The burning of money
 

By Nick Wachira

Financial Standard

2005

The process behind the introduction of new generation currency has been shrouded in high-level secrecy, controversy and speculation. However, as international minting houses battle for this multi-billion shilling note printing contract, we take you behind-the-scenes to see what really happens in the vaults of the Central Bank of Kenya and what this fuss is all about.

Deep inside the vaults of the Central Bank of Kenya building off Haille Selassie Avenue, three men are struggling to feed dirty cash into the Note Disintegration and Briquetting machines.

Just for show, 270,000 pieces of Sh50 denomination notes worth Sh13.5 million are about to be destroyed—or rather in technical terms they will be briquetted.

Hezron K. Mariwa, CBK’s director of currency operations and branch administration, has just signed the Certificate of Destruction of Currency Notes to authorise this little party. He also signs another document from internal audit, which shows that the BPS Note Processing Machine has noted a discrepancy of 10 notes worth Sh500, but otherwise everything is fine.

Every month, Mariwa says that CBK repatriates Sh1 billion from Uganda, slightly less than the amount of money from Tanzania and more from the region. Most of the repatriated cash and 10 per cent of the notes in circulation in Kenya end up on this machine—making it a major security installation in the country.

"Our currency has found its way into neighbouring countries through trade and the Kenya shilling is regarded as the dollar of the region," says Mariwa. "We must keep bringing the cash home because if we have too much of it out there, counterfeiters will catch up with us."

CBK used to repatriate the cash directly through the central banks of the respective countries, but these days, it is using commercial banks.

As Kenyans wait for the introduction of new generation bank notes—which will be equivalent in size to the US dollar notes and only featuring the portrait of the founding President Mzee Jomo Kenyatta—this machine is going to be very busy over the next five years.

Around 2.1 billion pieces of bank notes will be introduced into the economy during that period and the old notes will be destroyed and replaced with new ones.

This is the first time that Kenya has embarked on a project of such a magnitude and it has attracted a lot of scrutiny from the media and Parliament. This has encouraged CBK Governor Andrew Mullei to open the operations of the bank and in the process to The Financial Standard.

Though 10 people are here to witness the briquetting of the notes—half of them holding secret passwords required to operate the note destruction machine—security is mainly maintained by CCTV cameras and no guns are in sight. After all, figuratively speaking, this is Kenya’s Fort Knox (where the US stores its gold currency).

Previously, a contingent of heavily armed paramilitary troops used to guard a small note destruction exercise deep into the heart of Karura Forest. But these days, as Mariwa says, "soiled currency is destroyed online without the intervention of human operators here in Nairobi and at the branches in Mombasa and Eldoret as well."

Before these machines were installed, CBK branches used to destroy notes in the Kilns of Bamburi Cement in Mombasa and Chemelil Sugar Factory for Kisumu and Eldoret branches. A computer system known as Reports Management Unit at head office in Nairobi that is connected to all branches picks up, prints all data as they are processed and produces a summarised printout of the CBK’s cash balances at the end of the day. CBK now intends to set up eight currency centres as part of its "clean banknote policy". These additional centres will be located in Nyeri, Voi, Nakuru, Meru, Embu, Wajir, Kisii and Kakamega.

In addition to increasing currency outlets, Mariwa says that other important determinants of a successful clean banknote policy will be a review of the quantity and quality of banknotes provided, the determination of the level of economic activity and the distribution of commercial bank branches and the proximity of commercial banks branches to the CBK outlets.

Destruction of shredded, dirty and soiled notes is a major part of CBK’s currency stock management operations, both as a service and security issue. Each year, nearly 10 per cent of all bank notes received from commercial banks are highly soiled and must be destroyed.

In monetary terms, given that bank notes constitute Sh65 billion worth of currency, the soiled notes represent big money that could dangerously dent the integrity of Kenya’s buying power. Hence, the security around the operations. It estimated that it costs CBK between Sh7 billion and Sh10 billion to maintain and print new currency every year.

Kenya’s worth

As the Kenyan economy recovers, of particular concern is the amount of currency notes in circulation. At the moment CBK is circulating 193 million pieces of notes and 1.5 billion pieces of coins that both represent Sh155 billion worth of money. This is the cash that oils the wheels of the economy and money that Kenyans touch and smell everyday. If too few or too much of these notes and coins are printed or minted the economy can either be starved of cash or have too much money chasing few goods resulting in high prices for goods and services (inflation).

"The main challenge in stock management is to forecast the volume of notes and coins for each denomination required for issue into circulation on an annual basis," says Mariwa. Figuring this out is not an easy thing. The CBK, however, uses statistical forecasting and works out the notes re-order levels in order to ensure continued supply.

"The indicative lead time for De La Rue note production has been an average of 28 weeks," says Mariwa. Kenyan coins are minted in Europe.

The Kenyan currency that is in circulation now falls under the "1:2:5" crop of denomination mix popularly used worldwide. Denominations such as 25 cents and Sh2 have since been demonetised. The Sh40 coin—of which 1.6 million exist—that was issued last year to commemorate four decades of independence does not follow this matrix.

"One may wish to know how decisions are made to reach at these denominations," says Mariwa. "Strictly speaking, certain scientific models are employed with take into consideration purchasing power of citizenry, quantity of cash in circulation, proportion of cash payments, proportion of the highest denomination in the amount of cash in circulation amongst other variables." He says that the formation of the Kenyan currency approximates that of the Euro and the next denomination of banknote that CBK would wish to consider introducing is Sh5,000.

Road to new money

However, the secrecy around CBK’s currency stock management and the decision to introduce new generation notes to meet its new "clean banknote policy" has not shield this 40-year-old institution from speculation and controversy. This is especially after it short-listed Franscois Charles Oberthur Fiduciaire (FCOF) of France among the firms that were to bid for the currency-printing contract.

This led to summoning of Mullei by the Parliamentary Select Committee on Finance, Trade and Development. FCOF was last year at the centre of the Sh2.1 billion Anglo Leasing passport scandal storm and some Members of Parliament wanted the firm barred from bidding for work funded by taxpayers’ money.

However, despite the criticism, Mullei defends the thinking behind the new generation notes and the integrity of the bidding process. Indeed, the road to the new money and the "clean note policy" began a day after President Mwai Kibaki was sworn in as president. On January 1, 2003, even before the new government had been formed, a contract between Kenya and De La Rue became effective.

"The contract became effective when the Narc government was in power and should therefore have been consulted," Mullei told the Finance Committee.

"The contract was single sourced instead of being open for competitive bidding, as transparency would require. It was not clear to the new government why the contract was awarded in a hurry since the existing contract was to expire in May 2003."

These are the reasons that the Government advanced when it terminated the 10-year note-printing contract.

Consequently, says Mullei, CBK was authorised to renew the contract with De La Rue for only two years up to December 2004. This would ensure that there was adequate supply of notes, while arrangements were initiated by CBK for open tendering for the banknotes. De La Rue would also be invited to participate in the tender.

Prior to independence, the then East African Currency Board was responsible for the printing of common currency notes for the three East African Countries. After independence and establishment of Central Banks in the three sister states, the responsibility of printing currency notes was passed to the respective Central Banks. Mullei says the printing of Kenya banknotes had not been open to competitive tendering before the contract was cancelled. From 1966 to 1986, Wilkson & Bradbury, United Kingdom, printed Kenya currency banknotes. In 1986 Wilkson & Bradbury was bought by Thomas De La Rue & Company Limited, a leading banknote security printing company in the United Kingdom, which took over the printing of Kenyan currency.

De La Rue has been printing the Kenyan banknotes on the basis of agreement signed with the Central Bank. On October 8, 1991, an agreement was signed with the Central Bank appointing De La Rue as the sole and exclusive supplier of Kenya banknotes. De la Rue was in the process of putting up a Note Printing Plant in Kenya, which was also expected to service the region.

According to Mullei, the agreement with De La Rue required that the bank notes be produced in a plant in Kenya; the minimum order for Banknotes to be placed each year be 170 million banknotes; the validity of the agreement be 10 years with effect from May 3, 1993; the prices would be negotiated every two years based on average CPI in Kenya for printing and on average CPI in United Kingdom for the cost of paper. While the printing would be done in Kenya, the security paper would be imported from Britain. Prices were negotiated downwards in 1995, 1997 and 1999 during biannual reviews.

"The agreement did not provide for termination of the contract midway," says Mullei. "On December 5, 2002, the Central Bank of Kenya signed a 10-year agreement for the printing of banknotes with De La Rue. The banknotes were to be printed at the company’s plant in Kenya. If the plant was not able to meet the commitment, the shortfall thereof would be produced at any other facilities owned by the De La Rue Group of Companies."

The tender intrigues

According to Mullei, the Central Bank conducted extensive research to identify companies with appropriate competence that could be invited to tender for the printing of the banknotes. Ten companies were initially identified as major world players in the commercial printing of banknotes. Six were chosen to make presentations by the tender committee.

"The bank however considered it inappropriate to publicise the security features of the banknotes through invitation of public tenders," said Mullei. "In view of this, and in compliance with the Exchequer and Audit (Public Procurement) Regulations 2001, authority was obtained from the Minister of Finance to restrict invitation for this tender to internationally known banknote printing companies."

Following approval by the board, the six companies were shortlisted on account of their long experience and invited to make presentations to the board of directors and senior management staff in January 2004.

They included: Giesecke & Devrient from Germany for paper banknotes, Orell Fussli of Switzerland for paper and polymer banknotes, De La Rue Currency and Security Print Limited from United Kingdom for paper banknotes, Joh Enschede Banknotes from Holland for paper and polymer, Canadian Banknote Printing of Canada for paper and polymer bank notes, Note Printing Australia of Australia for polymer.

"Francois Charles Oberthur Fiduciaire of France and South Africa Banknote Company were considered, but not invited to make presentations," said Mullei. "The presentation by the six companies was intended to give board members and senior management staff a broad picture of the banknote printing process and covered among other things, the main advantages of the two materials (substrates) used in note production, that is, paper and polymer, types and different levels of security features, banknote sizes and denomination mix, as well as the advantages and disadvantages of multiple sourcing of banknotes. This would also enable the Bank to prepare the tender specifications."

Having considered the advantages and disadvantages of polymer and cotton substrate banknotes, Mullei says the Board of Directors decided that Kenya banknotes should continue to be printed on paper made from cotton substrate.

The tender document for the design, manufacture, printing and supply of New Generation Banknotes for the Central Bank of Kenya was presented to the 15th meeting of the Central Bank of Kenya Tender Committee that was held on December 14, 2004. Mullei told the Finance Committee "some critical decisions relating to the new generation Kenya banknotes had already been made."

Their decision was that: The banknotes will be in smaller sizes and colours already approved, the banknotes will bear the portrait of the first President of the Republic of Kenya Mzee Jomo Kenyatta, the notes shall be in series of Sh50, 100, 200, 500 and 1,000 denominations, the tendering for design, manufacture and printing of the new notes will be done in accordance with the existing procurement procedures and that tenders will be invited from some of the 10 companies that had been presented to the Board.

Because the board of directors of the bank had already resolved that Kenya banknotes would continue to be printed on paper of cotton substrate, Mullei says the Tender Committee decided that invitation to tender should only be confined to the four leading banknote printing companies, whose presentation to the board and senior management clearly indicated that they specialised in printing on paper.

The four companies selected were: Giesecke & Devrient of Germany, De La Rue Currency and Security Print Limited of the United Kingdom, Joh Enschede Banknotes of Holland and Orell Fussli of Switzerland.

"The Tender Committee recommended that although it had not been invited at the presentation stage," said Mullei, "the South African Banknote Company should also be invited to tender on the ground of being from the African Continent."

The committee considered the possibility of inviting Franscois Charles Oberthur Fiduciare, France.

"After deliberating at length, the committee noted that the company was not amongst those that had been invited for presentation to the board. The option of inviting Francois Charles Oberthur Fiduciaire was however left for consideration by the Government," said Mullei. "The tender would cover the whole process of design, printing and delivery of the banknotes, with the winner being awarded the tender for all the denominations, hence ruling out the possibility of multiple sourcing."

In view of the sensitivity and importance of the tender Mullei revealed that the Tender Committee held five subsequent meetings in December 2004 and January 2005. Then the four firms that were originally picked and the South African Banknote Company were invited to tender.

The tenders were floated on January 14, 2005 upon the expiry of the minimum period of 42 days required for international tenders under the Exchequer and Audit (Public Procurement) Regulations. The tender opening date was set for February 25, 2005.

However, at the request of one of the tenderers, the tender submission date was changed to March 30, 2005. The Government was widely consulted on the process. However, despite the earlier advise by Tendering Committee that Francois Charles Oberthur Fiduciaire did not qualify to bid because it had been excluded earlier from the process, Mullei’s testimony before the Parliamentary Committee on Finance did not make it clear when the advise was revised. The decision to kick out the South African firm was also not adequately explained.

"It was decided to invite Francois Charles Oberthur Fiduciaire on account of being one of the major Banknote printing companies in the world," said Mullei. "South Africa Printing Company was left out since it only prints currency for the Reserve Bank of South Africa." That did not go down well with the critics of the Government’s corruption record. The other aspects of the process were not attacked as much. The tenders were opened on April 12, 2005.