Govt sweats on Khato deal

A flurry of meetings—including ministerial level gatherings—show how government is leaving no stone unturned to walk away from the K400 billion Salima-Lilongwe Water Supply project.

But Capital Hill is facing a tenacious contractor in Khato Civils, who has given government 14 days to come back to the negotiation table or it will refer the matter for court arbitration.

Government’s efforts to terminate the contract were first announced at an extraordinary board meeting of Lilongwe Water Board (LWB) in Mangochi on July 11 2018.

Minutes of the meeting, which Weekend Nation has seen, reported that the Office of the President and Cabinet (OPC) had informed LWB to curtail activities of the project until there is committed financing.

“The board of directors [of LWB then] asked the Ministry of Finance, Economic Planning and Development to consider issuing a stop order to the EPC [Engineering Procurement Construction] contractor on discontinuance of the project activities until financing is identified to avoid possibility of any probable future litigations,” reads the minutes.

Also Chief Secretary to the President Lloyd Muhara, in his letter to the chief executive officer of Special Purpose Vehicle for the Salima-Lilongwe Project—a government special purpose vehicle set up to coordinate implementation of the project, advised the company to curtail all project activities due to financial constraints.

“I write to inform you that due to financial constraints, the government has pended payment to the Engineering Procurement and Construction [EPC] until when it will become feasible to do so,” reads the letter signed by Muhara.

If cancelled, Khato Civils-South Zambezi Joint Venture could claim up to K53.2 billion ($71 million) or more for breach of contract, ministerial minutes show.

Khato Civils already pocketed K12.7 billion ($17 million) as settlement of the preliminary claim for the Salima-Lilongwe Water Supply project.

In a letter dated January 7 2020, Khato Civils-South Zambezi Joint Venture—through its lawyer Chancy Gondwe—informed Secretary to the Treasury (ST) Cliff Chiunda that if he (Gondwe) was not going to hear from government on the botched deal within 14 days, in relation to the reengagement, Khato Civils shall treat the negotiations as abandoned. This is when Khato Civils will take the matter for international arbitration.

Two legal opinions on whether LWB can terminate the EPC contract with Khato Civils-South Zambezi Joint Venture indicate that government is better off negotiating with the current contractor to avoid spending tens of billions of kwacha in compensation without actually providing.

The legal opinions—one from the Attorney General (AG) and the other from LWB lawyers Likongwe and Company—were also meant to see whether government would be exposed to liability in the event of termination and determine the extent of the exposure.

The option to cancel the deal that Capital Hill is considering follows differences between the contractor and government over the financier that Khato Civils identified for the project.

The AG, Kalekeni Kaphale, advised the ST and LWB to engage the contractor to identify financiers and reach a financial close with an agreed time-frame.

“The engagement will, besides providing an opportunity to agree on realistic time-frame, also assure the contractor that government and LWB are not seen by the contractor as intending to frustrate the contract as they alleged in their letter,” reads the AG’s opinion delivered in October 2019.

Kaphale also told LWB that the implementation of the stop order authorised by the ST would not avert any expenses on the part of the board, except where the suspension was on account of default on the part of the contractors.

LWB lawyers, Likongwe and Company, in their legal opinion, advised that if LWB was to terminate the contract, the potential liability for LWB would be higher, saying Khato would claim for equipment and staff that were staying idle in Malawi.

“Khato will be entitled to claim the costs of maintaining the staff and keeping the equipment in Malawi. The result will be that LWB will have paid Khato in access of $17million, but LWB will not have anything to show for such huge amount spent as there will still be no water supply from Lake Malawi, and no other benefits,” reads the legal opinion.

In a letter, dated August 18 2019, Gondwe accused LWB and government of frustrating the project by avoiding to meet with Khato and address certain key issues.

In a telephone interview on Thursday, Khato Civils chairperson Simbi Phiri said they already have identified two financiers ready to “fly in tomorrow” to sign a financial agreement with the Minister of Finance at less than four percent interest rate and have the money released within 30 days of putting pen to paper.

He said he would, on expiry of 14 days, take the matter to the International Court of Arbitration either in Paris, France or The Hague in the Netherlands.

“They cannot just walk away from the agreement. They cannot cancel without settling,” said Phiri.

Minutes of the ministerial meeting in the boardroom of OPC, which Minister of Agriculture, Irrigation and Water Development Kondwani Nankhumwa chaired, reported that Khato Civils-South Zambezi Joint Venture would claim $71.5 million or more as compensation for terminating the contract.

The meeting was attended by about 17 government officials, including secretaries to ministries of Agriculture and Finance, then LWB former CEO Alfonso Chikuni and Salima-Lilongwe Water Supply Company Limited CEO, Modesta Kanjaye .

Gondwe said he could not comment on the amount that his client would demand as compensation as “the issue will have to undergo an assessment”.

“We are waiting to hear from government, especially the Secretary to Treasury within the next 14 days and depending on what the outcome will be, we shall submit the matter before an arbitrator,” he said.

Ministry of Agriculture and LWB spokespersons Priscilla Mateyu and Maurice Nkawihe, respectively, referred the matter to Ministry of Finance.

However, ST Chiunda said, in a telephone interview on Thursday, that he had not yet received the letter from Khato Civils-South Zambezi Joint Venture lawyers.

He also said Ministry of Agriculture, Irrigation and Water Development was better placed to comment.

“The policy holder on this issue is Ministry of Agriculture; this is also where the Special Vehicle on the Salima-Lilongwe Water Supply project is. I have to consult them to come up with an answer,” said Chiunda.