Kenya seeks fresh protection against regional sugar imports

After failing to prepare the sugar industry for competition in the regional market, the government is seeking yet another extension for safeguards.

Smart Company has established that negotiations are at an advanced stage for Kenya to get an extension to the current one-year protection that is scheduled to expire next month, potentially opening up the ailing local sugar sector to stiff competition.

The government is now seeking an additional three years to put the local sugar industry on a sound footing before it is opened up for international competition.

But having exhausted the allowance for normal extensions under the Comesa trade remedy regulation, the government has now invoked article 49(2) of the Common Market for Eastern and Southern Africa (Comesa) treaty that allows a member state to seek protection of an industry it considers immature compared to similar industries in the member states.

Industry report

Officials from the Agriculture, Fisheries and Food Authority (AFFA) have prepared a report on the status of the country’s sugar industry in comparison to those of five other Comesa member states.

The report will be presented to the bloc’s technical committee next month.

The technical team will then present its recommendations to the Comesa council of ministers to make a decision on Kenya’s application.

“The general conclusion is that most of the conditions we had been asked to meet for the last extension have been met and the rest are at different levels of implementation.

Hence we need at least three more years to be competitive,” said a senior official at AFFA, who declined be named since the negotiations are ongoing.

Political lobbying, which played a central role in getting the last extension, are also in high gear.

Kenya first sought Comesa protection of its sugar industry in 2002 before being extended in 2003 through a four-year window to allow the government institute reforms that would make the sector internationally competitive.

More than a decade later, there is little to show for the period that the country has enjoyed protection.

The safeguards restrict unregulated importation of duty-free sugar from the 19-member Comesa region and were granted with expectation that Kenya would boost the competitiveness of its industry by, among other measures, privatising government-owned millers.

Shielding the industry from unregulated imports for a few years, it was envisaged, would in the long-term enable the country to compete on the same level with its regional peers.

But since then, the government has been going back to the regional body asking for more time while the sector remains largely uncompetitive.

None of the five state-owned millers has been privatised while the high cost of production has made the country a highly attractive market for illegally imported sugar.

Last year, the country was granted a 12-month safeguard extension, that is now set to expire next month, by Comesa purely on political grounds.

This was because the country did not qualify for the extension on technical grounds under the World Trade Organisation and Comesa regulations which restrict the maximum allowable safeguard duration to 10 years.

“We understand that we have exhausted much of the options available to us overtime but there are other mechanisms to rely on since there has been considerable progress albeit slow,” AFFA interim director-general Alfred Busolo said adding that all hopes are now on the Comesa technical committee.

Article 49(2) provides that “for the purposes of protecting an infant industry, a member state may, provided that it has taken all reasonable steps to overcome the difficulties related to such infant industry… seek protection”.

Comesa, however, expects any member seeking to invoke this clause to provide evidence that it has taken “all reasonable steps” to overcome the difficulties faced by such an infant industry.

The Comesa Competition Authority had in October, last year, warned that it could not grant Kenya another extension as doing so would amount to anti-competitive business practice within the bloc.

The argument was that Kenya had always sought protection from competition with little evidence that steps were being taken to strengthen the sugar industry as advised by Comesa.

The conditions set by the bloc while granting Kenya protection and their subsequent extension over the past decade include privatisation of state-owned millers and diversification of their revenue streams.

Millers are also required to change from the current tonnage-based payment system for sugarcane to one based on sucrose content in a bid to encourage production of quality cane.

“We have initiated the purchase and subsequent use of cane testing units to move away from the current weight-based cane payment system while the sale of state-owned mills is awaiting parliamentary approval,” said Mr Busolo.

In December last year the National Assembly went on a two-month recess without adopting the report that is crucial in initiating the sale of state-owned sugar mills.

The companies lined up for privatisation are Nzoia, Chemelil, South Nyanza (Sony), Muhoroni and the now moribund Miwani sugar factory.

The plan is to sell the government’s 51 per cent stake in the five sugar companies to strategic investors and reserve another 30 per cent for farmers. Parliament had already approved write-off of the millers’ Sh33.78 billion debt.

The State would then sell the remaining 19 per cent stake through an initial public offering once the factories turn in profits.

Nzoia and Sony, which have cane growing area of 49,862 hectares and 31,415 hectares respectively, will be sold as they are.

Chemilil and Muhoroni will be merged to form one company with a cane growing area of 40,571 hectares. Miwani awaits the conclusion of an ongoing court case.

The mills were also expected to diversify into ethanol distillation and co-generation to reduce reliance on revenue from sugar.

But to date only Mumias Sugar Company has made tangible progress on this venture. The firms blame a tough legal environment for their failure to make headway in co-generation of power and other forms of bio-fuel energy production.

“The government has not provided enough incentives to enable millers venture into co-generation despite its viability as an alternative source of revenue,” sugar directorate boss Rosemary Mkok said in an earlier interview.

She said the low prices of co-generated electricity have made the venture unattractive. Perhaps this is the reason Mumias Sugar Company is embroiled in a dispute with Kenya Power.

Kenya Power is demanding millions of shillings from Mumias in power bill. On the other hand, Mumias, which supplies part of the 36 megawatts it generates to the national grid, says Kenya Power is yet to settle its account as per the terms of the power-purchase agreement signed between the two.

While the Energy Act provides for the E10 mandate (10 per cent blending of ethanol with petrol), industry insiders say the legal framework is weak on product pricing and marketing, discouraging investment in the business.

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Industry hampered by high cost of production

Currently, Kenya can only import up to 350,000 tonnes of sugar annually to protect local mills from competition. The country has relied on the Comesa safeguards to protect the sector from cheap imports that would render local sugar expensive.

Kenya is considered the second most attractive market for sugar after the European Union, due to its high cost of production that is almost double the global average of $300 per tonne.

Data from the Kenya Sugar Board puts the local production cost at $870 per tonne, way above Malawi, Zambia and Swaziland that incur between $300 and $350 cost per tonne.

It is for this reason that the country is always fighting illegal sugar imports that have frustrated the government’s effort to revamp the sector as millers struggle to sell their stock.

Kenya is a net importer of sugar, with an annual deficit of between 250,000 tonnes and 300,000 tonnes. The deficit is normally covered through temporary issuance of import permits by the government.

Sector inefficiencies

Uganda has been one of Kenya’s biggest suppliers of sugar, with imports from the country rising to 30,299 tonnes in November 2012 from 73 tonnes in November 2011.

It is feared that Kenya’s sugar industry cannot withstand unregulated sugar imports from the Comesa market due to inefficiencies in the sector that have rendered it largely uncompetitive.