Illegal molasses exports surge as local distilleries are left high and dry

A surge in illegal export of molasses has left Kenyan firms teetering on the brink, with distilleries the hardest hit.

Without access to the essential raw material that they use for the production of ethanol, the distillers are operating at a fraction of their capacity.

There are fears that they could now resort to laying off employees due to reduced output and in the worst-case scenario shut down altogether.

Players say the molasses, which is finding its way to Uganda, is processed into ethanol that is then illegally imported to Kenya.

The ethanol from Uganda, Kenyan firms claim, is used in the production of illegal spirits in Kenya, giving the unscrupulous business an edge in the market but also endangering the lives of Kenyans and at the same time denying tax revenues to the State.

The Sugar Directorate, housed by the Agriculture and Food Authority (AFA), in February this year suspended the export of molasses for three months following what it said were rampant malpractices perpetuated by exporters.

The suspension, it said, would allow for an in-depth investigation of the whole process and time to consult the industry.

"From late 2022, there have been a number of concerns regarding molasses access and adequacy by distilleries and exporters," said the Directorate.

"Distilleries being the main molasses users claimed that they do not access adequate molasses at affordable prices (as a result of excessive exports to lucrative markets), leading to acute shortage of the product that is their main raw material."

"Findings from the investigations through surveillance audits by AFA unearthed several malpractices, which led to the suspension of molasses exports from 6th February 2023."

The Ministry of Agriculture guidelines require 80 per cent of all molasses production to be reserved for distilleries and other industrialists while farmers, distributors, animal feed manufacturers and exporters should utilise the balance of 20 per cent.

As demand rises for molasses in Uganda, its exports from Kenya have become lucrative. The number of molasses exporters rose from two in the 2021/22 financial year to 16 in the 2022/23 financial year, according to the Sugar Directorate.

The local distillers and Kenya Revenue Authority (KRA) claimed that their revenues reduced drastically.

KRA said the suspension of molasses exports had adversely affected revenue generation for the Malaba and Busia border points from a monthly average of Sh200 million to between Sh40 million and Sh55 million.

Three distilleries in Kenya get their molasses from the about 15 sugar factories in the country's sugar belt in western Kenya. These are the East Africa Agro Chemical and Food Company (ACFC), Kibos Sugar Company and London Distillers.

These distilleries, however, do not have access to adequate molasses, with ACFC operating at about 50 per cent of its capacity.

"Agro-Chemical and Food Company Ltd (ACFC) is facing scarcity of molasses, forcing it to operate at between 55 per cent and 70 per cent of its capacity.

"The company has been permitted to procure 13,000 metric tonnes of molasses but currently has bought approximately 5,000 metric tonnes," said the Agriculture And Food Authority in a new report that also captures industry sentiments.

The distillers are not the only losers, with the report noting that they "contribute a significant amount of tax to KRA mainly through payment of excise duty and VAT."

Mohan Galot, the chairman of London Distillers, one of the three of Kenya's distilleries that also produces alcohol, says the smuggling of molasses into Uganda and ethanol into Kenya has been a double sting for them.

As a buyer of molasses, it means the firm has a shortage of raw material and as a seller of alcohol, smuggled ethanol has meant a depression of its market by bootleg drinks, which deny the taxman revenues.

The three Kenyan distilleries are in comparison to 11 in Uganda, most of which have only become operational in recent years.

"Exportation of molasses has led to transfer of jobs and taxes to Uganda. The 11 distillers in Uganda have ready markets for their products in Rwanda, DR Congo and Sudan," said the AFA report, adding that several Kenyan cane millers prefer selling their molasses to Uganda due to logistics and higher rates.

"Some millers with proximity to Uganda border prefer selling molasses to exporters because of reduced transport cost."

The illegal activities have seen the prices of molasses skyrocket, with a tonne currently going for about Sh50,000 from Sh5,000 a year ago.

"The current high prices of molasses have greatly affected operations of most distillers in the country by making their products uncompetitive. There is a need to understand why and how distillers from Uganda are willing to pay premium prices for Kenyan molasses," said the Sugar Directorate.

And while the government agencies are yet to figure out how the Ugandan distilleries can offer high prices for the raw material, even more puzzling is their rock-bottom prices for ethanol.

The ethanol imported from Uganda has a landing cost of Sh120 per litre, while the selling price of locally produced ethanol averages between Sh170 and Sh180 per litre.

According to reports, Ugandan distilleries have in recent years turned to buying molasses from millers in neighbouring Kenya and Tanzania as Ugandan millers increased production of spirits and hand sanitisers, denying the distilleries access.