1. AN ASSESSMENT OF THE STRUCTURAL AND POLITICAL ECONOMY ISSUES IN THE ZAMBIA SUGAR INDUSTRY Simon Ng’ona Centre Coordinator CUTS International Lusaka 30 th July, 2014

2. How many love or hate sugar?

3. Presentation Outline  About CUTS International Lusaka  The Felt need  Research Objectives  Research Method  Findings

4. About CUTS International  CUTS Lusaka was established in Zambia in 2000.  Functions as a centre of “Excellence for Policy Research, Advocacy and networking  “CUTS has distinguished itself through its stress on consumer – producer synergies for sustainable increase in consumer welfare, given that the ordinary consumer is not just a functional unit but an actual human being whose welfare and growth depends significantly on their association with economic production and the income generating opportunities arising from such association”.  The CUTS does realize that despite having diverse and sometimes conflicting interests, different stakeholder groups should be brought together through institutional arrangements possessing norms, rules and procedures which can facilitate convergence of expectations.

5. “The Felt need” There have been several concerns about the market structure as well as the prices of sugar in Zambia This led to the sector being the subject of discussion and research over the past years. Why?????? Sugar is a widely consumed product – Household/Downstream Market players The sugar sub-sector is very important in Zambia, contributing about 1% to GDP About 4% to total merchandise exports and employing over 8,000 permanent and seasonal workers However, the question which still sands is whether the exiting literature have covered enough ground on the sector

6. “The Felt Need”  Some of the other key questions which pre-occupied our minds included;  Are sugar prices in Zambia high and what are the causes? If we can identify the causes or high prices, then it might be possible to say what could be done to bring prices down.  What are the impacts of sugar prices on consumers, sugar using businesses, and on the prospects for investment and jobs in the sugar sector? Again, if we can answer these questions, then we would be in a better position to advise Government on what could or should be done. “People all around the world eat sugar as part of a healthy, nutritious and balanced diet. Many people worry that eating sugar may be bad for their health. Their concern is unnecessary as extensive research has not been able to link the consumption of sugars to any chronic disease except dental caries (tooth decay). And even though dental caries has been associated with sugar consumption, there are many other factors (including the consumption of other carbohydrates and oral hygiene) that play an important role in the development of caries”. Source: The World Sugar Research Organisation (WSRO)

7. “The Felt Need”  Based on these questions, CUTS identified the sugar sector as a sector for detailed analysis.  More Importantly the choice of sugar sector was based on the interactions with CCPC  The scoping study, just like other studies, tries to address these questions in order to distinguish between the normative outcomes that are expected to be found in the sector and observable outcomes which are outside the comfort of sugar pricing Are Sugar Prices high in Zambia?

8. “Research Objectives”  To review the existing literature on the Zambia sugar sector to identify research gaps where in information where  To collect general statistics in the sugar industry in Zambia, which were used to confirm the existing market shares held by different production companies; domestic sales and export figures; the divisions between commercial and small scale farming contributors to production; contemporary costs of sugar production; as well as the current retail and wholesale prices;  To review the current policy context on import and export dimensions on sugar, competition law, the position with respect to new investments in the sector and the key policies in neighbouring countries towards additives

9. Research Method  A simple methodological approach of literature review, basic data collection on wholesale and retail prices and in-depth interviews with key stakeholders was employed.  Literature review was undertaken for a general understanding of the market structure of the sugar industry in Zambia.  ACF Regional Comparative Study 2014 Action Aid Report 2013  Brian Chisanga 2012 (thesis) Kalinda, Chisanga 2014  0DI report 2010 Stockholm Environment Institute 2001  USAID 2001  Company specific information, mostly through the one on one interactions/ annual reports, websites information's of the sugar producing companies.  Interviews with some sugar producing or milling companies were held  Interviews with some about six key downstream market players (as well as retailers and wholesalers were held)  On the spot target interviews with consumers (Mazabuka, Lusaka, Kasama) .

10. Method Continued”  The study identifies 3 possible factors which could affect prices, (all of which will be explored in more detail through further research):  These include;  Costs of production  Retail and wholesale prices  Market Structure and Protection

11. Findings  Before the three identified factors are addressed, the study assessed the “Pricing Dynamics” in Zambia and other countries.  Many stakeholders and market regulators are agreed that prices of sugar in Zambia are high – considering the efficient levels.  Many studies reviewed seem to have convergence on the high pricing. A recent Africa ACF report states that: “… the prices of sugar in Zambia do not reflect the cost advantages and high levels of productivity in that market.”  Further, a 2010 (ODI) study finds that the cost of production for sugar in Zambia was $169/tonne compared to a world average of $263/tonne”.  ACF further notes that Ex-Factory prices per tonne is 910 US$/tonne for 2010 based on data from millers. It concludes that Ex-factory margins earned by millers on the basis of average factory costs and Ex-Factory prices in Zambia could be between 34% and 56%. This could be high for millers with efficient levels of production.

12. YearKenyaSouth AfricaTanzaniaZambia 20081.000.930.971.36 20091.161.011.090.98 20101.231.271.111.26 20111.521.451.281.32 2012-1.451.331.39 White sugar retail prices (US$/KG) ACF Further, our report presents original analysis of JCTR’s Basic Needs Basket (BNB) which show that between June 2009 and June 2014 sugar prices in Zambia have increased by nearly 50 per cent. This means that the price of a 1kg bag of sugar increased from ZMW 5.8 in 2009 to ZMW 8.6 in 2014 – an increase of ZMW 2.8. This trend of rising prices since 2009 is confirmed in the ACF report also

13. Factor 1: Costs of production : A number of factors are at play for sugar to be produced. Most studies have looked at these factors – with the recent study by ACF presenting some level of intensity. Some of the factor of productions include; Productive levelSupply Side Level High capital and maintenance costs for establishing a new mill Transportation costs High fixed business costs requiring substantial economies of scale in cane crashed to break-even ? NTB in the sector e.g. fortification requirements serves to deter entry into the industry ? Water Transport approximately account for 29 percent. ACF. There were also some reports about instances where Zambia Sugar’s policy of refunding transporters is now allegedly subject to abuse. Some distributors (it is said) can claim to be delivering sugar to far places like Ndola but can offload in Lusaka after claiming payment for a longer distance.

14. Factor 1: Costs of production :  Our general conclusion on this point is that our report argue that previous studies which have looked at sugar prices have failed to sufficiently quantify the production costs at each level of the value chain (with their vertical and horizontal perspectives i.e inputs and supply markets)  One exception is the ACF report which attempts to account for distribution and transportation costs – though build up of these costs and their justification are presented. An extensive exploration of this issue is still required.

15. Factor 2: Retail and wholesale prices  Part of the scoping study undertook some preliminary research on retail and wholesale prices of household sugar in Zambia. This was done in Mazabuka, Kasama (both key stakeholder location for sugar produced in Zambia), and Lusaka.  Contrary to some reports which suggest that millers accuse wholesalers and distributors of forming cartels and hoarding sugar artificially create shortages and inflate prices, the scoping study found out that small scale retailers and wholesalers do not make much profit from sugar sales.  Retailers and wholesalers instead use sugar as a crowd puller not a profit making product.

16. Factor 2: Retail and wholesale prices “cont Sugar retail pricing regime for select retailers in Mazabuka White SugarBrown Sugar MTN Go-on Ent. Fine shop Alpha Providence MTN Go-on En. Fine shop Alpha Providence Buying price (kg)7.47.86.87.36.66.8 6.5 Selling price (kg)7.58.09.08.57.0 8.0 Profit (kg)0.2 2.31.20.40.21.31.5 Profit margin (%)2.02.525.013.85.72.315.618.8 Average volumes per month (tonnes) 1.80.50.80.11.80.50.80.1 Profit from sugar per month 262.5100.01800.094.0700.080.01000.0120.0

17. Factor 2: Retail and wholesale prices Sugar pricing for select wholesalers in Mazabuka WhiteBrown MTNGo-on EnterprisesMTNGo-on Enterprises Buying price (kg)7.357.806.606.84 Selling price (kg)7.507.906.756.90 Profit (kg)0.150.100.150.06 Profit margin (%)2.001.272.220.87 Average volumes per month (tonnes) 1.750.501.750.50 Profit from sugar per month 262.5050.00262.5030.00

18. Factor 2: Retail and wholesale prices cont”  However, as this is based on a small set of case studies CUTS International Lusaka will explore this in further detail in future research  Another issue of note is the disparity in sugar prices in various regional hubs.  For instance, the scoping study revealed that sugar is most expensive in Mazabuka, the location of one of the millers. This has caused some wholesalers to buy from other far-flung areas such as Choma and Lusaka.  This disparity has also gone unexplained by the existing literature on the sector. It is hence a subject that must be pursued in the research phase to follow.

19. Factor 2: Retail and wholesale prices “con”  Another issue of note is the disparity in sugar prices in various regional hubs.  For instance, the scoping study revealed that sugar is most expensive in Mazabuka, the location of one of the millers. This has caused some wholesalers to buy from other far-flung areas such as Choma and Lusaka.  This disparity has also gone unexplained by the existing literature on the sector. It is hence a subject that must be pursued in subsequent research to follow. 

20. Factor 3: Market Structure and Protection :  The Zambia sugar milling market is oligopolistic and is dominated by one player, Zambia Sugar.  Zambia Sugar has a market share of about 94% in terms of industrial sugar production while this drops to about 92% for household sugar according to most literature.  There are no significant changes for Kasama Sugar across all categories, as the company remains with a market share of about 0.8%, which drops to about 0.7% for industrial sugar  Kafue sugar on the other hand has 7.2 % of the market share (for household sugar) and 5.8 percent for industrial sugar

21. Factor 3: Market Structure and Protection : Market shares and concentration in Zambia sugar industry Zambia SugarKafue SugarKasama SugarConcentration Total sugar produced (tonnes) 404,00030,0003,500Highly concentrated Market share92.3%6.9%0.8% Industrial sugar produced (tonnes) 96,9606,000700Highly concentrated Market share93.5%5.8%0.7% Household sugar produced (tonnes) 307,04024,0002,800Highly concentrated Market share92.0%7.2%0.8%

22. Factor 3: Market Structure and Protection :  Studies have tended to point to Zambia Sugar’s monopolistic control over the market as the reason behind high sugar prices in Zambia.  However, the current knowledge on the sugar sector is not sufficient to draw this conclusion  As previously mentioned, a study conducted by Ellis, Singh and Musonda (2010) reveals that Zambian sugar is relatively expensive when compared to other countries within the region of Africa and other continents. What this study does not reveal or probe is whether there may be factors at play in other countries making the price of household sugar lower in those places.  Further, the same study mentions that in a 2006 report by the CCPC the commission had established there was excessive pricing. However, discussion with CCPC who said that while they acknowledged sugar prices are high they have not yet established whether this amounts to excessive pricing. Further research is therefore required to better understand this important issue.

23. Factor 3: Market Structure and Protection :  The report also discusses the impact of Vitamin A fortification on the sugar sector.  Fortification is required for all domestic sugar. According to our findings this accounts for 10 percent more of the total cost for other players other than Zambia sugar  Existing evidence and interviews with key stakeholders undertaken by during our scoping study suggest that the Vitamin A fortification policy acts as a non-tariff barrier, protecting local sugar producers from imported sugar.  E.g. Downstream market players cannot import industrial sugar when there is a shortage. They have to go through Zambia sugar  Our report argues that the fortification requirement could be a significant cost driver and a possible barrier to entry for prospective market entrants

24. Summary of Gaps in Knowledge and Proposed Further Research  How successful the fortification process has been and how much of a cost driver it is in the sugar value chain  How the existent policy environment governing the sugar industry has affected its development; the entry of new players and costing or pricing structures  The extent to which the current market structure does or does not contribute to high prices of sugar in Zambia  A thorough evaluation of the entire sugar value chain to decipher the true reason behind the high price of sugar in Zambia  An evaluation of the pricing structure and incentives in other countries that may be making sugar prices lower  An evaluation of the effect of these high prices on the Zambian consumer at household level and as well as downstream end users  Whether the high price of sugar are because of monopoly pricing at the producer level

25.  CUTS has recognised the above mentioned as potential areas of further research.  More important among these is the need to study that will concentrate on assessing the impact of excessive sugar pricing on the downstream market and house hold consumers and to determine the cost of sugar production in Zambia.

26. CONCLUSION  This is an open process/project and we encourage interested stakeholders to seize the opportunity and participate in the process Ends