Sarrai Group's Mumias Sugar lease deal faces fresh turbulence

Uganda's Sarrai Group is fighting to cling to a 20-year lease to operate the collapsed Mumias Sugar Company. [Benjamin Sakwa, Standard]

The pronouncements by President William Ruto that his administration would revive the ailing sugar industry during his recent visit to Kakamega County might spell doom for Uganda's Sarrai Group.

The miller has been fighting to cling to a 20-year lease to operate the collapsed Mumias Sugar Company.

President Ruto promised residents of Kakamega that he would find a suitable investor to revive the once giant sugar miller as well as the entire sugar industry - the economic mainstay of Western Kenya.

The lease awarded to Sarrai Group was quashed by High Court Judge Alfred Mabeya in April. However, the company together with KCB Group rushed to the Court of Appeal and managed to suspend the decision.

The lease was awarded to Sarrai Group despite being the lowest bidder. In the deal, KCB-appointed receiver manager Mr Ponangipalli Venkata Ramana Rao (PVR Rao), accepted a lease offer for Mumias Sugar Ltd of Sh20 million per month from Sarrai and rejected offers from rival West Kenya, with a bid of Sh150 million per month.

However, it has been subject to numerous court battles as investors, creditors, suppliers, farmers and other players in the industry challenged the December 2021 process overseen by Rao, and later confirmed by the court as the administrator.

President Ruto noted that the government had pumped billions of shillings into the once giant miller, but sugar farmers and residents are yet to reap the fruits.

President Ruto said Kakamega residents had sacrificed 8,000 hectares (19,768 acres of land) for the miller, which should bring some benefit.

"Other than employment for locals, there has been no other financial benefit from Mumias Sugar. It has just become a dumping ground for government funds," President Ruto said during his visit, which was attended by leaders from the region.

Ruto promised that once the State settles all Mumias Sugar debts, his administration will do the same for Nzoia Sugar Company in Bungoma County.

"We shall look for a strategic investor and have an agreement beforehand that every month Sh100 million be handed to the people of Kakamega. We shall sit down with the county government to agree on whether the funds will go towards constructing roads, and hospitals or availing scholarships. And that is my commitment," he said.

The 20-year lease signed by Sarrai Group means that only 20 per cent of KCB's debt would be recovered in 20 years. Had KCB accepted the West Kenya Sugar bid, 122 per cent of the debt would have been recovered in 20 years.

Justice Mabeya while quashing the lease also agreed, saying: "A simple calculation would show that by leasing Mumias at Sh5.8 billion for 20 years, it would perpetually remain under receivership and administration. It would permanently remain an asset under KCB and be a retirement place for Rao."

Wide measure

The judge said KCB would superintend administration and receivership for 20 years and yet not be able to fully repay a single creditor.

"That won't do. The above circumstances justify this court to interfere with the administration," the judge said. "It is trite that the threshold for interference is a high one, and an administrator is generally given a wide measure of latitude when exercising his duties and powers."

Last month, Mr Rao lost an application seeking an extension of his term as the administrator of Mumias Sugar.

Justice Dorah Chepkwony declined Rao's application, saying the High Court had no powers to extend his appointment since his appointment was revoked by a judge of the same jurisdiction.

Mr Rao was appointed the administrator of troubled miller by Justice Mabeya on November 19, 2021. The Insolvency Act states that an administration lapses automatically at the expiry of 12 months from the date of appointment. Mr Rao's term expired on November 18.

Creditors had opposed Mr Rao's extension, saying he had completely refused to deal with or update them or call a meeting as directed by Justice Mabeya.

Justice Chepkwony at the same time agreed to hear an application filed by Ms Kimeto, seeking to find Sarrai in contempt of court for going on with operations at the miller despite being stopped by the court. The miller was placed under receivership by KCB Group in 2019 over an unpaid loan of Sh545 million and Mr Rao was appointed as the receiver manager.

His first assignment was to complete the lease process, which he did on December 22 as he picked Sarrai Group to manage the miller, a move that sparked a flurry of court cases.

Other than awarding the lease to the lowest bidder, competitors complained that the deal was shrouded in secrecy.

Justice Chepkwony also agreed to hear an application filed by Ms Kimeto, seeking to find Sarrai in contempt of court for going on with operations at the miller despite being stopped.

The lease was challenged by other bidders on grounds that it was shrouded in secrecy and Justice Mabeya later cancelled the lease, saying it was not in the best interest of Mumias.

While cancelling the lease, Justice Mabeya said there was no evidence that Mr Rao sought the advice of the Competition Authority of Kenya when he awarded the lease to Sarrai Group.

KCB debt

He further said Mr Rao did not explain how Mumias would repay KCB's debt and those of other lenders, including Dubai-based company Vartox, farmers, workers and suppliers. Dubai-based Vartox Resources Inc, which also challenged the lease claimed the award to Sarrai Group was not only deliberate and intentional but a calculated move by Rao and KCB to swindle other bidders and creditors.

"It is clear that there was no impartiality or transparency whatsoever in the selection process of who finally obtained the lease of Mumias," Vartox Resources Inc said in court papers.

Company director Kristian Khachatourian says the entire evaluation process was a sham characterised by Sarrai receiving 100 per cent in technical evaluation.

Vartox is claiming Sh6 billion from Mumias Sugar, which it inherited from Victoria Commercial Bank. Victoria Bank, on its part, took over the debts from Eco Bank and French Development Agency Proparco. The loans were secured through Mumias Sugar's energy generation and ethanol plants.

Lowest bidder

West Kenya through senior counsel Paul Muite in his submission said the deal did not make economic sense. "Mumias is a major anchor for the economy of Kakamega County and there never was any rational basis for Rao to have awarded the lease to the lowest bidder Sarrai Group at Sh6 billion when the highest bidder had put in a bid at Sh36 billion."

If President Ruto goes ahead and makes good on his words, farmers and creditors would be happy but could spell doom to Sarrai's 20-year lease.

Other bidders who were angling for the lease include Turkish and French consortium Kruman Finances (Sh19.7 billion), Kibos Sugar (Sh5.9 billion) and India's Pandhal Industries (Sh5.9 billion).

Mr Rao said West Kenya's financial bid did not make sense as the firm would have to crush an impossible amount of sugarcane to meet the Sh36 billion lease price quoted.

He dismissed West Kenya's bid on allegations that the firm would have become a dominant player.

His averment has been questioned in court as West Kenya argues that such a pronouncement can only be made by the Competition Authority, which was not involved in the process.

Sarrai Group will now be expected to remit Sh19.5 million to the Mumias Sugar administrator every month, while West Kenya would have paid Sh150 million per month.