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How muddled State policy sank sugar sector

NEWS
By Peter Theuri | March 8th 2020

Mumias Sugar Company which is under receivership. Lack of protection from smuggling and dumping, high production costs and inadequate research funding exposed public millers to competition that they could not handle. [Nathan Ochunge, Standard]

Walking down the streets of Chemelil town, you can feel the loneliness and neglect. The once lively Kisumu County municipality sits in pensive meditation.

Life was on the fast lane when sugarcane farming was lucrative, now the glory days lie in a sad past.

The tale is the same for all sugarcane farming towns. Kimilili, Ramisi, Nzoia, Mumias - many towns feel the scourge of slowdowns caused by reduction of activity around sugar manufacturing.

As of 2018, Kenya’s domestic sugar production could only satisfy half of the country’s consumption needs.

A report compiled by a task force formed by President Uhuru Kenyatta to study the bug eating the sugar industry, lays bare the extent of the virus eating the system.

There are 15 sugar factories in Kenya, nine of which are private. The first sugar miller was Miwani Sugar factory started in 1922. Ramisi (which closed in the 80s) came five years later.

By 1980 - a year when Kenya became sugar self-sufficient - five other public millers had been established. They were Muhoroni (1966), Chemelil (1968), Mumias (1973), Nzoia (1978) and South Nyanza (1979).

The task force notes that the public firms have been in financial distress since 2009. A mooted reprieve that would see their hopes revived collapsed in 2016 and the companies now teeter on the brink of collapse, as financial indicators reveal.

”In 2013, the National Assembly approved specific write-off of government debt owed by these companies under a defined restructuring programme that entails partial divestiture of government interest,” reads the task force report.

“The programme was, however, stopped through litigation mainly High Court petition No. 187 of 2016 (County Government of Bungoma and four others vs Privatisation Commission and Another) which was struck off by the court on the grounds that the matter be dealt with through the intergovernmental structures in the first instance.

“Due to the delays, the financial situation of the companies since then worsened.”

The current ratios for the six companies are far below the threshold. Sony is at 0.3, Chemilil 0.1, Nzoia 0.02, Miwani 0.01; Muhoroni 0.04 and Mumias  0.03.

The current ratio is a measure of a company’s ability to pay its obligations; that is, a ratio of a company’s assets against its liabilities. This value should be above 1.

Collectively, the organisations owe the government Sh90.4 billion in loans. Kenya’s sugar industry has a capacity of producing 41,000 tonnes of cane a day. This points to an input of over 9.8 million tonnes annually, which in turn translates to 1.09 million tonnes of sugar - more than Kenya’s annual demand for table sugar.

Owing to many challenges and inefficiencies in the value chain, the local industry has been unable to meet domestic demand.

In 2018, local sugar mills produced 491,097 tonnes, 57 per cent of the domestic consumption that currently stands at 850,000 tonnes.

This is a far cry from what was produced in 2016, 638,340 tonnes.

To cover for the deficits, Kenya has been importing table sugar from the Common Market for Eastern and Southern Africa (Comesa), under a duty-free, quota-free basis, and industrial sugar, which is taxed 100 per cent  import duty, from the rest of the world. 

But why is the local industry unable to satisfy the domestic market?

Cost of production

The cost of production of a tonne of sugar in Kenya, the stakeholders report shows, is $800 (Sh80,000). This dwarfs the cost of production in many other countries in the region: Madagascar at $543.92 (Sh54,400) Malawi at $540.93 (Sh54,093), Zambia at $580.47 (Sh58,047) and, closer home, Uganda at $670.01 (Sh67,000).

Sugar smuggled into the Kenyan market, together with ‘dumping’ by Comesa partners, means that Kenya’s product, priced higher due to higher production costs, cannot compete in the market.

The immense importation and smuggling of sugar hurts local producers as it creates excesses, the glut leading to lowering of prices. That eats into profits for farmers and manufacturers.

“We need to do more value addition on our exports,” said Kenya Association of Manufacturers Chief Executive Phylis Wakiaga during the launch of the Manufacturing Agenda 2020 two weeks ago.

She said low value addition leads to undervaluation of most of Kenya’s products.

This low value addition also hurts the sugar industry, even in pricing of by-products of sugarcane milling.

The 2016 degazettement of the Sugar Development Fund (SDF), which had been running since 1982, hampered research in the industry. Best practices in the sector are vastly dependent on research and subsequent innovation.

“This move largely contributed to inadequate funding for research, cane development and factory rehabilitation, resulting in low research initiatives, cane shortage and low factory efficiencies,” says the task force.

For instance, the then Kenya Sugar Research Foundation was funded by the SDF. Under the arrangement, Sh610 million was disbursed to the institution in 2013/14 financial year but this fell to Sh56 million in 2017/18, a 91 per cent reduction.

This completely paralysed the institute, according to the report. The degazettement also hurt farmers as they were unable to access cheap credit.

Further, outgrower institutions continue to owe huge amounts of money to the SDF, currently at Sh2.4 billion.

“Due to the poor performance of the factories and their inability to pay farmers promptly, declining incomes, factory inefficiencies, high cost of inputs and services and poor governance, farmers and farmer organisations have been unable to repay loans from the SDF,” says the report.

“The inability to pay these loans means the fund cannot revolve for the benefit of more farmers and sustainability.”

Further, sugar attracts a 16 per cent value added tax, on top of which a similar rate was added as transportation tax. Millers are struggling to make profits and as they struggle, so do farmers.

Delayed payments have also led to farmers disposing of their produce to other millers who pay promptly at unfairly low prices.

“This has contributed to the impoverishment of the sugar cane farming community... mainly their source of livelihood,” notes the task force.

Kenya National Sugar Farmers’ Union Deputy Secretary General Simon Wesechere says farmers have been disillusioned by the delayed and poor payments.

“There is completely no order in the industry. The factories lack the capacity to support the sugar farmers, people are not getting paid on time or are getting paid peanuts,” he told Weekend Business.

“Some millers are rogue and don’t want to pay farmers. Further, farmers have no access to basic (inputs) such as fertilisers.”

Farmers have also been discouraged from investing in sugarcane as cane poaching. There is no policy that obligates a farmer to supply cane to a designated miller and the factories to buy from specific farmers, allowing millers to solicit for cane from other regions.

This leads to delay in harvesting, leading to increase in harvesting age, quality deterioration, poor rationing and farmers disposing cane at unfavourable prices, the task force report says.

“It also discourages farmers from re-planting, creating a shortage in the long run,” says the report.

The task force suggests that farmers have an enforceable contract with a miller of their choice within their region. The miller should be obligated to pay the farmer within seven days.

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