At the end of January 2013, the US Department of Agriculture (USDA) reported that the Nigerian government had announced a complete ban on the import of “packaged sugar, granulated and in cubes”. In addition, “all importers of brown sugar are mandated to own sugar farms in the country or contract out sugar farming to individual local farmers if they are to continue having licences to import brown sugar for refining.” This followed the introduction of a duty waiver for imports of machinery for use in the sugar refining industry, and a 5-year tax holiday for investors in the sugar processing sector. This is expected to “attract an estimated $3.1 billion [in] foreign direct investment” and to “generate local production of 1.8 million tons of sugar and 161.2 million liters of ethanol annually”.
USDA reported that in marketing year 2011/12, total Nigerian sugar production was 65,000 tons raw value, a 9% increase on 2010/11, while consumption was an estimated 1.34 million tonnes. Consumption was projected to grow by 27%, “to reach 1.7 million tons by 2016”, reflecting both population growth and increased industrial demand. According to USDA, industrial sugar users are “expected to seek available inexpensive sugar substitutes”, in case the government’s ambitious domestic production plans are not realised.
USDA noted that Nigeria’s Minister of Trade and Investment had reiterated the seriousness of the government’s commitment to promoting greater self-sufficiency in sugar production in the run-up to a complete ban on sugar imports in 2015. However, according to USDA analysis, “investment in local sugar production is hampered by the huge funds required to establish a sugar estate as well as the lack of long-term loans for investment purposes”.
The USDA report notes that, to date, Dangote Sugar Refining Company is the only company to have developed a sugar estate and that it is expanding its raw sugar production capacity. In February, Dangote announced the acquisition of a 95% equity stake in Savanna Sugar Company (SSC), and stated its commitment to becoming “a fully integrated sugar company” via its “backward integration strategy”. At present, less than one-sixth of SSC’s land area is under cultivation.
According to USDA, “under the new tariff regime, Dangote Sugar will be the company with the largest competitive advantage’.
In some ACP countries, the use of import licences to develop backward linkages along supply chains has proved effective (e.g. the Namibian horticulture sector). However, in these cases import licences are commonly used as part of broader sector development initiatives, elaborated in close consultation with all stakeholders, and based on realistic assessments of commercially viable production potential within any given time frame. Furthermore, successful import licence allocation schemes are managed on a transparent and accountable basis, often through representative stakeholder-led bodies. Thus, the success of strategies that use import licences to foster backward linkages is vitally connected to meeting implementation challenges.
In the case of the Nigeria, in the past the use of import licences has proved highly controversial, in large part linked to the non-transparent and unaccountable application of import licensing arrangements.
The dominant role of a single company would also appear to complicate the management of the new import licensing regime, given the important competition issues that arise. There would appear to be a need to ensure that the new import licensing system promotes new entrants and stimulates greater competition in the sugar sector.
In addition, the new scheme will require not only the negotiation of out-grower contracts with existing smallholder producers, but also the mobilisation of affordable financing to expand their sugar production. Given the current dominant role played by Dangote Sugar Refining Company, important issues related to the functioning of sugar supply chains would appear to arise.
The EU regulatory framework and the UK experience of inter-professional agreements (IPA), which are designed to balance a single buyer voice by promoting a single seller voice, could potentially hold lessons in this regard (see Agritrade article ‘ Importance of inter-professional agreements in managing unequal power re...’, 28 October 2012)
If these issues are not addressed, then the government objective of promoting “available and affordable sugar” could be undermined by the entrenchment of the market power of a virtual monopoly producer.