Ideas & Debate

Kenya’s paper tax has political underpinnings

PAN

Pan African Paper Mills factory in Webuye. Kenya’s decision to break ranks with EAC Council of Ministers’ recommendation of a 10pc tariff on imported paper was all about softening the ground for the Rai Group to acquire the firm. PHOTO | FILE

A punitive tariff on duty on imported paper and intrigues in sugar milling sector not done for greater good of the economy.

Kenyan industrialists are pushing back against an increasingly emboldened bureaucracy that appears to be bent on making major policy changes without stopping to think about the possible impact on ordinary citizens or productive sectors of the economy. 

That fight went public last week when the association of manufacturers petitioned President Uhuru Kenyatta over the emerging aura of uncertainty in the business environment and its negative impact on productivity and growth. 

“We need policy stability. Do not allow public servants to make policy changes without consulting the industry,” Prandeep Paunrana who chairs the Kenya Association of Manufacturers (KAM), told Mr Kenyatta during the official opening of the lobby’s new headquarters building.

Mr Paunrana made an emotional plea, narrating to the president how, despite the East African Community’s (EAC) Council of Ministers’ meeting in Arusha having unanimously agreed to keep the import duty tariff on paper at 10 per cent, Kenya had chosen to break ranks with the rest to unilaterally introduce a 25 per cent tariff on imported paper.

As a consequence, Mr Paunarana lamented, paper converting and packaging companies in Kenya have found themselves at a big competitive disadvantage compared to their East Africa counterparts.

Cheaper in Dar

To drive his point home, he gave Mr Kenyatta the example of East Africa Breweries Limited.

“The beer maker, which is a big consumer of paper labels, now finds it cheaper to print labels in Dar es Salaam rather than buy from local manufacturers in Nairobi’s Industrial Area,” he said.

After listening attentively to the lamentations of the chairman of the influential manufacturers’ lobby, Mr Kenyatta promised to look into the matter.

Several questions arise. What national interests were so crucial to the government as to cause it to break ranks with the decision of the EAC Council of Ministers?

Unknown to most of the industrialists gathered at the presidential function, it all had to do with the shenanigans surrounding plans to sell the troubled Pan African Paper Mills (PanPaper).

Here is the background to the whole saga. Early this year, the government-appointed receivers of PanPaper, Messrs Ian Small and Kieran Day of the insolvency practice Begbies Traynor (East Africa), prepared a sales memorandum and advertised the company’s assets for sale to local and international investors.

As it turned out, two companies, namely, Juja Pulp and Paper Mills Ltd and T.S. Rai Group Ltd made it to the shortlist of potential buyers. The Rai Group Ltd emerged as the top contenders with an offer of Sh1.1 billion.

But Rai’s offer came with several demands and conditions.

First, the group, which is the largest timber merchant in East Africa, demanded a licence that gives it access to timber from government forests.

Secondly, and most significantly, the Rai Group demanded that the government must increase duties and tariffs on paper products — a demand whose aim is to shield the rusty factory it is buying from competition.

Finally, the group demanded several licences from the National Environment Management Authority (Nema).

Apparently Kenya’s decision to break ranks with the EAC Council of Ministers’ recommendation of a 10 per cent tariff on imported paper was all about softening the ground for the Rai Group to acquire PanPaper.

It would appear that in negotiating with the Rai Group, the government did not consider the implications its actions would have on the packaging industry which employs an estimated 15,000 workers.

Neither were the macro-economic outcomes of such a policy change considered.

The new 25 per cent duty on imported paper means that prices of local packaging material must go up, triggering upward movement in the prices of essential products such as maize, wheat flour, bread, food and beverages, books, pharmaceuticals and tea.

Also completely ignored were the implications on the competitiveness of local paper converters, especially in the context of the East African Community and the Common Market for Eastern and Southern Africa (Comesa).

Mark you, Tanzania is able to import paper from the Southern African Development Community (SADC) at zero duty while Uganda applies Comesa rates of 10 per cent on imported paper.

All other countries in Comesa are at a duty rate of 10 per cent except Kenya. Observers attribute the developments to the lobbying skills and influence of the Rai Group.

One of the largest private conglomorates in East Africa, the Rai Group also has extensive interests in the sugar sector. In Kenya, the group has a controlling interest in the West Kenya Sugar Company in Kakamega and Sukari Limited in Homa Bay.

In addition, the group holds sugar milling licences in two locations in western Kenya — one within the Busia sugar belt and for Bili Bili in the Bungoma sugar belt.

In Uganda, the company bought Kinyara Sugar Mills located in the western part of the country.

Such has been his influence that until recently, Mr Rai sat on the board of the defunct Kenya Sugar Board as a representative of sugar millers. He also served on the board of Kenya Forest Service as a representative of the timber millers and merchants.

Political fortunes

In Kakamega, the Rai Group has been engaged in a do-or-die court battle with Butali Sugar Mills and against the backdrop of major political overtones.

When Deputy President William Ruto visited Butali recently, it was widely interpreted as a sign of the resurgent political fortunes of the Kisumu-based owner of Butali.

The fact that political undercurrents are at play in the perennial battle between the two protagonists is exemplified by the involvement of big time politicos in functions staged by the companies.

For example, the ground breaking ceremony for Butali was officiated by former President Mwai Kibaki in December 2007.

The then Prime Minister Raila Odinga handed over an operating licence to the company at a state function in February 2011. A dissatisfied Rai Group went to the Court of Appeal to challenge the decisions.

In September this year, the Court of Appeal ruled that Butali’s licence was not valid and ordered the Kenya Sugar Board to process Butali’s licence afresh.

West Kenya is opposed to the existence of Butali, claiming that the competitor has encroached into its catchment area. Supporters of West Kenya insist that following the Court of Appeal judgement, Butali was operating illegally. Well, that was until Butali pulled in Mr Ruto — just to show their enemies whose backing they have.