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Kenya in push to privatise sugar firms as production dips

Kenya is racing against time to privatise its publicly-owned sugar factories ahead of the expiry of an agreement that protects the country from cheap imports from the Common Market for Eastern and Southern Africa (Comesa).

The EastAfrican has learned that the government plans to pull through with the privatisation plans for Miwani and Muhoroni factories within the next three months.

Under Comesa rules, countries within the region have duty-free access to the market. But Kenya was granted safeguards against this, allowing it to import sugar from outside Comesa.

In 2016, Comesa granted Kenya an extension of the safeguards — which expire in February next year — on condition that it shall have privatised its publicly-owned sugar companies to improve efficiency and increase production.

Kenya’s sugar sector is nearly crippled by obsolete milling technology, huge debts, poor production, mismanagement, corruption and non-payment of farmers. Its total domestic sugar production last year declined by 41.2 per cent to 376,100 tonnes, from 639700 tonnes in 2016.

According to Privatisation Commission acting chief executive Jacqueline Muindi, the plan to privatise is aimed at meeting the government-Comesa safeguard commitment to privatise sugar companies “to address the excess debt and the resources required by the companies (rehabilitation, expansion and modernisation of the mills)”.

The EastAfrican understands that Kenya could seek a further extension of safeguards from cheap sugar imports, given the bottlenecks emerging from the privatisation process and the country’s falling sugarcane production, which has made its costs remain higher than its regional peers.

Kenya is expected to present its sugar sector reforms scorecard as its fights for a new extension. This is likely to be a tall order.

“We are faced with the biggest tests; actualising the privatisation move in under eight months but again, we have apathy among farmers that has seen reduced sugarcane growing acreage and production, another key element we are supposed to have worked on under the Comesa safeguards. We are faced with the stark reality, seek another extension,” an official in the sector said.

Kenya hopes that through privatisation, it will improve the competitiveness of its sugar sector, which will end its perennial reliance on Comesa safeguards from duty-free sugar in the region, locking out regional players who are eyeing Kenya’s market.

Challenges

Should Kenya fail to get the safeguards, it will be good news for the sugarcane farmers in the Comesa countries and consumers in the country, but bad news for Kenyan farmers as cheaper sugar will flood the market, killing a sector that is already on a downward trajectory.

Currently, Kenya’s production cost is the highest within the Comesa countries at $840 per tonne as compared with the region’s average of $400.

Kenya has been under the Comesa safeguards since October 2004, and has failed to revive its sugar sector to compete with its regional peers, relying on exports to meet its bulging demand that currently stands at more than 870,000 tonnes annually.

The five sugar factories set for privatisation serve more than 300,000 cane farmers and jointly owe them more than $890 million in unpaid dues, with Muhoroni and Miwani, currently under receivership.

Their privatisation has been bedevilled by opposition from farmers, politicians and legal cases, which were eventually thrown out in November last year.

The EastAfrican understands that the Commission is currently re-evaluating the assets of the five millers, but has prioritised the sale of Miwani and Muhoroni sugar companies. The two factories debts stand at $560 million.

“So far we have agreed to the sale of Miwani. However, we have faced opposition in Nzoia, Sony and Chemelil. We will proceed with the sale of Miwani as we try and settle the issues of the other factories,” Henry Obwocha, the chairman of the Privatisation Commission said.

Ms Muindi said the commission is looking at offloading its controlling stake (51 per cent) in in each of the five companies by August 2018 as the close of sale.

“The remaining shares will be owned by farmers, and staff while the government will be left with some minority stakes in each of the millers,” Ms Muindi said.

25pc shareholding

Already, the Privatisation Commission has proposed that the national government agrees with the respective county governments on the 25 per cent shareholding approved for the retention so that the process can be expedited.

Under the envisaged privatisation proposal seen by The EastAfrican, the strategic investor will get a 51 per cent stake in the select factory, while the local farmers and employees through, out growers and employees trusts, will get 24 per cent. The remaining 25 per cent will be retained by the national government.

Last month, Kenya’s Deputy President William Ruto said that the government was in discussions with key stakeholders on how to expedite the privatisation of Miwani, Muhoroni, Nzoia, Sony and Chemelil sugar factories.

“We have to make changes to the model we are using to manage the sugar sector. We have no problem even if it means we surrender the governments’ entire stake in the sugar factories, so long as it will be for the benefit of the sugarcane farmers,” Mr Ruto said.

However, leaders from the sugar growing belt in Nyanza, Western Kenya have opposed the privatisation move instead calling on the government to write off the debts these firms owe it and hand over management to the locals.

Opposition

In March, farmers and political leaders from the Sony, Nzoia and Chemilil sugar zones opposed the sale of three of the five factories, demanding they get shares through respective county governments.

“We will not support the privatisation plans. The national government should pump money into these factories to revive them then hand them over to the county government. We would also like to see the outstanding loans the farmers owe these firms written off,” Muhoroni legislator Otieno K’Oyoo said.

Land, in the sugar zones has become a contentious issue given that some of these millers sit on previously held communal lands and their privatisation plans is pegged upon carefully solving this emotive issue.

“These strategic investors the government is talking about are interested not in reviving these factories but the land that they sit in for other investment plans,” Mr K’Oyoo said.

The privatisation commissions however says it has planned for the valuation of each sugar factory’s nucleus land and also protection of the lands post-privatization, through shareholders’ agreements

“The issues on land are historical and therefore may not be resolved expeditiously while farmer issues would require immediate address through the privatization process,” Ms Muindi says.

Currently, the Kenyan government, through the Agricultural Development Corporation owns Chemelil Sugar Company through a 96.21 per cent shares.

Kenya also owns 98.8 per cent of South Nyanza Sugar Company Ltd. Nzoia Sugar Company is also owned by Kenyan government through a 97.93 per cent shareholding.

In Miwani Sugar factory, which is under receivership, Kenyan government controls 49 per cent while its won 16.9 per cent of Muhoroni Sugar, which is also under receivership.

The privatisation push comes even as it emerged that last year, Kenya imported more sugar than it produced coming at a time that saw its production fall to the lowest as farmers staged protests and boycotted supplying milling firms with the raw materials.

More sugar

The 2018 Economic Survey shows that Kenya imports tripled to 989,600 tonnes last year from 334,000 tonnes in 2016. This was the first time in five years that the country was importing in more sugar than it produces.

Last year, the area under cane also reduced to 191,200 hectares compared to 220,800 hectares in 2016.

“The reduction in cane area was attributable to conversion of some area under cane to other crops. Further, the quantity of cane delivered to factories reduced by 33.3 per cent from 7.2 million tonnes in 2016 to 4.8 million tonnes in 2017.

“This was on account of prolonged dry weather conditions which were unfavourable for the growth of cane leading to harvesting of immature cane. As a result, the average sugarcane yield reduced to 55.3 tonnes per hectare in 2017 compared to 62.2 tonnes per hectare in 2016,” the Kenya National Bureau of Statics (KNBS) said in the survey.

Kenya also saw its total domestic sugar production decline by 41.2 per cent from 639,700 tonnes in 2016 to 376,100 tonnes in 2017.

KNBS said that a total of 989,600 tonnes of sugar was imported in 2017 to bridge the deficit occasioned by the low production during the year.

“Most of the sugar imports were meant for final consumption at 83.1 per cent of total sugar imports,” the agency said.

The country has an annual sugar consumption of 870,000 tonnes but production has been dogged by poor cane supply, high cost of production, old and inefficient sugar crushing machinery, corruption, farmer’s payments arrears, and mismanagement.

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