Sugar sector hopes hinged on Sh59bn debt write-off

TOO LITTLE, TOO LATE?
Consumers of industrial sugar may enjoy cheaper prices of the commodity as Finance minister Uhuru Kenyatta lifted the Sugar Development Levy (SDL) charged on imported consignments of the commodity.

This type of sugar is mainly used by soft drink manufacturers and is not produced in large quantities locally, leaving consumers mainly reliant on imports.
“I hope the benefits are passed on to consumers,” the finance minister said.

The SDL is currently pegged at 7 per cent of both local and imported sugar. So far the proceeds remain the most competitive source of credit for the industry and the only source of funding for Kenya Sugar Research Foundation (Kesref) and Kenya Sugar Board (KSB) operations.

The gesture by the Finance minister now leaves the operations of these institutions in a tight spot.

Research in sugar production methods and cane varieties is critical to the industry and players are certain to meet the minister’s proposals with reservations unless alternative sources of funds are provided to the Kesref management.

The write-off of a Sh59 billion debt currently weighing down on the sugar industry topped the wish list of the sub-sector’s players as Finance minister Uhuru Kenyatta moved to present his 2009/10 budget.

With barely 30 months to go before the country fully liberalises its domestic market for the commodity, the industry is under pressure to undertake major operational restructures that would ensure a competitive production system capable of surviving the anticipated onslaught from rival producer nations within the Comesa bloc.

“What the industry requires is a total write off of the debts so that reforms can begin on a clean slate,” Okoth Obado of the Kenya Sugar Board (KSB) said.

Kenya enjoys a preferential trade arrangement on sugar with Comesa. Though the arrangement was meant to expire one year ago, Kenya got an extension of the special safeguards on duty-free imports in December 2007.

The extension was, however, granted only after Kenya committed to enlarging the imports quota each successive year of application.

Besides, the tariff on imported sugar above the quotas is to fall each successive year down to zero by 2012. Besides the quota-tariff structure, the Kenya Government also committed to give up ownership of sugar mills within the first 24 months of the extension.

The Privatisation Commission of Kenya has started the sale process and has picked advisors to help identify strategic partners for State-owned Chemelil, Muhoroni, Sony and Nzoia sugar companies.

Other issues embedded in the deal with Comesa included requirements that the Government adopts an energy policy aimed at promoting co-generation and other forms of bio-fuel energy production to improve the industry’s competitiveness.

The pact also requires sugar sector operators to deepen research on high sucrose and early maturing cane varieties while the KSB and the Kenya Sugar Research Foundation (Kesref) should spearhead adoption of research findings by cane growers.

But despite this lengthy agenda, the sector is yet to make any substantive strides thanks to the huge debt portfolio accrued by firms over the years.

“The debt is a very frustrating setback and impedes cash flow,” Agriculture minister William Ruto told Parliament last week, adding that the Cabinet would review the issue in a bid to expedite the planned privatisation of the firms.

As at March 2008 the debt owed by various institutions in the sub-sector stood as follows; Chemelil (Sh2.54 billion), Miwani (Sh8 billion), Muhoroni (Sh9.96 billion), Busia (Sh375 million) and Nzoia (Sh26.6 billion).

Other debtors are Sony (Sh2.99 billion) and Agro-Chemical Food Company (Sh6 billion).

Government guarantees
Insiders said the debts mainly stemmed from government guarantees that have largely been offset but Treasury would have to seek the consent of Parliament to effect any write-offs.

“Proceeds from the privatisation process should be ploughed back to develop the industry,” Mr Obado said.

So far major strides have been made with regard to the energy policy with the Energy ministry launching a new initiative that would see the cash-strapped sugar factories have an opportunity to boost their earnings as the Government reached out to investors to help build the country’s overstretched electricity reserves.

In a new initiative the Energy ministry has put in place a renewable policy through which investors can negotiate attractive feed-in tariffs with the Kenya Power and Lighting Company (KPLC) for supply of power generated through biomass.

A key target of this policy is a sugarcane waste product known as bagasse that most millers have not put to sound economic use and usually rots away despite the huge potential for power generation.

The cost of producing electricity from bagasse is estimated to be less than half the cost of generating electricity from imported petroleum or natural gas.

The country is currently relying more on thermal power which contributes 40 per cent of the total power output, way above the ideal 16 per cent, a factor that has driven up the fuel element in power bills.

“The ministry of Energy has conducted a feasibility study on co-generation from bagasse and established that there is potential for immediate development of a system that can produce about 200 Mega Watts (MW) from the use of bagasse produced at the six sugar mills operating in Nyanza and Western Provinces,” the new policy stated in part.

So far Mumias Sugar Company is the only miller that has made major strides in attempting to tap this potential and currently runs a power project that churns out 2MW to the national grid using bagasse with industry estimates showing that every 100 tonnes of sugarcane crushed produces 17 tonnes of bagasse.

Co-generation
The company also recently launched a $50 million power co-generation project that is expected to generate some 34 Mega Watts (MW) for its own internal needs with the surplus 25MW being put up for sale to KPLC for general supply through the national grid.

Chemelil Sugar Company has its factory equipped with a 5.5MW power generation system that runs on bagasse with the output for internal use. Nzoia and Sony also have such installations with a capacity of 3MW and 7.2MW respectively.