Collapse of construction firm leaves thousands jobless in East Africa

24Jun 2020
The Guardian
Collapse of construction firm leaves thousands jobless in East Africa

​​​​​​​A recent BBC Eye documentary about a former infrastructure company—Spencon has brought to light a number of questions on the business tactics and motivation of private equity (PE) firms in Africa.

Spencon was an East African civil engineering and construction company that provided construction and engineering services for buildings, roads, bridges, power transmission and water supply infrastructure.

The company, which also operated in Tanzania, Uganda, Sudan, Malawi, Mozambique and Zambia, was established 41 years ago in Kenya.

Founder of the company, Jitendra Patel said that at its prime, the company had a workforce of more than 5,000 employees across Africa.

In an emailed interview, Patel said the company successfully executed over 200 infrastructure projects across nine Eastern and Southern African countries including Uganda, Tanzania, Zambia and Malawi.

At that time, the firm's projects in Tanzania were Kilimanjaro  sub-stations and Transmission lines (US$26.2million), Singida sub-stations and transmission lines (US$20million), Musoma Water Supply and Sanitation (US$25.6million), Kigoma Water Supply and Sanitation (US$19.9m)

He said: “Spencon developed solid relationships with a number of financial institutions including state backed development finance institutions (DFI) such as the Dutch Development Bank, FMO and was among the most reputable construction companies in the region for over 35 years.”

Patel said the construction firm has for years enjoyed solid relationships with all its stakeholders including governments, ministries, donor agencies, consulting engineers, suppliers and staff.

He said that in 2006, the US private equity fund, Emerging Capital Partners (ECP), invested US $ 15 million into the company with the aim of listing Spencon onto the Nairobi Stock Exchange by 2012 – 2014.

Initially the relationship with ECP was positive until mid-2011 when ECP conspired to take control of the company from its founders by manipulating findings of internal audit reports with the sole aim of forcefully acquiring all of the company’s shares in order to ‘flip’ the company at a huge profit.

Unknown to the founders at the time, ECP was in secret negotiations with, amongst others, one UAE based competitor who had expressed interest in acquiring the company for which ECP offered to sell 100 percent of the company’s shares.

However, the sale did not go through as it was blocked by two of the founders; had it done so, ECP would have yielded huge profit of over 200 percent.

Patel added: “ECP again conspired to defraud the founders in 2012 by forcing them to accept a US $ 6m loan, which was just another ploy to forcefully acquire the founder’s shares.”

According to him, the founders were then forced to enter an arbitration process in a last ditch effort to subvert and/or delay ECP’s predatory intentions to forcefully acquire 100 percent of the company.

However, ECP rejected the founders’ proposals for an equitable win-win solution. Instead, upon validating their Put Option right in the arbitration, they unceremoniously ousted all the founders and took over full ownership and management of the company in early 2014, according to Patel.

ECP then engaged a hostile and wholly ineffectual ‘management’ team to forcefully take over the founders remaining assets. Aside from grossly mishandling the business, the said team, led by ECP, engaged in massive bribery payments of over US $4m to Ugandan government officials within the first year alone.

These payments were reported to the authorities in the US and UK as well as to ECP’s donors - DFID, CDC and EIB, amongst others.”