Reducing production cost only will to boost our sugar sector
By Michael Arum | July 19th 2019
Kenya’s sugar industry has many natural advantages most of which have been undermined by policy and mismanagement that has seen its productivity slump. As a result, when import protection ends, probably next year, the industry will be immediately undercut by far cheaper imported sugar.
The cost to Kenya will be dire. A quarter of a million farmers grow sugar cane. Up to six million Kenyans draw a livelihood from Kenyan sugar. As a nation, we save anywhere from Sh40 billion to Sh55 billion a year in import costs by using locally produced sugar – which matters more as our trade deficit continues to grow and place downwards pressure on the value of the shilling.
Yet to remedy the decline in the industry the Government has drawn up new regulations that appear unjustified and even inexplicable.
COMESA has warned there will be no further extensions in protecting domestic sugar from imports, yet Kenyan sugar currently costs $870 a tonne to produce, compared with $350 a tonne in Malawi and $400 a tonne in Egypt.
There is, thus, no possibility of Kenyan sugar competing against imports without the cost of production falling dramatically. That makes it a top priority for the new regulations to reduce production costs.
Yet, the proposed new controls comprise a peculiarly old-fashioned model of expensive (for taxpayers) State intervention that is set to further load costs and actively prevent the key corrections that can reduce Kenyan production costs.
The starting point for Kenya’s excessive cost of production is seeds. Farmers still use old-fashioned, low-yield seeds, meaning Kenya produces far less sugar per hectare than its competitors.
A clear headstart would have come from regulations that encourage entrepreneurs to produce any of the 14 new high yield seeds developed by the Sugar Research Institute. Likewise, delivering on the Crops Act’s commitment to extension services to get farmers to switch to better seeds would have lifted yields by up to 100 per cent.
Instead, the regulations put sugar cane seed production under the control of the Sugar Directorate, taking it away from Kenya Plant Health Inspectorate Service that handles the rest of the seed licensing.
Setting up a new department in the Sugar Directorate with the technical capacity, expertise and infrastructure to test seeds and approve seed growers will be costly and time consuming and only replace what KEPHIS already does. Moreover, instead of fast-tracking additional licensing, it promises a period of delayed and disrupted seed licensing. Further, it has not been explained how this =new department will help to solve the sugarcane seed problem.
The next ‘dead hand’ on Kenyan sugar production is the mismanagement and inefficiency of our mills. We produce around 5.3 million tonnes of sugar cane a year, and have 16 sugar mills. Egypt produces only half as much sugar cane at 2.8 million tonnes, and has just 14 mills.
Yet Egypt produces nearly five times the sugar that we do – 2.3 million tonnes, compared with our 0.5 million tonnes.
That is because its mills are larger and newer, and crush better-quality sugar cane more efficiently.
Yet, instead of encouraging new mill investment, building incentives for higher quality cane or chasing more modern machinery, the new regulations have added a framework that is proven to deter farmers, and additionally created extra disincentives to mill investments.
The regulations introduce zoning, which means every farmer growing sugar cane is assigned just one mill they can sell to. Other countries tried similar programmes and drove farmers out of cane production.
In Australia, introduction of zoning damaged a once thriving industry, delivering a constant average fall in sugar cane production of 2.6 per cent a year. When the country abandoned zoning, the industry was transformed: Raw sugar production doubled in just five years.
Extraordinary new rules
Other sugar growing countries like Pakistan, India, and South Africa have all experienced the same.
Yet, as Kenya moves to zoning, that others have abandoned, it has also introduced extraordinary new rules around mill investments such that investors must put in place high powered management teams up to two years before getting licences or going into operation and to build sugar mills first, before finding out if they can be licenced.
No investor can take the risk of investing millions of shillings with the of getting a licence.
Perhaps not surprisingly, the new regulations are also not legal. Besides breaching the Constitution and multiple other laws, they never went through impact assessment.
A parliamentary committee is due to review this failure to carry out a cost-benefit analysis. There may also be a new attempt to introduce regulations to encourage use of better seeds and greater mill investment, and make Kenyan sugar as good as the rest of Africa’s.
Six million Kenyan farmers are hoping that a more serious attempt will be made to reduce production costs to make our sugar industry more competitive.
Mr Arum is the coordinator of Sugar Campaign for Kenyan Cane Growers
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