How Mumias Sugar was looted dry

Deep after-sale discounts offered to selected distributors, flawed procurement, weak financial controls and importation of sugar can be the prime reasons that could drive Mumias Sugar company to its grave.

Management approval allowed Mumias to sell its sugar at below cost, setting the miller on the path to self-destruction. The company that reported Sh2 billion in net profits in the past and paid over Sh600 million as corporate taxes in its best years, is now a pale shadow of its former self.

“Mumias is as good as dead. There is very little hope that we could ever return it to life after all the plunder,” National Assembly Agriculture Committee Chairman Mohamed Noor told The Standard.

This pessimism is built on several facts. First, Mumias’ accumulated debts are about Sh6 billion.

Secondly, the accumulated losses are fast wiping away the capital. Jittery shareholders have already ditched the stock. Take Abdul Karim Charturbai for instance. He was the single largest shareholder until late last year and his response may be a representation of many other shareholders.

Mr Charturbai was disenfranchised with the management and decided to sell all his 14.4 million shares, after it became apparent that the company was no more than a shell.

“He was concerned that there was no hope for this company,” his personal assistant said in an interview.

A company that held so much promise being the single largest sugar producer had been destroyed, she added. Most of Mumias’ prospects lay in the new projects that were expected to offer alternative sources of revenue away from sugar.

In the last decade, Mumias embarked on a massive expansion drive that would eventually see it shift its main milling factory from Western Kenya to the Tana Delta – as it became apparent that sugarcane supply could not support the growing demand.

Mumias also branched into co-generation of power from bagasse (the residue after sugarcane stalks are crushed to extract the juice), production of ethanol and even bottled water to widen its revenue base.

Lack of willing financiers meant that Mumias could not embark on the expansive sugarcane farming in a joint venture with the Tana River Delta Authority. Mumias, however, would roll out the other expansion strategies with the new product lines. Peter Kebati assured shareholders when he took over as managing director in 2012 that the prospects were good.

Forensic explanation

Kenya was producing only 70 per cent of her sugar requirements, had a wide shortage of electricity supply and most ethanol needs were met through imports.

“Farmers are encouraged to visit the factory,” Kebati said then, the company’s best year yet. KPMG’s report provides a forensic explanation to the downfall of a behemoth.

It has now emerged that almost anyone in the top management could sign off the massive discounts, as high as 32 per cent against a ceiling of eight per cent. Requests for these discounts were often raised after the sale had been completed – even in the subsequent months and years.

Typically, the contracted distributors would be compensated the equivalent of the discounts through a credit note – a document used to correct an invoicing error.

“In certain cases significant credit notes would be raised in subsequent financial years,” the audit showed.

Over the three-year period starting July 2011, Mumias’ 28 top distributors had been granted over Sh2.4 billion worth of discounts. Former managing directors Peter Kebati and Evans Kidero – the current Nairobi Governor, approved the highest value of credit notes.

The top distributors handled over 70 per cent of the miller’s sugar, the audit points out, which meant that Mumias has no control of the retail prices of its own produce in the market. The audit also found multiple cases of conflict of interest where senior officials transacted business with the company, at astonishingly highly inflated costs. Take for instance the case of a company associated with the Company Secretary.

It was at one time contracted to carry out fumigation services, taking over from an existing in-house department, at Sh423,000 a month before the cost was revised to Sh1.4 million. The change was attributed to a “correction of a typing error” while the payments would be expedited.