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Sugar sector in limbo as Comesa safeguards near expiry
It’s feared lifting of Comesa safeguards on March 1 could collapse the industry.

Sugar sector in limbo as Comesa safeguards near expiry

Fear has gripped players in the country’s sugar sector ahead of the expiry of the Common Markets for East and Southern Africa (Comesa) quota protection protocol on March 1. Kenya is a member of the Comesa Free Trade Area (Comesa-FTA). The FTA obliges the country to allow duty and quota free access for products, including sugar into her market.

But it also provides for the imposition of safeguard measures in order to reduce the quantities of commodity imported for a stipulated period of time to allow a particular industry to recover. The sugar sector has severally been granted extensions to the safeguard period to maintain tariff protection beyond a certain imported quota. Under the current arrangement which ends, on March 1 this year, Kenya can import a maximum of 350,000 tonnes from the Comesa-FTA duty free to cover the national deficit.

Any quantity above that amount from non-Comesa FTA countries invites application of full tariff. During that period (2004 to 2014), it was expected the local sugar industry would be able to increase its competitiveness. But in the wake of expiry of the protection quota, local cane millers fear the sector which has perennially failed to reach its potential still does not have the capacity to cope with the projected influx of cheap sugar from markets in the Comesa region once the safeguard is lifted.

Most players who spoke to Business Hub feel Kenya’s sugar industry is still not competitive hence cheap imports could probably inflict irreparable damage to the sugar sector or even lead to its possible collapse. In line with the above fears and to forestall the anticipated challenges to the sector, the Government has already indicated it will seek fresh safeguards.

Leading the assurances has been President Uhuru Kenyatta who has noted that the Government will work with the relevant authorities to ensure that the safeguard on the importation of cheap sugar from the Comesa region is extended. According to Agriculture Cabinet secretary Felix Koskei, a further extension of the regional bloc’s sugar safeguard is to be sought, since “the sugar industry should first be stabilised before the protection measures are lifted.”

Speaking recently on a visit to a sugar factory in Western Kenya, Koskei confirmed widespread fears among sugar industry players maintaining 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. Koskei maintained 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, a strategy favoured by the Kenyan Sugarcane Growers Association.

But it remains to be seen whether the country may be lucky to get an extension this time because the existing safeguards, which come to an end on March 1, have already gone beyond the Comesa limit of eight years and have reached World Trade Organisation’s 10-year maximum limit. Kenya is yet to fulfill a set of conditions related to privatisation of sugar millers and the introduction of a sucrose-content-based cane payment system that were subject of an earlier extension.

The issue is further complicated by restrictions on the duration of safeguards under Comesa rules, which would need to be amended. Indeed, the country’s sugar sector is currently facing several problems. For starters 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. Statistics indicate that the combined losses of State-owned sugar mills reached Sh6.1 billion last year.

Additionally according to a World Bank report, “the protection measures under Comesa have contributed to making Kenya a high-cost sugar producer”, with average costs of $950 (Sh81,700) per tonne, compared to $350 (Sh30,100) per tonne in countries such as Malawi. Also, apart from inefficiency massive revenue losses through suspected corruption such as the infamous staggering Sh1.67 billion loss at Mumias Sugar, a semi-privatised mill, in which the Government stake is now only 20 per cent have according to experts eroded the attractiveness of Government mills for potential strategic partners. The prevailing fears have been compounded by sugar smuggling.

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. In the midst of these challenges some players have criticised the Kenya Sugar Board (KSB) for inadequately fulfilling its regulatory functions, particularly with regard to the issuing of new milling licences with calls for the cancellation of some milling licences and for the dissolution of KSB.

In giving Kenya the March 1 lifeline that is now due for expiry, it was argued the country had met all the conditions imposed after the previous extension, apart from conclusion of the privatisation of the five publicly owned sugar mills. Kenya had also insisted that it had put in place a research on early maturing cane to enhance productivity. The country had also fronted the argument that it had also formulated an energy policy on co-generation to enable sugar mills to produce power for the national grid.

On the privatisation front, former Trade minister Chirau Mwakwere told the Comesa council of ministers that the then Cabinet had already approved the Privatisation Bill, which was now before Parliament. It had therefore been expected that this being the last extension the country had been afforded, the reform efforts would have enabled the country’s sugar sector to be competitive and, therefore, withstand the influx of cheap Comesa imports. But nothing much has changed compounding fears by sector players that the scrapping of the safeguard will negatively affect the Kenyan sugar sugar sector.

According to the secretary general of the Kenya Union of Sugar Plantation Workers, Mr Francis Wangara, the country is not yet ready for floodgates to be opened for sugar imports. Wangara notes that the cost of sugar production is still very high in the country and that cheap sugar imports from elsewhere will cause turbulence in the sub sector. “Forty per cent of costs go into production.

The infrastructure in the sugar belt is still wanting, further raising production costs,” he says. He adds: “Kenya still has a sugar deficit of 200,000 tonnes per year. But despite this, the end of safeguards will herald a regime of stiff price competition in the local market.” Chemelil Sugar Managing Director Charles Owelle says the quota period should be extended in order to allow millers put their houses in order.

A view also shared by two directors of the Kenya Sugar board, Mr Saul Busolo and Mr Billy Wanjala. “The Comesa safeguards should be extended in order to further protect the local sugar sector. Local sugar factories stand to lose,” says Busolo. Busolo also calls for permanent solutions aimed at protecting the local industry. Wanjala calls for an increase in cane development and improved seed variety and fast maturing cane in order for the local sector to compete effectively in the region.

The complexity of the impending situation is already evident as sugar companies in western region reduce the price of sugarcane per tonne following flooding of cheap sugar from elsewhere that is believed to originate from Comesa countries on Kenyan market. Millers such like Mumias, West Kenya and Butali shave lowered the price of sugarcane per tonne due to competition from cheap imports which is being sold cheaper.

Farmers interviewed by Business Hub said Mumias Sugar Company was paying Sh3,300 per tonne but the price has now gone down to Sh 3,000 while West Kenya which used to pay Sh3,200 now pays Sh2,700. The drop in sugar prices is also replicated at Butali sugar company. Comesa sugar safeguards have been in place since 2003, having been renewed in 2007 and 2011. - By FREDRICK ODIERO and BRIAN NGUGI

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