Diversification, access to private capital can revive sugar mills

Mumias Sugar Company recently asked the Treasury for Sh3.1 billion, a substantive amount and coming on the heels of a combined Sh3 billion pay-out that was handed to the miller since 2013. The cash injection is meant to stave off a near collapse of the giant miller.

The request by Mumias Sugar has triggered reader reactions for the Treasury to extend similar bailouts to Chemelil Sugar Company and other government-controlled sugar factories which are similarly in dire need for massive capital injections.

Reader concern is understandable since these factories are the lifeline for the economies in the Western sugar belt and their collapse would cast financial ruin in these areas.

Any intervention to prevent a near-collapse of the millers is welcome but is routinely asking the Treasury for cash injections indeed sustainable? The brutal reality is that the State-controlled sugar companies and other parastatals have to change how they operate if they are to survive and these parastatals have in the past admitted to this reality.

Processing sugar alone is not enough to save Nzoia, South Nyanza, Chemelil, Muhoroni and Miwani sugar companies. These five sugar companies have to produce a wider variety of products to effectively compete with their peers in Zambia, Sudan, Mauritius and Swaziland.

Today sugar milling companies in other markets produce ethanol, rum, animal feeds in addition to generating power. Neighbouring Sudan’s Kenana Sugar Company prides itself as the world’s largest integrated and diversified sugar factory. Kenana Sugar is a paragon of how a modern sugar factory ought to run. Its animal feeds product range includes poultry and cow feeds.

If Kenyan sugar millers were to produce sufficient amounts of cow and chicken feeds they would support the dairy industries in the Western region and thereby create new revenue streams for farmers. Additionally sufficient amounts of cow feeds would go a long way in reducing the risk of milk shortage which occur every year there is a drought and consequently result in a spike in prices as we are currently experiencing.

Furthermore there is a big, ready market for alcoholic beverages and fuel industries from ethanol that would be produced from the sugar miller. It is only by combining all these products that a sugar factory can have operational profitability and increase its visibility.

For local sugar millers to operate as envisioned, need massive amount of funding, technical and operational expertise is needed. The amounts needed in many cases exceed the Treasury’s annual allocation to county governments where they are located and new sources of capital new are needed and even the millers themselves are cognisant of this reality.

The 2013 Report of The Presidential Taskforce on Parastatal Reforms found that state-owned sugar millers admitted at having concerns that they would no longer be able to tap into funds from the Treasury once the Common Market for Eastern and Southern Africa (COMESA) are removed, a process that is expected to happen in the next nine months.

Additionally, it is worthy to note that there is a cost every time the Treasury sets aside funds for bailing out a state-owned enterprise which is paid in the form of other projects not getting funding. Growing demands for services in health, education and the massive infrastructure projects means that the Treasury has to be as prudent as possible in the allocation of resources.

The next and most feasible source for funds needed for rehabilitating the state-owned sugar factories, and make them diversify their products, is the private sector and this would entail opening up ownership to larger companies that have the funds and technology to shape up the five state-owned sugar millers.

Diversification will improve the viability of the sugar mills and wean them off Treasury funding but to achieve these firms must be open to new partners.

(Biko is CEO of Soko Directory)

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