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Corporate

How President Kenyatta brokered Sh500m Mumias bailout

Mumias Sugar factory. The sugar farmer in the Mumias zone has been subjected to many forms of exploitation.
Mumias Sugar factory. The sugar farmer in the Mumias zone has been subjected to many forms of exploitation. FILE PHOTO | NATION MEDIA GROUP 

The Treasury’s decision to bail out ailing Mumias Sugar Company on Friday was the result of President Uhuru Kenyatta’s intervention to stave off a looming economic and political fallout from the impending collapse of Kenya’s biggest sugar miller.

The Kakamega-based miller is set to get Sh500 million two months after Mr Kenyatta met a group of Western Kenya politicians in behind-the-scenes negotiations. 

Lugari MP Ayub Savula said the leaders took the extra-ordinary step to prevent the collapse of a company that is the centre-piece of Western Kenya’s economy.

“The company was on the verge of collapse, forcing us to take desperate measures,” said Mr Savula, who was part of the delegation that sought Mr Kenyatta’s intervention at State House last year.

Mumias accounts for 30 per cent of locally produced sugar, meaning its collapse would deepen the country’s dependence on imports.

The miller had 1,689 permanent employees as of June last year, besides the hundreds of thousands of jobs it supports in the sugar belt.

Besides, more than 130,000 Kenyan investors risked losing their combined shareholding of more than 50 per cent as the company teetered on the edge of insolvency.

Taxpayers also faced huge exposure in the event that the sugar firm collapsed arising from the government’s ownership of a 20 per cent stake.

This is the reality that prompted Mr Kenyatta into asking Agriculture secretary Felix Koskei to craft a rescue plan for the miller.

Observers also reckon that a Mumias bankruptcy would have devastated western Kenya’s economy that is still reeling from the failure of other major employers, including the Webuye-based Pan Paper Mills.

Mr Kenyatta was, however, clear that any relief from the government must come with a clear turnaround strategy to safeguard public funds.

The bailout announced on Friday, however, represents only a fraction of what the miller’s management and the 16 leaders from western Kenya had asked for at the crisis meeting.

Mr Savula said that the group had requested for a Sh2.4 billion cash injection to be disbursed in several tranches. It is therefore expected that the balance will be released in the next two months.

Mumias on Friday said it had embarked on an intensive vetting exercise that will require some employees to apply afresh for their positions. The company’s chairman Dan Ameyo said the vetting was part of the effort to reduce its wage bill and the cost of operations.

Mr Ameyo said Mumias had developed a new organisational structure in a bid to revert to profitability even as he insisted that those who brought the company to its knees would be prosecuted and the stolen money recovered.

Mr Koskei did not respond to our text messages by the time of going to press. Treasury secretary Henry Rotich, who was involved in the bailout plan, could not be reached as his mobile phone went unanswered.

The loan, which comes with a grace period, was approved to forestall auctioning of the company’s assets by creditors whose patience was running out.

A source at Mumias said the company had sought a prolonged repayment period to help it invest in its operations and improve its financial health.
Mr Koskei attributed the miller’s troubles to poor corporate governance that led to fraudulent practices by its management.

Mumias last year sacked its CEO Peter Kebati and commercial director Paul Murgor after an audit report allegedly implicated them in illegal sugar imports that cost the company Sh1.1 billion.

“As a government we will not watch as they walk free and enjoy ill-gotten wealth,” Mr Koskei said in a statement, noting that legal actions to bring the suspects to book had been instituted.

“Despite these difficulties a review of the company’s prospects indicate that its fortunes can be turned around and that with proper management it is a cash-positive company.”

Mumias on Friday advertised 10 top positions, including that of chief finance, factory, and supply chain services officers as part of a commitment it had made to shake up its management.

It also emerged that Mumias had merged some senior positions to cut its administrative costs.

Coutts Otollo, the chief executive, declined to comment on the restructuring process. The bailout is expected to be supported by other measures to have a major impact on the loss-making firm that had a negative cash flow of Sh1.3 billion at the end of June last year.

Mumias recently said it was in discussions with seven banks it owes about Sh6.5 billion to restructure the debts, including deferral of payments for at least one year and extension of the repayment periods.

Mumias plans to spend the Sh500 million on operating expenses, underlining the difficult financial position it has been facing in recent months.

The miller has been consuming more cash than it generates, leading to large losses and making it difficult to service debts.

The company’s losses increased by nearly two-thirds to Sh2.7 billion in the year ended June 2014 as the cost of sales rose 17.6 per cent to Sh12.2 billion.

Sales grew at a slower rate of 9.3 per cent to Sh13 billion as administrative costs increased 16.5 per cent to Sh3.2 billion, further thinning out the profit margins.

Mumias is relying heavily on its fixed assets — including land and equipment — to support a positive net worth.

The company’s net assets stood at Sh10.6 billion in June 2014 as the fixed assets amounting to Sh18.8 billion helped offset Sh12.9 billion in liabilities.

News of the bailout sent the miller’s share price up 5.4 per cent to Sh2.90 on Friday, breathing life into a stock that has recently attracted speculators betting on a government rescue plan.

Like other sugar firms, Mumias has high inefficiencies that have made it difficult to compete against low-cost producers in Africa, Brazil and other markets.

It remains to be seen whether the local millers will be protected yet again from cheaper imports from the Common Market for Eastern and Southern Africa once the current safeguards elapse this month.

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