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Ideas & Debate

Mumias Sugar deserves a life line

Mumias Sugar Company
Mumias Sugar Company. FILE PHOTO | NMG 

In Kenya, insolvency practitioners are better known for burying corpses than bringing patients back to life. I don’t know whether to blame it on our bankruptcy laws or on the fact that capacity in the field of insolvency in this country is not advanced enough. Our experience is that once a company is put under receivership, it never returns to profitability.

Mumias Sugar Company was put under receivership by the Kenya Commercial Bank (KCB) this week. Predictably, the lenders’ decision has been greeted with protest. I think it is an opportunity for the Treasury to work closely with KCB to design a feasible turnaround plan that has the support of all creditors.

If we can loop all lenders into an agreed arrangement, it may be possible for the parties to negotiate and agree on a moratorium on both principal and interest on debt.

Just pumping in money into the company without addressing the root causes of the problems will not help.

If Mumias, the largest sugar producer in the country and the biggest employer in western Kenya, is allowed to collapse, the impact on the economy of that region will be disastrous.

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What are the root causes of the company’s problems? It has all been documents in myriad investigations and forensic audits that have been conducted each time the company fell into problems.

We have since learnt that the much-vaunted multi-million diversification capital projects the company engaged in, including co-generation, ethanol production, and water purification were unviable ventures.

Mumias has had serious problems in the marketing area. For a sustainable turnaround to happen, you have to dismantle the nexus between distributors, transporters, directors, and top managers, who have made a complete mess of pricing and marketing at the company.

You have to dismantle and disperse the corrupt groups of distributors and transporters and their cohorts within the board and management of the company who have been siphoning billions of shillings from the company through opaque discounts, duplicated credit notes, and opaque forward contracts.

Such has been the capture of the company by this small group of distributors that at one stage, about 70 percent of the total revenue was coming from only 10 top customers. A forensic audit revealed that there was a point when 65 percent of sugar sales were conducted by six customers.

We have read from these reports how discounts were issued arbitrarily. The quiet joke within Mumias was that anyone working in marketing, sales and distribution departments became instant millionaires.

For turnaround to work, the priority must be given to supporting the sugarcane farmer.

I want to hear that over-surveys of farms have stopped, that farmers are being paid on time — that they are not charged exorbitantly for transport and tractor services — that they have access to subsidised credit for cane development, and that their dues are not deducted to pay for fertiliser and inputs that they did not receive.

The company must now work to restore its relationship with the farmer. Indeed, the biggest irony in the Mumias saga is that instead of the cane farmer making the money, it is the distributors, transporters and their political allies in Nairobi who have been gaining.

I remember what happened during the IPO, when the government decided to reserve 30 percent of the shares of the company to farmers. They responded in a big way, seeing the special allotment as an opportunity to diversify their sources of income.

A few months after that IPO, the price of the stock collapsed way below the issue price.

That set the stage for an invasion of Mumias Town of representatives of Nairobi-based stockbroking houses who travelled there with the aim of mopping up shares from farmers on the cheap.

Sugar farming must be made profitable to the farmer.

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