Made in Brazil, packed in Kenya: How tariff windows feed Kenya's sugar cartels (Daily Nation (Kenya))

Has Uganda been re-exporting into Kenya the sugar it imports duty-free from Brazil? Do the Ugandans really have a sugar surplus as they claim? These two questions are at the heart of the controversy over sugar imports from Uganda, yet if indeed Uganda is re-exporting sugar into Kenya, then what the political opposition should be fighting for is stricter inspection of imports from Uganda for compliance with rules of origin under the East African Customs Union.

So far – and despite the polarised debate among the political elite as to whether President Uhuru Kenyatta signed away major concessions on sugar imports during his recent visit to Uganda – there are no indications that the stipulations on rules of origin have been eliminated, or even relaxed, from Uganda sugar imports.

Neither has Kenya waived the regime for issuance of import permits, a major non-tariff barrier the Ugandans have been complaining about. What has created a major loophole that sugar barons have in the past exploited is what is know as stay of application of the East African Common External Tariff.

In 2011, East Africa experienced major sugar shortages which saw domestic prices in Kenya rise to an unprecedented level of S0,000 per 50-kilogramme bag. In the wake of the shortages and the high prices, Uganda and Tanzania decided to go to the EAC headquarters in Arusha, where they negotiated to be allowed to import duty-free sugar from India and Thailand in order to stabilise domestic consumer prices.

STAY OF APPLICATION

The EAC council of ministers allowed the two countries to import specific quantities and within specific time frames. On its part, Kenya decided to punish its consumers by allowing the high sugar prices to reign.

A perfect environment had been created for the sugar barons to collude with local producers and networks in Tanzania and Uganda to import quantities way beyond what had been agreed on in Arusha, and to re-export the surplus into Kenya so as to take advantage of the high consumer prices.

The barons came up with schemes to re-export what was supposed to go to Tanzania and Uganda under the stay of application arrangement. Large quantities of sugar entered Kenya through Kisumu, Lunga Lunga and Taveta border points.

Which begs the question: since all sugar imports from Brazil were transiting through Mombasa, wasn’t Kenya in a position to discover that Uganda had exported more sugar from Brazil than the allocation allowed under the stay arrangement?

It was to emerge from the paper trail that, in some cases, the names of Mombasa-based companies involved in facilitating the transit of sugar from Mombasa into Uganda were the same ones appearing in the documents as the buyers of the sugar coming in through Kisumu via Lake Victoria.

When Kenya complained, a Comesa delegation that included officers from the Kenya Sugar Board and comprising technocrats from the standards bureaus of both Kenya and Uganda was sent to Uganda to investigate whether Ugandan millers were stocking sugar from Brazil.

It all exploded into a big tiff between Kenya Revenue Authority (KRA) and Uganda Revenue Authority (URA). KRA had noted an inexplicable drop in tax receipts from sugar imports. When the investigations team visited Uganda, it emerged that three sugar barons had imported 100,000 metric tonnes from India despite the fact that the stay granted by the EAC council of ministers had only allowed Uganda to bring in 37,000 tonnes.

One of the big millers was found to be holding 26,000 tonnes in its godowns. Even though the issue was resolved, large sections of the sugar-growing fraternity in Kenya still refuse to accept that Uganda has surplus sugar.

On joining the East Africa Community in July 2009, Rwanda had to raise tariffs on sugar from 30 per cent to 100 per cent under the common external tariff. But since it is a net importer, and in order to stabilise local prices, Rwanda has had to apply for stay of application for sugar ever since.

In 2010, Kigali was permitted by the council of ministers to apply a lower 25 per cent tariff for 40,000 tonnes for six months. When that period expired, they were allowed another window from October 2012 to December 2013, throughout 2014, and finally for a period of one year from June 2015.

These windows, frequently granted to member states by the East Africa Council of Ministers, appear to be the oxygen feeding the sugar smuggling cartels in the region.

ROGUE MERCHANTS

It is an open secret that uncustomed sugar from non-Comesa countries is regularly dumped into Kenya. Today, industry insiders believe Egypt, a member of Comesa, is routinely used by barons as a conduit for sugar from Brazil, India, Thailand and Pakistan.

And how does smuggled sugar get into Kenya? How does it get into the distribution channels?

The suspicion is that it is smuggled into the country through under-invoicing, understatement, false description and abuse of rules of origin. Smuggled sugar is then re-bagged in Nairobi and sold through distribution channels in bags branded, especially, as Mumias Sugar.

Last year, Kenya Sugar Board officials stumbled on a network of merchants doing brisk business in selling branded Mumias Sugar bags. It was a rare revelation of the existence of a booming parallel market for sugar dumped into the country and deceptively re-bagged and branded as locally produced. Does it surprise that in places like Eastleigh in Nairobi, Mumias Sugar sells at prices much lower than ex-factory prices?

The situation is compounded by the existence of multiple parallel distribution markets and domination of the supply chain by a few players.

The best, and perhaps most comprehensive, record of the machinations and exploits of the barons who dominate this business is contained in a recent forensic audit by KPMG on Mumias Sugar.

That report revealed how sugar from the largest local producer, with a market share of nearly 20 per cent, was distributed by a handful of barons under an opaque arrangement that allowed the clique to double as the company’s financiers.

Currently, a well-connected private miller is reportedly lobbying the National Treasury to allow him to import raw sugar from Saudi Arabia, ostensibly because he has put up a white sugar refinery plant.

His argument is that since white sugar is allowed into the country duty-free, he is justified to get similar tax treatment. If the National Treasury accepts his request, the stage will have been set for yet another parallel market.