Exclusive: RBM’s Mzuzu branch payment mess exposed

The Reserve Bank of Malawi (RBM)—supposedly the epitome of fiscal integrity—is at pains to justify more than K9 billion in extra spending in the construction of its Mzuzu Branch offices up North, especially after the main contractor has abandoned the project citing non-payment.

This week, RBM could not explain the triple digit cost overruns, contentious procurement and payments to main contractor S.R. Nicholas Limited that have even irked the supervising architect, DDC Designs.

Complicating the whole scenario is S.R. Nicholas’ abrupt notice issued last month to abandon the project when the firm had already pocketed more than K13 billion in payments—apparently because RBM did not honour a debatable K191 million invoice.

A cache of documents we have seen show—among several issues—that the project cost, initially estimated at about K5 billion, jumped by K9 billion or 180 percent in August 2013, translating into K14 billion as the revised total project cost.

In fact, some documents in the dossier show that the project sum has already exceeded K15 billion without an official addendum (which would be the second) to revise the cost.

These currency conversions are made on an agreed base exchange rate of around K281 to the dollar.

The only explanation for the sharp rise in project cost that is given in the only addendum of August 2013 to the original contract that was signed in September 2010 was that the move followed the “devaluation of the Malawi kwacha in May 2012”.

There is no mention of changes to project scope or requirements as reason although this is a project in which all the triple constraints of time (there were several extensions), requirements (supervisors cite wrong specifications in some cases) and budget have been miles off course.

According to the Addendum No. 1 made on August 26 2013, RBM agreed to revise the “bill rates of the outstanding works following the devaluation of the Malawi kwacha in May 2012” by K9 billion.

Reads in part Clause 1 (ii) of the Addendum: “In addition to the contract sum as indicated in the contract the amount of K9 061 918 013.82 [nine billion sixty one million nine hundred eighteen thousand thirteen kwacha eighty two tambala] or the equivalent of $32 157 267.61 shall be added and total sum of K14 042 657 163.02 or equivalent US$49 831 998 .45 shall be the new contract price.”

In dollar terms, it means the project cost rose by nearly 190 percent from an initial agreed contract fee of around $17 million, a hike that long-time money market analyst James Chikavu Nyirenda on Wednesday described as inexplicable in the context of the devaluation reasons that the RBM advanced.

But Nyirenda said justifying the increase with the 2012 devaluation raises more questions than answers because the total sum would have increased to K8 billion and K9 billion if devaluation were indeed the justification.

“The difference has to be properly explained. To me, basing on the initial cost [K5.1 billion] and the exchange rate then, the argument of devaluation does not make sense.

“What I would want to check with them is perhaps whether there were any cost adjustments after the contract was signed, which is normal in the construction industry. That would go towards explaining the difference. But overall, to me, if the explanation being given is just about the devaluation, then I have problems with the increase from K5 billion to K14 billion,” said Nyirenda, senior lecturer in banking and finance at the Catholic University of Malawi.

According to RBM deputy governor (operations) Meg Kajiyanike, in one of the communications, the new project cost was dependent on conclusion of other project-related issues such as finalisation of the extension of time, project milestones, completion dates and attendance fees for prime cost items.

—Whither project baselines?—

Correspondence among senior representatives of RBM, S.R. Nicholas and NDDC Consortium (a team of project consultants comprising architects and surveyors) show a lack of respect for project baselines and expose alleged irregularities in the project’s implementation (phase two).

Letters we have reviewed also show that RBM Governor Charles Chuka was warned several times about the mess the project was in and was asked to “urgently” intervene to preserve the project’s integrity and public funds, but there is no suggestion in the information we have that he acted on the distress calls.

For example, in a November 18 2014 letter to Chuka, project architect DD Chidyaonga of DDC Designs, who is also a member of NDDC Consortium engaged to provide design and supervision services for the Mzuzu Branch, was blunt and, sometimes, literally pleading for executive action from the RBM top brass.

Said Chidyaonga: “The continual arrogance in undermining the authority of the designated project supervisors on this very important project and the wanton payments to contractors and suppliers without following right procurement procedures is seriously draining the public purse on a project whose revised contract sum of K14 billion has now been far exceeded to over K15 billion without further official addendum to revise the contract sum.”

In the letter, Chidyaonga also complained about alleged interference and what he claimed was fraudulent practice by an RBM officer [name withheld] in the project implementation, which the architect asserted was adversely affecting construction progress.

Chidyaonga alleged that at one point, the officer determined and instructed that a valuation certificate in favour of the contractor be made in the sum of K1 297 144 413.13 without levying liquidated damages.

“I wish to advise you sir [Governor Chuka] that the action unilaterally taken by [the officer] in giving instructions for payment… without the involvement of the project manager/architect is unprocedural under the terms and conditions of building contract and is tantamount to fraudulent practice and is fundamental breach of contract under clause 58.2(h) of the conditions of building contract.

“In order to stop the malpractice, which is now deep rooted and in order to protect government interest in this project, I beg of you, sir, to consider the removal of [the officer] from representing Reserve Bank of Malawi on this project and to deal with him in accordance with the applicable law,” wrote Chidyaonga.

In an earlier letter dated October 31 2014, Chidyaonga also warned Chuka that some project specifications were being ignored.

We tried several times to talk to Chuka for the past two weeks without success.

—RBM refuses to explain—

When contacted for an official explanation from the RBM on the issues raised, central bank spokesperson Mbane Ngwira said on Wednesday that it was too early to provide an explanation, saying they would make public all information available at the completion of the project.

“[RBM] as a public institution set up by an Act of Parliament is accountable to the general public. In this regard, at the completion of the Mzuzu Branch, all information on cost of construction, time to completion and any other challenges faced during construction would be made available to the public,” he said.

Ngwira said issues concerning contractual obligations between the parties involved in the project would have to be dealt with within the provisions of the contracts and it would be premature to be discussing such issues in the media.

“It is also true that within government, there are several institutions mandated to investigate any irregularities noted in the procurement of goods and services,” said Ngwira in a questionnaire response.

—Contractor abandons project—

The construction project was also thrown into disarray after S.R. Nicholas issued notice of contract termination on November 11 due to a delayed payment based on certificate number 48.

“This payment certificate has yet to be paid and today, under clause 58.2 d, the client, having not paid this certificate, has made a fundamental breach of the contract. With this letter, we are giving you notice of termination of this contract under clause 58.2 d of the contract,” wrote GL Bizzaro on behalf of S.R. Nicholas/Cilcon Joint Venture.

The termination notice came barely four days after NDDC Consortium team leader Ignatius Chitsanthi wrote RBM director of administration Patrick Mhango warning him that the contractor may terminate the contract due to unresolved payment issues.

“We note that the impasse and background issues to the return of Interim Certificate No. 48 have not been resolved… Under Clause 58.2(2) of the conditions of the contract, this could be construed as a fundamental breach of contract and consequently, the contractor may terminate this contract,” wrote Chitsanthi in his letter dated November 7.

At the time S.R. Nicholas was abandoning the project, the company had already received around K13.7 billion with just about K190.9 million as the outstanding balance whose payment delayed because of disagreements over so-called liquidated damages. We were unable to talk to S.R Nicholas as staff at the company’s premises said the managing director was out of the country.

However, according to project architect Chidyaonga in a letter dated November 24 2014, S. R. Nicholas’ termination of contract was invalid because it did not follow conditions of building contracts where payment issues are dealt with and did also not exceed the 45 days payment period.

—Will project be completed?—

The issue of multiple extensions of the contract and general delays to complete the project also angered some people within RBM.

In her letter addressed to the NDDC Consortium team leader dated June 5 2014, RBM’s Kajiyanike expressed concern in the manner in which the consortium awarded the contractor the fourth extension of 14 weeks.

Kajiyanike wrote that during one of their meetings, it was observed that the contractor lacked seriousness and wanted to complete the project in his own time.

“When the contractor requested for variation of the contract price, which effectively changed the contract sum from K5.16 billion to K14.02 billion, the bank effectively allowed him to accelerate the works in line with clause 29 of the general conditions of the contract. Contrary to this arrangement, the contractor is seeking more time to complete the project,” wrote Kajiyanike.

The project has already been extended three times hitherto, from 104 weeks (26 months) to 10 196 weeks (49 months).