There are fears that free trade among EAC members could make Kenya’s troubled sugar sub-sector more vulnerable. Scola Kamau spoke with the chairman of the Kenya Association of Manufacturers, Pradeep Paunrana on what is being done to safeguard local producers.

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Kenya, Uganda and Tanzania recently resolved to clear all sugar imports through the Single Customs Territory system. Given that the cost of producing the commodity in Kenya is higher than in the two countries, the former faces the risk of increased inflows of cheap sugar. How will local producers benefit from the SCT?

The EAC resolved to implement the Single Customs Territory regime in pursuit of a fully fledged Customs Union as envisaged by the EAC Treaty. Since 2008, cheap imported sugar has been finding its way into the Kenyan market through porous borders or legitimately through Comesa.

READ: Uganda, Kenya finally resolve sugar disagreement

The SCT regime in itself is not a challenge. The challenge is when a Comesa member state like Egypt, which is a net importer of sugar, exports to Kenya. Regulators say that cheap sugar originates from Brazil and is illegally granted originating status in Egypt through the Certificate of Origin.

Besides, imported sugar attracts 100 per cent duty.

How will you ensure that cheap sugar does not find its way into Kenya under the SCT regime?

The system is more efficient. It ensures that the item is declared by the destination country and that duty is paid before final release from Customs control.

Goods cleared under the SCT are monitored by KRA through the Electronic Cargo Tracking system via satellite. A Customs seal is affixed on containers and a tracker installed by reputable firms on the cargo trucks.

The previous transit system provided for declaration of goods without duty payment, until the consignment arrived at the destination country. This left room for dumping of sugar destined for Uganda and Rwanda in Kenya.

The old system also involved tracking of goods by Customs through escort vehicles assigned to gazetted routes. This exposed the process to corrupt practices and increased turnaround time.

What is the way forward?

We must launch an all-out war on illegal sugar importation by working with all stakeholders, especially law enforcement agencies.

We must work with the government to ensure all the public sugar companies are privatised to increase their efficiency.

We must work with the sugar sector to encourage diversification of products.

As the KAM chairman, what plans have you put in place to help rescue the troubled sugar sub-sector?

There is a need for concerted efforts to address challenges facing the sector.

Millers, the Kenya Sugar Board as the industry regulator, the relevant county governments and the national government must all take urgent corrective measures.

All industry stakeholders need to work together to encourage millers to diversify their production. For example, a study carried out by KSB reveals that the demand for white refined sugar is huge, yet there is no local supply of the item.

Efforts to address challenges faced by the sector include:

1. Limiting sugar imports to the kind that is not locally available. This calls for definition of industrial sugar in the EAC based on provisions in the International Commission for Uniform Methods of Sugar Analysis.
2. Most sugar farmers in the region still grow cane that matures in 18-20 months, despite new varieties developed by research bodies like the Kenya Sugar Research Foundation that mature in 11-14 months. There is a need for farmers to embrace the new early maturing varieties of sugar cane.
3. There is a need to invest in machinery upgrade and an increased uptake of recent technology used in efficient, cost effective production of sugar. The sugar board estimates the cost of production to be about $570 per tonne compared with $270 in Egypt, $210 in Malawi and $275 in Swaziland.
4. Mismanagement of state-owned factories has contributed to the ailing sector. Kenya should urgently privatise its five state-owned sugar millers in a bid to save the sector. The plan includes paying off all their debts, a total of almost $500 million. Parliament is expected to approve the privatisation plan in the next few months.
5. Illegal imports of sugar through porous borders is rife, which floods the market with cheap, duty-free imports. The practice undercuts the price of locally and legally processed sugar. Authorities need to clamp down on illegal importers by fighting corruption. This is a difficult process that requires a lot of political will power and an unceasing campaign against corruption.
6. The board should implement a payment mechanism for farmers on cane deliveries that should not be pegged on the sale of sugar. Stockpiles of sugar have been cited as the basis of non-payment to farmers.

Sugar is a dynamic good that derives its price from market conditions. The KSB stated that local prices in the first quarter of 2014 fell from an average $43 per 50kg bag to $36, which is below the break-even price. If the above measures are implemented, the equilibrium price of sugar above break-even point will be realised.

In six months, Kenya faces more sugar inflows from the Comesa region, as the one-year extension of the special safeguard arrangement for sugar expires. Is KAM planning to intervene to have the safeguards extended in order to protect local producers?

Domestic sugar prices are turbulent in nature and sensitive to the dynamics of demand and supply.  Over the past two years, prices have fluctuated between Ksh3,000 ($34) and 5,000 ($56.6) for a 50kg bag.

Kenya’s demand is currently estimated at 750,000 metric tonnes, though this figure is a source of some contention as there are no official figures for its consumption. Industrial sugar demand amounts to 140,000 metric tonnes.

Since local production can neither meet demand nor compete with prices from Comesa, a safeguard quota of 360,000 metric tonnes was given to protect local industries and meet the deficit in 2002.

The sugar sub-sector feels extending the safeguards further is not the solution, the solution lies in stopping the illegal sugar inflows and encouraging production companies to diversify.