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Saturday, January 7, 2012
Cement firm power struggle spills to court
By Jackson Okoth and Luke Anami
Wrangles at the East Africa Portland Cement Company (EAPCC) have now spilled from the boardroom to the corridors of justice.
At stake is the reputation of the listed cement manufacturing firm and interests of powerful shareholders, who include Treasury and the National Social Security Fund (NSSF) and advanced plans by the State to shed off its shareholding.
"The advisory team, led by Dyer & Blair investment bank, also includes Cement Consultancy Associates of UK, Muriu Mungai and Company Advocates, PKF Consulting Limited and Knight Frank Kenya, Limited who are the asset valuers. The legal and environmental due diligence and asset valuation work has already been completed. The rest of the due diligence work is still going on," said Solomon Kitungu, chief executive officer of the Privatisation Commission.
After this process is complete, the next one will involve consulting all the stakeholders before preparing an options report.
There is controversy over EAPCC status, including whether or not the State has any control over it.
Throwing spanner into the works are intentions by NSSF, the largest shareholder in the firm, to transfer its shares worth Sh114.2 million or 4 per cent of its stake in the firm to the fund’s staff pension scheme.
Whatever the outcome of the court case, the Privatisation Commission insists that the status regarding the Government’s shareholding does not change.
In a letter seen by The Standard On Saturday written by the NSSF Managing Trustee Alex Kazongo to the Industrialisation PS Karanja Kibicho, the fund mentions that it approved the transfer of EAPCC shares worth Sh114.2 billion to cover the deficit in the staff pension scheme. "The documentation and transfer instruments are in the process of being forwarded to the relevant regulatory agencies for approval and execution," said Kazongo in the letter, which is copied to Labour PS Beatrice Kituyi and Mrs Stella Kilonzo, Capital Markets Authority (CMA) chief executive officer.
Another letter to Dr Kibicho confirms that NSSF immobilised its shares in EAPCC on December 6, 2011 in an apparent preparation to effect a transfer. "However, no such transfer has been effected to date and no application has been lodged with the authority or the Nairobi Stock Exchange for a private transfer from NSSF to the fund’s pension scheme," said Mrs Kilonzo.
Kibicho has insisted that the EAPCC board of directors was suspended to pave way for investigation on allegations of malpractices within the company. He added that this decision had nothing to do with whether or not the cement company is a State corporation.
In a letter dated December 27, 2011 and written to Vincent Nyangiro, secretary Efficiency Monitoring Unit, Kibicho requests for forensic investigation into alleged malpractices within the firm.
On the list of areas the PS was urging for investigation into the allegations that there was a clinker price variation against tender committee’s advice, which cost EAPCC an estimated loss of Sh74 million, a flawed procurement process, irregularities in outsourcing and a botched contract for coal handling, grinding and dozing facility that caused the company a loss of Sh1.3 billion.
The EAPCC is also accused of using alternative procurement methods between August 15, 2011 and November 30, 2011 where it procured goods worth Sh1.1 billion without authority from the Public Procurement Oversight Authority (PPOA).
The board is said to have interfered with the tendering process, including attempts to sign a deal with a Korean firm for a kiln upgrade project and ignoring advice by the firm’s technical committee. The suspended EAPCC board is also accused of colluding to dilute Government shareholding.
There are allegations that the board was overpaid for unscheduled meetings, causing the firm to lose an estimated Sh13 million.
While directors of Bamburi Portland Cement also sit on the EAPCC board, the company is accused of supplying products to Portland, raising issues of conflict of interest.
Signs that all is not well at the cement firm came to the fore more than a year ago. This is when EAPCC’s top management began to question its performance contracting results.
The 2009/2010 Government performance contracting results had ranked EAPCC as the third worst performer, a fact the cement maker argued was injuring its reputation.
In a statement, the company attributed its poor rankings to a huge restructuring programme that it undertook during the period under review. It also suffered from astronomically high production costs brought about by a spike in the price of furnace oil, one of its key raw materials.
"The restructuring was a one-off event. Costs will not rise to such a scale in the future," said Kephar Tande, the now suspended EAPCC managing director.
The company undertook an intense restructuring programme that involved the retirement of many staff, all at a cost of Sh300 million. Further, rising costs for power, furnace oil and certain raw materials pushed the firm’s cost of production up approximately Sh1.8 million.
The firm phased out furnace oil, which was its key raw material, and replaced it with coal. It also upgraded its clinker production line to reduce clinker imports.
It will be up to the courts to decide the fate of EAPCC suspended directors and determine whether this firm is a State corporation or a private firm.
In the financial year ending June 2011, EAPCC’s net sales revenue increased by 8 per cent to Sh10.2 billion from Sh9.4 billion the previous year.
Despite improved performance, allegations of procurement malpractice and misuse of company resources has been flying around, forcing the board to be suspended until investigation is complete.
A look at its shareholding structure as at June 30, last year puts NSSF as the largest single shareholder with 27 per cent or 24.3 million shares. It is followed by Government (25.3 per cent), Cementia (Larfarge) 14.6 per cent, BCI 14.6 per cent, Bamburi (nominees) 12.5 per cent and others 6 per cent.
Legal battles are raging at EAPCC, which has an outstanding Sh3.6 billion loan with the Overseas Economic Co-operation Fund of Japan. This facility has been guaranteed by the Kenya Government and is denominated in Japanese yen, payable by 2020, at an interest of 2.5 per cent.