By Nyada Ralek

KENYA’S uncompetitive sugar industry has to reduce its costs by at least a third to achieve any level of viability, a new study says.
The study, carried out by a World Bank lead economist, Donald Mitchell, and whose preliminary findings have been made available to BioSafety News, is an indictment of an industry whose unending trials and travails have left a bitter taste on the mouths of the more than 100,000 small-holder growers who account for nine out of 10kg of sugar produced in the country.
It says that even after all duties and levies are paid, domestic sugar is still tagged at 50 per cent higher than its imported counterpart when it finally finds its way into the supermarket shelves, if it does at all.
Imported sugar currently attracts a punitive and protectionist 100 per cent duty on top of a 16 per cent Value Added Tax (VAT) and a 7 per cent sugar development levy (SDL). And this excludes the corresponding value of income taxes.
Besides, imports from the Common Market for Eastern and Southern Africa (Comesa) Free Trade Area states, which enjoy tariff-free access to the Kenyan market, have been limited to a 200,000-tonne ceiling to just fill a gaping local deficit of the same quantum. Anything above this threshold is a fair game for the normal slate of taxes and levies.
But with the Comesa quota limit expected to expire in three years, on February 28, 2008, time is clearly running out, and Mitchell argues that there is urgent work to be done.
The measure, which enabled Kenya to wriggle out of its Comesa peers last year, was intended to give local producers a temporary reprieve as they try to put their farms and factories in a competitive gear.
The tragedy is that despite its conditional strictures, there is no tangible evidence on the ground that the country has fashioned out any coherent and bankable farm-to-factory strategy to enable the producers to compete with the ever-growing number of traditional low-cost producers such as the Sudan, Malawi, Zimbabwe, Zambia and Egypt.
According to the study, the salvation for the local industry lies in privatising the state-owned firms, whose diminishing influence is perhaps best illustrated by the fact that they currently produce just 40 per cent of all the local sugar despite being in the clear majority at five out of seven factories in the country.
The study holds aloft the example of Mumias Sugar, which implemented a successful Initial Public Offer (IPO) at the Nairobi Stock Exchange about two years ago, as a mascot for what may be achieved through a well executed privatisation exercise.
Mumias’ private sector orientation, which has seen it head-hunt respected names in the Kenyan corporate land such as the current chief executive, Evans Kidero, is credited for its relatively good performance, compared to its counterparts.
For instance, it is the only local mill that has had a recent history of profit-making, recording positive earnings except for 1989/99 and 2002/3.
The study also observes that besides its relatively more commercial orientation, the western Kenya-based operator also has several factors going for it, such as a modern, well-managed factory, international competitiveness, manageable debt, good management and a tendency to pay its claimants promptly.
In Mitchell’s study, the prognosis is indeed grim for the other government-owned factories like Sony (South Nyanza), Chemelil, Nzoia, Muhoroni and Miwani, which are characterised as unprofitable and saddled by a huge debt burden.
“They use outdated equipment, sometimes as old as 30 years. They experience frequent breakdowns and are increasingly expensive to maintain. Management was not hired on merit, especially by the previous government. They are slow to pay farmers for cane and provide inputs such as fertilizer,” the study catalogues.
Kenya’s long trail of inefficiency in sugar production straddles the farm to the mills, which produce only 400,000 tonnes against an aggregate demand of 600,000; occasioning the importation of about 200,000 tonnes annually to fill up the deficit.
Most of the firms depend on small out-grower units, which average 0.8 hectares to meet their demand for raw sugar cane. This ensures that large-scale, quality-controlled and scientific crop husbandry a la most of Kenya’s competitors, is not possible on most of the farms.
Not much improvement in the form of farm consolidation and even better on-farm production is expected in the foreseeable future as the truth is that with the ongoing population explosion in Western Kenya, where the Kenyan sugar-belt is domiciled, cane plot size is declining by about 2 per cent a year.
Factors like higher transportation costs on the back of longer hauling distances as out-grower hinterlands expand for most of the factories and roads deteriorate have only served to exacerbate the problem.
Research, which is the mandate of the poorly equipped Kenya Sugar Research Foundation (KESRF), and for which consumers fork out the 7 cent SDL on every kilogramme of sugar bought, is chronically stunted. The study concludes that as a result, most cane varieties used in the country are slow maturing and outdated.
The study notes that KESRF needs to invest more effort and resources on developing shorter maturing varieties and having them widely adopted by farmers.
The study demonstrates that the biggest allocation of production costs go to transport, and with Kenya’s run-down road infrastructure not getting any better, it is easy to see why.
Other major claimants as far as production costs go include harvesting, interest on inputs, labor and fertilizer. Seed cane and levies also account for substantial costs.
On the factory floors, huge levels of inefficiency have resulted in an epidemic of under-capacity with only Mumias operating over 8 per cent of the time it is supposed to.
Tellingly, West Kenya, which is also the only other privately owned sugar mill in the country, comes a close second in the capacity utilization stakes at about 76 per cent.
The rest of the pack, which consists of government-owned mills like Sony, Nzoia, Muhoroni, Chemelil and Miwani, wallow in the under 65 per cent realm.
So-called out-grower companies are no better, which most small satellites of their bigger parents.
Mitchell fingers electricity as one of the areas where the factories could cut substantial costs, by generating their own power through the use of sugar-cane residue (bagasse)
“Co-generation of electricity provides an opportunity for adding value to the sugar industry by selling electricity, besides reducing the cost of electricity, which is already high in Kenya at 8-12 cents per kilowatt hour, besides its demand massively outstripping supply,” says the study.
It takes serious issue with levies like the SDL, which besides making sugar inordinately expensive are no better than a subsidy from profitable mills and consumers to unprofitable and inefficient factories and out-grower firms.
It is indeed a vicious cycle in which those who toil to make a return on investment are forced to finance the profligate ways of poorly managed State parastatals and the politically-appointed mandarins that run them.
The Kenya Sugar Board (KSB), which is the government’s agency for regulating the industry, also comes in for some flak; especially in the way it has been allocating import quotas.
The study notes that the way the system is structured currently hands out huge rents to private firms and calls for a different and more distributive allocation system
As the Kenyan sugar industry continues to turn sour, assailed by a litany of woes, it is the consumer who continues to get the wrong end of the stick. The truth is that Kenyans are being asked to pay for the inefficiency of local producers.
Consumers pay about 50-60 per cent more for sugar that they would if imports were fully liberalized.
For an indispensable part of the human diet, which accounts for about 11 per cent of all our total calorie needs, the government must move fast to prescribe workable options. Or we get ready to bury what remains of our local sugar industry, and in the same grave a thousand livelihoods come 2008.