The sugar ailing industry has to either shape up or shape out

Imported sugar is loaded into a vehicle. INSET: Cane harvesting in Western Kenya. [PHOTOS: FILE/ STANDARD]

By Jackson Okoth

Nairobi, Kenya: It is a race against time for run down State-owned sugar factories. They either shape up or ship out.

 Most of them may not survive the flood of competition when sugar import safeguards are lifted a year from now. Although Parliament has approved Sessional paper No 12 of 2012, which allowed the Government to write off debts owed by these millers, the process of eventually privatising them appears to have slowed down.

“We are still waiting for parliamentary approval before we proceed with the process,” says Solomon Kitungu, Executive Director/CEO of the Privatisation Commission.

Kenya’s inefficient sugar market is currently protected by safeguards against any duty-free imports from the Common Market for Eastern and Southern Africa (Comesa).

Following the launch of the Free Trade Area on October 31, 2000 by members of Comesa, Kenya expressed concern that her sugar sector was not able to compete against those from other member countries.

The Government then applied for protection of the sector by way of a safeguard under Article 61 of the Comesa Treaty so that sugar exports from the common market to Kenya are subject to customs duties.

The safeguard was implemented in March 2002 for an initial period of 12 months and subsequently renewed by the Council of Ministers.  Subsequent extensions have been done five times, with the last one lasting a year from February 2014 to February 2015.

“Most of these State-owned sugar milling firms have no capacity to modernise their operations or replace their age old machinery as required by the conditions imposed before safeguards can be lifted,” Peter Kebati, Managing Director of Mumias Sugar Company, told The Standard on Sunday in a past interview. Mumias is the most profitable and only listed sugar miller in Kenya.

One of the conditions put to the Government is that it must offload its interests in these sugar mills and allow them to diversify their operations into producing other products such as ethanol.

“State owned firms are also required to encourage their farmers and supply estates to plant early maturing cane varieties as well as seek for strategic partnerships with other investors,” said Kebati.

Grim prospects

As matters stand, the privatisation of State-owned sugar mills has stalled as the clock ticks towards the end of yet another extension. “It appears the only way out for State-owned sugar mills is to consolidate their operations, looking at the strength of each plant and what is strategic,” said Kebati.

While the future of Kenya’s sugar industry hangs in the balance, some players appear unperturbed by grim prospects if the Comesa safeguards are lifted.

“We are only worried that duty free imports into the country may not be regulated. At the moment, we are less concerned about the safeguards because we are still producing at a high cost and are unable to compete,” Saul Wasilwa, the Nzoia Sugar Company Managing Director told The Standard on Sunday.

To enhance efficiency of the sugar sector and meet Government and Comesa sugar safeguard commitments, there is a plan to privatise all State sugar companies, inject more capital, diversify and introduce early maturing cane varieties.

“It costs an estimated $50 million (Sh4.3 billion) to put up an eco-electricity generating plant and more than Sh500 million to construct water bottling plant or an animal feeds factory using molasses. We cannot execute any diversification plan because of lack of required capital,” said Wasilwa.

Trials are ongoing at the Kenya Sugar Research Foundation (KSRF) to introduce early maturing cane varieties to improve supply to the factories.

Huge deficit

A July 2013 report on the implementation status of the Comesa sugar safeguard lists public sector owned sugar companies earmarked for privatisation and approved by the Cabinet as Chemelil Sugar Company, Nzoia Sugar Company Ltd, South Nyanza Sugar Company Ltd, Muhoroni Sugar Company Ltd and Miwani Sugar Company.

Kenya’s potential demand is approximately 800,000 metric tonnes. However, the country’s domestic production has historically hovered around 550,000 metric tonnes, leaving a net deficit to be filled by imports of approximately 250,000 metric tonnes. With this big deficit, a number of private sector players have identified the sugar sector as an avenue to obtain a reasonable return. The recent entrants to the sector are Kibos Sugar and Butali Sugar Company.

At the same time, three factories are at different stages of construction. They are Sukari, Transmara and Ramisi. Although the attraction of available demand is obvious, Kenya’s sugar industry suffers the challenge of being one of the highest cost sugar producers. Statistics show that Kenya’s cost of production is way above the world average and those of other countries in Comesa.

Upon expiry of the safeguard measures, unrestricted amounts of sugar can be imported into Kenya without attracting any duty. This means Malawian sugar, produced at $215 (Sh18,640)  a tonne, or Swazi sugar, produced at $275 (Sh23,842) a tonne, can access the Kenyan market duty-free, a dreadful prospect for a sluggish sugar sector.

The Kenyan sugar industry is relatively high in cost compared to the neighbouring countries because of its reliance on small holder production. Cane growing is rain-fed and most factories have low capacity utilisation.

The reliance on smallholders rather than estates as is in the other countries results in higher costs because of greater variability in input use and field preparation, less timely and consistent crop care and higher harvesting and transport costs associated with many small growers. The higher production costs are also a result of the taxation regimes.

Currently, all of Kenya’s sugar factories are in the western part of the country. This area has a high altitude which results in longer growing cycles of 15 to 18 months per crop compared to the 10 to 12 months’ in neighbouring countries.

Lack of irrigation makes the cane vulnerable to drought and reduced yields, which raises average cost of production.

Inevitable reforms

Production costs will ultimately determine whether the sugar industry can compete with duty free and quota free imports from the Comesa free trade area.

Industry figures put Kenya’s sugar production costs at Sh43,349 per metric tonne compared to Malawi (Sh17,339-19,940), Zambia (Sh17,339-22,551), Sudan (Sh21,674-29,477) Egypt Sh21,674-26,009) and Swaziland (Sh21,674-Sh26,009).

Kenya’s production costs are nearly double those of the world’s major sugar exporters. Its ex-factory prices are about 50 per cent higher than import prices from the Comesa FTA exporters.

Without major reforms in the industry, the country will not compete. But even with major reforms, Mumias, which accounts for about 60 per cent of the country’s production, is the only miller that can  compete internationally.

The other four State-owned factories — Chemilil, Sony, Nzoia, Muhoroni — will still face a difficult challenge to compete unless they are privatised and recapitalised.

Other private mills may be able to compete if cane production costs are reduced as part of the reforms. Kenya’s cane prices are currently one-third higher than can be justified by international prices due to increases in the early 1990s.

Cane transport costs currently account for 37 per cent of production. Poor roads contribute to these costs by slowing the movement of cane hauling equipment and contributing to more frequent breakdowns and equipment deterioration, which in turn add to the cost of cane transportation.