Kenya will write off the debts owed to three sugar companies, and convert those of two others into equity loans. Private investors will then be invited to inject money into the companies in September.

Two companies — Chemelil and Muhoroni — will be merged under a privatisation plan seen by The EastAfrican. The merger will aim to maximise output from about 40,600 hectares of land on which the factories sit, making them suitable for more cost-effective plantation farming.

Under the plan, the land will be leased to investors so that it remains in public hands, and the machinery will be fully depreciated so that investors can deploy modern technology to give the mills a fair chance of competing with low-cost rivals in the region.

“Investors interested in either Chemelil or Muhoroni sugar companies will be required to bid for both. This would facilitate an ownership arrangement that allows for the two factories/zones to merge,” said Privatisation Commission chief executive officer Solomon Kitungu during a stakeholder meeting last week.

The measures are meant to make the five companies — the others are Nzoia, Miwani and Sony — more appealing to investors, with the debt and high cost of land having been identified as potential deal breakers for the divestiture, which is running behind schedule.

Under the terms of the safeguards negotiated with the Common Market for Eastern and Southern Africa (Comesa), to retain quotas on sugar imports to Kenya, the privatisation should be completed by February next year. However, with the prequalification phase for bidders — supposed to be completed by this September — still at the consultation phase, it could be three years before the mills change hands.

Kenya can only get an extension of the quotas for one more year under the World Trade Organisation rules for protection of nascent and sensitive industries.

Accumulated loans

Loans to the five companies have accumulated to Ksh100 billion ($100 million) from Ksh59 billion ($590 million) in 2009, according to a due diligence report by Ernst &Young.

Almost 70 per cent of the debt, Ksh51 billion ($510 million), was owed to the government and the Kenya Sugar Board as at June 2015. The debt increased from Ksh41.8 billion ($418 million) in June 2009, largely because of high interest rates and taxes.  

The government had earlier said it would write off Ksh33.7 billion ($337 million) of the debt outstanding as at June 2009, excluding tax arrears of Ksh10.6 billion ($106 million) whose fate would be determined by the respective tax agencies.

Asset value of the machinery amounting to Ksh5.95 billion ($59 million) will be written off to facilitate reconstruction of the sugar mills by establishing a plant with new equipment and technology to enhance the sector’s competitiveness.

The debts for Nzoia, Muhoroni and Miwani will be written off in full, while those for Sony and Chemilil will be swapped into equity.

Of the five firms, only Sony is solvent; meaning that investors will have to put in large sums of money into bringing assets such as cane processing equipment into a good state of repair. The companies had combined assets of Ksh5.4 billion ($54 million) as per June 2015, against joint liabilities of Ksh114 billion ($114 million).

Critical mass

Mr Kitungu said merging Muhoroni and Chemelil would create a critical mass for cane production in a sector where smallholder farms of below 20 acres have been among the factors blamed for Kenya being a high-cost sugar producer.

It is estimated that each factory requires a minimum viable area of 29,914 hectares of cane for optimal operation, more than three times Miwani’s catchment area of 9,143 hectares.

“The decisions on the Miwani Sugar Company will be made once ongoing court cases are determined,” said Mr Kitungu.

According to the privatisation strategy, local, regional and international investors will be able to buy shares in the five companies through an initial public offering.

Fifty-one per cent of the shares of each firm are expected to be sold to strategic investors, and the proceeds will fund the recovery and upgrading of the sugar companies.

The government will give up 51 per cent to the investors, according to the privatisation arrangement, from its current 98 per cent shareholding. Some 24 per cent of the stake will go to employees and out rowers — farmers who grow sugarcane on contract for the mills.

READ: Kenya sugarcane farmers demand more shares

About 24 per cent will be sold to employees and farmers on a contractual basis. The remaining quarter is expected to be sold to the public on a date yet to be announced.

“The remaining KSB debt will be repaid once adequate liquidity has been created in the sugar companies and the payments to staff and the farmers have been concluded,” said Mr Kitungu.