Forget Uganda’s 1pc imports, our State protectionism policy killing sugar industry

A lot of punditry and debate has gone into the recent Kenya-Uganda trade meeting in Kampala.

The Opposition has accused government of entering into concessions that allegedly would disadvantage the country’s sugar industry and the government has counter-accused it of petty politics and unnecessary criticism. Consumers as well have joined the foray arguing that they are most interested in cheaper sugar regardless of where it comes from.

Let me talk to you as a son of a smallholder farmer who has planted, chopped and loaded sugarcane onto a truck, delivered to a factory and waited over 25 months without pay.

Let me talk to you as a resident of the sugarbelt region where farmers are angry and hopeless because they can no longer take their children to school, fend for their families or buy themselves beer at the local bar with cane proceeds. Let me talk to you as well as a policy analyst who has researched Kenya’s sugar sector and has a thing or two to advise.

Believe me, the high cost of sugar in Kenyan shops and the low proceeds from sugarcane farming in the country have very little to do with Ugandan imports.

The bulk of sugar (87 per cent) imported to meet the country’s 190,000 tones average sugar deficit between 2005 and 2013 was from Egypt (57per cent) and Swaziland (30per cent). From Uganda we imported only one per cent.

In fact it is the government of Kenya’s prolonged protectionist policies and chronic failure to efficiently manage the sugar industry that is to blame.

The sugar sector in Kenya is run almost entirely by the government which holds the highest stake in most of the factories, controls trade policy through the National Treasury, regulates the sector through the Kenya Sugar Directorate, manages factories through state officers directly supervised by high echelons of government and oversees research and extension through the Kenya Sugar Research Foundation (KESREF).

The fact of the matter is that inefficiencies in management have made cost of producing and selling sugar in Kenya prohibitively high. This has made Kenyan sugar unable to compete with cheap sugar from more efficient producers in the Common Market for East and Southern Africa (Comesa) region and the rest of the world.

Mask inefficiencies

To cope and mask its inefficiencies, the government restricts the market (imports) using protectionist quotas, tariffs and non-tariff barriers.

Actually if the market were completely liberalised, the influx of cheap sugar would drive down sugar prices by 25 per cent and plummet the profits of local sugar companies. None of them would survive.

No wonder, the government has kept on negotiating postponement of the deadline for lifting Comesa safeguards meant to smoothen transition to full liberalisation of the sugar industry from 2008 to date.

But what makes producing and selling sugar in Kenya so costly and non-competitive? Foremost, the sugar value chain in Kenya is divided into three segments – production, processing and distribution.

In each of these segments, players are choked by inefficiencies contributed by inadequate policy, an outdated and unfair tax regime, poor infrastructure, high cost of energy, limited access to credit, and mismanagement of factories, all within the purview of government.

Beginning with production, despite over 25 years of industry protection and government direct investment, Kenya’s sugar industry has the highest production cost per tonne of sugar amongst the top producers in the Comesa region.

In 2013, the cost of producing a tonne was about Sh50,000 ($500) compared to Sh25,000 ($250) in Egypt and Swaziland, Sh20,000 ($200) in Malawi, Sh18,000 ($180) in Tanzania and Sh14,000 ($140) in Uganda.

The high costs of production have in fact driven down yields from about 120 tonnes per hectare in 1980 to 80 tonnes per hectare in 2013. Actually over the same period, the rate of growth of consumption outpaced production.

Whilst total sugar production increased from about 436,000 tonnes in 1980 to 548,000 tonnes in 2010, consumption grew from 300,000 tonnes in 1980 to 743,000 tonnes in 2010.

This has meant that Kenya remains a net importer of sugar despite capacity to serve domestic market and export surplus.

Notably, 92 per cent of all sugarcane produced in the country is delivered by small-scale farmers working through out-growers cooperatives (the rest is produced by factories).

These smallholders produce with low technical capacity, limited access to credit and depend entirely on rainfall. Moreover, the government taxes agricultural farm inputs and an additional four per cent Sugar Development Levy (SDL).

In terms of processing, Kenya’s sugar factories have a combined crushing capacity of about 24,000 tonnes per day which if optimally exploited would meet the national sugar demand and produce surplus for export.

Mismanagement

However, they operate at an annual average rate of about 55per cent of optimal capacity meaning the maximum cane they can crush per day is only about 12,000 tonnes.

This is the direct result of mismanagement of the factories especially those owned by the government and utilisation of outdated, non-competitive technologies.

Continuous factory breakdowns and irregular maintenance shutdowns have led to inconsistent factory demand for sugarcane that in turn disrupted supply because farmers are disoriented and demoralised. Sometimes farmers have had to wait with mature cane for up to 12 months due to such inefficiencies in mill operations.

Moreover, factory management and production time have also affected the conversion rate – the amount of sugarcane required to produce a unit of sugar.

In 2010 the average conversion rate in most of the publicly owned factories was about 12.7 tonnes per unit of sugar produced, nearly four tonnes above the average conversion rate amongst producers in the Comesa region.

Though the bulk of factory revenue comes from sugar sales, competitive millers in other countries diversify like in energy co-generation and exploit some of their by-products like bagasse, molasses, and ethanol.

Nonetheless, in Kenya, this is hamstrung by high investment costs, limited access to credit, low investment in research and development, a weak regulatory framework and uncompetitive price mechanisms.

Lastly in terms of distribution, the greatest cost factor for millers and distributors is in transportation. This actually also takes up about 45per cent of a farmers total earnings during production as the costs as deducted from the producer price paid.

Though transportation significantly affects the eventual cost of sugar, millers and distributors manage to beat the system by transferring the high overheads incurred in transportation to consumers which drives retail prices up.

Clearly, transportation is largely influenced by poor infrastructure and tax regime that affects oil prices. Both of them, the preserve of government that farmers and consumers have absolutely no control over.

In Kenya, sugar is not classified as a basic food hence it attracts 16per cent VAT. Ultimately, high retail costs of sugar caused by a non-competitive and non-efficient value chain have allowed a cabal of importer syndicates to exploit and abuse the protectionist policies to obtain obscene profits that way outstrip those attained by local producers. This is what informs the outcry by sugar industry players for restriction of Ugandan imports.

For the ordinary producing or consuming Kenyan, you should know that the government is insincere when it acts as though the only way to fix the deficit and drive down sugar prices is by importing.

The Opposition is equally insincere when it argues as though the one per cent sugar imports from Uganda is the problem.

Structural issues

The challenges of the sugar industry are deeply rooted structural issues that began from inefficiencies and bad policies in the Nyayo era, handed over to the NARC regime and not addressed by the current administration.

Illegally preventing Ugandan imports or dishing out politically motivated one or two billion shilling bailout confectioneries to factories will not fix the problem.

The sugar subsector is crucial to the economy and must not be left to fail. It contributes 15 per cent of the country’s agricultural GDP and 25 per cent of the country’s working population depends directly or indirectly on it.

As recommended by Comesa the government must expedite the process of credibly privatising the state-owned sugar factories, but most importantly, it must adopt a processor diversification policy, increase funding for research and extension, improve road infrastructure and implement a sugarcane payment system based on sucrose content rather than weight.

Mr Okwaroh is a research associate and director for Policy and Research at the Africa Centre for People Institutions and Society