Monday, February 23, 2009

Pan Paper woes hit paper industry in Kenya

By MUNA WAHOME, Daily Nation [Kenya] Saturday, February 21 2009 

A deal to revive the tottering Pan African Paper Mills appeared far from done as paper converters complained that the delay would start hurting them. 

While the government seems to have bent over backwards to accommodate the Indian Birla Group, who own 54 per cent of the paper manufacturer, the latter seems to be dilly-dallying in playing its part.

The Webuye-based plant has been operating intermittently lately, leaving paper converters high and dry. 

Horticultural exporters who use cartons could be forced to seek alternatives at short notice if suppliers are to be believed. 

A cement maker with a huge demand for bags is reported to be especially at risk and could be forced to turn to plastic packaging. 

Importation, according to converters, would take several crucial weeks due to port congestion and a painfully slow railway system.

Grossly inefficient

Last week a Kenya Manufacturers Association paper and board committee meeting resolved to petition Treasury to remove the firm’s 25 per cent import duty protection, including for paper grades like label and art papers which Pan Paper does not produce. As we went to press they were busy trying to secure an appointment with officials.

The argument of converters, who have for long protested the fiscal perimeter fence around the grossly inefficient firm, is that it is not producing anyway, at least for now.

Ironically, the resolution comes at a time when Pan Paper is seeking to ratchet the contentious duty up to 35 per cent, part of a raft of demands made by the firm, some of which have clearly met headwinds within a number of State agencies. 

The government owns 34 per cent of the shares — and has so far injected part of the Sh240 million agreed with other owners — with private and international institutions taking up the rest. The Indians were supposed to inject Sh300 million in the firm established in 1969. 

Behind the scenes, converters are seriously fretting at the prospect of an escalated import duty. 

Uganda and Tanzania duty is at zero, raising the prospect of paper products, especially from the Southern African Development Community, invading the market through Tanzania, which is a member.

“Honestly I would be better off translocating to Namanga and exporting goods to Kenya,” said one of the sources who attended what was initially set to be a Budget proposal preparation meeting but which turned into a crisis resolution meeting. The national Budget is read in mid-June but is prepared earlier.

Converters contend paper has been treated like an end product, instead of an intermediate good, and they want Treasury to lower the applicable rate for imports to 10 per cent. 

That is the rate applied by the Comesa bloc. But that is only for products that Pan Paper manufactures; some of the products charged at 25 per cent are not even available locally, and paper firms want this completely phased out.

In doubt

Clearly, a duty regime of 10 per cent would work against the revival of the firm with far-reaching political implications, particularly in Western Kenya where it directly employs 800 people (when operational) and sustains the rural economy. 

But as long as its future is in doubt, converters would hardly be persuaded that it is the right thing to factor in one largely non-governmental player in policy decision-making.

That a deal is in doubt is only too apparent. The Birla Group has been lukewarm toward state overtures, and the Forest department has not warmed to demand for a long-term forest lease for Pan Paper.

Part of the miller’s problem is that it has operated on short leases that have made creditors view is as an unsustainable business model. Not to mention that its balance sheet is groaning under a debt overhang to suppliers of nearly Sh8 billion. 

With converters saying that Comesa is already posing a threat, the Finance Bill 2009 may be their saviour or destroyer. 

“The direction of trade in packaging materials has already started to reverse with Uganda and Tanzania exporting to Kenya in recent times while it was the other way round only a few years ago,” say the notes.