Financial Standard, 21 June 2005
Portland in talks to retire yen debt
By Luke Mulunda

Cement manufacturer Portland Cement has opened talks with the Government to find ways of retiring a Sh3.5 billion Yen-denominated loan it borrowed from the Japanese Government in 1996.

MR MAPELU: "We’re more profit-oriented and have shed the parastatal skin to give our shareholders good returns."

Mr Zakayo Ole Mapelu, the managing director, told the Financial Standard last week that the firm cannot keep holding the debt that is devouring its revenues with frequent swings in the exchange rate. Mapelu said Portland was in talks with Treasury and the Ministry of Trade and Industry to re-negotiate ways of retiring the debt. "The problem is not paying but the volatility in the currency that makes it hard to predict the exact value of the debt," Mapelu said.

Portland is pushing either to be allowed to pay the debt at once or transfer it to the Government. "We don’t want to be held hostage," Mapelu said. "The turn-around is in motion and I won’t allow anything to put breaks to it."
Mapelu’s impatience is underpinned by the fact Portland has just embarked on a Sh800 million expansion project that will enable it to raise its production capacity by nearly 100 per cent.
The project involves construction of a fifth clinkering mill, which will increase the cement maker’s output from 600,000 tonnes of cement a year to nearly a million. The investment is expected to grow the company’s assets by one-third.
"Our eye is on the cement market that is expected to grow at an improved rate in the long term," Mapelu said. "In fact we’re a bit late."
Mapelu anticipates a boom in the construction industry, which grew by 11 per cent last year, saying the Government has shown a strong commitment to supporting the building of houses and roads. In addition, Portland has received orders from regional markets such as Sudan, Rwanda and the Democratic Republic of Congo.
The new plant will be located in the company’s Athi River premises and its commissioning has been scheduled to coincide with the firm’s 75th anniversary celebrations in 2007.

With four mills in operation Portland Cement cranks out 80 tonnes of clinker per hour. This translates to an average of 1,600 tonnes a day, a rate Mapelu says is too low. "The new production rate will only be enough to meet demand in the medium term. We’ll have to plan for the next period," Mapelu said in an interview.

For a company that has only emerged from a loss-making crunch, the question is where the Sh800 million expansion cash is going to come from. Mapelu says Portland will not pick up any debt but will use its own money to finance the project.
The announcement comes in the wake of a stock research report by African Alliance, which gives Portland a favourable rating, but doubted its ability to take advantage of a market boom and expand its 35.2 market share.

Bamburi Cement and Athi River Mining share the rest of the pie.

Tenders for construction of Cement Mill 5 were opened last week in the presence of all bidders -- a rare break from tradition where parastatal bids processed secretly.

"We did it openly to demonstrate not just transparency, but also to be seen to be transparent," Mapelu said. This way, Portland hopes to beat politicians, who love operating in the shadows, from interfering with the process.

Eight international companies bid for the tender, out of which only four including KMPP Polysius of South Africa, SPM Engineers of India, FL Smith A/S of Denmark and New Baron & Leveque International, which has offices in Nairobi were short-listed. Imasa, Ingeniena, Montajes Construction Palacio Valdes of Spain was disqualified for failing to provide the mandatory bid bond equivalent to 5 per cent of the total cost.

Mr Luke Obir, Portland’s procurement manager, said one tender had been disqualified because it was submitted 25 minutes after the Friday 11:30 deadline.

The winner will be known in three months’ time when work is expected to start. Mapelu said the project is scheduled to be complete in 15 months in time for the company to cash in on new government projects.

He said local companies did not present bids because they lack the capacity to undertake the job. "We’re looking at a turn-key project. Most of the international companies have partnered with local investors."

The 46-year-old Portland CEO’s bullish outlook for the cement market is underpinned by consumption growth in the private and public sectors. Already the Government has commissioned construction of the Naivasha-Mai Mahiu Road using cement blocks. The pilot project is expected to cost Sh1.6 billion.

Meanwhile, cement makers are also financing the recarpeting of the Kenyatta-Mbagathi Road in Nairobi in an effort to showcase the value of cement in roads construction.

This, coupled with the recent Sh500 million budgetary allocation for the upgrading of housing units in slums, points to a boom in an industry that has been captive to low growth due to high interest rates that discouraged private sector borrowing and a dearth in government projects.
Things are expected to get even rosier for the cement industry in the new financial year with Sh12.9 billion having been allocated for roads construction. The allocation represents a 300 per cent increment over the current financial year.

In his Budget speech, Finance minister David Mwiraria also set aside Sh2 billion for completion of stalled projects across the country pushing the total amount of government spending earmarked for construction to nearly Sh15 billion.

Last year cement consumption hit 1.5 million tones mark, up from 1.3 tonnes in 2003. "EAPCC had its share of the cake and this has helped us to turn the profits corner," said Mapelu, who was appointed to head the parastatal in May last year after beating four contestants in a recruitment process conducted by PriceWaterhouseCoopers.

Mapelu is also credited with helping Kenya Airports Authority make the transition from a being fully-fledged government department to a parastatal.
Looking at the company’s finances, it appears EAPC has had more than its share of the improved tidings. Mapelu says the company has made a giant leap in earnings, and predicts that this year’s profits, to be announced at end of June, will just be shy the Sh1 billion mark. If realised Portland’s will be one the biggest turnaround stories in Kenya’s corporate history given the fact that the company made a loss of Sh269 million in 2003.
"Last year wasn’t very good," he said, "but I’m proud to say we managed to achieve a turnaround. We’re more profit-oriented and have shed the parastatal skin to give our shareholders good returns."

The return to profitability has come on the back of comprehensive cost-cutting measures and improved efficiency in mining, production and distribution. "We’re literally sweating our assets, as opposed to keeping them idle," Mapelu said.

It is this strategy of squeezing all he can out of the workers and machines that are expected to feed growing cement demand.
GTZ, the German development agency that has been contracted to reconstruct part of the road network is Southern Sudan, is using cement from EAPC. With a strong presence in Southern Sudanese towns of Rumbek and Juba, servicing the contract is expected to be smooth for EAPC. "We’re supplying about 10,000 tonnes a month to Juba and new orders are flowing in from the Congo. We’re going to be very much part of the reconstruction processes in these countries," Mapelu said.