Nairobi, Kenya, April 18, 2006 – Cigarette manufacturer British American Tobacco will close its Uganda factory end of this month to concentrate production in Kenya. The Kenyan factory in Nairobi already supplies some cigarette brands in the Ugandan market under a contract manufacturing agreement.

The migration of manufacturing to Nairobi is part of a restructuring that has been going on since last year. It is intended to fully utilize capacity and reduce costs associated with having multiple plants in the same region, according to the company's management.

The transfer of manufacturing of cigarette brands to Kenya from some countries in the region lifted the company's performance in 2005 and helped breach the Sh2 billion mark in profit before taxation.

In Uganda, BAT will concentrate on leaf-growing and processing for export. The company has found it more cost-effective to concentrate manufacturing in one country rather than having them scattered in several countries. From Kenya, it can supply the other countries and cut its costs.

Last year, it began to manufacture cigarettes for markets in Djibouti, Somaliland, Mauritius and the Comoros. It also started shipping cigarettes for sale in Malawi and Ethiopia.

The Sh1 billion restructuring and expansion programme the company is to be completed by June.

As the company holds its annual general meeting next week, one of the key issues expected to be discussed by directors and shareholders is the dumping of cheap products in the Kenyan market.

According to the company's latest annual report, dumping of cigarettes remains a threat to sales as well as government revenue. It has been trying to sensitize various parties involved in the business on the impact of the problem and how it can be curbed. This has been done through workshops in Nairobi and western Kenya as well as meetings with revenue authorities in Kenya, Uganda, Rwanda and the Democratic Republic of Congo.

"This has elicited positive action leading to frequent seizures of illicit products in the capital and border points," says the report.

BAT chairman Evanson Mwaniki says in the report that increases in consumer prices were necessitated by a rise in excise tax by 10 per cent in the June 2005 budget. Even as the group focuses on developing international brands, it has also maintained segments for premium brands such as Dunhill cigarette launched last year.

In 2005, domestic sales grew by 2 per cent, driven by brands such as Benson & Hedges, Embassy, Sportsman and Safari. Gross turnover, at Sh11.2 billion, was 13 per cent higher than 2004, with pretax profit rising by 15 per cent to a record high of Sh2 billion.

But even as the figures look good, the company still faces a major threat, as the Tobacco Control Bill looms large. It is set to be tabled in Parliament in the course of this year. The company has already submitted its suggestions to the Government on its position regarding the Bill, in which it advocates a legislation that takes care of the interests of the various parties.

BAT cites among its successes in 2005 as recognition of its financial base by Global Credit Rating (GCR) company, which scored its domestic long-term credit rating at double A Plus. The short-term rating was put at A1+, the category's highest ranking possible. This was attributed to the operating performance and cash flow generation.

With 9000 contracted farmers, the firm processed 5,300 tones of green leaf tobacco. This was a 47 per cent increase over the 2004 season and paid farmers Sh355 million in revenue.

The key drivers of production and farmer income were good weather and improved quality. Tobacco buyer Alliance One, which was in its second year of growing flue-cured tobacco, recorded increase in production processed at the Thika Green Leaf threshing plant. This pushed utilization of the facility to full capacity.

The Thika threshing plant processed 23,800 tones of tobacco comprising 15,800 metric tones from Kenya and another 8,000 from DRC. According to the annual report, a number of improvements were carried out at the factory to enhance product quality and yield. The factory provided about 2,000 seasonal jobs at peak times.

Mr. Mwaniki says the momentum of economic growth experienced in 2005 is likely to face hurdles in 2006. He cites drought as likely to lead to higher cost of power while available resources are diverted from development activities into famine relief.

Like most exporters, he sees the strong shilling posing a threat. "The strong shilling, whilst mitigating the rise in the cost of imports, could seriously damage exports especially of horticultural products and tea," he says. On the other hand, the strong shilling should make it cheaper to import oil, a key input in manufacturing at time when the prices have been on upward trend.

Despite the current hardships, he sees the future prospects for the economy remaining "generally brighter", provided the Government continues to maintain a favorable macroeconomic environment.

Stepping up efforts to improve infrastructure and security, Mr. Mwaniki says, while addressing political concerns that shift focus from economic and social development will also be required to improve the prospects.

Source: The Nation