Privatisation of millers stirs up new supremacy battle

Muhoroni Sugar Company cane hauling area, General Manager Nashon Osieko said the company has lost sixty million shillings due to ethnic clashes in Muhoroni. (Denish Ochieng, Standard)

The last few days have been bittersweet for Kenya’s largest sugar miller. In a triumphant marketing across retail centres in major towns, Mumias Sugar was back on the shelves after months of absence.

Consumers were offered a 30 per cent discount and riding on a market resurging from political doldrums, Mumias’ share price at the Nairobi Securities Exchange rose a marginal 0.5 per cent.

Barely a week later however, Mumias Sugar Company on Thursday posted a 42 per cent increase in net loss to Sh6.77 billion in the year ending June 2017.

This saw more than eight per cent of investors’ wealth shaved off in just a few hours of the news breaking.

The reports from Mumias characterise the sea-saw rhythm that reinforces the efforts to privatise the country’s sugar industry and steer it back to competitiveness. The crop was the economic mainstay for the Western Kenya and Nyanza sugar belt regions more than 30 years ago.

Recently, the High court ruling on a much-anticipated case pitting the Central Government against county governments a spanner into the works and it appears that Kenya might not meet a crucial deadline to privatise the five sugar millers.

The drive to privatise Chemelil, Miwani, Muhoroni, Nzoia and SONY Sugar mills began more than 15 years ago with the coming in of the grand coalition government that proposed sweeping changes in public institutions and parastatals.

Leaders from both the political divide expressed concern that Kenya’s sugar industry risks a death similar to the one experienced by the cotton industry if quick interventions are not made.

Kenya’s sugar production has remained stagnant over the last 15 years with the country hard pressed to meet the 900,000 tonnes of growing domestic sugar demand each year against a domestic supply of 350,000tonnes. Because of this, marketed production of sugarcane has gone up from Sh21.6 billion in 2012 to Sh23.9 billion last year. In contrast, the marketed production of tea has risen from Sh100 billion to Sh116 billion over the same period of time.

Over the period of time, Kenya has enjoyed relative goodwill from her regional neighbours primarily member states of the Comesa trading bloc.

Over the years however, Kenya has lagged behind in the process of implementing the privitisation schedule and today, several counties in the Western Kenya and Nyanza sugar belt risk losing their economic mainstay.

Agricultural function

Last month, the High Court threw out a court case seeking to block the State’s sale of the five sugar millers.

The case was the culmination of months’ of litigation primarily led by the counties of Migori and Bungoma that host the sugar millers in questions.

The four counties had argued that the sugar factories serve a devolved agricultural function and thus their management falls under the jurisdiction of the county governments by virtue of the 2010 constitution.

The national government argued that State millers serve the public and not an agricultural function. It said the management of the assets and liabilities of the five sugar millers rests fully within the mandate of the National Treasury. Of the five sugar factories, two, Muhoroni and Miwani have since gone under receivership.

The government last year waived more than Sh40 billion of debts owed by the five millers in a bid to raise their premium to would-be investors.

Privatisation Commission Chairman Henry Obwocha says this dispute is central to determining a quick and efficient privatisation exercise.

“It now comes down to consensus between the county and central governments on what function the State sugar millers perform and who should take it up under a devolved system,” explained Obwocha.

The Privitasation Commission has prescribed a formula whereby 51 per cent of the millers will be sold to a strategic investor.

 “This is because these companies need to be run like competitively like private entities and a strategic investor will be able to take decisions quickly in matters key to the market,” explains Boaz Mbaya, a commissioner of the Privitisation Committee in charge of the sugar sector.

 Another 24 per cent will be reserved for the outgrowers and employees of the sugar companies with six per cent of this reserved exclusively for a trust that will hold the interest of the farmers. Mr Obwocha says this will prevent crowding out of retail investors by large barons as was the case that followed the initial public offer by Mumias Sugar.  “In the case of Mumias Sugar we had a situation where farmers and outgrowers were fragmented and each holding a few shares which was easy for rich traders to buy them out and consolidate their stake,” explained Obwocha.

“This time, the privitisation schedule provides for creation of a trust that will hold a combined six per cent bloc share that will belong to farmers as well as for employees and outgrowers.”

In addition, the government will be required to give priority to the farmers, employees and outgrowers before disposing off of the 25 per cent stake.

This stake is however at the centre of the whole dispute that has since been referred to a governmental arbitration panel.

The county governments led by Migori and Bungoma leaders argue that the state millers serve an agricultural function and as such should be managed by the counties.

The High Court had in its recent ruling instructed the county and central governments to settle the matter through a mediation since government agencies are not expected to enter legal proceedings against each other.

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