Sweet and sour: Inside the cartels, cases and politics pulling back Mumias Sugar

“Who led to the collapse of Mumias Sugar Company? It collapsed before we (Jubilee) came into power. Wasn’t it them (Nasa)? Our government came in and injected Sh3.1 billion in the company,” President Kenyatta tells thousands of Kakamega residents.

“We have agreed that because the previous managers had challenges, we shall inject a further Sh500 million to pay farmers,” he adds.

Two weeks earlier, Mr Odinga had been in Machakos campaigning and he accused the Jubilee administration of being behind the murder of Mumias Sugar manager Ronald Lubya.

The former Prime Minister claimed that Lubya was assassinated for allegedly refusing to sanction the importation of sugar from Sudan. Seven days before the 2017 polls, President Kenyatta claimed that Mr Odinga had been unfairly dragging the Jubilee administration into Mumias Sugar’s woes as a ploy to raise campaign funds.

Some things have changed ever since. President Kenyatta and Dr Ruto have fallen out. Interestingly, the President and Mr Odinga have become bosom political buddies.

But some things are still the same. Mumias Sugar is insolvent, and has burned a hole in taxpayers’ pockets while chasing a seemingly elusive revival strategy. The company remains the bedrock of vote-hunting in Kakamega County and its environs.

Dozens of politicians eyeing various political seats, from civic to gubernatorial races, have since 2011 made empty promises to ensure that Kenya’s second largest miller roars back to life.

Mumias Sugar was incorporated in 1971 as President Jomo Kenyatta’s administration sought a lasting solution to sugar shortages in Kenya. But its best run came in the 2000s after the firm was privatised.

By the time of its collapse in 2019, the government was still the biggest shareholder with a 20 per cent stake. KCB held an estimated 1.72 per cent stake and was the second largest individual shareholder.

Questionable decisions

More than 70 per cent of the firm’s shares were traded publicly at the Nairobi Securities Exchange (NSE) hence owned by thousands of individuals. The financial year ending June 2010 saw the miller rake in a record Sh2.6 billion in profits.

The company was, by all means, a model corporate body. Future audits, particularly a 2015 report by the globally acclaimed consultancy firm KPMG, would paint a different picture.

KPMG revealed that past managers, including the miller’s most celebrated managing director, Dr Evans Kidero, may have been behind questionable decisions and omissions that led to its collapse.

From unauthorised after-sale discounts to procurement irregularities and outright theft of sugar during transport, the KPMG pointed at 20 individuals that set the stage for one of the country’s most monumental corporate collapses.

None of the individuals mentioned in the KPMG report has admitted liability. Nobody has been jailed, or even arraigned in a court of law for crimes against Mumias Sugar. No recovery proceedings have been initiated against the suspected culprits.

The only sure thing is that Mumias lost billions on account of poor management.

Alongside four other millers – Chemelil, Miwani, Nzoia and Sony – Mumias had become one of the most crucial economic stimulants in western Kenya as thousands of farmers and other suppliers depended on it.

It was a source of income either directly or indirectly for an estimated 600,000 people – more than one third of Kakamega’s population.

And when the firm commissioned an ethanol plant in 2011, more profit was expected from supplemental income, in addition to what was being raked in by its electricity producing plant.

Sadly, the firm is now facing its biggest survival test as creditors seek to lease the factory to a rival miller in the hope that all debts will be repaid within 20 years. Farmers can only hope that Mumias will still be standing at the end of the lease period.

When lawyer Jackline Kimeto filed an insolvency petition against Mumias in April, 2019, she was hopeful that her move would pressure the miller into paying her Sh76 million debt.

The miller’s shame

Ms Kimeto had defended Mumias in a suit filed by Kenya Power in 2015, seeking Sh1.1 billion in unpaid electricity bills. She also handled other cases for the company.

But her petition pulled a thread that would eventually undo the seams holding together what was left of Mumias’ clothing, exposing the miller’s shame: It was flat broke and headed down the murky waters of bankruptcy.

More than 80 creditors joined the insolvency suit. Five months later, KCB placed Mumias under receivership. The lender appointed Ponangipalli Venkata Ramana Rao as receiver manager.

On September 25, 2019, the NSE suspended trading of Mumias’ shares on account of the receivership. Mr Rao’s first move was to fire all 900 workers as he started reviewing the miller’s books and operations. The number of staff was a pale shadow of Mumias’ heyday, when more than 9,000 people were on its payroll.

Unhappy with KCB’s move, Ms Kimeto filed an application challenging the manner in which the lender placed Mumias under receivership. She filed a second application seeking to have an administrator appointed to take over the miller’s management.

High Court judge Mary Kasango issued orders temporarily barring Mr Rao and KCB from selling or transferring Mumias’ assets, pending determination of Ms Kimeto’s application.

As the lawyer’s application was still lingering in legal red tape, a section of creditors was growing disgruntled with Mr Rao and KCB. They felt that the receiver manager was biased towards KCB at the expense of other creditors.

Creditors resolved in an October 16, 2019 meeting to have an administrator who would be answerable to anyone owed money by the collapsed miller.

Barely three weeks later, Mumias lenders met with representatives of the Kakamega County government and resolved to form a steering committee that would oversee the revival of the miller.

The committee was to have Ashitiva Mandale, George Kashindi, Lynette Okiro and Ms Kimeto. The final slot was reserved for a representative of the National Treasury. The group would work with Mr Rao.

When Mr Rao took control, the firm had not produced sugar for more than a year. More than 25,000 farmers dumped Mumias over non-payment of their dues. Strangely, ethanol had become the biggest and only reliable source of income for the miller.

Blessing in disguise

The receiver manager halted the remaining operations, pending a restructuring process that would be guided by a detailed review of issues affecting the company.

On March 15, 2020, President Kenyatta announced a partial economic shutdown after Kenya reported her second and third Covid-19 cases. It was doom for most companies. 

But for companies like Mumias, it was a blessing in disguise because ethanol suddenly became the most sought after raw material because there was not enough hand sanitiser to satisfy the local demand.

Even the police were surrendering ethanol confiscated from illicit brewers to make more sanitiser. Mumias had resumed ethanol production one month before the partial economic shutdown. At some point, the miller was producing 150,000 litres of ethanol a day.

There was, however, a pause between December 2020 and February 2021 following a molasses shortage. Mr Rao eventually sourced for molasses from rival millers and resumed the ethanol production.

Mumias also received a huge boost from the Kenya Revenue Authority (KRA), which opted to waive a Sh11 billion tax bill, a huge chunk of the miller’s debts. In April last year, Mr Rao said he intended to lease out Mumias’ assets for a 20-year period that would ensure the miller’s survival and repayment of debts.

Tycoon Narendra Raval emerged as the most interested candidate through his Devki Group of Companies. Court proceedings would later reveal that the Devki Group had placed a Sh60 billion bid for the 20-year lease. But Mr Raval’s firm did not want the public scrutiny that stakeholders were demanding and withdrew the bid on June 4.

Mr Rao was then summoned by the Senate to explain the leasing plans. He revealed that he had sourced for potential strategic investors.

The companies he had approached were the Devki Group, Catalysis Group (Russia), Sarrai Group (Uganda), Kruman Associates (France), Kibos Sugar, Third Gate Capital Management, Godavari Enterprises and Premier JV (India).

On June 18, activist Okiya Omtatah filed a suit at the High Court’s Constitutional and Human Rights Division in Nairobi seeking to have Mr Rao removed, and the National Treasury compelled to revive Mumias.

Conflict of interest

He argued that Mr Rao had acted unprofessionally by failing to explain the formula used to settle on the eight bidders. He also raised a potential conflict of interest on the receiver’s past dealings with the Devki Group.

Mr Rao had sold scrap metal to Devki Group while managing affairs of Kwale Sugar during a past receivership spell. Mr Omtatah also argued that Mr Rao had failed to issue any specific details to the public on Mumias’ state of affairs since taking over as receiver manager.

After Mr Rao conducted a fresh tendering for leasing, Mr Omtatah successfully sought orders compelling him to file financial statements and bids placed by the bidding companies. The documents would reveal that Mr Rao settled for the third lowest bid price of Sh6.2 billion, floated by Uganda’s Sarrai Group.

One of Mumias’ key suppliers, Gakwamba Farmers Cooperative Society, would join Mr Omtatah in protesting the manner in which Mr Rao was handling the deal.

Gakwamba filed a suit in the Commercial & Admiralty Division of the High Court in Nairobi on August 2 last year, faulting Mr Rao for entering negotiations with Devki Group and sought orders barring any deal.

“Mr Rao and KCB have not carried out an objective cost-benefit analysis to determine whether the so-called strategic investor is the most effective way of reviving MSCL and ending the suffering of its sugar farmers and other stakeholders,” the society argued.

Gakwamba owns 1,000 ordinary Mumias shares. Farmers under the group are also owed over Sh25 million for cane supplied. The group argues that Mr Rao should not be allowed to lease out Mumias assets through private treaty, and only a process accessible to the public should be implemented.

Justice Wilfrida Okwany agreed with the farmers. On September 23, the judge ordered that Mr Rao open bids in the presence of all bidders. Interestingly, the bids remained a closely guarded secret before Mr Omtatah later secured orders compelling Mr Rao to file the information in court.

Three days after the farmers filed their case, Mr Rao advertised a fresh procurement process for the leasing deal. Not all were happy with the move. Lawyer John Khaminwa had at this point joined the insolvency petition against Mumias. He is owed money by the miller, but wanted to support its revival rather than liquidation.

On September 16, Mr Khaminwa filed an application in the insolvency suit seeking to have Mr Rao cited for contempt of court. The lawyer argued that the court orders stopping sale and transfer of the company’s assets also covered leasing deals, hence Mr Rao was in violation.

Insolvency suit

Mr Rao and KCB opposed the application, holding that during the lease period all assets would still be owned by Mumias. A week later, KCB and Mr Rao filed an application in the insolvency suit, seeking to stop the Senate from further summoning them or interfering with the Mumias receivership.

The two argued that the Senate was interfering with their rights by giving instructions on how to handle the collapsed miller’s affairs. The Senate had on September 29 – a day before Mr Rao and KCB filed their application – requested the receiver manager to comply with the court orders.

Justice Alfred Mabeya had taken over the insolvency suit, and delivered one ruling to handle four applications – Ms Kimeto’s seeking to stop selling of Mumias assets, her request for appointment of an administrator, Mr Khaminwa’s contempt of court allegations and Mr Rao’s bid to stop Senate summons and directions.

In his November 19, Justice Mabeya agreed with Ms Kimeto on the need for an administrator. He, however, appointed Mr Rao the administrator while upholding his role as receiver manager.

The judge held that the Senate had not done anything to indicate interference, as it had only sought clarity from Mr Rao and requested that he comply with court orders. But the judge issued orders barring the Senate from directing Mr Rao on how to conduct business in his receiver manager capacity.

Mr Khaminwa’s contempt of court application was also dismissed, as Justice Mabeya ruled that the leasing would not lead to a sale or transfer of Mumias assets. “Mr Rao is at liberty to proceed with the process of leasing the Company's assets subject to strict observance of the Competition Act, 2010 Laws of Kenya,” the judge said.

The fresh bidding round attracted six companies. The Jaswant Rai family’s West Kenya Sugar proposed Sh36 billion and became the highest bidder following the Devki Group’s exit.

Tumaz and Tumaz Enterprises, owned by Butere-based businessman Julius Mwale, was the second highest bidder with Sh27.6 billion. A group of French and Turkish investors, through Kruman Finances Limited, bid Sh19.7 billion.

The Sarrai Group, owned by Jaswant Rai’s brother Sarbi, bid Sh6.2 billion. Only Kibos Sugar and Pandhal Industries had lower bids than Sarrai’s as they each wanted to pay Sh5.9 billion. The Sarrai Group got an early, but short-lived Christmas gift as Mr Rao declared the Ugandan firm the best bidder on December 22.

The firm was to take over Mumias operations, excluding ethanol production. Rumours of disgruntled bidders threatening court action started flying almost immediately. Tumaz and Tumaz Enterprises was the most vocal, stating that it was one of the highest bidders.

Kakamega County filed a suit at the Vihiga High Court seeking to stop Mr Mwale’s firm from interfering with Mr Rao’s decision.

Highest bidder

Mr Rao filed a similar suit in Nairobi, arguing that Mr Mwale was planning to disrupt his plans to rescue Mumias through the leasing deal. On January 14 this year, five farmers challenged Mr Rao’s decision to pick Sarrai, arguing that the receiver manager conducted an opaque process.

Lambert Lwanga Ogochi, Augustino Ochacha Saba, Prisca Ochacha, Robert Mudinyu and Wycliffe Barasa Ngong filed yet another suit. Justice Wilfrida Okwany issued orders barring Sarrai Group from starting operations.

West Kenya, Tumaz and Tumaz Enterprises, Gakwamba Farmers Cooperative Society and Mumias Outgrowers Company have since been enjoined in the suit. West Kenya maintains that it was the highest bidder but was unfairly locked out.

In response, Mr Rao argues that in overlooking West Kenya, he was following Justice Mabeya’s orders to comply with competition laws. He argued that if West Kenya would have acquired the lease, the Rai family-owned firm would have become a monopoly in the sugar industry.

The receiver manager adds that West Kenya had several cases against former workers and competitors, and that the Rai family firm did not submit a detailed investment plan in the bid.

Gakwamba Farmers claim that the five farmers who obtained orders stopping Sarrai from proceeding with the leasing deal are strangers sponsored by West Kenya.

In the insolvency petition, Dubai-based Vartox Resources Inc and Ms Kimeto have also challenged Sarrai’s leasing deal, arguing that the process was opaque and intended to benefit only KCB and Mr Rao.

The two argue that Sarrai’s Sh6.2 billion bid was not sufficient to pay Mumias’ debts, yet other firms would have cleared the miller’s liabilities in less than 10 years.

Vartox says that Mumias owes it Sh6 billion, which was secured with the miller’s ethanol plant. The Dubai firm holds that Mr Rao has refused to acknowledge its rights to the plant despite several notifications.

The plant is also collateral for loans that Ecobank and France’s Proparco issued to Mumias. Ecobank, Proparco and Vartox appointed Harveen Gadhoke as the plant’s receiver manager.

All focus is now on the case filed by the five farmers. Justice Okwany will hear the parties on March 14. Orders seeking to stop the Sarrai Group from taking over Mumias operations will lapse on the same day.

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