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Stricter controls can streamline sugar sector in Kenya

COMMENTARY
By Christopher Onyango | August 18th 2015

The importance and sensitivity of the sugar industry the world over cannot be overstated.

In Kenya, the sector contributes over 15 per cent of the agricultural GDP, provides income to about 250,000 small-scale farmers and supports an estimated 10 million people.

It is partly for these reasons that sugar is listed as a sensitive product that attracts relatively higher tariffs in the East African Community (EAC) and the Common Market for Eastern and Southern Africa (Comesa) trade regimes, among other products including milk and other dairy products, wheat, maize, fabrics and cement. The EAC region generally pursues a self-reliance trade strategy with regard to these sensitive products.

This means the EAC maintains some level of domestic production but at the same time allowing for importation to meet deficits. The same strategy applies to all those products designated as sensitive in both the EAC and Comesa protocols.

The agitation for continued protection of sugar is not unique to Kenya.

In the European Union (EU), there are fears that countries with comparative advantage in production of sugar, including Brazil, US, Russia, China and South Africa, are likely to expand their production and flood their markets when the supply quota system comes to an end in 2017.

Even more worried are the African Caribbean and Pacific (ACP) countries and the Least Developed Countries (LDCs) which supply up to 3.5 tonnes through a quota-free and duty free access into the EU market.

The ACP countries supply close to 60 per cent of the EU's import demand for cane sugar. The removal of the quotas implies there will be stiffer competition in the regional sugar markets.

Thus, the calls for replacement of cane growing with alternative profitable crops and/or stoppage of importations from Uganda and other trading partners appear far-fetched but are reflections of the challenges facing the global sugar sector.

Kenya has been imposing safeguards on sugar imports since March 2002, courtesy of Article 61 of the Comesa Treaty that provides for safeguard measures for domestic industries that need international protection until they become mature and stable.

The most recent extension given in March 2015 allowed Kenya to maintain a 350,000 tonnes ceiling on duty-free sugar imports from Comesa countries.

Beyond the stipulated threshold, tariffs of 35 per cent on imports of raw sugar and 100 per cent or $200 per tonne on imports of refined sugar from the rest of the world are imposed.

A closer look at the sugar sector reform proposals dating back to 1990s reveals actual implementations have been painstakingly slow and the sector still remains closely linked to the Government.

The reforms targeted the entire value chain, namely the production, processing and distribution components.

Currently, production is dominated by small-scale farmers, with only a few factory-owned farms. The poor state of infrastructure, including feeder roads and cartel-like harvesting and transportation systems significantly raise production costs.

It is not therefore surprising that harvesting and transportation alone account for over 45 per cent of total production costs.

These costs are borne by farmers who apparently have little or no control in making decisions. The processing component consists of 11 factories of which six are privately owned and the rest public and/or mixed-owner factories.

High levels of indebtedness of the sugar millers - at Sh59 billion - coupled with obsolete technologies remains a major challenge in this component.

Finally, the distribution component, which is highly integrated between wholesalers, retailers and importers is weakly regulated and under the tight grip of unscrupulous business people and cartels. As a result, smuggling and hoarding of sugar to create artificial shortages keep retail sugar prices high, well above the international prices. In a nutshell, the argument that cane farmers should turn to alternative crops is pre-mature and ill-informed.

Indeed, reforming the agricultural sector and the sugar sub-sector in particular should neither be driven by profit motives and economic growth, but rather the quest for inclusive development. Given the state of the sugar sector and considering the socio-economic and political implications of its collapse, the immediate measures should be to curtail the activities of cartels controlling cane transportation and distribution segments of the sugar value chain.

This requires strict enforcement of competition regulations coupled with good corporate governance in all the three components of the sugar value chain.

A fair and transparent management and allocation of Comesa sugar quotas, including staggering the same throughout the year to avoid speculations in the retail markets, is equally critical.

The other remedy would be to review the taxation structure of the sugar industry, which partly contributes to the high domestic prices, making it unaffordable to consumers. Again, prompt payments to farmers for cane deliveries should be streamlined to win back their confidence for sustainable supply of cane.

Above all, Parliament should give fresh impetus to ongoing long-term restructuring processes of the sugar sector.

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