The Safaricom Fraud Files : The Ellams and Sintel Scandal

Safaricom CEO, Bob Collymore

1. Introduction and Background

Ellams Products Limited has been the sole supplier of Prepaid Recharge Vouchers to Safaricom up until 11th September 2012 when Safaricom entered into a contract with a competitor, Sintel Security Print Solutions Limited (Refer Appendix 1-Contract with Sintel). The additional supplier was to enhance competition by driving down the cost of prepaid recharge vouchers and also be an alternative supplier (and reduce reliance on Ellams) as part of Safaricom’s business continuity plan.

There has been a previous case of conflict between Ellams and Sintel. The bone of contention then was a certain Mr. Devaraj Malarmesai Bagavan, a former production manager (2003 – 2007) at Ellams. Mr. Bagavan was deported from Kenya by the management of Ellams around June/July 2007 because he was alleged to have been looking for alternative employment, among other reasons. He was recalled back into the country by his current employer Sintel Security Print Solutions in late 2010. He became the production manager at Sintel Print Solutions which commenced operations in late 2011. In January 2012, the Immigration office is said to have cancelled his work permit without notice or reason and asked his current employer to buy him a ticket back to India within eight days. However, this order was never implemented and was challenged in court by Devaraj. Sintel Security Print Solutions was later enjoined in the suit (Refer Appendix 2–Investigation Report).

Bipin Vohra, a director of Sintel Security Print Solutions Company Limited, reported several allegations alluding to preferential treatment that was being accorded by our Supply Chain departments to its sole competitor – Ellams Products Limited. These allegations are;

1. That Ellams’ contract allows a variable price based on quantities ordered and is being used to their advantage unlike Sintel’s price which is fixed irrespective of quantities ordered.

1. That an order to Ellams in Jan/Feb 2014 was cancelled and replaced with a similar one with higher prices.

1. That Sintel was not invited for supply of sim packs yet 23 other firms including Ellams were invited.

1. That Sintel was being denied access to certain members of EXCO including Peter Arina and as result are not able to air their grievances.

1. Objectives

We launched an investigation into these allegations. Our objectives were to determine the merits or demerits of these allegations.

1. Detailed findings

1. Pricing in contracts

1. 1 October 2012 to 30 September 2013

Sintel’s contract price is quoted in US dollars. For the purposes of comparison, we have used an average exchange rate of USD 1 = KES 85. The comparative prices charged by Ellams and Sintel between 1 October 2012 to 30 September 2013 are illustrated in table 1 below:

1. From October 2013

Sintel’s contract price is quoted in US dollars. For the purposes of comparison, we have used an average exchange rate of USD 1 = KES 87. As per the respective contracts with Safaricom, the comparative unit prices (in KES) for both Sintel and Ellams as from October 2013 for recharge vouchers are illustrated in table 2 below:

Ellams agreed price is graduated to decrease as the order quantity (volumes of PINs per month) increases. The prices in the table marked in red indicate the price levels at which Ellams’ is more expensive than Sintel’s.

1. Monthly effective prices

We carried out an analysis of the monthly order prices for the two suppliers for the last one year as detailed in table 3 below. The instances where Ellams’ price was lower are highlighted in green.

Generally, Ellams has been charging a higher price than Sintel upto August 2013. For instance for the RV 1000, Sintel price is lower than that that of Ellams at whatever quantities ordered.

1. Potential Savings

We computed the potential savings to Safaricom if the orders to Ellam were instead given out to Sintel at the average prices for the respective months. From our computation, Safaricom could have saved Shs 26,318,867.45 since October 2013. The details are contained in the table 4 below:

1. Incorrect price applied on Ellams’ orders.

As per the contract, Ellams’ agreed price is graduated to decrease as the order quantities (volumes of PINs per month) increase. We noted instances where the price applied was either above or below and as a result, Safaricom paid an extra Kshs 12M. The details are illustrated in table 5 below:

1. Orders ratio

In the Contract Renewal for the supply of Secure Pre-paid Vouchers and other Material signed 5 Dec 2012 (Refer to Appendix 3), it was argued that Sintel did not have capacity to deliver all Safaricom’s requirements. It further stated that Sintel were importing 2 more machines to make a total of 5 to have a capacity of 7-8 million PINs per day……therefore Safaricom could  drastically reduce reliance on Ellams to optimize cost. It was proposed that the following order ratio in Table 6 should be applied.

We analysed the monthly quantities ordered from the two suppliers as shown in the table 7 below:

Sintel’s April 2014 order was done in March 2014

We noted that the quantities were as per the sign off, except for August 2013 and November 2013. In August this is as a result of Ellam’s order of 147,560,000 PINs was partly cancelled while in November 2013, there is a PO number 164301 which was issued to Sintel at prices 6 times lower. This particular PO was conspicuously missing from the list of PO presented by Sintel in their protest documents. This order was also over and above the quantity that was approved for the month of November 2013 in the sign offs.

We also analysed the ratio of total orders placed for the last one year (May 2013 to Apr 2014) and the monthly average order per denomination as detailed in the table 8 below:

Bamba 10, 20 and 50 are the highly ordered denominations accounting for 95% of the quantities ordered.

1. Delivery

We compared the quantities ordered vis-à-vis quantities delivered as contained in table 9 below:

1. Alleged cancelled order in January 2014

We found only one Ellams order (PO 167733) in January 2014 and it was not cancelled.

We noted two cancelled orders done on 2nd April 2014(PO 172301 & 172303) which were re-done again on 9th April 2014(PO 172818 & 172845). The additional orders were done at an additional cost of Kshs 13,756,000 as contained in table 10 below:

1. Sintel not invited to tender for supply of simpacks

Sintel alleges that it was not invited to tender for the supply of SIM Card packaging. Sintel were not prequalified for supply of SIM packs.

1. Sintel was finding it difficult to air these allegations to members of EXCO

The fact that these allegations have finally been received and are now being investigated waters down this allegation.

Draft Report – Sintel_210514 by Cyprian Nyakundi on Scribd