Uganda
is the ultimate banana republic (no pun intended). Ugandans consume more
bananas per person than anyone else on earth. I have remarked in the past on
the Jubilee administration’s penchant for skidding on banana skins. You might
expect that while in Uganda, they would watch out for banana skins. No such
thing.
It is
difficult to fathom how the administration would have put out a message that
could be construed to mean they had traded milk for sugar. Commercial dairying
being a predominantly Kikuyu-Kalenjin affair, and sugar cane a Luo-Luhya one,
even ignoring for the moment the President’s conflict of interest issues, the
political dimension of it would still have made it the most slippery banana
skin that the administration has stepped on to date. But such is the nature of
mediocrity. Just when you think it could not get worse, it does.
Why is
Kenya’s smallholder tea successful and cane sugar a dismal failure? There are
three factors. The first is market orientation, the second is the nature of the
products and the third is the business model.
Market
orientation.
Tea is
an export crop, while cane sugar production was established as an import
substitution industry. Because Kenyan tea farmers have to sell their produce in
the world market, they have to be globally competitive. That is, they have to
produce profitably a product the tea consumers out there want, at a price that
they are willing to pay.
MORE
COMPETITIVE
If they
were not able to, there is not much that the government could do to protect
them from competitors. It could be argued that the government could subsidize
them. Perhaps, but not for long. It would quickly fall foul of competitors, who
would report to the WTO. If that did not work, the competitors would do the
same and being more competitive to begin with, the subsidy war would bleed us
more.
The
sugar industry on the other hand is a classic case of the pitfalls of import
substitution. There are two of them. The first is that import substitution
industries were seldom based on viability. Rather the argument was, we are
importing so much of this product, why can’t we produce it ourselves?
The
question that was seldom asked when import substitution industries were started
was: can we produce our own competitively?
More
often than not, the size of the market was hardly big enough for a viable
industry. In the case of sugar, there was also immense political pressure —
central Kenya had cash crops, coffee and tea, while western Kenya had none.
The
second pitfall is that of infant industries refusing to grow up. Once an
industry was given protection, there was no incentive for it to become
efficient. In fact, the reverse happens.
VESTED
INTERESTS
The
industry acquires political clout that ensures it is never exposed to
competition. One way of doing this is ensnare the policy makers so that they
acquire vested interests in keeping the industry protected no matter how
inefficient. In the 70s, foreign investors did this by making policy makers
sleeping partners, suppliers and distributors.
The
infant industry problem is compounded if the industry is State -owned as is the
case with our sugar industry. The industry becomes a gravy train for the elites
since they know the State will always bail it out. This is precisely the case
with our sugar industry. For well over a decade, we have sought protection from
COMESA imports and have done nothing to make the industry competitive. We are
not about to.
Product
characteristics.
The
reason why Kenya’s smallholder tea is successful, in fact the most successful
in the world, is because smallholder farmers are able to produce much higher
quality tea than plantations. The reason is deceptively simple. The smallholder
farmers pick ‘two leaves and a bud’ – the shoots that give the best tea.
Plantation workers are paid by weight so they pick three or four leaves.
Even if
the plantation wanted them to pick two leaves, the supervision costs of
enforcing would be too high. It would need an army of supervisors to inspect
every basket. And of course the supervisors could always collude with the
pickers for a share of the additional earnings.
The only
foolproof solution is for the plantation owners to inspect every basket. In
economics, we call this a principal - agent, or incentive compatibility
problem.
Sugarcane
is the complete opposite. Smallholder sugar does not command any quality
premium over plantation sugar. If anything, the labour value-added is very
little. Labour is required during planting and harvesting. In the intervening
period - close to two years—farmers do very little. The earnings from sugarcane
production are in essence returns to capital and land rent.
To
illustrate, let us suppose sugarcane is grown by an absentee landlord. The cane
is sold in a competitive market. The alternative is to rent out the land at Sh5,000
per year. It costs Sh50,000 per acre to grow a crop which takes two years.
Even
assuming a very generous return on capital at 20 per cent per year, in a
competitive market, and equally generous “entrepreneurial rent’ at 10 per cent
of capital employed. In a competitive market, the returns to the absentee
landlord would be Sh35,000. An average smallholder farmer in Meru who picks her
own tea will have made at least Sh300,000 on an acre of tea.
Of
course the two are not directly comparable. The tea earnings include returns to
labour (about 50 per cent), which for the telephone farmer is a cost. Half of
the balance is the quality premium. Once direct costs such as fertilizers are
taken care of, the returns per acre become comparable to the sugarcane growing
absentee landlord. And that is precisely the point. The purpose of smallholder
cash crop farming is to provide them with profitable self-employment—to make
them small capitalists, not slaves of capital.
Business
model.
The
architects of Kenya’s smallholder tea industry were remarkably clever and
foresighted. In the 60s, state ownership of enterprises was in vogue. They went
against the grain and chose outgrower owned, private sector managed
enterprises.
The
State, through the Kenya Tea Development Authority (KTDA), guaranteed loans to
the factories which were repaid by deductions from farmers earnings. The
factories were managed by the multinational tea plantation companies on
contract and progressively replaced by the KTDA as local capacity was developed.
This is
why the privatization of the industry did not entail sale of assets. The
farmers had financed the assets. The State had simply been a facilitator and
custodian.
The
sugar industry took the State- ownership route. The one exception to some extent
was Mumias which was a joint venture between the government and Booker Tate, a
multinational sugar company, which managed the company until it was privatized
and management localized. The rest is history.
PRIVATE
MILLERS
Privatization
is not a solution. As noted, the contribution of sugarcane to the value of
sugar is comparatively little. Most of the value is created at milling, which
is capital intensive. Sugarcane today is politically priced at well above its
economic value.
The cost
is paid by consumers twice, directly through high prices, and indirectly as
taxpayers through bailouts. Private millers will have no business paying for
cane more than its economic value.
There is
no business model I can think of where, in a regionally integrated competitive
market, sugarcane would emerge as the best alternative for western Kenya’s
smallholder farmers. The only one with a fighting chance is if the government
gives the farmers the mills, debt free, but this entails a huge assumption—that
the farmers would run the mills efficiently. Doubtful.
One of
the arguments forwarded against the Uganda deal by among others, my good
friends Prof Anyang Nyong’o and Dr Mukhisa Kituyi, is Uganda does not have a
sugar surplus and the deal will be a conduit for barons to bring in sugar from
farther afield. I don’t disagree that mischief could be afoot, but the
surpluses argument should not arise.
The EAC
Common Market Protocol was signed in November 2009. It became effective on July
1 2010, with a five-year transition period which ended on June 30 this year.
The EAC is now legally a single market. In a single market, you produce where
it is cheapest and sell where it is most profitable. The Ugandan millers are
not obliged to satisfy the Ugandan market first before selling in Kenya or any
of the other EAC countries for that matter.
They are
not demanding market access because they have a surplus, but because the Kenyan
market is more profitable. They are entitled to our market. Moreover, you don’t
produce a surplus and then look for a market. You find a market and then
produce for it.
We may
be able to stave off external competition for a while, but the bell has tolled
for western Kenya’s sugar industry. The Kerio Valley Development Authority
(KVDA) estimates that it can grow sugarcane on large scale at a quarter of the
western Kenya cost in the Turkwell basin. Tana River County can put more land
under large scale irrigated sugarcane than the entire western Kenya sugar belt
with plenty to spare. The Ugandan millers or other investors could, and
probably will, invest in large scale production here. Are we going to stop
them?
LABOUR
INTENSIVE
What are
the alternatives for western Kenya? There is no shortage of them, and at any
rate, the lesson the region should learn from sugarcane is that mono-cropping
is a bad idea. As I hope I have demonstrated, the alternatives should be
evaluated on two criteria. The first is that it is labour intensive, meaning,
it enables the farmers to employ themselves.
The
second is that the farmer accounts for a high percentage of the end value of
the product. A good example is, lo and behold, milk! Dairying is labour
intensive, cows (or goats) must be fed and milked every day. Second, milk comes
from the cow ready to drink.
That is
as high a percentage of end value as you are likely to get. Processing i.e.
pasteurizing and packaging fresh milk does not add value to milk per se, it
simply improves the logistics of getting it to a mass market.
Most
Kenyans in fact prefer their milk straight from the cow. As it happens, there
is a technology, the “milk ATMS”, which is making it possible for farmers and
consumers to cut out the processors from the value chain.
The milk
ATMS have taken the market by storm, in the US and Europe as
well. It is a good example of a highly disruptive technology. In the US, the
milk processor lobby has secured bans in several states.
The informal market controls 80% of the Kenyan milk market; may the guys who sell chopped sugar cane may soon have a dominant share....
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