By Kenya Confidential Investigative Team, Nairobi – June 24, 2018
The year 2017 will go down in the history of Kenya as a season when manna literally came raining down into the money bags of sugar barons.
Mid December last year, a merchant ship, MV The Holy, made its way through the Indian Ocean waters of the Kenyan coast to dock at the Port of Mombasa. Aboard was a cargo of 55,000 metric tonnes of Brown Sugar from Brazil valued at more than Ksh 3 billion.
The cargo as consigned to was Awendo-based South Nyanza Sugar Company (Sony), in Migori County, a sugar factory that was on its lowest financial web and at could barely afford to pay its staff salaries. The desperate miller faced financial distress in a season it was operating at 50 per cent below capacity.
The Panama-registered merchant ship MV The Holy blew a wind of change towards the desperate Sony changing the financial fortunes of its management in a deal that earned a handsome commission to keep it afloat. The vessel details are, Gross Tonnage: 39727, Deadweight: 76623 t, Length Overall x Breadth Extreme:224.94m × 32.26m, Year Built: 2001
Mid morning on December 19, just a week to Christmas, the vessel commenced its discharge. Waiting quayside were six agents, who having concluded the deal with Sony, quickly took possession of the cargo. Agents at hand loaded it on their trucks and disappeared into the humid Mombasa thick air, and beyond.
Import declaration forms indicate the sugar was sold by Holbud Ltd, a company registered in Britain, that has previous exports to Kenya had queries and unresolved controversies. In May last year the firm shipped in 29,900 tonnes of maize imported by from Mexico by Naushad Merali. In 2015 Melari was quizzed in connection with a Sh6 billion contract for the supply of fertiliser on behalf of the Ministry of Agriculture that did not measure up to standard.
But no questions were raised for the December last year sugar consignment. Sony had cut a deal running into “hundreds of millions” according to its managing director. Immediately their cut was deposited into their account at Barclays Bank of Kenya, they signed off the sugar consignment to the tyre manufacturer turned commodities mogul.
Kenya Confidential has established that not a grain of the 55,000 metric tonnes of Brown Sugar from Brazil ever made it to its way to Sony warehouses in Awendo. It never was intended to reach that far. Sony was just a conduit. The six buy-back agents executed the settlement and left.
Sony Managing Director Bernard Otieno later explained; “We had our agent on the ground who inspected the sugar. We were paid our money which was in hundreds of millions. This was brown sugar and was fit for human consumption. It needed no further processing,”
The sugar left Mombasa in trucks to an undisclosed location for distribution. A broke Sony had no option and was at the mercy of the brokers who paid for the shipment from Brazil and all the other costs, including insurance and freight, and only gave Sony a share of profits for using their cover to bring in sugar – a duty free umbrella.
A fortnight before the ship arrived, Sony had used its position to clear the way. Otieno wrote to Treasury PS Kamau Thugge on November 14, seeking duty exemption for the cargo. In the request letter, Otieno explained to Thugge that the Sony had imported sugar and was going to be shipped by Mercantile Vessel (MV) The Holy and therefore needed Treasury to exempt the cargo from paying the taxes.
The exemption was done and the duty on the cargo was waived. Sony was targetted since it was in a dire situation unlike two other public millers, Nzoia and Chemelil, considered o be among the big players.
Sony sugar left the port without paying any taxes while another consignment that had arrived a few days earlier had been impounded by KRA officials demanding Ksh2.5 billion in taxes. Despite arriving several days earlier, MV Iron Lady, which was carrying 40,000 metric tonnes of Brazilian brown sugar, docked when rules had changed.
When MV Iron Lady made its way to Mombasa, Treasury had issued two contradictory gazette notices, one offering an extension to the duty free period to December, while the other one reversing it to October to stem the flow of easy money to rivals.
The row saw an importation rush that saw Ksh40 billion worth of sugar imported in just three months and opened the market to almost anyone with money to import. When sugar prices hit a new high early last year, it was in the interest of the government to contain it, especially being an election year.
President Uhuru Kenyatta issued an executive order to allow duty free imports of maize, sugar and powdered milk. National Treasury Cabinet Secretary Henry Rotich swiftly responded to the order and issued the first gazette notice on May 12. The notice allowed importers to bring in duty free sugar till August 31, 2017.
Unlike milk and maize where it was specific who would import and at what quantities, the sugar notice was a free for all. Any person could import. On the other hand, the notice allowed importation of only 9,000 tonnes of milk powder restricted to milk processors.
Under a blanket approval, almost anyone went into importation. But public miller had no the financial muscle to import the sugar on their own. Concerned of being overrun by sugar barons, millers rushed to seek protection from the Agriculture ministry. At one point, millers met the then agriculture Cabinet Secretary Willy Bett to protest the free for all importation.
The millers wanted to be allowed to import sugar according to their quota of production.
However, having no money, their pleas fell on deaf ears. Initially, the sugar was to be imported from the Comesa region, but given that the region was also suffering from its own shortage, the window was opened to almost any country that had sugar around the world.
West Kenya Sugar millers, popularly known as, Kabras did not have such a challenge. The miller, owned by billionaire Jaswant Rai whose family is now the biggest player in the sugar industry in Kenya, did not wait. Rai took advantage of this window and shipped in 185,000 metric tonnes of sugar, part of which it stored in its Pan Paper warehouse in Webuye. It is this consignment that has placed it in trouble.
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Though Rai maintains that his company has been above the board, players in the industry say he may have answers to the current sugar crisis given that he is also the chairman of the Kenya Sugar Manufacturers Association (Kesma).
In a short period of three months, Ksh 40 billion worth of sugar had been brought in by more than 100 importers. By the end of the first deadline, more than 400,000 metric tonnes of sugar had been brought into the country. Almost just any company imported. Even stationery companies, forwarding and clearing agents and transport companies imported.
On the list of importers include China Road Corporation, which is building the SGR railway, Menengai Oil Refineries, an edible oils and soaps associated with the Rai family as well as Hydery (P) Ltd based in Mombasa and which is associated with the Merali family.
Other major importers included Amnav Ltd, Arasan Traders Ltd, Awwal Oil Company Ltd, YH Wholesalers, Coast Terminal East Africa Ltd, Convex Commodity Merchants Ltd and Flora Bakers Ltd. More importers included Pillar Matt Ltd, Mshale Commodities Ltd, Hussaba Trading Company Ltd and Sukari Investments Ltd. More than 100 companies made 691 import orders cumulatively in the period.
The sugar arrived from just about anywhere, from Brazil, Swaziland, Madagascar, Zimbabwe, Thailand, Mauritius, Zambia and Mozambique among others. In the import frenzy, raw sugar and sugar not fit for human consumption was sneaked in and stacked in warehouses across the country. A fact admitted by Rai, who has business connection with the Kenyatta family from whom he bought Timsales Timber company.
When importers thought the window had been closed, there was a new push to have local millers get a piece of the humble pie. Sony sugar says it was approached by more than six individuals who wanted to be their partners in importing sugar, having gotten ‘word’ that the next batch would be restricted to millers.
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Sugar barons were now knocking on the doors of millers, seeking to partner with them to bring in more sugar. Chemelil and Nzoia also made plans to be part of the next import action. Eventually, the window was opened on October 4, less than two weeks to the repeat presidential election.
Rotich issued another gazette notice allowing vessels on the high seas that had been loaded between September 1 and December 31, 2017, destined to a port in Kenya and consigned to a local sugar miller to bring in the commodity without paying duties. The notice was dated the September 29, 2017. That is the window that Sony exploited.
Shortly after MV ‘The Holy’ had been loaded, Rotich came to change the rules again. Ten days later, he issued another extension to reduce the import window from the deadline of December 31 and brought it forward to October 13. This locked out many players who were also planning to exploit the window.
MV Iron Lady Shipment was not so lucky having made a controversial detour to Dubai, delaying it. The taxman says the duty free import window had closed and it wants Ksh 2.5 billion from the consignment as its pound of flesh.
That was at a time the country was preoccupied with the General Election and the aftermath of the Supreme Court decision nullifying the election. Who was importing sugar and in what quantities was not top on the agenda of the government.
The fallout after the taxman impounded 40,000 metric tonnes of sugar in Mombasa demanding Ksh 2.5 billion in taxes is behind the current sugar wars that are reportedly threatening to split the Jubilee administration.
The matter has now been escalated to the Supreme Court, which will determine who has the last word on whether Darasa, the sugar importer, pays taxes or not. Darasa Ltd says it imported the sugar legitimately and expects to be allowed to bring it into the market duty free. On the other hand, KRA says there are glaring inconsistencies in the import documents, which means Darasa does not meet the threshold for exemption.
At the heart of the court battle is the source of the sugar. Darasa maintains that the sugar was imported from Brazil but could not offload it due to the sheer size of the ship. The firm says the consignment headed off to Dubai from whence it came to Mombasa on board a smaller vessel.
KRA has issues with the documentation and told the courts that Darasa was not within the parameters set by the gazette notice that allowed importation of sugar and other items duty free to shore up stocks in a time of want. KRA argues it was unable to deal with a cargo that had two bills of lading, issued in two different countries. When questioned about these contradictions, Darasa says the sugar was inspected and certified by Dubai authorities.
KRA says in court papers that Dubai customs could not verify this import since it is not a sugar producing country and, if indeed it was destined to Kenya, it never then entered the Dubai jurisdiction. In the taxman’s hand for determination was the issue of how to deal with a cargo with two ports of origin.
The documents indicated that the sugar was produced in August and September 2017 which begged the question: If indeed the sugar was purchased in July, when it was loaded into MV Anangel Sun, did Darasa load unproduced sugar?
On its part, Darasa Investments argued that they had a legitimate expectation and KRA should be compelled to clear the consignment, duty free. In the High Court, Darasa Investments Ltd won.
The Court of Appeal subsequently overturned the decision in favour of KRA. Darasa says it had a legitimate expectation that its consignment would be cleared duty free, having been accepted and paid fees, levies and taxes amounting to Ksh 422,106,560.