After Ghana discovered oil and gas in 2007, the government and civil society aspired to avoid the “resource curse”. This is when countries have an abundance of non-renewable natural resources but no economic growth.
Kenya’s Spencon: rapid collapse leaves thousands jobless
The rapid collapse of Spencon, a 40-year-old construction giant in East Africa, a few years after it was taken over by a private equity firm, has left thousands jobless and is the subject of several court cases across the world.
An investigation by the BBC’s Africa Eye released on 6 April, 2020, detailed the collapse of Spencon, an infrastructure giant that had operations in multiple countries.
Founded by Jitendra C. Patel, known informally by the initials of his first two names JC, and two of his friends in 1979, Spencon had expanded operations to seven African countries, and had over 200 complete projects by 2007.
By the time it took on Emerging Capital Partners (ECP) as an investor, it was valued at $100mn.
In the global economic boom that preceded the 2008 financial crisis, Spencon’s founders set out to go bigger, planning to go public in Nairobi. Several of Kenya’s biggest companies, including Equity Bank and Safaricom, also listed around the same time.
Vision of Spencon
“Spencon had a vision of becoming one of the largest infrastructure firms in Africa by 2020 after listing in the Nairobi Stock Exchange with a possible cross listing in the Joburg and London Stock exchanges,” JC’s son, Pragnesh Patel, told The Africa Report from Panama, “That was the principle reason, we believed, why ECP, along with FMO of Netherlands and DEG of Germany, invested $22m in Spencon.”
At the time, private equity investments were not properly understood in the region, and could be easily confused for the “hands-off” lending models of government development aid institutions.
“The trajectory of Spencon’s growth since inception in 1979 till 2009 [after ECP’s conversion, i.e. for 30 years] grew at a steady rate of approx 15% per annum,” says Pragnesh.
“Post ECP taking control in 2009, the turnover and profit start dropping [for the first time in Spencon’s history] and the debt also started mounting.”
“ECP accepted to convert its loan and become a shareholder of Spencon but only on condition that the previous majority shareholders make certain commitments to ECP,” the fund said in a statement.
While it now had a minority stake, it came with a board majority and a veto on who became the Chief Financial Officer (CFO).
ECP says its interest subsequently rose to 38.6% after shares of one of the other founders, Kiran Saroop Sagaar, was redistributed as settlement for internal fraud.
Collapse in 2016
The focus on ECP’s activities, which led to the collapse of the company in 2016 and the loss of thousands of jobs, comes just months after a private equity (PE) owned chain of hospitals came under scrutiny for overbilling patients.
Screenshots from a work group at one of Nairobi Women’s hospital’s branches showed a deliberate and systematic strategy to convert outpatients into inpatients, regardless if it was necessary or not.
Since then, the hospital’s owners, American PE firm TPG’s Evercare Health Fund , have taken measures to restore the hospital’s reputation including firing the disgraced CEO, Dr. Felix Wanjala.
After Spencon collapsed in 2016, the remaining founder JC Patel sued ECP in several countries.
Both sides have accused each other of fraud, while BBC’s Africa Eye found evidence that the private equity firm’s representatives had not only worked with a known underworld figure, but had threatened the founders that they would sell their stake to the notorious Akasha drug family
While the company was struggling, they also moved the headquarters from the capital, and built a private golf course while refusing to pay their Kenyan staff.
“Illegal take over of Spencon”
“ECP’s appointee’s, Andrew Ross (Executive Director and CEO) and Steven Haswell (Executive Director and CFO), were sent to me to make a deal: to offer me 51% of a property company, Spedec for One US Dollar (where I owned the remaining 49%) that owned a $10m plus plot of land in Kasarani, thereby making me 100% owner of a valuable property,” Pragnesh wrote in an email.
“In exchange, they wanted us to drop our case against ECP for the illegal take over of Spencon in Mauritius. When I asked Ross what would happen if I refused to accept this offer, he said that ECP would sell their shares [i.e. Spencon’s 51% in the land owning company] to the Akasha’s thereby forcing them to become my majority partners.”
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Shortly after Spencon collapsed, the European Investment Bank (EIB) sent investigators to Nairobi, but years later, the results remain unknown and the company’s fate is tied up in multiple jurisdictions. A spokesman from the Department of International Development (DFID) recently told British media that “the UK has [a] zero-tolerance approach to fraud and corruption.”
Bottom Line: Over the last decade and a half, Kenya has been among the top recipients of private equity investments on the continent, racking in $1.2bn, 87% of the total investments in East Africa, between 2018 and 2019.
Private equity firms are now heavily invested in everything from agribusiness, retail, food chains, hospital chains, and fintech start ups.
While the investments led to rapid expansions across the country, Kenya lacks the legal framework to regulate against hostile takeovers, and its anti-corruption activities are mainly aimed at the public sector.