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Sour sugar wars boil over

FINANCIAL STANDARD
By | Oct 26th 2010 | 6 min read
By | October 26th 2010
FINANCIAL STANDARD

By Kenneth Kwama

In late 2003, when families of two brothers who jointly owned West Kenya Sugar Company Ltd (Wekscol) were engulfed in a bitter fight over control of the firm, one family member reportedly quipped that "blood is thicker than water. But profits are thicker than blood."

The murmurs erupted into full discord in 2004 when one of them Jayanti Patel, bolted out of the business he co-founded with his late brother, Biku Patel and established another sugar company after disagreeing with his brother’s son, Sunil Patel who had taken over as chief executive after his father’s demise.

On May 6, 2004 Jayanti applied to the Kenya Sugar Board (KSB) to establish a sugar company called Miwa Sugar Company Ltd (Mscl) in Kakamega District, but Wekscol objected citing various reasons.

Wekscol, under Sunil, decided to block the multi-million venture that would have allowed Jayanti to create a rival company on its door step to give rise to vicious competition for a small market that would have driven up sugarcane prices thus increasing Wekscol’s production costs.

However, Mscl was denied a licence, but it later metamorphosed to Butali Sugar Mills (Bsml), which has since been caught up in a corporate feud with Wekscol. The former claims it has invested up to Sh3 billion in the idle plant, which has capacity to employ more than 1,000 people. And to further complicate the ownership structure, it’s reported that a powerful politician from the region owns a stake in the company. He is reportedly behind the clandestine push to discredit West Kenya by playing with the emotions of the local farmers, who apparently are unhappy with the terms offered by West Kenya Sugar Company.

The emergence of bitter disputes between the two companies and the intervention of Government officials have been flagged as danger signs for companies that may be considering investment in the sugar industry.

"It is a total farce. A classical case of the right hand not knowing what the left one is doing. This will give us a very bad image as an investment destination," says a member of the KSB who requested not to be named.

Bad Signals

The state’s intervention and meanderings have incensed Butali, and possibly sent off bad signals to potential investors who could have wanted to invest in the sector. It could also set in motion a huge legal battle in which taxpayers’ money could be used to compensate disgruntled investors.

The feud has also split Kakamega town dividing farmers, politicians and even Government officials according loyalty with the rivalry introducing behind-the-scenes deals and questionable decisions by Government officials. The saga has also found its way in to the corridors of politics with the Prime Minister’s office the latest to join the bandwagon. This has clouded the planned operations of the factory.

Both sides give valid reasons, which an independent arbitrator could have easily resolved in the absence of the politics that envelop the issue.

At the heart of the dispute is a requirement by the Sugar Act that no sugar company should be set up within a radius of 24 kilometres of an existing factory. The Butali factory is about 10 kilometres from Wekscol.

The area where Butali wants to set up is therefore within West Kenya’s catchment zone and can’t reportedly sustain two sugar companies. But a director at Butali Sugar who requested not to be named refuted this.

"Both claims are false and are meant to stop us from starting a viable business," says the director. "If this was true, then how would you explain the case of Chemelil, Miwani and Muhoroni sugar factories that have co-existed within that radius for more than 30 years?"

"It is a ploy to stop us from starting our business," quips the director.

But industry insiders have warned that the proximity of the two firms is not good for business.

The close proximity could spark off price wars as the two fight for supplies from farmers.

From a distance, it is not too difficult to see why the two companies do not seem able to get along. Wekscol is guarding its turf. For the proprietors of Butali, relocation is nearly impossible because the plant is complete and ready to start processing sugarcane.

Besides Cabinet meetings, the tussle has also played out viciously at KSB where two past CEOs seem to have lost their jobs due to issues related to the dispute. The first casualty was former KSB’s chief executive Andrew Otieno, who presided over a board meeting in February 2005, which resolved not to register Butali because ‘it wasn’t viable.’

Two months later, April 12 to be precise, just after Otieno had been fired and replaced by Ms Rose Mkok, the same board approved the registration of Butali. The following day, before confirmation of the previous day’s minutes, Mkok reportedly communicated the decision to Butali Sugar Mills directors.

"The hasty manner with which Mkok registered the company even before the board confirmed the minutes given the gravity of the case, brought into foe likely lack of integrity and professionalism in her discharge of sugar industry regulatory role," states a report of the Efficiency Monitoring Unit (EMU), which is under the Prime Minister’s office.

Three weeks before the 2007 General Election, President Kibaki visited Butali plant and laid the foundation for construction of the sugar factory.

Blinkered by the devious rivalry, the two companies continued feuding and the registration of Butali Sugar Mills was revoked in October, 2008.

Agriculture Ministry

In January this year, then acting Permanent Secretary in the Ministry of Agriculture, Kiriti Wamae directed Mkok to ensure that the two feuding companies comply with the 24-kilometre radius requirement.

But in February, the board reinstated the registration of Butali, allowing construction to continue.

According to the EMU report, it later turned out that the minutes of the meeting that allowed for the reinstatement of Butali’s registration were doctored. It recommended that the Ministry of Agriculture should hold Mkok responsible for failure "…to provide clear rules and regulations within provisions of the Sugar Act 2001 as required of sugar factories."

Mkok has since been suspended.

The EMU report also advises the PS for Agriculture to ensure that the reinstated Certificate of Registration is revoked and factory relocated, preferably to Busia County "…where there is potential for development of a sugar factory."

The two companies first mulled over the prospects of relocation in 2006 when Butali communicated to both the KSB and Wekscol telling them of it could only relocate if Wekscol could pay it Sh1.352 billion immediately. This costs cover both actual and opportunity costs.

Wekscol, however, didn’t agree to this terms. The terms of Butali’s possible relocation, being conditional, have since elapsed.

So far, both firms have shown little sign of striving for a resolution. Each has been trying tricks in the book, and apparently several outside the book, in order to have its way.

Sunil, the previous owner of West Kenya Sugar Company sold the firm and together with his family, migrated to the UK. Although reports indicate that Sunil is back in the country and pursuing other ventures (constructing another sugar factory), KSB was reportedly not aware of the sale of West Kenya Sugar.

Currently, KSB is facing two separate lawsuits filed by West Kenya Sugar Company and Butali Sugar Mills.

Butali Sugar Mills has filed an application at a Kisumu court to compel the board to issue it with an operating licence so that it can commence milling sugar at its plant.

The company says it has completed construction of its plant at a cost of Sh3 billion and wants to start operating so that it starts paying back borrowed money.

In the second case, West Kenya Sugar Company has sued the board and Butali Sugar Mills jointly at Nairobi Milimani High Court.

The company wants KSB not to issue Butali with a license to operate and to respect the 24-kilometres radius rule and stop infringing on its catchment area.

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