Kenyan sugar industry on it knees
Several years ago our sugar industry made good tax submissions to the exchequer. However, since 2017, Kenyans favourite Mumias sugar packet is no longer on the supermarket shelves, the operations of the company were halted due to huge debts owed by the company. The fall out has been observed with myriad of talks and supremacy battles regarding the privatisation of the sugar industry. The Mumias problems are not ending soon, the company is set to retrench over 900 employees. That notwithstanding sugar is very expensive in Kenya compared to our neighbours. It goes without saying that if Kenya open its sugar market the prices are predicted to be twice cheaper. Protectionism has always been justified by the importance of the sector in job creation. However the sector is marred with inefficiencies. A case in point is Mumias sugar company:
Mumias sugar company employs over 2000 people and is supplied with canes by over 5000 farmers. The shut down has brought darkness in those families who depended on the company. In a country where unemployment rate stands at 80%, billions of shillings in investment and machinery now lies idle in Mumias just like it happened in the cotton industry. Government has been giving bail out money one after the other to rescue Mumias from a bottomless hole. The most recent bail out was 3.5 Billions in 2018.
But where did the rain start beating the sugar giant
There has been a huge problem of not paying farmers who supply 90% of the cane to Mumias. Due to persistent defaulting of farmers, some farmers have uprooted their cane. Cane poaching (selling to roadside buyers rather than honouring contracts with millers) is also evident, they sell to other buyers who pay almost promptly. The huge debt owed by the company to various players including banks, Kenya power among others has brought the company to its knees. As a result Kenya power disconnected the company's power supply. Mumias entered into a lopsided deal with the company that they eject some megawatts into the grid failure to which attracts a penalty. Mumias was unable to honour the deal hence the penalty has accumulated over time leading to a huge debt. Producing cane for Mumias is viewed by farmers as uneconomical and unwanted therefore have opted to sell to other companies which pay almost promptly. Mumias fortunes are dwindling, the overgrown 5000 acres of cane lies in the Mumias owned farm and no plans for harvesting due to factory shut down. Cane fires have become common occurrence in the area. Another bail out grant is therefore required to jump start the company's operations. The troubles of Mumias deepens and are not ending soon as it is being run for 17 years under receivership with 54 year old outdated machinery. The case of Mumias is one example to give a picture of a desperate situation in the sugar sector.
High cost of production
Kenyan sugar sector is not competitive and only survives due to high protection through high tariffs and non-tariff barriers. It is very uncompetitive with twice as much cost of production compared to other countries like Malawi, Zambia and Egypt. The average productivity per hectare in Kenya is half as much as in Zambia. Poor cane quality and obsolete crushing machines contributes to high crushing efficiency whereby extra canes are crushed for an equivalent tonnage level of sugar compared to other countries. Transportation is also not done right, millions of shillings is lost during transportation where sugarcane falls off during transportation from farms to the factories. Cane transport costs significantly reduces farmers earnings. Sugar cane acreage plantation is less than 10% and declining at a very high rate. It declined from 75000 ha to only 30000 ha since 2004. Cane poaching and illegal imports are also termed as the key challenges to the overprotected sugar industry. Cane poaching is as a result of long periods farmers goes without payment for their cane. Consequently millers are left with insufficient canes to mill and pushing the prices upward hence incurring losses.
Outdated machinery
The problems facing the industry are outdated machinery making the costs of production to be very high compared to other countries for example Egypt whose cost of production is thrice lower than that of Kenya. Some cane varieties responsible for good sugar and being planted in countries like Brazil are yet to be adopted here in Kenya. Lack of a good business strategy is also another challenge.
Privatisation of the Sugar industry
Kenya's sugar industry risks a death similar to one experienced in the cotton industry. One begs the question of who is sabotaging the economy of the Western region of Kenya? The five state owned milling companies are faced with huge debts and one wonders if the strategic investors will be willing to risk their money in a sector which is well hit below the belt. Anyway, that is upon the investor to decide. Some critics argue that privatisation is not a direct panacea to the woes of the sugar industry while others feel that its the only solution to beat the deadline given the COMESA.
why should we privatise
Private sector will bring efficiency in the sector, Government always strives to ensure that the sugar sector is functional with little effort in improving efficiency. The major cost items are harvesting, transportation and high costs of inputs and this can be well taken care of by a strategic investor.
Cane is not harvested on time. Farmers incur huge losses when sugarcane is not harvested in time. Contractual arrangement between farmers and millers should lay down rules on harvesting schedule of the cane and with with privatization, a strategic investor will honour farmers dues in time.
Protection of the local industries vs privatisation
The justification of overprotecting the Kenyan sugar industry has been more political and not pegged on economics reasons. Huge budgetary allocation to the industry is unsustainable and uneconomical. Socialism theory applied to justify farmers protection has not worked and will never work for poor farmers in Africa. Government uses taxes to support this terrain and ends up hurting consumers who have to dig deep into their pockets to pay for the sweetener. In a free sugar market sugar can cost Kshs 50 a kilogram but now consumers pays between kshs 100 and kshs. 200 per kilogram all in the name of protecting a very noncompetitive sector. The bottom line is we open the sugar market and privatise the sugar milling factories to take care of all the inefficiencies in the sector.
