Portland Cement defaults on loan, cuts staff by 78pc

East African Portland Cement cut its permanent staff by 78 percent in the year ended June 2021 as it battled a cash crisis.

The firm, which returned to profitability after posting a net profit of Sh1.8 billion in the year under review from a loss of Sh2.7 billion, cut its permanent staff by 209 in a massive layoff. This reduced its headcount of permanent staff from 268 to 59.

To mitigate this, the company nearly doubled its contract staff to 442 as it opted for cheaper labour. At the end of the year, its headcount comprising both contract and permanent staff had dropped from 525 to 501.

Auditor-General Nancy Gathungu revealed in the firm’s annual report that the company also defaulted on a loan from one of its key lenders, forcing it to dispose of some of its idle lands to retire the debt.

“The cement production plant continues to operate significantly below capacity due to working capital constraints, lack of essential spare parts and loss of market share to competitors,” Mrs Gathungu notes.

Further, she noted that due to the cash flow constraints, the company was unable to settle the amounts due to its key suppliers and regulatory authorities including Kenya Revenue Authority (KRA) and pension liabilities.

By the end of the financial year, the company, which is majority-owned by National Social Security Fund and the government, owed the taxman a total of Sh2.2 billion in Pay as You Earn (PAYE), Value Added Tax (VAT) of Sh656 million and pension liabilities stood at Sh110 million, being the principal, penalties and interests.

The chief State auditor pointed out this is contrary to the Income Tax Act which requires employers to deduct PAYE at source and remit the same to the tax authorities before the ninth day of the subsequent month of pay.”

“As a result of the default, the company is likely to suffer additional tax penalties and interest. Consequently, the company is in breach of the law,” the Auditor-General said.

But of greatest concern, the cement maker is facing significant litigations and claims against it which, if successful, may result in claims that are unlikely to be settled, given its current financial position.

The firm has an estimated exposure of Sh1.5 billion from employee-related claims arising from unpaid salaries based on Collective Bargaining Agreement (CBA) terms.

It also has claims from suppliers for unpaid bills for services rendered and goods delivered totaling Sh310 million, while claims arising from disputed deliveries, breach of distribution contracts and termination of supplier contracts total to Sh196 million.

“These events or conditions, along with other matters, indicate that a material uncertainty exists that cast significant doubt on the Group’s and Company’s ability to continue as a going concern,” Mrs Gathungu said.

The auditor, therefore, prepared her report on a going concern assumption that the company will continue to obtain financial support from the bankers, suppliers and shareholders.

The firm’s managing director Oliver Mwandigha Kirubai said working capital challenges remain the bedrock of the company’s ailment, which continues to deprive the factory of critical engineering spares and restoration.

“The impact of which is manifested in sub-optimal capacity utilisation and inconsistent product availability in the backdrop of high fixed operating costs,” Mr Kirubai said.

He says the Company's sales revenues were squeezed by low sales volumes on account of constrained plant run and intensified competition which continues to erode selling price.

“The business further suffered from enormous provisions made for non-performance of obligations and incurred huge finance costs driven by high level of legacy debt from the main financiers,” he said adding that the above factors constrained the Company’s capacity to mine from its brand equity rendering the business uncompetitive.

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