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The East African : May 24th 2015
The EastAfrican 38 BUSINESS MAY 23-29,2015 Why land, so≥ghum and the new alcoholic d≥inks cont≥ol law matte≥ COMMENTARY NG’ANG’A MBUGUA “A tax remission on sorghum-based beers would lead to a win-win situation for all involved.” A s Kenya’s agribusiness looks forward to days of growth, two challenges stand in its way. One, many landowners do not consider land a factor of production. As a result, swathes of productive land lie idle, their economic potential notwithstanding. Two, many farmers earn low incomes because there are not enough companies offering value addition for agricultural produce. Many farmers, therefore, end up selling their produce to middlemen at low farmgate prices. The Alcoholic Drinks Control (Amendment) Act, which President Uhuru Kenyatta signed into law recently, offers hope of addressing these challenges, especially for farmers who grow orphan crops like sorghum. For many years, sorghum was a poor man’s crop, considered suitable only for subsistence. However, when the Kenya Agricultural and Livestock Research Organisation partnered with East African Maltings Ltd, a subsidiary of East African Breweries, the fortunes of the crop were transformed as the two popularised the commercial farming of one variety of white sorghum known as Gadam. Within a few years, over 600,000 farmers had embraced commercial growing of Gadam, which was used in the manufacture of Senator Keg, a beer variety that was safe to drink and affordable to low-end consumers. Incidentally, the beer was introduced into the Kenyan market at the behest of the then finance minister David Mwiraria, who offered tax re- mission for low-end beers as one way of addressing the public health hazards posed by the consumption of illicit brews, many of which were laced with killer chemicals such as industrial methanol. Many of these brews were produced in unhygienic conditions, leading to deaths of consumers, or in other cases, blindness. The commercialisation of the sorghum transformed land, particularly in arid and semi-arid regions, into a factor of production. Indeed, land values in such regions as Meru, Embu, Homa Bay, Tharaka Nithi, Kitui and Machakos went up when the benefits of growing Gadam became self-evident. In the same breath, farmers not only became bankable but also creditworthy and banks started redirecting money to the rural areas, offering loans with land as collateral. As a result, other players, including transporters and aggregators, emerged in the chain. An entire value chain emerged, not only creating thousands of jobs but also putting in the market a product that was safe for consumers. All these gains, however, came undone when the tax remission was scrapped in 2013 as the Cabinet Secretary for the National Treasury sought ways to streamline tax collection from alcohol and to raise revenues generated from sin taxes. players in the alcoholic beverages market can enjoy the tax breaks of yesteryear provided they use locally produced raw materials like sorghum and target low-end drinkers with a product that is both safe and affordable. One of the goals that the new law intends to achieve is to educate the public on the benefits of using affordable alternatives to dangerous liquor. This has been a thorny public health issue in the face of the cyclical deaths of consumers from lethal spirits and brews, especially those derived from industrial chemicals and byproducts like methanol. The high social cost of these brews cannot be overstated as some of the unwitting victims include professionals such as teachers in rural areas. If implemented as envisaged, the law should improve accounting for such deaths, help the building of affordable rehabilitation centres for alcohol related complications and provide a policy framework for the manufacture, sale and consumption of alcohol. More important, however, is the re-invigoration of sorghum farming and the businesses that it had spawned in its golden years. A tax remission on sorghum- Senator Keg, made from sorghum, was safe to drink and affordable to low-end consumers. Picture: File Unfortunately, these goals were not met because, first, there was a sharp decline in the consumption of the beverages after the tax was ramped up; and, second, the value chain collapsed when the demand for the beer plummetted. With the signing into law of the Alcoholic Drinks Control (Amendment) Act, the fortunes that had dwindled in the intervening period are likely to be revived as now there is an incen- tive, throughout the value chain, for investors in the segment to go back to business. The new law says: “The Cabi- net Secretary responsible for Finance shall implement tax policies and where appropriate grant remission of duty under the relevant law on alcoholic drinks that are locally manufactured so as to promote compliance of those drinks with the objectives of this Act.” What that means is that other based beers would lead to a win-win situation for all involved, from the farmer in the arid areas, who will be in a position to afford better health and education for his family, repay his loans and grow his savings, to the beer consumer in a city slum who will have a drink that is healthy and safe and that will not rob him of his eyesight. Everyone else in that chain, not least of all the tax collector, will also benefit while other agribusinesses can learn from this model and make the transition to value-addition as one way of transforming the national economy through innovation. Ng’ang’a Mbugua is a senio≥ edito≥ with the Daily Nation. firstname.lastname@example.org T≥anspo≥t, ene≥gy p≥ojects to push M&As in insu≥ance secto≥ By SCOLA KAMAU Special Correspondent NEW MERGERS and acquisitions in East Africa’s insurance industry are expected in 2015, driven by an influx of new capital from private equity funds and foreign insurers, says a new Deloitte report. However, only smart companies will succeed in driving uptake of insurance in the region, which remains low. Kenya leads at 3.8 per cent, followed by Tanzania at 2.3 per cent while Rwanda and Uganda are 1 and 0.8 per cent of the population respectively. “With a low penetration rate of insurance and complicated insurance products, experimentation and innovation is called for in terms of insurers engineering products that are more consumer friendly, improving methods of attracting and engaging clients through traditional as well as new channels and more effectively communicating the value of the proposition they offer,” said Thomas Njeru, director of Deloitte East Africa. According to the Deloitte report, demand for insurance products across the region will be driven by infrastructure projects such as the Lamu Port Southern Sudan-Ethiopia Transport Corridor, modernisation of the railways network and the expansion of power generation, oil and gas exploration. Fresh deals this year include Barclays Life acquiring a majority stake in First Assurance in Kenya. World Bank investment arm International Finance Corporation announcing plans to purchase an estimated 11 per cent stake in reinsurer Zep-Re by for Ksh1.9 billion ($19.6 million) Jubilee Holdings chairman Nizar Juma said the company is in talks with three insurers in the region as it seeks mergers and acquisitions. Old Mutual plans to merge its Kenyan insurance business with its newly acquired financial services company UAP. The transaction should see the insurer increase its stake in UAP Holdings Ltd to 60.7 per cent after purchasing a further 0.8pc 37.3 per cent stake for $155.5 million. An influx of new capital flows is expected to enhance the overall capacity of the industry, thus increasing competition. “This will in turn kickstart merg- ers and acquisitions in the short to medium term as insurers seek efficiencies from economies of scale, a phenomenon that has already started unfolding over the past two years,” said Mr Njeru. A number of mergers were re- Insurance penetration among the population in Rwanda. This is the lowest in the region. corded in the region last year, among them Leapfrog Investments, an investor in financial services in Africa and Asia, which sold its minority stake in Apollo Investments Ltd to Swiss Re. Apollo, through its wholly owned insurance subsidiary, APA, is one of the top three regional insurers in East Africa. Pan Africa Insurance Holdings Ltd acquired a majority stake in Gateway Insurance. Sanlam Emerging Markets, A south African financier, acquired a 63 per cent interest in Soras Group Ltd, Rwanda’s largest life and non-life insurance company, for $24.3 million. But Liberty Holdings Ltd, for- merly CfC Insurance Holdings, said it has no acquisition plans at least for the next two years. “We are banking on technology to bring the existing products closer to the consumer in the region for at least consider other expansion strategies,” said Michael Du Toit, two years, when we might the company’s managing director and Liberty Africa regional managing director for East Africa.
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