Asian Journal of Agricultural Sciences 6(1): 6-15, 2014 ISSN: 2041-3882; e-ISSN: 2041-3890 © Maxwell Scientific Organization, 2014 Submitted: September 18, 2013 Accepted: October 04, 2013 Published: January 25, 2014

Sugar Value Chain in Zambia: An Assessment of the Growth Opportunities and Challenges

1Thomson Kalinda and 2Brian Chisanga 1Department of Agricultural Economics and Extension, School of Agricultural Sciences, University of Zambia, Kalundu, Lusaka, Zambia 2Farming Systems, Social Sciences and Economics Division, Zambia Agricultural Research Institute, Chilanga, Zambia

Abstract: The main objective of this study was to identify the major actors in Zambia’s sugar value chain and to assess the growth opportunities and constraints faced by the sub-sector. The study results show that the sugar sub- sector accounts for about 4% of the Gross Domestic Product and 6% of total national exports in Zambia. The sugar industry in Zambia is a monopolistic market structure dominated by one firm, Zambia Sugar Plc., which contributes over 90% of the total national sugar production. Zambia is one of the lowest cost producers of sugar globally. Growth in the sugar industry therefore holds great prospects for economic diversification and employment creation. Despite being a low cost sugar producer, growth of the sub-sector is constrained by high transaction costs. These include high fuel, electricity, transportation and distribution costs. Legislation on Vitamin A fortification of sugar also increases production costs and is a significant barrier to entry for potential entrants. Moreover, water rights and insecurity associated with customary land tenure have also emerged as major issues requiring attention to enhance investments into the sector. The situation is aggravated by lack of an articulate sugar sector policy to provide strategic guidance for sector development. In order to attract private sector investment and enhance growth; government policy should assure water rights and land tenure security for establishment of sugar plantations. There is also need to clarify government policy on bio-fuels as well as to review the export strategy to reduce dependence on EU markets and explore alternative regional markets.

Keywords: Diversification, employment creation, sugar industry, sustainable economic growth, value chain analysis, Zambia

INTRODUCTION contributed important export values, but the performance of these products seems to be erratic Agriculture is the mainstay of the rural economy of (Government of the Republic of Zambia, 2004a). Zambia and involves crop farming, livestock rearing, Zambia has a comparative advantage in the fishing and forestry. The agricultural sector, including production of a wide range of food and non-food crops, agro-processing, contributes about 40% of the Gross however, it has not capitalised on this comparative Domestic Product (GDP), 67% of the total advantage to increase production across a wide range of employment, supplies the bulk of raw materials which products. This is partly due to unfavourable policy account for over 80% of the manufacturing sector’s options, lack of capacity and resources to exploit these value added and contributes more than 12% of foreign advantages. In recent years however, production of exchange earnings (World Bank, 2007a; Government of crops such as maize, flowers, fruits and vegetables has the Republic of Zambia, 2011). increased but the comparative advantages in terms of The sector’s contribution to real GDP averaged livestock, fisheries and forestry have not been 18% over the past decade, making up 39% of earnings systematically harnessed. To a large extent the Zambian from non-traditional exports, though this has fluctuated agricultural economy remains largely a mono economy significantly mainly due to the dependence on seasonal dominated by maize production. (unreliable) rainfall (World Bank, 2007a). The largest Zambia possesses tremendous land and water exports and highest contribution are in primary resources with over 1.7 million cubic metres of agricultural products (maize, sugar, tobacco and cotton) underground water resources. Surface water resources and floricultural and horticultural products. Other on the other hand range from 136.2 million cubic important exports include coffee (Arabica), fuzzy metres per day in a drought year (10 year return period) cotton seed, paprika and soybeans. In some years, to 237.3 million cubic metres per day in an average maize, marigold meal, groundnuts and seeds have year. This is about 40% of the surface water resources

Corresponding Author: Thomson Kalinda, Department of Agricultural Economics and Extension, School of Agricultural Sciences, University of Zambia, P.O. Box 32379, Lusaka, Zambia 6

Asian J. Agric. Sci., 6(1): 6-15, 2014 in the Southern African Development Community learning in enterprise development as it treats the (SADC) region. Zambia is one of the few countries in enterprise not as a singular (autonomous) entity, but as Africa which is abundantly endowed in terms of land, part of an integrated chain of economic functions and labour and water resources. Based on this endowment, linkages across geographical boundaries. the country has great potential to expand its agricultural The VCA seeks to understand the various factors production and provide linkages with other industries. that drive the incentives, growth and competitiveness Out of the country’s total land area of 75 million ha within a particular industry and identify opportunities (752,000 km2), 58% or 42 million ha falls under the and constraints to increasing benefits for stakeholders medium to high potential for purposes of agricultural operating throughout the industry. This feature of VCA production (Government of the Republic of Zambia, lends to its completeness as a strategic tool in exploring 2004b, 2006). different alternative strategies for poverty reduction Zambia’s future development will depend (Asia DHRRA, 2008). The purpose of analyzing the significantly on the diversification of the economy. value chain of sugar was to identify key points of Most stakeholders believe that the best prospects for intervention along the chain and to recommend specific diversification are currently found within the policy directions to enhance the competitiveness of the agricultural sector given Zambia’s natural resource sugar sub-sector. This study took a descriptive approach endowment. Historically, Zambia’s agriculture sector to map the sugar value chain and identify the major has been dominated by maize production. However, actors and the functions they performas well as identify there is considerable potential for expansion in respect major constraints and opportunities in the chain. of a number of other agricultural products. Research evidence has shown that varieties of agricultural Data collection: Both secondary and primary data was products are or have the potential to be internationally used in the study. The data was gathered through desk competitive and have great potential for growth and research and key informant interviews. Secondary data employment creation. This study looked at the growth was collected through a review of published and and employment creation potential in respect of the unpublished material including past value chain studies. sugar sub-sector. This study was motivated by the need The main archival data was collected from the relevant to better inform policymakers on non-traditional websites, documents, company reports and academic agricultural sectors that could contribute significantly to thesis or papers and journals. A desk review of Sugar sustainable economic growth in Zambia. industry documents such as sales and marketing reports, The main objective of this study was to identify the financial and annual reports documented by major actors and their core functions in the sugar value Management staff were also critically reviewed. Other chain in Zambia. The study also identified and assessed Government agricultural, industrial and trade policy the major constraints and opportunities in the sugar documents which affect the sugar industry as well as value chain. In so doing, the study aimed at providing relevant statistical reports which document industry an in depth analysis of the key issues and challenges production and performance were also reviewed. faced by the sugar sub-sector with a view of assisting Key informant interviews were carried out with the formulation of favourable sector policies and leaders in the sugar industry or sector. Additional strategies towards promoting long-term growth of the sources with a detailed knowledge of growth and sub-sector. investment opportunities including the producers’ associations and government officials were also METHODOLOGY consulted for relevant information. Focus of the semi-

structured key informant interviews was on the specific Analytical framework: The study employed a Value research objectives as outlined above and to highlight Chain Analysis (VCA) approach. The VCA is one of any pertinent issues concerning the sugar industry in the many tools that have been used in analyzing markets with the aim of contributing to the process of Zambia. linking rural industries and enterprises into the mainstream markets (Asia DHRRA, 2008). This Data analysis: For purposes of this study, descriptive provides useful information that can helps policy- data analysis was employed to characterize the sugar makers to harness and maximize the benefits of the industry in Zambia. The data collected was analyzed to value chain as well as aid in developing strategic identify the main actors, characterize the key structure linkages between commodity producers, market players or elements of Zambia’s sugar value chain. Quantitative and consumers. As defined by Kaplinsky and Morris and qualitative data collected from documents and key (2001), the value chain describes the full range of informants was also analyzed to assess the activities which are required to bring a product or opportunities for enhancing growth of the sugar service from conception, through the different phases of industry and the constraints hampering growth of the production (i.e., involving combinations of physical industry. A descriptive-analytical narrative was used to transformation and the input of several producer present the findings from the study in order to have a services), delivery to final consumers and final disposal comprehensive picture of the key issues concerning the after use. The essence of VCA is to improve strategic sugar industry in Zambia. 7

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RESULTS AND DISCUSSION and private shareholders in Zambia control the remainder of the shares (Zambia Sugar Plc., 2011). Importance of Sugar Industry in Zambia: The sugar Zambia Sugar Plc. has an estate of 16,500 ha while sub-sector is one of Zambia’s most important economic 7,724 ha are under smallholder out growers. Zambia sub-sectors and is one of the most successful non- Sugar Plc.produces an estimated 60% of its sugarcane traditional export crops. The sector accounts for 3-4% of requirements while 40% is outsourced mainly from out the national Gross Domestic Product (GDP) and 6% of grower smallholders organized under the Kaleya total national exports in Zambia. The sugar industry Smallholder Scheme (KASCOL), Magobbo smallholder provides employment for around 11,000 workers, with a sugar cane schemes and other independent sugarcane total of dependents probably exceeding 75,000 (Palerm farmers. Sales to export markets are significant (60%), et al., 2010). The sugar sector generates over US$45 exceeding sales in the domestic market (40%) which million in gross export revenue annually, which has average around 150,000 metric tonnes per year. Of the almost doubled from the mid-1990s when export 40 % sugar sold in the domestic market, 75% is sold to earnings stood around US$ 25 Million (World Bank, the direct sector (for consumption) while 25% is sold to 2007b). the industrial sector for the manufacture of foodstuffs Sugar production is a high value agricultural and beverages. Zambia Sugar Plc. also produces high industry with significant contribution to the premium speciality sugar for the preferential EU market, manufacturing sector due to high value addition, diverse which is a niche export market which increases export range of products and markets. The sugar transformation earnings for the company. process results in refined sugar, raw sugar, speciality Kafue Sugar, which started its operations in sugar products, molasses and electricity generation. 2005/2006, is located on the Kafue River on the other Potential exists in production of ethanol-based fuel side of Zambia Sugar Plc.’s Nakambala Estates. Kafue blend and other downstream products (gel fuels). Value Sugar has an estate of about 6,000 ha and produced is also added by serving different markets including the about 30,000 metric tonnes of sugar in 2011 (about domestic, regional, international, preferential E.U and 7.2% of total national production). niche markets. Preferential E.U markets present the Kalungwishi Estates Ltd is a relatively new sugar most lucrative markets with further premiums offered to company which is located in Kasama in the Northern speciality sugar products. Province of Zambia. It cultivates about 400 ha which produced an estimated 1,400 metric tonnes in 2011 Structure and players in the sugar value chain in (about 0.3% of total national production) (Palerm et al., Zambia: The Sugar Market is largely private sector 2010). driven, highly concentrated and dominated by three The main business strategy preferred by these sugar milling companies, namely Zambia Sugar Plc., companies is that of vertical backward integration Kafue Sugar and Kalungwishi Sugar. Table 1 shows whereby the companies own cane producing estates. Zambia Plc. to be the single most dominant company The schematic presentation of the Zambian sugar value contributing over 90% of the total national sugar chain as shown in Fig. 1 demonstrates this by providing production while the remaining two companies only an indication that 60% of the sugar cane supplied to the contribute less than 10%. mills is from own-estates while only 40% comes from Zambia Sugar Plc. is the largest sugar producing individual farmers who either operate independently or company with a capacity to produce 450,000 metric are part of our grower schemes operated by the tonnes of sugar following its recent expansion. In 2011, companies. Zambia Sugar Plc. produced 385,000 metric tonnes The value chain outline also shows the various representing about 92.5% of total national production. sugar value chain actors including producers (cane Established in the pre-independence era, Zambia Sugar growers), processors (sugar processing companies also Plc. started operating from the Nakambala Estate in referred to as sugar millers), domestic, export and by- Mazabuka district south of Lusaka in 1966 and has a product markets, wholesalers, retailers and consumers. record of consistent growth and innovation. It is a Wholesalers and retailers are the main channel through subsidiary of Illovo Sugar Limited of South Africa, a which sugar reaches the consumers. For the Zambia leading manufacturer of sugar and downstream Sugar Company (Zambia Sugar Plc.), an approximate products, which holds 82% of shares while institutional 80,000 metric tonnes representing about 60% of local or

Table 1: Basic information on sugar producing companies in Zambia Hectare under Percentage of total national Hectares under sugarcane Production in production (based on 2011 Sugar company Location sugar (Estate) (Smallholder) (metric tonnes) production estimates) Zambia Sugar Plc. Mazabuka 16,500 7,724 385,000 92.5 Kafue Sugar Kafue 6,000 N/A 30,000 7.2 Kalungwishi Estates Ltd Kasama 400 N/A 1,400 0.3 Palerm et al. (2010), Zambia Sugar Plc. (2011), Mulikelela and Munagnya (2010)

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Producers • Own estate production 60% • Independent farmers and Out growers 40%

Processors By-product market Export Market 59% • Zambia Sugar Plc.- 92.5% of • Molasses, • SADC chemicals, total national production • • Great Lakes electricity, etc. Kafue Sugar-7.2% of national production • EU • Kalungwishi Estates Ltd- 0.3 % of national production

DOMESTIC MARKET 41%

Direct Sector Industrial sector 76% of 41% 24% of 41%

Wholesalers

Retailers

Consumers

Fig. 1: The Zambian sugar value chain; Chisanga (2012) domestic sales were delivered to wholesalers and agents Zambia national sugar strategy”. In 2010, the ZNSS was in the 2009/2010 season. Each of the wholesalers or updated with some changes to the 2006 NSS. This NSS agents delivers an average of 6,000 metric tonnes. The was eventually finalised and adopted in 2010 to provide sugar companies also deliver refined sugar directly to strategic policy guidance regarding the sugar industry at retailers including supermarkets like Shoprite, Spar and national level (Government of the Republic of Zambia, Pick n Pay. In 2009/2010, this amounted to almost 2010). 11,000 metric tonnes, representing about 9% of local Currently value added to sugar and its by-products sales. An average of 250 metric tonnes was delivered to in Zambia in real terms is about US$ 145 million. The each retailer. Zambia National Sugar Strategy (ZNSS) aims at Another important player in value chain is the increasing the value added from the current US$145 Sugar Producers Association (SPAZ) that represents million to US$157 million by 2013 and to US$200 various interests among sugar stakeholders; the million by 2020 (Ministry of Commerce Trade and government; donor agencies and funding organizations. Industry of Zambia, 2010). The ZNSS aims to achieve this by promoting out grower schemes; supporting Regulation and governance: Unlike other export diversification into alternative uses of sugar such as crops, there is no specific regulatory body that ethanol production and the development of a sugar trade determines pricing or quality standards in the sugar policy. This is expected to generate more employment industry. At present, there is no particular policy as well as increase incomes from the sugar industry. regulating the sugar industry and trade. Policy guidance The Zambian government introduced controls with therefore, is drawn from related policies such as the regard to sugar imports. According to Zambia’s National Agricultural Policy (NAP) and the Sixth legislation, all sugar in Zambia that is meant for direct National Development Plan (SNDP). However, Zambia consumption has to be fortified with vitamin A in has recently formulated a comprehensive Zambia specific quantities. This implies that all domestic and National Sugar Strategy (ZNSS). An outline document imported sugar should meet specific fortification was formulated in mid-2006 as “the elements of the requirements. This legislation does not exist in other 9

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450 Sugar Area Planted 35 Sugar Production 400 30 350 25 300

250 20

200 15

150 10 Sugar production '000 Metric tonnes Metric '000 production Sugar 100 Sugarcane area planted '000Hectares 5 50

0 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Fig. 2: Sugar production and area planted in Zambia, 2001-2011; FAO Stats countries which means all sugar coming from outside Projected future trends in sugar production: There cannot be imported into Zambia. In effect, this policy are a number of drivers shaping the future trends in affects sugar imports, as it is Non-Tariff Barrier (NTB) sugar production in Zambia. Among these are expansion on sugar imports. The law on fortification also increases programmes at existing sugar companies and proposed the cost of producing domestic sugar which is pushed new investments in the industry. Globally, high world onto consumers increasing the farm to retail price sugar prices are expected to sustain revenue realizations spreads. It also crowds out the sugar market as it is a from all export markets, into which increased sugar significant barrier to entry for potential entrants as the volumes are to be sold. The existing strong local cost of fortification machinery is high (Ellis and Singh, economic fundamentals are expected to benefit local 2010; Chisanga, 2012).Coupled with this, there is an sales, whilst exchange rate movements and weather administrative barrier to sugar imports where potential conditions will continue to influence profits (Zambia importers are required to obtain import permits from the Sugar Plc., 2011). Financing costs are forecast to government which is often not transparent and often decrease year-on-year with a reduction in borrowings delayed. This has limited imports, which had soured to and the refinancing of expansion-related loans. The cost around 25% of total domestic consumption in1999 at of financing is further expected to decrease following the reduction in lending rates by financial institutions the time the law was put in place (Chisanga, 2012). after the Zambian Central Bank reduced the reserve

ratio requirement. In addition, the government is Production trends: Sugar production in Zambia has expected to reduce corporate taxes for commercial been on the rise since its privatization in the 1990s. This banks by 5 from 40 to 35%, respectively and all these has been driven by huge amounts of Foreign Direct efforts will serve to reduce the cost of borrowing. Investment (FDI) flows and new production technologies introduced. Although increased production Employment and income distribution: Apart from can be largely attributed to one sugar producing contributing to GDP through exports, the sugar industry company (Zambia Sugar Company Plc.), emerging contributes to employment of permanent and seasonal sugar companies mainly Kafue and Kalungwishi Sugar workers and supports smallholder farmers involved in are growing in significance in the market. Figure 2 out grower sugarcane production. The sugar companies shows annual sugar production and area planted for the also spend large amounts of money on local suppliers. period 2001-2011 in Zambia. Sugarcane area planted By supporting local business in the supply chain, sugar and sugar production has been on a steady rise since companies indirectly attract additional investment to the 2001 with an exception being during the 2008 and 2009 local economy, thereby increasing local growth in seasons when a slump in production was experienced. SMEs through their participation in the value chain. Heavy rains that were experienced in 2007 saw a Zambia Sugar Plc. is the largest employer in Mazabuka reduction in production yields over the 2008 season. and contributes positively to the development of the Production fell further in 2009 but more recently, there town. has been a surge in output owing to major capacity According to Zambia Sugar Plc., the company expansion at Zambia Sugar Plc. and Kafue Sugar. employs around 2,000 permanent employees and just 10

Asian J. Agric. Sci., 6(1): 6-15, 2014 over 4,000 seasonal workers at peak periods. The Average sugar production (tons/ha) company spends more than ZMK 190 billion (US$ 38 16 15.3 million) in salaries, wages and benefits to employees. 14 The largest of these positive impacts is experienced by the company’s out growers whose total earnings for 12 cane delivered to the Nakambala factory amounted to 10 more than ZMK 200 billion (US$ 40 million) in the a

h

/

s 8

2010/11 season. Approximately 70% of the procurement n

o budget is spent on Zambian suppliers (Zambia Sugar T 6 5 Plc., 2011). Kafue Sugar spends about ZMK12 billion 4 3.3 (US$2.4 million) annually on salaries for over 2,000 workers thus contributing positively to development in 2 1.4 the Nampundwe area on the outskirts of Lusaka. The 0 h a a s m i y sugar industry contributes considerable tax revenue to e a b n d tn m e a l ie a K government. For instance, it contributed about US$7.9 g Z n V a million in corporate taxes on profits in 2007 (Mulikelela B and Munagnya, 2010). Sugar production is a high value agricultural Fig. 3: Average sugar production in case study countries in industry with significant contribution to the 2007; Ellis and Singh (2010) manufacturing sector due to high value addition, diverse range of products and markets. The sugar transformation Brazil, Malawi, Zimbabwe, Australia and Swaziland process results in refined sugar, raw sugar, speciality respectively (World Bank, 2007a). The Economic sugar products, molasses and electricity generation. Research Services (ERS) of the United States Potential exists in production of ethanol-based fuel Department of Agriculture, USDA, revealed in a 2007 blend and other downstream products (gel fuels). Value study that the cost of production for these low cost is also added by serving different markets including the producers (including Zambia) for raw cane was 8.69 US domestic, regional, international, preferential E.U and cents per pound while the world average was 12.39 US niche markets. Preferential E.U markets present the cents per pound. Additionally, recent research by the most lucrative markets with further premiums offered to Overseas Development Institute (ODI) revealed that speciality sugar products. sugar production in Zambia is very efficient, stating that Currently value added to sugar and its by-products the average cost of production in Zambia is US$169 per in Zambia in real terms is about US$ 145 million. The metric tonne compared to the world average of US$263. Zambia National Sugar Strategy (ZNSS) aims at The privately managed Zambian sugar sector has shown increasing the value added from the current US$145 to compete successfully on world markets, representing million to US$157 million by 2013 and to US$200 a possible source of considerable investment and growth million by 2020 (Ministry of Commerce Trade and and faring better than the Kenyan sugar sector, for Industry of Zambia, 2010). The ZNSS aims to achieve this by promoting out grower schemes; supporting example, which has a high degree of state involvement. diversification into alternative uses of sugar such as The ODI study also compared Zambia’s costs to ethanol production and the development of a sugar trade three other sugar-producing countries, Kenya, Vietnam policy. This is expected to generate more employment and Bangladesh, illustrating that the sugar yield as as well as increase incomes from the sugar industry. measured in tons/hectare in Zambia far exceeds that of The sugar industry also contributes significantly to the other three countries, which is indicative of high infrastructural and social development. Much of the efficiency in production (Fig. 3). infrastructure in Mazabuka town in Zambia has been Despite being a low cost sugar producing country, developed, improved and maintained by sugar sector Zambia’s sugar domestic price was found to be the revenues. Sectors such as engineering, banking and highest among the five study countries as shown in transportation have developed in response to the needs Table 2. The table shows the sugar retail prices in five of the industry. selected countries. It is clear from the figures above that the cost of Opportunities for growth in the Zambian sugar doing business after the farm-gate is relatively higher in industry: The analysis highlighting the major Zambia than in the other sugarcane producing countries. opportunities for the growth of the sugar industry is It is therefore prudent for policymakers to critically look presented below: at factors such as taxes, cost of financing and transport efficiencies if the retail price of sugar is to compete Competitiveness of Zambian sugar: Zambia is one of favourably with other countries. the lowest cost producers of sugar in the world. It is Competition and trade in sugar is for the most ranked the world’s sixth lowest cost producer after part governed by preferential trade agreements. The 11

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Table 2: Sugar retail price in selected countries (COMESA) and the Southern Africa Development Sugar retail price 2008 – Spot market Community (SADC) through regional trade Country price at time of country visit (USD)/kg Bangladesh 0.57 arrangements such as the SADC Sugar Cooperation Vietnam 0.66 Agreement, offers an opportunity for export growth Zambia 1.2 through increased access to regional markets and Ghana 0.99 diversification of market access, which is currently Kenya 1.05 Ellisand Singh (2010) highly dependent on the EU market. The growth of industrial use of sugarcane and the policy shift by agreements have largely benefitted sugar producing Brazil, the major world sugar producer, to support sugar production for ethanol production has increased global developing countries like Zambia by helping them access regional and international sugar markets. The demand for sugar, thus implying that there is a market significant trade arrangements include the ACP/EU available for sugar in the future.

Sugar Protocol, the Agreement on Special Preferential Sugar (SPS), the Everything-But-Arms (EBA) initiative, Public support programmes for sugar production: There are a number of public led initiatives to support the Caribbean Basin Initiative (CBI), African Growth sugar production in Zambia as a result of the and Opportunity Act (AGOA), North American Free privatization of the sector. The government attracts Trade Agreement (NAFTA), the SADC Sugar investments into the sector through its promotion of FDI Cooperation Agreement and the Southern Africa and promotion of agricultural growth. Private and donor Customs Union (SACU). The ACP/ EU Sugar Protocol agency cooperation has also emerged as an important may perhaps be regarded as the most important thus far, source of initiatives shaping the sugar industry and as it has enabled the developing countries access to the increasing smallholder participation in the sugar value EU sugar markets at prices substantially higher than the chain. world prices. One such initiative is the Magobbo sugar scheme One of the drivers of Zambia’s sugar industry sponsored by the European Union (EU) and Mazabuka competitiveness is the amendment in the EU quota Sugar Cane Growers Trust (MSCGT). The scheme is regime. Under the Lomé and Contonou Agreements, the implemented through the MSCGT to facilitate sugar country enjoyed protected quota-based access to the cane production in an out grower scheme involving the European Union for a maximum of 28,000 metric local population in the Magobbo area of the district. The tonnes per annum. This regime, however, has changed European Union agreed to support the MSCGT with a under the new “Everything but Arms” agreement financial grant of up to 60 % of the project cost. The between the EU and African, Caribbean and Pacific total cost of the project is US$6, 5 million with an EU (ACP) countries whereby the price for raw sugar has contribution of US$ 3, 9 million. The project was been cut by 32% while the quota has been increased. initiated in October 2009, with the broad objectives of The new trade policy permits Zambia to export a expanding sugar production and sugar product volumes, maximum of 250,000 metric tonnes of refined sugar as well as realising significant increase in permanent (almost 95% of its current production) to the EU from employment in the sugar sector in Zambia (WHYDAH 2009 until at least 2015 from which it stands to benefit Consulting Ltd., 2011). Some 900 farmers are through this expanded duty free quota, although the benefiting from the scheme which has brought an price of the product is no longer guaranteed. In the estimated 438 ha into production. The project is absence of a guaranteed price, Zambian exporters will envisaged to increase income from the current have to look at the regional markets seriously because, US$1,168 per year (2011) to US$4, 000-US$ 5000 in according to the World Bank (2007b), international 2012 and to US$ 10,000 in 2022 (ibid). price competitiveness is affected by freight costs which Another initiative is the Manyonyo Water Users are found to constitute an approximate 45% of the Association (MWUA). This is a government initiative export parity price. This suggests that Zambia might be supporting irrigation and livelihoods by supporting better placed to serve regional rather than international smallholder cane production co-funded by the African markets such as the EU because of its high inland Development Bank (Palerm et al., 2010). MWUA was transport costs. Zambia is also affected by duties, taxes initially meant to be a multipurpose scheme for and other protectionist policies in countries where it irrigation of various crops. With the expansion project exports sugar. This results in higher prices of sugar in of Zambia Sugar Plc., the Manyonyo farmers saw an these markets. However, evidence shows that the opportunity for growing a high value crop with secured regional markets that Zambia serves offer higher returns markets and have committed themselves to producing than the EU quota based market due to high transport sugar cane. Zambia Sugar Plc. has committed itself to costs to reach overseas markets (Struyf and Chuba, buy the cane crop as a way of making better use of their 2009; World Bank, 2007a). increased milling capacity. The scheme is expected to Increased and deeper regional integration under the have 555 ha under sugar cane once it becomes fully Common Market for Eastern and Southern Africa operational (Struyf and Chuba, 2009). 12

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Expansion and proposed investment programmes: Kazungula and support about 3,000 ha of plantations by Zambia Sugar Plc. also completed the acquisition of out-growers (The Zambian Economist, 2011). Nanga farms from Zambeef, which has brought an additional 10,500 ha into the estate under Zambia Sugar Sugar out grower schemes: Out grower schemes or Plc. in Mazabuka. Smallholder out-grower development contract farming is gaining prominence in Zambia’s at Magobbo and Manyonyo smallholder schemes has sugar industry as a model that secures cane deliveries brought an additional 438 ha into smallholder sugarcane from smallholders while guaranteeing their market and production. In 2011, Zambia Sugar Plc. produced a thus supporting farmers’ livelihoods. The most record 1.97 million metric tonnes, which saw sugar successful out grower scheme is the Kaleya Smallholder production increase to 385,000 tons from 315,000 tons Trust (KST), which has been operational since the in the previous season representing a 16 % increase 1980s. It currently operates with 160 smallholder (Zambia Sugar Plc., 2011). The company envisages farmers with about 1,040 ha under sugarcane. The out reaching its projected output capacity of 450,000 tonnes grower scheme was initiated by four shareholders per year in 2013. Zambia Sugar Plc. has also expanded (Zambia Sugar Plc., Development Bank of Zambia, on electricity generation, making it self-sufficient in its Commonwealth Development Cooperation and Barclays electricity requirements by expanding from 10 Bank). This was an initiative for poverty alleviation and megawatts to 30 megawatts. The company also plans to also as an expansion strategy by Zambia Sugar Plc. to start ethanol production. The expansion project at provide more cane for milling operations (Struyf and Zambia Sugar Plc. is projected to create some 10,000 Chuba, 2009).There are three major institutions jobs, including smallholder out-grower schemes. operating the Kaleya Smallholder Scheme, namely, the Kafue Sugar has grown from an initial 2,000 ha in sugar milling company (Zambia Sugar Plc.); a 2005/6 to a current 6,000 ha and is expanding its estate management Company (KASCOL); and farmers by about 700 ha thus increasing its capacity to 45,000 organization (Kaleya Smallholder Trust-KST) (Palerm metric tonnes per year. This expansion is expected to et al., 2010). As was outlined above, two other out cost about US$6 million. The expansion will create a grower schemes are currently under development. These combination of 1,000 permanent and seasonal jobs. are the Magobbo Cane Growers Trust (MCGT) and Kafue Sugar also has plans for developing an out Manyonyo Water Users Association (MWUA). grower scheme. These plans are still at a preliminary stage with a planned area of about 500 ha, which would Challenges in the sugar industry: The analysis be put under a centre-pivot irrigation regime. The highlighting the major challenges facing the sugar scheme would benefit some 80 farming families. It is industry in Zambia is presented below: intended to practice green cane harvesting. The Kalungwishi Sugar Company has no immediate plans High transactions costs: A number of major challenges for expansion or out-grower schemes. or constraints exist in the Zambian sugar market The sugar industry has also attracted a number of including the high cost of doing business in Zambia as proposed new investments. Among these is the Luena reflected in high taxes, high fuel, electricity and farming block in the Luapula Province of Zambia. transportation and distribution costs and the high wages Luena Farm Block is located 1,060Km from Lusaka and that push the domestic price of the commodity upwards. comprises about 100,000 ha of farmland suitable for The sugar industry is capital intensive and requires growing sugar. The Government of the Republic of heavy capital investments such as setting up irrigation Zambia is currently seeking the participation of private facilities and factory plants. In Zambia, the cost of sector investors to partner with to develop the farm borrowing is very high and this limits growth of the block into an integrated sugar plantation and processing sugar industry particularly for small industry players unit. Development of the Luena Sugar Cane Plantation and potential new entrants. will include the development of infrastructure such as Zambia also faces a major challenge with roads, power, water, residential and commercial transportation which affects is competiveness in the properties (Zambia Development Agency and international market. Zambia is a landlocked country Commonwealth Business Council, 2011). and coupled with poor transport infrastructure, this Another proposed new investment is the South makes it very expensive to access export markets. As African based AGZAM Project Developers Ltd which noted above, freight constitutes a significant proportion plans to build a US$251 million sugar and bio-ethanol (about 45 %) of the export price posing a major plant which will be one of the largest non-mining challenge for the sugar industry. investments in recent years. The company plans to The competition framework governing Zambia’s produce 200,000 metric tonnes of sugar and 28 million industries including sugar is weak as is evidenced by the litres of bio-ethanol per year by 2013 and it is expected monopolistic structure of the industry. This has been that the project will create around 4,000 jobs. The reflected in the domestic pricing of sugar where the company will cultivate about 15,000 ha of cane sugar in price is significantly higher than the cost of production. 13

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The Zambia Competition Commission, which is the of appropriate policies in Zambia. There are no clear main competition regulation body in the economy, is legal and institutional frameworks to facilitate limited in scope in resolving competition problems development of the national fuel-blending sub-sector, to arising in the economy especially where there is vested enhance the interest from potential ethanol producers interest. and the fuel blender(s) and guarantee the market.

Conflicts on land tenure and security: Land tenure CONCLUSION AND RECOMMENDATIONS and security is another issue affecting the growth of the sugar industry in Zambia. In some cases, the conversion The analysis of the sugar industry in Zambia of customary land to large leaseholds for establishment concludes that the industry is positively contributing to of sugar plantations has eroded local rights to land use economic growth, value addition, employment and and common pool resources. As land is acquired for wealth creation. The sugar industry in Zambia has commercial farming, industry and tourism, local people experienced significant growth in recent years owing to in some areas have lost access to water sources, grazing the increasing investment in the subsector. This has land and forest products. Some smallholder farmers generated positive economic benefits for the local have been reluctant to get involved in out grower economy through employment creation and other schemes in Zambia since most of the land is held under multiplier effects in the areas of operation. Out grower customary tenure. They fear that if the conversion of schemes are a growing model in the sugar industry and their land for sugar production is not done transparently present a great opportunity for enhancing smallholder with assurances of tenure security, they will end up incomes. The preferential trade agreements (particularly being displaced and in conflict situations. the EU/ACP Sugar Protocol) have been instrumental in ensuring access of Zambian sugar to the European Water and environmental issues: Water and markets. Government and donor agency led initiatives environmental issues are of critical importance in sugar are gaining prominence in the sugar industry with a production as the industry is a major user of water major aim of promoting smallholder sugar production resources. Two sugar producing companies (Zambia for enhanced livelihoods. Sugar Plc. and Kafue Sugar) rely on the Kafue River Zambia has been found to be a low cost sugar which has come under heavy stress due to other uses of producing country. However, the high domestic price the same water including hydroelectricity and domestic raises questions of domestic competitiveness of the consumption and as well as the regulation of flows at sugar market. The industry faces challenges of transport the Itezhi-Tezhi Dam. Furthermore, water crises caused infrastructure constraining exports and international by the increasing population demanding more and more competitiveness. Water rights and land tenure security water, as well as the changing climatic conditions have emerged as major issues requiring attention to coupled with poor management of the basin, have enhance investments and increased participation by brought about an imbalance between supply and smallholders. The lack of a clear policy framework on demand. There are legal implications regarding access ethanol production negatively affects the sugar industry, to commercial irrigation water. Water rights are granted as there is no strategic framework to guide the by the Water Board of the Department of Water Affairs. production of this important by-product. Potential for Access to water rights is a major barrier for land increased value addition in the industry exist through development for sugar production including out grower widening the domestic and market base through scheme development. At present water rights have been investment such as in biofuels and other downstream granted to Zambia Sugar Plc. (1,246,428 m3) and sugar products. 575,540 m3 for out grower scheme while Kafue Sugar Considering findings of the study on the has been granted 515,000 m3. There are indications that opportunities available and constraints faced in the the water rights already allocated to sugar estates and sugar industry, further sustainable growth and Zambia Electricity Supply Corporation (ZESCO) employment creation can be achieved through coherent Limited may be exceeding future water availability strategies which: (Palerm et al., 2010). • Identify areas or regions for expansion of sugar Lack of clear policy on ethanol production: Viable plantations that have assured water rights, land opportunities for ethanol production, for blending with access and tenure security, to create incentives for petrol exist and ethanol production from molasses is private sector investment in the sugar industry expected to commence in the foreseeable future. Ethanol especially given the already growing local and production from molasses is expected to further increase foreign investment in the sector. the viability and profitability of cane • Clarify Government policy on bio-fuels so that the production/processing for both sugar cane farmers as legal and institutional framework enables the well as sugar mills. However, the sugar industry is yet development of the national fuel-blending sub- to seriously undertake production of ethanol due to lack sector. This would enhance the interest from 14

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potential ethanol producers and the fuel blender(s) Kaplinsky, R. and M. Morris, 2001. A Handbook for and guarantee the market. Value Chain Research. IDRC, Ottawa. • Reviewing the export strategy especially taking Mulikelela, M. and N. Munagnya, 2010. Kafue Sugar into the account the market access risks posed by Expansion on. Times of Zambia, July 7th, 2010. amendments in the EU trade policy, focusing on Palerm, J., T. Sierevogel and M. Hichaambwa, 2010. reducing dependence on the EU markets and Strategic Environmental Assessment (SEA) of the exploring alternative markets such as the regional sugar sector in Zambia. Report Prepared for the markets. Delegation of the European Union in Zambia, Zambia. REFERENCES Struyf, G. and S. Chuba, 2009. Study to examine the feasibility of the expansion of sugar out growers Asia DHRRA, 2008. Value chain analysis report: schemes in Zambia. EUROPEAID/119860/C/SV/ Cambodia, Philippines and Vietnam: Linking small Multi Lot 1, GRM International. farmers to market project. Asian Partnership for the The Zambian Economist, 2011. Investment Watch: Development of Human Resources in Rural Asia Sugar and Bio-ethanol. Online Retrieved from: (AsiaDHRRA) and Jakarta, Indonesia: The ASEAN Foundation, Manila, Philippines. http://www.zambian-economist.com/2011/04/ Chisanga, B., 2012. Efficiency and integration in the investment-watch-sugar-bio-ethnol.html. Zambian sugar market: Analyzing price (Accessed on: Feb. 02, 2012) transmission, price formation and policy. M.Sc. WHYDAH Consulting Ltd., 2011. Interim Evaluation Thesis, University of Pretoria. of the Magobbo Sugar Cane Out Growers Project. Ellis, K. and R. Singh, 2010. Assessing the Economic World Bank, 2007a. Zambia: Poverty and vulnerability Impact of Competition. Overseas Development assessment. Poverty Reduction and Economic Institute (ODI), UK Aid, London. Management, Southern Africa, Africa Region Government of the Republic of Zambia, 2004a. Report No. 32573-ZM. Retrieved from: www- National Agricultural Policy. Ministry of wds.worldbank.org/.../WDSP/IB/2007/. Agriculture and Cooperatives, Lusaka. Government of the Republic of Zambia, 2004b. World Bank, 2007b. Competitive Commercial Irrigation Policy and Strategy. Ministry of Agriculture in Africa (CCAA)-Zambia Agriculture and Cooperatives, Lusaka. competiveness report. The World Bank Government of the Republic of Zambia, 2006. Fifth Environmental, Rural and Social Development National Development Plan: 2006-2010. Ministry Unit Africa Region, Washington, DC. of Finance and National Planning, Lusaka. Zambia Development Agency and Commonwealth Government of the Republic of Zambia, 2010. The Business Council, 2011. Investment Project Zambia National Sugar Strategy. Ministry of Profiles. Zambia Investment Forum, Lusaka. Commerce, Trade and Industry, Lusaka. Zambia Sugar Plc., 2011. Annual Report 2011. Government of the Republic of Zambia, 2011. Sixth National Development Plan: 2011-2015. Ministry Retrieved from: www.illovosugar.co.za/About_Us of Finance and National Planning, Lusaka. /.../ZambiaSugarPlc.aspx.

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