The Star (Nairobi)

18 August 2012

Kenya: Kisumu Molasses Factory - How Did the Odingas Get It?

analysis

On February 16, 1990, the body of Foreign Affairs minister Dr Robert Ouko - who had been missing for four days following a trip with then President Daniel arap Moi to the USA - was found, mutilated and burnt, in a thicket near Got Alila Hill, four kilometres from his Koru home, in Nyanza.

Ouko's death was announced to the nation by Moi, who expressed his "profound sorrow". A couple of days earlier, Moi had also announced his "sadness and grave concern" at his minister's unexplained disappearance. He said he had directed that the state machinery be deployed to trace Ouko's whereabouts, and that his "top personnel" were applying "maximum effort" towards this end. It was too late. As he spoke, Ouko was already lying murdered.

Seven months later, on October 1, 1990, Moi appointed a commission of inquiry into Ouko's death. This went on very well for months - until the day Scotland Yard detective John Troon, who was investigating the case, named Nicholas Biwott, then MP for Kerio South, as one of his two main suspects. Biwott, at the time, enjoyed a status in the inner circle around Moi that had long rendered him immune from criticism, despite the fact that he was widely disliked and feared.

Moi acted swiftly to close down the commission of inquiry before any evidence against Biwott could be heard. Biwott's problems had begun when a witness, director of medical services Prof Joseph Oliech, told the commissioners that the Scotland Yard detectives had asked him whether Ouko had made any enemies because of the stalled molasses plant in Kisumu.

The molasses plant, then properly called the Kenya Chemical & Food Corporation Ltd, had been inaugurated in 1977 and abandoned five years later, one of the costliest failures in Kenya's industrial history. The original proposal for the plant's establishment had come from Nitin Madhvani, of the influential Madhvani family, investors in Kenya, Uganda and elsewhere, particularly in the sugar industry, of which molasses is a by-product.

It was to be a joint venture with the government to produce power alcohol. Despite the fact that the Madhvani group had been involved in a previous joint venture with the government that had failed to get off the ground (the Kenya Fibre Corporation, based in Nanyuki) and had cost the Treasury huge sums, the new company was set up and capitalised at Sh170 million, of which the government, as 51 per cent majority shareholder, contributed Sh86.7 million. In 1977, this was a huge sum of money.

The project was initially dealt with by three ministries - the Ministry of Finance under Mwai Kibaki and later under Prof George Saitoti, the Ministry for Commerce and Industry under Eliud Mwamunga, and the Ministry of Foreign Affairs under Dr Munyua Waiyaki. The plant's main planned function was to produce power alcohol, that is, an energy fuel, out of waste from the sugar production process.

The Ministry of Energy, under which the project eventually fell, was created by Moi in 1979, and Biwott was given the portfolio in 1983. By 1981, the government had guaranteed Sh600 million in loans for the failing molasses project and was being asked to guarantee another US$24 million. Lenders were pressing for repayment and contractors and suppliers had stopped work for lack of funds.

In 1982, government estimates showed the country would lose Sh135 million a year for the next 10 years if the project went ahead. At that point, the plant was all but abandoned, and in 1983 it was placed in receivership. Some people, however, including Ouko, minister for Industry at the time, believed the project was still viable, and Ouko had appealed to the government and been instructed to find investors for the project. He had subsequently brought investors from Italy to see the plant and they had said it was possible to revive it.

But a row over the molasses plant had been simmering for some time. Avon Ltd managing director Eric Onyango, giving evidence to the Ouko Commission, said Ouko had told him there were those among his Cabinet colleagues who favoured a different set of investors who would pay them "kickbacks". Competition had become intense.

Ouko himself had told other friends who later gave evidence that there were powerful forces in the Cabinet opposed to his determination to expose corruption. Onyango said Ouko had told him that the level of corruption in the Cabinet was "not only alarming but unbelievable". Another witness said he would reveal the names of Ouko's enemies if he were granted police protection. Biwott, informed, under the inquiry's rules, of possible adverse mention of himself, brought in a team of three lawyers.

Moi was quick to see that big trouble might be brewing and he promptly announced a new commission of inquiry - into the molasses plant. Attorney General Amos Wako was on hand as usual to deny that there was anything remarkable in this timing, and to say that the two commissions would operate independently.

Soon afterwards, the witness who had asked for police protection, James K'Oyoo, who had been a political aide to Ouko, was recalled to the stand. Deputy public prosecutor Bernard Chunga applied for K'Oyoo's evidence to be given in secret, describing it as "possibly alarming", but the witness responded that he would not ask for protection as long as his testimony could be given in public. When he took the stand, K'Oyoo said Ouko had mentioned threats to his life over the molasses plant.

A report in the New York Times, meanwhile, said the newspaper had obtained a copy of a US High Court injunction blocking Citibank New York from recovering dollar funds equal to Sh400 million in loans to Biwott's companies. Sh320 million of this was reported as secured by letters of credit in a Swiss bank account owned by Biwott.

The New York Times quoted New York officials who warned that high levels of corruption in Kenya could endanger future US aid. A letter from the head of BAK, the Italian group favoured by Ouko regarding the revival of the molasses plant, to a legal firm in Nairobi said Kenya's reputation in international business circles had been marred by corruption, and it cited Turkwel Gorge and Noolturesh (Kajiado-Machakos) water projects.

Chillingly, a memorandum from the same group of companies indicated that, in the days immediately before he died, Ouko had been preparing a report on the high-level corruption that was hindering the revival of the molasses plant. The writer of the memorandum said, "I spoke with him last on Saturday, February 10, when ... he told me he was staying in Kisumu to finish his report for HE [President Moi]...."

Three days after this conversation about the report Ouko was preparing, Ouko was dead. When Detective John Troon finally took the stand, he told the commissioners he had repeatedly tried to interview Biwott, without success, and also that he had been stopped from proceeding with his investigations, particularly regarding the questioning of senior government officials.

Meanwhile, the International Monetary Fund's quarterly report stated that half the funds deposited in foreign bank accounts owned by Kenyans had been deposited in the past five years alone. On November 18, 1991, Troon named Biwott as one of two principal suspects in Ouko's murder and recommended full investigation of the corruption allegations against him. Troon said he was certain Ouko had been murdered because of his anti-corruption stance.

The following day, Moi relieved Biwott of his ministerial post "with immediate effect", then abruptly disbanded the Ouko Commission of inquiry, instead directing the Kenya Police Commissioner to "proceed with due diligence and speed" in investigating Ouko's death. Sceptics abounded, especially as the commissioners themselves had requested an adjournment because of harassment by the Special Branch, including a brutal arrest of Ouko family lawyer George Oraro, "clearly calculated to undermine the continuance of these proceedings", they said.

Moi's action was also interesting from another point of view: it came days before Kenya was to meet its increasingly reluctant donors in Paris. The issue of the billions stashed away abroad by corrupt political leaders was expected to feature prominently on the agenda, including the hundreds of millions of shillings held by Biwott in Swiss bank accounts.

With Ouko's death, the whole matter of the Kisumu molasses plant was abandoned, and the physical structure of the plant fell into disrepair - a rusting skeleton standing at the edge of the Kisumu-Busia road, a colossal monument to government mismanagement and wasted public funds.

It was apparently not until five years later that it was deemed safe to raise once again the issue of the molasses plant - and "all moveable assets" of the plant were advertised for sale on July 10, 1995. Raila Odinga, like Ouko, believed the plant had a future, and he protested officially at the intention to dispose of the assets of the company piecemeal.

The sale did not proceed, but on March 8 of the following year, 1996, an advertisement again appeared in the Daily Nation newspaper, this time offering "For sale by public auction: All assets of Kisumu Molasses Factory". The auction was to be conducted at the plant on April 15, 1996.

Among the conditions of sale was "(b) "IMPORTANT: First consideration will be taken for offer to purchase the whole plant in total [writer's emphasis]. Thereafter consideration for purchase of large combination of units and finally consideration of single item purchases." The would-be purchaser of the "whole plant or large items" was required to pay 25 per cent of the purchase price by banker's cheque at the fall of the hammer, and the balance within 30 days.

The auction did not actually take place until June 3, on which day, Mr Odinga was present. Representing Spectre International Ltd, he bid Sh570 million for the "whole plant". This turned out to be the highest bid and it was accepted by the auctioneers on behalf of the receiver and the plant's debenture holders, Kenya Commerical Bank - but only tentatively.A token deposit was therefore paid, in two cheques totalling Sh2million, with the balance of the 25 per cent to be paid upon official acceptance of the bid by the receiver and debenture holders.

M N Kanyi, of auctioneers Panama Rovers, wrote to Mr Odinga the following day and again two days later, on June 6, 1996, confirming that the bid had been accepted. Kanyi returned the two cheques lodged and requested payment of the full 25 per cent, which amounted to Sh142,500,00, not later than June 14, with the balance to be paid by July 15, 1996.

The letter of June 6 included, however, a major caveat. While the advertised lot had described "the whole plant in total", Kanyi now stated in his opening paragraph that the Sh570 million purchase price "covers all the assets of the company, which, as stressed prior to the auction, exclude land".

The Daily Nation advertisement had made no mention of this and Spectre's board was taken aback by Kanyi's remarks. It was difficult to see how a factory could be purchased sitting on thin air and it had naturally been assumed that the 240 acres of land on which the factory stood was part of the "whole plant in total" advertised for sale.

Spectre instructed its lawyers, Lumumba & Ojwang, to write to the auctioneers, which they did on June 7, pointing out that it was clear from correspondence and a previous High Court case (no. 2433 of 1995) relating to the plant that both seller and buyer understood the land to be an integral part of the offer, and that the subsequent exclusion of the land constituted a "drastic turn of events". Said Lumumba & Ojwang, "Our clients have no intention of relocating the plant elsewhere," and they were therefore seeking confirmation that the auction sale included the land .

Panama Rovers replied, saying that the Daily Nation advertisement had advised potential purchasers that it was their obligation to "ascertain the state of the assets". While this would appear to refer to the condition of the assets, and not to be a new meaning for the words "whole plant in total" (a double emphasis of the entirety of the goods), Panama asserted that the joint receiver JK Muiruri, of Bellhouse Mwangi Ernst & Young, and the auctioneer had explained before the auction that the lot included plant and machinery but not land.

The receiver also wrote to Spectre, emphasising that the land was not part of the sale. On June 13, 1996, Mr Odinga wrote to the receiver saying that discussions about the land had been initiated with the government and "the matter is in the process of being resolved". He asked for an extension of the time within which to pay the deposit.

In a congruent letter to Panama from Lumumba & Ojwang, the lawyers noted that Spectre had been given the impression that the land was part of the package. Indeed, a change in the wording of the sale notice from the "all moveable assets" advertised on July 10, 1995, to "all assets of Kisumu Molasses Factory" and the "whole plant in total" on March 8, 1996, was significant and supported this impression, said Lumumba & Ojwang, who again asked for confirmation of the inclusion of the land.

The receiver replied to Mr Odinga the following day, June 14, 1996, granting the extension of the time within which the deposit had to be paid, with the price in full to be paid by December 16 that year. Panama replied to Lumumba & Ojwang confirming that the land was not part of the sale and advising that they would enter into no further correspondence on this issue.

The situation was apparently deadlocked, and Spectre, apparently in disbelief, wrote once more to the receiver, on July 27, for reconfirmation of the land issue, which was subsequently received in a letter from the receiver of July 29, 1996. The receiver expected the shs.142,500,000 deposit on September 16, 1996. Instead, on that date, Spectre International filed suit against the receiver, stating neglect to confirm prior to the sale that the land was not included, and seeking (a) a declaration that the sale of "all assets" included the land, (b) an injunction restraining the receiver from disposing of any of the assets of the factory and (c) costs.

At the hearing of the injunction suit (HCCC 2324 of 1996), counsel for Spectre International Ltd cited the Collins English Dictionary with regard to the meaning of plant, the first meaning being: "The land, buildings and equipment used in carrying on an industrial, business or other undertaking or service."

Counsel also cited a report on the "progress, problems and prospects" of the venture, dated April, 1981, 15 years earlier, which had been prepared for the Kenya Chemical & Food Corporation Ltd by the law firm of Schnader, Harrizon, Segal & Lewis, of Philadelphia and Washington, USA.

In the provisional balance sheet of June 30, 1982, under the heading 'Capital work in progress', appeared the items "Land and site development, buildings, and plant and equipment". Lumumba contended that this reference showed that the land was among the assets of the molasses company.

The application was vigorously opposed by lawyer Lee Muthoga. After lengthy legal arguments, Mr Justice AG Ringera, presiding, opined that, because the land had not been expressly itemised as an asset in the Daily Nation advertisement, Spectre had not established a prima facie case.

Because Spectre had withheld the deposit pending resolution of the case, Ringera also refused to grant an injunction against the receiver's disposal of the factory's assets. But he granted the interlocutory injunction assigning costs to the receiver, on grounds that the molasses factory was "in its death throes", was being liquidated and was therefore unable to pay any damages.

In the absence of the land on which the factory stood, Spectre withdrew from its proposed purchase of the plant. The receiver then wrote to the second-highest bidder, Equip Agencies, which by this time had also decided to steer well clear of this white elephant/hot potato. Presumably most investors would be reluctant to spend huge sums of money on a derelict, non-functioning factory standing on land over which they had no control.

And so the molasses plant stood, forlorn and unwanted and deteriorating by the day, for another three years - until the receiver decided to have another go at disposing of this towering government problem. On February 12, 1999, he wrote to those who had been the top four bidders in 1996 to ask them if they were still interested. Spectre wrote back, saying it was still interested but it wanted to confirm the present-day value, as well as the thorny issue of the status of the land.

Spectre inspected the site and found the plant buildings in a very poor condition. Time and weather had taken their toll, as had vandals. Now an even greater investment would be required to revive the factory. But Spectre wrote to Bellhouse Mwangi Ernst & Young on February 18, 1999, making an offer of shs. 120 million, 10 per cent to be paid on acceptance and the balance within 120 days. "We are in negotiation with the government over the land issues," said Spectre's letter, "and do not anticipate difficulties in that regard."

On June 9, 1999, receiver Muiruri wrote to Spectre accepting its offer of shs.120 million. Spectre had been outbid by shs.15 million by another bidder but successfully argued its case that it planned to develop the factory in accordance with the government's original aims, and not simply to cannibalise the moveable assets, as the other bidder planned. To make things crystal clear, Muiruri noted in his letter that the shs. 120 million was for the "moveable assets and not of shares or of any running business".

The land was not mentioned at all but Spectre was already pursuing its own negotiations in this regard. On April 7, 1999, Spectre general manager Israel Agina had written to Moi requesting the allocation for industrial development of the parcel of land on which the molasses factory stood. Agina noted that the land had already formerly been allocated to the Kenya Chemical & Food Corporation but that the allocation had not been completed.

What he said was true. The land had already been allocated to the molasses plant by the government, which had itself compulsorily acquired the land in 1976 for precisely that purpose. The land was previously communal land, and shs.2 million had been paid to the local community, which had ceded the land at this price only on the promise that the community would benefit from employment at the plant. The community had not otherwise been adequately compensated.

The government, having thus acquired the land, had in 1982 issued a letter of allotment to the Kenya Chemical & Food Corporation, which had paid the stand premium of shs.2.4 million to the government. All that remained was for the title to be issued, but this had not been done by the time the factory went into receivership in 1983.

And as an interesting aside, on October 29, 1983, the Municipality of Kisumu had written to the KCB, the debenture holder for the Kenya Chemical & Food Corporation, demanding land rates for the plot, unpaid since 1978. The letter contained the sentence "As you are aware, the Corporation owns 240 acres of land on which it started its operations [writer's emphasis]."

In his letter to Moi, Agina said the land remained an obstacle to the conclusion of Spectre's desired purchase of the plant, while the factory's existing assets were deteriorating rapidly. "We hope," said Agina, "to convert the idle facility into a socio-economic complex."

That hope became a reality. More than two years after Spectre was offered the company, the sale agreement was finally drawn up mid-2001. In September of that year, government letters of allotment granted a total of 114.8 hectares of land for 99 years for total fees of shs. 3,699,750, which were paid by Spectre International on October 11, 2001.

The land was to be used for horticultural, industrial, residential and educational purposes, including the growing of such crops as citrus, tomatoes, onions and cabbages, and for a school and a health clinic. All title certification, registration, search, new register, attestation, inspection, copying, survey, rent, stand premium, stamp duty, land adjudication and other fees were likewise paid by Spectre four days later, on October 15, 2001. The sale agreement was signed.

As usual, however, the transfer of title was not effected until nearly two years later. This eventually occurred in 2003 (under the Narc government), by which time Spectre had also paid the commissioner of lands all the rent arrears relating to the land for the years 1982 to 2003. Spectre then set about the huge task of rehabilitating the plant - appraising the work with professional valuers and beginning to seek expert scientific advice on appropriate crop-growing and methods of ethanol production.

It also began the search for investment partners. Eventually, Energem would take a 55 per cent controlling share, and the Kisumu Development Trust (with directors the late Joab Omino, former Rarieda MP George Ngure Ondeny and current chairman John Otega) would hold five per cent on behalf of local people, who had come together to raise shs.1.8m towards the project. Spectre would retain the remaining 40 per cent.

The rehabilitation project resulted in the commissioning of the plant in 2004. The yeast plant was completed in 2006 and the factory now produces industrial ethanol for blending with liquid (bio-fuels), potable alcohol for beverages and chemical industries, carbon dioxide, and bio and organic fertiliser yeast.

At the height of the factory's operations, a daily output of 60,000 litres was achieved, but the current precarious state of the sugar industry has affected this. Nevertheless, the company employs directly more than 500 people and indirectly another 200. At the height of its operations, it remitted an average of Sh1.2 billion to the exchequer every year. It also exports to the Comesa countries.

The Kisumu Molasses Factory has partnered with local schools to build laboratories and boreholes, and to provide electricity and clean drinking water. It conducts a free medical camp every three months for the entire Kisumu area, bringing in doctors and buying medication, all of which is provided free of charge to the 6,000-plus local residents treated. It is helping in efforts to control and eradicate water-borne diseases in the area.

So, from a derelict, rusting, useless hulk to a fully functioning industry bringing benefits to local residents through employment, education and health, and contributing more than a billion shillings annually to the Treasury, the Kisumu Molasses Plant has been a huge success story.

Unfortunately, huge success stories can lead to terrible jealousy, as Ouko's case also so sadly demonstrated. A Commission of Inquiry into the Illegal/Irregular Allocation of Public Land was appointed by President Mwai Kibaki on July 4, 2003. It presented its report, commonly known as the 'Ndung'u Report', to Kibaki in June 2004.

The main part of the report lists many ways in which directors of public corporations with large public land holdings had misused their positions to make these organisations - for which they had a duty of care and a responsibility to the public - fail, so that the assets could be sold off cheaply for private gain.

The commission found that such state corporations' land was illegally allocated "in total disregard of the law and public interest". It said no justification for the allocation of such land could be found in any of the records, and that subsequently "the lands so allocated were then sold by the allottees to other state corporations for colossal amounts of money far in excess of the prevailing market value of the land. This way, many individuals were unjustly enriched at great expense of the people of Kenya."

The report went on to detail how "the loss of corporation land was triggered by the actions of the Commissioner of Lands", whose office would engage in some "specially designed correspondences" prior to wrongly granting title to individuals or their third part proxies "The corporation management would wake up to a rude fact that their land had been acquired and title issued thereto without their knowledge," said the report, adding that another ploy was the illegal allocation of state corporation land after "irregular surrenders" of that land.

"The allottees would sell the land so illegally acquired," said the report, so that "in a space of say three months, a civil servant, a politician, a political operative, etc, would transform from an ordinary Kenyan, financially struggling like many others, into a multi-millionaire. Thanks to the rampant illegal allocation and sale of state corporation land."

The report cited Kenya Railways, Kenya Agricultural Research Institute, Kenya Power & Lighting Co Ltd, Kenya Airports Authority and Kenya Industrial Estates as among many state corporations that "lost huge chunks of their land in these circumstances". None of this applied in the case of the Kisumu Molasses Factory.

But despite this, the allocation to Spectre International Ltd of land on which the molasses plant stands is also mentioned in the report, which concluded that the "direct allocation of alienated government land to the company by the commissioner of lands was illegal". This conclusion would appear to be in direct contradiction of the facts, as detailed above, which are that:

• The land on which the molasses factory stands was acquired compulsorily by the government for the purpose of building the molasses plant.

• The land was already allocated to the molasses plant in 1982, though the transfer had been only partly completed by the time the company went into receivership in 1983.

• The land was properly allocated a second time, this time to Spectre International, in 2001.

• Spectre paid 20 years' rent arrears and all the necessary government fees for the land.

• The land has been used for the economic realisation of the original objectives of the government, of the investors and of the local community.

• It was government land, and government is not in the business of selling land. Government merely allocates land for industrial and other development. This is a normal procedure and it is precisely the procedure properly followed in the case of the molasses plant.

As in no other case investigated by the Ndung'u Commission, the land on which the Kisumu Molasses Plant stands has been used for the purposes stated. A hugely successful company has been established on it, which has been of immense benefit to the country via the returns the plant remits to the Treasury every year, and to the local population through jobs, education and health care. And its success is down to the determination of one man, Raila Odinga. Let no one tell you otherwise, for whoever does so is not telling you the truth.

Many have tried to say that Mr Odinga took money for the plant from local people and converted it to his own use. This is totally false and blatant propaganda. The shs.1.8 million raised by the local community is safe, in the form of the five per cent shares in the hands of the Kisumu Development Trust. The contributors will begin to see returns on their investment when the Kisumu Molasses Factory becomes a publicly quoted company on the stock exchange.

Before any company can go public, it is required to have made a profit for two consecutive years. Spectre had huge commitments, loans and other expenses to meet in the course of the massive task of reviving the molasses plant. But it eventually it began to be a profitable concern, and it was intended that the company would be listed last year, 2011.

Unfortunately, the major shareholder, Energem, then went bankrupt. This led to the need for major restructuring and a search for another strategic partner. This was found, but the sugar industry problems have meant that the plant's output has not yet been steady enough to qualify for stock exchange listing. It is hoped this might happen next year.

In the meantime, the silence from anyone whose interests are being safeguarded by the Kisumu Development Trust is deafening. What is more, the company's doors are open to anyone who feels aggrieved, and the fact the Trust chairman John Otega is the company's human resources manager makes this all the easier. All the noise that is heard comes only from those interested in political propaganda.

So that is the story, and all receipts, correspondence and certificates of allocation relating to the purchase of the Kisumu Molasses Factory and the land on which it stands are available for inspection.

Land remains generally a very interesting and potent matter and, now that we are on the subject, what about all those other issues in the Ndung'u Report, issues that involve billions in public funds lost to this nation, massive issues that absolutely dwarf the Kisumu Molasses Factory - where no issue at all exists? Is anybody going to start talking about those?

The writer is a freelance journalist.

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