THE TROUBLE WITH SUGAR INDUSTRY,BY LUKE MULUNDA
When Peter Kebati took to the podium in September last year to announce that Mumias Sugar Company had made a full-year loss of Sh1.67 billion, the managing director quickly pointed an accusing finger at illegally imported sugar, which he said was gnawing at its market share.
Mr Kebati was categorical that the influx of imported sugar into the Kenya market, which retails at a lower price than locally produced sugar, was responsible for pushing Kenya’s biggest sugar miller into the red. Mumias Sugar’s sales plunged by nearly a quarter to Sh11.9 billion in 2013 compared to Sh15.5 billion a year earlier, in what was linked to cheap imported sugar in the Kenyan market.
Two days later, it was unearthed that Mumias Sugar executives had secretly imported 10,000 tonnes of sugar into Kenya, which they repacked and sold under the listed firm’s brand. The damning revelations showed that senior officials at Mumias were expecting a further 20,000 tonnes of cheap sugar, pushing the total imports to about two-thirds of the company’s annual sugar production.
Mumias Sugar, based in Western Kenya, produced a total of 47,320 tonnes of sugar in the year to June 2013. It thus came as a shock for the sugar miller to sign a deal with a local firm, Dantes Peak Ltd, for the importation of cheap sugar from Sudan’s Kenana Sugar Company. This ironic script written by top managers of the loss-making company played out at a time when there was an oversupply of sugar in the Kenyan market, which has depressed prices and sugarcane farmers’ earnings per tonne.
In March this year, the National Assembly’s Agriculture committee members raided a Mumias godown in Shimanzi, Mombasa and found 10,000 bags of imported sugar from Egypt, Sudan and India.
The scam involved Mumias sugar managers engaging third parties to import cheap sugar, repackaging it as Mumias’s and raking in super-high profits for themselves.
These events set the stage for Mr Kebati to make history at the Nairobi bourse as the first chief executive of a listed firm to be set packing for sabotaging his own company.A stormy Mumias board meeting held on March 30 this year – three days after the Mombasa scam was uncovered – resolved to suspend Mr Kebati together with the company’s commercial director Paul Murgor pending an investigation into allegations of their involvement in discreet sugar imports.
Mumias chairman Dan Ameyo sent the two executives on a two-month compulsory leave and immediately opened an inquiry into their conduct.
Mr Coutts Otolo, a non-executive director at the miller, took over as acting chief executive while marketing and communication director Pamela Lutta is the interim commercial director.
Mr Kebati was appointed the sugar miller’s managing director in July 2012 to succeed Evans Kidero who ventured into politics and is now Nairobi’s governor.
Mr Ameyo made the radical move barely three weeks into office in what appears the boldest decision to sort out the corporate governance mess at Kenya’s largest sugar miller. “The company is losing as much as 60 per cent of revenues through such sugar importation rackets. We’ll get to the bottom of it,” Mr Ameyo said.
This means that Mumias Sugar Company’s sales would have grossed Sh18 billion if all illegal imports were to be phased out of the Kenyan market. This would in turn translate to better returns for shareholders.
That a company’s CEO is responsible for the haemorrhage of his own firm’s earnings and market share is not only shocking but amounts to a criminal offence in the league of economic sabotage.
Our investigations reveal how a group of powerful brokers are minting billions while hurting Kenya’s sugar sector by exploiting the country’s sugar import quota set every year.
Kenya’s total sugar production capacity was estimated at 590,757 tonnes in 2013 against a demand of 802,083 tonnes, according to latest data from the Kenya Sugar Board (KSB). This gap between production and consumption means that Kenya needs to import about 300,000 tonnes of sugar annually, mostly from the Common Market for Eastern and Southern Africa (Comesa) trading bloc.
Kenya in 2003 agreed to partially open up its markets for sugar importation after a long protectionist spell where importing the commodity was highly restricted. This opened a window where the Kenya Sugar Board (KSB) licenced sugar importers to bring the sweetener into Kenya under set quotas with a promise to fully open up its market.
Sugar importers are subjected to value added tax (VAT) at the rate of 16%, sugar development levy (7%) with exemptions of industrial sugar importers and import duty.
Kenya applied to Comesa for extension of the sugar import safeguards, which were set to expire in February this year, but the government got a one-year extension to develop the local sugar industry to be able to compete with cheap sugar from the economic bloc.
The government’s argument is that limiting sugar imports will protect Kenya’s sugar industry from threats by imported sugar which is often cheap due to low-production costs in source countries. Kenya’s sugar production costs stands at $870 per tonne, which is nearly three times higher than Zimbabwe’s $300 per tonne, Malawi ($310) and $340 per unit in Swaziland and Sudan.
Paradoxically, Mumias Sugar has been at the forefront in beseeching government to seek these multiple extensions given its high production costs. The duty-free quota allocation for sugar imports has been growing annually to hit 340,000 tonnes last year from 220,000 tonnes in 2009.
In 2010, the quota was 260,000 tonnes and grew to 300,000 tonnes the following year. Any import outside this quota should face a 100 per cent import tariff meant to discourage importation of the commodity.
Illegal and uncoordinated importations of sugar pose the greatest risk to the sub-sector, hence the government’s approach to set import quotas, which are blatantly abused by sugar barons with connections in government and Kenya Revenue Authority.
Interestingly, Mumias has a sugar import licence, which has been exploited by top managers to fleece shareholders and wananchi. KSB does not make public the list of licenced sugar importers, but people familiar with the business say it is controlled by an elite group of wealthy businessmen.
Sources indicate that a governor and an MP from Western Kenya are part of the ring that import sugar to Kenya and package it as local sugar.
It is believed the group works with proxy companies to import sugar mainly from Sudan and Egypt, evade import duty and then resell at almost double the buying price. Even though they may have a sugar import licence, they mostly exceed their allocations to bring in excess sugar, hence creating a market glut.
The importers get the commodity at Sh64 per kilogramme and sell it at an average Sh121 per kilo, highlighting the super margins enjoyed by this cartel.
These sugar barons have engaged trading firms to source for the product and have protection from high places to do their business. The axis involves Mumias Sugar bosses, customs officials, some officials of the Mombasa Port, security agencies and highly placed political figures.
These phony firms wire money to other dealers in Sudan and Egypt, making it difficult to trace transactions or put a name to the deal. The imports surpassing set quotas are bleeding Kenya’s 11 sugar firms dominated by debt-laden State-owned millers such as Nzoia, Sony, Muhoroni and Chemilil.
These government-owned sugar millers posted a combined net loss of Sh6.1 billion in the year to June 2013, underlining the vulnerability of the firms to increased competition from cheap imports. Muhoroni, under receivership since 2001, posted the biggest loss of Sh3.9 billion followed by Sony (Sh1.06 billion), Nzoia (Sh1.05 billion) and Chemilil (Sh936 million).
Another publicly-owned miller, Miwani Sugar, closed shop in 2012 under the weight of debts. Mumias Sugar, owned 20 per cent by the State, is the only listed sugar miller in Kenya.
The private players in the industry include West Kenya, Soin, Kibos, Butali, Transmara and Sukari industries. They have also started feeling the pinch of imported sugar, which has forced them to cut cane prices by almost half due to a sudden drop in prices caused by illegal imports.
The main elements leading to Kenya’s high production costs are associated with milling, cane transport, seed cane prices and the 18-month cane maturity period especially in Western Kenya, which controls the bulk of the national sugar production.
Over-reliance on smallholder farmers for cane production has further resulted in erratic supply to factories due to their dependence on rain-fed agriculture rather than large scale commercial estates under irrigation.
It is hoped that the suspension of Mr Kebati will awaken the government to take steps to improve the sugar industry’s competitiveness by weeding out illegal sugar importers and reducing production costs. The government has vowed to privatise the State-owned sugar millers by the end of this year, but little has been done to revitalise the struggling sector.