Why Kisumu brewery will be significant development
From left: EABL MD Andrew Cowan, the company's chairman Charles Muchene and NSE CEO Geoffrey Odundo. PHOTO | SALATON NJAU | NATION MEDIA GROUP
What you need to know:
It has demonstrated once again that tax policy is not just about how to raise the money for the government to spend.
The biggest development dilemma here is that livelihood options have dwindled drastically.
Here are the reasons I think that the new Sh15 billion brewery East African Breweries will be shortly launching in the lakeside town of Kisumu is a very significant economic development in western Kenya. First, it has demonstrated once again that tax policy is not just about how to raise the money for the government to spend.
This project is happening because of a decision made by David Mwiraria when he was Finance minister. He was the first to come up with the idea of introducing tax remission for beer made from sorghum, millet and cassava. To enjoy this remission, you have to develop and invest in a comprehensive value chain for these food crops. Originally set at 35 per cent, it was gradually increased to 100 per cent between July 2006 and October 2013 and later revised to the prevailing level of 80 per cent.
TAX POLICY
One of the reasons new investment by our leading companies is low is because tax policy is framed by revenue-obsessed types, who believe that collecting more money for the government is more important than tweaking policy to promote innovation and new investment. If you track recent trends, you will see that public investment by the government in roads, ports, railways and health services has been growing faster than investment by businesses. It is not a very good trend because we all know that a shilling of private sector spending is more efficient at creating wealth and durable jobs than a politically motivated shilling of investment by the State.
The Kisumu EABL plant has demonstrated that if you give investors tax concessions and attractive incentives – you can influence companies to expand and invest in new businesses. We are also learning that where you have introduced tax concessions to attract private sector investment, you must introduce and maintain an element of predictability in your fiscal laws.
Investors will always ask themselves this question before they decide to take risks: if I start an undertaking on the strength of tax holidays announced by the government, how can I be sure that the remissions and concessions will continue to be in force when production starts in four years?
One of the main factors for the paucity of investment by leading companies is the instability of our tax laws. Tax remissions announced today can be amended tomorrow. Which brings me to the second reason the EABL plant is a major economic development in the region. In my view, the biggest development dilemma here is that livelihood options have dwindled drastically, especially since the collapse of growing of sugarcane and tobacco. The Kisumu plant could open new options for hundreds of thousands of farmers. It is estimated that to run and maintain the Kisumu plant, which has a capacity of a million hectolitres of alcohol, the EABL will require nearly 20,000 metric tonnes of sorghum every year. The company will be forced to spend billions of shillings in developing a stable and high quality sorghum value chain. The circumstances could force the EABL to spend billions to roll out a sorghum extension programme covering multiple aspects, including access to inputs and credit, joint collection centres, mechanisation and contract farming. Western Kenya needs livelihood options away from sugarcane. Never before has sugarcane farming been so exploitative of the farmer. All the State-owned sugar milling companies have become zombies. Yet when they tell you that the sugarcane farmer is inefficient, they are merely repeating a myth. How can sugar be unprofitable when nearly six new private mills have sprouted in the last 10 years? Or should we take it that the private mills are motivated by philanthropy?
I think the private millers and their close allies and partners within the cartels that control the sugar supply chain are the albatross hanging around the neck of the poor sugarcane farmer. They are why the farmer makes huge losses from sugarcane growing while traders and private millers make big profits. In truth, the advent of this new crop of private millers has only added to the suffering of farmers.
Private millers exaggerate production costs so as to hide what ought to go to the farmers. Mark you, the last production cost study for sugar was conducted several years ago. Let us maintain the tax remissions to give the farmer an opportunity to grow sorghum. In the long run, the investment the EABL is making may be what we need to move us away from over-dependence on ugali. It may be how we will to get our farmers to return to producing more nutritious food crops such as millet and cassava. Someday in the long distant future, we will no longer face threats of an “unga revolution”.
