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.