LESSONS FROM THE UGANDA-KENYA SUGAR BURST UP

Last week Raila Odinga planned a series of public rallies in sugar growing western Kenya to protest easing the access to the Kenyan market for Ugandan sugar.

Kenyan authorities have been restricting sugar imports from Uganda. They argue that our factories are not producing sugar surplus to our requirements therefore we must be importing sugar for onward sale in Kenya.

Knowing our people, you would not discount the Kenyan authorities' fears, but they have sent three different teams form their finance ministry, bureau of standards and revenue authority to verify our claims that we are producing more than we can consume and have confirmed the veracity of these claims for themselves....

Last year Uganda produced 438,000 tons of sugar against local demand of 320,000 tons. This year it is projected that our sugar mills will throw off 500,000 tons, while demand will come in at 360,000 tons.

Kenya’s sugar industry is failing to keep up with its population’s demand producing about 500,000 tons, short by 300,000 tons of national demand. The sector dominated by government controlled millers.

That there is probably at the heart of the Kenya sugar industry’s problems.

Mumias Sugar is currently shut down for regular maintenance works but industry sources believe they have had to shut down for lack of enough cane to crush. By the time they shut down in July the factory, the biggest in east Africa, was only crushing between 2,000 to 5,000 tons of cane day compared to its potential of 7,000 tons.

This was mainly because farmers had gone unpaid since last year to the tune of kshs500m (sh17b) and had opted to supply other mills in the area.

The mill has been steadily run down since the previous managers Booker Tate, were shown the door in 2002. Things came to a head when a forensic audit pointed to mismanagement and corruption. To illustrate the latter the reported a one billion shillings (sh35b) hole in the accounts.

Kenya has been getting extensions from the COMESA to stay an opening of the market to sugar from the trading block, pleading that they needed time to restructure the industry so they could be competitive against regional sugar producers.

It costs at least twice as much to produce sugar in Kenya (at $500 a tonne) as it does in neighbouring Tanzania and Uganda, as well as significant exporters Zambia, Swaziland and Egypt, according to industry experts.

"Among the reforms of the sector was the total privatisation of the state controlled mills to allow private capital in and greater efficiency, unfortunately politics has got in the way of this development and so the industry has been bleeding...

As our own experience shows, it is easy to mobilise against privatisation of state enterprises and the liberalisation of sectors that were previously dominated by state backed marketing monopolies.

When such companies are privatised the new owners normally take an axe to any excesses in spending, especially by reorganising the workforce. The reorganisation of the workforce often begins with laying off excess workers before replacing them with more efficient workers as production increases.

Oftentimes in older state enterprises workers have been hanging on thanks to some godfather in government and rarely pulling their weight in terms of contributing to the company’s profitability.

Such “draconian” measures can become unpopular politically and throw a spanner in the works.

Staying privatisation of companies and general liberalisation of economies is an attempt to avoid short term pain to the detriment of a company or economy’s long term prospects.

In Uganda we do not need much convincing or economics theory to prove the veracity of this claim. Opening the economy to the free market caused pain in the initial stages but the net effect has been positive – higher productivity, greater product variety, improved work environments and more revenues for the treasury...

I shudder to think if we had let the populists win the economic argument what Uganda would look like today. We would probably still be waiting for telephone and power connections for months, lining up for everyday commodities and generally suffer little choice in every economic decision we had to make.

The trouble with economics is that you cannot run controlled experiments.

But events as are now wracking the Kenyan sugar industry will serve as good case studies when viewed against the largely liberalised Ugandan sugar sector of why not opening up a sector to private initiative is a bad idea.