Kenya is crucial to Ormat’s financial well-being. In its 2020 annual report, Ormat disclosed that its international electricity operations accounted for 28% of revenue and 70% of net income, with a “substantial portion” coming from Kenya, which “contributed disproportionately to our gross profit and net income”. [Pg. 59] Kenya’s lopsided contribution is despite Kenya only representing 16% of its generating capacity, suggesting that Kenya is Ormat’s most lucrative single market.[2] [Pg. 12] This begs the question: how did such an advantageous deal for Ormat come about?
A Politically-Connected “Tycoon”, Joseph Manga Mugwe, Told Us He “Opened the Door” for Ormat and Made a Personal Appeal to Kenya’s Notoriously Corrupt President, Daniel Arap Moi
When Ormat arrived, Kenya was on the verge of a drought-fueled energy shortage and ruled by a rampantly corrupt government led by President Daniel Arap Moi that, during 24 years in power, robbed from state coffers and took billions in kickbacks from private enterprise. Against that backdrop Ormat was able to negotiate terms so favorable that today it receives energy tariffs almost 40 percent higher than other geothermal contracts. A partial explanation may be found in Ormat’s choice of consultants, legal teams, facilitators, contractors and partners – many of whom have or had family, business or political connections to the governments in power at the time. We discovered through an interview with the prior landowners of part of Ormat’s Kenya operation that the company established operations in Kenya with the help of a self-described consultant with impeccable political connections, Joseph Manga Mugwe. Described by Kenyan media as a “tycoon”, Mugwe told us in an interview that then-president Daniel Arap Moi – deemed one of Kenya’s most corrupt post-colonial rulers – personally gave approval for Ormat’s operations in Kenya.
Mugwe Acknowledged in an Interview With Us That He Used His Political Clout to Facilitate Ormat’s Entire Operation in Kenya
We had called Mugwe to ask him about his intermediation in a deal to purchase land for part of Ormat’s operations. He readily explained that his role had been much larger, claiming to have facilitated Ormat’s entire operation in Kenya. He said by phone: “Orpower (Ormat) came to me and I helped them get a license yes, yes, yes. I’m the one who helped them through the door in Kenya.” “I never was on the board but I was a kind of a consultant and teaching them how to move around.” This unofficial consultancy role seems to have been a clear conflict of interest. At the same time that Manga Mugwe was facilitating Ormat’s entry to Kenya he was also a director of KenGen, the state power generation company that controlled geothermal resources at that time – including the resource it ceded to Ormat. Despite this, he openly acknowledged that Ormat executives were referred to him by officials in the state electricity company KPLC – the company with which Ormat was about to sign a PPA and the sister company of Kengen — because of his political clout.
“They (Orpower) inquired through KPLC who could make the application for them and people said Manga Mugwe because they knew of my political connections.”He said he regularly used to meet Ormat’s founders, Lucien and Dita Bronicki, when they came to Nairobi. He said he made a direct and personal appeal to then-president Daniel Arap Moi for Ormat to be given a contract in Kenya.
“I supported them and I even spoke to the President then, Daniel Arap Moi, and he was very receptive. And KPLC (Kenya Power) gave the go ahead.”(To make way for geothermal development, nomadic Maasai herding communities were then forcibly displacedby internationally-funded projects from across the Olkaria geothermal field. Hardly the ESG angle that many investors believe they are getting when investing in Ormat.)
Ormat’s Contractors in Kenya: Consistently Close Ties To The Empire of Former President Daniel Arap Moi, Accused Of “Looting” Kenya Of More Than $1 Billion
Detailed in a leaked 2004 report by international security firm Kroll, former Kenyan President Moi’s sons and business cronies helped run his racket via front companies and offshore bank accounts. It was amid this climate of rampant corruption that Ormat first arrived to do business with the Moi government. Ormat’s Kenyan plant was developed in multiple phases spanning almost 20 years and three presidencies, eventually growing from 8 MW capacity to 150 MW. Ormat listed several contractors in a 2012 exhibit for a loan for its Kenyan Olkaria III project. From this list, we see multiple companies run by close associates to Moi, including his son. Others were led by businessmen with close political and economic ties to the Mwai Kibaki Presidency (2002-2013), a former Moi minister who later moved into opposition. During Kibaki’s tenure, Ormat’s PPA was modified twice, allowing it to increase capacity. [Schedule 3.01 (x)] The contractor list is not complete, but rather appears to be a snapshot of a limited timeframe between late 2011 and mid-2012. Some of the contractors, however, are known to have worked with Ormat for many years. Overall, it paints a picture of a network of private contractors tied to Kenyan political interests, facilitating payments to politically-connected individuals:
[Table sources: (1) SEC filing (2-3) Kroll report (4) Media report (5) Analysis of Kroll report, Part III (6) Media report(7) Kenya Gazette (8) Kaplan & Stratton Website (9) Kenyan Gazette (10) Media report (11) 2015 Investigation (12) Media report (13) Media report (14) Media report (15) Media report (16) Government notice]
Ormat Was Investigated in Kenya in 2017 After Whistleblowers Alleged The Company Had Overbilled Kenya’s State-Run Entity
Kenyan media outlet The Standard published an articleseveral months ago (which now appears to have been removed) that disclosed that Ormat was investigated in 2017 by the Kenyan Ethics and Anti-Corruption Commission (EACC) over corruption allegations.
The investigation was triggered when anonymous whistleblowers claimed Ormat’s Kenya plant had misrepresented its capacity and had forced its operators to report altered daily meter readings, among other allegations. While the commission’s report ultimately failed to bring conclusive evidence of corruption, it found certain alarming issues. In one example, the EACC learned that the amount of power fed to the grid by Ormat’s plants was communicated verbally or through email to the National Control Center, instead of automatedly. The report identified this issue as potentially leading to “erroneous data for the invoice inputs”.
Two Former CEOs Of Ormat’s Key Kenyan Customer, Kenya Power, Were Arrested In 2018. More Than A Dozen Top Managers Were Also Arrested Or Accused Of Crimes.
Ormat’s sole customer for its 150MW capacity Olkaria III Complex in Kenya is a state-run entity called Kenya Power and Lighting. [Pg. 36] Just as with Ormat’s utility customer in Guatemala, Kenya Power has grappled with rampant corruption. In July 2018, Kenya Power’s CEO, Ken Tarus, was arrested for “economic crimes” including “scandals involving bogus tenders and suppliers with the alleged theft of hundreds of millions of shillings by state officials from several government bodies.” [1,2]
As part of the same USD $45 million corruption case, at least 9 other Kenya Power managers and former managers were arrested, including former CEO Ben Chumo. This is the same Ben Chumo that oversaw Ormat’s approved 2014 power plant expansion, per Ormat’s SEC filings.
(Source: Ormat 2020 10-K, [Pg. 410])
Later media reports in early 2020 speculated that “cartels at the company had swindled over Sh150 billion (USD ~$1.5 billion) from customers over a five year period” through overbilling. An ongoing investigation was expected to yield 15 more arrests, reports noted. This past summer, Kenya’s main newspaper, Nation, declared that Kenya Power is now “beyond redemption” and should be privatized.
Given Ormat’s financial reliance on Kenya, a privatization or a reorganization of Kenya Power, or its financials, could have a devastating impact on Ormat’s overall financial position.
Multiple Other Key Signatories on Ormat’s Contracts in Kenya Were Later Charged With Corruption
Corruption at Kenya Power is not new. Samuel Gichuruwas the longstanding head of Kenya Power (1984-2003) when Ormat signed its energy deal with the company in 1998. The contract was signed by the then Energy Minister Chris Okemu. [Pg. 393] Gichuru was party to a letter affirming Ormat’s increase in capacity in 2000, per company filings.
(Source: Ormat 2020 10-K [Pg. 400])
Both Gichuru and Okemu were later accused by prosecutors in Jersey of money laundering the proceeds of bribes and corruption through a front company based in the UK Channel Islands. The pair dodged extradition but the Jersey Court confiscated more than $5 million in kickbacks which had been paid to Gichuru in just two years, 1999-2001.
Recently, more assets were seized from the pair:
The court sentencing document stated: “(Gichuru) accepted bribes from foreign businesses that contracted with KPLC during his term of office and hid them in Jersey…Contractors passed on the cost of the bribes to KPLC by inflating their charges by disguised means. Gichuru and the contractors defrauded KPLC…Windward (Gichuru’s Jersey front company) disguised the fact that money paid to Gichuru came from contractors of KPLC. This is a classic money laundering technique called layering.”Court papers named 11 foreign companies, including Spanish, Finnish, British and Israeli entities, though Ormat does not appear. But Jersey judicial authorities confirmed in an email to us that these were sample charges and a sample list of companies. They said the full list of foreign companies who paid bribes to Gichuru was never submitted to the court.
Kenya Power Is Reportedly “Broke” And “Technically Insolvent”, Posing a Major Risk to Ormat’s Lucrative Arrangement in the Country
The extensive historical corruption at KPLC appears to have exacted a painful price on the company and ultimately, Kenyan citizens. A media report that first appeared in Nation in March of 2020 stated that Kenya Power is “broke and now running dangerously closer to empty”. The same article described KPLC as “technically insolvent”. The Kenyan government owns 50.1% of the utility and shares are publicly traded on the Nairobi Stock Exchange. KPLC’s most recent financials note that Kenya Power has “remained in a negative working capital position for the third consecutive year” with current assets of KES 44 million versus current liabilities of KES 115 million.
The financial audit notes that “strategic initiatives…undertaken to improve the financial results of the company…appear not to have yielded the intended results.”
“Broke” And “Technically Insolvent” Kenya Power Has Been Consistently Late Paying Ormat
Kenya Power’s financial hardships are starting to show up in the utility’s apparent inability to pay Ormat on time. In Q1 2019, Ormat began reporting a late balance due from Kenya Power. The late balance has been increasing significantly since it was first disclosed, as has the average number of days Kenya Power has been in arrears.
[Source: Ormat filings, Pgs. 12 and 5, Pgs. 10 and 5, Pgs. 9 and 5, Pg. 172, Pgs. 11 and 5, Pgs. 10 and 5, Pg. 10, Pg 104]
As of December 2020, KPLC’s overdue payments averaged 78 days past due. This is up from an average of 70 days as of December 31, 2019. [3] [Pg. 107] In Ormat’s Q3 2020 call, the CEO acknowledged that payments from KPLC had slowed over the years, saying: “Kenya has been slowing payments for last 2 years but they’re still paying.” Ormat says that while Kenya Power is late on its bills, it is still expected to pay the balance. As a result, Ormat has apparently not set aside an allowance for credit losses pertaining to Kenya. [Pg. 112] Financial volatility from Kenya could immediately translate to a material negative for Ormat’s balance sheet, as well as its ongoing profitability. We also think evidence of corruption could reduce Kenya’s willingness to continue to support Ormat’s lucrative contract in the country.
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