Julius Barigaba
29 June 2009
Nairobi — High production costs will deny East African sugar producers the benefits that will come with the launch of the Customs Union of the Common Market for Eastern and Southern Africa (Comesa).
The Customs Union will bring zero rated sugar imports into East Africa and leading sugar millers and trade experts in Uganda say the region's producers are still far from reaching optimal levels of production and therefore are not ready to embrace a trade arrangement that will open the region's markets to competition.
"We don't want to embrace negative linkages from Comesa," said Patrick Okilangole, the principal commercial officer in charge of Comesa Desk at the Ministry of Tourism, Trade and Industry. "So the East African Community tariff will still apply so that we don't lose what we have gained under the EAC Customs Union."
While Kenya had the foresight to seek a safeguard from Comesa sugar till 2012, the "gap sugar" quota allowed into the country stood at 220,000 tonnes under the same trade regime but was last year revised at the rate of 40,000 tonnes per annum.
Starting 2008, any sugar above the quota limit will be successively reduced from 100 per cent by 30 per cent per annum till 2012, spelling the full liberalisation of the sugar industry to sound the death knell for the industry in Uganda.
"This therefore means that unless some other safeguard measures are introduced, there will be full liberalisation of the sugar industry from Comesa imports by March 2012. This will seriously affect the entire East African sugar industry," says Wilberforce Mubiru, executive director of the Uganda Sugar Cane Technologists Association.
According to Mr Mubiru, Kenya's recent agreement which is leaning towards a full liberalisation of Comesa sugar into Kenya over the next three years, can only mean one thing.
That by virtue of the East African Customs Union, Kenyan made sugar (after being displaced by cheap imports from Comesa) will find its way into Uganda.
The idea of a liberalised sugar market should not be permitted until such a time when EAC member states have enough capacity to procure more sugar than their country's domestic requirement, said Mr Mubiru.
P.K. Eswar, spokesman of the Madhvani Group was unequivocal about sugar imports from Comesa and other countries.
"We cannot welcome it because it means our sugar will be uncompetitive," he said.
"Uganda is not prepared for zero rated sugar. No country in East Africa currently has capacity for that. The industry in East Africa has not been developed to take that kind of competition. We are strongly opposed to this."
The Madhvani Group owns Kakira Sugar, its flagship company and market leader in Uganda.
The three biggest mills -- Kakira, Kinyara Sugar and Sugar Corporation of Uganda Lugazi, in addition to two small operators in Uganda currently produce a paltry 240,000 metric tonnes of sugar annually.
But experts put annual consumption figures for the local market at 250,000-270,000 metric tonnes, translating into a supply gap of up to 40,000 tonnes.
This shortfall is partly addressed by imported volumes from countries like South Africa, India, Tanzania, and Swaziland. Imports hit the 100,000 tonne mark last year, most of it coming into the country for re-export purposes.
Exerts say freeing up the East African sugar market will lead to dumping from countries with less production constraints.
In Uganda, Kakira produces well over half of what is supplied to the market. It is currently at 148,000 metric tonnes as of April this year, while Kinyara and Sugar Corporation last year produced 67,000 and 42,000 tonnes respectively, according to data from Uganda Sugar Cane Technologists Association.
The industry has been undergoing expansion with prudent investment and market drives, but investment capital, infrastructure and cost of power have taken their toll on the millers.
For instance, to ramp up production from under 100,000 tonnes last year to the current 148,000 tonnes, the fully private owned Kakira needed to invest $53 million in new crushing capacity and cane outgrower numbers.
The ownership of other millers is largely private, but they still require the government to inject capital into the businesses to increase production capacity. The government still owns 49 per cent of Kinyara, whose majority shareholding is held by the Rai Group of Kenya and Mauritius.
The government also maintains minority shareholding in Sugar Corporation.
Like other manufacturers, Uganda's sugar industry too has suffered from the inadequate power supply in the past few years, compelling millers to invest in their own power generation.
But the cost implications for such investments and the emergence of burgeoning markets in the region where a lot of products manufactured in Uganda have been selling meant that the price of sugar shot by 71 per cent in 2005 to Ush2400 ($1.2) from Ush1400 ($0.7) before stabilising around the $1 region.
According to the Uganda Export Promotions Board, 78,000 metric tonnes of Ugandan-made sugar found its way to Sudan, Rwanda, Democratic Republic of Congo, Burundi and Swaziland -- all Comesa countries.
To reach optimal production levels and become competitive in the Comesa region, Ugandan sugar millers must increase cane outgrowers -- Kakira, for instance is supported by only 6,000 outgrowers, up from 3,500 last year, with a similar tonnage increase in the plant's crushing capacity.
Similar moves by the other millers will see the industry increase capacity to 300,000 tonnes, which Mr Mubiru says is within reach this year once all millers have completed factory expansion.
The big firms have on top of increasing outgrower numbers also sought other expansion strategies by acquiring land to expand their cane growing functions.
Protectionist Uganda has long suffered jitters over Comesa, first since the bloc announced a free trade area in 2001, and the now the launch of the Customs Union will have brought more fears to the local manufacturers.
Accordingly, the sugar millers under their umbrella bodies -- the Uganda Manufacturers Association and the Private Sector Foundation of Uganda have tabled a proposal to the Ministry of Trade, raising concerns over the possibility of sugar dumping that might hurt their firms, especially now that they are expanding their capacities.
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