Dema Power Project – A Murky Tale

BSR: A murky tale: The Dema Power Project Revisited

Alex T. Magaisa

October 22, 2018

(Note: This is a revised and updated article first published in August 2016)

 

In July 2016, the Zimbabwean government commissioned the first phase of the USD83 million Dema Diesel Power Plant (hereafter the Dema Project), ostensibly to provide temporary power to prevent shortages which had become increasingly frequent. The idea was to establish temporary power supplies pending the completion of long-term expansion projects at the main power plants in Kariba (hydro) and Hwange (thermal).

However noble the idea appeared to be, the circumstances around the granting of the contract for a temporary power project were rather murky. They implicated local political elites and multinational actors in the power generation industry. It brought the role of multinationals in developing countries under the spotlight. Do they care about corruption and the cost it imposes on the poor? The Dema Project confirmed the stereotype that they are only interested in profits while local elites are content with rent-seeking. Both groups - local elites and multinational - don't care if it imposes costs on the poor. 

Why the Dema Project is murky

The dubious nature of the Dema Project deal was exposed in great detail by the Zimbabwe Independent newspaper. In one of the most significant pieces of investigative journalism in 2016, the Zimbabwe Independent’s journalist Elias Mambo uncovered and chronicled how the public authorities in Zimbabwe corruptly disregarded the outcome of a tender process and awarded the contract for the Dema Project to a company which did not even take part in the bidding process.

The company which was awarded the contract is called Sakunda Holdings (hereafter “Sakunda”), a fuel procurement and distribution company. It was given the contract despite the fact that it had not participated in the bidding process for the tender. In fact, the tender was won by an American company called APR Energy Holdings. However, inexplicably APR later lost the contract which was given to Sakunda.

So, how did Sakunda end up with this multi-million dollar contract, even though it did not participate in the tender process?

Lifting the veil

To understand what happened one has to lift the corporate veil of Sakunda to identify the people behind it. At the time, Sakunda was owned by a gentleman called Kuda Tagwirei. The Zimbabwe Independent newspaper described him as a close associate of the ruling party, ZANU PF. Also according to the Zimbabwe Independent, his business partner in the Dema Project project is one Derrick Chikore, brother of Simba Chikore, husband to Bona Mugabe, the then President Robert Mugabe’s daughter.

In short, one of the key parties associated with the Dema Project was related to the former President. More importantly, this happened when Mugabe was still in power. This raises the probability that political influence was applied in the improper award of the contract to Sakunda. It was improper because Sakunda did not bid for the contract.  According to the Zimbabwe Independent, APR Energy Holdings, the original winner of the contract, “was later sidelined in favour of Sakunda after intervention by the President’s Office”.

No prior experience

It is important to note that Sakunda had no previous experience in the business of power generation. One of the tender requirements was that the successful bidder had to demonstrate experience in the field of power generation. This is probably why it did not bother to participate in the tender process. Yet, after APR won the tender, they inexplicably lost it and it was given to Sakunda, a rookie in the business.

How was Sakunda going to manage this big project when it did not have the necessary experience, expertise and equipment? Simple. Sakunda sub-contracted a British multinational called Aggreko plc, which has vast experience in the business. Sakunda hired Aggreko’s services for equipment and technical expertise to set up and run the project.

Aggreko is a large Glasgow-based multinational business listed on the LSE. A year before the deal in 2015, it had made a profit of £252 million before tax, and £289 million the previous year. It has a great track record and has supplied temporary power resources to clients in both developed and developing countries. Back in 2016, it stated on its site that 19% of its revenue came from the African region – joint second just behind North America. There is no doubt that Aggreko is a huge and successful multinational business.

At first sight, there is nothing wrong with this arrangement. Aggreko was merely providing a service to a client. However, it was not as simple as that. The facts were that Aggreko was already a player in the saga. Aggreko had participated in the tender process, and had therefore lost the bid to its American rival, APR. The Zimbabwe Independent, wrote that tender documents show Aggreko as one of the losing bidders for the Dema Project. The paper says they were “initially disqualified because the ‘bidder is non-compliant with mandatory technical requirements of the request for proposal’”. Furthermore, its costs were allegedly too high. So Aggreko were not new to the Dema Project. They had bid for the contract and lost.

However, in a sudden and curious twist of events, it was Aggreko and not APR, the original winners which was now the key player in the Dema project. The winner had lost and the loser had now taken the contract, albeit indirectly, through Sakunda. Sakunda had won the contract in an irregular way.

In April 2016, in accordance with the rules of the LSE, Aggreko formally announced to the stock market that it had won a three-year contract with Sakunda. Sakunda, not ZESA, was its client. However, since Sakunda had no experience, expertise or equipment for power generation, it was Aggreko which was effectively carrying out the multi-million dollar project. Sakunda would be no more than an intermediary in a project that would effectively be carried out by Aggreko.

It was remarkable turn of fortunes for Aggreko. Aggreko was very pleased with this arrangement. Its CEO at the time, Chris Weston announced in April 2016, “We are pleased with the award of this important contract. Our operational flexibility and our ability to deploy large amounts of equipment at short-notice, in particular our fuel efficient engines, was critical to this award.” (ShareCast news). Missing in this self-praising narrative is the fact that Aggreko had actually lost the initial bid to their American rival, APR.

Rent-seeking behaviour

The arrangement is classic rent-seeking on the part of Sakunda. Aggreko would perform the work and get its fee, while Sakunda would simply collect rents from Aggreko. All because Sakunda is allegedly local and its beneficiaries were politically connected. At the time, some lazily tried to justify such an arrangement on the grounds that it was a way of promoting local businesses. But this was no more than elitist nonsense. Sakunda hadn’t participated in the tender process and had no legitimate right to be awarded the contract. Since Aggreko was the company that would actually do the project, such an argument for local promotion would have made sense if the tender had been awarded to a local community trust. However, there was more which made it even worse and a burden to the taxpayer.  

Captured guards

There was no hope that the Zimbabwe Anti-Corruption Commission (ZACC) would investigate the matter because after all, the anti-graft body was now housed in the Office of the President and Cabinet. This was the same office which the Zimbabwe Independent accused of influencing the improper award of the contract to Sakunda. Two years later, the ZACC, and another anti-corruption unit set up by new leader, President Mnangagwa both sit in the President’s Office. There is no prospect of effective anti-corruption work if the anti-graft units are housed in the highest political office in the land.

Cost to the poor

As for Aggreko, the issue is about its ethical responsibilities. As a losing participant in the bidding process, it can’t have been aware of the murky circumstances in which their client ended up with the multi-million dollar contract. Their own rival had been improperly deprived of the contract but it went ahead and took up the contract anyway. They would have been aware of the identity of characters they were dealing with at Sakunda. Their business intelligence and compliance units would have been aware of these political connections. Corruption imposes heavy costs on the poor as explained below.

At the time, it was said that ZESA would have to pay USD8 million in advance every month, for a period of at least 3 years. Ultimately, however, it was the ordinary Zimbabwean who would carry the bulk of the cost. The Dema Project would produce electricity at a massive cost of 15,04c/kWh – very expensive compared to hydroelectricity at Kariba, which cost 4,11c/kWh, and thermal power from the Hwange Thermal Power Station, which was priced at 6,97c/kWh. Even imports were far cheaper with imports from Zambia costing 5,18c/kWh, and 5,66c/kWh from Mozambique’s Hidroeléctrica de Cahora Bassa (HCB). This is why ZESA had applied for an increase in tariffs by 49% - a cost to the consumer.

Besides, under the deal Sakunda would provide fuel for the project. But it had a special concession which meant it would import duty-free fuel. That’s no taxes at all, a boon for a company that was already in the fuel-supply business.

It later emerged that Sakunda had in fact been bought by another multinational, Trafigura, which has a heavy presence in the fuel procurement and distribution business. But Kuda Tagwirei [the boss of Sakunda] has remained closely associated with the company which has been lauded as a key partner in the Command Agriculture programme, in respect of which Mnangagwa claims and is given much credit. This raises a new dimension in Sakunda’s relationship with the highest office in the land.  

Conclusion

This is how the Dema Project unfolded. A company that had not participated in the tender process, Sakunda, ended up with the multi-million dollar contract. The company that had lost the tender, Aggreko, ended up carrying out the project. The company that had won the tender, APR, ended up with nothing. In all this, Sakunda did not only have a special facility to import duty-free fuel, it was simply collecting rents from Aggreko. And finally, the poor Zimbabwean taxpayer was carrying the cost. The elites won again and the poor carried the cost.  

Alex T. Magaisa

Kent Law School

wamagaisa@me.com

atm@kent.ac.uk

Key Zimbabwe Independent articles used for this article:

https://www.theindependent.co.zw/2016/06/03/mugabes-relative-corrupt-project/

https://www.theindependent.co.zw/2016/07/22/aggreko-engineers-roll-controversial-dema-project/