Opinion and Analysis

State must privatise sugar mills urgently

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By JAINDI KISERO

Posted  Thursday, November 22  2012 at  20:07

In Summary

  • The biggest shadow brooding over the sugar industry in Kenya is the impending removal of the so called Comesa safeguards, namely, the temporary arrangement the government negotiated with the trading bloc to insulate the local industry from imports.
  • That-if the millers don’t put their houses in order-if the factories don’t reduce production costs drastically- the industry will die come 2014 when the safeguards are lifted.
  • Clearly, the entry of new private investors in the industry is proof that the sugar business can be conducted profitably in this country. Yes, the entry of these new players into the scene has spawned disruptive competition for cane.

The latest development in the sugar industry is the talk about an impending acquisition of one of the new sugar factories in the Southern Nyanza region by one of the players in the industry.

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Initially, I was inclined to dismiss the talk as having no substance. But I changed my mind after I found out that Office of the Commissioner for Monopolies had actually dispatched its officers in the field to study the implications of the impending acquisition and to investigate whether it was likely to lead to over concentration of economic power in the sugar industry by one player.

Whichever way you look at it, the fact that an investor is ready to commit billions to acquire a sugar factory in an environment dominated by so much uncertainty is confounding to say the least.

Indeed, the sugar industry is currently in the middle of a scramble for cane supplies like never witnessed in its history. The number of court cases where companies are accusing each other of poaching sugar from their designated zones have risen exponentially.

But the biggest shadow brooding over the sugar industry in Kenya is the impending removal of the so called Comesa safeguards, namely, the temporary arrangement the government negotiated with the trading bloc to insulate the local industry from imports.

Now and again, we are reminded that our local industry risks being swept way by Comesa imports the moment the safeguards are lifted.

That-if the millers don’t put their houses in order-if the factories don’t reduce production costs drastically- the industry will die come 2014 when the safeguards are lifted.

The statistics on the performance of the industry also present a bleak picture. Production and recovery rates by factories have dropped, cane delivered to factories are on a downward trend, while most factories are suffering crippling cash flow problems.

The question that arises is the following: what is keeping investor appetite for sugar factories high? What is driving the acquisition mania? I don’t have an answer.

What I know is that as Adam Smith told us many years ago, the butcher at the shop around the corner in your estate does not keep meat there because he loves you: it’s the pursuit for profit that motivates him.

Clearly, the entry of new private investors in the industry is proof that the sugar business can be conducted profitably in this country. Yes, the entry of these new players into the scene has spawned disruptive competition for cane.

But we are also learning that privatisation does not just mean selling government shares to private interests.

Indeed, the privatisation of the sugar industry in Kenya has happened by default. Cabinet approval for privatising the five State-owned sugar companies was given way back in the year 2010, but things got delayed because of lengthy bureaucratic procedures. For close to two years, we did not have a Privatisation Commission in place.

The list of proposed commissioners chosen by former Finance minister Uhuru Kenyatta was shot down by the parliamentary committee for finance on the grounds of lack of ethnic diversity.

A few months ago, a new list prepared by Finance minister Njeru Githae was finally approved by the parliamentary committee.

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