Change
in the
Sugar Industry
The Sugar Campaign for Change (SUCAM)
Email: sucam@kenyalink.org
Website: http://www.kenyalink.org/sucam
5461-18-422101-1023
BACKGROUND
VIABILITY OF
THE INDUSTRY
SUGAR AS A
SPECIAL COMMODITY
SUGAR
INDUSTRY AGREEMENTS
EFFICIENCY AT
FACTORY LEVEL
RETAINING
INDUSTRY WEALTH
“Painting a
body without an engine”
“Sugar
industry has been the most corrupt agricultural sector in
CONCLUSION
Background
The
sugar industry in
Viability of the industry:
Under
efficient management sugarcane is one of the most viable crops to grow
economically compared to other crops.
(See Graph Below)
(Notes:
Source ISOL Survey – Crop Comparisons – Standardized Index)
Field
costs can be reduced on smallholdings.
The
number of by products from sugarcane far outweighs other commercial crops. We have potential to save foreign exchange on
energy costs both from cogeneration and power alcohol, amongst other effective
utilization of by products.
The
first premise for radical reform in the industry believes in the viability of
the sugar industry. If technocrats
handling the sugar docket in the MoA for example do not believe in the
viability of the sugar industry they can do little to reform the industry. Similarly if factory management or out grower
management do not believe in the viability of the industry there will be little
incentive to innovate and strive for
efficiency. It is imperative that all
stakeholders in the industry, particularly growers, millers, government
technocrats and policy makers agree on a common and mutual beneficial vision
and blueprint for reforming the sugar industry.
Sugar as a Special Commodity;
“The
SADC protocol on trade provides for the free movement of goods and services.
Exempted from this is free movement provision are
“sensitive products” which were selected on account of their strategic
importance, peculiar characteristics or high profile in the economies of the
countries concerned.” [DPRU][1]
Sugar
is considered a sensitive product on the basis of three major considerations:
1. The existence of severe distortions in the form of
tariff and non-tariff barriers surrounding various markets in different parts
of the world. In the world market, sugar trade is not governed by price signals
generated by the normal forces of supply and demand this distortion requires us
to view sugar from a different lens when we consider our negotiations in WTO
and COMESA.
2. Sugar is a political commodity. At a basic level, people need something sweet
to make food palatable (basic need); otherwise there would be a lot to complain
about ultimately casting the government of the day in poor light. At a higher
level, sugar features prominently in the policy making of sugar producing
countries, irrespective of stage of development. Even one of the most advanced in the region (
3. More importantly, sugar industry plays (or has
potential to play) crucial strategic role in respective economies. They promote economic growth through
contributions to national output, savings in foreign exchange and government
revenues out of which social services are provided. They promote economic diversification through
forward and backward linkages with other sectors. They promote human
development through incomes generated from both direct and indirect employment.
It
is because of these three social, economic and political reasons that the sugar
industry in
Given
a common understanding on the inherent viability and special nature of the
sugar commodity it is possible to address the reform agenda in the industry.
What needs to be done to restructure the sugar
industry?
Reforms
on the sugar industry must focus on achieving low costs of production and high
levels of efficiency that will firstly mutually benefit the two primary
stakeholders: growers and millers, and secondly influence economic growth and
job creation at national level.
1. REDUCING COSTS OF GROWING CANE: SUGAR INDUSTRY
AGREEMENTS
Shifting
from an ad hoc unplanned farming system to a predictable, planned, cost
effective and efficient system
Efficiency
and low cost production at farm level
Sugar
industry agreements must be seen as a means of increasing productivity and
improving yield management and cost reduction strategies in the farming system
up to the point of delivery and payment of sugarcane to the mill.
Effective
sugar industry agreements should institutionalize predictable farming,
harvesting, transportation and payments programmes, ensure long term planning
and sustainability of farming sugarcane, and rationalize roles of key
stakeholders / institutions at farm
level (out growers institutions, service providers, transporters, millers,
KESREF Extension, MoA Extension etc)
Some
of the issues that sugar industry agreements should consider:
·
Quota farming
system for greater planning and efficiency by building economies of scale
·
Cane variety
rollouts, technology transfer and yield maximizing agronomy and husbandry
practices. (16 m/var) (New varieties cannot be introduced in an ad hoc system)
·
Harvesting
schedules that optimize sucrose content and reduce double preparation costs.
·
Input and service
procurement standards and benchmarks to encourage greater transparency,
accountability, competitiveness, and cost effectiveness in service provision
and diminish opportunities for rent seeking
·
Payment schedules
and systems for farmers including an equitable pricing formula.
·
Institutionalizing
stronger trust relationships between
millers, out grower’s institutions and farmers.
·
Specifying roles,
responsibilities, and relationships of stakeholders and accountability systems
particularly for OGIs. This shall also present duplication of roles and thereby
reduce costs.
·
Intercropping and
additional income opportunities to enhance food security at household level.
·
Rationalizing
field costs, including tax charges, interest rates, service charges etc.
Draft
sugar industry agreements (SIAS) are currently in circulation. These are drafts
and need significant input from KESREF, Technologists and need to be widely
discussed with farmers and millers before institutionalization. SIAs must not be
imposed on farmers and should not be implemented for political expediency. The spirit of SIAs should be facilitative to
create incentives and room for innovation for farmers and ensure the long-term
viability of the sugar industry.
If
SIAs are to be effective it is crucial that delayed payments owed to farmers be
cleared and payment systems be streamlined within 30 days. This is part of recreating the incentive and
trust system necessary for efficient farming. SDF funds must be used to clear
farmers’ debts before funds are used for any other purpose.
2. REDUCING COSTS OF MILLING CANE: EFFICIENCY AT FACTORY
LEVEL
Due
to the structure of the political economy that
a) Addressing management and accountability structures of
all mills
·
Professionalizing
management boards and enhancing accountability. Removing patronage based
appointment systems completely
·
Developing
management contracts for mills based on Kenyan requirements. Many management
contracts provide no room for innovation, growth and improving performance and
instead provide opportunities for rent seeking at the expense of developing the
sugar industry. Many contracts have
been awarded based on political patronage and therefore terms of contract have
been skewed. All management contracts in the sugar industry should be reviewed
and redrafted with stringent performance criteria and time lines for development. Management contracts will only be effective
and efficient if backed with long-term government commitment to restructuring
the sugar industry.
·
Adopting open
accounting systems of all mills providing accurate data on financial systems in
use to public for scrutiny (for mills that have large government and farmer
stake). It is imperative that
independent audits be carried out for
all mills and procurement and tender systems
be monitored and evaluated.
b) Diversification
§
It is
embarrassing that over 30 years on since the first sugar industry was started
in
§
If the industry
is to survive we need to move beyond sugar production to effective use of
co-products
o
Electricity
o
Processed
molasses (current processing system of molasses provides little plough back to
the sugar industry)
§
Government policy
must create an incentive structure for diversification—beyond contract
specification. (Tax incentive schemes etc)
§
Sugar mills have
incurred huge debts. Again most debts
incurred in a political economy that encouraged corruption and mismanagement. Current government is faced with a dilemma:
how do you deal with huge debts incurred largely through mismanagement, knowing
that those involved in corruption will not pay back debts.
o
There has to be
prosecution and conviction of all those involved in corruption and
mismanagement
o
As an immediate
concern a debt portfolio should be opened where all debts are transferred,
cleaned and analyzed. This will enable a
cleaning of balance sheets of mills, as bad debts will have been offloaded to a
separate portfolio. Analysis of bad debts will determine those that can be
written off, those that can be scrapped based on how debts were incurred. Initially, creating a debt portfolio will
have no budgetary implications. Once
analysis of bad debts is complete then it will be possible to determine what
budgetary support is required to clean debts. At immediate stages however,
clean balance sheets will enable new interests from investors.
d) Factory Maintenance
§
SDF funds have
been often misused resulting in poor factory maintenance. Further more, there have been incidences of money being availed to
maintenance crew whereby they are asked to carry out annual repairs and
maintenance for a month or so. This is
criminal for a factory that has to get spares from overseas. Local fabrications
and machining need several months of preparation. There must be an adequate planning and time
for preparation. Rushed contracts will
be expensive, often inefficient and promote rent-seeking behavior. (Muhoroni sugar
company case)
e) Efficiency Parameters
§
Industry
benchmarks and incentive systems need to be set that encourage performance and
innovation within mills. Performance
enhancing incentive structures can include tax relief incentives.
§
Should there be a
crashing period? Is it efficient for factories to crush continuously? With
proper planning, it is possible to maximize returns from a shorter crushing
period and thereby reduce processing costs?
There is an urgent need for the marketing structure in
the sugar industry to be reformed for the following reasons:
§
There is too much
information asymmetry on the demand and supply of sugar in
§
Apart from
imported sugar, a second major problem in the marketing system is the fact that
domestic millers are also engaged in price wars amongst themselves as opposed
to fighting against cheap imports as an industry. Preliminary findings from research that we
are currently conducting amongst distributors shows that much of the price
instability in the sugar industry is as a result of undercutting by millers
aggravated further by imported sugar.
§
Sugar marketing
strategies must be based on cost effectiveness through examining the demand
elasticity of the commodity in relation to marginal costs. Given the highly inelastic nature of sugar
demand, it may be economically inefficient and unnecessary for millers to
invest heavily in marketing of sugar. This
is an excessive burden to millers as the current marketing system forces
millers to move a way from their core function of producing sugar and utilizing
by-products effectively. This structure
also creates a conflict of interest between millers and traders.
§
Lastly, the
current sugar marketing arrangement profits sugar traders more than it profits
millers and farmers. Proceeds from sugar
trade are not being ploughed back into the industry. If the industry has to move forward with new
investments it is crucial that trading profits are retained within the
industry, to provide for growth and robust sugar industry. Estimates show that approximately Kshs 5 billion is lost out of the sugar industry to sugar
traders.
It is for these primary reasons that we call for a
single channel marketing system that will add greater coordination to marketing
and distribution of sugar in the country, whilst at the same time encourage
millers and farmers to be competitive on reducing costs of production so as to
maximize profits in specific milling zones.
The single channel marketing system will prevent dumping of imported
sugar and ensure effective regulation of domestic demand and supply. It will also ensure retention of trading
profits within the industry.
As in other major sugar growing countries, primary
stakeholders—the millers and the farmers as an economic entity free from
political manipulation, must manage a single channel marketing system. (We
don’t want to create another KNTC). This arrangement has been widely adopted in
sugar industries worldwide. A strong
single channel marketing system should operate on a tariff quota auction system
for greater transparency and monitoring of local and imported trade. For more empirical evidence on the cost
effectiveness of single channel marketing read: Gill Lavers report on cost
effectiveness of sugar marketing (
In the short run, a single channel marketing system
will retain much-needed funds for the industry development, particularly in
areas such as irrigation and cane variety research.
4) CANE PRICING
DEBATE: “Painting a body without an engine”
The
cane pricing debate has overshadowed many of the core structural reforms that
are required in the industry. The cane
pricing debate can be likened to painting a car without an engine. There are
several preconditions that need to be met before cane-pricing debates are
heard. These include:
· Clearing delayed payments. Current case of farmers from Nzoia best
example. How do you increase cane prices without creating incentive prices for
farmers?
· Putting in place sugar industry agreements – which if
efficient will actually lower cost of producing cane thereby allowing a
parallel reduction in the price of cane with no significant negative change on
the farmers net incomes.
· Putting in place systems that will allow payment of
cane based on sucrose. We need to
develop simple but efficiency driven price formulas that encourage yield and
quality increases at farm level, but also factor in factory efficiency and
performance. Current pricing formula does not create factory efficiency
incentives, resulting in farmers paying for factory inefficiency.
· Bringing marketing and import regulation under
stricter scrutiny.
Further
more, the pricing debate is hampered due to lack of impartial data from which
formulas can work. Every stakeholder
gets a different pricing result depending on the parameters used, and therefore
as such every stakeholder is right. Pricing
debates will depend on the kind of parameters and data sets one uses. We need independent data to be able to
develop farmer-sharing ratios. The
current ratio of 50-50 is historical and not empirical. Most sugar producing countries have
farmer-sharing ratios of over 63%. The
lack of independent impartial data is a failure on the part of the former
KSA/KSB and this problem must be rectified.
There
is no point reducing or increasing price of cane if structures to facilitate
cost reduction are not put in place. E.g. several farmers would continue to be
paid “chuth ber”
The
cane pricing formula should be discussed and debated with much more technical
input from KESREF, KSSCT using robust data.
5) CORRUPTION IN THE SUGAR INDUSTRY:
“The Sugar industry has been the most corrupt
agricultural sector in
· PIC reports, independent audits, EMU all point to the
fact that sugar industry has been used as a major conduit to promote self
seeking behavior
· Some observations:
o
Lack of
government commitment and lack of commitment to reform by technocrats is
evident in the amount of time it took to release the EMU report and the
implementation of the requisite restructuring even within KSB. People chose to
maintain the status quo. As a result no radical changes as such.
o
PIC reports to
date have not been acted upon.
o
Several
institutions not audited/exempted from audit
o
Funds have been
disbursed to institutions which have not had the capacity to absorb the funds
(OGIs)
o
All stakeholders
have operated in a corrupt political economy turning a blind eye/ participating
in corruption in one way or another.
o
Loopholes and
avenues for corruption continue to exist.
·
As a matter of
urgency:
o
People involved
in corrupt activities must be prosecuted and convicted with harshest penalties
possible
o
Independent
audits carried out of all allied institutions to establish a clean bill of
health
o
Measures should
be put in place to seal all loopholes to corruption
a. Procurement and sourcing systems (fertilizer,
machinery, single sourcing etc)
b. Consultancy and contract management systems
c. Systems that prevent conflict of interest (e.g.
marketing agent and trader, policy makers and service provision etc)
d. Management capacity of all allied institutions to be
enhanced using open accounting systems.
6) SUGAR ACT, 2001
Implementation Status:
The sugar Act 2001 has
faced resistance to implementation largely from the same quarters that have not
wished to see significant change in from the status quo. Lack of good will to operationalize the sugar
Act and implement even the major positive aspects of the Act has marred any
positive change in the industry. Many
stakeholders have used the minor loopholes in the act as a scapegoat to
implementing stronger positive reforms. It is important to note that Acts, like
constitutions are not cast in stone and require refining and amendments to make
them better. This does not mean that
Acts are not workable. The sugar act
will not work if people do not want it to work. Many of the amendments proposed or raised by
stakeholders are semantic as opposed to operational amendments. Many of the proposed amendments are located
in the second schedule of the Act, which can be reviewed by the Minister for Agriculture.
Operating Amendments
The only major operating amendment that some
stakeholders have pushed for is a decrease in the farmer representation on the
board or an increase in miller representation.
Others have argued that farmers should not be allowed to have directly
elected representatives to the KSB and rather KSB directors should be
appointed.
The composition of KSB has been the most contentious
issue of debate. Farmer representation
should not be reduced especially during restructuring, as farmers need a strong
voice in the apex body. In fact it is this voice that has helped bring
up many debates in the sugar industry to the forefront. Farmer representation should continue to be
based on direct elections to encourage greater accountability to farmers and
the quality of representation will continue to increase as farmers become more
informed. It is true that elections for
KSB were conducted with lack of political goodwill, and lack of clear election
rules or farmer registers. Representation of millers and government must
be seen to in the context of the fact that currently most mills are government
owned and as has been evident government and mill positions have often been
similar—as a result it is possible to note that representation at KSB is
largely balanced at this point in time. (This structure should change once
government divests to play a more impartial role in the management of the
sector.)
The sugar arbitration tribunal (SAT), as provided for
by the Act has not been constituted. This again is a representation of lack of
political goodwill to implement the Act. The SAT must be impartial and have high
technical input to provide equitable judgments during disputes. An independent
arbitration tribunal is imperative for ruling on grievances that cannot be
resolved by consensus.
Semantic Amendments
·
Most amendments
proposed are semantic. These include issues of radius, weighing on site etc.
·
Most amendments
can be done without taking Act to parliament through ministerial gazettment
·
Other amendments
such as the 51% farmer shareholding were placed due to lack of clear
privatization framework. Divesture of Mumias Sugar and the manner
in which farmers shares were issued and bought, and the planned divesture of
Chemelil and the manner in which deductions were taking place from farmers
require review.
·
KSB roles,
functions and powers can be enhanced.
·
Pricing formula:
the spirit of quality based testing is acknowledged. Sucrose testing is the way to go but Act must
facilitate for preconditions for an efficient farming and processing system to
be put in place before sucrose testing is adopted.
There
is no doubt that semantic amendments should not have stopped the KSB and
stakeholders from striving towards efficiency.
What is clear is that people wishing to maintain the status quo have
largely used the sugar Act as a scapegoat.
As
stated earlier, Sugar needs to be recognized as especial commodity. Our trade negotiations must encompass the
special nature of the sugar commodity.
Beyond this however we have to recognize and admit that our costs of
production are high and that we need to restructure the industry. If we expect the premise that our costs of
production are high largely due to political economy as opposed to natural
constraints our challenge is to rectify the political economy to lower costs of
production. Restructuring the Industry
requires regulating imports, particularly dumped products that can stifle local
growth and change. No sugar producing
country in the world has opened up its sugar markets the way
Beyond
safeguards however, as is the case with SADC countries, our approach towards
Sugar should not be inter country competition, but should rather be a
coordinated trading system that is externally focused. (See DPRU Paper). The challenge is for
In
the mean time, due to domestic sugar shortfall it is recommended that
8.
INSTITUTIONAL
ANALYSIS AND REFORM
i.
Overhauling and
Questions need to be asked about OGIs – roles and
responsibilities:
a) What sort of services should OGIs carry out
b) How do OGIs become more accountable to their farmers
c) Should OGIs carry out services such as transportation
d) What sort of capacity building (non-financial) is
required for OGIs to become more sufficient?
e) Due to weak OGIs, it has been possible to exploit
farmers (weak information systems etc)
f) What are optimal size of OGIs – that can maximize on
marginal costs
§
Farmer
representation at national level has been weak.
KESGA continues to lack grassroots support and recognition, and top
management has been largely politicized by a few individuals at expense of
grassroots democracy. KESGA elections
are supposed to be carried out this week, yet most farmers are unaware of
process of elections. If KESGA is to
have any meaningful representation for farmer, it must have truly democratic
grassroots elections with all farmers involved.
KESGA Should not be a representative if OGIs, but should provide checks
and balances to the performance of OGIs on behalf of farmers. The Kenya Sugar Board (KSB) was supposed to
coordinate impartial elections of KESGA but has failed in its duty. There needs to be amore representative of
farmers with strong forward and backward linkages. KESGA should not receive any monetary support
until grassroots elections are facilitated with majority farmers participating
in direct elections to constitute a strong collegiate.
Technological
institutions:
-
KESREF
o
The potential of
KESREF to drive the industry a head is immense, particularly over low cost
technologies. This research function
must be given much greater priority, as is the case in other major producing
countries.
-
KSSCT
-
The technologists
in the region also have huge potential of driving industry policy direction and
development. It is advisable to
recognize KSSCT in the Sugar Act and provide support for technologists to guide
industry development.
Either of the technological institutions should be
mandated to ensure impartial data collection for effective policy making.
-
Sugar Mills
i.
Management
systems and board structures need to be reviewed.
ii.
Mills need to
coordinate trade and industry development more as opposed to undercutting each
other and creating price instability.
-
i.
KSB need to exert
itself more and de-politicize itself.
There has been too much infighting in KSB due to many factors, which
include the fact that lack of political goodwill to implement the Sugar Act
resulted in partisan and camped sugar Board.
All KSB directors need to work together in building on consensus and
drop the negative attitudes and perceptions each have created of each other.
ii.
The role of
government in the Kenya Sugar Board has been unclear, largely due to negative
attitudes and perceptions towards the sugar industry and lack of goodwill to
implement the Sugar Act or reform the industry.
Government positions needs to come out clearly and positively.
iii.
Authority and
Management systems need to be redefined with clear demarcation and distinction
between executive management and its accountability to the Board
directors. Management capacity of Kenya
Sugar Board needs to be reviewed, strengthened and made more professional.
iv.
KSB by now should
have prepared a blue print for reform.
Unfortunately in the 12 months of its constitution there is very little
to show in terms of a solid reform agenda. We need to ask ourselves what impeded
KSB to perform- many of the answers lie in our own attitudes and
perceptions. All stakeholders should be
striving towards one goal: making this industry work – we have more in common
than differences.
v.
KSB must adopt
open accounting systems and open information systems to create greater
transparency and accountability in the industry. All loopholes for corruption and financial
wastage must be sealed.
vi.
KSB directors
must be accountable to an AGM. This is to provide checks and balances and
ensure that all stakeholders understand problems and challenges faced by AGM
and the support or changes by all stakeholders.
vii.
The potential for
KSB to drive reforms in the industry is immense but this requires goodwill from
all sides and constant accountability and information feedback. There is no doubt that KSB far out marks the
former Kenya Sugar Authority. KSB however should not be compared to its
predecessor but instead to apex institutions in other sugar producing
countries.
-
Sugar Parliamentary Committee (SUPAC)
I.
SUPAC needs to be
strengthened and provided with continuous information to enable lawmakers to
effectively lobby for the interest of the sugar industry and adopt reform
agenda.
9.
FUNDING AND INFRASTRUCTURAL DEVELOPMENT
-
The deterioration
in sugar industry is immense. Reforming
the industry to become efficient will require capital investment for road
rehabilitation and development of cost reducing infrastructure. Reforming the industry will also require
expenditure in clearing debts.
-
SDF should
continue to be used as a funding source for new development (not operational
expenditure), however SDF management must change to
concentrate more on agricultural development and efficiency as opposed to
factory maintenance. (Factory
maintenance should be planned for and be part of normal factory operational
costs).
-
More funding will
be available through the single channel marketing system – even beyond the
annual SDF collection. This trade money
should be used for capital expenditures and supporting diversification in the
industry.
-
All funding must
be strictly monitored to prevent abuse of funds as previously experienced.
10.
INTERMINISTERIAL COORDINATION
-
The Ministry of
Agriculture alone cannot do the restructuring of the sugar industry. There needs to be string inter-ministerial
coordination and commitment to reforms in the sector. The following ministries are key to the
success of reforms in the sugar industry:
i.
Ministry of
Agriculture (Overall coordination)
ii.
Ministry of
Finance (debt Restructuring and Industry Development Fund Management)
iii.
Ministry of Trade
and Industry (Trade negotiations and regional trade coordination)
iv.
Ministry of
Energy (Diversification – Cogeneration)
v.
Ministry of Water
(Irrigation and water control)
vi.
Ministry of
Public Works and Roads (Ground Infrastructure)
vii.
Ministry of
Transport and Communication (Transport reforms – Kenya Railways)
viii.
Ministry of
Environment (Sustainable Agriculture and Development)
ix.
Ministry of Local
Government (Local Authorities and Cess Utilization)
-
The commitment of
all key ministries mentioned is necessary for the achievements of a coherent
and comprehensive strategic policy in the sugar sub-sector. An inter-ministerial task force must be
formed to effectively implement the reform agenda.
11.
DEVELOPING
A CONSENSUS AND BLUEPRINT FOR REFORM
-
This Task Force
will not come up with answers. The Task
Force must guide the way for all stakeholders to develop through participation
and consultation a common consensus and blue print for reforming the
sugar-sub-sector. That way, all parties
will trust each other and commit themselves to the reform agenda. We currently have no coherent policy of
framework for reform. Ad-hoc reforms
need to stop. Long Term reform programs
need to be instituted. In the short term
the task force must recommend measures to correct past wrongs, the most
important of which being clearing delayed payments owed to farmers and
embarking on restructuring institutional structures to be more professional and
efficient and secondly put in place structures to increase development funding
through SDF and single Channel Marketing.
CONCLUSION
The Sugar Industry is viable and can be made to work
in
This document has been released by the
Sugar Campaign for Change
(SUCAM)
A full detailed copy of the taskforce
report and other documents related to the sugar industry are available for
viewing to the public at the SUCAM library in Kisumu. Additional documents may also be available
online.
For more information:
Visit:
The Sugar Campaign for Change
6th Floor,
Wing B
Call:
057 40003 / 40665
Write:
Kisumu,
Email:
Website:
http://www.kenyalink.org/sucam
DOCUMENT REFERENCE
5461-18-422101-1023
The Sugar Campaign for
Change is an independent lobby and advocacy committed to positive change in the
sugar industry in
[1] Quoted from Key Issues Facing Sugar Industries In
SADC, Michael Matsebula, May 2001, Development
Policy Research Unit,