This is a special report that has been published in The Standard Newspaper on the rot that has plagued Mumias Sugar Company:
“A total of 1,497 trucks left Mumias Sugar Company’s warehouse between 2011 and 2014, but were diverted on the way to the miller’s other storage centres across the country, in a distribution scam that has cost the country’s biggest miller billions of shillings.
Further, some of these transporters were paid millions of shillings, despite having not delivered a single kilogramme of sugar, according to a KPMG forensic audit report in our possession. Mumias was duped into paying in excess of Sh62.9 million in transport costs for the diverted goods, with staff accepting ‘theoretical deliveries’.
This is how the scam worked: A transporter would leave Mumias in Kakamega County, for instance, with a truck loaded with 600 bags of sugar destined for a warehouse in Nairobi. On arrival in Nairobi, the transporter would get a stamp showing the sugar was delivered, even though the truck would not offload any bags.
Assuming each of the 1,497 trucks carried an average of 600 bags of sugar, then the miller lost 898,200 bags. At Sh5,200 a bag — the price a bag of sugar hit when the diversions were happening, up from Sh4,100 — it adds up to a loss of Sh4.6 billion. Added to the Sh62.9 million incurred in transportation costs, Mumias was saddled with an unnecessary bill of about Sh4.7 billion.
The KPMG audit found that in 2011, the year Nairobi Governor Evans Kidero was at the helm, a total of 343 shipments were diverted out of the 1,495 that were shipped. The following year, 133 trucks were diverted in similar fashion. After Peter Kebati took over at the miller, the scandal escalated. In 2013, a total of 1,017 deliveries were diverted out of the 2,448 trucks sent out. Some goods were also received after 72 days in transit, yet transporters were not surcharged for the delays.
The KPMG report reveals how on January 29, 2014, a lorry, registration number KAW 222Y, belonging to transport company, For You Carriers, was allowed through Mumias Sugar’s finished products’ weighbridge at 4.47pm. The lorry was loaded with 640 50-kilogramme bags of sugar and left for the miller’s Nairobi warehouse the following morning at around 7am.
However, eight hours later, the same lorry checked in again at the Mumias weighbridge and was loaded with 600 bales of 2kg sugar.
Given the speed of a loaded truck, the police checks along the way and the process of offloading sugar and accounting for it, it would have been impossible for the transporter to make the trip from Mumias to Nairobi and back in just eight hours. It was later discovered that the lorry had been driven to Shibale market, which is a few kilometres from Mumias town, where seals were broken and the entire consignment of 640 bags of 50kg sugar offloaded into an unidentified truck.
This is just one of the instances captured in KPMG’s 338-page report on revenue leakages and distribution scandals at the firm. Mumias maintained five warehouses between July 2011 and February 2014 in Bungoma, Kisumu, Mombasa, Mumias and Nairobi. The logistics manager on duty is supposed to provide daily reports from which allocations for dispatch to various customers are made. A gate pass is generated after this report is done. To transport sugar from one warehouse to another, three copies of the delivery note, in white, light blue and green, are issued for every shipment. The delivery note contains the destination, quantity, route, track number and name of the transporter. A transporter is issued with the white and light blue copies, while Mumias Sugar retains the green copy at the gate. A software system then generates a gate pass before the delivery note is handed to the weighbridge clerks.
As part of the procedure, a transport supervisor in Mumias sends out daily reports to the external warehouses to notify them of the goods in transit. A transporter is required to deliver both copies to the external warehouse on arrival, but return with the white copy to the Mumias warehouse for payment.
A product not delivered by a transporter to a customer or warehouse is treated as a short landing, according to the sales and distribution standards the miller subscribes to.
Each transporter is expected to deliver goods destined for Nairobi within five days, while those for Mombasa must be delivered by the end of the seventh day. If they fail to meet these deadlines, the transporters are supposed to be surcharged. However, these procedures were flouted a number of times to cover up the distribution scam.
KPMG also found that 1,497 inter-warehouse transfers between Mumias and Nairobi were not delivered within five days. These related to 46 transporters. A transport supervisor in Nairobi told KPMG that she was aware of the scam. Transporters would not deliver goods meant for the warehouses, yet they would present delivery notes for stamping.
The supervisor said the practice was most common with distributors who were also transporters. Some of those alleged to have had the highest number of diversions include Rising Star, For You Carriers, Mega Transporters, Paleah Stores and Maarufu Stores. The transporter would then be invoiced without sugar being delivered and would get a gate pass prepared for invoicing.
There were also instances where the transporters and distributors diverted sugar and were surcharged, only for it to later turn out that they did not have funds in their distributor accounts. This resulted in unapproved credit. The then commercial manager at Mumias, Paul Murgor, told KPMG investigators that he was also aware of the diversion scam. He told the audit firm that he had informed the managing director at the time, Mr Kebati, but no action was taken.
“All diverted trucks should have been short landed as per policy. We found that for the diverted goods, the transporters invoiced Mumias and were paid for transport services for the goods diverted. We found that despite the sugar not being received, the delivery notes would be stamped ‘Received’,” KPMG quotes Mr Murgor as saying. Further, Mumias executives ignored advice from their own internal auditors who had raised these anomalies in their findings.
One of the internal audit reports had found that there were no procedures put in place to ensure sugar was delivered to the appropriate destination. The internal auditors recommended that Nairobi and Mombasa warehouse staff be prohibited from accepting theoretical deliveries.
But despite the warnings, by the time KPMG went in, Nairobi staff were still accepting these types of deliveries, with transporters being paid for diverted goods. KPMG also did not find any evidence that transporters were being surcharged for diverted goods.
Further, some of the transporters had been recruited informally and had not signed contracts, which was against the miller’s own procurement procedures. Mumias had 146 transporters, out of which only 76 had contracts.
At the time the audit was conducted, there were 38 transporters without contracts who had transactions with the miller. Several transporters were also operating without the appropriate insurance cover.
Before a transporter is brought on board, they are required to have a third party insurance certificate and goods in transit (GIT) liability cover. “Transporters were operating with general motor vehicle insurance cover instead of GIT insurance,” the KPMG report reads. Without these covers, Mumias exposed itself to massive losses in case a shipment went missing.”
