Mumias bailout in order, but demand prudence

There is huge expectation among long-suffering sugar-cane farmers in Kakamega County, after President Uhuru Kenyatta announced the Sh1 billion bailout for the beleaguered Mumias Sugar Company (MSC).

The air of exaltation was amplified in the gratitude expressed by leaders from the region who have been at pains to revive the dwindling fortunes of the company.

Cane farmers remember painfully the thriving yesteryears, when MSC paid a decent amount for their produce, only to be run down by a clique of greedy and incompetent managers. They watched helplessly as the once successful sugar miller was mismanaged.

Indeed, MSC’s financial woes are a reflection of similar woes with other sugar companies in the region. Last year, the Government bailed out Sony, Muhoroni and Chemelil sugar companies with Sh1.1 billion. They too, have been toiling under heavy financial burdens.

While the Jubilee government’s gesture is most welcome, it raises several pertinent questions that need urgent answers. Why have we allowed so many companies to be mismanaged only to throw good money after bad money, thereafter? Are audit firms doing their job faithfully and to the spirit and law governing the profession? Could there be complicity in the way audit firms are going about their work?

A recent forensic examination revealed that MSC was in the financial red having lost well over Sh7 billion through shady deals initiated by past managers. As a consequence, cane farming has almost ground to a halt with farmers opting to grow other crops. Most of them are owed large sums of money for the cane the company harvested but was unable to pay for. Cane transporters and a security company are owed large sums of money besides the delayed salaries for workers.

Given these financial obligations, it is hard to visualise how far the Sh1 billion will go into solving the problems at MSC. The company had requested for Sh5 billion, an amount calculated to factor in all costs and perhaps leave the company enough money to meet short term operational and miscellaneous costs. The expectation even as the President was giving out the cash was that the shortfall of Sh4 billion would be met through a rights issue. Indeed, on Thursday, the National Assembly approved Sh2 billion that Treasury will use to take up its rights in the upcoming issue. It is hoped that the remaining shareholders will raise the difference.

Considering the current state of MSC, and farmers’ scepticism, it is likely the quest for a rights issue could well be an expensive gamble. Will existing shareholders be willing to sink in more money to raise the Sh2 billion to save the struggling entity?

Since the government is the major shareholder, in MSC, and shares are trading at a paltry Sh2.45 per share compared to a peak of Sh50 only a few years back, the company would have to sell its shares at a discounted price of say, Sh1.50 per share to attract buyers.

It is impossible to see how, at such a ridiculous price, the company would raise the Sh4 billion deficit. MSC simply has no prospects at the moment and the expected turn around could prove highly elusive. Shareholders are jittery, and many would want to opt out lest the company capsizes. Given such a scenario, there is the danger of mischief where a sole individual could undertake to purchase all the rights issues, thus elbowing out the government and other shareholders to remain the sole shareholder.

Assuming, therefore, that the rights issue is a flop, what next for the biggest sugar miller in East and Central Africa? The surest way of keeping the firm alive would have been for the government to commit to give the miller the whole amount over a given period of time while it gauges effectiveness of its last minute efforts to revive the company. The way things are at the moment, it might be a case of too little too late.

Still, there is urgent need to demand prudence in management of public companies and punish heavily those who plunder taxpayers’ money.