Pulp, paper and packaging

Background

Pulp and paper production in Kenya is presently dominated by one firm, Pan African Paper Mills (Panpaper). There are, however, several smaller mills engaged in the production of various kinds of paper and packaging materials. Panpaper accounts for 40 per cent of employment and over 60 per cent of value added in this industry. There are over 20 medium and large enterprises for which Panpaper is the main supplier of raw materials. The industry has linkages with Eastern and Southern African countries, where it provides other industries with packing, printing, wrapping materials and newsprint. The industry is dominated by Indian groups, who have extensive operations in the country and other countries in the region.

History of firms in the sample

Origins, ownership and structure

The firms in the study sample are Panpaper and East African Packaging Industries (EAPI). Panpaper started operation in 1974 as a joint venture between the Kenyan government, the IFC and Orient Paper Mills, part of the Birhla group from India. Its primary objectives were to enable Kenya to reduce paper imports and to earn foreign exchange through exports.

The first plant of EAPI was established in Mombasa in August 1959 with 75 per cent of its shares foreign owned. The second plant was established in Nairobi, in 1963. Each of the plants had increased its workforce to about 300 permanent employees by 1992. EAPI specializes in the production of packaging materials. Among its main products, and main export items, are paper sacks, including those used in packing cement, tea and sugar.

EAPI was one of the pioneers in the region in the manufacture of paper sacks for tea, replacing the wooden chests which had traditionally been used. Following the approval of paper sacks by the World Tea Association, the technology quickly spread. EAPI started manufacturing paper tea sacks in 1980. In 1993 it was the only firm producing this item in the country. Some of the other producers of paper tea sacks are in Sri Lanka, Australia, Zimbabwe and South Africa. Since the quality of paper sacks is generally standardized, a firm's competitiveness in the export market is significantly determined by its ability to keep labour and other costs down.

Export history

As already mentioned, the primary objective of Panpaper was to produce paper domestically to substitute for paper imports and to expand exports. This dual role of saving and earning foreign exchange had only partially been realized. In its early years of operation, Panpaper exported substantial proportions of its output, reaching a peak of 29 per cent in 1978. However, as domestic demand grew, the firm reduced its export share in order to satisfy local requirements. By 1985-86, exports were down to 0.2 per cent of output. However, with expansion in 1990- 92, this trend has been reversed and the firm was able to increase its export share to 10 per cent in 1992.

EAPI has been more successful in fulfilling its export objectives. In the 1970s and most of the 1980s, the company exported about 20 per cent of its total output. This proportion declined marginally in the late 1980s because some of the countries which used to import the Kenyan product established their own paper sack plants. In addition, EAPI had experienced some problems in obtaining raw materials. Burundi has been the firm's largest market for tea sacks, followed by Uganda and Tanzania. Its main export markets for cement bags have been Sri Lanka, Brazil, Tanzania, Sudan and Mauritius.

EAPI's success as an exporter was the result of a combination of factors. It was among the first firms to manufacture paper tea sacks. This gave the firm more or less monopolistic power in the region for some time until other countries established their own plants. Moreover, throughout most of it history, the firm has been able to offer competitive prices because of the export compensation scheme. The relatively low labour cost in Kenya was an added advantage. Kenya's labour costs were, for instance, estimated by EAPI's management to be about 20 per cent of those in South Africa. Availability of some of the raw materials locally, especially paper from Panpaper, was another advantage. The firm is among the largest domestic buyers of paper from Panpaper, consuming 900 tonnes of raw materials per month.

The firm has also given sustained attention to export markets. Both the Nairobi and Mombasa branches of EAPI have export departments charged with the responsibility of promoting exports in the region and beyond. Finally, the large domestic demand for paper sacks for tea and cement enabled EAPI to enjoy economies of scale and to supply its products at competitive prices to the export market. The tea industry in East Africa obtained most of its packaging requirements from EAPI. The BPCC and EAPC cement firms continue to be the most important domestic consumers of cement sacks from the firm, which has established a plant in Mombasa to specialize in the production of cement sacks. The rapidly growing horticultural export business has had a significant positive effect on the expansion of domestic demand for paper packaging material.

External factors affecting export growth

Raw material problems

Panpaper uses plantation forests for which it pays royalties to the government, which has a virtual monopoly on the supply of logs since it owns most of the country's forests. The rapid depletion of forests due to increased land use and other competing timber uses has forced Panpaper to launch its own afforestation programmes. The government has also substantially raised royalties, reducing Panpaper's ability to compete against legal imports, which were subject to a 25 per cent tariff. Panpaper has in the last three years established new plants utilizing alternative raw materials such as scrap paper. Duties on imported inputs such as chemicals, higher-priced local logs and depressed paper prices on the world market were external problems identified by the firm's management. The firm had also experienced higher power costs.

Constraints on EAPI's exporting capacity included raw material supply limits from Panpaper and the loss of export markets as some importing countries established their own plants. This was a particular problem for EAPI because the manufacture of paper sacks is essentially a low-technology and low-capital industry. EAPI was also hampered by inefficiency and corruption at the Mombasa Port and under-utilized capacity - 50 per cent in the Mombasa plant and 65 per cent at the Nairobi plant. The seasonal nature of horticultural exports aggravated the under-utilization of capacity during horticultures low seasons. Shipping costs were also high, reducing the competitiveness of the firm's products in Europe and other distant markets.

The recent relaxation of trade links with South Africa eased the problem of raw material supplies to some extent, as the firm was able to receive paper raw materials within 10 days, as compared with 4-5 weeks for materials from Europe. In the last two years the firm has obtained about 40 per cent of its raw materials from South Africa.

Technology, productivity and human resources

Characteristics of demand in target markets

Panpaper produces a wide range of products, including bleached and unbleached papers for packing, printing, wrapping and newsprint' in about 35 grades. This diversity means that it cannot achieve economies of scale. The scale is determined by product diversity and to a considerable extent by the country's varied industrial/consumer needs. Panpaper could not avoid this given the existing structure of the industry. Costs could be reduced if the firm specialized in a smaller range of papers or was able to export more of its output.

Technology and productivity

Over time, Panpaper has established an impressive and well-run operation. Not only has the foreign partner, Orient, effectively transferred some know-how regarding plant maintenance and operation, it has also improved the plant's operating levels. Energy consumption in terms of fuel per ton of paper has been reduced by 25 per cent through equipment modification, better 'housekeeping', and raw material switching. Its technicians have found ways of using new raw materials such as eucalyptus, straw and scrap paper. The company has also modified its processes to use local corn-starch instead of imported TKP (tamarind kernel powder). Its chemical recovery rate of 92 per cent was comparable to that of efficient plants elsewhere. The firm operated a captive caustic soda, chlorine and hydrochloric acid plant, the largest of its kind in East Africa. Its operations, being semi-automated and spread over a broad product range, required more skills than a plant of a similar size in an industrialized country. Its workforce has gradually mastered a significant number of those skills, while its workshop can manufacture various simple spare parts.

EAPI has settled for an intermediate technology and relied on second-hand machines. The firm buys reconditioned machinery which has been discarded by European firms in favour of automated machines. New technology in the manufacture of paper sacks is mainly focused on increased automation and mass production, which are not so crucial for developing countries with small domestic markets. The management of the enterprise argued that reconditioned machines were for the time being adequate and suitable for the Kenyan market.

Human resources and development of skills

Panpaper employs about 2 200 local staff and 235 expatriates. Its rural setting (Webuye), far from major cities, compelled the firm to develop an intensive training programme a year before actual production started, as local skills in paper manufacturing were virtually non-existent. The complexity of the process called for a large number of expatriates. Of the 235 Indian technicians appointed at the start, 30 remained in the firm by the end of 1992. The firm's training school had turned out nearly 3 000 graduates from a variety of technical courses. Several technicians have been sent to India, Europe and North America for advanced training. This intensive effort has yielded results, so that Panpaper has been able to reduce the number of expatriates significantly and keep the plant running at high capacities in addition to expanding capacity and introducing new products. The productivity of workers has increased over time, though it was still below levels in countries such as India.