This archive report was first published on 17 July 2019.
Kenya's Sugar Industry on Brink of Collapse ¶
Published on July 17, 2019
Kenya's sugar industry has many natural advantages, but policy and public mismanagement have undermined its productivity, leading to a slump. When import protection ends, the industry will be undercut by cheaper imported sugar, resulting in huge costs to Kenya.
Approximately 250,000 farmers grow sugar cane, and up to six million Kenyans depend on Kenyan sugar for their livelihood. Locally produced sugar saves the country between Ksh 40 billion and Ksh 55 billion annually in import costs, which is crucial as the trade deficit continues to grow and put downward pressure on the value of the shilling.
However, the government's proposed new regulations appear unjustified and inexplicable, especially considering that COMESA has warned against further extensions in protecting domestic sugar production from imports. Kenyan sugar production costs $870 per tonne, compared to $350 per tonne in Malawi and $400 per tonne in Egypt.
The proposed new controls comprise an old-fashioned model of state intervention that will further load costs and prevent key corrections to reduce Kenyan production costs. The starting point for Kenya's excessive costs is seeds, as farmers still use old-fashioned, low-yield seeds, resulting in lower sugar production per hectare compared to competitors.
A clear jumpstart would have come from regulations encouraging entrepreneurs to produce high-yield seeds developed by the Kenya Sugar Research Foundation (KESREF) and already released for commercial production. Delivering on the Crops Act's commitment to extension services to get farmers to switch to better seeds would have lifted yields by up to 100%.
Instead, the regulations put sugar cane seed production under the control of the Sugar Directorate, taking it away from the Kenya Plant Health Inspectorate Service (KEPHIS) that handles all of the country's seed licensing. This will be costly and time-consuming, and only replace what KEPHIS already does.
The next 'dead hand' on Kenyan sugar production is the mismanagement and inefficiency of our mills. We produce around 5.3m tonnes of sugar cane a year, and have 16 sugar mills, while Egypt produces only half as much sugar cane at 2.8m tonnes, and has just 14 mills. Yet Egypt produces nearly five times the sugar that we do.
The regulations introduce zoning, which means every farmer growing sugar cane is assigned just one mill they can sell to. This has been proven to deter farmers and prevent key corrections to reduce Kenyan production costs. In Australia, the introduction of zoning damaged a once thriving industry, delivering a constant average fall in sugar cane production of 2.6 per cent a year.
The new regulations also introduce extraordinary new rules around mill investments, such that investors must put in place high-powered management teams up to two years before getting licenses or going into operation, and must build sugar mills first, before finding out if they can be licensed. No investor will take such a risk, investing millions on the hope of a possible subsequent license to operate.
Perhaps not surprisingly, the new regulations are also not legal. In addition to breaching the Constitution and multiple other laws, they never underwent an impact assessment, which is required as a matter of law in creating new regulations that affect large populations.
