Teetering on brink of collapse: KCC in Sh1.5 billion loss, mounting debt

The crisis could derail President William Ruto’s ambitious plan to use the company as a vehicle for improving dairy farmers’ earnings.

Auditor General Nancy Gathungu laid bare the financial turmoil at the firm, highlighting a staggering Sh1.5 billion loss before tax for the year ending June 2024.

The report paints a grim picture of an entity drowning in debt, with liabilities surpassing assets by Sh1.2 billion, exposing the severity of the entity’s cashflow problems.

“This is an indication of negative working capital,” the Auditor General said, adding that the company was relying on bank loans and overdrafts to survive.

It emerged that New KCC paid Sh192 million to cater to interest expenses on loans and bank overdrafts.

Moreover, delayed settlements risk triggering penalties and supplier boycotts, worsening the company’s downward spiral.

“It is evident that the company heavily relied on bank loans and overdrafts during the year under review,” Gathungu said.

Interest expenses on loans amounted to Sh97 million, while bank overdrafts were Sh86 million.

Ruto, while on a tour of Mt Kenya, emphasised the government’s commitment to revitalising the diary sector through New KCC.

He assured dairy farmers that the government would ensure timely payments for milk deliveries to New KCC, and make it more competitive to guarantee farmers a stable market.

The head of state further pledged to upgrade New KCC facilities, including cooling plants, and to boost its processing capacity.

But the Auditor General has cast doubt on the company’s future as uncertain in the face of the financial troubles.

“These events or conditions indicate that a material uncertainty exists that cast doubt on the company’s ability to continue as a going concern,” the auditor stated.

The audit review has further exposed New KCC’s dire situation in the face of a Sh3.2 billion debt, mostly owed to farmers, of which some were overdue for more than 120 days.

The Auditor General has warned that nonpayment would worsen the company’s financial mess and disrupt its supply chains, concluding that her “opinion is not modified in respect of the matters”.

“Failure to settle the debts as and when they fall due may attract interest, hence affects the operations of the entity if the suppliers stop supplies due to nonpayment of debts when they fall due,” Gathungu said.

The Auditor General is further concerned that new KCC management was yet to appear before the relevant parliamentary committee to respond to the past year’s audit queries.

The Public Investments Committee on Social Services, Administration and Agriculture, chaired by Navakholo MP Emmanuel Wangwe, provides oversight to New KCC.

Other concerns with a bearing to New KCC’s costs of operations include excess staff and assets that are not well listed, hence exposed to pilfers.

The company was found with 171 staff over and above the approved establishment of 400 staff on fixed-term contracts.

A state corporation advisory committee circular of October 2021 reiterated to managers the need to balance staffing levels as approved.

“In the circumstances, the over-establishment may negatively impact on the realisation of the company’s goals,” the Auditor General said.

The saving grace could be the company’s assets that have appreciated over time, but the value of the same could not be ascertained by auditors.

Gathungu said the accuracy of the assets register maintained by the Nixon Sigey-led management could not be ascertained.

The milk processor is just one of a long list of struggling public entities for which the Cabinet recently proposed mergers, dissolutions and absorptions to keep some afloat.

 INSTANT ANALYSIS

New Kenya Cooperative Creameries (New KCC) is a state-owned dairy processor and one of Kenya’s largest milk companies. Established in 1925 as Kenya Cooperative Creameries, it was revived in 2003 as New KCC after the original KCC collapsed due to mismanagement. The company asserts that it plays a crucial role in Kenya’s dairy sector, supporting more than 650,000 small-scale farmers by providing a stable market for milk.