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

Michael Arum, SUCAM coordinator

The sugar sector employs over 250,000 Kenyans and supports six million livelihoods. Yet it has become one of the country’s loss-making ventures. Not because the industry is not viable and that farmers don’t have the experience and skills to farm the crop, 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.

While the government is supposed to develop laws as tools to implement these policies, the proposed Crops (Sugar) Regulations, 2019, have no element that upholds these requirements, instead creating a buyers’ market – known as a monopsony – that will lead to the final death of Kenya’s sugar sector.

At the heart of this ‘fix’ of the sugar industry is zoning, renamed cane catchment areas during the national sugar taskforce draft report validation forum. This force sugar farmers to register and then be assigned one mill they are allowed to sell to. The results are set to be irreparably damaging to Kenya and to western 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 won’t be illegal. All competition has been ended.

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

Yet, the anti-competitive combination of power being relocated to buyers and intense and highly-staffed government control mirrors many similar approaches by the Ministry of Agriculture and Irrigation, of late, in policies that seem to be employing large numbers of staff to proscribe the minutiae of agro-industry mechanics.

In the current climate of avowed 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 install a factory, special approvals, permission-based registrations, and extra licenses. All of these are put in without reason or justification, but all of them grant government employees power over industry players – which is an unusual way to stop requests for ‘appreciation’ payments.

Numerous extra barriers to market entry have been added too. No farmer or Kenyan can produce sugar seeds, grown sugar, process sugar, transport it, distribute or wholesale it with any normal business license, but must now go through complex bureaucratic registration processes that include exorbitant licensing fees in a now fully controlled market and industry.

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 and allocating sugar processing operations and all distribution trade to millers will lead to further operational inefficiencies by millers; arbitrary deductions during ploughing and in provision of seed cane, delayed services such as provision of seed cane to farmers, harvesting and cane transportation as well as defective weighbridges.

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

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 farmers 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 Sh16.6bn a year 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 to provide a sustained surplus for exports, thus improving the country’s balance of payments. In 10 years, the net revenues would amount to Sh172bn based on industry spending of Sh20bn.

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