**The COMESA quota has generally been under-utilized**<sup>**15**</sup> **, reportedly due to non-tariff barriers (NTBs) that allow discretionary blocking of sugar imports.** The Kenyan Government has upon several occasions, including 2011, locked out COMESA imports due to various disputes<sup>16</sup> .  Mandatory import permits for sugar are required by the regulations under the Sugar Act of 2001<sup>17</sup> , through which the Kenya Sugar Board has complete control over imports.  Although licenses are issued annually, every shipment of sugar requires pre-import approval.  For this reason, it is unclear whether the duty free COMESA quota will be used in full.  Other NTB’s such as clearing fees and informal payments<sup>18</sup> may also play a role in increasing the price of COMESA imports, but these are likely superfluous in comparison to the discretionary control.  More recently, high world prices of sugar making preferential access to other markets (such as the European Union (EU)) more attractive and occasional export bans from key COMESA exporters<sup>19</sup> have reduced the availability of imports from COMESA. It is doubtful whether this last factor has had significant impact, given the dominance of the discretionary controls mentioned above.

**Barriers to competition from COMESA imports mean that these imports have a limited effect on Kenyan sugar prices.** The barriers mentioned above have prevented imports in sufficient quantities to drive down the local price of sugar towards the levels in cost-leading COMESA countries. Kenya has a structural deficit in sugar production relative to consumption of roughly 200,000MT per annum at current prices. The amount of imports allowed is just such that the market clears at the current (high) prices, but there is no threat of sufficient imports to undercut prices due to the NTB’s in place.  Without these barriers, cheaper imported sugar should lead to decreases in the local price, all things held equal.  With the insulation from competition provided by NTB’s, local price variation is driven by local production, supplemented by limited imports from COMESA<sup>20</sup> .  International landed prices form a loose upper bound to Kenyan prices. Section 2.2 below expands on this issue.

**Government ownership in the sector remains large, despite higher relative efficiency in the private sector and long term plans for privatization.** While some privatization has taken place over the past decade, government-controlled factories held a 37 percent production share<sup>21</sup> , with additional non-controlling shares in other firms.  Part of the argument in favor of privatization is the relative efficiency of production in private mills over those controlled by the government<sup>22</sup> . Plans to privatize the industry, with the hope of inspiring

> 15 See FAS (2009, 2011).  Between 2002 and 2006 the quota of 200,000MT was never completely used according to KSB (2010) data.  FAS (2011) noted that only about 40 percent of the quota was used in 2010. 16 A COMESA lockout occurred between October 2008 and July 2009 surrounding disagreements between Kenya and COMESA regarding the auctioning mechanism (FAS, 2010).  FAS (2012) claims that the Government of Kenya allowed few imports in 2011 due to a pending lawsuit regarding imports from COMESA.

> 17 The most recent iteration of the regulations is “The Sugar (Imports, Exports and By- Products) (Amendment) Regulations, 2013”.

> 18 See FAS (2009)

> 19 For example Egypt in late 2009 (FAS, 2010).

20 Imports of non-COMESA raw (brown) sugar are negligible and may actually be zero – they are so low they may represent data errors. Trademap data, author calculations. Illegal imports, either undeclared or coming in falsely under the auspices of COMESA (see for example CGD Bills Digest (2005), http://www.trademarksa.org/news/mombasa-sh16bn-sugar-import-scam-unearthed) are likely not substantial enough to drive prices down either.

21 Kenya Sugar Board Data (KSB), 2011.

> 22 See Chisanga et al (2014).

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