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Kenya’s Ailing Sugar Industry Gets Boost from MIGA

May 10, 2007—A recent MIGA study found that foreign investors are increasingly looking to Kenya as a regional business hub in sub-Saharan Africa. A well-developed port system, membership in the Common Market for Eastern and Southern Africa (COMESA) and the East African Community (EAC), and a motivated workforce are some of the attractions Kenya offers to investors lured by the untapped potential of the vast African market.

After decades of poor growth and governance problems, the last five years have seen Kenya moving toward economic recovery, driven largely by agriculture, the service sectors, telecommunications, and tourism. And yet, Kenya is far from achieving its full development potential. Constraints to business, such as the cost of infrastructure services, a heavy regulatory burden, and insecurity and corruption, still make it difficult for the country to attract investment into sectors offering the highest potential for job creation and sustained economic recovery.

World Bank Targets Kenya’s Development Challenges

The World Bank is helping Kenya by focusing its assistance on improving the environment for investment and growth; promoting private sector development; improving infrastructure; and reducing barriers to trade. MIGA has been a strong supporter of the Bank’s country assistance strategy in Kenya, providing political risk insurance to protect the investments of foreign investors keen to tap into a promising market and to contribute to Kenya’s economic renewal.

In Kenya, MIGA has supported the design, construction, and operation of a 48 MW geothermal power plant, and the construction and operation of the first modern bulk handling and storage facility for imported grains and fertilizers in the port of Mombasa. More recently, MIGA has demonstrated its commitment to helping Kenya generate jobs and reduce rural poverty by supporting the rejuvenation of an ailing sugar industry that has failed to keep up with demand.

Greenfield Sugar Plant to Support Small Growers

Four out of six operational sugar mills in Kenya are mainly state-owned and plagued with a host of problems—preferential pricing regimes and protected markets, lack of market reform and policy strategies, poor road infrastructure, lack of credit for small-scale farmers, high production costs, outdated technology, and excessive middlemen. The lack of inward investment has led to the industry’s decline, as local farmers, who relied on income from the cultivation of cane at one time, have turned to subsistence farming. In the Kisumu region, the closure of the Miwani mill in 2001 and the subsequent neglect of sugarcane production impacted the local economy sharply. 

The Kenya Sugar Board, which regulates, develops, and promotes the sector, is actively encouraging private investment in the sugar industry in Kenya, and has made strong recommendations to restructure or privatize government-owned mills. It was in this context that Industrial Development Corporation of South Africa Limited and a UK-based businessman, R. S. Chatthe, proposed the establishment of Kibos Sugar and Allied Industries Limited, a greenfield sugar factory and 3,000 hectares of irrigated sugarcane.

The factory, set to open in late 2007, will also support small growers in the area who currently experience high losses while transporting their cane to factories further afield. Total mill production is expected to be 50,000 tons a year, thanks to new technology and an experienced team to manage the project from inception to operation.

The enterprise was also financially attractive to the investors due to the competitive advantages of economies of scale and low capital outlay. The one thing stopping the investment from going forward was the prospect of noncommercial risks such as expropriation, transfer restriction, and war and civil disturbance. This is where MIGA stepped in. MIGA agreed to guarantee up to 90 percent of the equity and about 95 percent of the investors’ non-shareholder loan to Kibos Sugar and Allied Industries Limited by issuing $6.7 million in political risk insurance.

MIGA Allays Investor Concerns about Political Risk

“Perceptions of risk by investors and bankers can be a major obstacle to investment. MIGA’s risk mitigation tools can play an important role in securing foreign direct investment, spurring economic growth and employment in developing countries,” says Yukiko Omura, MIGA’s Executive Vice President. “Projects that aim to reduce poverty in sub-Saharan Africa; strengthen rural communities; support the development of the private sector; and encourage investments between two developing countries (South-South investment) are in line with MIGA’s priorities.”

“Foreign investment can play a critical role in a country’s development by introducing modern technology and management methods, and by linking the country with the global economy,” adds Nkem Onwuamaegbu, underwriter for the project. “We were interested in this project because it really took aim at improving the Kenyan people's quality of life.”

Charles Midigo, who farms over 19 hectares of land in Kibos, had switched to subsistence crop farming (maize, cassava, and potato) after the closure of the local mill in Miwani. The move had proved to be volatile financially due to market and price fluctuations. Thanks to the Kibos sugar project and the switch back to cane cultivation, Mr. Midigo expects supply-side risks to be virtually eliminated and his profit margins to double. Many farmers like Charles Midigo have already signed contracts with the project, says Elisha Ondango, chairman representing 32 cooperative societies of cane producers in the Miwani and Kibos zones.

The project looks poised to take Kenya one more step toward revitalizing its sugarcane farming industry. Self-sufficiency in sugar production may help drive much-needed economic growth in the country—the very reason that MIGA got involved with the project in the first place.

 

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