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Citizen Weekly

Sunday, 7 December 2014

PARLIAMENTARY REPORT ON THE CRISIS FACING THE SUGAR INDUSTRY

2.11 Submissions by the Inspector General of Police.
41. Appearing before the Committee on April 29 2014, the Inspector General of Police made the following submissions:-
i)National Police Service was established by Act of Parliament and mandated to enforce the law which includes surveillance of all goods, including sugar, entering or being traded within but some borders are extensive, porous and some areas may not be manned;
ii)The Kenya Police Service, immigration department, Kenya Revenue Authority, Kenya Ports Authority and Kenya Airports Authority work together in manning the borders and to ensure that the necessary taxes and duties are paid;
iii)The Kenya police escorts all the transit goods including sugar and ensure that KRA’s main interest (tax) is paid and all other laws are adhered to;
iv) The Kenya Police has managed to arrest and prosecute suspects in sugar smuggling although often courts release the suspects, especially cases concerning sugar through Kismayu and Kenya’s boarder with Somalia;
v)Legislation regulating the sugar industry is very weak and there is need for strengthening it;
vi)The national police service does not protect criminals and is not aware of a warehouse in Mombasa that is protected by police where even Kenya Sugar Board personnel denied access to the premises but promised to investigate the matter following complaints from the principal secretary department of agriculture and report to this committee;
vii)    the IG acknowledged that some police officers had lost their lives while tackling contraband sugar which somehow abets insecurity terrorism in the country since all entries are not ascertained that it is sugar;
viii)The IG acknowledged that the capacity in terms of resources is lacking at our borders and that there is need to develop a policy where a particular officer can several a station for only three years per station;
ix)Officers are regularly appraised on the required documentation for importation of any goods in the country, however the service was dealing with isolated cases of integrity among the officers as and when they arise;
x)The Kenya Police Service had signed agreement memorandum with Kenya sugar board and Kenya Revenue Authority toe establish anti-smuggling unit to deal with cases of smuggling;
xi)The Kenya Police Service has been underfunded for a long time but there is noted improvement in the allocation of resources to the police service;
xii)Police officers are routinely seconded to the KRA to oversee operational matters including revenue collection and compliance to statutory requirements; and
xiii)The various government agencies at the border points need to appreciate security as a cross-cutting issues and an important aspect of our national development.

2.12 Submission by Kenya Bureau of Standards.
42. Appearing before the Committee on May 14 2014 the managing director for Kenya Bureau of Standards submitted as follow:-
i)KEBS was established in July 1974 under CAP 496 of the laws of Kenya. It offers several services including standards development and harmonisation, testing, measurement (calibration), enforcement and standards, product inspection, education and training in standardisation, metrology and conformity assessment, management systems certification and product certification;
ii)KEBs analyses sugar imports coming into the country on request and notification of arrival of the same by KPA and KRA;
iii)Since 2012; seven consignments of sugar had been recommended for destruction by KEBs and other government agencies for non-conformance to quality specifications and KEBs is among the state agencies charged with destruction of goods that do not conform to the standards;
iv)KEB was aware of the impounding of a consignment of sugar that had been imported by Mumias Sugar Company although the IDF was reading Dantes Peak Limited;
v)KEBs  was facing the challenge of determining the importers of industrial sugar meant for manufacturing but which was being repacked for domestic consumption against the regulations;
vi)KEBs does not have up-to-date equipments and infrastructure for analysis of various commodities imported and exported. KEBs also lack capacity for enforcement of standards and market surveillance and therefore cannot cope with demands like single window and 24 hour operations at the port of clearance or entry /exit. 
2.13 Submissions by management and board of directors for Mumias Sugar Company
43. Appearing before the committee on May 27, June 12, July 10 and  July 17, 2014, the board of Directors of Mumias Sugar Company submitted as follows:
i)The board and management were aware that the company exported sugar to several European and African countries between 2006 and 2012 and concerns that the sugar may not have left the country and that revenue in the form of VAT payable could have been lost;
ii)The board and management were also aware that certain information regarding the exports was missing from the company’s records and promised to institute forensic audit of all MSC exports in view of the fact that some of the key managers had since left the company and would report the findings to this committee;
iii)The company was in a crisis a result of serious management short fallings and the company was unable to meet its obligations including payment to farmers;
iv)The company was on a restructuring process to address serious management bottlenecks and disciplinary measures had been taken against some managers following the findings of the forensic audit on sugar imports and other management shortfalls;
v)The board and management were not involved in the decision to import the consignment of the 10,000 MT of sugar in 2012 and there was an ongoing board investigation on the same and undertook to submit the outcome of the investigations to the committee within two months. The board had asked KPMG to investigate into whose accounts money from the imports went. The final KPMG report would also shed light on exactly how much monetary loss MSC incurred through fraudulent activities.
vi)The preliminary report of the forensic audit by KPMG on sugar imports by company could not be released to the committee at the stage because  there were certain transaction details that had been captured in the report and the board undertook to submit the report in two months when those aspects had been addressed;
vii)The board admitted that it was having challenges from neighbouring Companies that had taken advantage of delay in payments for sugarcane by MSC to poach cane from its contracted farmers.
viii)    The Board admitted that there was massive corruption and lack of clear management direction in MSC in the past, to this effect some officers had been sent home pending investigation; and
ix)The board also affirmed that there were reforms going on at MSC to clean the mess and also to recover the money lost. The company did not have an internal audit department and the chairman promised to have a new department reconstituted;
2.14 Submission by the director general of the National Intelligence Services.
44. Appearing before the committee on July 10, 2014, the director general of NIS made the following submissions:-
i) That the function of MIS was to gather intelligence and compile reports on the same for action by the relevant authorities;
that NIS has no prosecutorial powers;
The sugar industry was crippled by among other issues, high cost of production and obsolete technology hence Kenya was a very lucrative market for the commodity and that has been a catalysts for sugar smuggling in the country.
45. The committee expressed disappointment over the information presented by the director general and informed him that Kenyans had very high expectations of his office. The DG expressed his appreciation  of the committee’s need to deal with the sugar issue and requested that the committee details out of information they required from him and he would respond within two weeks.
46. The committee acceded to his request and outlined the required information as follows:
I.Provide information on illegal sugar importation, exportation and smuggling;
II.Provide the name of the illegal importers and smugglers and their local partners within and outside government institutions;
III.Provide information in the custody of national intelligence service if any concerning smuggling of sugar into the country through Kismayu and along Kenya’s border with Somalia;
IV.The names of companies, traders, dealers, transporters’ and any other persons involved in the alleged sugar exports by Mumias Sugar Company to regional countries and in particular owners of the trucks that ferried the sugar for export from Mumias Sugar warehouses; and
V.The circumstances under which sugar meant for industrial use ended up being used as table sugar and the persons involved in the repackaging of the sugar for domestic consumption.
A letter detailing the above was sent for action however this has not been done to date.
2.15 Submissions by the cabinet secretary ministry of Agriculture, Livestock and fisheries.
47. Appearing before the committee on Tuesday  September 9 2014, the cabinet secretary made the following submission on the status of the sugar sector in the country and other matters affecting the industry:-
2.15.1 On the status on the sugar sector in Kenya the cabinet secretary informed that:-
i)The sugar subsector plays a major role in Kenyan economy and was a source of income for million in citizens. The country was producing about 600,000MT of sugar against the annual domestic requirements of 800,000MT running a deficit of about 200,000MT.
ii)There were 11 operational sugar mills in the country, one additional new mill was to be commissioned in Kwale while two other mills (Muhoroni/Miwani) were under receivership.
iii)The combined installed crushing capacity of operational mills was about 29,990Mt of cane per day. The current capacity was sufficient to produce about 1 million tonnes of sugar per annum. The target was to expand this capacity to approximately 50,000MT in order to produce 1,250,000MT to make Kenya a sugar surplus producer.
iv)The sugar closing stocks held by the factories at the start of the year 2013/12 was at 27,392 MT up from 19,205 MT at the end of 2012/12. The stock level increased to a high of 42,845 MT in February, 2014 against optimal level of 9,000MT.
v)The ministry embarked on the strategy to decrease the sugar stock to an acceptable level of 8,478MT, which was achieved by August 20 2014.
vi)The increased sugar stock was attributed to;
·Sustained high sugar production;
·Carrying forward huge stocks from the previous year;
·Surplus balances in the world market and depressed prices; and
·Increased presence of uncostumed sugar in the country attracted by high  cost of production
vii)The Kenya sugar industry has the potential to generate up to 120MW of electricity for export to the national grid without major investments’. However, it is only Mumias Sugar Company that is currently generating 38MW out of which 26MW is exported to the national grid. The rest of the factories generate electricity for their own use but do not export to the national grid.
viii)All five government-owned sugar factories are earmarked for privatisation programme. The programme received cabinet approval in 2008 and debt writeoffs have been approved by parliament as a precursor to government divestiture. This aims at;
·Transforming the industry towards commercial orientation; and
·Injection of the required fresh capital
ix)The Parliamentary Departmental Committee on Finance, Planning and Trade passed a resolution on January 9 2013 “that privatisation of the public sector sugar companies should be postponed until such a time when all legislation affecting the Agriculture Sector (sugar) and the county governments have been put in place”. In order to kick start the privatisation process, the parliamentary Committee on Finance, Planning and Trade approval is required.
2.15.2 On the challenges faced in the industry the CS submitted as follows:-
i) Low productivity and high cost of sugar production
48.These had been caused by a number of actors that include the following among others;
· Deteriorating soil fertility;
·  Low adoption of high yielding sugarcane varieties;
·  Poor agronomic practices;
·  Land subdivision into uneconomic sizes;
·  Intermittent moisture stresses due to drought spells;
·  Low quality seed cane materials;
·  Insufficient and unsustainable technical support to out-growers;
·  Frequent cane shortages which lead to immature cane;
·  The high and rising cost of inputs such as diesel, imported fertilisers and machinery;
·  High harvesting and transport costs;
·  Sugarcane is grown by smallholder farmers under rain-fed conditions;
·  Poor roads within the cane catchment areas;
·  Lack of sufficient finance for government owned sugar factories to rehabilitate the machineries;
·  Length of cane harvesting and milling time; and
·  Lack of capacity to utilise the by-products for ethanol and power generation.
ii) Illegal sugar imports
49. That the high presence of illegal imports earlier in the year saw the industry continue to experience stock piles and declining ex-factory prices of sugar. The uncustomed sugar imports were re-packaged into local bags to conceal identity and evade the surveillance network. In the period January to July 2014 the market and experienced declining sugar prices to a low of Sh3,200 for a 50kg bag against the average industry break-even of Sh3,800 pushing down cane prices to low of Sh3,000 per tonne.
iii) Intra Regional Trade
50. That this was especially for net deficit sugar countries that exported substantial amounts of sugar to partner states with disregard and / or compromise or laxity in the enforcement of the rules of origin. Egypt for example, despite being a net importer, is a significant supplier of sugar to Kenya.
2.15.3The CS gave the following recommendations on how to streamline the sugar industry
51. The cabinet secretary told the committee that to mitigate these challenges, the following strategies were recommended and the ministry had initiated a number of them with a view to streamlining the Kenyan sugar sector as follows:
i) Cost Reduction and Increased Productivity Measures
a) Diversified product base
52. All new investments for setting up sugar factories must demonstrate a revenue stream beyond sugar when applying for registration. The existing mills will be required to provide a road map towards expanding their product base beyond sugar within the next five years. This will provide a transition from the single revenue stream which contributes heavily to the industries uncompetitiveness.
b) Bulk procurement of inputs and machinery
53. The cost of inputs will be reduced through bulk procurement of high spend items such as fertiliser and farm machinery (tractors); a process that has already been put in motion. This will be implemented within the next two months.
c) Modernisation of factory technology
54. Fresh injection of capital for the poorly performing government-owned mills was urgent hence the recommendation for speedy exploitation of viable options that can see ministry fast track the stalled privatisation of the five public sector owned sugar mills. This will contribute quite significantly to the long term revitalisation of the industry by way of injection of much needed capital estimated at Sh58 billion to address the industry productivity challenge which may include public private partnerships, auctions or private treaties with willing investors. This should be done by March 2015.
d) Diminishing Land Sizes
55.There is need to roll out of a land policy that introduces mandatory block farming to preserve economical land sizes that will enable the industry benefit from economies of scale, planned cane development/harvesting and mechanisation in the future. This should be done by December 2016
e) Payment System
56. The industry must shift from the payment system-based on weight to one based on quality. Remuneration that rewards efficiency and penalises inefficiency to be adopted by the entire industry by December 2016. The system will improve efficiency as it will remunerate based on quality.
f) Development of a seed cane policy
57.This will guide the industry in the development and adoption of high yielding, early maturing and disease resistant certified seed cane of relevant varieties. This policy is targeted to be in place by June 2015.
g)Sugar production and consumption
58. In order to validate our statistics on the national sugar demand and supply, an independent study will be undertaken by  December 30 2014 to confirm the updated status based on changed fundamentals such as population and production growth.
h)Improvement/Management of roads infrastructure
59.This will be done to encourage collaborative management of infrastructure in the sugar belt that will enhance the impact on the available pool of funds to the sugar value chain within the various agencies in the sugar belt.
 ii) Intra Regional Trade and Rules of Origin
60. There is an urgent need for verification missions to deficit countries which have high export history to satisfy authenticity and the harmonisation of regulatory/administrative processes within the trading blocks. A case should be put forward for the establishment of competent authorities in respective partner states from purposes of liaison on sugar matters. This specifically applies to Uganda and Rwanda who do not have regulatory bodies’ specific to the sugar sector. Kenya and Tanzania have in place such authorities making collaboration and administration smoother. This should be done by October 30 2014.
iii) Single Customs Territory
61. On the impact of the single customs territory, a position paper seeking an amendment to exclude sugar based on its unique challenges will be submitted immediately.
62. In the meantime Agriculture, Fisheries and Food Authority will in collaboration with Kenya Revenue Authority station officers within the partner states and in Mombasa to ensure the sectors’ interests are protected.
iv) Uncustomed Sugar Imports
a) Ban on Sugar Auctions
63. It is recommended that instead of auctioning impounded uncustomed sugar imports, it should be destroyed publicly and, to avoid conflict of interest, sugar miller/ manufacturers should not be allowed to import sugar from now on given the Mumias and Chemelil experience. This should be implemented immediately.
b) Single Desk Marketing and Distribution of Sugar
64.Replacement of dedicated factory distribution networks with a single desk marketing arrangement that will minimise costs of marketing and unfair trade practices particularly among the poorly performing state owned mills should be done. This will mitigate the duplication on high individual publicity and marketing budgets and also allow the companies, to focus on milling of sugar and related activities such as ethanol production and manufacturing of specialty value added products. This should be done by December 30 2014.
c) Establishment of permanent inter-agency surveillance and enforcement unit.
65.  The gazettement of a permanent inter-agency surveillance and enforcement unit on sugar trade that reports directly to the director general of AFFA made up of the sugar directorate KEBs, public health, Kenya Revenue Authority and the police. This should be done immediately. 

Chapter 3
3.0 Findings of the committee
Mr Speaker,
66. The committee investigations which included site visits to the various areas of interest to the subcommittee terms of reference came up with the following findings.
3.1 Presence of Cheap and Unregulated Sugar in the Local Market
67 The committee’s investigations established that a huge quantity of sugar enters the Kenya market unregulated and untaxed. In the last six years, the country has consumed close to 335,000 MT (KSB statistics) of sugar, either illegal or meant for industrial manufacturing. The sugar is repackaged by unscrupulous business people in packages similar to t hose used by local millers. Apart from such sugar not meeting the KEBs specifications for domestic consumption, the country loses in terms of taxes.
68 The flooding of illegal sugar is the cause of the evident market distortions as it is posing unfair price competition to the disadvantage of local sugar miller sand cane farmers.
69 It is good to note that in 2001 parliament passed the Sugar Act number 10 of 2001 which outlines well the requirements for licensing of sugar millers and the functions of the Kenya Sugar Board.
3.2 Cane poaching
Mr Speaker,
70. Allow me to explain to the house what cane poaching is and how it operates. Traditionally, the Kenyan cane growing model has operated on an outgrowers model whereby farmers are supported to grow cane on their farms and in turn they are expected to supply the cane to the millers who have provided the pre harvesting inputs which include land preparation, supply of seed cane, supply of fertiliser, farmer extension services, harvesting and transport of the cane to the millers where the cost will be recovered.
71 In practice, development of own cane by millers, commonly known as nucleus estate as well as contracted farmers was a precondition for licensing of cane millers. This precondition is no longer adhered to thereby creating the current wrangles in the cane zones as the  new millers who have been licensed before demonstrating that they have enough cane to run their factory capacities have encroached on contracted cane already established by existing millers.
72 The genesis of cane poaching is attributed to the licensing of West Kenya Sugar Company and Butali Sugar Mills within close proximity to the already existing cane millers with total disregard of the law.
 3.3  Industry Channels
73 Mr Speaker, the sugar sector in Kenya is faced with many challenges that, is not addressed, will lead to the demise of the sector. Although the petition highlights cheap imports and smuggling as well as poaching of sugarcane among sugar millers, the committee established that high cost of production, field and factory inefficiencies, heavy indebtedness, corruption and impunity, lack of capital to modernise and automate the mills, fast decreasing land sizes and loss of soils fertilities and failure by the regulator to properly manage and regulate the sector as some of the key challenges that have over time led to the current crises in the sugar sector.
(i) High Cost of Production
74Kenya is ranked among the highest cost producers in the world, which makes it an attractive destination for both legal and illegal imports. While the cost of production in the region is about USD 400 per metric tonne of sugar, the cost of production in Kenya is well in excess of USD 550 per MT. This is a result of poor agronomic practices, high cost of inputs old machineries at farm and factory levels, deteriorating soil fertility, low yielding sugarcane varieties, reliance and rainfed conditions, small and uneconomic land sizes land unsustainable technical support to out-growers, poor road infrastructure and high transport costs and low by-product utilisation, among others.
(ii)  Heavy Indebtedness
75 All public-owned mills are heavily indebted and lack the capital required to expand, modernise and automate the factories for the required efficiencies and economies of scale. At the moment, five public-owned mills are owed over Sh100 billion with Nzoia Sugar Company having a debt of Sh37 billion, Miwani Sugar Company (in receivership) Sh28 billion, Muhoroni Sugar Company (in receivership) Sh27 billion, Chemelil Sugar Company Sh5 billion and South Nyanza Sugar Company Sh3 billion. The money is owed to the government of Kenya, suppliers, banks, Kenya Sugar Board and farmers for cane deliveries.
iii) Corruption, Impunity and Fraud
76The mills have engaged in a number of projects and programmes that have turned out be either misadventures or ones with low rates of returns. Mumias Sugar Company’s investment of ethanol and co-generation plants and Nzoia Sugar Company’s purchase of trailers that could not be used on Kenyan roads are cases in pints in which huge sums of money have been lost in the process. Sugar sales and exports and imports in particular have turned out to be avenues through-which monies are siphoned out of the companies. While the concept of distributorship in sugar sales has become a major case of corruption and impunity, the engagement of mills in regional sugar exports between 2006 and 2012 is suspect. There is glaring discrepancy of evidence on the sugar allegedly exported by Mumias Sugar Company where the summary of exports submitted to the committee vary from the detailed submissions on company (exporter) basis. A case at hand is where one Nesrdin Mohammed (an Ethiopian exporter) wrote to MSC requesting to be allowed export of 5,000MT of sugar to Ethiopia. The summary of this export indicates a total export of 5,882MT while the detailed export item list has a total of 117, 641MT as exports by Nesredin Mohammed. (Annex II).
 77. That notwithstanding, a total summary all exports by MSC for the period of 2006 to 2012 are given as (52,284MT) while the detailed itemised list to individual companies total to 757,431MT. The committee therefore finds no evidence of a mass of sugar 757,431MT from MSC, Chemelil Sugar Company (2,000MT) and South Nyanza Sugar Company (5,471.95MT) having indeed crossed the borders to Uganda, Sudan, Ethiopia, Rwanda and Democratic Republic of Congo as exports. Further, the registration certificates provided have varied information. For instance, MSC submitted that Mid Africa Commodities and Mega Laser are exporters from South Sudan when the certificates indicate the firms are registered to operate in Kakamega and Malaba border respectively. (Annex II)
78 Investigations on Mumias Sugar exports in particular did not led to any other conclusion except that it was a ploy to defraud the government of value added tax realisable. Neither the management nor the board of Mumias Sugar Company could confirm that the sugar left the country. Although former Mumias managing director, Evans Kidero submitted that documents providing that the consignments indeed left the country were with the company, the current Mumias management was at pains to prove that indeed the sugar left the country but documents provided by the management of mumias in an attempt to prove the sugar was indeed exported and discrepancies as cited above. The board of directors, through the chairman Dan Ameyo, submitted that the board would carry out a forensic audit on the exports, like it had done on company sugar imports, and give its findings to the committee within six months.
79.While it was evident that the Mumias exports were questionable, the committee found it curious that the company had been given a clean bill of healthy by the auditors Deloitte and Touche. It was only after the committee investigations that Mumias Sugar Company hired a different external auditor KPMG which raised serious management shortfalls in the company and particularly as relates to sugar imports and exports which have led to top management staff being laid off. Contents of the KPMG report were not divulged to the committee despite various requests by the chair. In indeed the sugar was not exported at all, then the government lost over Sh250,000 000 in VAT.    
(iv) Production Inefficiencies
80. The total area under cane in the country presently is  203,730Ha, comprising  189,390Ha belonging to out-growers and  14,340Ha Nucleus Estates (land owned/leased by mills to grow cane).  There are 300,000 cane farmers, 4,500 of which are large scale.
81.The quality of cane as measured by pol pc  cane averages 12 compared 13.5pc in the
region. Pol pc of cane dropped from a weighted average of 11.16 in 2012 to 11.08 in 2013, due to cane harvested below 13 months. However, there was an improvement in fibre pc cane, from 17.1pc to 17.01 during the period.
82. The average yield per Ha in Kenya is 60.5MT compared to the global average of 63MT. Columbia produces 115 MT per Ha Total cane supplied for processing by mills in 2013 was 6,764,200 MT compared to 5,842,830 MT in 2012, representing a 15.77pc increase.      
83. Sugarcane yield in the industry has seen a steady decline in the last ten years
hitting a low of 51 tonnes of cane per hectare per year, attributed mainly to: high cost of    fertiliser; application of inappropriate    fertiliser combinations leading to acidic soils; use of inappropriate heavy machinery leading to destruction of cane stools and compromising the viability of the ratoon crops; exhausted soils due to many years of sugarcane cultivation, and; cane husbandry practices that do not support the newer cane varieties.
84. Harvesting techniques in concomitant with poor harvesting programmes, poor transport arrangements and poor roads result in low field operation efficiencies. Poor infrastructure in the sugar belt is a big contributor to the high cost of sugar production through spillage, heavy wear and tear on transportations units and fewer than optimal trips per day.
85. At present, there are 11 working sugar mills in the country, four of which are government-owned. The combined installed capacity of the mills is 29,990 metric tonnes of cane per day, with an underutilised capacity of 60pc due to technical, financial and management limitations. The sugar industry in Kenya supports directly or indirectly six million Kenyans, which represents about 16pc of the entire national population. The sugar industry contributes about 7.5pc of the country’s gross domestic product and has a major impact on the economies of Western Kenya and Nyanza regions and, to a lesser extent, Rift Valley. The sugar subsector is expected to equally have a major impact on the economy of Coast region once the mill being built in Kwale becomes operational.
86.The Factory Time Efficiency in 2013 improved from 76.65pc in the 2012  while the Overall Time Efficiency (OTE) a/so rose from 60.27pc to 64.13pc, which very low compared to the industry standards of 92pc for FTE and 82pc for FTE respectively.                                            
87.Sugar production increased from 503,210 MT in 2012 to 599.070 MT in  2013 as  a result of increased cane supply and better recoveries. Recoveries improved from tonnes cane/tonnes sugar (TC/TS) of 11.61 in 2012 to 11.29 in 2013.  The factory time efficiency improved from 76.65pc in 2012 to 79.98pc in 2013. The overall time efficiency also rose from 60.27pc to 64.13pc.
3.4 Obserrvations
NS Repackaging of contraband sugar
substantial amounts illegal sugar imports is repackaged into local branded bags to conceal identity and evade the surveillance network. Industrial sugars have been found repacked and end up on the market to compete with table sugar that has been subjected to full duty hence taxation.
(II)Flouting Sugar Import License Limits
Rising Star Commodities Ltd, a licensed sugar importer, is suspected of bringing in sugar beyond declared quantities and needs to be further investigated too over claims it denies Kenya Sugar Board entry into its godowns for verification. It is suspected that Rising Star Commodities repackages imported sugar into bags with Mumias brand details. During our investigations, the committee found repackaging of rice imported in lower grade bags into superior quality bags taking place in one of its godowns. The committee observed that in 2013/2014, KRA allowed into the country 15,140.40 without permits from KSB. The companies involved are; Hydrey (P) (3000MT), Krish Commodities Ltd (1,140.40), Reeswood Enterprises Ltd (4,000), Shake Distributors Ltd (6,000) and Shree Sai Industries Ltd (1000).
(iii)  Compromised Consumer Safety
Sugar auctioned by Kenya Revenue Authority is allowed back into the local market without Kenya Sugar Board verifying if for direct consumption or manufacturing. This also  goes against Kenya Bureau of Standards regulations.
(iv)Rampant false declaration
Sugar allegedly originating from Madagascar’s suspected to be from a non-COMESA country. In 2013, 10,000 MT was brought in by Mshale Commodities Ltd and Stuntwave Limited. Records at MSC indicate a total summary of all exports by MSC for the period 2006 to 2012 as (52,284MT) while the detailed itermised list to individual exporting companies total to 757,431MT which is a big variation from records held at the KRA indicating 70,431 MT as exports of brown sugar by MSC the same period. (Annex II (a) – (h), IV (a) and v (a).
(v)In addition, there has been no comprehensive verification of sugar imported from Egypt to determine if some of it is from non-Comesa region. It is suspected that sugar from the open world markets finds its way into Kenya through some companies operating Egypt.
(vi)The Commissioner-General of KRA and the Inspector-General of Police both lack capacity to fully deal with illegal importers of sugar at the ports. They lack up to date facilities and equipment to detect and identify sugar imported illegally.
(vii)  Illegal ports of entry
The committee’s investigations also found out that there is a port of discharge in Shimoni Port, which is being used as an illegal entry point. Customs officers and police are undoubtedly aware of the vice. Repackaging takes place in Msambweni, Ukunda, Bomani village, Bodo and Majoreni areas. This should be investigated as a matter of urgency.
(viii) There is lack of proper coordination between KSB, KRA,KEBS and KPA in handling and verification of imports creating loopholes for sugar being imported as other commodities
 (ix) KSB, KPA and KRA lack sufficient equipment capacity to scan and verify     contents of incoming cargo
(x) The Kenya Sugar Board has contiguously issued  Mumias  Sugar  Company licence to import sugar even at a time when there is a lot sugar cane lying in hundreds of hectares of farms unharvested.
(xi) The Kenya Sugar Board has continuously awarded Sugar Levy Funds and Cane  development fund to millers with no cane  development schemes room for  unlevelled competition ground - more cash at hand (small millers) versus less cash (big millers)
Chapter 4
4.0 Recommendations of the Committee
Subsequent    to    the    committee   findings    and    observations,    the    following recommendations that will streamline the sugar sub-sector are proposed.
(i)Enhance both farm and factory production efficiencies Kenya needs to implement the sugar industry strategic agenda for increased competitiveness and reduction in consumer prices. There is need to lower production cost, improve extensions among others 1 reduce and eventually eliminate the incentives to smuggle sugar into the country
(ii)Establishment of multi-agency anti-smuggling unit Kenya Sugar Board is unable on its own to police the sugar market. The sugar regulator lacks capacity to man borders and enforce its mandate as a regulator. The country needs to establish a permanent inter-agency enforcement unit on sugar trade to increase scrutiny and monitoring of crossborder trade and step up border patrols to eradicate sugar smuggling. The unit should draw membership from KPA, public health, KSB, KEBS, the police and KRA.
The agency will, if formed check illegal imports that enter the market concealed as other low value commodities such as rice, pasta or even fertiliser. The committee recommends a 100pc verification of all granular imports through our formal entry points should be undertaken, and that auctions of sugar at the port should be stopped forthwith.
(iii)Companies that cleared through KRA without permits from KSB should be banned
 from importing sugar into the country. They include Hydrey (P) Krish Commodities Ltd, Reeswood Enterprises Ltd, Shake Distributors Ltd and Shree Sai Industries Ltd. Equally, KRA should be reprimanded for clearing the sugar without permits and officers responsible should be punished accordingly.
(iv)The then Kenya Sugar Board chief executive officer, Rosemary Mkok should be relieved of her responsibilities for failing to  discharge her responsibilities effectively in regulating the sugar subsector as per the existing regulations. In particular, she should be held accountable for issuing an operating license to West Kenya Sugar Company in complete disregard of the law. Thorough investigations should also be carried out to determine the role she played in the registration of Butali Sugar Mills in complete disregard also of the regulation on zoning.
(v)Licences for West Kenya Sugar Company and Butali Sugar Mills should be suspended until both millers prove they have developed sufficient cane to sustain their operations to reduce cane poaching.
(vi)Formulate and develop a value chain management strategy and amend the Sugar Act:                                                         
A central marketing body similar to the Mauritius Sugar Syndicate should be formed to contain unnecessary inter-mill competition, which propagates distortions. At the current ex-factory price of Sh3,600 per 50kg bag (Sh72 a kilo) retail outlets continue to sell sugar to the consumer at Sh125 per kg, a difference of Sh52. This benefit is not cascaded to the miller, consumer, retailer or tax collector but middlemen of sugar marketing.       
(vii)Laws governing the regulation of sugar imports and exports should be amended      to provide for higher accountability standards for repackaged sugar and for stiffer penalties for offenders. The new regulations should demand for people labeling indicating date of manufacture, name and address of manufacturer, country of origin, batch number for purpose of traceability upstream and downstream the value chain.
(viii)Review repackaging regulations to guarantee consumer safety
Sugar is a product that impacts on health and safety and enforcement of requisite standards, products inspection and quality assurance squarely falls on KEBS. However, a number of leading supermarkets and retail outlets in the country and who are not licences sugar manufacturers or importers are repackaging sugar in own brands contravening the KEBS standards. Samples taken by KSB have failed to meet legislated standards and action taken. This calls for stringent measures to regulate repackaging of local end imported sugar.
(ix)KEBS should device a mechanism for ease of detection of fake symbols and lebels on all the approved goods
(x)Tax reforms on sugar and tax break to investors
Kenya should retook its taxation regime to reduce the price of sugar in the domestic market, which is at present very high relative to those in neighboring countries. At present, VAT is charged on the sugar development levy, constituting double taxation. This has the effect of making the local market an attractive destination for sugar imports whether legal or illegal.
The committee therefore recommends that the government should consider offering tax breaks to encourage new investors into the sugar industry. Additionally, duty waiver for sugar industry farm inputs and farm machinery will go a long way towards reducing the high cost of sugar production.  
(x)Infrastructure development to reduce operational and overheads costs
Feeder roads remain largely unattended due to poor coordination between various agencies that support infrastructure development, such as KeRRA, LATF, CDF and the county governments. This tends to spread resources too thinly for substantive infrastructure development. The committee recommends that the national government should provide mechanism for coordinated infrastructure development to avoid duplication of responsibilities by different bodies mandated to maintain roads as well as coordinate donor support in the roads sector. Coordination of all these efforts targeting infrastructure will ensure sustainability in maintenance of rural access roads in the sugar belt.
 (xii)Land tenure system
Population growth has consistently played a negative role on land holding patterns in the core sugar belts. The existing land tenure system is retrogressive as it has seen a steady decrease in land sizes through sub­division. The government should implement the National Land Policy to mitigate further land subdivision for improved productivity. These uneconomically viable land units make operational costs high eating into cane farmers and millers mark up.
(xiii)Fertiliser subsidies for the sugar sub-sector
Selective fertiliser subsidies targeting the cane production is recommended to reverse the worrying trends in productivity occasioned by the factors outlined above. This measure will enhance cane production per unit area to international industry standards, and thus make local sugar industry more competitive. The subsidy should be complemented by bulk procurement of subsidised inputs and capacity utilisation.                    
(xiv) Investigate market operations of Mumias Sugar
While production and performance improved in general in the year 2013, it is notable that there was a decline in area under the cane in Mumias zone. The government should commence investigations as to why performance within Mumias Sugar growing zone has been declining in the recent past and take corrective measures to present further deterioration. In particular, the government should also investigate Mumias Sugar Company dealings with certain importers and large distributors to unearth possible engagement in underhand-deals and other market malpractices.
Specifically, the government should investigate business relations between MSC and Czarnikow Sugar EA, ED and Man Sugar Ltd, Rising Star Commodities Ltd, YH Distributors, Kambale Nzagale of (DRC). Osman Adan and Nestredin Mohammed of (Ethiopune, S and G General Suppliers, Star General Suppliers and Mugabe Thomas of Rwanda, Mega Laser International, Manyuon Samule Deng, Mid Africa, Southern Sudan Mudland Co Ltd. Kapoeta Trading Co Ltd and International Relief Service of Southern Sudan, Aura Mercantile Co Ltd. Trident Investment Ltd and Uchumi Commodities (Uganda) Ltd of Uganda among others. (Annex 11-ah).
In view of the fact that MSC made exports to the regional markets through various companies mentioned above, there is glaring disparities between records from MSC and the respective exporting companies. For example, Nesredin Mohamed of Addis Ababa wrote to MSC to purchase 5000M7 for export and the records from MSC indicate a summary total of 5,882MT which still has a bigger variation from the detailed records submitted by MSC indicating a total of 117, 641MT having been traded by Nesredin Mohammed as exports to Ethiopia between 2006 and 2009. Records at MSC indicate a total summary of all exports by MSC for the period 2006 to 2012 as (52.284MT)while the detailed itemised list to individual exporting companies total to 757/131M|F which is a big variation from records held at the KRA indicating 70,431MT as exports of brown sugar by MSC the same period. (Annex II (a) - (h), IV (a) and V (a))
The    government    should    recover    from    the Sh250,000,000 in realisable VAT and that the then managing director, Evans Kidero takes full responsibility for the fraudulent transactions. Kidero should as a consequence be barred from holding public office as the fraudulent transactions took place his watch. Equally, owners of all the trucks that ferried the sugar from Mumias godowns supposedly for export and companies associate with them, namely YH Wholesalers, Peleah Stores Ltd. International Relief Services and others should be investigate and made to pay for their complicity in the fraudulent exports.
(xv) The committee recommends introduction of landing certificates for all transit sugar as a confirmation of physical exit to stop any diversion and must be accounted for diversion and repackaging godowns in Mombasa. Mariakani, and even Nairobi, Eastleigh area have been identified with prominent personalities quoted as orchestrating the vice. Substantial stocks of repackaged sugar have failed quality tests confirming they are not of local origin
(xvi)The committee recommends that Kenya Sugar Board management be punished/prosecuted whenever they disregard the law (Sugar Act 2001) and he property of managers responsible be attached to compensate for any losses.