REVIVING INDUSTRY

Free market far more advantageous for sugar sector than a heavily regulated regime

Forces of demand and supply would lead to far better results.

In Summary

• Competition would force all of the industry’s participants to strive for greater efficiency or risk going out of business.

• Existing cane infrastructure would be used at a higher rate than the current 58 percent.

The sugar industry employs more than 250,000 Kenyans and supports six million livelihoods. Yet it has become one of Kenya's loss-making ventures. Not because the industry is not viable and that farmers do not have the experience and skills, but because government policies are overriding a free and fair market system, breaching the Competition Act, 2010.

The Act advocates market forces, promoting effective competition and preventing unfair and misleading market conduct, and specifically prohibiting dominant undertakings and restrictive trade.

Yet the proposed Sugar Regulations, 2019, have no element that upholds these requirements. They instead create a buyers’ market – known as a monopsony - that will lead to the death of the sugar sector.

 

At the heart of ‘fixing’ the sugar industry is zoning, renamed cane catchment areas. This forces sugarcane farmers to register and then assigned one mill to sell to. The results will be irreparably damaging to Kenya.

By giving all the sugarcane-buying power in a region to a single miller, the government is indirectly granting them absolute control over prices and farmers’ income too. Indeed, millers can treat their supplying farmers however they like, pay slowly, pay late, shift prices, demand off-sets; they can do anything because there will be nowhere else any farmer can go that will not be illegal. All competition has been ended.

Ultimately, if we were able to achieve 90 per cent utilisation of the existing capacity, the country would end up saving Sh16.6 billion annually in import costs, significantly reducing our trade deficit.

It’s a policy based redistribution of power that raises questions about why the government passed the Competition Act in the first place. If the ideal way to rescue an ailing uncompetitive industry was to override all market forces, why was a competition policy commitment put into the nation’s statute?

In the current climate of asserted determination to end corruption, its new regulations, furthermore, appear filled with opportunities for rent-seeking, across requirements for letters of comfort as confirmation of commitment by investors to instal a factory, special approvals, permission-based registrations, and extra licences. All of these are put in without justification, but all of them grant government employees power over industry players.

Numerous extra barriers to market entry have been added too. No Kenyan can produce sugar seeds, grow sugar cane, process sugar, transport it, distribute or wholesale it with any normal business licence. They must now go through complex bureaucratic registration processes that include exorbitant licensing fees.

In the end, for sugarcane farmers and their dependents, the sum is set to be grave for it will be very expensive or near impossible to transition into alternative crop. This will open up a bigger trade deficit as Kenya imports even more sugar.

Additionally, centralising sugar processing operations to millers will lead to further operational inefficiencies such as arbitrary deductions during ploughing, delayed services such as seed cane provision to farmers, harvesting and cane transportation.

 

If the country were to allow the forces of demand and supply to prevail – as the Competition Act specifies – with minimal government control, we would achieve far better results.

Over time, the volumes of sugar produced would not only be sufficient to meet consumer demand, but also provide a sustained surplus for exports, thus improving the country’s balance of payments. In 10 years, the net revenues would amount to Sh172 billion based on industry spending of Sh20 billion.

Sugarcane farmers would be at liberty to sell their cane to mills of their choice, which would drive millers to set their buying prices at the right market value or jeopardise their raw material supplies.

Competition would force all of the industry’s participants to strive for greater efficiency or risk going out of business; seed producers would ensure they sell the highest quality of seeds to avoid losing market share to competitors, farmers would strive for higher sugar content, and everyone would earn more.

As a result, the existing cane factories and infrastructure would be utilised at a far higher rate than the current 58 per cent.

Ultimately, if we were able to achieve 90 per cent utilisation of the existing capacity, the country would end up saving Sh16.6 billion annually in import costs, significantly reducing our trade deficit. Over time, the volumes of sugar produced would not only be sufficient to meet consumer demand, but also provide a sustained surplus for exports, thus improving the country’s balance of payments. In 10 years, the net revenues would amount to Sh172 billion based on industry spending of Sh20 billion.

But instead, we are stuck with spending at least Sh23.8 billion annually on sugar imports to supplement the mounting production deficit, and a huge civil service bill to override the market and devise ‘letters of comfort’.

SUCAM coordinator