Davis Mataka
4 July 2008
column
THE widespread shortage of sugar that battered the country recently may be over in many areas, but the underlying factors that gave birth to the shortage are still begging for answers.
According to the Zambia Consumer's Association executive secretary, Muyunda Ililonga, "the shortage of sugar still calls for thorough investigation and corrective measures to ensure that history does not repeat itself."
Zambia recently experienced a nationwide shortage of the key commodity for almost a month, which saw the prices of sugar hitting record highs on the local market. In May 2008, a two kilogramme pocket of sugar fetched for as high as K18,000 in some places from the average K7,500, while a kilogramme packet fetched for as high as K10,000 from the average of K4,500 the previous two months. Supply has since normalised and prices have stabilised with a two kilogramme packet now trading between K 8,500 and K10,000 in most outlets, while a one kilogram packet ranges between K5,000 to K6,000.
The long winding queues that became a common feature at sugar outlets as people fought to secure the white crystal, one of the most prized products of every Zambian household are no longer the order of the day. And the number of people panic buying has diminished.
The sudden shortage of sugar has, however, given impetus to the need to re-look at the operations of the industry and some of the critical factors that could have given rise to its scarcity. Not only the scarcity, but also the high cost of the product on the Zambian shelves.
Although most analysts have repeatedly criticised the cost of sugar in Zambia as being too high for the country that grows and produces its own commodity, producers have often cited the addition of 'value added service such as pre-packed fortification of the product with vitamin A as justification.
However, experts in sugar fortification have disclosed that the maximum cost one can incur for fortifying a kilogram of sugar is just K70.00 (Seventy kwacha) only. According to an Illovo document the cost of sugar production in Zambia is one of the lowest in the world which is only 35 UScents (K1200) for a kilogramme of sugar.
The Food and Drug Act Cap 303 of the Laws of Zambia prohibits the sale of unfortified sugar in the country. The law was initially aimed at protecting consumer's health as a certain minimum quantity of vitamin A, from a medical point of view, is essential to human health.
However, the fortification law overlooked the fact that there are several scientific studies which proved that regular and excess intake of vitamin A could cause harmful toxic elements in the human body.
Further from the human right point of view, is it appropriate for any government body to compel those, who already have sufficient quantity of vitamin A in their body due to balanced diet pattern or from the consumption of fish, liver, eggs, butter, etc to consume in excess through daily usage of fortified sugar?
The fortification law in Zambia which was adopted a couple of years ago was based on the findings for some sample surveys in some provinces where certain sections of the population namely young children, pregnant women, etc. had diagnosed deficiency in vitamin A.
It may be relevant to highlight the fact that drug and vitamin manufacturers and some of the donor agencies not only supported the surveys, training and capacity building but also intensively lobbied for the adoption of fortification law in Zambia. It is well known that the major element of vitamin A is a material called "retinol", which is being manufactured and controlled by a handful of multinational companies based in Switzerland, France and the United States.
And if one were to play the devil's advocate, one would also ask that if the deficiency in vitamin A is found in people who have poor diets and the assumption is that they are poor, is it then realistic to expect them to afford sugar? Another point to consider is that the world is now putting emphasis on healthy eating which includes taking natural foods. Shouldn't the solution be to promote local foods that are rich in the said vitamin.
Although on paper, the law on sugar fortification does not necessarily stop anyone from importing unfortified sugar, but rather requires to first fortify the product before offloading it on the market, critics perceive the mandatory fortification of sugar as an advantage to the local sugar producers who have to determine the market prices of the commodity without interference from the external market force.
Most countries in the region, or in the world as a whole do not have the requirement on fortification of sugar. "There is need to liberate the sugar industry and allow for import competition," says University of Zambia consultant economics Professor, Oliver Saasa.
Other than the fortification requirement, Zambia's lack of imported sugar on the market has over the last one year been further compounded by the pressure of a legally-binding development agreement signed between the Government and the country's largest sugar producing company, Zambia Sugar Plc.
The Investment Promotion and Protection Agreement (IPPA) was signed on March 30th, 2007 ahead of the ongoing expansion works at Zambia Sugar's Nakambala estates in Mazabuka.
The expansion works would cover an additional 10,000 hectares arable land around the sugar plantation at an estimated $185 million, which could see the company increase its annual sugar out put to over 3.2 million tonnes.
Currently, Zambia Sugar's annual production is estimated at around 240,000 tones while the country's annual consumption is estimated at 150,000 tonnes. Although Zambia has two other sugar producers, Consolidated Farming known as Kafue Sugar and Kalungwishi Estates also called Kasama Sugar, the market value of the product is largely determined by Zambia Sugar, as the output of the other two is almost insignificant.
The IPPA - entered into by Zambia Sugar with the Zambian Government through the Ministry of Commerce, Trade and Industry and the Zambia Development Agency (ZDA) has a designated regulating authority - among other things, in clause 5.1.2 obligates the Government to "continue to treat sugar as a sensitive and priority product within Government policy guidelines and existing bilateral, regional and multilateral treaty obligations and also to take steps as are reasonably necessary to ensure the effective enforcement of Statutory Instrument No. 69 of 2006".
The Statutory instrument in question requires the certification of the Ministry of Agriculture and clearance from both the Health and Commerce ministries for one to import sugar, and this in a way, gives overriding powers to the provisions of the Zambia Sugar agreement on the 'non-importation of the commodity'.
Analysts say for as long as imports of the product are restricted, regardless of the local producers' ability to satisfy domestic demand, the commodity price will never be commensurate to the availability of the product on the market.
"The issue is not about flooding the market with sugar, because it does not guarantee competition in the industry. The market might be flooded with sugar, but the price will be too expensive for consumers to afford because one company would be the price determinant," Professor Saasa comments.
Despite the import restrictions that are indirectly perceived to protect Zambia Sugar, there have been recent allegations that the sugar company itself has been importing the product from its sister company in neighbouring Malawi at a much lower unit cost and reselling at abnormally high prices, well above regional and global prices of sugar.
One analyst, a practicing lawyer who preferred to remain anonymous, said the alleged importation of sugar by the country's largest producer "clearly runs counter to the spirit of the Statutory Instrument; it is a breach of term which can be implied that local production must be insulated against such huge imports.
" In the light of the development and breach, it will be irrational as well as discriminatory in an unconstitutional way for the Government to insist on banning imports by others, especially by those being inconvenienced by the on-going shortage," the analyst says. Zambia Sugar also fulfils export quotas to the European Union and selected African countries, particularly in Southern Africa-but the understanding has been that the company only exports the surplus after fully satisfying the local market.
Like the controversial mining agreements, the IPPA also entitles the sugar producer to several other incentives including the exemption of duty on the importation of production machinery, and also obligates the Government to pay in case of default or termination of agreement.
According to the 2007-2008 financial statement of Illovo, the parent company of Zambia Sugar Plc, group revenue increased by R530.5 million to Rands 6.8 billion, whilst operating profit rose from R1 034 million to R1,065 million, with an operating margin of 15.7 per cent.
Taxation decreased significantly from R288.3 million to R140.7 million due mainly to a change in the tax rate resulting from the Zambian subsidiary (Zambia Sugar PLC) being recognised as an agricultural operation for tax purposes and also being granted expansion-related tax allowances.
This reclassification as an agricultural operation gave rise to a one-off tax credit in respect of past tax years which impacted the tax cost in the year 2007-2008. When converted, the tax benefit which Illovo Company gained through the development agreement in Zambia is equivalent to K 70 billion for a single year.
"A striking feature (in the IPPA agreement) was the absence of any definite reciprocal obligations or undertakings to be assumed by Zambia Sugar, other than carrying out their own projects for their own commercial benefits," the analyst observes. "In contrast, Government was expected to confer benefits, advantages and rights and to assume obligations which in the ordinary course should have been those already covered by the ZDA Act.
Since incentives are already covered in the ZDA Act, the question arises: what was the need for an agreement?". There are frequent complaints from local business community that Zambia Sugar Plc is keen on awarding bulk of its ancillary, procurement and export sugar destined for regional markets to foreign companies despite the facts that Zambian Companies are ready and capable of undertaking the tasks. In this way, it is also evident that the core principles of the Citizens' Economic Empowerment, (CEE) were ignored in the framework of the IPPA.
Commerce, Trade and Industry Minister, Felix Mutati, however, said there was nothing sinister about the IPPA saying it was just like any other agreement that the Government entered into with several private investors to promote investment in the country under the ZDA Act.
"We have signed similar agreements with investors who qualified for investment incentives under the ZDA Act and there is nothing strange about this one," Mr Mutati says, "It's not a secret agreement, and is in the public domain. Suffice to mention that it is not subject to renegotiations because Government has an obligation under the Agreement and so do Zambia Sugar."
Whether the obligation not to renegotiate the terms of the agreement are enough insulation against the reoccurrence of a sugar shortage in the near future, remains to be seen but what is in public interest is that Zambia needs an urgent solution to tackle the abnormally high prices of sugar and also prevent any possible reoccurrence of a sugar shortage.
Moreover, consumers and also numerous small and medium scale business firms engaged in the food processing sector in Zambia should be given an opportunity to access sugar at prevailing regional prices if not the global prices level- both are well below K2000 per kilogram.
The survival and growth of small scale business firms in the bakery, biscuit, jam and soft drinks segment in Zambia is largely depend on the availability of sugar, which is their key input.
If the local companies are not able to access their inputs at fair regional prices, how then can they compete with imported products? Government in that regard needed to be mindful of the opportunity cost, which is equivalent to billions of kwacha per annum as "monopoly protection money" that consumers and small business in Zambia will have to pay, just for buying local sugar.
If any investment promotion and protection agreement is to be considered as development friendly, there should be a fair balance between commercial benefits of investors and public welfare of the host country. Is Zambia as a country not learning from the lessons of the unfavorable privatisation and development agreements of the 1990s?. This is where there are difficulties in comprehending the rational of the IPPA with Zambia Sugar Plc.
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