Are ALTA Rents Fair - 09 Appendix 2

The partnership of Booker McConnell with the Government of Kenya in the Mumias Sugar Company (M.S.C.) has been described as one of the most imaginative and successful examples of transnational private participation in agricultural development. It provided productive employment for an area of the country previously neglected, was highly labour-intensive in its operations, made up a deficit in supplies of a major food that would otherwise have had to be imported, and paid over to the government in taxes a substantial part of its gross income. Even Susan George in her critique of the multinationals how the other half dies (Penguin Books 1976) had only good words for Mumias Sugar.

Traditionally Kenya has imported much of its sugar. Consumption was growing by more than 7 per cent per year when, in 1965, the Ministry of Agriculture prepared a sugar project for the Nzoia river valley. The climate was suitable; also the region though quite densely populated was very underdeveloped.

Booker Agriculture International (B.A.I.) had been set up by the sugar processing and marketing firm Booker McConnell following the nationalisation of its operations in Guyana. It had a subsidiary Fletcher and Stewart that built sugar processing plants and machinery'.

Following an approach by the Government of Kenya, Booker Agriculture International, drew up a project plan for a 3300 ha nucleus estate and an outgrower component. The Mumias Sugar Company was formed in June 1971. The factory began operations on July 1, reaching its designed capacity by September the same year. Between 1977 and 1979, factory capacity was more than doubled, from 125 to 300 tons of cane per hour. By 1979 Kenya achieved self-sufficiency in sugar with Mumias providing 45 per cent of its supply.

Mumias Sugar Company was established as a commercial corporation with 3500000 authorised shares of 20 Kenyan shillings each. Booker Agriculture International took 5 per cent at the insistence of the Kenya Government to ensure that it had a financial interest at stake. Details of the shareholdings and loan capital in 1974 and 1981 are provided in Table 4.8.

In addition to carrying out a pilot project and performing a major design role, B.A.I. had a managing agency agreement with the Mumias Sugar Company. This, along with the contract to supply the sugar factory, was Booker's main reason for going into the project. B.A.I.'s remuneration had three elements:

	End 1974	End 1981
Authorised shares of K.sh.20/-	3,500,000	12,000,000
Shares issued and fully paid	2,900,000	8,500,000

	$	$
Kenya Government	3,800,000	8,421,000
Commonwealth Development Corp.	661,000	2,044,000
Kenya Commercial Finance Co.	498,000	595,000
East African Development Bank	276,000	314,000
Booker McConnell Ltd	276,000	526,000
Total share Capital	5,511,000	11,900,000
Loans and advances	4,560,000	21,284,000
Profit and loss account	793,000	(108,000)
Total capital employed	10,864,000	33,076,000

Conversion rates 1974 K20sh = $1.90: 1981 K20sh = $1.40

The outgrowers' farms were small. It was considered socially desirable to use no more than 50 per cent of their area for sugar cane so that food supplies could be maintained. The Company grouped together individuals' cane plots to make stands of cane no smaller than 6 hectares. This enabled machines to be used economically for deep ploughing and other heavy land preparation work. Cane transport costs could also be kept down in this way.

Disease-free planting material and fertiliser were supplied to each grower on credit and each farmer was then responsible for his own planting, weeding, and fertilising. However, Company representatives visited the plots regularly to advise farmers and harvesting was carried out by the Company. This control was essential to maintain the necessary regular volume of cane flow to the factory. All cane, both on the nucleus estate and on outgrowers' farms was cut by hand which provided more employment than mechanised methods.

This relationship between the Sugar Company and the growers was covered by a contract and at the end of 1981 17,474 farmers had signed contracts with the Sugar Company. The outgrowers' scheme was a clear success. The difficulties came up on the marketing side.

The participants in the project knew there were risks on the production side, but the market seemed clear: Kenya was in deficit for sugar; its expanding population would take up whatever could be produced M.S.C. was to sell output to the Kenya National Trading Corporation at a price fixed by Government. The Corporation was obliged to buy all of M.S.C.'s production. Nevertheless, the problems came up on the market side. On occasion the Corporation found itself unable to take delivery of sugar already manufactured. M.S.C.'s own operations had then to be shut down temporarily for lack of finished sugar storage space.

Most serious for the Company was the Government's unwillingness to raise the price paid for sugar in spite of inflation. Between May 1977 and April 1981, despite repeated requests from M.S.C., the Government kept prices constant. The Company was forced to subsidise cane farmers' operations. The cane and sugar price increases approved in 1981 were 12.8 per cent and 9.8 per cent respectively, while over the same period the general rate of inflation was 48 per cent. The impact of this on M.S.C. can be seen in Table 4.9. Net profits before tax dropped from over $5000000 in 1977 to a loss of $108000 in 1981. Yet production had been raised by 90 per cent to 167400 tons. In his 1980 and 1981 annual reports, the Chairman, Professor George Saitoti, summed up the situation as follows:

(1980) The Company’s cash resources have suffered over the past three years from diminished profits due to the lack of a price increase and the need to subsidise the farmers. In view of the present liquidity position, the directors have recommended no dividends for 1980. It is deeply regretted that, due to circumstances outside management control, shareholders will be denied the reward of their successful investment.

(1981) The Company's cash position continues to be highly unsatisfactory' and survival was possible during the year only by taking excessive credit on the payment of the sugar excise.

Any private Company's operations in any country are exposed to the unfavourable effects of changes in policy or regulations by the Government. B.A.I. had minimised these risks by entering into a partnership with the Kenyan Government to pursue common economic and developmental goals in such a way that both Company and Government were rewarded if objectives were achieved. Unfortunately, the pressure of outside events, particularly increases in the cost of imported oil, resulted in the Government seeking every possible means to keep down price inflation, especially in basic food items like sugar. While the Government as a major shareholder had to forego dividends along with the others, and received no tax on Company profits because there were none, it continued to collect the excise duty. So, even after allowing for devaluation of the Kenya shilling, it took out more in dollar terms than in previous years.

Table 4.9. Summary operating results: Mumias Sugar Company 1977, 1979, and 1981.

	1977	1979	1981
	$ thousands
Gross turnover	29,780	40,848	48,847
Excise tax	7,936	10,490	11,831
Net turnover	21,844	30,358	37,016
Payment to growers	6,152	10,042	14,197
Profit (loss) before taxes	5,738	276	(108)
Income tax	2,527	(467)
Profit (loss) after tax	3,211	743	(108)
Equity	17,547	17,334	14,069
Profit after tax as percentage of equity	18%	4%
Dividends	2,430	1,620
Dividends as a percentage of equity	14%	9%
Tax revenue to government	10,463	10,490	11,831
Nucleus estate cane (hectares)	3,300	3,300	3,300
Outgrowers cane (hectares)	9,900	15,400	24,300
Cane crushed (tons)	697,000	975,000	1,566,000
Sugar produced (tons)	81,275	109,800	167,400
Annual increase in production	28%	19%	2%
Registered farmers	9,372	13,113	17,474
Permanent employees	3,521	4,108	4,936
Seasonal employees	89	5,282	9,218

The Company was profitable from the first six months of operation. This was due to higher cane yields, higher factory capacity utilisation, and lower costs than had been forecast. The social cost-benefit analysis has also been very favourable, mainly because of the boom in world sugar prices during the early years of the project. By the end of 1974, a mere 18 months after production began, the project, based on the opportunity value of sugar at world price levels, had completely)' paid for itself. Sugar prices have fallen since. However, B.A.I. management estimate that Mumias has the lowest production costs of any sugar project in East or West Africa.

Almost 5000 permanent and more than 9000 seasonal jobs have been created, and almost 17500 farmers are now receiving cash incomes who were not before.

Company employees have benefited from organised training at the apprentice, technician and management levels. By 1978, out of 102 management employees, only 17 were expatriates. In accordance with the original agreement, B.A.I. was to withdraw at the end of its fixed term management contract and Kenyans would take over complete managerial responsibility.

It is said that the project furthered inequality in land holding and incomes among the farmers concerned, led to relative neglect of traditional food crops and to social deficiencies deriving from rapid access to wealth. These criticisms cannot, however, be pressed very far. They are based on hindsight on a project that succeeded beyond all expectations.

For Booker McConnell the payment by results contract proved very favourable. Its management fees averaged a $1.7 million over the years 198O~2. This was about 3 per cent of gross turnover - not high, however, considering the initial management risks, the success achieved and the part played by its management in achieving it.

It was also a step to other such contracts in Somalia and Papua New Guinea, and eventual takeover of a majority share in the International Basic Economy Corporation (I.B.E.C.) of New York.

Annual output		Percent of net revenues
less than 45,000 tons		0.0
45,000 - 50,000 tons		0.5
50,000 - 55,000 tons		1.5
55,000 - 60,000 tons		3.0
60,000 - 65,000 tons		4.0
more than 65,000 tons		5.0