Government changes tack in effort to revive Pan Paper MillsWednesday August 28 2013
Nearly five years ago, many people in western Kenya were left crestfallen after the once-vibrant Pan Paper Mills collapsed under huge debt.
The closure of the factory in 2009 meant economic disaster particularly for thousands of employees and residents of Webuye township in Bungoma County, who heavily dependent on the paper mill for their livelihood.
From empty shop shelves to deserted rental homes, the economic impact of the shutdown was devastating.
Today, the government is hoping to revive the mill and restore Webuye’s economic fortunes that continue to deteriorate ever since the giant machines went dead silent.
Interestingly, it is Ian Small who will once again lead the fresh turn-around efforts after his unsuccessful stint at the helm a few years ago. The factory collapsed under his watch as receiver manager, prompting some critics to question the rationale of retaining him in the position.
Industrialisation secretary Adan Mohamed, however, said the government will employ a new strategy for the revival of Pan Paper Mills and defended the retention of the receiver manager.
“I know Pan Paper has been under receivership before, but this time round we will be doing things differently to ensure its full revival,” he said adding that the government was banking on the receiver manager’s experience.
(READ: State picks Pan Paper receiver manager)
A key shift in strategy is that the State will now play a bigger role in the acquisition of logs for conversion into paper and paper products.
“We will have to acquire the licences for the potential investor to access the raw materials in the forest with ease and we will also have to ensure that all the title deeds for the land owned by the factory are in order,” the minister said.
He argued that the title deeds and logging licenses would act as an assurance of the government’s commitment to the success of Pan Paper, which is vital in winning over strategic investors.
Previously, Pan Paper managers faced frustration in acquiring rights to harvest wood. Insiders say some influential players in the logging industry and their allies at the Kenya Forestry Service (KFS) frustrated Pan Paper’s efforts for fear that it would heighten competition for the country’s dwindling wood supplies.
The situation was worsened by a government ban on logging, with cartels going full throttle to protect their territories from perceived intruders. This left Pan Paper with small and costly supplies of raw material that could not sustain viable operations.
Lack of title-deeds for the land on which the factory sits further raised the risk profile of the venture, putting off investors.
Mr Mohammed said a negotiated deal to have Mr Small as the sole receiver manager for both short and long-term lenders, who are owed a total of Sh5 billion by the collapsed firm, would boost its revival.
“The fact that we have managed to bring together all the lenders to appoint one receiver manager is a milestone in itself because this is the key process towards the revival of the factory,” said the minister.
He said previous feuds between long and short-term lenders over the management the plant frustrated revival efforts. While Mr Small represented the short- term lenders, the long- term loaners insisted on having their own appointee take over the day-to-day functions of Pan Paper.
The long-term lenders hold securities on the land on which the Pan Paper factory is built and the plant and equipment. Creditors in this category include the International Finance Corporation (IFC), Deutsche Bank, PTA Bank and the East Africa Development Bank.
The list also includes Kenya Commercial Bank, Development Bank of Kenya and Proparco.
The short-term lenders on the other hand hold securities over floating assets which include paper in the stores, trade creditors, tax credits and refunds and include Eco Bank, Bank of Baroda and Barclays Bank.
Dr Muliaro Wafula, who headed a task force appointed by the government in 2011 to advice on the viability of reviving Pan Paper, said the new strategy aimed at easing the sourcing of raw material would help attract strategic investors since the machines at the factory are in good working condition.
“We ran it for three months as we assessed its potential as members of the task force and I can confidently say it is still a viable project,” said Dr Wafula.
“We were able to produce papers of the highest quality during that period and met the required orders,” he added.
But he challenged the government to address the issue of costly and unreliable power supply that could jeopardise the revival of the factory.
“We realised that power and transport were the biggest burden that the factory was struggling with to stay alive and we recommended that the plant should establish its own electricity from the available sources in the area in order to cut down on cost,” he said.
A part from the amount the factory owed its creditors, Pan Paper had also accumulated power bills amounting to about Sh150 million, which it could not pay.
Bungoma governor Ken Lusaka said the change of tack by the government would help boost the revival of the factory.
“I am quite optimistic that the factory will be revived given the commitment that the government has exhibited towards the process,” he said, adding that the agreement with the government was that much of the turn-around programme would be concluded by October.
“We will be meeting after every two weeks with all the stakeholders to assess the progress of the revival. This will ensure that we get the latest updates as well as ensuring that we are not left out on every new development,” said the governor.
Mr Lusaka noted that the receiver manager should be done with the documentation process and by October, the investor would be on the ground.
The closure of the mills turned life upside down for many, with business premises lacking tenants, businesses shutting down and others operating at less than half their previous capacity.
The mill was the heart of booming trade in Webuye town, with the restaurant sector being the key beneficiary.
“The situation is deteriorating day by day,” said Herman Kasili, chairman of the National Chamber of Commerce and Industry, Webuye branch.
Mr Kasili says the economy of the town has gone down by 75 per cent while money circulation has dropped to 60 per cent since the closure, leaving residents in poverty.
“As we speak now, Webuye is a ghost town. What we have witnessed in the past four years is totally different from the town that we used to know when the mills were running,” he said.
Mr Kasili pointed out that the closure of the factory has also affected the nearby town of Bungoma.
He says for the process to be successful, the strategic partners should involve the local leaders during the revival process.