Pan Paper in SH9BN debt

• Audit shows how Indian managers left the company to sink in red ink and turned it into an economic disaster
• From bosses who double-paid themselves to shrinking raw material, a government audit shows how the Indian managers watched as the company withered

The mood in Webuye is as foul as the smoke the Pan Paper factory emits. Since machines stopped last year after power was switched off over unpaid bills and other debts, residents are reluctantly learning to live without the economic engines they so relied on that the pollution didn’t really matter.

Yet the revival of Pan African Paper Mills has become such a hot issue, delaying hopes of getting the town back to its feet. For politicians with eyes on voting numbers, it cannot be left to die, but development experts say it’s an economic disaster.

The company is under receivership with an outstanding Sh9 billion debt. Its majority shareholder, Birla Group (54.3 per cent) has already left Kenya for India, leaving the webuye-based factory without top management. They had managed the company, through Orient Paper Industries of India, since 1970 earning a fixed annual fee of $1.2 million (about Sh96 million) paid in dollars.

According to a report prepared by a committee appointed by the government to evaluate the status of the company, the Indian management company was paid even when thre was nothing to show for it by Pan African Paper Mills (EA) Ltd managers.

“There was no evidence of set benchmarks against which to measure performance as the company has never had a strategic plan,” the report filed with the Ministry of Industrialisation on April 14, 2009 states.

Local companies have for years been forced by the government to buy paper from Pan Paper at high prices. In fact, Kenyan companies importing paper had to pay 25 per cent more duty than their counter part in Tanzania and Uganda to protect Pan Paper from cheap imports. And a year after the collapse of the mill, a struggling economy is still paying the price of its inefficiencies.

The Kenyan poor were worst hit by efforts to keep Pan Paper alive. The Kenya Association of Manufacturers says the prices of goods packed in paper bags – such as maize meal, sugar, cooking fat and oil, soaps, detergents – which forms the biggest budget for the poor, are up because of the extra duty on imported paper.

“Kenyan paper converters are currently operating on an uneven playing field where Tanzanian businesses are importing paper at zero per cent duty from South Africa while Uganda levies zero per cent on all their industrial raw materials including paper,” KAM says.

The Indian managers were on the Pan Paper Mills payroll as well, “which could be a clear case of double payment,” according to the report.

Orient also enjoyed additional fees pegged on sales and net profit.

The Indians left a month after realising that they had run down the company to the point where they could not even pay Kenya Power and Lighting Company for power consumed. In January 2009 KPLC switched off electricity supply over an unpaid bill of Sh201 million.

That triggered a chain reaction, which saw short-term lenders – including Kenya Commercial Bank, Barclays Bank Kenya, Ecobank Kenya and Bank of Baroda Kenya – place the company under receivership in March last year.

They are jointly owed Sh1.4 billion with the balance of Sh9 billion owed to long-term lenders and suppliers. Supplies too are getting impatient.

In November 2009, KenolKobil moved to court seeking orders to have the company’s assets sold over failure to pay Sh530 million for supply of petroleum products.

“Pan Paper Mills’ ability to carry the existing total debt is clearly in doubt,” the report says.

Since 2001 Pan Paper has not repaid any of its debts, while it stopped paying interest on loans in 2005. But it is not just money that ails the Pan Paper.

By the time of closure, production is said to have declined from a high of 8,000 to about 3,500 metric tonnes per month in January 2009 against the factory capacity of 10,000 metric tonnes.

Then shortage of raw material. In a 2006 analysis to help the company source for credit, CfC Stanbic Financial Services said out of the 25,000 hectares of Pulpwoods plantation that is exclusively reserved by the government for use by Pan paper only 8,000 hectares were available as wood harvest is restricted to trees that at least 18 years old. Additional acreage would only be available in 2013.

“In our view the current licence and felling plan regime may not be in the best interest of Pan Paper and therefore need to be revised to ensure fair equity,” CfC, now CfC Stanbic Financial Services, said in its report.

Regional competitiveness is also an issue. Pan Paper pays Sh700 per cubic metre in royalties to the Government of Kenya in return for the exclusive right to harvest trees. Mufundi Paper Mills, its competitor in Tanzania pays only Sh175.

“In this respect a competitor of Pan Paper based in Tanzania has competitive advantage over Pan Paper in terms of cost of wood,” CFC Financial Services.

The expected Common Market in which the five East African Community member countries can trade freely will mean Pan Paper has no chance of surviving. In spite of this the government, seeking to score political points, wants to revive the factory, with Ministry of Industrialisation saying Treasury has set a side Sh500 million.

“After serious deliberations on the matter, the government has decided to revive the operation of Panafrican Paper Mills,” Prof John Lonyangapou, the permanent secretary of Industrialisation, said in a letter to short- term lender ordering them out of the company.

The government is a minority shareholder with 34 per cent, with majority owned by the Indian company.

There are political and social considerations in the push for revival, inspired partly by the patriotism that powered Uchumi Supermarket’s comeback.

But there are other reasons that make more economic and social sense. Killing the milling company, for example, would mean closing down Webuye town, whose economic activities are highly dependent on factory and sending away over 60,000 people to the throes of poverty.

With the factory closure about 1,300 workers are jobless and over 30,000 more who were indirectly benefiting from the paper mill economy are now destitute.

“Loss of jobs places serious strain on many households and could also pose security risk at Webuye and the neighbourhood,” the government says.

The factory also maintains a whole chain of education institutions from pre-primary to secondary schools and medical institutions that service the people of Webuye, the larger Western Province and places like Kaptagat and Timboroa.

Its death would mean either the government takes up the funding or kill a whole ecosystem with great political repercussions. The plan, the government says, is the to revive the company to prepare it for sale to a strategic partner or to the public through an initial public offering.

The revival is premised on four assumptions. One, that government will consistently and adequately supply wood to the factory, maintaining the Sh700 per cubic metre charge in royalties.

Two, suppliers agreeing to support the revival by delaying demand for payment and both short term and long-term lenders undertaking not to attach company assets.

“We consider the issue of financial restructuring as extremely critical to achieving success in any turnaround strategy,” the government report says.

But the lenders are growing uneasy with the way the Ministry of industrialisation is treating them. Since placing the company under receivership, they have been trying to negotiate with the government but, they claim, it is playing hard ball.

In one of the responses to the short-term lenders’ offer, Prof Lonyangapou says: “Proceed and remove assets under their mandate, …from the factory premises so that all the remaining assets are prepared in readiness for the revival of the factory.”

But according to the short term lenders, the assets they have are valued at slightly over Sh1 billion against their outstanding debt of Sh1.2 billion.

Their debt will thus not be satisfied and they are bound to push for more. This would trigger panic among the trade creditors who are owned Sh2.7 billion. A sale by short-term lenders would give KenolKobil justification to have the company assets sold to satisfy its debt.

wkangaru@nation.co.ke