The government has sold off debt-ridden Pan Paper factory for Ksh900 million. Pan African Paper Mills, East Africa’s largest paper manufacturer, has been sold to Rai Group, according to the deal reached between the timber merchant and Treasury and the Ministry of Industrialisation.

The Eldoret-based group is one the largest timber merchants in Kenya. If the deal goes through, it will mark the end of Panpaper as Kenyans know it since the new owners will be free to do anything with it, including stripping it apart and replacing it with a different business.

But the deal has raised questions, especially given the fact that the paper-making business is being sold to a timber merchant.

Analysts say Rai Group, which has set three key conditions for buying Panpaper, could just be interested in getting access to cheap timber from Panpaper’s farms and contracted farmers.

One of the conditions was the approval of its licence by the Kenya Forest Service, the government-run organisation that manages and protects government forests in the country. This is the condition that’s causing chills among a number of stakeholders who doubt whether Rai Group’s goal is, indeed, reviving the company, which used to employ thousands of people and sustain the Webuye town economy.

Its second condition is that the National Land Commission issue titles to all untitled properties belonging to Panpaper. This points to the feeling that it would want to fully own the properties, which are its main target in the deal.

The third is that all title documents owned by Panpaper be transferred to the Rai Group. “Its eyes are clearly set on Panpaper land and properties,” says an investment consultant who took part in negotiating the deal for government.

The main concern is that timber harvested from government forests at concessionary prices for paper manufacturing is likely to be diverted to the timber business in which Rai Group can make a fortune from the higher margins. It is not clear if the government has put in place any structure to monitor how Rai utilizes the harvested trees.

This is not surprising. Ahead of the company being advertised for sale, Industrialisation and Entrepreneurship Cabinet Secretary Adan Mohamed announced that the private party which ends up buying Panpaper will be given a lucrative and long-term licence to harvest wood from government forests at subsidised rates. He said that the lucrative offer was being made to whet the appetite of potential buyers.

Six investors, mostly from Congo and Egypt, had expressed interest in acquiring the Panpaper, but only two submitted bids, according to Mohammed. The other bidder was Raiply Ltd, which is closely linked with West Kenya Sugar Company. The multi-billion shilling business empire involved in the production of wood products such as blockboards, plywood and propylene bags.

Panpaper’s long-term lenders hold securities on the factory and its assets, including land and the plant, a liability estimated at Sh6 billion. Some of the creditors of the factory include the International Finance Corporation, which is owed Sh2.5 billion, PTA Bank (Sh682 million), Deutsche Bank (Sh1.8 billion), and the East Africa Development Bank (Sh317 million).

The government owned a 25 per cent shareholding in the firm with an Indian conglomerate Orient Paper Ltd controlling 34 per cent. The rest of the shares are held by East African Development Bank (EADB), Industrial and Commercial Development Corporation (ICDC), Development Bank of Kenya and Barclays Bank Trust Investment Services.

The sale is a major loss for the government, and by extension the taxpayer, who have invested billions in trying to revive the company, which makes the Ksh900 million purchase price a short-change.

Millions pumped into revival

In 2012, for example, just a year or so after the company had collapsed, the government gave Sh2 billion to the Ministry of Industrialisation to revive the plant. More millions were released for trial production runs to keep the plant running and operational to prevent the machines from rusting from disuse. The government, in efforts to revive Panpaper, signed hundreds of millions of shillings in VAT refunds that Panpaper owed the Kenya Revenue Authority.

In addition, the government signed an agreement in which it transferred all the debts owed by Panpaper to short-term lenders. Above all, the government paid Panpaper’s short term lenders a total of Sh400 million in cash to prevent them from auctioning its assets.

At some point, there were plans by the government to buy the company from the long-term lenders, restructure it, and make it a fully-fledged parastatal under the Industrialisation Ministry. In fact, in 2013, the Treasury and the Office of the Attorney General incorporated a new government-owned company, Webuye Paper Mills Ltd, which was to take over the assets of the company from long-term lenders.

This is not be the first time a troubled paper making plant to be sold to a timber trader in East Africa. In 2004, Tanzania sold the State-owned Mufindi Paper Mills to the Rai Group of Kenya at $1 million. But focus will remain on how the deal is concluded and the direction Rai Group will take.

Next Read >> Pan Paper set to resume operations in August


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