State Department for Water and Sanitation Principal Secretary Julius Korir faced tough questions from the National Assembly Public Accounts Committee (PAC) over the rising cost of the multi-billion-shilling Mwache Multi-Purpose Dam project after the Auditor-General raised concerns about costly price adjustments and the risk of further cost overruns.
Korir appeared before the committee to respond to audit queries contained in the Auditor-General's report for the 2023/24 financial year, where lawmakers sought an explanation for hundreds of millions of shillings paid to the contractor through contract price adjustments.
According to the audit report, the State Department reported Sh2.35 billion under acquisition of non-financial assets during the financial year, with Sh1.54 billion spent on construction works for the Mwache Dam project and other civil works.
The Auditor-General, however, questioned the implementation of the flagship project, citing significant increases in payments arising from contract price adjustments.
The report shows that the contract for construction of the Mwache Multi-Purpose Dam was awarded to an international contractor at a cost of Sh13.75 billion. By June 30, 2024, the government had paid the contractor Sh4.28 billion for certified works.
Included in the payments was Sh356.38 million in claims resulting from price and cost adjustments under Clause 13.8 of the contract. The clause allows payments to be revised to account for changes in labour costs, construction materials and other project inputs during implementation.
However, the Auditor-General found that claims included in certified works amounting to Sh1.15 billion exceeded the contractual ceiling for price adjustments by Sh70.03 million.
The report noted that while the contract allowed price adjustments equivalent to Sh286.35 million, the payments exceeded that limit, raising concerns over compliance with the Public Procurement and Asset Disposal Act and the terms of the contract.
Auditors also faulted the ministry for failing to demonstrate measures to prevent further escalation of project costs during the remaining implementation period.
"Management did not explain measures being taken to forestall further cost adjustments over the remaining contract period and as a result of the price adjustments, the Project may incur cost overruns leading to wastage of public resources over the Project period," the Auditor-General stated.
The findings prompted members of the Public Accounts Committee to question whether sufficient safeguards had been put in place to protect public funds allocated to the project.
In response, the State Department defended the adjustments, saying they were provided for under internationally recognised engineering contract standards used in major infrastructure projects.
Korir's team told the committee that the project is being implemented under the FIDIC Conditions of Contract for Construction, a framework commonly adopted for projects financed by Multilateral Development Banks.
According to the ministry, "Clause 13.8 in the General Conditions of Contract provides that, the amounts payable to the Contractor shall be adjusted for rises or falls in the cost of labour, goods and other inputs to the work, by the addition or deduction of the amounts determined by the formulae prescribed in this sub-clause."
Officials said the contract includes a structured price adjustment mechanism designed to help both governments and contractors manage inflation and fluctuating market prices during long-term projects.
"The Contract has a structured price adjustment clause where projects spanning years can manage financial uncertainty. This mechanism allows contractors and clients to share the risks associated with fluctuating prices, ensuring projects are completed within reasonable financial constraints and timelines," the ministry explained.
The State Department further said the adjustments are calculated using predetermined variables, including changes in the cost of cement, reinforcement materials, labour and fuel.
"For Mwache project, the price adjustment clause allows for the modification of contract prices based on changes in predetermined factors, i.e. material costs (cement and reinforcement), labour rates, and fuel prices," the response stated.
Despite the ministry's defence, lawmakers are expected to continue examining whether the payments complied with procurement law and whether adequate controls exist to prevent further increases in the project's cost, as the Mwache Multi-Purpose Dam remains one of the government's flagship water infrastructure investments.