End beckons for Indians at PanPaper

The Orient Paper Ltd — the Indian conglomerate that has had a stranglehold on the running of the Webuye-based Pan African Paper Mills in Western Kenya for the past 40 years — is facing its severest test ever, with relations between the company and the government at their rockiest.

The Daily Nation has learnt that Orient, the joint venture partner with the government in Panpaper, has given the government an ultimatum to either give Panpaper money and subsidies it has demanded by the end of this month, or kiss goodbye to its offer to make fresh capital injection into the company.

The Indian investors — who have been negotiating a revival plan for the troubled company with the government for the last three years — have demanded a wide range of concessions: A reduction of royalty on wood from Sh700 to Sh200; an increase in import duties on imported paper to 35 per cent; subsidised electricity; and an immediate injection of Sh500 million into the factory by the government.

Until recently, the government appeared willing to play along with Orient Paper. But opinions among top government officials would appear to have shifted rapidly, with key voices questioning whether it made sense to allow the Indians to continue managing the Webuye factory.

Hard-hitting letter

The change of mood in the government was captured by the sentiments of the permanent secretary in the Ministry of Industry, Mr John Lonyangapuo, who recently fired off a hard-hitting letter to Public Service Head Francis Muthaura, calling for the termination of the technical management agreement under which the Indians manage the factory.

The PS called for appointment of a new team to take over the management of the company for the next 12 months as the government sources a new strategic partner to buy off the Indian investors.

The Indians own 34 per cent of the company, while the government’s stake is 25 per cent. The rest of the shares are held by ICDC, East Africa Development Bank, Development Bank of Kenya and Barclays Bank Trust Investment Services.

Early this week, there was intense and widespread speculation that all the Indian expatriates working at PanPaper had fled the country and abandoned the company.

But the Daily Nation has learnt that the expatriates — including chief executive N.K. Saha, had been summoned to headquarters to brief the board of the company on its status, and that they were expected back soon. Under the technical management agreement under which the Indians manage the company on behalf of other shareholders, all key management positions are occupied by expatriates from India.

The agreement, which is due to expire in 2010, also allows the Indian investors to earn huge fees that are calculated on turnover instead of profits — implying that the fees must be paid to Orient Paper — regardless of whether the company makes profits. PanPaper has not made profits for the past 15 years. By 2000, the situation became so grave that the company started defaulting on servicing most of its obligations.

Power and control

In his letter, Mr Lonyangapuo charged that the management agreement was lopsided and gave Orient Paper too much powers and control, compared to other shareholders. “It was difficult to trust reports and assessments prepared by the company since the CEO and all the top managers were serving as both employees of the company and shareholders,” said Mr Lonyangapuo.

“Tenets of good corporate governance have not been embraced,” he said, adding that it was unfair to allow Kenyans working in the company to suffer in the hands of a minority whose management style left a lot to be desired.

The PS accused Orient Paper of shifting goal posts in rescue strategy negotiations with the government: “These people are not keen at all to participate in assisting the turning around of the company.”

As a result of the negotiations, the Cabinet in November, proposed a series of measures to turn around the company, listing a wide range of concessions and subsidies. But the ink had not dried on the paper when the Indian investors came up with a fresh list of concessions and subsidies.

For instance, they wanted the government to intervene and force the Kenya Revenue Authority to pay them outstanding value added tax refunds. And, they wanted the government to prevail upon the Kenya Power and Lighting Company not to disconnect the factory’s electricity and to provide the company with subsidised power.

While the Cabinet had proposed to reduce royalty on wood harvested from government forests from Sh1,200 to Sh700 a unit, they demanded that the price be reduced to Sh200 a unit.