ABSTRACT
The estimated project capital cost of $125 million as set out in the feasibility study fell significantly short of the eventual project capital cost of $586 million for the following reasons:
Cost estimates for the project components covered by the feasibility study were on the low side. Furthermore the feasibility study did not incorporate provision for a social services infrastructure, including housing, education and medical care. That was the main reason for the capital cost revision exercise carried out in 1977 by the project consultants Alexander & Baldwin Agribusiness (Hawaii), with a resultant significant increase in project capital cost estimates. Since then the gap between cost estimates and actuals has narrowed to an acceptable level.
Lonrho’s feasibility study was undertaken in 1973, with a revision in 1974. As the factory’s commissioning year was to be 1976, with credit for sales revenue taken from 1976/77, there was inadequate provision for pre-production expenses and working capital.
About $175 million of outstanding loans were supposed to be met from the proceeds of exporting sugar from 1976/77. The project was delayed and export of sugar did not materialise as anticipated, resulting in a major under provision for loan interest.
Initially, continuous full production of at least 300,000 tonnes was assumed per annum from the year 1979/80 onwards. Originally, the revenue account projections showed a large cash flow surplus which never materialised due to delayed execution of the project and much lower annual production levels than originally envisaged.
Technip (France) and Nissho-Iwai (Japan) were not manufacturers of sugar plants and related machinery. Since the financial package was provided by them, both companies undertook the plant’s engineering on the basis of machinery procured respectively from French and Japanese manufacturers. Thus, the factory price was not competitive, as it included financing costs plus high overheads and profits for both companies on top of the individual manufacturers’ costs-plus profits.
The project commenced commercial production from 1980/81. Hence additional pre-production costs plus interest on loans for the period 1976/77 to 1980/81 were incurred.
Due to the assassination of the American Ambassador in Khartoum in late 1973, the original planned loan finance from ECGD and US Exim Bank fell through, and substitute finance had to be found as late as 1975/76 to meet the escalated costs of the factory and irrigation pumps.
In the event, there were more consultants, consulting engineers and legal counsel during the construction period than had been envisaged, which further increased costs.
Project management techniques in the initial stages were inadequate, with no critical path analysis for the project work as a whole and no computerised information system. Project management was sarcastically referred to as ‘mushroom management’ because, just as whenever there is dirt mushrooms pop out of the ground, where there was a problem on site a manager was appointed to tackle it.
Delays in triggering financial arrangements meant that orders for sugar plant machinery and equipment could not be placed by target dates, which increased manufacturers’ prices for shortening manufacturing time schedules.
Signing of contracts for civil, mechanical and electrical works was delayed, especially after the cancellation of the first major civil engineering contract for estate infrastructure work, originally awarded to International Construction Company of Kuwait. In order to save time, some contracts were entered into hurriedly, without inviting public tenders. This proved to be costly.
As production was delayed for four years, there was no sugar sales revenue for that period, all expenditure being financed from successive increases in share capital, admitting new shareholders and obtaining loan finance from various sources. All of these efforts occupied a great deal of management’s time, with routine work on many occasions interrupted or slowed down until finance was in place.
With a view to speeding up project work, many goods had to be air freighted, an expensive proposition.
Finally and most importantly, the 1973 Arab-Israeli war and subsequent formation of the OPEC (Oil Producing and Exporting Countries) cartel pushed crude oil prices in the world market to an unprecedented level. The world economy was caught in spiralling inflation for the balance of the decade, rendering original costs estimates obsolete.
In conclusion, it is a matter of conjecture whether any other company would have fared better than did Kenana under these circumstances.