The Nairobi Solution: Ch.1

Pudong always looked futuristic.

A Chinese Wall Street built all at once in the late 1990s. Every skyscraper new and modern. Pudong’s skyscrapers were also symbolic. Symbolic of the size of China’s financial system and how quickly it had come on the world scene. Maybe that was the point, Erik thought.

He peered up struggling to see the tops of the buildings as their car moved along Fucheng Road. The glass towers blurred past his window in the late afternoon haze. They arrived at the impressive Shanghai International Center, one of Pudong’s tallest buildings. Somewhere up there on the 83^rd floor was China Eastern Rail Systems (CERS).

Erik collected his bag from beside him on the backseat. It was the canvas Orvis bag Nicole had given him for a birthday gift because he liked fly fishing. It had his computer and his notebook. Next to it was Claire’s purse which was glossy black leather. Erik sighed, opened the car door and swung his legs out onto the street.

‘Alright let’s fix this mess.’

A young, professional woman from China Eastern greeted them in the lobby and escorted them to the elevator bank. They stood in silence as the modern elevator whisked them up to the 83^rd floor. When the elevator doors finally opened, they were led down the hall to a large conference room with black walls and no windows. The woman gestured for Erik and Claire to sit on one side of the long sleek boardroom table. Various red silk tapestries decorated the walls. Recessed spotlights shone down on large ceramic vases on pedestals in the corners.

Seated across from Erik and Claire were Lui An, Chen and 4 other members of the China Eastern team. 6 on 2. Everyone smiled politely while an assistant moved around the table carefully pouring tea. After the teas had been poured, the assistant left the room and the door closed quietly behind her.

Leather bound folders were set out on the table in front of everyone. Erik assumed these folders contained copies of the recent CERS price proposal. The reason they were here. Erik didn’t touch the folder or look at it.

Lui An sipped his tea and remarked that the spring had been wetter than usual this year. The pre-amble about the weather and the seasons reminded Erik of Japan.

Eventually Claire thanked Chen and Lui An for the meeting.

“Director Chen and President Lui An thank you for welcoming us to your office. We’ve met before, but I would like to introduce Erik Anders. Erik is a Director for Turkana Trust, the main bank financing our project. “

Erik nodded and smiled to the others across the table, while Claire continued.

“And thank you for putting together these updated rail equipment proposals. However, we would like to discuss what appears to be a misunderstanding in the terms. Naturally, given the importance of the contract and the strong relationship between our firms we thought it best to meet and discuss everything in person.”

Claire was surprisingly good at this diplomatic nonsense. Her outside demeanour was measured and polite. China Eastern had started a knife fight and Claire was speaking as if this was the United Nations.

“As you know we have been working with your sister company to construct Stage 1 from Mombasa Port to Nairobi. The work has been on time, on budget, and the final stretch to Nairobi is scheduled to complete within the next 12 months. We are at the point, as stipulated in our original agreement, to order rolling stock for the project; the 8 locomotives, 40 passenger coaches and 80 intermodal wagons.

In keeping with the terms of the agreement, East Africa Rail sent you a $50 million deposit on June 15^th last year. Understandably, we were surprised to see your latest invoice which appears to reflect a 25% increase from our agreed upon price. Director Chen or President Lui An would it be possible to help us understand the discrepancy between this latest invoice and the fixed price agreement which we signed 4 years ago when we began the project?”

Chen nodded to Lui An to speak.

“Thank you Ms. Delacroix, and Mr. Anders for travelling to Shanghai. We are grateful for the strong relationship between East Africa Rail and China Eastern. We are glad the project is progressing on time and on budget, as we expected it would. Yes, we received the $50 million deposit last year, but we never received the associated financing guarantee for the remaining $250 million from Turkana Trust despite repeated requests. I think this is perhaps the basis for our misunderstanding.

As stipulated in the agreement Turkana Trust is required to provide a letter of guarantee within 90 days of the deposit payment. We received no such letter despite repeated attempts to contact the bank. Mr. Anders, your bank’s CEO, Mr Rajiv Desai was unresponsive. Still, to this day have not received any evidence of Turkana Trust Bank’s financial support of the rolling stock order.”

Director Chen took over.

“We of course will continue to support the project and intend to start manufacturing the rolling stock as soon as possible. But you understand that having never received any financial guarantee from your bank, the initial contract terms have lapsed. The price increase you noticed in the invoice reflects the increased price of steel and general costs over the last 4 years. We had to adjust the terms of the agreement to maintain our margin. Obviously, we cannot deliver these locomotives at a loss.”

Rajiv had never sent the financial guarantee letter to CERS. That started to explain things.

“Director Chen”, Erik stepped in, “I apologise for any challenges you may have had up to this point in working with Turkana Trust. It is upsetting to hear you did not receive the financial guarantee alongside the initial deposit. I came to Shanghai because I wanted you to personally know that Turkana Trust is under new ownership. Mr. Rajiv Desai is still CEO of the bank, but he and his family are now minority shareholders. The bank is now majority owned by Belway Capital in London and I assure you things will be run differently. I have been appointed by Belway to sit on the Turkana Trust board and focus on the key strategic issues.

As you realise the East Africa Rail project is extremely important to the bank and the change in contract terms you are proposing creates a material difference in the cost of the project. As you know the equity funding for East Africa Rail comes from the IFC. While the IFC supports the project and has guaranteed to fund the full equity obligation this funding gets released in tranches. A price change this material to a major line item is almost certain to trigger an entire financial review of the project and potentially halt further disbursements potentially creating a 1-2 year delay. Naturally, this delay is something we would like to avoid.

Given all these considerations, and in the best interests of all of us, would it be possible to stick to the original terms of the agreement, maybe with the understanding that when we contract for Stage 2 to Kampala we include extra margin into the contract to compensate CERS for its current flexibility? If we could work something out along these lines it would be highly appreciated and build our relationship for future projects.”

Erik could sense Claire wincing at this proposal, but she said nothing.

“We understand your position Mr. Anders and Ms. Delacroix.” Lui An responded in a fake caring voice with his hands clasped in front of him. “And we have made the increase as little as possible, but we cannot go lower. You of course are also not bound by the initial agreement and are free to negotiate with any other suppliers you may wish to speak to, like the Japanese.”

Claire decided for one last plea.

“I would like to reiterate what Erik is saying, that this change in price for the rolling stock is going to trigger a complete project feasibility review by the IFC at our next board meeting. It will create a severe delay while all the feasibility studies are reviewed again. There is a risk the IFC underwriting committee may not commit to more funding. Obviously, this would be bad for both of our companies.” Claire implored.

Neither Chen or Lui An said anything.

Erik could see they were at an impasse.

“Would it be possible for someone to direct me to a private room so I can make a phone call?” Erik asked. “I would like to update my team in London. I won’t be long. Please excuse me momentarily.”

Erik was escorted down the hall to another conference room. This one was much smaller, but had a window looking down over the Huangpu river. The Huangpu divided Shanghai East and West. Across the river was the Bund, an older district of Shanghai. The sky was grey. It was often slightly grey.

Erik sighed, pulled out his phone and called Dwight. This was not going to be pleasant.

“Dwight, hi. It’s Erik”

“How’s it going? Not great. They raised the price and it’s not a misunderstanding. They say Rajiv never sent them a financial guarantee letter which was supposed to have accompanied East Africa’s deposit. According to CERS the contact terms lapsed. My guess is they are probably right.”

“I know. I can’t believe it either. I tried offering that we keep the old price, and make it up to them in Stage 2, but they didn’t bite.”

“I AM trying to sort it out. But this is Rajiv’s screw up. I don’t know what he was thinking. Maybe he was trying to keep the financial guarantee off the books so it wouldn’t go into the Central Bank of Kenya RWA calculation, but I don’t know. I’m just trying to guess why he would make such a massive screw up.

Dwight yelling in the background.

“I KNOW it’s a major problem. But remember we always said there would likely be surprises; things we wouldn’t find in the due diligence. Maybe this is just one of those things.”

Erik held the phone away from his ear as Dwight’s yelling got louder.

He had experienced this before and knew the pattern. Dwight was about to go into full erupt mode.

Erik continued listening with the phone away from his ear.

Erik started to frown.

“You want to get rid of Rajiv? And I’m supposed to run the bank? You mean the everyday stuff? The treasury?”

“I mean I guess I can do that. But wasn’t the original idea that Rajiv had experience running the bank, and had all the local connections? And we would just give strategic oversight from London?”

Erik listened.

“Yes, I know Rajiv is a fucker. OK.”

“Obviously, I’ll have to speak to Nicole about it. She will most likely be ok with it. Though I know for sure she won’t move to Nairobi. I’ll have to commute. We will work it out. In the meantime, what do you want me to tell the Chinese?”

More yelling from the phone.

“Tell them no deal and we’ll find someone else? Even though we have no idea who and the Japanese will be even more expensive?”

Erik leaned his forehead against the window and looked down at the river 83 floors below. The glass felt cool and nice on his face. It was early evening and small barges were floating coal down the river to a nearby terminal. Across the river there were the lights of cars driving along the Bund.

In the background Dwight was expressing how furious he was about Turkana Trust’s loan exposure to East Africa Rail. How he always knew this was going to be a problem and how angry he was for getting involved in Turkana Trust in the first place and how it was Erik’s fault for getting him into this.

Erik didn’t want Dwight to get any madder. He had to make this work out somehow. It couldn’t be yet another failure. Even if it meant moving to Africa.

“Yes Dwight. I know I got us into this.”

“I know it looks bad. I will find a solution. Somehow.”