The hot potato that is leasing and ultimate sale of State-sugar mills

Last month, the government announced its intention to privatise struggling State-owned sugar factories through a long-term leasing (20 years) model.

The mills are expected to be transferred to private entities and the lessee commit to re-developing, modernising and efficiently operate the factories, meet government's objective of higher farmers’ income and increased profitability.

Until 2010, 70 percent of sugar millers were State-owned, but this has reduced to 50 percent following the opening of more private mills.

The five millers slated for privatisation are Miwani Sugar Company Ltd, Muhoroni Sugar Company Ltd, Chemelil Sugar Company Ltd, Nzoia Sugar Company Ltd and South Nyanza Sugar Company Ltd.

Interestingly, the Agriculture ministry says these factories have a combined share of 30 percent of the sugar market but some of them have been dead for years. So how did the ministry come up with that market valuation?

Invited bidders

Notwithstanding, privatisation of these sugar mills is not a rosy initiative as the government tries to paint it.

First, there is more than meets the eye in this lease plan; the government has invited bidders to compete for the lease agreements, but this process seems to be a charade.

The ministry said it was looking for investors with experience in the global sugar industry but looking at the list of bidders that does not seem to be the case. In fact, those reported as frontrunners are local investors who are part of the problem holding the industry at ransom.

If the government was committed to a legitimate privatisation plan, then among the first requirements would be that local sugar mill owners were ineligible to bid because they will be consolidating their market share.

Now, to see the Rai family, which currently controls 45 percent of the sugar market among the bidders casts doubts on the integrity of this process.

Second, these five factories are situated in Western and Nyanza and have a major impact on the economies of those areas, so there is a lot at stake for them because many livelihoods directly and indirectly depend on the factories.

If the privatisation will be handled illegitimately, the lessee will face hostility from locals and will fail to deliver on the required objectives. A good example is how early last year when KCB placed Mumias Sugar under receivership, local politicians together with residents stormed the company demanding the receivership be stopped.

Politicians even vowed not to allow the receiver manager to set foot on the premise. Now, it was not lost on them that Mumias sugar was a private company not a State-owned firm.

They knew this fact but still went ahead to try and stop the receivership because the political economy of Mumias sugar is deeply rooted and aligned.

Increase income

Third, the government says its intention to privatise the sugar factories is to help increase farmers income and improve competitiveness which may not be the case.

Kenya has the lowest sugar yields in the region and globally, it has less than five tonnes per hectare while Tanzania has 6.8 tonnes per hectare.

To address this the private investor will have to implement a backward integration strategy, going into large-scale irrigation farming so as to boost recoverable sugar yields and higher farm productivity.

The revival of Ramisi Sugar is a good reference. The private investor who took over banked on irrigation farming to increase production by putting more than 2,200 hectares of the fields running on modern technology including surface drip-fed irrigation system to improve sugar yields.

In Western Kenya, many sugarcane growers are smallholders and it is hard to enjoy the economies of scale through irrigation. So new investors will have to look for large scale growers to effectively implemented this backward integration strategy, which will most likely conflict with smallholders.

 This is where the rubber meets the road in implementation of this leasing agreement because this will pose a serious threat to the political economy of these areas.

So, it will be in the government's interest to engage stakeholders in every stage of the privatisation so as to buy local support as well as run a legitimate privatisation process or else its bound to fail.