5 October 2008
Nairobi — Orient Paper & Industries of India, joint venture partners with the Kenya government in East Africa's largest paper manufacturer -- Pan African Paper Mills Ltd (Panpaper) -- are about to commit the government to a massive bailout plan involving the effective injection of the equivalent of Ksh1 billion ($14.2 million) in fresh capital into the troubled company.
Sources in the Ministry of Forestry and Wildlife told The EastAfrican that the Indian investors were also lobbying the government to direct the Kenya Forest Service to give Panpaper all the stocks of wood it will require during its operations.
The Treasury has also proposed that the company be allowed to harvest wood at an extraction rate of 450,000 cubic metres per annum.
If the Cabinet accepts the proposals, the government will have to reduce the amount of royalty that Panpaper pays to the Kenya Forest Service to Ksh700 ($10) per cubic metre of wood instead of the current rate of Ksh1,200 ($17).
At this rate, the estimate is that the forest service will lose Ksh900 million ($13 million) in revenue between now and the year 2010.
It is also proposed that the government convert Ksh440 million ($6.3 million) royalty arrears due from Panpaper as at June 30 into equity.
Panpaper's bailout plan has been on the cards since 2006, but Cabinet approval has been delayed reportedly due to a quiet tug of war between the Treasury and the Ministry for Forestry and Wildlife.
Consequently, the Office of the Prime Minister has intervened and referred the matter to an interministerial committee before the matter is presented before the Cabinet.
It is understood that a draft Cabinet memorandum containing the proposals has already been circulated to the relevant parties.
In terms of a cash injection, the proposal is for the government to pay Panpaper Ksh246 million ($3.5 million).
In May this year, the government released to the company Ksh140 million ($2 million), leaving a balance of Ksh86 million ($1.2 million). A sum of Ksh100 million ($1.4 million) has been factored into the current budget.
Under the bailout plan, the Indian investors will also inject new capital at a level proportionate with their shareholding in the company.
Panpaper has an annual capacity of 120,000 tonnes of paper per annum and controls close to 60 per cent of the market in Kenya.
Established in 1969, its shareholders are the government of Kenya (34 per cent), the Birla Group of India (25 per cent) Orient Paper and Industries Ltd of India (29 per cent), ICDC (6 per cent), EADB (4 per cent), Development Bank of Kenya (2 per cent) and Barclays Bank of Kenya Trust (1 per cent).
The new proposals to bail out Panpaper come against the background of a raging debate within government over the lopsided nature of the technical management agreement under which the Indian investors are paid $1.2 million per year as management fees regardless of whether the company is making profits or not.
And, despite paying heavy fees under the agreement, Panpaper is still obliged to keep on its payroll long-term expatriates imported from India.
In 2005, the government was forced to appoint a task force to investigate the affairs of the company and make recommendations on the way forward.
One of its terms of references was to determine whether Panpaper still needs to be managed under a technical service management agreement 37 years after the Indian investors started operating in Kenya.
A key finding was that the corporate governance of the company needed to be changed radically.
The task force said in its report that they had found a situation where Orient Paper exclusively provided management and technical support and where all senior management were either seconded by this offshore outfit or recruited by it without involving the board.
In addition, the Indian investor had six representatives on the board -- including the chairman. Besides, senior management from Orient sat on the board as alternates to substantive directors.
Panpaper operated profitably until 1996. Since then, its financial and operational performance has deteriorated, with profitability diminishing and working capital eroding.
The company has been making losses since 1977, resulting in the accumulation of a huge and unsustainable debt.
Lately, the problems have been exacerbated by a sharp increase in royalty fees and irregular supply of wood.
Worse still, fuel costs have increased exponentially.
The company was choking under a massive debt of Ksh6.7 billion ($95.7 million) as at June 30 last year, most of which will be maturing in the next two years.
A confidential government report says that profitability has been deteriorating over the years, while working capital deficits are on an upward trend and the liquidity position has worsened.
Panpaper's financial distress is captured by the fact that during the year ending June 30, 2006, its operating profit was Ksh415 million ($5.9 million) compared with accrued interest charges of Ksh730 million ($10.4 million).
In the same period, accumulated interest arrears together with the entire outstanding principal loan amounts exceeded the annual turnover of the company.
"Panpaper is currently cushioned from being declared technically insolvent by capital reserves that arose from re-evaluation of the company's assets in 1999," says the report.
The first signs of the company's worsening indebtedness came to light in early 2005 when it was forced to write to term lenders to plead for debt rescheduling, lamenting that it was unable to meet both principal and interest payments.
As it turned out, the lenders refused to agree and recommended instead that an independent study be conducted to establish the long-term viability of the company.
Consequently, the lenders appointed financial consultants Ms McKinsey and Co to work out a turnaround strategy and to chart the way forward.
However, implementation of the report by the consultants has been slow.
Two factors are at play: First, marshalling the political will to move boldly on the matter has been difficult mainly because many people in authority believe that Orient Paper has all along benefited from the company at the expense of other shareholders.
The study by the government found that virtually all senior management seconded to Panpaper by Orient Paper are on Panpaper's payroll, which amounts to double remuneration.
There is also the view that the Mckinsey turnaround plan merely proposes to shift most of the burden of reviving the company to the government.
In the first place, the consultants suggested that Panpaper be allowed to extend its wood-harvesting areas to forests in Kericho, Koibatek, and North Nandi districts, making it possible for the company to obtain supplies of 450,000 cubic metres of wood per year.
Observers opine that allowing Panpaper to extend its harvesting areas to places as far-flung as Kericho and North Nandi can only happen at a huge political cost.
Be the first to Write a Comment!
Copyright © 2008 The East African. All rights reserved. Distributed by AllAfrica Global Media (allAfrica.com). To contact the copyright holder directly for corrections — or for permission to republish or make other authorized use of this material, click here.
AllAfrica aggregates and indexes content from over 125 African news organizations, plus more than 200 other sources, who are responsible for their own reporting and views. Articles and commentaries that identify allAfrica.com as the publisher are produced or commissioned by AllAfrica.
