Wednesday, August 04, 2021 / 02:30 PM / by
AbdulQudus Isiaka, Proshare Research/Header Image Credit: EcoGraphics
Nigerians have become unstuck in a large domestic sugar market that fails to deliver. Commodity market analysts have noted that the three largest suppliers of the commodity have serially missed the annual sugar production targets set by the national sugar master plan in 2013. Indeed, commodity specialists have noted that the sugar plan has been met more in its breach than compliance. It has also been observed that in the absence of drastic measures, the country would likely remain an importer of sugar up until 2031.
Disappointed industry watchers have expressed surprise at the Central Bank of Nigeria's (CBN's) recent decision to approve special licenses for the import of sugar by the country's three largest sugar millers; Dangote Sugar, BUA Sugar, and Golden Sugar Mills.
The CBN's approval was according to one market analyst "giving carrots to a donkey for bad behaviour". According to the analyst that works for one of the big three millers, but requested for anonymity because he was not officially authorised to speak on the matter, "the sugar business requires a reset and a masterplan rethink. The current 2013 plan projected that by 2020 Nigeria would be a marginal exporter of sugar but this has not happened, so a new way needs to be fashioned that is devoid of unhelpful public policy nuances. Putting a Volkswagen Bettle engine into a Rolls Royce is fanciful but only clever by half, you get the Rolls Royce body without its engine performance. The old masterplan needs to give way to a new plan that contains high performance milestones and fresh commitments with penalties for failure".
The Sugar Master Hiccup
Crafting a National Sugar Master Plan (NSMP) was the fallout of the Nigeria's huge import bill which left a perpetual strain on the country's foreign reserves and hurt the external value of the Naira. In 20212 this led to the fiscal and monetary authorities to act quickly to identify commodities whose import could be substituted. Items identified included flour, cement, and sugar.
The substitution strategy took into account the fact that Nigeria had the ninth largest stretch of arable land in the world and the largest irrigable expanse of land in Africa. Despite this fact, Nigeria appears to have shown weakness in taking advantage of its natural competitive advantage in agricultural and agribusiness and sacrificed it on the shaky alter of the export of fossil fuel. With increasing oil price and volume uncertainty in 2021, a growing climate awareness and greater global attention to environment, society and governance (ESG), the neglect of the agricultural sector is biting Nigeria in more ways than one, including the poor development of the domestic sugar industry. The local industry has been caught in a web of private sector indolence, public sector indifference and household consumer helplessness.
In 2012, the Federal Government set up the National Sugar Development Council (NSDC) to develop a blueprint for the sugar industry with the principal objective of achieving sugar self-sufficiency within ten years, thereby reducing the volumes of annual importation. Ultimately, the plan was expected to take advantage of the vast opportunities along the sugar value chain to create several jobs. The plan also promised to contribute to the production of ethanol a commodity that could prove to be useful in generation of electricity in the country (see illustration1 below).
Illustration 1: Drivers and Objectives of the National Sugar Masterplan.
To achieve the set objectives, the government provided a set of fiscal incentives including a concessionary 5% sugar import levy and 5% duty for raw sugar import to incentivize investment in the local sugar value chain and to spearhead the renaissance where existing major players/importers like Dangote Sugar, BUA, and FMN who got encouraged to increase their stake in the entire sugar value chain.
The plan was based on a backward integration plan meant to give teeth to the government's import substitution strategy involving millers and refiners growing and managing 250,000 hectares of new sugar farmlands in addition to:
Annual consumption was projected to grow from 1.41MMT in 2010 to 1.75MMT in 2020 there would be up to 0.047MMT available for export by 2020. All these were expected to eliminate sugar imports and at the same time increase the number of permanent jobs along the sugar value chain from 1750 to 37,378.
How the Numbers Stack Up
As of 2016, when the plan was three years old, BUA had yet to produce a grain of sugar, despite the company's pledge to produce 15,600 metric tonnes of sugar. Dangote produced 20, 200 metric tonnes, or 28% of the 72, 000 metric tonnes it committed to producing, whereas Golden Sugar produced 800 metric tonnes, or 1% of the 57, 750 metric tonnes it should have produced. By 2017, the most significant achievement recorded under the BIP implementation was recorded with the launch of the $64billion Sunti estate and factory established by FMNL, set out on 17,000 hectares, 3000 of which were already under cultivation having a 4500MT daily capacity.
In 2018, investments in the sugar sector of the national economy reached N157b, with BUA's Lafiagi, Kwara State farm (due for completion in Q1 2022) being the single largets investment. The estate has a 20,000- hectare sugar plantation capable of producing 10,000 MT. More recently, Dangote Sugar in partnership with the Nasarawa State government recently launched the Nasarawa farm.
While some progress has been seen with respect to setting up raw sugar processing plants, stakeholders and analysts alike have expressed concerns about the slow pace of development in terms of cultivation of the sugar plantations as well as the actual refinery of raw sugar into white/table sugar. The Sugar Master Plan expected that by 2020, 224,000ha of cane area would be in cultivation (see Table 1).
However, as of present the total domestic production of sugar is a long way from the NSMP target.
...And then came the free-for-all in the free zone
As an aside, it took the intervention of the Kano State Governor, Abdullahi Ganduje, to bring about a truce between the proprietors of two major players in the local sugar industry, Aliko Dangote of Dangote sugar and Abdul Samad Rabiu of BUA when both capitalists squared up in what was widely reported as the sugar war. In a scathing memo to the minister of trade and investment, Dangote along with FMN accused BUA of deliberately undermining the BIP. Analysts, however, believe that what was of greater concern to the industrialists was the fact that BUA seemed to be leveraging its location in the Bundu free trade zone in Port-Harcourt to import raw sugar without paying import duties, and then processing and unlawfully selling a portion of the processed sugar to the Nigerian market hence raising the market supply and a downward pressure on local prices.
The trade minister in a letter (HMITI/GEN.CORR/008/VOL.1/) dated 10th February 2021, ordered BUA to clear itself of the accusations (see illustration 1)
In a 24-page response BUA denied the accusations responding with a counter allegation, BUA accused other players of paying lip service to the Sugar Master Plan, according to the company it was the only one of the three major players to own an integrated factory that included a plantation, sugar mill for crushing canes, a refinery to produce refined sugar, and an ethanol plant. Rabiu claimed that all other millers only had sugar mills that were not capable of producing sizable quantities of refined sugar (See illustration 2).
Illustration 2: Sugar Cane Deconstructed
The thrust of the BUA argument was that while other players chose to cater to the needs of industrial consumers by providing un-refined sugar, it was going a step further to refine sugar, a choice which implies that the pace, size and cost of setting up their factory would be higher (See illustration 3).
Illustration 3: Understanding the NSMP Sugar Value Chains
While the National sugar masterplan recognizes the two types of processors - Sugar millers and Distillers/refiners- separately, it failed to take the differences into account when setting its domestic production/import substitution timelines.
Although the two Kano sugar moguls may have settled their rift it was not long after that the Nigerian Ports Authority (NPA), banned the importation of refined sugar and its by-products through all Free Trade Zones (FTZs). That episode raised questions about the commitment of the the stakeholders. The fact that the plan identifies millers and distillers as processors when the cost outlay of both vary widely is a source of concern.
Jumping Through Hoops
It has been obvious that the Backward Integration Plan (BIP) under the NSMP has had a poor run, and this could partly be responsible for several factors leading to low investments in the sector, including:
The Absence of Patient Capital
The Sugar farm takes an average of 4-6 years to thrive, this is because, unlike many other agricultural products, it is planted through grafting which requires that a sugar nursery is first established before the seed canes are re-planted. In this period, funds are tied down without generating revenue for the farmer. Given the fact that there are several other business ventures with a shorter pay-back period, Investors are not pre-disposed to waiting for so long to make returns on their funds.
The Ghouls of Risk
As is usually the case with agri-business, the risks of running a plantation and the adjoining processing plant are many ranging from pests, flooding, bush fire, to drought. Investors are therefore faced with the possibility of losing a fortune from damages. Since, processing plants have to be purpose built, any drastic shortfall in the output of the farms also affects the viability of the plants.
The Long Road to Land Acquisition
Progress of the NSMP is being held back by the lack of preparedness on the part of the governments of states and the host communities to sell arable land. A case in point was the proposed sugar estate in Zaria Kalakala, Kebbi State, which was stalled by the over-bearing influence of some top politicians necessitating the revocation of the land titles after the company had begun perimeter fencing, topographical, and soil surveys. Another instance was that of Golden Sugar Estate, Sunti, which incessantly suffers community hostilities requiring police intervention.
Authorities Racing with the hare and hunting with the hound
The sugar Masterplan is a lustrous document, but as always, policies in the public sector buckle when it comes to implementation. With just two years left to the end of the NSMP, Nigeria still ranks as one of the top five importers of sugar in the world, however the NSDC, now and again pats itself on the back, claiming that the country is on track to achieving the objectives of the programme. As if to support this erroneous assertion, the CBN in a recent circular (TED/FEM/PUB/FPC/01/006) issued on July 16, 2021, asserts that having made what is referred to as 'reasonable progress' Dangote, BUA, and FMN would be granted exclusive sugar import licenses (See illustration 4).
Illustration 4: CBN Memo licensing sugar importation
The federal government, according to analysts, has made several unorthodox decisions over the last six years but handing over import licenses to sugar manufacturers who were expected to produce the commodity locally in line with the master plan is as queer as they come. The few players in the sugar manufacturing business underscores its oligopolistic nature of the upstream end of the local business mirroring the narrow competitive structure of the cement business which sees nearly the same actors as major rivals.
With closely protected networks of oligopolies shaping the local commodities landscape, a growing number of economists are raising heckle of production and import concessions in the hands of a narrow band of Nigerians, thereby skewing further an already highly biased wealth structure. They note that the consequences of a K-shaped rebound of the economy from the COVID-19 recession could lead to major socioeconomic unrest in months to come. In an environment of privilege, power and patronage nothing sweet would likely come from the scuttled and largely ignored sugar master plan; reality would seem to be as bitter as that.
5. PDF: Nigerian Sugar Master Plan
7. Inside the Dangote, BUA sugar war - Premium Times - Apr 09, 2021
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