Monday, 21 September 2015

Grokking The Miseries Surrounding The Limping Economic Giants of Mumias, Uchumi and Kenya Airways

Once regarded as economic giants in their respective sub-sectors and fields of operation, less can be heard and talked of them in terms of profits but only a lot can be said about the astronomical losses that have recently been posted by these firms. There is no doubt that the financial health of these former economic jewels has been worsening due to various factors; known and unknown. Mumias Sugar Company has for decades been the giant sugar miller in Kenya. Uchumi Supermarket has arguably been the market leader in wholesale and retail until the onset of its financial woes. Kenya Airways has been the pride of Africa until when the financial ebb caused by mismanagement set in.

These limping and sleeping economic giants have been victims of mismanagement which has been the onset of their decline leading to massive losses. Starting with Mumias Sugar Company, the last time the firm posted a profit was in 2011 where the pre-tax profit was Kshs.2.64billion. Since 2012 to date, there has been a stream of losses as follows: in 2012, a loss of Kshs.1billion was recorded. Come 2013, the sugar miller posted a loss of Kshs.1.6billion which worsened in 2014 when a financial loss of Kshs.2.7billion was realized. In 2015, financial normalcy was still far-fetched when the entity made a loss of Kshs.3.4billion.

Kenya Airways’ financial woes ostensibly began in 2012 where losses have been recorded until this year. The last time when the shareholders and stakeholders were smiling and in good books was in 2011 when a profit of Kshs.2.034billion was posted by the carrier. In 2012, the troubles set in when a loss of Kshs.4.2billion was made. The financial difficulties continued to hover around in 2013 when it reported huge loss of Kshs.7.86 billion. The following financial year, KQ posted a loss of Kshs.4.86billion but then in 2015, all hell broke loose when the once acclaimed pride of Africa recorded a massive loss of Kshs.25.7billion, money which is enough to fund the construction of another superhighway in Kenya. 

Beginning with Mumias, there have been scandalous activities and events that have characterized the economic giant of Western Kenya. One such clandestine activity was that in which the management squandered Kshs.1.1billion as a result of importing illegal sugar. This questionable tender and deal to import sugar is said to have been awarded to Dante’s Peak, a company that is primarily owned by one Benson Sande Ndeta, a prolific businessman who is also the chairperson of Savannah Cement. One astounding fact is that Dante’s Peak is registered as a company that deals with cement and ballast. This deal dates back to sometime in December 2012 when Peter Kebati had taken over as the CEO of the sugar miller. Other former directors who have been accused alongside Mr. Kebati include Emily Otieno who served as the Company Secretary, former Commercial Director Paul Murgor and Chris Chepkoit who is the former Finance Director.

It can be clearly observed that in the same year in which the deal was generated is when a continuous stream of financial losses commenced. With utmost certitude, the former CEO Mr. Kebati needs to answer the questions on the financial doom and gloom that has engulfed Mumias Sugar. During Dr. Evans Kidero’s time as the chief executive, Mr. Kebati served as the Chief Financial Officer and I thought of him as a prime replacement of the current Governor of Nairobi County. To my disappointment, however, it is during his unsuccessful tenure that things began heading south.

Another cause of the financial losses that have rocked the miller are the spiraling administration costs and/or expenses. These are costs that are incurred as a result of controlling and directing a firm and they include the salaries of senior executives and the costs of general services such as accounting, contracting and industrial relations. The administrative costs are not directly identifiable with financing, marketing or production operations. This implies that Mumias Sugar Company has been using a lot of money to pay the senior management and cater for other expenses which involve the issuance of contracts, employee relations and accounting. With diligent prescience, the new CEO Errol Johnston needs to design a turn-around strategy that will lead to relatively lower administration costs which may involve restructuring the management and also awarding tenders that are corrupt-free.

On the side of Kenya Airways, a number of factors are thought to have generated the losses that have been recorded at the firm especially the historical Kshs.25.7billion loss that is the largest ever in Kenya’s corporate world. The KQ management, while releasing its financial year results for 2014/15 listed cancellation of flights due to Ebola, a slump in tourism and competition on the continent as the key factors that contributed to the massive loss. 

Though there is a bit of dynamism in the industrial operations, I fail to understand why and how Ethiopian Airlines recorded a profit of $175million which is about Kshs.18.38billion in the same financial year of 2014/15. In my opinion, KQ’s management has to give an elaborate explanation to their losses because Ethiopia has also been affected by the instability occasioned by Al Shabaab, and the Ethiopian Airlines’ flights to West Africa were also suspended temporarily due to the deadly Ebola virus and compounding it all, it also faces stiff competition from other airlines.

The CEO and the entire management team of KQ have simply been unable to cultivate a strategy to continue making the airline the pride of Africa. There is definitely an atmosphere that oozes staleness when it comes to formulating a new results-oriented strategy at KQ. Stern action ought to have been taken the moment the loss was reported and in fact, some key decision-makers would have been sent packing and these include the CEO, the Chief Operations Officer (COO) and the Finance Director and the director in charge of supply chain/procurement.

KQ’s financial tailspin has been as a result of poor decision-making by the management amid other internal factors and issues that can be amicably controlled. You cannot wail and talk of stiff competition if you are pricing the air tickets at a high price compared to your competitors. This at one time or another has made several aircraft to fly when they are significantly empty with very few people on board especially on the local routes. Also, KQ has very high administrative costs which have partly contributed to the losses. Nevertheless, the airline went on to purchase a number of the Boeing planes and the Embraer jets whose maintenance costs have been extremely high. What we have not been told clearly are the  underhand tendering deals that are likely to have transpired in due cause of operation. Mbuvi Ngunze, as the CEO, is a man under siege as he is expected to normalize the financial books of KQ.

Methinks however, that Mr. Ngunze has fallen victim of a “rotten” system that has been in place. He only took over in November 2014 from the then CEO Eng. Titus Naikuni who had been at the helm since 2003. The last three years before his exit, Naikuni captained a team that made losses and in came Ngunze whose first year has been marked by the “mother” of all losses. But Ngunze has also been part of the “rotten” system because he was the COO during part of Naikuni’s tenure. So what is the way forward for KQ? There were suggestions of a Kshs.60billion bailout by the National Treasury which is set to cover the debts that the carrier needs to service. But with incisive forethought, the following can be done to resuscitate the airline: instituting  corrupt-free procurement procedures, downsizing the staff and restructuring the management to curb the rising administrative costs, re-looking into the price of tickets and a couple of other positive changes.

Uchumi chain of wholesale and retail stores was on a path of financial recovery when Jonathan Ciano was appointed as the receivership manager in 2006 before being the chief executive. Seen as the ‘king of turn-arounds’ having engineered the recovery of Kenya Power before joining Uchumi, Ciano has had his professional acumen tattered as the giant retailer was on the verge of making losses under his watch. In the mid-year results announced in February this year, Uchumi made a loss of Kshs.262million. Its financial impropriety has been traced to procurement deals that are corrupt. For instance, at his watch before he was sacked, Uchumi owed suppliers Kshs.1billion which is quite crazy. The most astonishing fact is that some staff members were awarded tenders to supply various items.

The recent appointment of Julius Kipng’etich to head the retailer has been deemed as a good move that will steer the firm into profit-making. The immediate former COO of Equity Group, former MD of Kenya Wildlife Service and former MD of the Investment Promotion Council has already announced a raft of measures to streamline the operations of Uchumi. Among the measures include downsizing, closure of loss-making branches and the introduction of mobile supermarkets to tap the low-end market especially in the urban informal settlements.

To say the least, the responsibility lies with the management to make sure that the economic giants awaken from the slumber. But in restoring efficiency and financial prudence requires that procurement procedures have to be above board because this is where most entities lose finances. Explicitly, the management needs to formulate and design strategies to deal with issues concerning competition and market relevance.

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