of land worth 30 million in Nairobi was donated for a street children rehabilitation center
– Spent 114 million in advertising (by a monopoly) and 35 million shillings in legal expenses
– Has shares in the Petroleum Institute of East Africa and Consolidated Bank
– Successfully changed their pension from a defined benefit to a defined contribution scheme

Outlook:
– Slight financial dip in 2008 will probably be attributed to the post-election disruptions
– Capital spending could be significant as they are extending the pipeline to Uganda (Eldoret to Kampala). Also, the company already spends quite a bit in pipeline rehabilitation costs, but won’t a completely new pipeline (though more expensive) be a better solution?
– Needs a stronger management team led by a strong MD – like Kengen’s Eddy Njoroge (someone with a legacy to protect who will shun the wheeler dealers) and a stronger board (not just the Energy ministers’ cronies)
– Could be a good IPO buy i.e. a cash cow pre-tax profit margins of almost 50%

Other Opportunities
– Bank of Africa: branch managers, assistant branch managers, operations assistants’ recruitment@boakenya.com by 5/2
– Consolidated bank credit manager, administration manager, apply to the Head of HR 51133-00200 by 31/1
– Housing Finance senior relationship manager (mortgage finance), portfolio manager, legal officer, human.recources@housing.co.ke
Dyer & Blair sales agents, and for several hundred other weekly jobs visit Kenyan jobs blog.

KCB and Triton

KCB has been rather silent on the Triton matter even as the company’s share price took a mini hit and its profitability outlook was downgraded in some circles.

The last release from their website was in reference to the launch of a Sustainability Report of the group. It’s not online yet, though it will be, an interesting report with lots of rarely disclosed facts on the bank, mostly their corporate social responsibility (CSR) activities, and will be repeated every two years.

in the report
KCB Brand – has a 75% corporate reputation, is the most popular financial brand, and the 4th most popular in Kenya (after Safaricom, Kenya airways and Coca-Cola) according to the Steadman Group.

Silence on Triton can be explained by KCB’s customer privacy guidelines – the bank assures customers of privacy through stringent procedures and guidelines and undertake responsibility for any breach of confidentiality that may arise

Impact of Triton policy on responsible lending requires that the KCB audit committee meets twice a month, credit committee also twice a month to discuss the risk profile of bank, and the risk management committee meet quarterly or when required

Corruption & Triton: KCB has zero tolerance to corruption, and has 110 ethics champions trained to combat corruption. Also in 2007, KCB exited from Transparency International (TI) bribery index, it prohibits political contributions (direct or indirect) from bank funds, and is a founder member of Ethical Business Group Kenya. The Report states that 2 staff were dismissed and 9 terminated.

Labour matters

  • Employees got an average of 39 hours of training a year.
  • Base salary is equal regardless of gender: for subordinates (male is Kshs. 36,057, female is Kshs. 33,984) clerical (m 58,434 f 63,600), section heads (m 85,770, f 87,684) managers (m 192,090, f 161,138)
  • Staff include managers (630 males to 287 females), most of whom are aged 30 – 50 years (492 m, 212 f)

Environmental

  • All loan projects are required to obtain environmental (NEMA) certification.
  • KCB will strive to reduce water consumption (estimated at 191,000 cubic meters p.a) reduce energy consumption (5.782 million kwh, consume 312,000 litres of diesel which emitted 248,000 and 838 tons of carbon dioxide respectively).
  • KCB will strive to recycle paper, scan documents – encourage customers to uptake e-services (use less paper), participate in tree planting and reforestation,

Empowerment of Kenyans

  • Loan base rate of 12%.
  • KCB has 71,000 e-customers (receive information by electronic means – which means less paper consumed)
  • Create wealth nationwide – branches can procure 33% of products in local areas, and KCB has 9 full branches in sparely populated areas.
  • Provide agricultural loans (mavuno for tea farmers and brookside for dairy operators)
  •  In the education sector, they partner with AIESEC and the Palmhouse foundation

Triton ends well? for KCB: The Triton matter may be a foregone conclusion if the Daily Nation article about an out of court settlement between the Government of Kenya and its financiers (KCB, Fortis, Ecobank, Equatorial banks) is true – and that the government (i.e. taxpayers) may pay the financiers off to not go to court over their funds lost with Trition and the Kenya Pipeline Corporation (KPC). The silence will mean that unsavory happenings at KPC will (maybe) not be exposed further, clearing the way (hopefully) for an IPO of the troubled company.