Omo investors won’t scrub away Kuraz’s sugary stain

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Omo investors won’t scrub away Kuraz’s sugary stain

Private sugar investors are set to face the same challenges and dilemmas in the Lower Omo as the EPRDF’s fallacious planners

(ethiopia-insight)–When three leaders came to cut the ribbon of the Omo-Kuraz III sugar factory in October 2018, built using $290 million of credit from China Development Bank, all eyes were on southern Ethiopia.

The visit of Prime Minister Abiy Ahmed, accompanied by his predecessor Hailemariam Desalegn and Eritrean President Isaias Afeworki, was an important step for Kuraz Sugar Development Project, an unprecedented mega-scheme of four estates in Ethiopia’s southwestern lowlands whose progress has been stuttering.

The success of the venture was compromised at the outset by government overconfidence in its technical and financial capabilities. A decade ago, then Prime Minister Meles Zenawi and his colleagues aimed to replicate the success of the Metehara and Fincha sugar estates, both planned and constructed by the Dutch H.V.A. in the 1960 and 70s.

The overstretch, initially overseen by Abay Tsehaye, first Director General of the Ethiopian Sugar Corporation (ESC), resulted in the costly redesign of waterworks, reduction in planned cane cultivation and processing capacities, and, ultimately, a delay in the compensation of negatively affected local communities.

Abay, then a member of the politburo of the Tigray People’s Liberation Front, was previously board chairman of the Development Bank of Ethiopia and Commercial Bank of Ethiopia. The latter provided ESC loans since the turn of the decade worth more than $2 billion for projects in Afar, Tigray, Amhara, and Southern Nations regions.

During the 2018 visit, Abiy proclaimed, in a manner typical of his predecessors, that the inauguration of Omo-Kuraz III showed results finally matching vision: “now the problems seem to be alleviated and we need to march forward”.

Yet it isn’t at all clear who will be marching where.

As the second five-year Growth and Transformation Plan nears its end, the ambitious goals set out in 2010 for the sugar industry, primarily employment and production increases, have not been accomplished. The clearest indicator is yet another international procurement tender for up to 100,000 tonnes of white sugar following the purchase of 200,000 metric tonnes late last year. This shows there is still a costly supply-demand gap.

With several billion US dollars invested in new processors and modernizing estates, almost a decade of state-led sugar industrialization has yielded disappointing results. Output, for example, continues to fluctuate. After peaking in 2017/18, it dropped by around 40 percent to 240,000 tonnes in 2019/20, as heavy rains and spare parts shortages slowed production. Employment creation, a central objective of investing in the sugar industry, has been particularly unsuccessful.

Kuraz has reached a point of no return

So, while the completion of Omo-Kuraz III was a crucial milestone, in light of Kuraz’s overall struggles, and amid concerns about ESC’s indebtedness, the best way forward is uncertain. The government is seeking private investment to proceed, but it is far from clear that this is practical, or desirable.

Human rights-focused critics of the Omo-Gibe basin development have described the effects of the upstream Gibe III hydropower reservoir and land-clearing for Kuraz in the Omo’s lower catchment as a tragedy that has caused hunger and conflict. The latest critical report was from US-based Oakland Institute, a vocal critic of Ethiopia’s river basin developments. Corroborating the Californian think tank, a recent academic studyfound the environmental and human costs of the Omo-Gibe schemes outweighed gains, yet the government still insists the opposite.

It might come as a surprise to some that Abiy’s administration has pledged to finalize Kuraz. With the continuing barrage of criticism, and the administration’s eagerness to disparage the achievements of predecessors such as the TPLF’s Meles and Abay, a rethink might have seemed likely. But the perseverance demonstrates that Kuraz has reached a point of no return; it became too big to fail, showing similarities to the Grand Ethiopian Renaissance Dam (GERD) where sunk costs and built structures leave no option but to press on. That said, the efforts to seek private investment indicate that all is not well at Kuraz.

The planned privatization of sugar estates aims to increase capital and reduce ESC’s debt. But earlier projections of returns on investment are unlikely to hold. Instead ESC will likely sell without having repaid debts in full and without holding onto any significant future income streams. Moreover, the end of the state’s de facto industry monopoly and entry of new private stakeholders raise important questions. For one, how will private interests influence matters such as pastoralist policy and the construction of regional transport infrastructure as part of development plans. Additionally, the primary goal of sugar industrialization was to meet domestic demand. This could become secondary for investors who have to generate returns through exporting.

Misadventure

Many political decisions on big projects also have a symbolic function—arguably one of the hallmarks of Ethiopia’s Developmental State. If GERD was designed to symbolize the Ethiopian renaissance, Kuraz marked, high in the modernist mind, the far south’s impending transformation from a remote periphery to an agro-industrial export hub. Besides commercial considerations, the symbolism of Kuraz—planned as 175,000 hectares of sugarcane with a combined processing capacity of 84,000 tons of cane per day—should not be dismissed.

The reasons for the project’s underperformance, and arguably also the Developmental State’s, are complex. Yet Kuraz’s travails points unambiguously to a large degree of ‘planning fallacy’. This form of overconfidence combined with ardent belief in the transformative power of technology had major consequences. In keeping with the nature of the authoritarian development model engineered by Meles, ESC rushed into the multi-billion dollar project, largely neglecting critical feasibility and impact assessments.

In 2016, more than four years into construction, the number of processing factories was reduced from five to four, as Omo-IV was cancelled, and the planned cultivation area slashed to 100,000 hectares. This downsizing was mainly a result of funding shortfalls caused by additional spending on redesigning irrigation infrastructure, and the use of new subcontractors for project components initially handled by the Metals and Engineering Corporation (MetEC), which was formerly run by serving military officers.

Since MetEC was stripped of all its contracts for constructing 10 processors, initially five within Kuraz, the construction of Omo-Kuraz I factory in Salamago district of South Omo Zone came to a halt, leaving a badly assembled half-finished factory. Omo-Kuraz II and Omo-Kuraz III factories, both constructed by China’s COMPLANT, entered production in March 2017 and October 2018—albeit at reduced capacity. By contrast, the inauguration of Omo-Kuraz V, designed and constructed by Chinese JJIEC, and especially Omo-I, is still a long way off.

It created new conflict dynamics

The construction problems have reduced the numbers of people employed on Kuraz. More than 110,000 jobs had been created for the local communities since 2011, according to official figures. This, however, is still far from the four jobs per hectare estimate given by ESC officials in 2014. Significantly, the ESC’s 2013 socio-economic development study refers to a total population affected by Kuraz of slightly below 50,000 people traditionally living on and in close proximity to the designated project area. This shows that migrant laborers from other regions of Ethiopia took more than half of the jobs.

In its recent report, Oakland Institute quotes locals who accuse the government of ‘having tricked’ them. Agro-pastoralist such as the Mursi (Mun) or Bodi (Me’en) were meant to benefit from Kuraz through small-scale irrigation schemes, the provision of social services, and jobs. The delay in compensating locals for the loss of fertile plots created by receding floodwater and for grazing land lost to sugarcane is problematic for the government in at least two ways.

First, it illustrates how the capital-intensive transformation of the region failed to bear fruit for its indigenous communities. Second, it created new conflict dynamics. There have been attacks on vehicles and workers as retaliation for killed livestock and human victims along the newly constructed road linking Jinka and Salamago. Such incidents affect the estate economy and create risks for farmworkers and drivers. This will be of concern when it comes to potential privatization and the due diligence assessments of interested investors.

Privatization: prudent, possible, profitable?

Following the official privatization announcements in June last year, foreign and domestic investors soon expressed interest in taking over both operational and incomplete projects. Unlike telecoms or logistics, joint ventures and sale of estates was already on the market back in 2016. Although ESC recorded interest from 30 potential bidders by January 2019, the economic prospects of individual estates vary. Operational estates for sale such as Tendaho, Fincha, Metahara, or Wonji Shoa, are likely to attract more interest from existing Chinese and Indian partners, whereas Kuraz, with its heightened sensitivities and semi-operational estates, could be a hard sell. This is due to a combination of factors.

Leaving aside the politics for now, primarily these are: the quality and status of construction, cane availability, and waterworks. Despite the use of top-quality material, construction and design errors in Omo-Kuraz I factory, for instance, will pose considerable technical challenges for any investor, according to a engineer who visited the site in mid-2018. Dovetailing with this assessment, Chinese contractors have little interest in Omo-I. They instead favored the Chinese-built plants when they were asked last year about taking on MetEC’s monstrosity.

Functioning reliable irrigation systems, and, most importantly, a steady availability of water, are crucial for large-scale sugarcane cultivation. From the river diversion at the headwaters of the project site in Salamago district, two main irrigation canals on the left and right banks of the Omo have been constructed to feed the designated cultivation areas for each estate in Salamago District (Omo-Kuraz I, Omo-Kuraz II) and Nyangatom District (Omo-Kuraz V) of South Omo Zone, and Bench-Maji (since April 2019, West Omo Zone) and Kaffa Zones (Omo-Kuraz III).

A closer look at the project map reveals that the separate estates of Kuraz, the two completed processing factories Omo-Kuraz II and Omo-Kuraz III, and the partially completed factories Omo-Kuraz I and Omo-Kuraz V, are not separated, but are linked by the main canals, which, for the time being, are without individual water intakes from the Omo River. Selling the Kuraz estates to separate investors could therefore create water allocation problems if no additional provisions are taken, which would be costly.

Furthermore, in order to use the factories’ full installed capacity profitably, a sufficient supply of cane is vital. Here, time is another constraining factor, as cane availability continues to negatively affect the production capacity of existing processors. Several years might still be needed to produce enough cane to run all four at maximum capacity. The quality of waterworks and uncertain soil conditions might be another limiting factor in expanding the cultivation area.

Joint ventures, with factory operation and cultivation split between ESC and investors, was another option proposed by the state-owned corporation. However, investors questioned the feasibility of this arrangement, stating, “if they want to sell, they need to hand over the entire operation, which also includes the land.”

The three current and former leaders at the opening of Omo-Kuraz III; Oct. 14, 2018; ESC

Then, in addition to these logistical challenges, there is the politics.

One representative of a Chinese corporation involved in sugar questioned the security of Ethiopian investments following upcoming elections: “In the past, the Ethiopian government more often then not did not live up to contractual agreements, which increased costs and posed new technical challenges. We want to take over the schemes for 30-40 years. What if the regime changes?”

While resource competition between sugar estates and traditional land users is an equally important issue in locations such as Afar and Oromia, the lower Omo Valley, with its uniquely diverse indigenous agro-pastoralist population, poses considerable challenges for investors and the government. Operational security is largely determined by conflict dynamics, scarcity-induced regional migration, and local acceptance, or rejection, of projects.

Since construction of Kuraz began, unprecedented transformation occurred: the clearing of thousands of hectares of land, major road construction, and the arrival of migrant workers, which turned the indigenous population into a minority in their homeland. The most visible effect, however, comes from the regulation of the Omo’s flow regime due to Gibe III, and the consequent ending of the river’s annual flood since 2015. Critical reports have repeatedly pointed to the negative effect on local people’s livelihoods of planning and the implementation defects, which investors will also need to factor into reputational risk assessments.

So, a salient question arises: will Kuraz’s privatization turn into a costly and damaging venture for investors? At a minimum, this requires hard thinking by the government about how existing land users will be included and consulted from here on in. Another question concerns the sharing of land lease payments and tax revenues with the regional state, which is itself in turmoil. As an initial critical step, new feasibility assessments are necessary to determine the actual agro-economic potential of the scheme and what can be done to get the project on course.

Mistrust

For a long time, Kuraz was largely off limits to observers and there was little reliable information on its progress. The prevailing view within ESC was that journalists, and no less researchers, disregarded the potential benefits of the project in search of a ‘land grab’ story. This led to speculation and accusations that ruled out constructive dialogue. Another consequence was that local knowledge recorded by ‘external actors’ was ignored by ESC because they did not consider foreign researchers to have a legitimate mediating role.

While the actions taken by ESC to safeguard locals’ rights and resources are insufficient, Oakland Institute’s report paints a one-sided picture. It fails to document the reasons for Kuraz’s shortcomings, which were a combination of the funding problems, design and implementation failures, and disregard of indigenous lifestyles. Unfortunately, the ESC’s negative attitude impeded long-term research that could have helped mitigate negative impacts; circumstances that might now discourage investors. And after fervent criticism of the state’s handling of the projects, Oakland Institute can hardly convincingly argue for Kuraz to remain in public hands now that corporation are circling.

The agro-economic potential of the region remains clear, however, generating expected returns remains a tremendous challenge and will inevitably create more social and environmental costs. While more capital and technical know-how are vital to finalize construction, the successful operation of the scheme will be determined by multiple factors.

Generating returns remains a challenge


With close to 35 billion ETB ($1.2 billion) spent on Kuraz’s estates until April 2018, it is uncertain how much additional funding is needed to finalise Omo-Kuraz I and Omo-Kuraz V, and the required expansion of irrigation and cultivation. For instance, the estimated costs of $550 million for Omo-Kuraz V, for which construction started in late 2016, are most likely not included entirely into this calculation, as loans from Chinese banks are reportedly paid in instalments directly to the main contractor.

More importantly, if the private sector replaces ESC as the main actor in the region, development interventions such as training programs, out-grower schemes, and the provision of services to the local communities are at risk of being deprioritized. Although largely unsuccessful so far, these were integral to Kuraz as part of a broader regional development project.

If economic interests alone guide investment decisions, official visions for inclusive pastoralist development—as recently reiterated by Deputy Prime Minister Demeke Mekonnen—will require additional effort and financial commitment by the government, and a big question mark remains over whether this will materialize.

 

 

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