Lafarge Kenya Says Government Dispute May Hamper Expansion

Lafarge SA’s Kenyan unit said a dispute with the government over control of the company is hampering plans to more than double its production capacity in the next five years.

East African Portland Cement Co., or EAPCC, has been embroiled in a disagreement with the government for at least the past two years over ownership of the company, Chairman Mark ole Karbolo said in an interview yesterday in Nairobi, the capital. That may stall plans to increase its output of clinker, the main ingredient in cement, to 5,000 metric tons a day from 2,000 tons, he said. The government is concerned that Lafarge may have a dominant position in Kenya’s cement industry.

“The core problem is political interference where the ministry of industrialization wants to usurp and directly influence the role and power of the board,” Karbolo said. “Should the situation remain this way, it’s going to create difficulties in maintaining a united board.”

Cement-production capacity in East Africa is forecast to surge 89 percent to 17 million tons per annum over the next four years, as growth in the construction industry outpaces economic expansion in the region, Cardinal Stone, a Lagos-based investment bank, said in an Oct. 29 research report.

Cement supplies in Kenya, Tanzania and Uganda are forecast to grow at a compound annual growth rate of 6.4 percent to 14.6 million tons by 2018, driven by infrastructure projects, according to a report published by Frost & Sullivan’s Cape Town office in November.

Task Force

Lafarge owns 42 percent of EAPCC, while the Kenyan Treasury holds 25 percent and the state-controlled National Social Security Fund has 27 percent. A task force appointed by President Uhuru Kenyatta last year found that the cement producer doesn’t qualify to be labeled as a state-owned company because the National Social Security Fund shares belong to its members, and not to the state.

Kenya’s government wants Lafarge to dilute its shareholding in EAPCC because “government cannot allow a foreign company, or even a local company, to hold a monopolistic stake in an industry because this will be detrimental to consumers,” Wilson Songa, permanent secretary in the Industrialization and Enterprise Development Ministry, said in a phone interview on Feb. 12.

‘Cross Directorship’

Lafarge, which is the world’s second-biggest cement producer and is based in Paris, also controls 59 percent of Bamburi Cement Co., the country’s largest cement producer by market volume, which in turn owns 12.5 percent of EAPCC.

The Competition Authority of Kenya is preparing a report on whether Lafarge has a monopoly in Kenya’s cement industry, Elizabeth Ntonjira, head of communications at the Nairobi-based agency, said in an interview yesterday.

“We will present a report on whether or not the cross directorship in Lafarge leads to unwarranted concentration of economic power,” she said, without saying when the report will be released.

Kenyatta announced on Feb. 7 he had removed Karbolo as chairman of EAPCC and replaced him with Bill Lay, the former chief executive officer of General Motors East Africa. Kenya’s High Court reinstated Karbolo three days later, finding in favor of the chairman’s assertion that the president had no mandate to fire him.

Court Rulings

On Feb. 14, the High Court said that neither Karbolo nor Lay can serve as chairman pending a further ruling on Feb. 20. Former President Mwai Kibaki tried to remove Karbolo from office in February 2012, before that decision was overturned by the High Court two months later.

EAPCC, founded in 1933, is East Africa’s third-biggest cement producer, after Bamburi and ARM Cement Ltd., which are both based in Nairobi.

“The company is worth a lot of money and it has the potential to become the leading cement manufacturer within the East African region,” Karbolo said of the government’s efforts to control the board. “That’s the reason they are interested in taking over the management. It’s a hot cake.”

Shares in EAPCC rose 1.4 percent to 72.50 shillings in Nairobi today, bringing the stock’s gain so far this year to 5.1 percent and giving the company a market capitalization of 6.5 billion shillings ($75.4 million). Bamburi is valued at 75 billion shillings and ARM at 44 billion shillings, according to data compiled by Bloomberg.

Didier Tresarrieu, Lafarge’s representative on EAPCC’s board, declined to comment on the dispute with the government.

Improving Efficiency

The state’s interest in the company is aimed at making EAPCC more efficient, said Songa.

“There is no reason why EAPCC should not be the leading cement company in the country and indeed within the East African region,” he said. “We are only interested in making the company more robust and more efficient. And a change in management is certainly the panacea.”

EAPCC posted a profit of 1.7 billion shillings in the year through June 30, compared with a loss of 972.7 million shillings a year earlier, as sales grew 8.3 percent to 9.21 billion shillings, according to results posted in October. The company said at the time it plans to spend 2.7 billion shillings on its expansion over the next two years.

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