How illicit alcohol is taking heavy toll on the economy

Tuesday March 15 2016

Administrators pour illegal illicit brew 'Kangara' at a sugarcane plantation of Lunyu village in Kakamega East district during major crack down on 12th September 2015, led by OCPD Joseph Chebii and locals where more that 30,000 litres of Kangara was destroyed. PHOTO | FILE 

By EDWIN OKOTH
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When the government launched a crackdown on illegal alcohol in July last year, many Kenyans were thankful that at least something would be done to address the menace that had wreaked untold havoc to many families and lives.

Many had gone blind after imbibing some dubious pints. This scenario was aptly captured by a man who, having lost his eyesight after gulping some toxic alcohol, is said to have drunkenly spluttered, “even if you switch off the lights we will continue drinking.”

More sadly scores have lost their lives to the killer brews. The crackdown last year was therefore godsend to Kenyans. Government officials and civilians joined hands in a rare show of unity to rid the country of the curse that brews had become. So thousands of litres of illicit brews literally went down the drain.

However, the otherwise noble initiative took a dramatic ugly turn when legal shops and warehouses were targeted. Sobriety was thrown out of the window and what followed was unspeakable mayhem and hooliganism, a spectre that effectively played into the hands of the same traders the fight was meant to punish. In the process genuine businesses lost millions of shillings in revenue. Many also lost jobs.

While the crackdown had squarely focused on the health hazards of the brews, the illegal business also significantly hurts the economy in other ways. First it robs the country of young men who would work in various sectors and contribute in growing the economy. During the crackdown, it was discovered that thousands of young men had become zombies, doing nothing productive but just indulging in the brews.

More fundamentally, the unlawful trade robs the country billions of shillings in revenue. The National Alcohol Beverages Association of Kenya (Nabak) Chairman Gordon Mutugi said genuine dealers did not just suffer the loss associated with the crackdown but also continue to lose revenues as the dubious dealers still hold onto 30 per cent market share of the multi-billion industry.

“The government is the biggest loser here since the illicit dealers don’t pay tax at all yet they narrow revenues of those who genuinely pay taxes. This is an industry that generates close to Sh100 billion annually and leaving 30 per cent of it in the hands of dark dealers is a great loss,” Mr Mutugi said
“Those in the illicit liquor trade have no value chains, further limiting economic impacts and that is why the government has all the reasons to deal with it in the best way”

The network of illicit alcohol trade runs deep with the entire chain comprising contraband goods or counterfeited materials that they use in brewing, allowing them to sell their products cheaply. This further locks out genuine dealers from the market.

Smart Company learnt from a reliable source that the average cost of producing a genuine 250 milli-litre of spirit is Sh93.34 plus VAT. The market price after factoring in marketing and associated costs of delivering the product and inclusive of the profit margins is Sh120 at the minimum. 

A quick look at most shops selling spirits however revealed that a similar quantity of some brands are sold for as low as Sh95, underlining the market muscle some dealers have in undercutting manufacturers and denying the government millions of shillings in unpaid taxes.

Mr Kairu Thuo, a legal, finance and tax administrator based in Nairobi, said the government is faced by the double headache of missing out on revenues from the illicit brewers and spending heavily to address the challenges they bring about, including mounting a cracking down against them.

“It is possible to drive down the prices of genuine alcohol even as tax remains high as long as the industry is administered well with all players paying tax. Legitimate brewers are forced to raise the price of alcohol to recover their earnings that are lost to those drawn to the cheap illegal liquor,” Mr Thuo said.

“The illegitimate brewers on the other hand continue not to pay tax creating a cycle of negative effects in the entire market system.”

The illegal traders also use contraband raw materials like spirit and sugar to make their drinks and ingenuously pack them in recycled bottles acquired from the retail market. They then sell them disguised as genuinely branded products. This way, they don’t pay branding or advertising costs.

Two weeks ago, close to 40 containers of contraband sugar worth Sh64 million were impounded by the Kenya Revenue Authority officials as they combed depots in Mombasa for illegal imports. The tax collector made the discoveries in a single week with the last 16 containers found at the Kilindini port misdeclared to evade the authority’s scrutiny.

KRA said suspicion on the consignment arose when it emerged that the sugar was from a Ugandan miller, Kakira Sugar Company.

“It’s instructive to note that Kakira Sugar Company is based in Uganda and any imports originating from the firm would ideally enter Kenya by road or rail haulage through the land borders and not through the port via sea vessels,” KRA said.

Another swoop the previous week had found  a 40-foot container suspected to contain 135 drums of a liquid product. The tax value of the product, suspected to be ethanol, was estimated at Sh11 million.

Both consignments could have been meant to be used in illegal brewing or they could have just been directly sold illegally in the consumption market without earning the government any revenue.

“Using the contraband raw spirit, which suppliers would not have paid any tax, takes away about 40 per cent of the cost (of making illegal alcohol) allowing the traders to sell even cheaper,” said the source from the breweries who chose to comment in confidence.

At the height of last year’s month-long crackdown, genuine manufacturers who were also affected had raised concerns that more than 3,500 workers would be rendered jobless.

“Nabak employs 3,000 people directly and tens of thousands in distribution. All these jobs are now at risk,” said Kenya Breweries corporate relations director Eric Kiniti at a press briefing.

London Distillers closed its Athi River factory, at one point sending 500 workers on compulsory leave. The Brewers’ association chairman said the industry is highly regulated further hurting genuine players.

Two years ago,  Uasin Gishu County Assembly, for example, passed County Alcoholic Drinks Bill 2013 stipulating guidelines for liquor production and penalties for those found breaking the law. They also set up an alcohol control and licence board to enforce the new rules.

Strict penalties

The law imposes strict penalties against persons found manufacturing or distributing illicit alcohol against the set rules, including a Sh2 million fine or a jail term of up to five years.

The law also set penalties against those found selling alcohol to underage consumers and to police officers in uniform and on duty.

Earlier this month, Bungoma County officially gazetted a law that allows the sale and drinking of traditional brews in the county. The Bungoma County Alcoholic Drinks Control Act, 2015, gazetted by Governor Ken Lusaka   regulates production, sale, distribution and consumption of traditional brews and other alcoholic beverages.

Traders under the new laws are required to apply for licences from sub-county committees and be cleared by public health officers before selling the brew. Traders are also required to sell the brew at market centres and not in residential homes as has been the norm.

“We do not have a problem with the crackdown or legislation touching on alcohol but we need consultation and consolidation of these laws so that we have uniformity. If every region will come up with its own laws then this industry will not survive. We have proposals already drafted which we will present to national legislative platforms so that we have order in this sector,” Mr Mutugi said.

The proposals include setting up a single agency bringing together all the players in the industry to harmonise liquor administration. Mr Mutugi said the current situation has glaring loopholes in between agencies that illicit brewers cash in on to continue bleeding the economy.