Jobs and earnings on the line as battle over licensing of Butali Sugar Mills intensifies

In December 2010, Sally Kosgey, then Agriculture minister, boycotted the laying of a foundation stone by former Prime Minister Raila Odinga to pave way for the construction of the Sh3 billion Butali Sugar Mills Ltd. The former powerful civil servant during President Daniel Moi’s regime, who turned politician, believed that the registration of the miller was in violation of the Sugar Act.

Four years later, Ms Kosgey has been vindicated after the Court of Appeal ruled that the lower court had made a “fundamental jurisdiction error of law by usurping the role of Kenya Sugar Board”, which is the only body mandated by law to license sugar factories.

And now the multibillion-shilling factory is at a crossroads. It is an issue that will bring to light the viability of Kenya’s fledgling sugar industry and relations between various stakeholders.

READ: Future of miller now lies in technical committee’s hands

The Court of Appeal’s ruling has also set the stage for the battle of the titans, with area MP Ayub Savula saying that he has asked Butali managing director Jayantilal Patel to seek recourse in the highest court of the land.

Milling capacity

“I have instructed the MD to move to the Supreme Court with the view to reverse the decision of the Court of Appeal,” Mr Savula told the Business Daily. The Lugari legislator sits in the Agriculture committee which last year questioned the licensing of the Butali factory, saying its registration was irregular and called for the withdrawal of its certificate.

Licensing of a sugar miller is a culmination of processes which comprise registration and issuance of an interim letter of operation before the applicant is eventually awarded a milling certificate by sector regulator KSB.

The current battle is between two investors, Jagwant Singh Rai of West Kenya Sugar Company and Sanjay Patel of Butali Sugar Mills. The bone of contention is a rule made under the Crop Production and Livestock Act which requires that a factory should be set up at least 25 kilometres from the location of an existing one.

Butali and West Kenya are 10 kilometres apart.

In 2000, the ministry of Agriculture had demarcated the zone to be operated by West Kenya Sugar and which included parts of Malava division. The firm also got another letter in 2004 authorising it to expand its milling capacity, with the assurance that no other white sugar mill would be allowed to operate within its 25-km radius — what is known as a mill command area.

But in 2004, Butali Sugar applied for a licence from KSB to operate a mill about 10 kilometres from West Kenya Sugar. Although their operations would be within West Kenya Sugar’s command area, a certificate of registration was issued on April 13, 2005 forcing the firm to move to court seeking an order to prohibit construction of a factory in its zone.

Before milling commenced, West Kenya Sugar, the Agriculture ministry and KSB agreed that no factory would be allowed to operate within its command area, forcing Butali Sugar to move to court claiming Sh590 million in loss of business.

In October 2008, KSB revoked Butali’s registration and asked the firm to “identify” a new location at least 25 kilometres from West Kenya Sugar. But 17 months later, KSB had a change of heart and reinstated Butali’s certificate on condition that removes KSB as a party in a suit pending in court, and on any other matters pertaining to its registration.

West Kenya Sugar, which claimed to have invested in excess of Sh3.5 billion in expansion, filed another suit saying its sugar mill would not be commercially viable if Butali Sugar went ahead with milling plans.

West Kenya Sugar said the available sugarcane was not enough to satisfy its milling capacity, leave alone that of a rival plant. The firm asked the court to restrain KSB from licensing an operator within its command zone.

But in an earlier ruling in September 2010, Justice Martha Koome had found that the agreement on exclusive zones was “illegal and unenforceable”. Butali Sugar has been relying on this ruling to push its case.

The fresh delay forced Butali Sugar to file a suit against KSB to compel it to issue a licence. The High Court ruled that the application for a licence was a “mere formality and could have been acted upon immediately” after Butali Sugar made an application.

The court argued that KSB could not “hide behind the cloak of court cases” as it had not shown reasonable cause for not issuing a licence.

Outside the corridors of justice, the Butali case was also turning sour for other stakeholders, coming a few months to the 2010 referendum for a new Constitution. It was also acquiring a political life of its own.

In October 2010, Agriculture ministry PS Romano Kiome suspended KSB chief executive Rosemary M’kok over delays in licensing the Butali mill. Mr Okoth Obado, then chairman at the sugar regulator, was also reportedly sacked by fellow directors over his stand on licensing of the entity.

For her part, Ms Kosgey blamed Ms M’kok for acting inconsistently, thus allowing Butali to start operations without due procedure.
She was accused of being aware of several letters barring Butali from putting up a sugar mill but attended a ceremony to lay its foundation stone on December 5, 2010. The battle saw Butali move to court, compelling KSB to issue it with operating papers, leading to West Kenya Sugar seeking an injunction on licensing of the new player.

Documents in the possession of the Business Daily show that the management of KSB, which has been changed to the Sugar Directorate, had ignored directives from its technical team not to license Butali. The documents, signed by former KSB chief executive Andrew Otieno, indicate that he had rejected two previous applications because they did not meet requirements of the Sugar Act.

“The proposed location of your facility is within a radius of 10 kilometres from an existing miller and that may have adverse effects,” reads part of the letter from KSB to Butali.

Other reasons given by KSB for its reluctance to register Butali factory was that its financial ability to develop enough sugar cane for its mills was not evident, meaning that its proximity to an already existing factory would lead to raw material deficiency.

In 2005, Butali Sugar had sent another application to the board for licensing which KSB’s technical committee also turned down. KSB advised the miller to seek an alternative location in the province.

In March 2005, Agriculture PS James Ongwae wrote to Mr Otieno seeking to know why Butali had been denied registration. Mr Otieno responded by reiterating the industry regulator’s stance that granting the miller a licence would be irregular. KSB’s technical team said that Butali had not followed licensing procedures.

“In view of the above, the proposed Butali Sugar Mills project is not considered for registration in western Kenya,” said the technical report.

Ironically, the regulator has registered three companies within the Mumias sugar belt which sought to produce sugar, ethanol and power co-generation. These are Busia, West Kenya and Mundika sugar factories.

Last year, KSB denied Mumias Sugar Company a licence to put up another plant in Busia arguing that the potential of the area, estimated to be at 5,000 tonnes of cane per day, had been exhaustively allocated to earlier applicants in mid-2012.

The ground-breaking ceremony for the construction of the Sh3.6 billion Busia Sugar Industry was held in April at Busibwabo area in Matayos constituency, with Mumias having moved to court earlier to challenge the establishment of the miller in its zone.

The battle between Butali and West Kenya will once gain bring to the fore the sugar politics of western Kenya. With a 500-tonne daily capacity and thousands of workers, lack of a licence will mean loss of jobs for Butali while relocation will cost the company millions of shillings.

Kenya produces about 500,000 tonnes of sugar annually, relying on imports from the Comesa countries to bridge a shortage of 200,000 tonnes.

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