The Treasury risks paying Sh43.3 billion to a Dubai-based tycoon over an alleged TV channel and digital migration contract breach by the loss-making Kenya Broadcasting Corporation (KBC).
The claim by Ajay Sethi, the founder and chairman of Channel 2 group Corporation, is a quarter of the Sh174.57 billion that taxpayers could be called upon to settle in contract disputes, according to Treasury Cabinet Secretary Ukur Yatani.
The State broadcaster has net assets of Sh2 million and returned a loss of Sh9.79 billion in the year to June.
Mr Sethi is seeking the claim through arbitration in London over the termination of a joint venture by KBC in March 2009, ending what was supposed to be a 24-hour entertainment and sports channel
The State broadcaster is also accused of using information from a feasibility study carried on the digital television market by Channel 2 to launch a distribution platform together with China’s StarTimes.
“As the principal owner of all State corporations, the government is the natural underwriter of risk that they face,” said Mr Yatani in note to Parliament.
“The Sh43 billion was attributed to claim against KBC over claims that it breached a contract regarding the launching of a TV channel and the digital migration process.”
KBC is also accused in the London court of entering into a pact with a third party company as part of the digital migration.
The weak financial position and the strategic role of KBC as the State broadcaster make it difficult for the government to allow its assets to be auctioned or be put under receivership should it lose the suit.
KBC has struggled since the sector was opened for competition and the withdrawal of mandatory permits fees — which in the UK has been used to fund BBC shows and services including TV, radio, the BBC website, podcasts, iPlayer and apps.
The Kenyan State broadcaster has been unable to repay a Japanese debt that the government guaranteed. This has seen taxpayers remit Sh663.5 million to meet its repayment obligations.
KBC used to receive Sh1,000 as permit fee for every radio and TV set, which was outlawed following the liberalisation of broadcasting in 1997.
The first deal was signed after Mr Sethi invited KBC officials to Dubai in September 2005 to see the operations of Ajman TV, which he owned. He said KBC liked the channels idea and that he and the State broadcaster were looking at the “bigger picture, towards the introduction of digital technology in Kenya.”
After signing the agreement with KBC, dated September 20, 2005, Mr Sethi incorporated his company at the British Virgin Islands nine days later.
Mr Sethi, a graduate of Punjab University Chandigarh, was selling vehicle spare parts in Nairobi up to 1993 when he shifted to the Emirates and set up a new company — Unique Part Trading LLC with branches in Sharjah and Dubai.
It is here that he took advantage of the property boom and became a real estate dealer. He then met the son of a top Bollywood actor, Shammi Kapoor, and they started a media business.
Mr Sethi now claims that KBC’s breach of their joint venture brought to an end his determination to venture into the East African market.
KBC and Mr Sethi’s company had jointly incorporated Channel Two G Corporation (Africa) Limited to run the joint venture as per an agreement signed in May 2006 in which the Dubai company was to share revenue at the ratio of 70:30.
The joint venture was to end in August 2017 when it would have earned a profit of $481.9 million (Sh52.4 billion).
According to the suit papers, KBC was supposed to provide some of the equipment, but some were found to be “inadequate”.
As a result, the Dubai company obtained funds for the procurement of a new transmitter for Metro TV, staff, billboards and hired an advertising company.
In a letter dated March 2009, KBC said it terminated the venture because of programming and “poor financial performance”. But Mr Sethi says that this was caused by weak and unreliable signal.
While terminating the venture, KBC accused Mr Sethi of misrepresenting himself that he had “capabilities, competence, expertise and financial resources” to run the station.
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