Bitter-sweet politics of Kenyan’s sugar industry

By JAMES ANYANZWA

NAIROBI, KENYA: The already ailing local sugar industry is headed for more trouble.

This follows indications that the Government might not conclude the sale of its five sugar millers before the expiry of the extended Common Market for Eastern and Southern Africa (Comesa) safeguards.

Over the last 12 years, the country’s sugar stakeholders have managed to convince Comesa that it was not ready to admit imports from the region.

This is despite the World Trade Organisation limiting such protectionist measures to 10 years. But Kenya’s technocrats appear to have mastered the art of skilled negotiations.

The most recent one-year extension was granted two months ago, and will be in place until February 28, 2015.

But hardly has the ink dried than Kenya is considering yet another extension. Sceptics are doubtful the move would gain currency; after all, the country has failed to put its house in order in 12 years.

Currently, Kenya is allowed to cap sugar imports from the 19 Comesa countries, an agreement that was first enforced in March 2002.

This was intended to help the sub-sector lower its production costs to levels that would see local produce compete against cheaper sugar from the trading bloc.

HIGH PRODUCTION COSTS

The Kenya Sugar Board (KSB), the industry regulator, estimates the cost of producing a tonne of sugar in western Kenya to be about Sh49,500. Other Comesa countries’ production costs range between Sh20,800 and Sh25,200.

“Locally produced sugar could be the costliest here than anywhere else in the world, but the millers are trying to change this. Our main problem is ageing mills that are not efficient and are expensive to run,” said Ms Rosemary Mkok, the chief executive of KSB.

Another problem is Government taxation. While other regional countries are relieved of levies on sugar, in Kenya, taxes account for 24 per cent of production costs.

South Sudan, through major sugar manufacturer Kenana Sugar Company, is one of the countries that poses a threat to the Kenyan sugar industry.

With a capital injection of $500 million (Sh43.4 billion), Kenana plans to boost sugar production to one million tonnes by 2015. The company is allowed to export half its output to other African countries, Europe and the Gulf Region.

Kenya, on the other hand, has an annual sugar deficit of about 200,000 metric tonnes, which is usually filled by imports from the Comesa region that come in duty free. KSB expects Kenya’s sugar production to climb by 17 per cent to 700,000 tonnes this year, on the back of improved cane supply and higher factory capacity. 

But once the Comesa safeguards lapse, the increase in output from the rest of the region has the potential of putting pressure on the Kenyan sugar industry.

Further, the country has done little to meet the terms of the latest extension that was intended to revive the local sugar sub-sector and pave way for competition from imports.

One of the main reforms recommended was the privatisation of the “sickly five” sugar millers. Many now fear it will be another dash to privatise come early next year.

The millers, whose sale is still awaiting parliamentary approval, are Chemilil, Muhoroni, Miwani, Nzoia and South Nyanza (Sony Sugar) sugar companies.

Miwani and Muhoroni are currently under receivership.

The Privatisation Commission (PC), the body mandated to oversee the sale of State-owned corporations, noted that the sale process would take at least 12 months to complete.

“It depends on when we start, otherwise a complete one year should be adequate,” Mr Solomon Kitungu, the commission’s chief executive, told Business Beat.

The privatisation of the millers is expected to improve their efficiency by involving private capital and expertise.

Further, with the Government selling its stake, it gets additional revenue and the demand on its resources is reduced.

Last week, in discussing the investment blunders the National Treasury has made by not taking up its rights in companies listed at the Nairobi Stock Exchange (NSE), Business Beat talked about the two hats the Government wears.

BENEFITS OF PRIVATISATION

One is its regulatory hat, which sees it continue to hold significant stakes in certain companies, like KenGen, for strategic reasons. But this also means its priority is not always to cash in and make returns on its investment.

The second hat is its capitalist one. This sees it bid to make the most returns for itself and its shareholders, who happen to be the general public.

Privatisation reduces the push and pull the Government suffers by having this somewhat split personality; it reduces the conflict between its regulatory and commercial functions, allowing it to focus on improving the business environment for publicly traded assets.

Privatisation also puts ownership of public assets in more hands, broadening participation.

But before any assets can be sold, the PC has to prepare a detailed proposal for approval by Cabinet and Parliament. The proposal includes an asset’s financial position, the recommended method of privatisation, the costs that will be involved, how employees will be dealt with and how Kenyans will participate in taking up ownership.

The Government plans to sell a 51 per cent stake in each of the five sugar millers to strategic investors, and another 30 per cent to farmers.

Once the millers begin to make profits, the Government will sell the remaining 19 per cent stake in an initial public offering at the NSE.

The move has been welcomed by the Kenya Society for Agricultural Professionals (Kesap), which says the sugar industry need to be made more competitive rather than rely on protectionism.

Chairman Paul Mbuni said though the country has benefited from Comesa safeguard extensions, the Government has done little to revamp the industry during this period.

“We need to a complete paradigm shift in the sugar industry. The cost of production is very high, and we need to put our industry on a competitive ground. We can’t continue relying on protectionism,” he Mbuni said.

But the cheap imports flooding the market threaten to derail efforts to streamline production. KSB allows just enough sugar imports to meet the country’s deficit.

However, the Kenya Revenue Authority has admitted it is not able to stop the illegal importation of sugar into the country.

“It is not possible for us to control the entry of contraband goods along the borders, such as those of Somalia and Sudan,” KRA Commissioner General John Njiraini said last week.

While appearing before the Parliamentary Committee on Agriculture, Livestock and Cooperatives, he also said his staff also lack the capacity to authenticate permits issued by the KSB to importers.

INEFFICIENCIES

These cheap imports have left millers with huge stocks of local produce, and because of the lack of market, they have been unable to pay cane farmers.

As a result of Kenya’s production inefficiencies, the ex-factory price of sugar at the doors of a local miller is Sh90, with customers paying an additional Sh35 at retail outlets.

The average importation price, according to the sugar board, is Sh63.

Faced with these figures, the parliamentary committee on agriculture has recommended that the Government stop sinking public funds into troubled millers and instead pull out of the sugar industry completely.

The 29-member committee, which is headed by Mandera North MP Adan Mohamed Noor, noted that there is no justification for the Government to continue pumping taxpayers’ funds into “loss-making, inefficient and uncompetitive sugar millers” whose operations have been blamed for the skyrocketing retail sugar prices in the country.

“Some of these factories are making losses, others are insolvent while others are in receivership. We have no business pumping money into factories that cannot compete. The best thing to do is to liberalise the sub-sector,” said Mr Noor.

Even the country’s largest miller, NSE-listed Mumias Sugar, is struggling to make profits. It announced a Sh73.4 million loss in the six months to December last year.

Nzoia Sugar, which operates on a much smaller scale than Mumias, posted a Sh667 million loss in its last financial report.

But contrast this to the cash the shadowy characters behind illegal sugar importation make. A February investigation by the Standard Group’s Investigations Desk revealed that sugar importers made Sh15 billion in profits last year.

And although Mumias Sugar has taken a proactive approach to the looming lift of Comesa safeguards by diversifying its revenue streams into other segments such as ethanol and energy production, the bulk of their topline is from sugar sales. If nothing changes, liberalisation of the sub-sector would no doubt be damaging.

The Comesa Council of Ministers has recommended that the five State-owned millers be unbundled and treated as single operating facilities, with each sold on its own merit.

In addition to the privatisation, other reforms the council insisted on as part of the terms of the extension include a change in the cane-pricing formula, from one based on cane weight to one based on sucrose content.

REFORMS REQUIRED

Over the next 10 months, the Government is also expected to improve the road network and related infrastructure in cane-producing areas.

It should also adopt an energy policy aimed at promoting bio-fuel energy production that will help make the sugar sub-sector more competitive, and establish a Sugar Safeguard Committee to monitor implementation of the safeguards.

However, most of these reforms are still ongoing, including research on high-sucrose and early-maturing cane varieties.

This has raised concerns over the country’s level of preparedness to implement reforms in the sub-sector before the safeguards expire.

Once they do, Parliament has warned that in their current states, local millers would not be able to compete with the influx of cheap imports from Comesa member states, and most would be forced to close shop.

janyanzwa@standardmedia.co.ke