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Kenya to seek further extension of COMESA sugar safeguards

19 January 2014

According to the Kenyan Agriculture Secretary, Mr Felix Koskei, a further extension of COMESA sugar safeguards is to be sought, since “the sugar industry should first be stabilised before the protection measures are lifted.” Speaking on a visit to a sugar factory, Mr Koskei maintained that under current conditions the Kenyan sugar industry “cannot easily survive in a fully liberalised market”, and that most factories would close if safeguard provisions were allowed to lapse as scheduled. According to a World Bank report, “the protection measures have contributed to making Kenya a high-cost sugar producer”, with average costs of US$950/tonne, compared to US$350/tonne in countries such as Malawi.

COMESA sugar safeguards have been in place since 2003, having been renewed in 2007 and 2011. It is unclear whether a further extension will be granted, given non-fulfilment by Kenya of conditions related to privatisation and the introduction of a sucrose-content-based cane payment system. The issue is further complicated by restrictions on the duration of safeguards under COMESA rules, which would need to be amended.

The Kenyan government maintains that a further 24 months are needed for the completion of the sugar sector privatisation process, while it looks to attract strategic investors along with some level of farmer ownership, an approach favoured by the Kenyan Sugarcane Growers Association . Participation of strategic investors is seen as “critical to turning around struggling state-owned millers”. In addition, as part of the reform process the Kenyan government is seeking to make it mandatory for sugar millers to co-produce sugar, ethanol and electricity, in order to improve the overall financial performance of sugar mills.

The Kenyan sugar sector is currently facing several problems. The licensing of new millers has led to the emergence of extensive levels of cane poaching. This has seen utilisation of mill capacity fall, with serious financial problems emerging. Press reports indicate that the combined losses of state-owned sugar mills reached KSh6.1 billion (€51.8m) in 2013. This includes losses of KSh 1.67 billion at Mumias Sugar, a semi-privatised mill, in which the government stake is now only 20%. These “massive losses” are eroding the attractiveness of government mills for potential strategic partners.

Some representatives of both millers and farmers have criticised the Kenya Sugar Board (KSB) for inadequately fulfilling its regulatory functions, particularly with regard to the issuing of new milling licences, and there have been calls for the cancellation of some milling licences and for the dissolution of KSB.

Meanwhile, press reports have indicated that Kenyan sugar stakeholders are complaining about both sugar smuggling and the arrangements for quota-limited access for COMESA sugar producers (350,000 tonnes). Kenyan millers maintain that duty-free imports have left them with a growing stockpile of unsold sugar, as imports undercut local prices. This has led to calls for licences for COMESA duty-free imports to be suspended.

For their part, industrial users of imported sugar, such as Coca Cola, have called on the Kenyan government to ensure that any crackdown on illicit importers and rogue re-packers of sugar imported for industrial uses does not impact on genuine importers of sugar for industrial use. 

Editorial comment

The Kenyan sugar sector is deeply troubled. It has a high cost structure and a proliferation of millers competing for outgrower cane supplies, which is reducing mill capacity utilisation and undermining the financial performance of milling companies. ‘Cane poaching’ is also eroding multi-stakeholder initiatives to boost cane production, as the benefits of individual mill investment in farmers are poached by other millers. The absence of contract enforcement between millers and growers is likely to reduce the attractiveness of existing state-owned mills to private investors.

While moves towards privatisation will deal in part with the management problems associated with the state-owned sugar sector enterprises, other issues contributing to Kenya’s high costs of production – such as high energy charges, poor rural roads, limited use of irrigation and problems of input supply – will all need to be addressed. In addition, privatisation is likely to require a strengthening of the regulatory framework, at a time when the effectiveness of the existing regulatory body is being questioned.

A clearer, stronger, enforceable regulatory framework for relations across the sugar sector is necessary, particularly if issues related to the pooling and sharing of incomes from non-traditional revenue streams are to be addressed.

These problems and challenges exist quite independently of the issue of the COMESA safeguard. While a further extension of safeguard provisions is seen as essential by Kenyan sugar industry stakeholders, it would appear to be stretching the credibility of the temporary nature of the COMESA safeguard provisions. A compromise around an annually renewable safeguard, linked to a clearly defined timetable for privatisation, may, however, be possible. 

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