Research and Programs Director- Eastern Africa Policy Centre.
Events happening late last month have provided proof yet again that Kenya’s sugar sector remains in limbo. Mumias Sugar started by declaring a half year loss of 1.58 Billion KES, up from the 1.4 Billion KES loss it made over the same period last year. The miller is asking for a KES 2Billion state bail-out, this after it received 1 Billion KES bail-out in June 2015. By that time, the miller owed its creditors 10 Billion KES. In the same week, the Kenya Revenue Authority KRA impounded 16 containers of “Contraband” sugar entering the country at the port of Mombasa, two months ago the KRA had impounded 8 containers.
The above issues are just but a tip of the iceberg. As you will soon discover the sugar industry in Kenya has been a comedy of policy and political mistakes. This situation has left the sector an underperformer in a region with vibrant sugar sectors. The sector has remained a mere appendage of the Kenyan economy rather than an important cog in Kenya’s the economy.
How did this paralysis get entrenched? One cannot answer this question without going back into the post-independent history of the sugar sector and perhaps the prevalent ideological persuasions of political leaders at the time. Broadly, there have been four policy regimes: the state-centric regime, the structural adjustment Programs regime, the mixed market regime and the COMESA regime. These regimes have had the effect of the allocating or at times misallocating the gains of productive activity within the sugar sector.
During the colonial period, sugar farming and milling was under the hands of Asian families. Asians had invested in both the Western Kenya sugar belt and the Coastal sugar belt. Political independence brought through conscious efforts to Africanize critical sectors of the economy. Sugar farming was opened up for native farmers.
The state also assumed prominent roles in the sector. The state-centric approach was characterized by state capitalism that involved substantial central planning and the state’s direct involvement in economic activity. During this policy regime, the government acquired controlling stakes in Muhoroni, Chemelil and Miwani sugar which had previously been owned by Asian families. The government also controlled the distribution and wholesaling of sugar through the monopolistic control of the Kenya National Trading Corporation (KNTC). KNTC also fixed the price of sugar, and as such there was very little incentive for improved production in the sector. Farmers could not increase production because of improper farm-gate pricing policies, state millers could not improve production efficiency because they had minimal competition. Farmers bore the brunt during this phase due to low cane prices, consumers suffered because of rationing that ensued from the logistical incompetence of KNTC.
In the early 1980s, the Kenyan government, as did other African governments was going through severe fiscal difficulties. The pile up of underperforming state enterprises and volatile international commodity markets left the Kenyan government cash-strapped. The government was forced to divest from many sectors of the economy including the sugar sector.
The World Bank and the International Monetary Fund forced the Kenyan government to liberalize the economy and the sectors therein, like the sugar industry. There was overriding apathy for the neo-liberal agenda, behind SAPs. This was a minor problem during this phase, the major one being that privatization and import liberalization provided an opportunity for well-connected local and political elite and crony capitalists to lay their hands on privatized millers or sugar import licenses. The government went against the spirit of liberalization by protecting cronies through a range of import tariffs and import quotas. This heralded the protectionism in the sugar industry. Although domestic millers and suppliers were protected from international and regional competition through a range of import tariffs and quotas they could not meet growing demand. Deficits range around 300,000 metric tonnes annually. Deficits coupled with highly controlled import regulations have kept domestic sugar prices around 100% more than the global average.
In the early 2000s, a few clever things started to happen within the industry, one being that the government started acknowledging the important role of co-operative governance in the sector. The government invited the private sector and civil society organizations into the governance of key regulatory institutions. This period coincided with the poverty reduction strategy which aimed at providing opportunities for farmers to generate incomes from increasing economic activity. Sugar production within this period increased, the government moved further back from the market and endeavored to play an effective regulatory role rather than direct production. The existence of state and private millers side-by-side also allowed for the comparison of efficiency. Private millers offered farmers better cane prices and had better cane conversion efficiencies.
The other incessant challenge that the Kenya sugar industry has faced over the years has been the country’s ascension into COMESA. In 2004, Kenya was given safeguards that protected its sugar industry from import competition. This safeguards were given with a view to providing the country time to make its industry more competitive. In 2014, the country successfully lobbied for the fourth time to extend the COMESA safeguards up to 2017. There is little evidence that the sugar industry is competitive and is ready for completion with other COMESA members who outperform Kenya on many important parameters.
Historically it is clear that the imprint of the state and government policy has been detrimental in the sugar industry. The government’s role in misallocating incentives and profits within the sector have come at the cost of an underperforming sector. In light of this realization, it would be prudent for the government to fully liberalize and privatize the sector and allow market forces to dynamize and make the sector competitive, as has happened in the telecommunications sector in the country.