PanPaper Mills: A study in how not to revive a firm in financial distress

Tuesday November 18 2014

PanPaper in Webuye was placed under receivership in 2009. FILE PHOTO |

PanPaper in Webuye was placed under receivership in 2009. FILE PHOTO | NATION MEDIA GROUP

By JAINDI KISERO
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I think that the fate of the Pan African Paper Mills, better known as PanPaper, until recently the largest paper maker in East Africa, is still a big story. Here is why.

First, because of the social misery that its imminent demise is sure to visit on hundreds of families and businesses, not only in the Webuye area but also on the economy of western Kenya in general.

Secondly, it is a lesson in how the people we entrust with the responsibility of negotiating with foreign investors on our behalf routinely cede our long-term strategic interests.

We allowed the Birla Group of India to skim surpluses from the company for years without committing new capital, and then to flee, leaving behind a heavily indebted company.

Thirdly, PanPaper’s fate is a compelling story about how vultures will hover around a carcass to take advantage, especially after the government has announced that it is going to pump in money to revive a dying company.

Fourthly, it is a compelling lesson in how receivers have mastered the art of deception, pretending to be solving a problem when their true intention is to hang on and make money by charging fees.

ACRIMONIOUS PARTING

I will start with the latest news. From what I gather, Mr Ian Small and his partner have resigned from being the receiver managers of the company.

Mark you, Mr Small and his partner have been running the company for six years.

The public was made to believe that the receivership was part of a plan to revive the plant.

What I hear from the grapevine is that the parting of ways with the government has been acrimonious.

Just why have the receiver managers resigned? Here is the background to the saga.

Early this year, the receivers prepared a sales memorandum and advertised the assets of the company for sale to international investors.

Months later, they submitted a report to the government, recommending one of the bidders as the best candidate to purchase and revive PanPaper.

The difficulty arose when the receivers insisted that the proposed buyer be given major sweeteners, including access and approval to harvest timber from government forests at subsidised rates.

From what I gather, the receivers wanted an arrangement where the forest licences would be part of the sale agreement between the government and the buyer.

As it turned out, the Ministry of Industrialisation disagreed, accusing the receivers of unduly exerting pressure on the government to grant concessions to the proposed buyer.

The ministry argued that the process of seeking the forest licences and approvals had to follow due process. Mr Small resigned.

NO TRANSPARENCY

In retrospect, the process of reviving PanPaper has been a complete disaster.

From the outset, there was no transparency. We allowed lawyers and receivers to take us around in circles for far too long.

In the initial stages, the government gave a whopping Sh2 billion to the Ministry of Industrialisation for the purpose of reviving the plant.

That money was deposited in a special account and ring-fenced against being spent by the ministry on any other activity.

More millions were released to the company for trial production runs “to keep the plant busy and operational and to prevent the machines rusting from disuse”.

At one point, the government was forced into an agreement that took away VAT refunds running into hundreds of millions of shillings owed to Panpaper by the Kenya Revenue Authority to a group of short-term lenders.

In addition, the government signed an agreement under which it transferred all the debts owed to PanPaper to short-term lenders.

On top of it all, the government paid the lenders Sh400 million in cash.

What lessons have we learnt? The biggest is that if you want to revive a company, placing it in receivership may not be the best option.

Receivers are not trained to revive troubled companies. The exception, of course, is the case of Uchumi Supermarkets Ltd, which was brought back to life by receivers through a protective receivership bankrolled by the State with the full support of the company’s shareholders and suppliers.

You only appoint a receiver of Mr Small’s ilk when your intention is to realise securities to recover your debts, not to revive a company.

Poor western Kenya. It sure is going to have yet another white elephant.