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August 2004

No let-up in sugar wars

Controversy continues to dog the sugar industry following illegal importation of the commodity by a clique of individuals.
Deremo Maiko

By The very mention of the word sugar in Kenya has tended to evoke memories of controversy, even during the nearly two-year National Rainbow Coalition (Narc) administration. At any given time, there is this or the other controversy about the commodity with, international, regional or domestic dimension regarding the Kenya sugar.

Some even opine it is not worth producing in the first place. In 1997, dumping sugar by politically correct traders was crucial in the lapsing of the IMF programme. Most of the time thereafter, the controversy concerns importation of the commodity in the country from the Common Market for Eastern and Southern Africa (Comesa). And to casual observers, it would appear as an open-and-shut case. But in Kenya where deviousness rules the very econo-political set-up, it is not.

In a nutshell, Kenya being a member of the 11-member Comesa Free Trade Area is exposed to duty-free imports. But invoking section 61 of the Comesa Treaty, which allows safeguards where injury is proved, Kenya was allowed a four-year window in which it would limit the importation of the untaxed sugar to 200,000 tonnes. The magic figure is supposed to be the difference between what Kenya consumes (600,000) and what it produces.

The figure has been bandied around for almost ten years by the regulator Kenya Sugar Board (KSB) and the predecessor Kenya Sugar Authority. Analysts with good sense are wont to ask why the figure remains constant­and the more sensible hypothesis would be that it allows unstated amounts to get into the country with connivance of those responsible for stating the sugar statistics.

The FTA duty-free sugar, being a gold mine attracts myriads of takers ranging from industrialists­industrial sugar consists of 110,000 tonnes of the quota­to speculators who fight out for the balance consisting of table sugar. The latter is where the controversy comes in. While KSB is supposed to gazette the importers, some speculators are too clever by half. Before such gazettement is done, they just take advantage of the legal lacuna and bring in the sugar.

In the wake of such flooding, the Government organs are left throwing whodunit at each other. The matter ends up in court, with Kenya Revenue Authority (KRA) refusing to tax the sugar due to lack of legal force and the KSB accusing it of killing the local industry. For instance, by the time KSB raised the issue this year, it emerged that only less than ten tonnes of the quota were remaining.

Accusations flew around and speculators went to court on being blocked. At the end of the day, the government ends up paying the penalty for blocking the sugar. Surprisingly, it emerged that a single supplier had attempted to fulfill the quota, even going to the extent of securing exclusivity in some Comesa countries. He serviced about half the quota at the expense of the competition. His argument is that neither KSB nor the ministry of Agriculture has the mandate to decide on who should import.

The duo insists that the licenses have to be auctioned. By the time KSB cancelled the Mat International license, it was just like locking the stable well after the horses had bolted. There are allegations of connivance by politicians including ministers and KRA officials in allowing uncontrolled sugar imports though. They are not entirely unfounded according to sources in the industry but they remain hard to prove.

What is known though is that the domestic industry is currently in no major danger from the foreign growers after the four-year breathing space was granted­non-Comesa pays 100 per cent duty. Indeed, the largest producer, Mumias Sugar Company has reported a hundredfold increase in profitability. Others like Nzoia Sugar Company have reported record turnover of Sh2 billion ($25 million). Mumias is to engage in a Sh3 billion ($37.5 million) expansion while Sony is targeting similar expansion.

The four-year window followed two successive years of abrogating the Comesa FTA in favour of Kenya. It remains to be seen how far Kenya can go in reforming the sector after wasting the first period granted. So far, except for Mumias, which is listed at the Nairobi Stock exchange, and Chemelil, the others are yet to achieve satisfactory levels of restructuring.

But what is the problem with Kenyan sugar? First, it is produced inefficiently­fragment small-scale farms that cannot achieve economies of scale. Very importantly, all the producer factories built in the first decades of Independence were government owned; it is only Mumias, which has done an initial public offering (IPO). This has meant that recovering capital cost loaded with corruption and inefficiency has been a problem.

Add that to the various taxes loaded on finished sugar and farm inputs and you get a commodity whose cost of production is more than double compared to regional countries like Uganda, Malawi and Zimbabwe. For instance it is estimated that it costs $120 to produce a ton of table sugar in the countries, while in Kenya it comes to around $300.

The distribution system is loaded with inefficiency and corruption in favour of a clique. Ironically, the clique has been accused lately of buying up the local commodity to force the KRA to release illegal imports­causing an increase in shelf prices of up to 30 per cent. The inefficiency in the industry has forced the government to cough up money to pay farmers their arrears. KSB has been forced to dig into its coffers and lend farmers Sh1.5 billion ($18.75 million) in soft loans while government was forced to fork out Sh800 million ($10 million) in loans to millers for paying farmers’ arrears.

That sugar supports some six million Kenyans, mainly in the Western region of the country, makes it a political commodity. Weighty argument has thus tended to be overshadowed by self-serving arguments by politicians, who are equally self-serving. On the global scene, excess sugar stocks have made Kenyan sugar easy prey. For example Brazil produces table and industrial sugar as a by-product of alcohol while Mauritius does it after getting power.

Efforts to diversify have come to naught especially after the Kisumu Molasses Plant was stillborn after heavy corruption in its construction. Efforts to start power production by some have been put paid to by rigid electricity laws. In the meanwhile everyone is watching to see whether the government can reform the industry and clean it up. Three years are remaining.

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