Kenya: Sugar Mill Privatisation, Legal Hurdles & Rising Prices
A look back at the most important developments in the Kenyan sugar and ethanol industries over the last several months, courtesy of F.O. Licht’s expert regional analysts.
Mill-by-mill consultations begin ahead of privatisation
The government will conduct a factory to factory consultation to fast track the privatisation of state-owned sugar companies, the privatisation commission has said, according to local press reports.
The first consultative meeting was scheduled to take place at the Muhoroni Sugar Factory on March 22.
The decision was reached after industry players asked the commission to adopt the strategy, saying each company has unique problems.
Council of Governors chairman for the agriculture committee, Okoth Obado, said there is need to comprehensively engage major players before privatisation. He asked the commission to ensure sugarcane farmers are actively involved in public consultation. Obado, who is also the Migori governor, said counties should be involved.
Meawhile, Nandi governor Stephen Sang asked the players to live by their commitments and support the privatisation process. Sang also asked the National Land Commission to undertake land assessment of the factories to be privatised. "That will ensure the factories have title deeds," he said.
Kisumu deputy governor Mathews Owili said the county must be engaged in the consultations because it hosts most of millers to be privatised.
The government wants to privatise Muhoroni, Miwani, Chemelil, Sony and Nzoia sugar companies. The first three are all in Kisumu county.
The privatisation of the five state-owned sugar millers started in 2008 but disputes on land ownership, interest of cane farmers and the share to be given to county governments where the factories are situated have delayed the process.
Government to write off KES89 bln sugar factories debts
Deputy President William Ruto has announced the Government's plan to write off KES89 bln (USD1=KES100.390) owed by sugar factories in an effort to support the privatisation process.
At the same time Ruto declared that no further funds would be given out to Mumias Sugar Company (MSC) in which the government had injected KES4 bln.
Politicians from the constituency of MSC had asked the government to release KES15 bln to clear debts and provide necessary working capital.
Tanzanian firm eyes Kilifi for sugar mill
A Tanzanian company, Tembo Sugar Millers, has made applications to set up a sugar mill in Kilifi, which would be the second at the Kenyan Coast, according to local press reports.
The Director General of the Agriculture, Fisheries and Food Authority (AFFA), Alfred Busolo, said they had received documents early this year by the company seeking an entry into the Kenyan market through Kilifi.
“Things are still at a preliminary stage because they have to confirm potential, do a feasibility study which might take time,” Mr Busolo said.
Kenya has seven private sugar manufacturers including Kwale International Sugar Company Limited (KISCOL) which is located at the coastal belt. KISCOL was constructed between 2007 and 2015 at an estimated cost of USD200 mln.
Other privately owned millers include West Kenya Sugar, Kibos Sugar, Butali Sugar, Transmara Sugar, Sukari Industries and Kisii Sugar Factory. Kenya’s state owned millers have been struggling even as the government plans to privatise the five ailing sugar millers - Chemelil, Muhoroni, Miwani, Nzoia and Sony.
The only listed government miller, Mumias Sugar, is in tatters even after several interventions and is now seeking another bailout to revive the factory and promote efficiency.
Government to seek a further COMESA safeguard extension. The government and sugar industry stakeholders are planning to convince the Common Market for Eastern and Southern Africa (COMESA) to give them yet another extension of safeguards from cheap sugar imports, according to local press reports.
The COMESA safeguards have been introduced in 2002 and since 2004 Kenya has year after year fought for their extension to limit importation of duty free sugar. The current extension, which started in February last year, will expire in February 2019.
Kenya has survived by invoking Article 61 of the COMESA treaty which provides protection of emerging sectors until they are considered mature for competition. Outgoing Agriculture Cabinet secretary Willy Bett claimed that the country has made progress on a number of the conditions that it was expected to fulfil but much more still needs to be done.
Expected changes in the sub-sector cannot be effected in the remaining timespan. These changes include privatisation of five ailing state-owned millers which cannot be done within the one year timeframe. The process has been hampered by court cases.
Sugar imports triple in 2017 amid collapsing output
Sugar imports nearly tripled to 989,619 tonnes in 2017 from 334,109 tonnes the year before as traders rushed to ship in the sweetener after the government scrapped the import duty on sugar from non-COMESA countries in May, according to a report from the Sugar Directorate.
The bulk of the sugar imports was brown/mill white type (table sugar 829,871 tonnes), representing 84% of the total consignment, while the balance was industrial sugar used for manufacturing of food and beverages. The significant increase in table sugar imports was attributed to huge imports of duty-free sugar between May and August 2017 to mitigate a prevailing local shortage, said the report.
Some 263,990 tonnes of sugar was imported from the COMESA Free Trade Area while 627,756 tonnes was shipped in from non-COMESA countries (most of it from Brazil). Kenya imported 26,700 tonnes of sugar from East African countries last year, which is a decline from 39,109 tonnes in 2016.
Sugar production in the country dropped 41% to 377,818 tonnes in 2017 from 639,742 tonnes in 2016 due to a drought. This led to a spike in retail prices between January and May 2017, which hit a record KES200 ($1=KES100.865) per kg. The huge imports then led to a fall in price to KES115 for a kilo.
Privatisation plans face opposition from counties
Governors from the western Kenya sugar belt have rejected plans by the government to proceed with the sale of four state-owned millers in the region, according to local press reports.
They say the process was mismanaged and want it started anew, with the approach changed to give farmers priority, according to local press reports.
They say the process was mismanaged and want it started anew, with the approach changed to give farmers priority, according to local press reports.
The state plans to privatise Nzoia, Chemelil, South Nyanza, Muhoroni and Miwani companies. In a unanimous vote, governors from more than 13 counties that form the Lake Region Economic Block (LREB) slammed the brakes on talks to have thorny issues blocking the process ironed out, which would allow the Privatisation Commission to sell off the decades-old factories to strategic investors.
Speaking in Kisumu on January 19 during a consultative forum convened by the commission, the Agriculture ministry and the National Treasury, the governors called for fresh consultations at individual miller level and intergovernmental talks. This, they said, was the only way of ensuring interests of the main stakeholders - the farmers - would be addressed and the burning legal and policy questions on the process started in 2008, answered.
Migori Governor Okoth Obado, who chairs the Council of Governors’ Agriculture committee, argued the question of the need for the millers' privatisation remains unanswered. Challenges facing the millers, he said, were unique to each and grassroot discussions with the farmers, employees and political leaders on what it means to privatise the factories was the proper approach.
Kisumu Governor Anyang’ Nyong’o, who chairs the LREB, said in a statement that as part of preparing the millers for the sale, the government should first pump in funds to get them back on their feet. He also refuted arguments that privatisation was an avenue for strengthening competitiveness of the millers.
In a charged session, the legislators at one point proposed that the rescue model be adopted to hand over the management of the millers to the counties, arguing that agriculture was a devolved function and the factories were in their jurisdictions.
A section of farmers present at the summit were, however of the opinion that the privatisation should go on, saying it was the only way of making the factories competitive. They said they had been making savings since 2001 to buy shares and should be allowed to do so. A representative from one of the largest cooperatives supplying cane to Chemelil and Muhoroni factories said that “making nucleus land communal would result in disintegration, killing the industry altogether.”
After an eight-hour debate, the governors successfully stopped the process, paving way for new talks whose progress will be revisited in March. In the new bottom-up approach, consultation with farmers is expected to raise the issues they want addressed before representatives meet land and agriculture technocrats, after which the process will be scaled up to a national summit in which the Privatisation Commission will sit.
Investor to set up $1.9 mln beet sugar factory
The owner of Juanco Group Ltd plans to put up a KES200 mln ($1.9 mln) beet sugar factory in Njabini, Nyandarua County, according to local press reports.
Jungae Wainaina, in a consortium with local investors, is setting up the sugar beet extraction plant with a capacity to crush 500 tonnes of beet daily, equivalent to 150 tonnes of sugar.
The report pointed out that sugar beet matures in six months, nearly a third of the best maturity period for sugarcane in western Kenya.
Wainaina is the proprietor of Juanco Group Ltd with interests in agricultural, industrial and consumer markets and plans the venture within a year. "The plant would be built in a modular basis with 500 tonnes of beet per day for up to six modules. This will be under 5,000 acres (2,100 ha) per module for single cropping or 2,500 acres (1,042 ha) for two crops annually", Wainaina said.
The equipment is at the high seas after regulatory approvals were obtained for their importation.
Wainaina said farmers in the greater Nyandarua have been yearning for a perennial cash crop to boost their earnings. He noted that the only cash crop widely cultivated in the county is pyrethrum.
He pointed out that beet processing would also provide valuable by-products for livestock feed, which dairy farmers are badly in need of in the country.
Wainaina said soil analysis conducted on fields had proved that the area is conducive for growing sugar beet, adding that Nyandarua has the requisite rainfall levels for development of the sugar beet industry.
Stakeholder talks on privatisation launched
The journey to privatising five state-owned sugar millers has begun in earnest with governors and farmers opening talks with the Privatisation Commission, according to local press reports.
This follows a court ruling that called for an out-of-court settlement between the three parties. Efforts to privatise the moribund sugar milling companies have often hit a dead end, with each party seeking to protect its interests. But last week, commission officials led by acting CEO Jacqueline Muindi were holed up in a closed-door consultative meeting with stakeholders, signalling an easing of the gridlock.
The meeting was aimed at finding ways to meet the conditions laid by the governors, who stopped the privatisation process citing lack of consultation. Sources from the meeting held in Kisumu told local daily The Standard that neither the farmers nor the governors were really opposed to privatisation; in fact, they supported the new initiative. However, the county bosses insisted that some of the pre-conditions must be fulfilled.
The state plans to privatise Nzoia, Chemelil, South Nyanza, Muhoroni and Miwani. In November, a judge dismissed three petitions seeking to stop the sale of the millers but directed the warring parties to seek alternative dispute resolution mechanisms before seeking court intervention.
New Busia sugar mill delayed by legal issues
Completion of the new Busia Sugar Industries mill is delayed by court cases, according to local press reports.
Following the ground-breaking for the mill in Busibwabo, Matayos subcounty, in May 2014, the company has weathered 12 lawsuits, with three pending, it was added.
Six months later a resident was paid by a BSI competitor to file lawsuits at the High Court in Busia, Bungoma, Kitale, Kisumu and Nairobi to stop construction, according to the report. Twelve cases have been determined in BSI's favour.
Justifiably, farmers who had already signed contracts with the company to supply sugarcane were angry and protests broke out.
The company's lawyer, Hassan Ali, said the first case was based on environmental issues, even though the National Environmental Management Authority and the former regulator, the Kenya Sugar Board, had given their clearance and licenses to proceed with the construction works.
There's cut-throat competition for dwindling sugarcane. Some of BSI's contracted farmers' crop is being targeted as the endless legal suits continue. The lawsuits are taking a toll on the investor, who initially set out to put KES3.8 bln ($1=KES102.186) into the factory. The delays have pushed up the construction costs.
The situation is so bad that on occasion President Uhuru Kenyatta, while touring development projects, has been forced to implore the warring parties to terminate the legal battles and resolve their differences amicably. Of course, to no avail.
Initially BSI's parent company, Africapolysac Ltd, had planned to complete construction and swing into full production within 10 months after the groundbreaking in May 2014. The company had compensated more than 100 families that gave up their land for the factory. It had also put up modern primary and secondary schools, and a police station for the local community.
Despite the legal wars, the factory is 95% completed. It is expected to crush 3,000 tonnes of sugarcane per day once up and running, supplied by 4,000 sugarcane farmers already contracted to plant the crop on 8,000 acres.
Five state-run sugar mills to be privatised by August 2018
Five public-owned sugar companies are likely to be privatised by August 2018, the Privatisation Commission has said.
The commission's chair Henry Obwocha announced it has kicked off engagements with key stakeholders to find an amicable solution that will pave way for the sale of the five firms which include Chemelil, Miwani, Muhoroni, Nzoia and Sony Sugar.
The stakeholders’ engagement exercise is expected to take place over the next two months.
The engagement follows a ruling by the High Court made on November 10, 2017 that stopped efforts to halt privatization of the said firms. The court ruled that the efforts were premature and that resolving the dispute would be taking the prior jurisdiction of the organs of the Intergovernmental Relations Act, through which the governments is required to make every reasonable effort to settle the dispute.
The ruling was a response to a consolidated petition by Kisumu, Bungoma and Migori county governments against the privatization of the sugar companies.
According to the commission's acting chief executive Jacqueline Muindi, completion of the engagement will set the stage for re-advertisement of requests for expression of interest, shortlisting of the pre-qualified firms and invitation of bids. “It is expected once we have a list of those who have expressed interest to take at least seven to nine months, suppose we finish the stakeholders’ consultations by end of January, then we could be looking at August 2018 as the close of sale of the 51% stake,” Ms Muindi said.
The government plans to sell a 51% stake in the companies to strategic investors and reserve another 24% for farmers and employees. The government will then sell the remaining 25% it holds in the milling companies through an initial public offering once the factories are profitable.
However, there are ongoing consultations as directed by the court between the stakeholders, the county governments and the national government on the aspects of whether sugar production is an agriculture function which is devolved or a public investments function. The answer to this question will decide what level of government should control the sugar industry.
High Court clears way for resumption of sugar mill privatisation
Five state-owned sugar millers are up for sale again after the High Court dismissed a petition filed by western Kenya political leaders to block the transaction, according to local press reports.
Kisumu governor Anyang' Nyong'o, former Gem MP Jakoyo Midiwo, the Council of Governors, Migori and Bungoma counties had in the petition claimed the national government has no authority to privatise the mills because animal and crop husbandry are devolved functions.
On November 10, Justice Edward Muriithi ruled the court intervene in the standoff between the Privatisation Commission and the county leaders before alternative dispute resolution mechanisms are exhausted.That implies that the sale process initiated earlier is on.
The Privatisation Commission had in 2015 kicked off the process of selling majority stakes in Nzoia, South Nyanza, Chemelil, Muhoroni and Miwani sugar companies. Two of the businesses, Muhoroni and Miwani, are in receivership.
The move sparked a war with leaders from the sugar belt, who insisted that only county governments have the authority to deliberate on the privatisation of public firms in the agriculture industry.
Justice Muriithi has suggested that the dispute be resolved through alternative dispute resolution vehicles such as mediation, negotiations and arbitration as prescribed by the Intergovernmental Act, 2012, according to Kenya's Daily Nation newspaper.
Justice Muriithi's decision has lifted a court order earlier issued in 2015 that barred the Privatisation Commission from completing the disputed process. The commission had announced plans to sell a 51% stake in each of the five sugar companies to strategic partners through a bidding process. It added that another 24% stake in each of the firms would be sold to outgrowers and employees, while the government would retain a 25% stake in each of the millers but with an option of selling its share in future. Parliament approved the privatisation plan in April 2015.
Governors present demands for sugar mill privatisation to proceed
Plans by the government to privatise four state-owned sugar millers in Western Kenya could be revived after governors formulated a raft of demands they want fulfilled first, according to local press reports.
Kisumu governor Anyang' Nyong'o said his colleagues from the Nyanza sugar belt have drafted a series of conditions, which he termed a prerequisite for the process to proceed. Together with farmers and millers' representatives, they will initiate talks with the government on November 8.
The state wants to privatise Chemelil, Muhoroni (in receivership), South Nyanza Sugar Company (Sony) and Trans Nzoia Sugar Company.
Zoning of the sugarcane growing areas, introduction of block-farming, provision of inputs to farmers, upgrading of infrastructure in the sugar zones, inclusion of farmers in management boards, prioritisation of payment to farmers and checked importation of sugar are among conditions the governors want implemented before further engagements on privatisation.
Other thorny issues are the fate of the factories and the land they are on which fall in the territories of the devolved units. Introduction of the zoning regulation is expected to tame runaway cane poaching, which has over the years threatened to cripple public millers as private investors raided their territories with better pay to farmers. Reintroduction of this regulation could turn the tables on private millers, some of whom have not invested in the development of their own cane.
Block farming, on the other hand, is expected to ensure sustainable availability of cane throughout, reducing incidences of operation disruptions due to low crushing capacities.
"The only way to guarantee efficiency of factories before selling them is to ensure they are operating at full capacity. And this can only be done if cane development is organised in blocks such that there is cane at different stages all the time," said Prof Nyong'o.
The political leaders are also pushing for reintroduction of the Sugar Development Levy to help farmers in cane development.
Governor Nyong'o is one of the leaders who had moved to court to halt the privatisation process, arguing it was initiated without exhaustive consultations with county governments, which control agriculture and are seeking to protect the workers and the farmers. Efforts initiated by the Inter-Governmental Relations Technical Committee (IGTRC) to iron out issues raised by political leaders to enable the process go on were stopped by governors last year.
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