BY SPECIAL CORRESPONDENT
To outsiders and the not-so-curious employees, Safaricom House looks like a paradise of business where the angels of innovation have direct access to the gods of money.
The head office of Kenya’s leading mobile services operator is a beehive of activity – from the lawn mowers to the techies in glass offices writing codes for apps and, finally, the executive suites that house the brain and brawn that steer the company and its various business units.
With consistent growth in profits over the last decade, topping Sh38 billion in 2015 financial year, Safaricom has unarguably hit the Holy Grail of mobile business. Yet, it turns out, in its corridors, there are invisible angels of doom who, behind the scenes, have been manipulating procurement processes to squeeze hundreds of millions from their employer and in the process short-changing it and its customers.
A forensic audit of the company’s procurement processes for the 2013/14 and 2014/2015 financial years reveals a lot of rot at Safaricom House, with fraud-related activities that may have cost the company billions of shillings for which it got bad service or products in some cases.
The audit, ordered by Safaricom CEO Bob Collymore himself, must have disrupted his honeymoon, coming just over a month after he got married to his Kenyan girlfriend, Wambui Kimiru. His directive for an audit was well intentioned but probably he had no idea it would scoop out so much dirt from a company he has managed for the last five years and which projects itself as corruption-free.
Last year, Mr Collymore issued an edict that Safaricom, which is listed at the Nairobi Securities Exchange (NSE), would not do business with corrupt companies or those even implicated, signaling that the ship he stewards was clean.
But the KPMG audit, Date February 18th, 2016 but leaked recently, turns all that on its head, with top managers implicated in questionable procurement processes. The dossier reviewed 23 questionable tenders at Safaricom that were awarded between September 2013 and August 2015 and exposes how its senior management took advantage of an absence of serious audits and contracting loopholes to sidestep best practices in corporate governance.
Questions have been raised over procurement of five-acres of land at Garden City where Safaricom paid more than double the market price.
The audit report also questions Safaricom’s procurement of corporate promotional merchandise worth Sh201 million from Vajas Manufacturers Ltd, Chinese technology firm Huawei’s $12.5 million contract to upgrade the M-Pesa platform, and payments of Sh2.1 billion to media services company Scanad, which is a subsidiary of WPP Scangroup.
The list of doubtful deals at Safaricom includes contracting of South Korean firm Kaon Media to supply set-top boxes ($1.6 million), My1963 commuter card project with Fibre Space (Sh15 million), the purchase of network spares management from GSM Systems ($2 million) and a billing system from Huawei at a price of Sh839 million.
The Garden City mega deal
Safaricom Chief Finance Officer John Tombleson and four other senior executives are flagged for having influenced the purchase of a Sh1.15 billion five-acre piece of land at Garden City, where the telecommunications firm plans to build its headquarters under a projected code-named One Campus.
The other top executives named in the report are Roy Masamba (Director of Resources), David Kinuu (Head of Human Resource – Shared Services), Vodafone’s Group Property Strategy Manager Richard Muraszko and former Vodafone executive Billy Davidson. The list shows a mix of Kenyan and Vodafone representatives, showing the great lengths that they would go to bend the rules.
KPMG auditors found that Mr Tombleson started negotiations with Actis, the private Equity firm that built the Garden City, to buy land at the mall eight months before Safaricom’s board approved the plan to put up the office complex dubbed ‘One City’.
“We found correspondence between the finance director, John Tombleson, and Mentor Management CEO James Hoddel in which they were discussing the possibility of Safaricom acquiring land at the Garden City site several months before the formal process commenced,” says the KPMG report, quoting an August 14, 2013, email exchange.
In a letter dated September 13th, Mr Hoddel indicated that he had met Safaricom Director of Resources Roy Masamba the previous week to discuss Safaricom’s future real estate requirements.
Complicit board of directors?
While Safaricom’s board of directors was, on May 12, 2014, informed of the need to consolidate the company’s operations, the land was eventually bought from Actis in July 2015.
There have been questions on the valuation of the land and the integrity of bidding. Actis owns both Ruaraka Diversified Investments Ltd (RDIL), which owns the 32-acre Garden City land, and Mentor Management Ltd, the company that Safaricom picked to help search for a suitable property.
In essence, Safaricom appointed RDIL (Actis) to help it look for land, but the company went ahead and sold its own land to it. That could not have escaped the eyes of the managers in charge of procurement at Safaricom and opened the whole arrangement to questions on what deal was cut under the table to make the managers blind to the obvious conflict of interest.
“Tombleson, Masamba, Davidson, Muraszko and Kinuu were aware of a conflict of interest between Mentor Management and Actis,” the KPMG report says. “(But) They failed to put in place sufficient measures to provide safeguards or procedures that would safeguard the interests of Safaricom. Further, they did not declare this conflict to the executive committee and the board.”
In this case, Safaricom’s interest was not objectively secured in a documented manner. Tellingly, a separate evaluation was not carried out during the extension of the scope for Mentor Management Ltd (MML), which may have provided better pricing for the mobile operator. “Open procurement was circumvented…rather than carrying out a fresh evaluation prior to their additional appointment,” KPMG auditors say.
Actis is a principal shareholder in MML, but Mr James Hoddel, the CEO of MML, said this relationship was made clear to Safaricom right from the beginning of the project. “During pre-qualification,” he noted, “we provided Safaricom with our ownership documents which clearly indicate Actis’s interest as a shareholder.”
Other shortlisted bidders were Two Rivers (owned by centum), Fox City, Intex Construction, Nebange, Newbury and Northlands, which is owned by the Kenyatta family. But the five firms were not declared to Safaricom. As if that is not enough, auditors reveal that Garden City as well as another bidder named Nesbitt had, in fact, submitted their proposals after the deadline had lapsed.
Paid ten times more
Yet at the end, Mentor Management Ltd raked in Sh11.7 million in agency fees from Safaricom, or one per cent of the value of land purchased. It is not clear why other reputable property firms were not approached since Mentor Management was picked through a restricted tender. It is also not shown why this was restricted.
Meanwhile, Safaricom was charged Sh230 million per acre for the five acres of Garden City land, which is more than double the current Sh100 million per acre market price for land around Kasarani. Safaricom eventually paid out Sh1.15 billion to Ruaraka Diversified Investment Limited. At the real market rates, it should have paid Sh500 million or thereabout. It was high noon for Actis, which made huge returns from land it bought at only Sh37.5 million per acre from East African Breweries in 2011.
The One Campus project aspires to create a world-class workspace and an environment that enables and promotes quick decisions, among others, at Safaricom. It was the brainchild of Roy Masamba, who joined Safaricom in November 2012 as Director of Resources and proposed to change the working environment at Safaricom in line with Vodafone global standards.
Bumps on road to the Promised Land
The journey to this ‘promised land’ started in May 2013. The company’s facilities’ team assessed the proposal and reviewed existing facilities and gave the proposal the go-ahead. And so management took the cue and decided to centralize its offices from the current set-up where staff are spread out across four main facilities – headquarters 1 and 2, Safaricom Care Centre and Jambo Contact Centre.
Initially, the total project cost was estimated at $84.5 million. The cost, however, doubled to $160 million before being slashed to $123.5 million, which was then approved by the board. According to the board resolution of June 15, 2015, the main contributor to the increase in cost was “improved quality of the floor, wall and window finishes and fit-out which are able to be built to an East African Standard.”
Meddling began from the word go
Manipulation of transactions began right from the first stage of calling for bids for property consultancy to search for office space and land purchase options. Three prequalified companies were to be invited to submit commercial bids on November 25, 2013: Knight Franck Ltd, DTZ Leadenhall and Mentor Management Ltd. It later emerged that Mentor Management Ltd, which was proposed by Tombleson, had not even been pre-qualified by the time of submitting its proposal, yet it beat its rivals and eventually got the job. DTZ was being pushed by Vodafone’s Group Property Strategy Manager Richard Muraszko but was rejected because, according to the KPMG interviews with the managers, “they did not have much experience in the Kenyan market by this date.”
Night Frank was invited because it was a prequalified Safaricom supplier and also being one of the leading property consultants in the country. That no other consultants were invited in a market with many such companies, meant the managers knew what they wanted and thus had to work with a company that would play ball.
As expected Mentor Management’s lowest bid won the tender after the rules were created after bids were received to favour Mr Tombleson’s preferred candidate by basing the decision only on the finance bid. Safaricom’s head of HR shared services safety David Kinuu advised Category officer Adrian Ochieng in an email dated December 18, 2013, to proceed with the commercial evaluation as the three invited bidders were considered to be technically capable following a pre-selection undertaken by the executive committee. This breached Safaricom’s procurement rules.Mentor Management offered Sh1, 794,304, DTZ Sh2,451,000, while Knight Frank was highest bidder at Sh16,200,000.The deal did not just end when MML was awarded the job on January 15, 2015. First, MML did not sign any contract with Safaricom, and the explanation from its CEO is that it operated on the basis of purchase orders. That effectively gave it an open cheque. “The absence of a contract meant that MML was not expressly restricted to acting for Safaricom alone, declaring conflicting relationships or restricted from receiving financial benefits from other parties in this transaction such as Actis,” says KPMG report.
MML was paid Sh23, 052,000 for their involvement in One Campus project, which is 10 times the amount quoted in its initial bid for property search.
The game of interests
MML provided a list of 47 properties but recommended just six: Fox City (Thika Road), Garden City (Thika Road), Intex Construction (Lower Kabete Road), Nebange Ltd (Limuru Road/Magnolia Close), Nesbitt Site (Limuru Road/Magnolia Close) and Newbury (Red Hill Road). The list then narrowed to four – Nesbitt Site, Garden City and new properties that were introduced by Roy Masamba (Northlands) and Tembleson/Murazko (Eldama Ravine, Westlands).The manipulations and conflict of interests continued. Two bidders – Eldama Ravine, and Northlands – were left out, with Tembleson dropping Bob Collymore’s name and ‘chairman’ who he said had recommended they focus on Nesbitt and Garden City.Safaricom agreed finally to acquire land from Garden City, but there are conflicting reports from those involved on how it was done. Some managers say the price was not negotiated while others say it was. A commercial valuation was also not done as confirmed by Mr Tombleson.
The audit shows the price of Sh230 million per acre was higher than the various indicative prices provided to Muraszko, Kinuu and Justine Njonjo, the head of legal and secretarial services, which were as low as Sh100 million. Mr Hoddel explained the price difference as caused by the fact that Garden City was serviced land, which made it more expensive than Northlands, which had quoted Sh140 million per acre.
Interestingly, Safaricom further awarded the Actis-owned Ruaraka Diversified Investments — the seller of the land — to undertake construction of its office complex project at a cost of $70.05 million.
Then again, RDIL was given the work of procuring design and construction, and would earn 15% of the cost of design and construction.
Lining their pockets
And so the story of RDIL’s tight marriage with Safaricom continues, with managers justifying single-sourcing services to MML so as to “ensure continuity with a constant that was involved from inception and thus save on time and extra costs that maybe incurred as a result of the learning curve.”
Safaricom engaged ArchBill Consultants to audit the cost plan and established that the project cost was “above market rates” and recommended a review of the planned spending. Actis has engaged a consortium involving construction firm Profica as the project managers, Boogertman & Partners (architects), Turner & Townsend (quantity surveyors), YMR (quantity surveyor), and Sutherland (engineering services).But behind the scenes, the managers were lining their pockets, even though the report does not expressly show real money moving from the MML accounts to the individuals involved.
MML CEO James Hoddell said he had reviewed the regulation and legislation on presenting information about new products, pitching for new business, and sales approaches, and found no record of any requirement that businesses must be qualified as suppliers before presenting new products to potential buyers.
“Regarding the subsequent and entirely different work that MML undertook for Safaricom, Mr Hoddell had no foreknowledge of the need that Safaricom would later have for detailed research and feasibility reports – a field in which MML is the market leader,” the company said in a response. “MML was asked separately and much later to quote for the research work, which it did, and it was then awarded the work solely on the basis of that quote.”
The project was stopped by Collymore late last year, with progress already behind schedule. Groundbreaking should have been done in October yet project design was still ongoing in November. This has been attributed to delay in decision making on next steps with regard to the development model for One Campus.
It will be interesting to see how Bob Collymore handles the matter now that KPMG recommends radical measures. “Given the relationship between RDIL and MML potentially gives rise to conflict of interest, Safaricom should consider severing its current engagement with either MML or Actis/ARDIL or both,” KPMG says.
