Be careful with sugarmill deals


What you need to know:

  • The State-owned millers turned into vampires that sucked the farmers’ blood.
  • At the national level, State-controlled sugar firms proved to be good vessels for rent-seeking elites.
  • We all know that privatisations transactions are very prone to corruption.

No crop has created as much misery and suffering to man as sugarcane. White Gold, as the British colonialist called it, was the engine of the Slave Trade that saw millions of Africans transported in open ship carriers like cattle across seas to the Americas beginning in the early 16th century.

In western Kenya where the crop was introduced in the 1970s, thousands of households and rural poor were induced by money to vacate their only pieces of land to give way to the so-called nucleus estates.

They were forced into landlessness and had to join the ranks of the urban poor and to live in overcrowded rural towns with no proper amenities such as Mumias, Awendo and Muhoroni towns.

As the State-owned companies were established, there was no such thing as mitigation measures to support what is referred to in contemporary parlance as ‘project affected persons’  — the poor rural folk displaced by the massive projects.

More wives

The compensation paid to rural folks was a pittance, which they ended up squandering in the first two years in conspicuous consumption and marrying more wives.

The State-owned millers turned into vampires that sucked the farmers’ blood through weighbridges with rigged meters, meagre producer prices and payments that delayed for months on end after cane was delivered.  At the national level, State-controlled sugar firms proved to be good vessels for rent-seeking elites.

Massive irregular loans from State-owned and international banks were dumped on the companies — ostensibly to finance expansion projects but, in reality, to create opportunities for kick-backs and backhanders for ruling elites.

The farmer ended up suffering the consequences of having to depend and heavily indebted sugar companies as their only marketing outlets for his cane.

Most abused

Nzoia Sugar Company, which was commissioned in October 1978, stands out as the most abused State-owned Kenyan sugar company by corrupt elites.

In my archives, I recently came across a sessional paper of 1988 where then-Finance minister George Saitoti was seeking parliamentary approval for government guarantees for a number of loans that had been taken out to fund expansion and rehabilitation of Nzoia Sugar.

The details are as follows. First, a $19.9 million (Sh2 billion) loan from the Export/Import Bank of the United States. Secondly, a Sh95 million from the National Bank of Kenya. Thirdly, a loan in Special Drawing Rights amounting to Sh290 million from the East Africa Development Bank.

Finally, supplier credits worth $23.5 million from the American company by the name Arkel International.

Transfer pricing

On what were these billions of shillings going to be spent?

Clearly, the motivation was opportunity for transfer pricing. Corrupt elites were creating avenues to enable them to stash billions of shillings in Swiss private banks.  Which brings me to my second observation.

It seems the corrupt elites were also using the State-owned sugar companies as vessels of siphoning money out of the State-owned NBK through irregularly contracted loans.

Indeed, if you go through correspondence, mainly between the former CEO of the bank, Mr Raphael Gitau, and the Treasury in the period in 1988-1993, you see several letters where the bank was pleading with the Treasury to settle loans lent to State-owned sugar companies, including Nzoia, Muhoroni, South Nyanza (Sony) and Miwani. All these loans were contracted through mere letters written by permanent secretaries.

The story of Miwani, the oldest of the sugar companies, offers a different example and insight on the exploits of the corrupt.

The government bought the miller in April 1990 for Sh354 million and then handed it over to Mr Ketan Somaia’s Venessa International to run it under a very shady arrangement. Yet, Venessa had no capacity to manage a sugar company.

Saddle with loans

After taking control, Somaia moved with alacrity to saddle the company with loans from his own Delphis Bank under arrangements that were manifestly in breach of corporate governance rules on related parties’ dealings.  Since the borrowings from Delphis were secured by the company’s shares, Somaia and his agents ended up taking full control of the miller.

Were it not for the intervention of the defunct Kenya Sugar Board, Kisumu-based barons would have wrested the company from the government.

Which brings me to the recent plans by the government to lease the companies to strategic investors.

We all know that privatisations transactions are very prone to corruption. We must make sure that the company is an international player with experience in running a successful sugar manufacturing operation and has deep enough pockets.

We must introduce clear investment benchmarks for performance, including mechanisms for monitoring performance on agreed measurable targets.

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