TABLE OF CONTENTS ABBREIVIATIONS AND ACRONYMS i · PDF fileTABLE OF CONTENTS ABBREIVIATIONS AND ACRONYMS i EXECUTIVE SUMMARY ... CANGO The Coordinating Assembly of Non-Governmental

Swaziland National Adaptation Strategy

TABLE OF CONTENTS ABBREIVIATIONS AND ACRONYMS i EXECUTIVE SUMMARY ii I. THE SWAZILAND ECONOMY AND THE SWAZILAND SUGAR INDUSTRY

A - THE PHYSICAL AND SOCIAL ENVIRONMENT 1 1. Country and Population 1 2. The National Development Strategy (NDS), 2 3. The Poverty Reduction Strategy Action Plan (PRSAP) 2

4. Regional Differences within the Country 3 B - IMPORTANCE OF SUGAR TO THE NATIONAL ECONOMY 4 1. Macroeconomic Context 4 2. Employment 5 3. Land, its Stock, Tenure, and Use 5 a) Use of Irrigated Land for Cane 6 b) Use of Irrigated Land for other Crops 6 c) The Large Irrigation Projects 7

4. Agro- and Forestry Processing, Manufacturing 7

5. Foreign Trade 8 6. The Public Sector 9

C - GENERAL CHARACTERISTICS OF THE SUGAR INDUSTRY 10 1. Location and History 10 2. Resources 11

a) Land and Water 11 b) Climate 11 c) Industrial Plant 12 3. Operation and Physical Results 13

a) Cane Production 13 b) Cane Processing 14

4. Financial Results 15 a) Production and Processing Costs 15 b) Output Sales and Industry Revenues 16 c) Processor and Grower Margins 17

D - SWOT ANALYSIS OF THE SUGAR INDUSTRY 19

II. EXPECTED SOCIO-ECONOMIC IMPACT OF THE REFORM 21

Background Information 21 1. Revenue Earnings of the Industry 21 2. Impact on Government Revenue and Operations 26

3. Impact on the Social Sector 26 4. Impact on Wider Economy 26

a


III STRATEGY MEASURES FOR NATIONAL ADAPTATION 28 A. The Competitiveness Of The Sugar Industry 28 1. Commercial Cane Growers 28 2. Cane Millers 28 3. Improved National Infrastructure 29 B.Trade Policy And The Pursuit Of Premium Markets 29 1. The Domestic SACU Market 29

2. Sugar Sales in Regional Markets 30 3. The EU Sugar Market 30

C - Promoting Smallholder Cane Growing 31 1. Stabilisation of the Financial Situation Smallholder Cane Growers 31 2. Smallholder Cane Growing Schemes at LUSIP and KDDP 32

3. Rationalisation of Smallholder Association Management 32 D - Diversification Within And Outside Sugar Industry 34 1. Value-added Products Based on Cane 34 2. Value-added Products Based on Sugar 34 3. Growing and Marketing of Crops Other than Sugar Cane 34

4. Strengthening Agricultural Research and Extension 36 5. Trade in new Products, Food Safety and Standards Control 37 6. Diversification into New Economic Activities 37

E - Social Services, Welfare And Labour Issues 37 1. Re-organisation of Social and Commercial Services at Sugar Estates 37 2. Assistance to retrenched workers 38 F – Mitigating Impact on Government Fiscal Position 38 G - Enhancing A Sustainable Socio-Economic Environment and Cross-cutting Issues 39

1. General Investment Climate 39 2. Natural Environment 39

3. Improve access and security of tenure on land 39 4. Provide Grant Financing of LUSIP 40 5. Empowerment of the Poor to Generate Income 40 6. Human capital development 40 7. Pursuit of good governance 41

H - Institutional Structures For Implementation 41 ESTIMATED COSTS OF STRATEGY RESPONSE MEASURES 42 IV. FUNDING REQUIREMENTS OF STRATEGY 47 V. CONCLUSIONS 48 ANNEXES 49

b


LIST OF TABLES

Table 01 Change of Selected Demographic Characteristics in Swaziland 1 Table 02 Swaziland, Prevalence of HIV/AIDS by Age group 2 Table 03 Swaziland, Population Data by Region 3 Table 04 The Swaziland National Accounts, and Selected Indicators 4 Table 05 Swaziland Employment Data 5 Table 06 Swaziland, Inventory of Land, by Tenure and Use 6 Table 07 Swaziland Foreign Trade Balance 8 Table 08 Swaziland Government Budget 9 Table 09 Swaziland Government, Foreign Grants Received 10 Table 10 Temperatures 13 Table 11 Cane Production in 2005/2006 15 Table 12 Cane Processing in 2005/2006 16 Table 13 Cane Production Costs 2005/2006 of Selected Growers 16 Table 14 Processing Costs 2005/2006 at Swaziland’s Cane Millers 16 Table 15 Swaziland Sugar and Molasses Sales, 2005 17 Table 16 Distribution of Proceeds from Sugar Sales, 2005 17 Table 17 Pro-Forma P&L Statement, Cane Processing 18 Table 18 Pro-Forma P&L Statement, Cane Production, Selected Swaziland Growers 18 Table 19 Decline in Swaziland’s Earnings from EU Sugar Market 21 Table 20 Pos-EU-Reform Projection, Industry Revenues 22 Table 21 Impact on Gross Margins per ha of Smallholder Cane 23 Table 22 Decline in Workforce at Mills and MCP, 2006-04-25 25 Table 23 Budgeted Expenditure on Housing and Social Services 25 Table 24 Decline in Cane Yields at 11 Smallholders in Big Bend 33 Table 25 Estimated Cost of Strategy Measures 42

LIST OF ANNEXES ANNEX I-01 Swaziland’s Public and Publicly Guaranteed Debts ANNEX I-02 Swaziland Cane Production Results (2001/02 – 2005/06) ANNEX I-03 Swaziland Cane Processing Results (2001/02 – 2005/06) ANNEX I-04 Swaziland Sugar and Molasses Sales and Revenues (2003/04 – 2005/06) ANNEX III-01 Gross Margins from Irrigated Sugar Cane ANNEX III-02 20-Year Cash-Flow Budget for 1 ha of New Cane ANNEX III-03 15 Likely and Unlikely Crops to Substitute Sugar Cane in Swaziland

c


ABBREVIATIONS AND ACRONYMS ACP African Caribbean and Pacific AIDS Acquired Immune Deficiency Syndrome CANGO The Coordinating Assembly of Non-Governmental Organisations CDC Commonwealth Development Corporation CFTC Commonwealth Fund for Technical Cooperation COMESA Common Market for Eastern and Southern Africa DRC Democratic Republic of the Congo E Emalangeni ( Swaziland's unit of currency) EU European Union FAO Food and Agriculture Organisation of the United nations GDP Gross Domestic product Ha hectare(s) ITF Individual Tenure Farms KDDP Komati Downstream Development Project LUSIP Lower Usuthu Smallholder Development Project MEE Ministry of Employment and Enterprise MEPD Ministry of Economic Planning and Development MFAT Ministry of Foreign Affairs and Trade Mm3 Million Cubic Metres MNREE Ministry of Natural Resources, Energy and Environment MOAC Ministry of Agriculture and Cooperatives MOE Ministry of Education MOF Ministry of Finance MOH Ministry of Health Mttq Metric tonnes tel quell MW Megawatt NDS National Development Strategy NGO Non Government Organisation PRSAP Poverty Reduction Strategy Action Plan RSA Republic of South Africa RSSC Royal Swazi Sugar Corporation SACU Southern African Customs Union SADC Southern African Development Community SASEX South African Sugar Extension Organisation SCGA Swaziland Cane Growers Association SEB Swaziland Electricity Board SIDC Swaziland Industrial Development Cooperation SNL Swazi Nation Land SPS Special Preferential Sugar SSA Swaziland Sugar Association SWADE Swaziland Water and Development Enterprise Tibiyo Tibiyo taka Ngwane TOR Terms of Reference T Tones Tcpd tonnes cane per day t/ha tonnes per hectare Tq tel quell UK United Kingdom UNDP United Nations Development Programme UNFPA United Nations Population Fund UNHCR United Nations High Commission for Refugees UNICEF United Nations Childrens Fund US United States of America VHP Very High Pol WB World Bank WUG Water User Group

i


EXECUTIVE SUMMARY This strategy document is a response to the declining performance of the sugar sector and is, in particular, a mitigation measure against the negative effects on the sugar industry and the wider economy that will result from the reform of the European Union (EU) sugar market. Swaziland, the Sugar Industry and the EU Sugar Sector Reforms The sugar industry is of critical importance to Swaziland’s development, and plays a multifaceted role in the economy. It contributes about 18 percent to national output and over 35 percent of the workforce in the agricultural sector is employed in the sugar industry. The Swazi sugar industry can be held up as a real success story from other sectors, in terms of growth and productivity. Presently, on less than 50,000 ha of irrigated land, it produces in excess of 650,000 tonnes of sugar per year, representing a turnover of more than E1.5 billion, or above € 200 million. Swaziland’s sugar industry has consistently ranked among the top ten most efficient producers of sugar. The industry is poised for some major expansions in the short to medium term with new entrants expected to come through the Komati Downstream Development Project and the Lower Usuthu Smallholder Irrigation Project, as about 16,000 hectares of land will be cultivated to sugarcane, producing an extra 200,000 tonnes of sugar. The success of the industry, and of Swaziland’s export-led economy, and the basis for further expansion can be attributable to the preferential markets that have been provided by developed countries (particularly in Europe and the USA). The European market absorbs about 150,000 tonnes of the total sugar production of Swaziland, whilst representing over 30% of industry revenue due to the higher prices obtainable in the EU. The sugar industry is now facing several challenges, primary of which has been the appreciation of the local currency, and, recently, the process of erosion of preferences in the EU market. The result of these developments is a reduction in export earnings and a reduction in industry revenues (due to a fall in the average sugar price). The EU has announced reforms to its internal sugar market regime, which will result in the lowering of prices obtainable in the EU by a cumulative 36% over the next four years (between 2006 and 2009). In complement to its sugar market reform, the EU has pledged to support countries, in particular those dependent on the EU market through the Sugar Protocol provisions of the Cotonou Agreement, in their adaptation process. Swaziland is therefore, through this strategy document, responding both to the need for reform in order to ensure the continued viability of the sugar industry and the requirement of the EU to have a comprehensive strategy to which the support could be channeled. Swaziland is also facing a host of economic challenges, ranging from low economic growth to high levels of unemployment and poverty. The HIV/AIDS pandemic has also reached alarming proportions, with an estimated 42.6 percent of the adult population being HIV positive and the public resources available to respond to these challenges are gradually diminishing. The Strategy Objectives and Pillars The over-arching goal of this strategy is to have the sugar industry continue playing the important economic development role that it has effectively played in the past. On this basis, the sugar industry should be able to continually maximize on its productivity, efficiency and competitiveness. Furthermore, where there is need to restructure operations, and possibly diversify, there is need to have a response mechanism that will ensure that society is not left worse off as a result of the EU sugar sector reforms. ii


In supporting the sugar industry to continue playing its strategic multifaceted role, the strategy seeks to respond along three pillars. First, the restructuring needs of the industry will be supported, whilst ensuring that a programme of continuous productivity and efficiency improvement is implemented. Secondly, the continued viability of smallholder sugarcane farming will be ensured. Thirdly, the value of markets will be preserved, and where possible (preferential) market access will be enhanced. On the broader adaptation needs, the strategy seeks to minimize the possibility of deterioration in living standards resulting from the reforms and to support diversification initiatives, both within the sugar industry and outside to other sectors. This will also include the provision of social safety nets to ensure that people who were dependent on the sugar industry (retrenched employees, their families and the communities) are able to continue supporting reasonable livelihoods. Other macroeconomic imbalances will result from the EU sugar reforms. These will include negative effects on export earnings (and foreign reserves accumulation), balance of payments, government revenue and increased expenditures on social services, increasing unemployment and worsening poverty situations. Many other sectors of the economy will be affected due to the multi-sectoral linkage of the sugar sector, and therefore a need to provide cushions for the broader economy too. Diversification activities, although limited in the short-term, will be investigated, pursued and supported. Priority Needs Several priorities have been identified in the response strategy. First, the establishment of the institutional structures to coordinate the implementation of this strategy is paramount. These structures will also be useful in the further elaboration of the identified strategies into actionable projects and programmes. Whilst some institutions already exist for the implementation of the strategies, there is need to further strengthen them, and where necessary create new ones to facilitate fast and effective responses. The creation of a Restructuring and Diversification Management Unit is urgently needed. It will be responsible for the further elaboration of these strategies into actionable programmes, and to coordinate other agencies which will be involved in the strategy implementation. Secondly, the stabilisation of the financial situation of smallholder cane growers will receive priority attention. It is recognized that without early and effective action on the plight of smallholder growers, the objectives of employment creation and poverty reduction will be seriously compromised. This will even further compromise the strategic role of the sugar industry as a whole in national development. The primary areas of action is the unsustainable debt situations already being faced by smallholders and the high cost of establishment, coupled with challenges of efficiency of production for the new entrants. A support scheme will be implemented as a matter of priority. The third priority relates to the protection of value of the trade dimension. Trade, in particular trade preferences, plays an important role in the continued viability and sustainability of the industry. There is need to ensure that expanded duty free access is pursued with the developed countries, in particular the EU as it is expected to continue being a high premium market for Swazi sugar for some time into the future. Regional markets will also need to be nurtured and protected in order to absorb Swazi sugar at reasonable prices. In this regard, Swaziland will initiative dialogue and intensify its lobby against any developments which seek to erode the value of regional integration and the regional markets. This will particularly focus on the possible retro-fitting of the RSA-EU TDCA into the whole of SACU (and other SADC countries presently negotiating an EPA with the EU), and further initiatives to seek expanded duty free access into the EU market. In the first instance, the protection and guarantee of the present SPS allocation of 30,000 tonnes will need to be secured. Support to trade negotiations, and lobby systems, is necessary. A fourth priority relates to the welfare of retrenched workers and the ability of the sugar companies to continue providing quality social services at their estates for the benefit of workers and the

iii


neighbouring communities. A variety of initiatives are planned, including the provision of safety nets and support for adaptation and diversification. Of priority will be the issue of access to social services for retrenched workers, and the development of a model for the future management of the social services currently provided, and managed, by the sugar companies. In complement to this will be initiatives to support and re-train retrenched employees, particularly those wishing to venture into the outsourced services. The present economic climate constrains the Government’s ability to provide good social services, and the provision of support programmes in response to the effects of the EU sugar reforms. As it stands, public resources are already overstretched owing to the many social and economic challenges facing Swaziland. Without any external help, the effects of the reforms will be profound. Besides the need to provide alternative revenue streams to replace the revenue to be lost from the reduction in the sugar levy and related taxation in the sugar sector, there is need to support fiscal stability and the ability of the Government to respond to the national problems. Without this, any effect due to the EU sugar reforms will be manifested and severe because of the multiplier impact of the sugar industry in Swaziland. As a priority, there is need to assist the Government in implementing its response strategy and the wider poverty reduction strategy programmes. This will involve on one part the provision of budget support, and on the other, the further elaboration of identified programmes. Presently, Swaziland is not eligible for budget support from the EU. As a matter of priority, the process allowing the mode of assistance to move towards budget support will be initiated with a view to conclusion and the provision of budget support in the medium term. Phases, Financing and the Vision This strategy is phased along the lines of the modalities for the deployment of the EU assistance. The first phase covers the period between 2006 and July 2007, which is defined as the short-term. The second phase covers the period from August 2007 to December 2008, and is defined as the medium term. The third phase covers the period from 2009 to 2013. It is expected however that implementation will not necessarily be in line with this phasing, as the nature of the projects to be implemented will determine the implementation schedule. It is expected that implementation may go up to 2015 for some activities, particularly those that will receive financial support in the 2013 financial year. This phasing method does not in anyway mean the support will be sought only from the EU. Other donors, including the Swaziland government and the sugar industry, will also be involved in the implementation and financing of the strategy. The alignment with the EU process is meant to allow for ease of reference, whilst at the same time it is expected that the EU will support, in line with its commitment, the major adaptation process. The financial requirements for implementing this strategy are estimated at €349 million, or about E2.6 billion. This appears a huge figure but it represents the magnitude of the response needed and the need to support other complimentary programmes, without which the success of the adaptation process will be compromised. It should also be borne in mind that some of these resource requirements reflect those that will be financed from industry sources, some of which are already being implemented. The nature of such industry-financed activities will require loan financing, where concessional terms will be pursued. Other investments/interventions are necessitated by the need to relieve the industry of the financial burden on some operations which are social in nature, and therefore not core to the business of producing sugar. Through this strategy, the country is espousing a vision of a more competitive sugar industry continually playing a significant role in the development of Swaziland. The sugar industry will be able to continually play its strategic role of facilitating the development of poor communities in the lowveld, through maintained viability of smallholder farming programmes and the provision of quality social services to the communities. In the long term, the efficiency and productivity of the sugar industry must

iv


ensure that it has achieved a competitiveness level that allows it to sell sugar profitably in a more liberalized trading environment. This focus reflects the fact that the sugar sector has a potential to grow further, provided the necessary support is given, and that there are limited opportunities for diversification to other sectors. All stakeholders in Swaziland, including the Government, the sugar industry and civil society, were in concert in the elaboration of this strategy. The strategy is a product of extensive dialogue and consultation, and has the support of all stakeholders. The success of this vision and strategy rests on the continued support of this strategy, reviewed when/where necessary, by the stakeholders and the participation of the donor community in its implementation. A comprehensive review of this strategy is envisaged in late 2008/early 2009.

v


I. THE SWAZILAND ECONOMY AND THE SWAZILAND SUGAR INDUSTRY

A. The Physical and Social Environment

1. Country and Population Swaziland is a small, land-locked kingdom in south-eastern Africa, and is bordered in the North, West and South by the Republic of South Africa and in the East by Mozambique. Although the country has an area of only 17,364 square kilometres, it contains four distinct geographical regions. These run from North to South and are determined by altitude. Swaziland’s four distinct ecological regions in Swaziland consists of the Highveld in the North and West with mountainous scenery and high rainfall, sloping east, through the intermediate Middleveld, to the dry, hot, and relatively flat Lowveld. The Lubombo mountain range forms an eastern barrier between Swaziland and Mozambique. Substantial rivers run west to east, from South Africa through Swaziland to Mozambique and the Indian Ocean, cleaving through the Lubombo range in spectacular gaps or “poorts”. Politically, Swaziland is a monarchy. According to the Constitution, the King is appointed in the traditional Swazi way. Parliament is made up of the Senate, which is the Upper House, and the House of Assembly. The present Senate comprises 20 members, 10 of whom are elected by the House of Assembly and 10 appointed by the King. The House of Assembly consists of 80 members, some of whom are elected by the Nation and others appointed by the King. All Swazi citizens are eligible to vote, and elections take place on a National and Regional basis. Elections for Parliament are held every five years. The King appoints the Prime Minister and Deputy Prime Minister and all other Ministers from both Houses, either the MP's or Senators. If the House passes a motion of “no confidence” in any Minister or in Government, the King may dismiss any one, or all, of the Ministers. The Cabinet has the responsibility to consult and inform the King on all Government matters. Swaziland’s slightly over one million inhabitants are essentially rural, about 70% of them living as subsistence farmers. The population is expected to reach 1.126 million in 2006 and is growing by an estimated 2% per annum. The growth rate has declined from 2.9% in 1997 to a current 2%. In Table 01, the change in some key demographic characteristics is presented.

Table 01: Change of Selected Demographic Characteristics in Swaziland 1997 2004

Below 15 years of age, % 45 41 Above 65 years of age, % 3.2 2.9

Female, % 53 52 Aged between 25 and 39 166,000 162,400

Average life expectancy, years 56 39 Source: Ministry of Economic Planning and Development, Mbabane

The average life expectancy has been reduced by HIV/AIDS from 58 years to 39 years. Family planning has also had an impact on the growth rate. The reduction in growth rate and life expectancy have significantly affected population structure. There has been a reduction in the dependant population, which at the same time, however, is accompanied by ever increasing unemployment. The population is shifting from the rural Lubombo and Shiselweni regions to urban Manzini and Hhohho.

1


The HIV/AIDS infection is, indeed, posing a very serious threat to Swaziland’s population. The infection rate, regarded as the highest in the world, has a devastating effect on the level of skilled manpower, poverty and provision of social services especially in education and health. The alarming rate, at which it has been increasing of late, is shown in Table 02.

Table 02: Swaziland, Prevalence of HIV/AIDS by Age Group Prevalence % of Antenatal Clinic Respondents, 1994-2002

Age Group, years 1996 1998 2000 2002 2004 15-19 24.1 25.6 26.3 32.5 29.3 20-24 32.3 36.4 42.5 45.4 46.3 25-29 27.2 38.0 40.7 47.7 56.3 30-34 21.7 24.8 29.7 29.6 41.0 35-39 11.0 21.8 17.0 23.9 30.9 40+ 11.7 25.7 26.9 25.0 38.0

Average 26.0 31.6 34.2 38.6 42.6 Source : Ministry of Economic Planning and Development, Mbabane

2. The National Development Strategy (NDS) Swaziland has a National Development Strategy (NDS), which contains a vision that seeks to place the country in the top 10% of the medium human development group of countries by the year 2022. The strategy places social developments, such as food security, human settlements and shelter, safe water and sanitation, health and human capital development, social security, gender issues, and the problems of disadvantaged groups at the very heart of Government policy, right along with a vigorous economy, the efficient utilisation of natural resources, and the development of infrastructure, research, and innovation. In the process, the country is facing serious challenges. It currently is experiencing an HIV/AIDS pandemic and a deceleration of economic growth, with increasing unemployment and poverty. It also is facing increasing fiscal and balance-of-payment deficits, reduced foreign direct investment, and deteriorating social standards. Swaziland recognizes the need for an attractive investment climate, based on sound macroeconomic policies and fiscal discipline, leading to accelerating economic growth. This requires considerable transformations within the private and public sectors, in order to generate a surge in private investment and an expansion of the tradable goods sector. At the same time Swaziland seeks to enhance the development of its human resources, to create greater labour market flexibility, and to place a new emphasis on industrial and infrastructural development.

3. The Poverty Reduction Strategy and Action Plan (PRSAP) The PRSAP is Swaziland’s overarching policy statement for reducing poverty and other related challenges. Its main objective is to reduce poverty by more than 50% by 2015 and ultimately eradicate it by 2022. This ambitious goal, cautions that tackling poverty in Swaziland would require fundamental reforms and a change in development approach. The PRSAP describes the country's macroeconomic, structural and social policies and programs to promote growth and reduce poverty, as well as associated external financing needs. Given the centrality of poverty reduction in the country, it is worth mentioning that enshrined in Government initiatives is the drive to revive the economy and also reduce inequalities and poverty. An important initiative was the development of the national vision – the National

2


Development Strategy (1997 – 2022) – for which poverty reduction takes the central focus. The PRSAP is the development framework towards improving standards of living. It guides the formulation of government policy at both micro and macro levels and calls for a development agenda “with a human face”. It also calls for a new pattern of development, which is pro-growth and pro-poor, where the poor participate and share fully in growth, human development, and enjoy social protection. Approximately 70% of all Swazis live below the E128-per-month poverty line. Roughly 55% of the wealth of the country is held by the wealthiest 20% of the population, while the poorest 20% own just over 4%. The national unemployment rate is estimated to be 29%, but 40% of the youth and 70% of women are unemployed. The erosion of the value of traditional trade preferences in the major overseas markets will exacerbate stagnation and increase pressure on the poor who are least able to cope, especially with the illnesses associated with HIV/AIDS. The grim effect is the impoverishment of households, with the elderly and children being the most vulnerable. By 2010, there may be 120,000 orphans. 4. Regional Differences within the Country The “Highveld”, along the western border of the country, with an average altitude of 1,200 metres, lies on the edge of the escarpment. Between the mountains, rivers run east through some scenic gorges. Mbabane, the capital, is located on the Highveld. The “Middleveld” lies at an average of 700 metres above sea level. This is the most densely populated region of Swaziland, with a lower rainfall than in the mountains. Manzini, the principal commercial and industrial city, is situated in the Middleveld. The “Lowveld” of Swaziland, at around 250 metres of elevation, is less populated than other areas and presents a typical African bush country of thorn trees and grasslands. Development of the region was inhibited, in early days, by the scourge of malaria. The eastern rim of Swaziland comprises the “Lubombo”, largely devoted to cattle ranching and the production of sugar. The area is also home to three of Swaziland's nature reserves. Eastern Swaziland is the region where the country's rivers fed by Highveld streams, reach their largest size. Large portions of the Hhohho and Shiselweni political regions on the Highveld are covered by the forestry industry. The Lubombo Region, on the Lowveld, comprises the main irrigation area. Even though it is dry, it is good ranching country. Employment is skewed towards the Manzini Region, which has an industrial orientation, with its industries clustered at the Matsapha Industrial Estate. The Hhohho Region includes Mbabane, the capital. Leading employment categories here are public administration, financial services, wholesale, and trade. Unemployment is highest in the Shiselweni Region, which is dominated by forestry, and in Lubombo, where the sugar industry is located. These regions have high levels of unskilled labour. In Table 03, the breakdown of total population by region is shown, as well as its overall development.

Table 03: Swaziland, Population Data by Region 2001 2002 2003 2004 Total Population 1,029,841 1,056,029 1,081,170 1,104,810 Hhohho Region 283,206 293,576 300,565 307,109 Manzini Region 311,012 325,257 333,000 340,351 Shiselwei Region 220,386 221,766 227,046 231,989 Lubombo Region 215,237 215,430 220,559 225,361 Male 490,168 503,563 516,538 528,966 Female 539,659 552,469 563,628 575,749 Source: Ministry of Economic Planning and Development, Mbabane

3


B - Importance of Sugar to the National Economy

1. Macroeconomic Context The EU sugar reforms have far-reaching impacts on the socio-economic development of the country, especially considering the sugar industry’s important place in the economy. Even though Swaziland’s population is predominantly rural, the country’s formal economic activity primarily takes place in manufacturing, the extractive industries, and in services, i.e. in non- agricultural sectors. The economy’s performance has slowed down remarkably in the new century, averaging a growth rate of 2%, down from 3.7% between 1995 and 1999. Although the agricultural sector’s contribution has declined significantly, the sector is the mainstay of the economy in terms of activity spread, employment, poverty reduction and inputs into the manufacturing sector. The summarised national accounts, shown in Table 04, bear witness to this fact. The agricultural sector accounts for about 8% of Swaziland’s Gross Domestic Product (GDP). Out of this fraction, sugar cane growing makes up 6%. The manufacturing sector, which accounts for 35% of GDP, includes sugar manufacturing and refining (7%), as well as secondary sugar- and molasses-based production, such as sweets and alcohol. The sugar industry, as part of the agricultural as well as of the manufacturing sector, directly accounts for 18% of GDP. Indirectly, it is contributing to the economy through its multiple linkages with other sectors. It thus plays a crucial role in the Swazi economy.

Table 04: The Swaziland National Accounts, and Selected Indicators Financial Year 2001/02 2002/03 2003/04 2004/05

Gross Domestic Product Sector in million E at current prices and factor costs

Agriculture 922.8 1,018.4 993.1 1,001.8 Sugarcane 606.6 720.7 737.7 744.2 All other Activities 316.2 297.7 255.4 257.6 Forestry 55.8 56.6 57.4 61.8 Mining 34.6 47.3 50.4 57.0 Manufacturing 2,710.1 2,983.3 3,269.7 3,443.0 Food Products Sugar and Byproducts 567.7 721.0 771.4 812.2 All other Food Products All other Manufactured Goods 2,142.4 2,262.3 2,497.6 2,630.8 Construction 452.0 514.2 539.0 588.6 Distribution Financial Services 242.3 285.1 314.2 382.4 All other Sectors TOTAL 8,818.2 9,648.6 10,604.0 11,577.2 Gross Domestic Expenditure

Destination in million E at current market prices Final Consumption 7,715.3 7,191.2 7,148.3 9,244.9 Private 5,719.1 5,125.7 5,011.0 7,033.3 Government 1,996.2 2,065.5 2,137.3 2,211.6 Capital Formation 2,667.9 2,490.8 2,889.6 2,387.8 Private 1,945.8 1,750.9 2,083.6 1,128.8 Government 722.1 739.9 806.0 1,259.0 Stock Changes Foreign Trade Balance -1,665.1 -33.4 566.1 -55.5

Key Exchange Rates Emalangeni per Unit of Foreign Currency (Dec.) € 10.63 9.04 8.32 7.70 $ 12.00 8.64 6.62 5.65 ₤ 17.41 13.84 11.78 10.89

4


Source: Ministry of Economic Planning and Development, Mbabane

2. Employment The decline in the performance of the economy in the past 5 years has exacerbated the country’s ability to create employment opportunities to match the level of new entrants into the labour market. Private sector employment in Swaziland is growing at a lower rate than that of the public sector. At the same time, the rate of growth of the labour force was faster at 5.2% per annum since 1991 whilst paid formal employment rose by 1.03% per year. A large portion of growth came from transport, construction, agriculture, and forestry. Recently, the private sector has restructured its operations, resulting in big retrenchments. Agriculture and forestry declined from 35% in 1995 to 29% in 2000. Swaziland’s employment situation is summarised in Table 05. The most recent unemployment figure available is 29% at national level and 40% for the youth for the year 2001. Reportedly, the level has risen considerably since. Until about three years ago, the sugar industry accounted for approximately 10% of formal sector employment. However with the income losses in local currency terms on sugar sector sales to the EU market arising from a 37% depreciation of the Euro against the Rand and the prospects of a substantial reduction in the EU sugar price resulting from the implementation of sugar sector reform measures, the sugar industry began a process of restructuring, resulting in a decline in formal employment in the industry from approximately 10,000 to 5,600 (in part, this drop has been “compensated” by the creation of about 3,000 jobs in outsourced services).

Table 05: Swaziland Employment Data 2001 2002 2003 2004 2005 Total Employment 149,360 147,158 151,436 162,530 185,198 Private Sector Employment 63,816 60,381 60,762 62,564 59,436 Agriculture 15,443 15,522 Cane Production 6,600 Other Ag. Activities Manufacturing 16,821 19,485 Sugar Industry 3,400 Sweets Industry Oter Mfg. Activities Other Sectors 30,644 30,210 Public Sector Employment 33,216 33,216 33,548 33,883 33,995 Informal Employment 52,328 53,561 57,126 66,083 91,767Total Unemployment Unemployment % 29 Source: Ministry of Economic Planning and Development, Mbabane

In addition to direct wages, the industry contributes to human development through social services, such as housing, clean water, education, health care, and recreation, which are available to the employees, their households as well as to neighbouring communities. There is, of course, a considerable though not quantifiable multiplier effect associated with the sugar enterprises, exerted through their own activities in the markets for goods and services, as well as through the waves of economic activity generated by their employees and contractors.

3. Land, its Stock, Tenure, and Use In addition to its people, the land base constitutes an essential resource of Swaziland’s economy. The bulk of Swaziland’s land is held as traditional communal land, known as Swazi Nation Land (SNL). Most Swazis, a majority of them rural and poor, live on SNL, where they graze their cattle

5


and grow rain-fed crops, mainly maize. These subsistence-based activities contribute less than 1% to GDP. SNL makes up 1.1 million ha out of Swaziland’s total surface area of 1,736,000 ha. The table below indicates that in 2001 the balance of the land was made up of Individual Tenure Farms (ITF) and commercial forestry areas, jointly occupying 0.5 million hectares. Almost all of the irrigated land is found on ITF or on SNL that has been leased, mostly by estates. Until very recently, virtually all irrigated land was found at large production units. During the last few years, a development of irrigated sugar cane production on SNL by smallholders has started in both the southern and the northern Lowveld. This has brought Swaziland’s total area under cane to over 50,000 ha and the total area under irrigation to a reported 70,000 ha. A general summary of this land base, by tenure and use, is shown in Table 06 below.

Table 06: Swaziland, Inventory of Land by Tenure and Use Types of Use Individual Tenure Swazi Nation Total

Farms, ha Land, ha Ha Total, km2 17,360Total, ha 1,736,000 Unused 107,000 Used 519,000 1,110,000 1,629,000 Urban & Industrial 11,000 0 11,000 Comm. Forestry 87,000 0 87,000 Agricultural 421,000 1,110,000 1,531,000 Grazing 332,000 964,000 1,296,000 Arable 89,000 146,000 235,000 Rainfall 43,000 146,000 189,000 Crops 28,000 120,000 148,000 Fallow 15,000 26,000 41,000 Irrigation 46,000 0 46,000 Sugar Cane 44,000 0 44,000 Citrus 2,000 0 2,000 Source: Central Statistical Office

a) Use of Irrigated Land for Cane Sugar cane is by far the most prevalent crop in irrigated agriculture. More than 90% of Swaziland’s allocated water is used for growing cane. 96% of all irrigation is in the Lowveld, because of inadequate rainfall for reliable rain-fed cropping. Cane accounts for an estimated 60% of agriculture’s 8% contribution to GDP.

b) Use of Irrigated Land for other Crops The only crops other than sugar cane, which occupy significant areas of irrigated land in Swaziland are citrus, bananas, and vegetables. According to the 2000/01 agricultural census, there were 2,324 ha under citrus. Most of this area was located in the Lowveld. Subsequently, some citrus trees have been removed by large ITF estates in order to make way for sugar cane. Such decisions were generally based on citrus export marketing problems on the one side and the attractiveness of good sucrose prices at nearby mills on the other. Area and land tenure statistics do not appear to be available for crops other than sugar cane and citrus. Vegetables are mainly grown in the Middleveld, especially near Malkerns and Sidvokodvo. Commercial banana and citrus plantations exist at Ngonini in the North of the country, at Tambuti near Big Bend, and near Sinceni. Small-scale banana plantations, generally less than 10 hectares each, occur on SNL scattered in the frost-free areas of the Lowveld and Middleveld.

6


c) The Large Irrigation Projects

The run-of-river water in Swaziland’s rivers is fully allocated, predominantly to ITF and to leasehold SNL areas. Water supply to SNL is therefore relatively inadequate. In order to rectify this imbalance, two major irrigation schemes designed to primarily serve SNL have been initiated. Swaziland and South Africa have combined to finance the Komati Downstream Development Project (KDDP) and to create the Maguga Dam on the Komati River and to share the captured water. The dam has just filled for the first time, and approximately 2,800 ha of cane have already been planted. Eventually, more than 5,200 ha of SNL will be brought under irrigation. Construction has just begun on the Lubovane Dam, upstream of Big Bend in the southern Lowveld, which will store summer floodwater diverted from the Great Usutu River and ultimately irrigate the Lower Usutu Smallholder Irrigation Project (LUSIP), planned to comprise a total area of 11,500 ha. So far, most of the area at both schemes is foreseen for sugar cane production.

4. Agro- and Forestry Processing, Manufacturing Primary as well as secondary sugar-cane-based industries constitute the largest part of agro-processing in Swaziland. Among the first, there are the three sugar mills, which will be dealt with in detail in the following sections. Among the secondary industries, there are the ones based on cane processing outputs, such as distilleries of alcohol from molasses, refineries of raw sugar or, conceivably, any production based on bagasse or cane trash. Another significant agro-processing industry is Swazican, a cannery at Malkerns in the Middleveld, which, under various owners, has been in the business of canning pineapple and other fruits since the 1950s. It produces a range of products including canned pineapple slices, pieces and concentrated juice and jams. During the citrus harvest, Grapefruit segments from the Lowveld, not exportable as fresh fruit, are canned. This industry also makes use of sugar in its processing activities. In addition, the western, south-western and northern Highveld of Swaziland contains 166,000 ha of commercial forests, among the largest commercial tree plantations in the world. Land tenure, to some extent is on ITF, but predominantly on SNL, which is leased out mainly to Usutu Pulp (SAPPI) and Mondi, two international forestry companies. The chief product, a flash-dried unbleached kraft pulp, is based on pine. It is produced at a pulp mill at Bunya on the Usutu River, not far from Mbabane. Of this pulp, 75% is marketed overseas and the remainder within SACU. The first of these plantations was established by CDC in 1948, and the pulp mill opened in 1961. Sustainable timber yields have been maintained over at least 3 cycles of about 18 years from planting to harvest. Other forest products in Swaziland include saw timber, Eucalyptus mining timber, and treated poles for transmission lines and fencing. 3 companies, Usutu with 70,000 ha, Mondi with 26,000 ha, and Shiselweni Timbers with 11,000 ha, dominate the industry. The companies are major employers, but most silvicultural operations, such as harvesting and transport are contracted out. Usutu alone claims that when contractors and their families are added to the core numbers employed they provide a living for at least 20,000 people. In the manufacturing area, Cadbury’s and Coca Cola, producing sweets and soft-drink concentrates for much of southern Africa, and playing a role of some importance in the Swaziland economy, may be considered downstream elements of the sugar system. The other

7


major user of sugar is Conco which produces soft drink concentrates, and is the biggest contributor to Swaziland’s foreign exchange earnings.

5. Foreign Trade The output from the productive sectors of Swaziland’s economy then proceeds to the respective domestic and foreign markets. With respect to a market being domestic or foreign, Swaziland’s situation is defined by its membership in a series of trade agreements. The most important of them is the Southern African Customs Union (SACU), made up of Swaziland, South Africa, Botswana, Lesotho, and Namibia. Its aim is to maintain the free interchange of goods between its member countries. It provides for a common external tariff and a common excise tariff to the common customs area. All customs and excise duties collected are paid into South Africa’s National Revenue Fund. The revenue is then shared among members according to an agreed-upon formula. South Africa is the custodian of the pool. The revenue share accruing to each member state is calculated according to the following 3 components: (1) its share of the customs pool, according to total intra-SACU trade including re-exports; (2) its share of the excise pool, according to GDP; and (3) a development component, from 15% of the total excise pool, distributed according to the inverse of each country’s GDP/capita. Other agreements extend to their members specific advantages with respect to trade in specific commodities. Of these, Swaziland belongs to the Southern Africa Development Community (SADC, which includes all of SACU plus DR Congo, Malawi, Tanzania, Zambia, Mozambique, Angola, Zimbabwe, Madagascar and Mauritius) and to COMESA (membership including Angola, Burundi, Comoros, Djibouti, Eritrea, Ethiopia, Kenya, Madagascar, Malawi, Mauritius, Libya, Sudan, Swaziland, Zambia, Zimbabwe, Uganda, DR Congo, Rwanda, Egypt, the Seychelles).

Table 07: Swaziland Foreign Trade Balance 2001/02 2002/03 2003/04 2004/05 2005/06

Description Value in Million Emalangeni Exported Goods & Services 11,368.9 12,676.4 13,731.2 15,696.1 17,474.1 Exported Goods 8,951.4 9,956.6 11,039.4 12,253.8 13,601.6 SUGAR 516.2 584.7 956.3 1,197.3 Canned Fruit 111.6 148.9 117.4 110.2 Wood Pulp 515.7 678.8 424.6 446.4 Consumable Finished Goods 1,019.5 1,561.0 2,489.4 Miscellaneous Edibles 3,854.9 4,194.6 4,163.6 Other Goods 2,802.5 2,684.3 3,082.2 10,938.8 Exported Services 2,417.5 2,719.8 2,691.8 3,442.3 3,872.5 Imported Goods & Services 12,129.1 13,289.4 13,662.0 15,956.6 16,574.4 Imported Goods 9,611.5 10,227.0 11,416.5 11,645.5 12,541.7 Food & Live Animals 1,429.0 1,589.0 1,682.4 Minerals, Fuels & Lubricants 1,144.3 1,087.9 1,185.4 Chemicals & Chem. Products 1,220.8 1,291.2 1,575.1 Mfgd. Prod's classif. By Mater. 2,129.6 1,738.7 1,843.1 Machinery & Transport Equip. 2,392.5 2,363.2 3,753.8 Misc. Manufacturing Products 1,127.5 1,639.1 1,265.3 Other Goods 167.8 518.0 111.4 Imported Services 2,685.4 3,580.4 2,356.9 4,311.1 4,032.7 TRADE BALANCE -760.2 -613.0 69.2 -260.5 899.7 Source: MEPD, Economic Review and Outlook, 2004/05-2007/08 Central Bank Quarterly Review, December 2005

8


These agreements, especially SACU, must be taken into consideration when looking at Swaziland’s trade accounts. In the case of sugar, Swaziland herself consumes approximately 100,000mt of sugar per year, but sells roughly 300,000mt within the total of SACU. All of these are considered domestic sales, which considerably reduces the weight of the sugar industry’s official exports. According to Table 07, the sugar industry, in 2003, accounted for 7% of Swaziland’s export earnings. 6. The Public Sector In carrying out its functions of providing an appropriate physical and legal framework for Swaziland’s citizens to lead their lives, of intervening in unforeseen situations of hardship beyond the control of the individual, and of improving the long-term prospects of the different economic sectors through judicious investments, the Government disposes of a stream of funds, which are derived from a number of sources, among them tax and customs revenues, but also foreign assistance, in case of special hardship. Table 08 presents a summary of the annual Government Budget for the past five years. On the revenue side, one perceives the substantial relative weight of the Customs Union Receipts. They make up more than one half of all government income. On the expenditure side, the high proportion of recurrent expenditure, especially of personnel, is apparent, leaving only a reduced amount for capital expenditure. Grants from foreign governments and international organisations make up a constant element of government revenues. They generally enhance the government’s possibilities for long-term investment.

Table 08: Swaziland Government Budget Public 2001/02 2002/03 2003/04 2004/05 2005/06

Accounts in Million Ealangeni REVENUES & GRANTS 3,111.4 3,426.0 3,885.0 4,842.4 5,429.7Revenues 2,984.5 3,262.9 3,747.3 4,726.8 5,328.7 SA Customs Union Receipts 1,503.7 1,618.6 1,878.1 2,772.8 3,136.9 Company Tax 245.1 259.6 322.4 324.0 418.0 Individual Income Tax 431.2 494.1 698.7 742.1 751.6 Sales Tax 407.7 528.6 547.7 549.3 650.7 Other Revenue 396.8 362.0 300.4 316.7 341.5 incl. Sugar Export Levy 21.7 30.1Grants (see Table I-B-07) 126.9 163.1 137.7 115.6 101.0EXPENDITURES 3,421.6 4,018.2 4,344.7 5,556.5 6,165.0Recurrent Expenditures 2,548.0 3,045.0 3,485.0 4,299.9 4,783.4 Personnel 1,162.5 1,417.1 1,668.9 1,963.6 2,707.2 Goods & Services 777.9 905.6 1,045.6 1,421.2 956.1 Subsidies & Transfers 505.3 555.0 591.5 742.1 844.4 Interest on Public Debt 102.3 167.3 179.0 168.0 253.8Capital Exp. & Net Lending 873.6 973.2 859.7 1,262.6 1,381.6OVERALL SURPLUS (DEFICIT) -310.2 -592.2 -459.7 -714.2 735.3Net Foreign Financing 384.2 218.4 112.6 220.0 50.3Net Domestic Financing -74.0 373.8 347.1 492.1 685.6 Source : Ministry of Economic Planning and Development, Mbabane

A detailed breakdown of foreign aid grants received by Swaziland during the past five years is shown in Table 09 below. Swaziland’s public and publicly-guaranteed debt is listed in Annex I-01.

9


Table 09: Swaziland Government, Foreign Grants Received 2001/02 2002/03 2003/04 2004/05 2005/06 Origin

Selected Grant Value in Million E, actual FAO 4.770 0.675 UNHCR 0.751 0.968 WB 0.177 CFTC 0.620 0.568 UNICEF 23.128 24.000 UNDP 1.992 2.212 UNFPA 1.800 1.800 EU 10.581 46.910 54.394 27.772 Denmark 0.590 Taiwan 109.097 64.368 16.980 55.014 60.000 UK 2.818 Cuba 1.369 1.058 Japan 40.431 42.300 TOTAL 121.816

Source : Ministry of Economic Planning and Development, Mbabane C - General Characteristics of the Sugar Industry

1. Location and History The origins of Swaziland’s sugar industry can be traced to an irrigation project in the Lowveld area at Big Bend in 1956. Early production at the Big Bend mill amounted to 5,600 mt of sugar per year. This mill was subsequently upgraded, while a second mill was erected further north, at Mhlume, by the Colonial (now Commonwealth) Development Corporation (CDC) in 1960. During the 1964/65 season, Swaziland’s production was 100,000 tonnes. There was considerable expansion of the industry after Swaziland became independent in 1968. Following the establishment of Simunye’s mill and estate there were now three mills which together milled 5 million tons of cane in the 2005 season and produced 650,000 tonnes of sugar. In 2004/2005, Swaziland sold 606,000 tonnes. The Royal Swazi Sugar Corporation owns the northern mills and miller-cum-planter estates at Mhlume and Simunye, while Ubombo Sugar’s miller-cum-planter operation at Big Bend is owned by the Illovo Sugar Company. Tibiyo taka Ngwane (Tibiyo) has invested in all the mills. Each mill is served by a miller-cum-planter estate, commercial outgrowers and an increasing number of Smallholders and Farmers’ Associations. The expansion of the industry on the basis of smallholdings on two new irrigation schemes below the new Maguga Dam on the Komati River and the embryonic Lower Usutu Smallholder Irrigation Project (LUSIP), is expected to have a substantial participation of smallholders as was envisaged in the NDS. At first sight, cane production in Swaziland appears to be heavily concentrated on a few very large producers. The estates of the two milling companies and the few large growers (including Tibiyo Taka Ngwane, Tambankulu Estates, and Crookes Plantations) account for 77% of the area planted and represent 81% of all cane produced. Nevertheless, there has been an explosion of new cane growers during the past 10 years, as the area under cane has increased from 38,000 ha in 1996 to over 50,000 ha in 2006. The Mhlume mill is supplied by the smallholders at the Vuvulane irrigation scheme, a unit with a combined area over 1,000 ha, and by 32 medium scale and small growers. Here, a “small” grower is often a Farmers’ Association with 50 to 200 members operating anything between like 50 and 300 ha. The balance is made up of medium and small-scale individual farms, ranging from 24 to 150 ha.

10


Simunye has fostered medium and smallholder groupings in the adjacent SNL and at Malkerns, numbering 38 in all. At Ubombo, there are 86 growers with less than 70 ha and 11 growers with between 70 and 200 ha. Thus, in the three cane supply areas, at least 150 medium and small scale growers have arisen, most of which are Farmers’ Associations. Assuming an average of 50 families per enterprise, one would arrive at a total of 4,000 families, which would imply a total of 20,000 persons or 2% of the national population involved in cane production. In 1960, when South Africa left the British Commonwealth, South Africa’s Commonwealth Preference Quota in the UK sugar market, the predecessor of today’s ACP quota in the EU, was transferred to Swaziland. Thus, the Swazi industry from its very beginning was able to rely on preferential prices for its sugar. This situation is now gradually coming to an end, and the challenge is on the industry to survive in a context of substantial erosion of the value of traditional trade preferences.

2. Resources a) Land and Water The Swaziland sugar growing industry presently occupies 50,000 ha of land in the essentially frost-free Lowveld and Middleveld. The mix of soils is generally satisfactory to accommodate large continuous areas of sugar cane and, with careful selection, suitable sites exist for a range of other crops. The crop is dependent on irrigation. Water is drawn from three major east-flowing rivers, which are the Usutu (annual potential outflow 2,357M m³), the Komati (annual potential outflow 1,239M m³) and the Mbuluzi (annual potential outflow 460M m³). These are international rivers shared with either South Africa or Mozambique or both. According to present planning, most of the additional 2,500 ha that will become available in the North with the completion of KDDP will be planted to cane by smallholders. The same is true of the 11,500 ha that will become available in the South with the execution of LUSIP. b) Climate The climate of Swaziland’s Lowveld is well suited to the growing of sugar cane provided that irrigation water is applied. Annual rainfall is between 590 mm at Big Bend and 685mm at Mhlume, with most of the rain falling between October and March. Winter rainfall is sparse and erratic. Temperatures, as shown in Table 10, are high in summer, generally warm in winter with very occasional light ground frost in valley bottoms.

Table 10 Temperatures

Location Elevation above sea

level

Mean min – Mean max October to March (Summer)

Mean min – Mean max April to September (Winter)

Mhlume/ Simunye Northern Lowveld

250 m

15.7ºC - 31.4ºC

10.0ºC - 28.3ºC

Big Bend Southern Lowveld

98 m

19.1ºC - 32.2ºC

6.4ºC - 28.6ºC

Malkerns Middleveld

740 m

14.8ºC - 27.7ºC

7.8ºC - 25.4ºC

Source: Food and Agricultural Organisation, Agro-Climatic Characterization of Swaziland, 1992

11


Sunshine hours vary from 6.5 hours per day in October and November to 7.8 hours per day in July. Daily wind run is high in spring and early summer, with calmer conditions in winter. Evaporation normally exceeds precipitation in all months.

c) Industrial Plant Swaziland’s three factories, Ubombo, Mhlume, and Simunye, are good examples of modern and well-designed medium-size sugar plants. They were erected at the time the sugar industry was established in the Lowveld and have been operating with very good technical results. Ubombo started operations in the late fifties, Mhlume in the early sixties, and Simunye in 1980. Today their rated daily crushing capacities are 9,000 mt, 7,000 mt, and 9,000 mt respectively. At the core of the cane supply at each factory, there is a substantial miller-cum-planter operation, flanked by one or two large independent cane growers. In recent years, for reasons of economy of scale, the mills started to explore the possibilities for broadening their cane base, smaller farmers were also finding it attractive to grow cane. More recently, smallholders, especially as smallholder associations, have specifically targeted agricultural development schemes on Swazi Nation Land for the production of sugar cane. The three factories started out as three distinct companies, each one concerned with its own cane base. Since the year 2000, however, Mhlume and Simunye belong to the same company. This allows for the shunting of cane between the two in an optimal way. Cane arrives at all three sugar mills by a network of all-weather roads, a significant portion of which is tarred. Due to Swaziland’s comparatively long crushing season, which lasts from April into November, a high productivity in terms of sugar per year per installed daily crushing capacity is obtained. The indicator for Swaziland is 26 mt of sugar per installed ton cane per day (tcpd), while for South Central Brazil and Kwa-Zulu Natal it is just below 23 mt. All three factories produce raw and VHP sugar, while Ubombo and Mhlume make refined sugar as well. The latter is sold inside the Southern African Customs Union (SACU) and within some of the neighbouring countries. Large storage and packaging capacities are associated with the marketing of refined sugar. A large amount of VHP sugar is also sold in packaged form, in SACU and within neighbouring countries. Each of the three Swazi factories has the corresponding packaging installations. The sugar destined to the above markets leaves Swaziland by road. The raw and VHP sugar destined overseas leaves through the port of Maputo in neighbouring Mozambique. It is taken there either by rail or by road. None of the mills has a railroad siding, but each has access to a trans-loading station, where the sugar is loaded onto freight cars. Each of the three factories is equipped in a slightly different way, according to its specific history and current requirements. As for Cane Reception, Mhlume and Simunye receive hand-cut, whole-stalk cane only, while at Ubombo, about 10% of cane received is cut by mechanical chopper harvesters. Juice Extraction takes place by the traditional milling process at all three plants. At each of Ubombo and Mhlume, however, there also exists a cane diffuser. The Raw Sugar Manufacturing stations are fitted in a similar way in the three houses. In addition, Ubombo and Mhlume, are able to refine about 40% and 70% respectively, of their primary output. Simunye has a distillery, enabling it to convert its own and Mhlume’s final molasses into potable alcohol. Steam Generation occurs at 30 bar in all three factories. In order to reduce coal consumption, all three factories attempt to realise as much of their refining and distilling, during the crushing season. Electric Power Generating equipment is laid out so as to allow carrying the largest possible share of the miller-cum-planter irrigation load. Coal is fired only to supplement process

12


steam, as electric power may be bought cheaper than it can be generated with imported coal. Because of this, all factories are striving to improve their steam balances in the processing, especially the evaporating stations.

3. Operation and Physical Results

a) Cane Production Growing sugar cane in Swaziland is taking place under a set of conditions that have strictly defined its key parameters. A total annual rainfall in the Lowveld of about 600 mm prohibits any cane growing without irrigation. The concentration of most of the rain between November and March and an extended period of high juice purities during the rest of the year make cane harvesting possible over a period of about 30 weeks, from mid April well into November. These two conditions practically set the schedule for the main tasks in cane production, planting and harvesting. Another influential condition is the longevity of the cane stool which permits a nine-year crop cycle, with a yearly plough-out and replant of only about 11% of the total cane area. Replanting takes place simultaneously with harvesting, with only a fraction of the replanted land actually losing a year of production, i.e., producing a crop of one-year-plus cane for the following harvest. At Ubombo, the “spring planting” (July/Sept.) covers about 80%, with the “Autumn Planting” (Feb./March) taking care of the remaining 20% of renewal. For cane varieties, the Swazi industry is participating in the SASEX programme of South Africa. Varieties such as N23, N25, and N19 are gradually replacing the NCo genomes.

Table 11: Cane Production in 2005/2006 SIMUNYE MHLUME UBOMBO Total Area harvested, miller-cum-planter, ha 11,286 9,073 7,656 28,015Area harv., large growers (>1000ha), ha 1,844 1,873 7,161 10,878Area harv., medium & small growers. Ha 2,651 4,707 3,286 10,644Total area harvested, ha 15,781 15,653 18,103 49,537Cane produced, miller-cum-planter, t 1,248,704 859,068 802,030 2,909,802Cane prod., large growers, t 226,021 223,427 824,840 1,274,288Cane prod., medium & small growers, t 249,318 434,225 297,116 980,659Total cane produced, t 1,724,043 1,516,720 1,923,986 5,164,749Sucrose in cane, miller-cum-planter, % 14.61 15.13 14.21 Sucrose in cane, large grower, % 14.29 14.39 13.55 Sucrose in cane, medium & small grower, % 14.35 14.54 13.89 Sucrose produced, miller-cum-planter, t 182,436 129,977 113,968 426,381Sucrose produced, large grower, t 32,298 32,151 111,766 183,516Sucrose produced, medium & small grower, t 35,777 63,136 41,269 140,183Totals sucrose produced, t 250,511 225,264 267,004 750,080Weighted mean sucrose in cane, % 14.53 14.85 13.88 14.52Cane yield, miller-cum-planter, t/ha 111 95 105 104Sucrose yield, miller-cum-planter, t/ha 16.16 14.33 14.89 15.22Cane yield, large grower, t/ha 123 119 115 117Sucrose yield, large grower, t/ha 17.52 17.17 15.61 16.87Cane yield, med. & small grower, t/ha 94 92 90 92Sucrose yield, med. & small grower, t./ha 13.50 13.41 12.56 13.17Source: Industry Records

Irrigation is the single most important and most expensive of all agricultural practices. Its optimal way of application may vary by mill area and even by section or field. In recent years, the traditional systems of furrow and sprinkler irrigation have been augmented by the centre pivot

13


and by drip irrigation. At the miller-cum-planter operations of the Royal Swazi Sugar Corporation, which owns both Mhlume and Simunye, drip irrigation, at 9,500 ha, is now the prevalent system. It is being expanded at a yearly rate of 500 ha, at the expense of the sprinkler system, of which, nevertheless, there still exist 6,200 ha. Furrow irrigation is maintained at around 4,000 ha. It is the cheapest to apply but requires at least twice as much water as does drip irrigation. At Ubombo, drip irrigation is not favoured, because of problems caused by silt in the Usutu River water. They are also moving away from sprinkler irrigation, but are expanding their area under centre pivots. Fertiliser application is done through the irrigation system wherever possible, with the drip irrigation offering the advantage of exact control and sub-surface administration. The principal cane diseases of the area, smut and mosaic, are being controlled through the planting of resistant varieties. The physical results of sugar cane production in Swaziland can be impressive. For instance, the large independent cane growers in Simunye obtained 17.52 mt/ha of sucrose per year in 2005/2006. The discrepancy between the results of this particular group and of other growers shows, however, that the available potential is not being realised to the same degree in all cases. More detailed results over a period of five years for each of Swaziland’s cane production areas are provided in Annex I-02.

b) Cane Processing

The basic elements of the technology to recover commercial sugar from a very voluminous and highly perishable agricultural product such as cane have been in place for almost a hundred years. This means that, even though almost all the major unit operations for materials separation are involved, sufficient experience has been accumulated to warrant reasonable results under a wide variety of conditions. The first process in this technology is that of juice extraction. It separates the soluble solids, sugar among them, from the insoluble ones such as pith and fibre. The extracted pith and fibre leave the process as bagasse, containing only a very small residue of sucrose. Most of the soluble solids continue in the juice going to process. Juice is clarified with the help of hydrated lime and process heat derived from bagasse. The impurities leave the factory as filter cake, which normally is used in the field for soil improvement. Almost all soluble solids continue in the clarified juice. The juice is concentrated into syrup by evaporation to facilitate the subsequent step of sucrose crystallization. Evaporation is a crucial process, because of the possibilities for thermal efficiency it offers through the use of multiple effect evaporators. The syrup is concentrated further under vacuum, until some solids are forced to precipitate, sucrose, fortunately, being the first one to do so. The crystals are separated from the mother liquor by centrifugal action and the mother liquor is allowed to return to the crystallization process. Eventually, the molasses will yield no more sucrose crystals and, becomes the last by-product.

14


Table 12: Cane Processing in 2005/2006

Simunye Mhlme Ubombo Total Cane Crushed, t 1,885,709 1,355,082 1,932,696 5,173,487 Crop Days 245 245 239 Time Efficiency, % 79.96 79.61 83.60 Effective Crushing Rate, t/h 407 295 401 Coal Consumption, kg/tc 4.158 17.893 pol in Cane, % 14.56 14.86 14.04 Fibre in Cane, % 13.85 14.05 13.19 Mixed Juice Purity 86.64 86.48 84.54 Raw Sugar tq, t 12,534 46,930 123,282 182,746 VHP Sugar tq, t 230,930 4,896 4,660 240,486 Refined Sugar tq, t 0 125,459 104,044 229,503 Total Sugar tq, t 243,464 177,285 231,986 652,735 Molasses, t 68,633 53,128 121,761 Sucrose Extraction, % 96.91 97.52 96.62 Sucrose Recovery, % 88.15 87.77 85.26 Sugar on Cane, % 12.91 13.08 12.00 12.62 Source: RSSC and Ubombo

The sucrose and non-crystallisable sugars remaining in the molasses can be converted into ethanol by bacteria under proper fermentation conditions. The ethanol is normally driven off in steam-operated distillation columns and recovered condensed in water-cooled condensers. The bagasse is used to generate steam, from which mechanical as well as thermal energy are derived. The former, contained in live steam, drives process and electric generating equipment, while the latter, as exhaust steam, enters the evaporators and from there cascades through the entire chemical part of the process, including juice heating and pan boiling. Ideally, all the mechanical and thermal energy needs of a factory are met by the combustion of bagasse, without the requirement of outside fuel. The application of the successive materials’ separation steps of cane processing in the Swaziland mills is yielding results of remarkable efficiency. 88% of all sucrose that entered the process at Simunye was recovered in the form of commercially usable sugar. Less than 12 % were lost, which included sugars in final molasses. The technical operating results are summarised in Annex I-03. The true test of the efficiency of cane production and processing operation are, however, not the technical results but the financial ones. These are examined in the following section. 4. Financial Analysis

a) Production and Processing Costs

Out of the approximately E19,000 per ha spent in 2005 by miller-cum-planters and large independent growers on the production of cane, about 40% went toward direct establishing and cultivation costs of cane. Harvesting and transporting the cane took up another 20%, and the remainder was absorbed by overhead, including the general and administrative component as well as human resource costs. Of the cultivation costs, roughly one half was due to irrigation, the main items being labour and electric power. On a per-ton basis, the costs of cane production – given the average yield of around 100 t/ha - are about one hundredth of the per-ha figures. Harvesting costs are about E40 per tonne, with a breakdown of E15.00 for manual cane cutting, E7.50 for mechanical loading, and E17.50 for transport.

.

15


Table 13: Cane Production Costs 2005/2006 of Selected Growers

RSSC, M-C-P Ubombo, M-C-P Ubombo, Man.Farm Area Harv., ha 19,350 7,656 2,208 Cane Deliv., t 1,954,325 802,030 228,469 Sucrose, % 14.28 14.21 14.11 Sucrose, t 279,078 113,968 32,237 Amount per per mt Amount Per per mt Amount Per per mt E 1000 ha cane E 1000 Ha cane E 1000 Ha cane Total Cost of Cane 352,456 18.22 0.180 146,710 19.16 0.183 42,994 19.47 0.188 Direct Cost of Cane 226,680 11.72 0.116 118,168 15.44 0.147 40,447 18.32 0.177 Personnel 52,581 7,995 Other Op. Costs 37,965 19,791 Electricity & Fuel 9,927 6,843 Haulage Contr. 13,544 5,818 Equipm. Deprec. 28,605 4,151 Indir. Costs of Cane 125,776 6.50 0.064 28,542 3.73 0.036 2,547 1.15 0.011 Administration 105,137 14,531 1,451 Human Resourc. 20,639 18,585 1,855 Sundry Reven. -4,574 -759 Cost, Sucrose, E/t 1,263 1,287 1,334

Source: RSSC and Ubombo

The values appearing in Table 13 reflect these relationships only in a general way, but some detail had to be sacrificed to keep the information from different enterprises comparable. The same applies to the figures for the cost of processing cane into sugar and molasses. Table 14 shows the cost of processing but, at this stage, do not include the cost of cane. They are broken down into direct and indirect costs, with nearly one half of the direct costs taken up by payroll. Approximately one quarter goes to power and fuel, and one quarter to materials.

Table 14: Processing Costs 2005/2006 at Swaziland’s Cane Millers RSSC Ubombo

Cane Crushed 3,114,372 1,923,959 Sugar Made, ttq 387,745 231,986

per per t per per t Amount, E 1000 T total Amount, E 1000 t total cane sugar cane sugar Total Manufacturing Cost 238,471 0.077 0.615 150,318 0.078 0.648 Direct Cost of Sugar 167,131 106,168 Indirect Costs of Sugar 71,340 44,150 Administration 31,340 19,373 Human Resources 40,000 24,777

Source: RSSC and Ubombo

b) Output Sales and Industry Revenues

The output of Swaziland’s sugar factories, refined sugar, VHP raw sugar, and straight raw sugar, is sold in a number of different markets. The local market, which includes all of the SACU area, takes refined and VHP sugar. So does the regional market, which includes some of the other countries of southern Africa. Straight raw sugar is exported under quotas to the EU and to the US and without any constraints to the world market. In Table 15, a breakdown of 2005/2006 sales by type of product and by market is provided, indicating prices and the respective revenues obtained. In Annex I-04, information covering the past three (3) years is shown.

16


Table 15: Swaziland Sugar and Molasses Sales, 2005

Volume Price Exch R. Price Revenue Market MTtq FC/MT E/FC E/MT E1000

REFINED SUGAR SACU R 196,850 2,589 1.00 2,589 509,645 Regional $ 1,011 217.45 6.05 1,316 1,330 TOTAL, REF. 197,861 510,975

VHP SUGAR SACU $ 114,460 420.35 6.05 2,544 291,186 Regional $ 93,605 194.31 6.05 1,176 110,079 UK Special ₤ 1,000 355.26 11.46 4,071 4,071 TOTAL, VHP 209,065 405,337

RAW SUGAR EU / ACP € 119,878 474.09 7.85 3,720 445,946 EU / SPS € 36,670 437.90 7.85 3,436 125,998 USA $ 15,687 356.24 6.05 2,156 33,821 World $ 27,513 143.42 6.05 868 23,881 TOTAL, RAW 199,748 629,647

ALL TYPES OF SUGAR TOTAL, ALL 606,674 (at an av. of 19.10 USc/lb) 1,545,959

MOLASSES SACU R 204,698 188.00 1.00 188.00 38,483

Source: Swaziland Sugar Association The proceeds are distributed among the factors of production, after the marketing and general expenses have been covered. Sharing between growers and millers is based on a 0.681/0.319 ratio. The ratio is re-negotiated periodically, with the high fraction accruing to the growers.

The cane growers’ share of the proceeds is divided by the amount of sucrose delivered to the mill, which results in a value in E/t, the cane growers’ “sucrose price”. On the basis of it, they are paid for their cane deliveries on a weekly basis. At the beginning of the crop, the sucrose price is based on an estimate of both sucrose production and revenues from sugar sales. As the real figures become apparent, the “price” is continuously revised, until after the end of the crop, its final level and the corresponding balance payment are realised. The procedure is displayed in Table 16, where the sucrose price, however, is not at the final 2005/06 value yet, which turned out to be E 1,381.09 per ton.

Table 16: Distribution of Proceeds from Sugar Sales, 2005 Sales Revenue from Sugar E1,000 1,546,143 Constant Sales Rev. from Molasses E1,000 38,483 Total Sales Revenue E1,000 1,584,626 Total Marketing & Gen. Expenditures E1,000 273,070 Net Distributable Proceeds E1,000 1,311,555 Growers' Share of Proceeds Fraction 0.681 Amount to Growers E1,000 893,169 Sucrose as produced in the field, t T 686,425 Growers’ Return on Sucrose, E/t E/t 1,301.19 Amount to Millers E1,000 418,386 Sugar produced telquel T 597,563 Sugar prod., expressed as 96º T 641,935 Millers’ Return on 96º Sugar E/t 651.76

Source: Swaziland Sugar Association

c) Processor and Grower Margins With millers’ and growers’ shares of the sales proceeds defined, it is possible to confront their revenues with their respective costs and to examine the resulting margins. All net distributable proceeds are passed to the miller, who, according to the sucrose price and amount delivered, pays the grower his share. This then becomes the miller’s raw materials cost. The remainder after

17


subtracting his direct and indirect manufacturing costs from the manufacturing margin gives an indication of his profits before interest and taxes. In spite of the limitations on time and detail, the information in Table 17 shows this margin to be very narrow, indeed. To further illustrate the point, sugar costs are given in national and international units.

Table 17: Pro-Forma P&L in Cane Processing 2005/2006, Swaziland Millers #1 #2 Cane Crushed 3,114,372 1,923,959 Sugar Made, ttq, t 387,745 231,986 per per t per per t Amount, E 1000 t total Amount, E 1000 t Total cane sugar cane Sugar Sales Revenues 918,287 0.295 2.368 647,235 0.336 2.790 Raw Sugar 875,142 Other Rev. (Ref. Allow.) 41,657 GROSS REVENUE 918,287 0.295 2.368 647,235 0.336 2.790 Sales Charges 0.000 0.000 100,534 0.052 0.433 Marktg & Dist. Costs 84,794 Stock Adjustments -7,611 Levy, Exports to EU 23,351 NET REVENUE 918,287 0.295 2.368 546,701 0.284 2.357 Raw Materials Cost 582,586 0.187 1.502 346,870 0.180 1.495 Growers' Sucrose 582,586 346,870 Manufacturing Margin 335,701 0.108 0.866 199,831 0.104 0.861 Total Manufact. Cost 238,471 0.077 0.615 150,318 0.078 0.648 Direct Cost of Sugar 167,131 106,168 Indirect Costs of Sugar 71,340 44,150 PROFIT 1/ 97,230 0.031 0.251 49,513 0.026 0.213 Cost of Sugar, E/MT 2,118 2,143 Cost of Sugar, ¢/lb (US) 15.7 15.9 1/ Before interest and tax Source: RSSC and Ubombo

The sucrose payment received from the miller constitutes the cane grower’s revenue. In Table 18, three examples of actual large cane growers are followed through. On a turnover of around E20,000/ha, the cane grower receives a margin of only between E 1,000 and E3,000.

Table 18: Pro-Forma P&L, Cane Production 2005/2006, Selected Swaziland Growers

#1 #2 #3 Area Harv., ha 19,350 7,656 2,208 Cane Deliv., t 1,954,325 802,030 228,469 Sucrose, % 14.28 14.21 14.11 Sucrose, t 279,078 113,968 32,237 Sucr. Price, E/t* 1,300 1,300 1,300 Amount per per t Amount per per t Amount per Per t E 1000 ha cane E 1000 ha cane E 1000 ha cane Sucrose Revenue 362,801 148,159 41,908 Other Revenues 11,654 20,061 6,139 Gross Revenue 374,455 19.352 168,220 21.972 48,047 21.760 Tot. Cost of Cane 352,456 18.215 0.180 146,710 19.163 0.183 42,994 19.472 0.188 Dir. Cost of Cane 226,680 11.715 0.116 118,168 15.435 0.147 40,447 18.318 0.177 Indir. C. of Cane 125,776 6.500 0.064 28,542 3.728 0.036 2,547 1.154 0.011 PROFIT 21,999 1.137 0.011 21,510 2.809 0.027 5,053 2.288 0.022

* Intermediate Source: RSSC and Ubombo

18


D - SWOT Analysis of the Sugar Industry From the general description of the sugar industry provided above, the following key strengths, weaknesses, opportunities and threats may be identified.

The major strengths of the sugar industry in Swaziland lie in its high competitiveness, due to efficient cane production and technically efficient sugar production plants. This is further enhanced by premium markets to which the Swazi sugar is sold. So far, the exposure to the low-paying world market has been minimal, although it is poised to grow due to a reduction in the quota access to preferential markets and increased production of sugar. The industry has further benefited from the regional integration initiatives, particularly within SACU, which has provided a higher price due to protection. Furthermore, the industry is regarded as a sensitive sector, and is therefore not subject to the normal trade liberalisation programmes that other products are subjected to. It is therefore possible to retain preferences, and protection, on sugar for sometime to come. The industry has benefited from an efficient marketing system, which has been centralised within the Swaziland Sugar Association. It has been possible, through the SSA, to improve marketing efficiency and coordinate other external marketing initiatives. The strategic multifaceted role of the sugar industry in the economy of Swaziland has allowed it to receive particular attention and assistance from the Government. This has been the reason that smallholder cane growing has received particular policy attention.

The sugar industry has, against these strengths, several weaknesses which threaten its future viability. These relate to the increasing costs of producing cane and sugar, compounded by a weakening efficiency of production for smallholders (particularly the new entrants). The high cost (and inefficiency) of transportation is a critical factor affecting the cost-reduction of the industry. These are beyond the control and influence of the industry. So is the cost of utilities, which are high but cannot be influenced from the industry. Energy, for example, is key to industry performance, whilst its cost and efficiency is not competitive.

Several opportunities lie within the industry, and its related sub-sectors. The possibility of obtaining additional market access into the EU market presents one area of opportunity for the further sustainability and growth of the industry. The increasing world prices also provide cushion against the falling prices in preferential markets. Other opportunities to increase supply to other preferential markets exist, due to reduction in supply from the EU and Brazil, and a divergence of supply by the LDCs from some markets into the EU. The productivity and efficiency challenges facing the sugar industry in cane growing and sugar production are not permanent. They can be responded to. There is thus opportunity to improve on productivity and efficiency, and thus competitiveness. The process towards liberalisation of control and introduction of competition in the local energy market presents an opportunity for the local sugar industry to produce electricity to be sold onto the national grid. The increasing oil prices, coupled with necessary policy reforms in the region, can help diversification efforts into bio-fuels, and ethanol production.

The biggest threat facing the sector relates to a fall in the price obtainable for Swazi sugar in export markets, including the SACU market. The low return to smallholder sugar farming has acted as a disincentive to improve productivity. This threatens to worsen the smallholder indebtedness. Furthermore, the strengthening of the local currency reduces the export earnings and the value of foreign preferential markets. The process of trade liberalisation and preference erosion presents another dimension to the threats facing the future of the industry. However, if the necessary reforms are embarked on, the industry can still profitably sell sugar at more liberalised world markets.

19


Strengths Weaknesses

High productivity in cane growing Technical efficiency in sugar production Access to preferential markets Support from the Government Good marketing infrastructure Limited exposure to the world market

Inefficient infrastructure and high transport costs Increasing costs of sugar production Increasing inefficiency of smallholder farmers in growing sugar Deficiencies and inefficiency of public utilities, with their related high costs

Opportunities Expanded access into the EU and regional preferential markets Diversification into other sugar-based products Supply of sugar markets previously supplied by Brazil and LDCs Temporary nature of problems facing smallholders Nurturing regional demand

Threats Preference erosion EU-RSA TDCA Expiry of COMESA derogation Failure of smallholders to run farms efficiently Low returns to smallholders, and reduced viability of irrigation projects Price pressures on SACU market

20


II. EXPECTED SOCIO-ECONOMIC IMPACT OF THE REFORM

A. Background Information The EU reforms will result in a cumulative price decline of 36% over a four-year period between 2006 and 2009, resulting in a price cut from the current €523.7 to €335 per tonne as shown in Table 19. Then the prices will remain constant for about ten years, wherein the EU might introduce a new wave of reforms. Whilst there are presently no threats to the Sugar Protocol quota allocations guaranteed under the Cotonou Agreement, the allocations for the Special Preferential Sugar are not guaranteed and are being subject to a system of annual allocations which is less predictable (and thus bringing less guarantees). The system to allocate these quantities is still to be developed by the European Commission. The impact analysis relates only to effects of the price cuts ignoring the possible loss of the SPS allocation1. Monetary effects of the reforms are considered for industry revenues and the government revenue streams, although it has serious multiplier effects on the whole economy.

1. Revenue Earnings of the Industry The more direct impact of the reforms will be on the revenues obtainable from sales into the EU market. The direct impact on Swaziland of the price decline for the EU Protocol sugar may be calculated as the difference between the revenues received without the reform and those expected with the reform actually in effect. The figures are shown in Table 19. It is assumed that the Sugar Protocol allocation will be maintained at the current allocation of approximately 120,000 tonnes (raw-sugar equivalent) and that the 30 000 tonnes previously sold through the SPS will be sold to the world market, given that all other preferential markets are now fully subscribed thus increasing Swaziland’s exposure to the world market. Furthermore, two big irrigation projects (KDDP and LUSIP) are expected to bring in about 200 000 tonnes of sugar which will be sold in the world market in the medium term, causing a further reduction to the average price.

Table 19: Decline in Swaziland’s Earnings from EU Sugar Sales Marketing Year Raw Sugar Price,

€/t Sugar

Protocol Quantity

t

Revenues Earned, €

Revenues Lost, €

2005/06 523.70 120,000 62,844,000 02006/07 496.80 120,000 59,616,000 3,228,0002007/08 496.80 120,000 59,616,000 3,228,0002008/09 434.10 120,000 52,029,000 10,752,0002009/10 335.00 120,000 40,200,000 22,644,000

39,852,000 The industry will therefore lose about €40 million in the period of the price cuts (2006-9). The revenue reduction of about €23 million per year after 2009 is about a third the annual industry

1 This is considered only in the calculation of industry losses.

21


expenditure on social services. If then, the current SPS sales of 30,000mt are sold to the world market at the 2005 prices, the revenue loss is estimated at €7 million per year from the time of the full price cut (2009). Table 20 below shows the impact of the EU price cuts on the industry’s revenues and that will have a direct effect on the incomes of sugar cane growers and millers. Revenues earned on sugar protocol exports and those earned on special preferential sugar exports to the EU accounts for around 30% of total industry revenues. The cut will have a particular impact on the sucrose price paid to growers which will fall by E270. The miller return on 960 sugar will reduce by E135.

Table 20 Post-EU-Reform Projection, Industry Revenues 2005 2006 2007 2008 2009 Raw S. fob Price, EU Quota, €/t 523.70 496.80 496.80 434.10 335.00 Raw S. cif Price, EU Quota, €/t 474.09 447.19 447.19 384.49 285.39 Exchange Rate, E/€ 7.85 7.85 = = = Raw Sugar Price, EU Quota, E/t 3,722 3,510 3,510 3,018 2,240 Raw Sugar Price, World, $/t 143.42 143.42 = = = Exchange Rate, E/$ 6.05 6.05 = = = Raw Sugar Price, World, E/t 868 868 = = = Raw Sugar to World Market 27,513 64,183 = = = Sugar Sales Quant. t Amounts, E1000 Refined 197,861 510,975 510,975 = = = VHP 209,065 405,337 405,337 = = = Raw EU quota 119,878 446,139 420,825 420,825 361,821 268,564 Raw, EU, SPS 36,670 125,998 0 0 0 0 Raw, US quota 15,687 33,821 33,821 = = = Raw, WM 27,513 23,873 55,691 = = = Sales Revenue from Sugar 1,546,143 1,426,649 1,426,649 1,367,645 1,274,388 Sales Revenue, Molasses 38,483 38,483 = = = Total Sales Revenue 1,584,626 1,465,132 1,465,132 1,406,128 1,312,871 Total Marketing & Gen. Expend. 273,070 273,070 = = = Net Distributable Proceeds 1,311,555 1,192,062 1,192,062 1,133,058 1,039,801 Growers' Share of Proceeds 0.681 0.681 = = = Amount to Growers, E1000 893,169 811,794 811,794 771,613 708,104 Sucrose produced in the field, t 686,425 686,425 = = = Grower Return on Sucrose, E/t 1,301.19 1,182.64 1,182.64 1,124.10 1,031.58 Amount to Millers, E1000 418,386 380,268 380,268 361,446 331,696 Sugar produced telquel, t 597,563 597,563 = = = Sugar prod., expressed as 96º 641,935 641,935 = = = Miller Return on 96º Sugar, E/t 651.76 592.38 592.38 563.06 516.71

Note: = means the variable is assumed to remain constant over that period.

Due to the dilution effect of sales in other markets, the prices to growers and millers are estimated to drop by about 20%. If instead of holding the world market constant at last year’s level of $143/t, it were assumed to continue at its current level of $350/t, sugar export revenues would decline by 15%.

a. Impact on Cane Suppliers, particularly Smallholders Smallholder farming is useful in the national fight against poverty, especially in the lowveld region, where sugar is grown. Besides investment made by the millers to develop the smallholder cane growing sector, the Government has made huge investments to the development of irrigation projects primarily targeting the growing of sugar cane. Through the government projects, a further 16,000 ha of land will be planted to sugar cane in the next 5 years. Out of the total area supplying cane to the Simunye and Mhlume mills, 7,358 ha belong to “Medium and Small-scale Growers”, where this category is either a multi-member Smallholder Farmers’ Association or an individual grower producing less than 1,000 t of sucrose per year.

22


These growers represent 23% of the supply area of the two northern mills (Simunye and Mhlume). The Ubombo mill is presently supplied from 3,286 ha of cane belonging to Medium and Small-scale Growers, representing 18% of the mill supply area. If one assumes that over the next four years all production costs will remain at their 2005 levels, as well as the exchange rate of the Rand/Lilangeni and all prices for Swazi sugar except the one obtained in the EU, the sucrose price to the grower will have dropped from above E1,381/t in 2005 to E1,031 in 2009. For the average Medium and Small-scale Grower (given his cane yield of between 90 and 95 t/ha), such drop will have the effect of taking his gross margin per ha from above E5000 down to E1189. This decline includes the negative effects already being felt by this sector due to the strengthening of the local currency, reducing the local value of export earnings. At this margin, there will be no surplus to cover internal overheads and debt servicing. As the figures in the example of Table 21 show, most smallholder cane growers will fail to service their loans and would eventually go out of business in the near future.

Table 21: Impact on Gross Margins per ha for Smallholder Cane Growers (Mabhudvu Farmers’ Association)

Before EU Price Drop 2005

After EU Price Drop 2009

Cane Yield, t/ha 93 93 Sucrose in Cane, % 13.89 13.89 Price of Sucrose, E/t 1,381.09 1,031.58

E/ha E/ha Revenue 16,807 13,326Expenditures on: Vehicles and Equipment 87 87 Fertilizer 1,280 1,280 Chemicals 550 550 Labour 909 909 Irrigation 1,835 1,835 Harvesting and Haulage 7,224 7,224 Other 252 252 Total 12,137 12,137Gross Margin 4,670 1,189Estim. Annual Debt Servicing Cost 6,551 6,551Loss before other overheads E/ha -1,881 -5,362

Assuming the continuing strength of the Rand/Lilangeni, but assuming in addition that the world market sugar price will maintain its 2006 level (i.e. at $350/t instead of $143), the sucrose price to the grower will drop to only E1,111/t, and gross margins for growers would drop to just over E2000/ha. Even then, many growers would drop out because of their inability to fully cover overheads and debt servicing. These farmers have an average debt burden of about E43,000 per ha, whilst interest debt service alone is averaging about E7,000 per ha. This situation is compounded by the need to service seasonal loans, which also carry high interest rate charges. On seasonal loans of E14,000 per ha and interest rate of 15.5%, interest charges on seasonal loans alone take some E2,170 per ha. This situation suggests that without immediate financial restructuring of both seasonal loans and capital investment loans, a substantial proportion of recently established smallholder sugar farmers will be not financially viable. This would undermine a key component of Swazi economic empowerment pursued by the Government with the assistance of the EU and other external donors since the mid 1990s. Their situation is aggravated and unsustainable in an environment of decreasing local value of export sales and the further reduction in EU prices.

23


One of the most vulnerable groups among the small and medium-scale growers are those recently established (and those to be established) Farmers’ Associations in the Komati Downstream Development Project (KDDP) and those to come under the LUSIP. The capital costs related to developing land and establishing the irrigation systems are now unsustainable if they are financed on borrowed funds.

The large growers at both Ubombo and the northern mills are likely to survive at lower EU price levels. They consistently produce yields in excess of 120 tons per ha and have long since recovered the capital expenditure applied to their initial irrigation infrastructure and establishment of cane stands.

b. Impact on Sugar Mills i) Social and Community Services The history and geography of the sugar mills has dictated that the sugar companies provide social services out of their own resources in order to maintain a good quality of life for their employees, and in order to ensure that good environmental practices are adhered to, including other social welfare interests. These mills are located in areas which were remote in nature with no good infrastructure connecting them to the industrial centres of Matsapha and the capital towns. This has required the mills to maintain a minimum standard of social services. The industry is now running what is termed industrial/company towns in Mhlume, Simunye, Tshaneni, Tambankulu and Big Bend. These towns provide an array of social services to employees, their families and neighbouring communities. The amenities provided include housing, clean water reticulation, sewage, electricity, refuse collection, good roads, crèches, primary and secondary schools, technical education facilities, clinics, hospitals, sporting and recreational facilities and clubs. The companies had no option but to provide the services and the staff to run them if they wanted to operate their businesses in those centres. The premium prices obtained in preferential sugar markets have enabled the companies to continue financing these amenities including improvement of quality and standards. While it can be argued that this model of social services provision has out-lived its usefulness in a time of increasing global competitive pressures, the financing of these services cannot simply be abandoned or simply handed over to the state immediately. The impact of EU sugar sector reforms on revenue however mean that the estates and large farms are poorly placed to continue historical levels of funding. As such, as soon as the price reform in the EU sugar market became a prospect, some of the companies (in particular both RSSC and Ubombo Sugar) began programmes of rationalization. RSSC has, for example, withdrawn some medical services, closed some clinics and restricted the hours of access at others. Some “municipal” services were outsourced. Because of the need to retrench workers as part of a restructuring and adaptation exercise, many company houses will stand empty. Furthermore, the cost of maintaining the remaining ones presents a stretch on resources for most of the companies. As the companies relieve themselves of the ‘extra’ services, and concentrate on their core business, continuous provision of social services at current standards is standing at a high risk point. This is against an environment where their need will be felt even more given Government’s inability to take over the provision and running of these services. For optimality, it is important that the companies remain able to provide a good portion of these services. It is difficult as yet to estimate how the companies will react to the reforms, in terms of services to be cut, as that will depend on the development of a model (see next chapter), but it is clear that attempts in the

24


direction of reducing their involvement in social services are favoured by the EU reforms, and similar challenges to their revenue streams. The table below shows the level of involvement that the two major companies seek to have in the coming period in response to the need to cut their expenditures on social services. After the rationalization exercise, the two companies are still budgeting to incur, annually, the amounts shown in Table 22.

Table 22: Budgeted Expenditure on Housing and Social Services (Emalangeni)

Company Housing and

Social Services Education Services

Health Services Security Totals

RSSC 8,436,000 9,033,000 9,246,000 8,166,000 34,881,000Ubombo 10,149,000 2,694,000 7,180,000 3,280,418 23,303,418Total 18,585,000 11,727,000 16,426,000 11,446,418 58,184,418

ii) Employment levels

The effect of the currency appreciation can be used to show the effects of the EU price cuts on the industry, as both processes have involved a cut in the price received by industry. In response to a reduction in export earnings, some of the companies have embarked on programmes to reduce their workforce, and thus the related costs of maintaining them. The number of workers directly employed by RSSC, for example, has dropped by 48% through outsourcing and retrenchment. The equivalent figure for Ubombo is 46%, as is shown in Table 23.

Table 23: Reductions in work force numbers from previous years to 2006 RSSC Ubombo Prev. 2006 ch %ch Prev. 2006 ch %ch

M-C-P 1722 1057 665 38.6 757 Factory 834 447 387 46.4 476 Support 1047 324 723 69.1 214

Perm-anent.

Total 3603 1828 1775 49.3 2444 1447 997 40.8M-C-P 1710 895 815 47.7 1107 Factory 134 49 85 63.4 9 Support 48 36 12 25.0 24

Seas- onal

Total 1892 980 912 48.2 2125 1140 985 46.4 Source: RSSC and Ubombo

In anticipation of the price decline in the EU sugar market, the industry is already engaged in a substantial restructuring exercise with respect to its levels of staffing. The retrenched staff is adding to the pool of unemployed, while the economy, at its present level of performance, does not offer any capacity to absorb them in other sectors. More than 3000 workers have been retrenched by the sugar industry in the past 2 years, and are poised to continue doing so. This is a huge number given that it represents close to half the workforce. Given the contribution of the sugar sector to overall employment in the agricultural sector and the wider economy, the impact is horrendous for an economy already plagued by problems of high unemployment and poverty. Given the links between formal sector employment and avenues out of poverty this trend is particularly worrying in terms of its consequences for the overall levels of poverty in Swaziland.

25


2. Impact on Government Revenue and Operations The most direct impact of the EU sugar reform on Government will relate to income earned on sales into the EU market on two accounts. First, the Government charges a tax (called the sugar levy) on export to the EU under the Sugar Protocol. Secondly, the reduction of industry earnings from the EU market, which presently represent a third of total industry revenues, will leave less taxable income from which Government can earn revenue. Other indirect revenue losses will be in the form of losses in personal income tax (including the taxation of benefits), and general sales tax as the buying power of people will be reduced through retrenchments and other mechanisms. The most glaring and easily quantifiable area of loss is the sugar levy which is a tax applicable to sales of sugar under the EU Sugar Protocol. Government is expected to lose about €9 million per annum in revenues from the levy. The sugar levy was designed to secure part of the economic rent to be derived from the existence of the preferential access to the EU market for use in the provision of wider social services in Swaziland. With the implementation of EU sugar sector reforms, at current prices and exchange rates, a higher premium for Swazi sugar in the EU market will be disappearing particularly in relation to the domestic (SACU) market. The justification for the levy will thus disappear. The revenue losses from other sources of the sector are not readily quantifiable but are significant. For this to be happening in a period of serious strain on public finances and a huge pressure of expenditures, given the HIV/AIDS pandemics, high unemployment and poverty, the significance of such revenue losses will be huge. This is against a backdrop of limited ability for the Government to utilise fiscal, monetary and trade policy to intervene in cases of such developments. The Government is therefore constrained in its response to this reduction in revenue. Government operations will suffer, unless an equal injection is obtained from the EC and other sources, in the form of budget support. This is particularly relevant as the sugar industry seeks to withdraw from the financing of a range of social services, and the financial burden falling on the Government is set to increase substantially. 3. Impact on the Social Sector The social welfare services that are provided by the sugar estates/companies will no longer be available to the employees that will face retrenchment, including their families. Furthermore, even for those employees that will remain in employment, the companies will cut the level of social services provided and subsidised. This will have the effect of reducing social welfare standards, for employees and their communities. The ability of the economy to absorb and assist those who will be retrenched is limited. Access of ex-employees to social services provided by the companies is forfeited on their departure. This places them at the hands of the state, which is already overstretched given the many challenges relating to high unemployment and poverty levels, and other social challenges exacerbated by the high prevalence of HIV/AIDS. The EU reforms are therefore having some profound impacts on the society.

4. Impact on the Wider Economy The sugar sector plays a multifaceted role in the economy. Besides creating employment, providing social services, bringing foreign exchange, and boosting economic growth, the linkages with other sectors of the economy make it more important. The effect of any decline in the performance of the industry is therefore macroeconomic in nature. Manufacturing, which has for many years been the main driver of economic growth in the country, will suffer as a result of the decline in the performance of the sugar industry.

26


A weakening performance of the sugar sector results in higher unemployment, poor industrial performance, reduction in foreign reserves and the weakening of the balance of payments position, amongst many other macroeconomic imbalances to result from these EU reforms. With sugar exports to the EU accounting for 21% of total Swazi exports to the EU, a 36% decline in Swazi sugar sales to the EU will result in approximately a 7% decline in the total value of Swazi exports to the EU (all other factors constant) The reduction of the employment level in the sugar industry is translating directly into an increase in the national poverty indicators. The income losses sustained by former sugar employees, by passing either into unemployment or self-employment under the industry’s scheme of out-sourcing of services, are exacerbated by the fact that about 7 dependents must be assumed for each retrenched worker. This situation is compounded by the increased costs which retrenched workers face in accessing health, education and housing, as a result of their loss of status as employees (with non-employees facing higher charges, fees and rents than employees). This undermines the welfare of future generations, as those directly affected now will not be able to maintain their lifestyle and to pass it on to their children. The financial sector in Swaziland is heavily exposed to the sugar sector. Any decline in present and future performance of the sugar sector directly challenges the viability of the financial institutions as well, as the financing model used was based on higher prices. For example, 14 Farmers’ Associations, farming a total of 2,341 ha, have borrowed E109 million, mainly from the commercial Swazibank, and have an average debt load of over E43,000 per ha of cane. Interest alone is presently requiring annual payments per ha of over E7,000. There is need to stabilise the financial situation of the sector so that financial institutions are not exposed to further risks of collapse.

27


III. STRATEGY MEASURES FOR NATIONAL ADAPTATION

A. THE COMPETITIVENESS OF THE SUGAR INDUSTRY

1. Commercial Cane Growers Swaziland’s commercial cane growers, especially those producing over 1,000 tons of sucrose per annum, have a reputation for efficiency and are well aware of the challenges facing them. They have been world leaders in sucrose yields per ha and continue to rank with the best. However, there is a need for them to continually monitor and improve their effectiveness because given the nearly 30% increase in national production since 1999 a significant proportion of their production ends up in the world market. They must now compare their costs to competitors like Brazil and Australia rather than to those of other ACP countries. Given that in the long run Swaziland can be expected to profitably place sugar in the world market, it would be justified to increase the area in cane. There are areas readily developable for irrigation into sugarcane. Such are on SNL and land owned by Tibiyo. Any increase in area by commercial cane growers is dependent on its coordination with smallholder development schemes. Even though, in some instances, difficulties are being experienced with cane growing under smallholder developments, there is indication that cane growing on those lands can be successful. To improve competitiveness on cane growing, the following measures need to be adopted and implemented:

• Reduce labour cost in cane production • Continue to raise sucrose content of cane • Streamline cane delivery practices • Reduce harvesting, loading and haulage costs • Reduce irrigation costs

2. Cane Millers While sugar factories in Swaziland are able to hold their own with the best, as far as total sucrose recovery is concerned, they offer considerable room for improvement. These mainly relate to operating costs. There are two main areas, in which costs conceivably could be reduced, i.e. personnel and energy. With the level of installed automation, it should be possible to reduce personnel costs, which at present constitute a hardly competitive 50% of operating costs. There also appears to be some room for reducing operating costs through the elimination or drastic reduction of the consumption of supplementary fuel, i.e. coal. A careful review of the thermal balance is underway in each of the mills, as well as trials with substitute fuels, such as baled trash, obtained from mechanically harvested green cane.

Furthermore, millers will find it strategic to become decisively involved in getting economic cane production in the two large irrigation schemes (KDDP and LUSIP). This goes hand-in-glove with the decision to secure a long-term increase in the base of cane supply. This will ensure viability of the two irrigation schemes on one hand, whilst on the other it will allow outsourcing of cane growing away from the mills – thus promote economic efficiency that goes with specialisation. In addition, millers would now be better placed to force competition – with the benefits of efficiency and increased productivity – in cane growing, particularly smallholders.

28


Measures • Reduce the cost of labour, through retrenchments, and realignment of operations,

including outsourcing; • Explore the use of alternative forms of energy in order to reduce energy costs, without

compromising energy efficiency; • Increase milling capacity to absorb and cost-effectively process cane to be supplied from

the new irrigation schemes.

3. Improved National Infrastructure Hauling of cane and transportation of sugar are two significant components of the cost of sugar. Improving maintenance of existing roads, and expanding the road network, thereby servicing additional agricultural areas, will greatly contribute to the reduction of the hauling cost of cane and sugar. Another area of the road infrastructure improvement relates to the creation of new service roads between farms and the mills. This will also include the construction of bridges to shorten the distance between farms and mills. This will greatly contribute to the reduction of transportation costs, which have formed a major cost of the sugar industry especially in the transportation of cane. An especially problematic issue in hauling export sugar, as well as other Swazi products, is access to and the efficiency of the terminal facilities at the port of Maputo. A programme for the upgrading of the Maputo port terminal is required. Measures • Improve and expand road system, incl. bridges, to reduce transportation cost • Improve truck unloading facilities at Maputo export terminal

B. TRADE POLICY AND THE PURSUIT OF PREMIUM MARKETS

1. The Domestic SACU Market Existing arrangements within SACU should continuously be reevaluated as to their usefulness, not only for the Swazi sugar industry but also for the Swaziland economy as a whole. This includes the EU-South Africa Trade Development and Cooperation (TDCA) Agreement, under which sugar-containing food products imported duty-free from the EU may displace similar products made in Swaziland in the SACU market. In this regard, an extension of the TDCA provisions to the entire SACU area, modified where necessary to include the development of regional demand for regionally produced sugar, is possible. There is also a need to maintain (and where possible expand) preferential access to regional markets and preserve the value of both the domestic (SACU) and regional markets.

29


Measures

• Start dialogue with BNL countries and RSA and, subsequently, the EU, to extend the conditions of the TDCA to the entire SACU area

• Modify TDCA provisions to include the development of regional demand for regionally produced sugar

• Provide concessional loan financing for downstream value-added industries.

2. Sugar Sales in Regional Markets Even though sales in regional markets do not yield prices much above the world market, those sales generally provide the opportunity for value-added sales, given that the sugar is shipped in bagged or even in packaged form. Regional markets provide an opportunity to place Swazi sugar at markets marginally better than the world market. The most important policy here is to push for more preferential access in regional markets and promote the development of regional integration measures that will ensure regional markets are of value. Preferential market access in COMESA is presently provided through a derogation which is renewed annually. This extension is now not prospected to be renewed this year, and therefore a need to find a more sustainable trade arrangement with countries in the COMESA region. The integration of SACU within the SADC trade agenda should also be undertaken cautiously, ensuring that the interests of Swaziland, particularly with regard to sugar, continue to be preserved. The nature of demand in regional markets, requires a specific packaging and bagging system. There is need to develop this system, as more sugar will have to be sold into this market, and the world market which requires bagged sugar, as opposed to bulk sales.

3. The EU Sugar Market The EU market will continue to be a high premium market into the future. There is need to maximise benfit from preferential access into this market, whilst also seeking more access which will be commensurate to compensate the reduction in income losses resulting from the reforms. Swaziland should continue seeking immediate expansion of duty free access to the EU market, the main priority in 2006 being to avoid the loss of some 20% of the current duty free access to the EU market enjoyed by Swaziland through the SPS. If this cut in duty free access can be avoided, income losses on sales of sugar to the EU market will be limited. The prevailing surge in world prices can provide temporary relief to the impact of a lower EU price on the industry revenue. However such surge cannot be used on a sustainable basis to maintain the viability of the sector and to help smallholder growers who are in conditions of bankruptcy. Such a marketing strategy would therefore only be temporary. Such cannot by any measure reduce the need for the additional access to the EU. Overall therefore, it is vital that the EU is implored to avoid any reduction in Swaziland’s duty free access and that it rapidly moves towards providing certainty on the commitment and future level of expanded duty free access to be granted Swazi sugar exports from 2008 onwards. The need to strengthen and nurture the regional SACU market is even more important now. The EU, and other partners, need to support the protection of Swaziland’s interests under the EU-RSA TDCA.

30


C. PROMOTING PRODUCTIVITY AND EFFICIENCY IN SMALLHOLDER CANE GROWING

As a consequence of a 37% decline in the value of the Euro against the Rand since 2002, the smallholder sugar farming sector in Swaziland is facing a severe financial crisis. This was a major factor contributing to a 21% decline in the sucrose price between 2002 and 2005. With smallholder farmers responsible for investment in on-farm capital equipment including irrigation systems, the decline in the sucrose price has had profound effects on their financial viability. This is further compounded by the high interest rates charged on their finance.

Currently, newly established smallholder sugar farmers pay some 31% of total earnings in interest for both seasonal and capital loans. In many cases, this leaves insufficient funds to cover even the repayment of the seasonal loan. This is contributing to growing levels of indebtedness amongst smallholder sugar farmers. This is proving a direct challenge to the operation of farmer associations as this leaves no income for distribution to members. Some of the farmers are finding their own solutions to the income needs of their families and such activities have led to a deterioration in the efficiency of smallholder sugar production.

It is essential that this downward cycle of declining efficiency be halted and reversed, before the financial effects of EU sugar sector reform are felt through the wider economy in Swaziland. Without such reversal and support, newly established smallholder sugar farms will become financially non-viable. The key to reversing this downward cycle is the financial restructuring of smallholder loans, and concerted efforts to improve efficiency.

1. Stabilisation of the Financial Situation of Smallholder Cane Growers

Financial restructuring of existing loans is essential, since without it smallholder farmers will see no personal benefit from the implementation of measures to improve yields, increase sucrose content and reduce seasonal costs. Put simply, under current circumstances the benefits of any improvements in production efficiency are not realised as the beneficiaries of such are the owners of the capital they have borrowed. Also, the average operating costs in the smallholder sugar sector increase 40% since 2002. Individual grower margins and a 20-year cashflow budget are shown in Annex III-01 and Annex III-02, respectively. If a form of financial restructuring can be undertaken which ensures that smallholder farmers gain the financial benefit of any innovations adopted and which also ensures that, over time, financial institutions get their money back, then a sustainable basis can be laid for Swazi smallholder sugar production, which enables it to survive the financial consequences of EU sugar sector reform. Measures

• a programme for the financial restructuring of seasonal loans, and laying a basis for future funding will need to be developed. It might for example take the form of a revolving fund which would subsidise the rate of interest on seasonal loans. For it to bring about the necessary relief on the farmers’ financial situation, the revolving fund would need to be financed from grants, rather than loans;

31


• persuading financial institutions to restructure the terms of their loans by on one end lowering the interest rate charged, and on the other, extending the repayment period to about 10 years;

• linking the above initiatives to a commitment to adhere by certain farming practices, that ensure improved productivity, and good financial management.

In the absence of such a financial restructuring the current downward cycle of declining efficiency and escalating indebtedness will continue. This will be bad for smallholder sugar farming in Swaziland and bad for the financial institutions which have lent extensively to the smallholder sugar farming sector. Such a scheme would restore financial stability to the smallholder farming sector and lay the basis for the introduction of measures to improve yields, increase sucrose content and reduce seasonal costs. These improvements would then equip the smallholder sector to be better able to cope with the consequences of EU sugar sector reform and the accompanying lower price.

The implementation of this scheme will put money into the hands of sugar farmers at the end of each season. The amount of income distributed at the end of the season would depend on the success achieved in adopting innovations to improve yields and sucrose content. The successful adoption of measures to improve yields and sucrose content would be greatly improved if farmers know they would get the benefits of such innovations at the end of the sugar season. It is also possible that efforts to contain the escalation in seasonal costs would stand a good chance of success when this scheme directly increases the money paid out to smallholder sugar farmers at the end of the season. In terms of the interests of the financial institutions, this scheme would still provide the financial institutions with a rate of interest above that recently charged for car loans in Swaziland. It would furthermore remove the burden of seasonal loans, repayment of which is becoming more and more difficult. It would also, more importantly, remove the threat of substantial defaults on sugar sector loans which threatens the stability of the financial institutions involved, as this scheme would ensure that the financial institutions eventually get their money back with good and predictable returns.

2. Smallholder Cane Growing Schemes at LUSIP and KDDP The prevailing financial situation of smallholder sugarcane growers at KDDP requires that the programme be re-looked. It will also be advisable that Government reconsider smallholder conditions within the LUSIP scheme. An indiscriminate expansion of smallholder cane growing runs the risk of not allowing the process of self-selection, and the adoption of good farming practices as a condition for continuing growing cane. Otherwise smallholders will incur unsustainable levels of debt. It stands to reason that, in the interim, the agronomy and economics of a variety of crops and livestock activities should undergo vigorous and skilled research, so that a sustainable way forward is found by the time LUSIP water is available for irrigation in about 2008. The entry of new smallholder farmers through the KDDP and LUSIP needs to be carefully managed.

3. Rationalisation of Smallholder Association Management

The early development of smallholder cane at Big Bend was characterized by a “bottom up” approach. Swazi farmers on SNL approached the millers with their desire to supply cane and

32


were assisted by the millers in accessing water rights, grower contracts (quotas), funding, and a “hands-on” extension service. Most importantly, direct intervention and liaison with Swazibank, Fincorp and SIDB, the funding banks, was taking place. The miller created and staffed a Smallholder Liaison Unit and provided direct day-to-day help and extension advice. The system worked well, but had to be scaled down after the Government established its own programmes (including the creation of SWADE) to drive the process of promoting smallholder cane growing. The operation of the smallholder schemes, in particular the organisation of the farmers’ association, is not yet at par with the needs of an industry facing serious challenges. The lack of efficient co-operation within and between smallholders’ and Farmers’ Associations as well as medium-scale growers is a cause of concern, as it can compromise any initiatives to rationalise the operation of smallholder schemes. The mills require strict co-ordination of ripening, harvesting and haulage to maximize their efficiency. Furthermore when the LUSIP canal system becomes operational, there will be an additional need for collaboration in water management. Water User Groups (WUGs) are planned to accommodate blocks of land of up to 100ha.

Table 24: Declining Cane Yields at 11 Smallholders in Big Bend, mt/ha Grower ID 2000 2001 2002 2003 2004 2005

109 65.0104 59.2 88.7 100.6 106.0 85.2 97.6103 152.6 86.8 64.5 87.2 71.2 50.4102 133.0 133.0 80.5 73.0 58.2 62.7101 76.4 64.8 75.1 67.2 55.1 77.2100 72.7 102.6 94.0 87.0 90.897 72.9 76.6 60.799 79.8 75.3 69.8 75.095 65.1 78.4 91.0 77.4 73.1 78.093 75.0 70.5 66.9 56.1 48.5 64.392 91.7 96.0 98.8 91.8 97.2 97.3

Total 653.0 691.0 833.0 805.0 706.0 759.0Av. Yield, t/ha 93.0 86.0 84.0 80.0 72.0 75.0

Source: Ubombo Sugar A result of this lack of coordination and implementation of good farm management training programmes has resulted in a decline in yield levels well below those needed to remain in business. Table 24 confirms the declining (o average) trend in cane yields from 11 selected smallholders in the Big Bend area. It is necessary that a system be created and applied to all plantings, which restores productivity and efficiency, whilst at the same time promoting coordination of farmer groups to maximise efficiency in the use of resources. It is proposed to make any future crushing contract subject to the smaller growers agreeing to carrying out their farming operation as part of a group, and subject to all groups or individual growers co-ordinating their activities with the sugar mill and the grower’s bank. Grower contracts would therefore commit the grower to accepting and implementing the best practice code developed by the industry, and relevant stakeholders, regarding in-field and harvesting practices. Measures:

• Implement management training programmes • Implement programmes for improving cane production and harvesting, yields

and sucrose content • Apply capacity building programme to SWADE • Attach management conditions to smallholder cane crushing contracts

33


D. DIVERSIFICATION WITHIN AND OUTSIDE SUGAR INDUSTRY

1. Value-added Products based on Cane Fibre is the main non-sucrose component of the sugar cane plant, its value consisting mostly in its usefulness as fuel. Using high-pressure boilers and obtaining an efficient utilisation of process steam, it is possible to recover sufficient mechanical energy per tonne of fibre to allow part of it to be sold as electrical power to the public grid. The operating conditions at Swaziland’s mills, characterised by a practically continuous operation throughout a seven-month crop, make them predestined for the sale of this by-product. As substantial investment will have to precede such operation, some basic parameters must be in place, before mills are able to make any commitments on the sale of this by-product. Measures

• Promote competition in the energy sector and allow the commercial sale of electric power to the national power grid

• Identify best practices to develop electric power co-generation within sugar-industry-based initiatives

• Investigate alternative energy sources and the efficiency of their usage • Where cane is used to generate electricity, the country must develop appropriate policies

that allow cane growers to benefit from proceeds of sale of bagasse-based electric power

2. Value-added Products Based on Sugar Ethanol is the principal sugar-based cane product other than sugar. In the world market, fermentation ethanol sells for its sugar equivalent at the Brazilian price, given that Brazil is in a position to arbitrage between products, whenever it sees a price advantage. Thus, any producer, able to sell sugar at the present average Swaziland price, would lose money if he were to sell ethanol instead of sugar. Nevertheless, Swaziland should keep abreast of new developments in the field. Measure

• To allow Swaziland to take full advantage of any opportunity for arbitrage, a system of continuous monitoring and research will be put in place.

3. Growing and Marketing of Crops other than Sugar Cane The scope for agricultural diversification in Swaziland needs to be seen in the light of:

a) the market opportunities available; b) the logistical challenge of getting goods to market, of a standard and at a price,

acceptable to the consumer; c) the possibilities for low cost competitive production.

Priority will need to be accorded to addressing the issue of markets and logistical constraints for the competitive supply of these markets. Any attempts to support production diversification away from sugar without careful consideration of market and logistical components of the equation, risks jeopardising the sustainability of diversification efforts.

34


In looking at diversification, the critical issue to be addressed is that of the market to be served. The local (Swazi) market is relatively small and while opportunities exist for some farming groups to diversify into other products for local consumption, large scale production for the local market across a range of products would risk a price collapse. Serving the much larger regional (South African) market would appear to offer opportunities, but this will be dependent on price trends in this market and the ability to preserve and package products to a standard acceptable to the wider SACU market. The question of standards is complicated by the efforts of the South African authorities in some sectors to establish national standards equivalent to those required in major overseas markets (most notably the EU). In addition to the quality issues, domestic policies may mitigate against the supply of those markets and products from outside. The issue of food safety standards, both with regard to compliance and ensuring verification of compliance is a central issue in any efforts to diversify agricultural production, based on serving the EU market. Sugar, which has been produced on a high quality for a long time, does not suffer the same problems. The question of standards, broadly conceived, will be a central issue for any efforts at diversification targeting wider regional or international markets. Swazi producers must be able to place products on the South African market or wider international market, of a standard and at a price acceptable to consumers in these markets. If this cannot be achieved, diversification becomes highly problematical. This will require substantial investment in national standards control authorities and at the enterprise level in ensuring compliance with the standards set. This is an issue of growing importance in terms of trade with the EU, particularly as tariff protection is dismantled. The mobilisation of private sector financing for enterprise level investments may however prove difficult, for with trade liberalisation, de-regulation, market reform and a growing emphasis on food safety, there is considerable uncertainty as to the likely market returns on new forms of agricultural and food product production in a country such as Swaziland. In this context instruments may need to be set in place to provide a counter-weight to these uncertainties and a positive incentive to such investments. This situation is compounded by Swaziland’s land-locked status, escalating liquid fuel costs and the relative under-development of freight forwarding facilities in the country. This can lead to high transportation costs in getting products to markets, with no guarantees of reliability of supply. Targeted measures of support to address these constraints will be required if diversification is to be supported in Swaziland. In this context a first priority is a targeted programme for the strengthening of public sector capacities for food safety control and compliance. This would provide a supportive framework for the mobilisation of private sector investment, since it would serve to ensure acceptance of Swazi produced products for placement on regional and international markets. This should involve:

a) the financing of an initial base line and scoping study on local food safety control and compliance capacity;

35


b) establish a programme for following up on recommendations to strengthen food safety control and compliance.

While the specific measures of support required to promote diversification will be varied and multifaceted a number of general instruments can be established to support this process. The first priority in this regard would be to provide facilities and incentives to (sugar) farmers to diversify into other areas of agricultural production or other economic activity linked to rural development (including measures designed to lower the costs of transportation in rural areas). In addition, there will probably be a need for assistance to enterprises in identifying viable market/product combinations for agricultural diversification in sugar farming areas and a scheme to enhance the quality control, packaging and marketing capabilities of smallholder farmers associations. The establishment of these general diversification support initiatives, leave actual production decisions to the private sector operators and are designed to reduce risks and facilitate and promote innovation. Additonal information on alternative crops is presented in Annex III-03. The need to strengthen agricultural research station is addressed in the next sections and so is the aspect of food safety standards and their control. Measures

• Establish concessional loan facility for farmers changing to other crops or to agricultural

services • Support cost-sharing grant schemes to assist enterprises in identifying viable activities

besides sugar • Establish a scheme to enhance the capabilities of smallholder associations for quality

control, packaging, and marketing • Create model to allow local lenders to participate in financing of diversifiers

4. Strengthening Agricultural Research and Extension Based on the analysis in the preceding section, significantly more research is required into the potential of alternative crops, to either complement or replace sugar There is little or no information on soil types or climatic conditions required by other crops, nor are there any market analyses for the respective sectors. These need to be established as a matter of priority. In this respect, existing research institutions and facilties should be strenghened and expanded to enable them to undertake more appropriate agronomic field trials that are determined by market requirements. Measure

• Strengthen research facilities and institute market research and practical field scale agronomic trials on alternative crops.

36


5. Trade in New Products, Food Safety and Standards Control

A standard and quality control unit was established in 1996 in the Ministry of Enterprise and Employment, with legislation allowing for the creation of a Standards Authority enacted in 2003. A lot of work is needed on meeting market requirements to allow Swaziland to export food products to international markets. Phyto-sanitary standards of the different markets as well as consumer tastes and preferences have to be taken into consideration. Measures

• Study the capacity for control of and compliance with phyto-sanitary, livestock health, and food safety regulations for potential Swazi exporters. The creation and support for the operation of the national quality and standards institution is necessary;

• Establish a support mechanism to follow up recommendations on control of and compliance with the above

6. Diversification into New Economic Activities

Where potential has already been identified in other sectors, other than agriculture, such needs to be nurtured and developed. Tourism stands out as one obvious sector to support people to venture into. The possibilities of diversifying into the tourism industry need to be investigated and promoted. The sugar industry area also possess good potential for diversification into tourism. Measure

• Promote Tourism

E. SOCIAL SERVICES, WELFARE AND LABOUR ISSUES

1. Re-organisation of Social and Communal Services at Sugar Estates

Under conditions of global competition, sugar mills and cane plantations are no longer able to provide goods and services, including social services, such as housing, health care and education, in the way they used to when the industry was operating in relatively remote locations. Progress in transport and communications technology has eliminated much of such remoteness, and more timely and economic forms of providing these services must be found. As part of the restructuring exercise, companies will be forced to restructure their method and level of providing social services. Beneficiaries (workers and neighbouring communities, including retrenched workers) will be first to fill the impact of this. It must also be recognised that, as a social service, these facilities ought to be provided by the state. As such, whilst the companies are scaling down their involvement, towards pulling out, the Government should be facilitated a process of gradual takeover. Financial resource limitations however prevent the Government from undertaking this immediately and on a full scale. As such, the companies must

37


be encouraged to continue providing these social services whilst a model for sustainable management in the future is being developed. This may include a process of developing the requisite local Government structures to take over the running of the industrial towns.

Measures

• Study the management and financing of providing housing, health, and education, currently financed by the industry

• Develop local government structures capable of running social and communal services at the sugar towns

2. Assistance to Retrenched Workers

At the same time, the mills and major growers have begun a substantial programme of retrenchment. This is leading to the immediate loss of income for the affected households, as well as to the loss of free access to health care and education. The retrenchment programme is combined with the outsourcing of a series of services, where some of the retrenched workers have the opportunity to become contractors. Measures:

• Phased easing-out of access to social services for retrenched employees • Support a loan facility for SMEs, in particular retrenched employees who wish to venture

into other income generating activities and even in running the outsourced services of the industry. This will include a programme of retraining and multiskilling;

• Establish effective support services for rural micro- and small-scale enterprises, as farms and mills lay off personnel and “outsource” services

• Support the development of social safety nets

F. MITIGATING IMPACT ON GOVERNMENT FISCAL POSITION Given the reduction in government revenues that will occur as a result of the changes in the EU sugar regime, coupled with the limited ability of the Government to finance the adaptation needs necessary, there is need to support the Government through the provision of additional revenue streams or other related forms of assistance. The magnitude of the responses required, and the financial requirements are huge. Swaziland will loose about €9 million per annum in revenues from the sugar levy. In addition there will be less tax payable by the industry and a decline in income tax and general sales tax as levels of income and consumption fall as a result of retrenchment. Budgetary support is therefore essential, and Swaziland needs to immediately implement measures to enable it to qualify for general budgetary support. Assistance will also be required in the implementation of the programmes identified here.

38


G. ENHANCING A SUSTAINABLE SOCIO-ECONOMIC ENVIRONMENT AND CROSS-CUTTING ISSUES

1. General Investment Climate The possibility of having to diversify from sugar into other economic activities necessitates a careful monitoring of the national business climate, given that national as well as foreign private capital will be needed. The cost of doing business in Swaziland has recently been affected by the high tariffs and low dependability of public utilities. This may require the privatisation of certain services in order to improve efficiency The business climate would also be helped considerably by a relaxation of the regulations governing the establishment of new businesses. An implementation of the investor roadmap which shows areas where Swaziland needs to work on in order to improve is attractiveness for foreign investment is required. This will include, but not limited to, ensuring that there is competition in the local utility provision market (with the related requirements of efficiency and delivery) including the general relaxation of business registration requirements. Measures

• Ensure more efficient public utility services • Relax regulations governing the establishment of new businesses

2. Natural Environment There are environmental concerns about the level of air pollution caused by the use of coal as supplementary fuel in the sugar factories. Any attempt to rationalise the mills will, by itself, bring down the amount of pollution, as coal constitutes one of the more significant components of operating cost. Trials for collecting, storing, recovering and burning baled cane trash as supplementary sugar factory fuel are presently being carried out on a semi-industrial scale by the industry. The contribution of water to economic prospects and national welfare must constantly be maximised, and there is a need to develop a national water conservation and management system. Support to industrial-scale trials of substituting coal by baled sugar cane trash as supplementary factory fuel should be provided. Also, a national water master plan must be developed with a view to implementation in the medium term. On a general level, there is need to improve environmental management mechanisms. Measures:

• Support industrial-scale trials of substituting coal by baled sugar cane trash as supplementary factory fuel.

• Support development and implementation of a national water master plan • Improve environmental management mechanisms

3. Improve access and security of tenure on Land Presently, access to land in Swaziland is very regulated, and limited. It is therefore not easy to use land as a means to support income generation, nor is it possible to use Swazi Nation Land as

39


collateral for loans. A national land policy is required to facilitate this change. The land tenure system will thus need to be reviewed, in line with the development (or revision) of the land policy. Measure:

• Improve security of tenure on SNL

4. Providing Grant Financing of LUSIP LUSIP is a national programme aimed at promoting smallholder farm development in the lowveld, primarily dedicated to the growing of sugar. It will, at full capacity, allow for the irrigation of about 11 000 hectares of land to sugarcane. Given the strategic goal of placing smallholder agricultural development at the heart of national development in these areas, there is need to ensure the full viability and success of this project. Many donors, including the EU and EIB, have committed themselves to the financing and success of the project. The reforms in the EU sugar market however place the viability of the project at risk. Whilst this obtains, and can be dealt with appropriately, the project has realized a financing gap to allow smooth completion. As such, funding in the magnitude of €42 million will be required. To keep the viability of the project intact, such financing must be in the form of a grant, as loan financing would compromise the viability margins. Measure:

• Finance the LUSIP financing gap.

5. Empowerment of the poor to generate income The Ministry of Economic Planning and Development, working together with other Government Departments, has developed a framework for providing access to credit for business and agricultural purposes through the Poverty Fund. Many eligible poor are either unaware of the fund or lack information on how access it This fund needs to be promoted and disbursement mechanisms finalized to facilitate access by the poor and ensure that it meets its establishment objectives. Measure

• Assist in disbursing the Poverty Fund

6. Human capital development In spite of a nominally high rate of unemployment, acute shortages have been recorded in the levels of health and education of the Swazi population. The problem is exacerbated by generally poor health care facilities, by the high level of HIV/AIDS infection, and the high death rate and rapid increase in the number of orphans that go with it. These problems, together with a general shortage of skills, constitute a great burden on the process of transformation, as the Swazi economy is striving to develop and diversity. Considerable support will be needed by government if it is to assume responsibility for running the health and education services of the sugar communities and expanding/improving access to national facilities for the general populace.

40


Measures:

• Expand appropriate National Schooling and Technical Training • Implement multi-skilling programmes for retrenched sugar workers • Reinforce General Health Services, especially regarding AIDS • Strengthen Basic Social Services to Population

7. Pursuit of good governance Good governance is the efficient, effective, and accountable exercise of administrative, managerial, and political authority at all levels of human society. In the delivery of public services to the poor, good governance is frequently affected by excessive centralization. The objective of this strategy is to promote decentralised planning, budgeting and delivery of services to the rural poor. The strategy will also involve improved management of the country’s fiscus. Measure

• Decentralise planning, budgeting and delivery of services to the rural poor.

H. INSTITUTIONAL STRUCTURES FOR IMPLEMENTATION The implementation and coordination of this national strategy requires the use of dedicated institutional structures, whilst not replacing existing ones. In this regard, existing institutions will be assessed for their capacity and effectiveness in delivering the programmes espoused in this national strategy. Where necessary, capacity building support will be provided. In addition to the existing institutional structures, there is a need to establish and staff a dedicated unit to implement this National Adaptation Strategy. The unit will operate semi - autonomously and its activities will be co-ordinated by the Ministry of Economic Planning and Development. Its activities will also be driven by the private sector, which will include representatives of smallholder farmers. The unit will be operationally efficient, and will administer funds dedicated to restructuring and diversification. The unit will also coordinate with other institutions in the delivery of the assistance. The unit will have to be supervised by a National Adaptation Strategy Steering Committee coordinated by MEPD, which will be responsible for policy and direction. This steering committee will comprise representatives of all relevant stakeholders. Support will be required in the establishment and running of the unit, and other operational activities of the Steering Committee. The institutional assessment and capacity building will also be undertaken under the activities of the Unit. This Unit will be called the Restructuring and Diversification Management Unit.

41


TABLE 25: ESTIMATED COSTS OF STRATEGY RESPONSE MEASURES, €1,000 Code and Description Sources of

FundsPhase I Budget

Phase II Budget

Phase III Budget

Total

III-A COMPETITIVENESS Intensify programmes for reducing field level costs, raise sucrose content, streamline cane delivery, reduce harvesting, haulage and loading costs, and reduce irrigation costs

Industry/ Govt

200 500 300 1000

Explore the use of alternative forms of energy Industry 100 200 100 400Improve and expand the system of tarmac roads in the Lowveld

Donor 0 10000 20000 30000

Improve Maputo freight handling facilities Donor 0 500 200 700Expand bagging capacity Donor 0 1000 2000 3000Expand refining capacity Donor 0 3000 4000 7000Reduce the cost of public utilities and improve their efficiency

Govt 0 4000 4000 8000

Support research and development initiatives Donor 200 3000 8000 11200III-B TRADE POLICY DIMENSION AND ACTIVE PURSUIT OF PREMIUM MARKETS

Extend the provisions of TDCA to the entire SACU area and modify where necessary to include the development of regional demand for regionally produced sugar.

Govt 50 50 50 150

Maintain (and were possible expand) preferential access to regional markets and preserve the value of the domestic (SACU) market

Govt 50 50 50 150

Ensure a good transition arrangement is created to secure continued preferences on volume sales to the EU (particularly SPS allocation) and seek increased access of Swazi sugar to the EU, and other preferential markets

Govt 10 0 0 10

42


III-C PROMOTING SMALLHOLDER SUGAR CANE GROWING Support smallholder farmers in improving their farm operations to improve efficiency and viability of existing farmers and facilitate the entry of new ones

Govt/Donor/Industry

500 750 300 1550

Re-examine the viability of the smallholder cane grower component of LUSIP and KDDP

Donor 300 50 0 350

Stabilize the financial situation of existing small and medium sized cane growers

Donor 7000 8000 14000 29000

Re-examine, with a view to improve, management training programmes presently provided to sugar farmer associations

Donor 300 2000 4000 6300

Improve cane production and harvesting, yields and sucrose content

Industry 200 200 300 700

Provide capacity building programme to SWADE and SSA extension services

Donor 100 100 100 300

Introduce management (and productivity) conditions to smallholder cane crushing contracts

Industry 0 0 0 0

Design a financing/lending model for smallholder farming to be used by financial institutions

Donor 200 150 100 450

III-D DIVERSIFICATION Expedite approval of legislation allowing the commercial sale of electric energy to the national power grid

Govt 0 300 0 300

Identify best practices to develop electric power co-generation within sugar-industry-based initiatives.

Govt 300 0 0 300

Investigate alternate energy sources and products, including the efficiency of energy generation from bio-fuels

Industry - - - -

Support studies and programmes on the (viability of the) generation and use of bio-energy and production of ethanol

Govt 200 300 0 500

43


Provide low-cost financing for pilots phases of co-generation of electric energy

Industry 0 20000 0 20000

Re-visit the industry agreement to ensure that growers get benefits from co-generation activities (on proceeds of bagasse)

Industry 0 0 0 0

Establish a facility/programme for farmers changing to other crops or to agricultural services.

Donor 0 2500 0 2500

Establish a scheme to enhance the capabilities of smallholder associations for quality control, packaging, and marketing.

Industry 0 450 900 1350

Reduce transport costs and improve transport infrastructure and services from production centers and to link with markets

Donor 20000 12000 30000 62000

Develop financing model for diversifiers and help them in accessing finance and training

Donor 0 200 0 200

Promote and support research and development into other products/crops

Donor 200 4000 8000 12200

Establish and support institutions and infrastructure for testing of products for quality and standards

Govt 210 1800 0 2010

Develop products for existing and new markets and the necessary support mechanisms (infrastructure, marketing information, etc), including making the necessary investments (and policy changes) to make the production of alternative products viable

Donor 200 350 300 850

Provide support for downstream value-added industries Donor 0 1000 2000 3000Support the expansion of refinery capacity and efficiency

Industry 150 500 300 950

Develop tourism products for the SME sector in the sugar areas, and to support new initiatives of diversification into sector

Govt 200 200 2000 2400

Establish a support mechanism to follow up recommendations on control of and compliance with food safety regulations.

Govt 200 500 500 1200

44


III-E SOCIAL AMENITIES PROVISION Develop a model for the sustainable management and financing of social amenities in industry areas to ensure continued provision of quality housing, health, and education, currently financed by the industry

Govt 300 0 0 300

Support the gradual development of local government structures capable of running social & communal services at the sugar communities

Govt/Donor 300 10000 30000 40300

Create a programme to support transitional and coping measures for retrenched workers, especially with regard to access to industry social services

Govt 500 800 0 1300

Support the strengthening of basic social services provision to population, and provide safety nets for retrenched and unemployed people

Govt 300 1000 0 1300

Implement multi-skilling programmes for workers retrenched at sugar companies

Donor 300 300 900 2100

Establish an effective and continuous AIDS programme, and related AIDS (effects) mitigation measures

Donor 0 8000 2000 10000

III-G ENHANCING A SUSTAINABLE SOCI-ECONOMIC ENVIRONMENT

Establish effective support services for rural micro- and small-scale enterprises, as farms and mills lay off personnel outsourcing services

Donor 300 2400 2700 5400

Relax regulations governing establishment of new businesses

Govt 0 0 0 0

Support the implementation of the investor roadmap Govt/Donor 500 1500 1500 3500Establish a research farm to run practical field scale agronomic research and market research on alternative crops to sugar cane

Donor 300 1500 1300 3100

Improve security of tenure on land Govt 0 0 0 0Ensure full concessional/grant financing of LUSIP Donor 0 42000 0 42000Support semi-industrial-scale trials of substituting coal Industry - - - -

45


by baled sugar cane trash as supplementary industrial fuel. Expand and improve quality of the national schooling and Technical training

Donor 10000 10000 20200

Decentralise planning, budgeting and delivery of services to the rural poor

Govt 300 3000 4000 7300

Engage the EU with a view to move the assistance modality towards sectoral and/or general budget support

Govt 200 100 0 0

Promote good governance Train communities on the utilization of Poverty Funds to support coping and diversification, including entry into sugar industry

Donor 200 4000 4000 8200

Support the development of a national water conservation plan

Donor 0 200 - 200

Improve environmental management mechanisms Donor 300 1500 1500 3300III-H INSTITUTIONAL STRUCTURES FOR IMPLEMENTATION AND COORDINATION Establish “Restructuring and Diversification” Unit (includes M34)

Donor 300 1000 1500 2800

Support the continuous operation of the National Adaptation Steering Committee

Govt To be financed by operating costs of Unit

Evaluate the capacity of existing institutions and programmes in delivering on the activities required in the adaptation strategy

Donor 200 300 100 600

Support the creation of additional structures/institutions/programmes necessary for the successful implementation of the strategy

Donor 0 3000 1500 4500

TOTAL 12,780 152,090 162,500 349,760Phases: Phase I = covers the short term comprising the period between 2006 to July 2007 Phase II = covers medium term between the periods of August 2007 and December 2008 Phase III = covers the long-term between the periods January 2009 to December 2015

46


IV. FUNDING REQUIREMENTS FOR STRATEGY The total estimated cost of the National Adaptation Strategy is approximately €349 million or E2.6 billion. A summary of the cost estimate of the previous chapter, given by sector, period, and likely source of funding, is presented as Table 25 above. The breakdown by sector indicates that close to 30% of the total would go to increase the competitiveness of the sugar industry, the largest portion of it towards solving the financial problems of the cane-growing smallholders. Approximately another 30% would go into diversification efforts, energy and alternative crops among them. A further 15% would be absorbed by the restructuring of social amenities at the sugar communities, notably their transition from company towns to municipal entities, while another big share -- about 22% -- would fund multi-sector issues at a national level. Most prominent among these would be the general reinforcing of social services and the completion of the financing of LUSIP. About 3% of the estimate is for institutional and trade related issues. The cost estimates for the various strategy measures, as well as the appropriate timing for the respective applications were obtained from representatives of the sugar sector, government departments, and institutions engaged in development work. In addition to their principal areas of concern, the measures have been classified with regard to the time frame, in which they have to be taken. A short term, medium term, and a long term have been foreseen. The short tem encompasses the remainder of 2006 until July 2007. The medium term includes the remainder of 2007 until end 2008, while the long term includes the years from 2009 through 2013. The 36% decline of the EU sugar price is starting in 2006 and will be complete by July 2009. The EU accompanying measures are envisioned to continue until 2013, while implementation may go up to 2015. An indication of the most likely source of funding for each of the measures is also provided. The breakdown by phase of application shows a clear emphasis on the medium term, i.e. during 2008 and 2009. In that period, just about 50% of the estimated amount would be spent, with 4% being applied before and the remaining 46% after phase II, during the years until 2013. With respect to the potential sources of funding, only the three main groups, government, donors, and industry, have been identified. It is important to note that industry actually is carrying a substantial share of the adaptation as part of its normal operation, which is mentioned but sometimes not quantified within the National Adaptation Strategy.

47


V. CONCLUSION The aim of this national adaptation strategy is to minimize the adverse effects of the EU sugar reforms on the Swaziland sugar industry and the national economy. Given the importance of sugar to the Swaziland economy the effectiveness of these measures will have a direct impact on limiting levels of poverty at both household and national levels. The strategy has identified a number measures that will assist the structural transformation of the sugar sector in the longer term, whilst reducing costs at all levels in the short to medium term. The strategy also supports the development of alternative economic activities in those areas where sugar production become economically unviable. Short term priorities identified as being suitable for immediate EU and other donor assistance in 2006, include the establishment of a Restructuring and Diversification Management Unit to coordinate the implementation of the strategy, the restructuring of smallholder farmer financing and the use of grant finance to restructure existing smallholders debt, the maintenance of health and education facilities for affected communities, and the development of suitable models for the future provision of social services presently financed by the industry. The Swaziland government must also ensure that current levels of duty free access to the EU market are expanded and that regional markets for sugar are nurtured to maintain or increase the regional demand for sugar. In the medium term priorities will focus on programmes aimed at reducing the cost of smallholder sugar production and reducing marketing costs, together with measures for the diversification into alternative crops and the promotion of small and medium enterprises. High priority will be given in the short to medium term to ensure that Swaziland implements the required measures to qualify for general budgetary support, to compensate it for losses in Government revenue. An additional medium term priority is the securing of the necessary grant funding to close the funding gap for LUSIP. In the longer term, development programmes focusing on poverty reduction will be developed and implemented, whilst the sugar industry continues with its restructuring processes. The overall funding requirement for the national adaptation strategy is €349 million which will be financed from a combination of sources including Government, the sugar industry and a number of donors. Whilst this is a large amount of money, it will be required over a period of ten years. This strategy will assist Swaziland develop a more competitive sugar sector that will also assist the development of poor communities by maintaining the viability of smallholder farming programmes. The strategy is based on the belief and commitment that the Swaziland sugar sector has a potential to grow further if the required support is made available timely.

48


ANNEXES

49


ANNEX I-01 Swaziland's Public and Publicly Guaranteed Debt

2001/02 2002/03 2003/04 2004/05

Lender in Million E, at March 31INTERNATIONAL ORGANSATIONS 1,898.5 1,422.3 1,120.2 1,764.9

IBRD 113.6 84.1 71.4 134.6IDA 53.2 36.7 26.6 23.4ADB / ADF 1,563.8 1,092.4 790.2 1,397.4EDF / EIB 107.6 178.6 203.0 193.7IFAD 50.6 24.5 24.8 15.8NTF 9.7 6.0 4.2 0.0

FOREIGN GOVERNMENTS 774.3 941.9 994.8 1,035.6United Kingdom 20.5 11.5 8.8 8.8F. R. of Germany 257.9 99.1 197.2 179.2Denmark 61.9 62.6 44.5 33.1U.S.A. 87.8 58.7 42.8 37.9Japan 0.0 321.1 276.7 265.8Italy 18.1 9.4 7.2 5.3Souh Africa 210.2 221.4 293.8 285.4Badea 30.3 71.5 43.8 39.6Kuweit 39.6 52.1 53.6 156.9Taiwan 48.0 34.5 26.4 23.6

PRIVATE SOURCES 163.2 189.0 223.0 235.7GRAND TOTAL 2,836.0 2,553.2 2,338.0 3,036.2

Borrower in Million E, at March 31GRAND TOTAL 2,835.9 2,553.3 2,338.9 3,036.2

Central Government 2,703.9 2,339.2 1,987.0 2,700.8Public Enterprises 132.0 214.1 351.9 335.4

TOTAL DEBT SERVICE 170.6 251.3 280.4 264.2Principal 101.5 140.1 126.4 127.9Interest 68.3 109.5 153.3 135.3Commitment Charges 0.8 1.7 0.7 1.0Source: MEPD, Economic Review and Outlook, 2004/05-2007/08

50


ANNEX I-02-a SWAZILAND CANE PRODUCTION RESULTS (2001/02 - 2005/06), SIMUNYEResources Harvest Yields

Crop Enter- Arable Ar. Land Plant Av. Dist. Area Cane Av. Sucr. Av. Age Cane SucroseYear prises Land in Cane Cane to Mill Harvested Harvested in Ca. H. Ca. Harv. per per per per

Nr. ha ha % km ha t % mo. ha ha*mo ha ha*mo

Miller cum Planter2001/02 1 10.60 14.00 10,691.3 1,108,863 13.42 10.8 103.72 9.60 13.92 1.292002/03 1 4.70 14.00 11,022.0 1,213,076 14.49 11.9 110.06 9.25 15.95 1.342003/04 1 10.00 14.00 11,059.2 1,270,697 14.35 12.1 114.90 9.50 16.49 1.362004/05 1 2.70 14.00 11,163.6 1,197,119 14.00 12.4 107.23 8.65 15.01 1.212005/06 1 7.50 14.00 11,285.7 1,248,704 14.61 11.2 110.64 9.88 16.17 1.44

Large Growers (>1,000 ha)2001/02 1 6.0 1,130.7 127,365 13.70 11.5 112.64 9.80 15.43 1.342002/03 1 6.0 1,436.6 173,390 14.50 11.8 120.69 10.23 17.50 1.482003/04 1 6.0 1,766.4 226,152 13.70 12.3 128.03 10.41 17.54 1.432004/05 1 6.0 1,814.8 225,051 13.71 12.0 124.01 10.33 17.00 1.422005/06 1 6.0 1,843.5 226,021 14.29 12.0 122.60 10.22 17.52 1.46

Other Growers2001/02 20 91.6 1,249.8 129,399 13.41 11.6 103.54 8.93 13.88 1.202002/03 23 91.6 1,532.6 148,694 13.67 11.9 97.02 8.15 13.26 1.112003/04 31 91.6 2,211.7 230,864 13.53 11.9 104.38 8.77 14.12 1.192004/05 38 91.6 2,618.2 239,601 13.49 12.0 91.51 7.63 12.35 1.032005/06 38 91.6 2,650.5 249,318 14.35 12.0 94.06 7.84 13.50 1.12

Total2001/02 22 13,071.8 1,365,627 104.472002/03 25 13,991.2 1,535,160 109.722003/04 33 15,037.3 1,727,713 114.902004/05 40 15,596.6 1,661,771 106.552005/06 40 15,779.7 1,724,043 109.26

51


ANNEX I-02-b SWAZILAND CANE PRODUCTION RESULTS (2001/02 - 2005/06), MHLUMEResources Harvest Yields



Miller cum Planter2001/02 1 13.6 8.0 8,842.7 772,986 14.48 11.8 87.42 7.41 12.66 1.072002/03 1 10.3 8.0 8,817.3 792,370 15.37 11.8 89.87 7.62 13.81 1.172003/04 1 15.6 8.0 8,972.1 865,119 15.02 11.2 96.42 8.61 14.48 1.292004/05 1 11.1 8.0 8,983.3 835,562 14.71 11.2 93.01 8.30 13.68 1.222005/06 1 14.5 8.0 9,073.1 859,068 15.13 11.4 94.68 8.31 14.33 1.26

Large Growers (>1,000 ha)2001/02 1 20.0 2,090.0 236,363 13.80 12.0 113.09 9.42 15.61 1.302002/03 1 20.0 1,980.6 223,170 14.80 11.8 112.68 9.55 16.68 1.412003/04 1 20.0 1,917.6 226,236 14.80 12.2 117.98 9.67 17.46 1.432004/05 1 20.0 1,891.8 199,298 13.90 12.0 105.35 8.78 14.64 1.222005/06 1 20.0 1,873.0 223,427 14.39 12.0 119.29 9.94 17.17 1.43

Other Growers2001/02 23 31.0 2,474.4 216,647 14.04 11.6 87.56 7.55 12.29 1.062002/03 25 31.0 2,676.6 263,633 14.72 12.0 98.50 8.21 14.50 1.212003/04 34 31.0 3,709.1 359,953 14.22 12.0 97.05 8.09 13.80 1.152004/05 39 31.0 4,423.8 417,604 13.95 12.0 94.40 7.87 13.17 1.102005/06 39 31.0 4,707.4 434,225 14.54 12.0 92.24 7.69 13.41 1.12

Total2001/02 25 13,407.1 1,225,996 91.442002/03 27 13,474.5 1,279,173 94.932003/04 36 14,598.8 1,451,308 99.412004/05 41 15,298.9 1,452,464 94.942005/06 41 15,653.5 1,516,720 96.89

52


ANNEX I-02-c SWAZILAND CANE PRODUCTION RESULTS (2001/02 - 2005/06), UBOMBOResources Harvest Yields



Miller cum Planter2001/02 1 7,931 7,773 8.5 8.0 7,491.0 672,406 13.35 12.4 89.76 7.24 11.98 0.972002/03 1 7,937 7,814 11.4 8.3 7,602.0 767,572 14.03 10.7 100.97 9.44 14.17 1.322003/04 1 7,941 7,889 11.1 8.3 7,634.0 768,687 14.22 11.9 100.69 8.46 14.32 1.202004/05 1 7,946 7,916 10.4 8.4 7,659.0 715,831 14.14 12.2 93.46 7.66 13.22 1.082005/06 1 7,946 7,946 10.7 8.3 7,656.0 802,030 14.21 11.9 104.76 8.80 14.89 1.25

MCP Managed Farms (Tibiyo)2001/02 1 2,360 2,293 12.4 11.4 2,228.0 196,978 13.41 13.3 88.41 6.65 11.86 0.892002/03 1 2,358 2,358 7.9 12.0 2,340.0 233,366 13.41 13.3 99.73 7.50 13.37 1.012003/04 1 2,359 2,359 11.0 12.1 2,322.0 238,831 13.41 13.3 102.86 7.73 13.79 1.042004/05 1 2,362 2,362 9.3 12.0 2,335.0 225,663 13.41 13.3 96.64 7.27 12.96 0.972005/06 1 2,362 2,362 11.9 12.1 2,208.0 228,469 14.11 11.8 103.47 8.77 14.60 1.24

ANNEX I-02-c SWAZILAND CANE PRODUCTION RESULTS (2001/02 - 2005/06), UBOMBO (cont.)Resources Harvest Yields



Large Growers (> ha)2001/02 20 5,366 32.8 4,953.0 515,725 13.34 104.12 13.892002/03 20 5,534 32.8 4,953.0 567,196 13.34 114.52 15.282003/04 20 5,499 32.8 4,953.0 553,083 13.34 111.67 14.902004/05 20 5,918 32.8 4,953.0 537,020 13.34 108.42 14.462005/06 20 6,019 32.8 4,953.0 596,371 13.34 120.41 16.06

Medium Size Growers (> ha)2001/02 15 597 9.7 597.0 45,711 13.53 76.57 10.362002/03 15 603 9.7 602.0 55,051 14.05 91.45 12.852003/04 15 659 9.7 655.0 67,466 14.07 103.00 14.492004/05 15 671 9.7 671.0 64,503 13.87 96.13 13.332005/06 15 679 9.7 670.0 61,477 13.67 91.76 12.54

Small Growers2001/02 76 1,727 32.6 1,708.0 150,742 13.23 88.26 11.682002/03 76 1,916 32.6 1,874.0 169,188 13.78 90.28 12.442003/04 76 2,359 32.6 2,347.0 213,950 13.89 91.16 12.662004/05 76 2,549 32.6 2,489.0 226,709 13.99 91.08 12.742005/06 76 2,624 32.6 2,616.0 235,639 13.95 90.08 12.57

Total2001/02 113 16,977.0 1,581,562 93.162002/03 113 17,371.0 1,792,373 103.182003/04 113 17,911.0 1,842,017 102.842004/05 113 18,107.0 1,769,726 97.742005/06 113 18,103.0 1,923,986 106.28

53


ANNEX I-02 SWAZILAND CANE PRODUCTION RESULTS (2001/02 - 2005/06)Resources Harvest Yields



Miller cum Planter2001/02 3 27,025.0 2,554,255 94.512002/03 3 27,441.3 2,773,018 101.052003/04 3 27,665.3 2,904,503 104.992004/05 3 27,805.9 2,748,512 98.852005/06 3 28,014.8 2,909,802 103.87

Large Growers (> ha)2001/02 23 10,401.7 1,076,431 103.492002/03 23 10,710.2 1,197,122 111.772003/04 23 10,959.0 1,244,302 113.542004/05 23 10,994.6 1,187,032 107.972005/06 23 10,877.5 1,274,288 117.15

Other Growers2001/02 134 6,029.2 542,499.0 89.982002/03 139 6,685.2 636,566.0 95.222003/04 156 8,922.8 872,233.0 97.752004/05 168 10,202.0 948,417.0 92.962005/06 168 10,643.9 980,659.0 92.13

Total2001/02 160 43,455.9 4,173,185 96.032002/03 165 44,836.7 4,606,706 102.742003/04 182 47,547.1 5,021,038 105.602004/05 194 49,002.5 4,883,961 99.672005/06 194 49,536.2 5,164,749 104.26

54


ANNEX I-03 SWAZILAND CANE PROCESSING RESULTS (2001/02 - 2001/06)Resources Cane Quality Outputs Performance

Crop Cane Crop Time Eff.cr. Coal Fi- Mixed Raw VHP Refined Total Mo- Sucr. Sucr. Sugar Year Crushed Days Effic. Rate Cons. pol bre Juice Sugar tq Sugar tq Sugar tq Sugar tq lasses Extr. Recov. %

t % t/h t/tc % Purity t t t t t % % Cane

Simunye2001/02 1,371,359 217 76.36 361 43,251 13.65 12.85 85.55 166,201 0 0 166,201 49,506 96.94 87.90 12.122002/03 1,709,611 231 88.72 382 31,147 14.46 12.90 86.48 0 220,624 0 220,624 59,324 96.74 88.52 12.902003/04 1,916,923 245 86.41 382 25,626 14.23 13.43 85.85 0 244,754 0 244,754 72,651 97.11 89.10 12.772004/05 1,864,722 252 82.67 384 8,269 13.91 13.45 86.18 12,962 218,166 0 231,128 67,876 96.83 88.51 12.392005/06 1,885,709 245 79.96 407 7,840 14.56 13.85 86.64 12,534 230,930 0 243,464 68,633 96.91 88.15 12.91

Mhlume2001/02 1,225,997 238 81.23 268 40,484 14.25 15.40 87.91 65,380 0 83,616 148,996 43,975 97.17 88.45 12.152002/03 1,105,960 224 75.02 280 37,029 15.18 15.38 88.54 62,132 0 85,189 147,321 42,597 97.10 87.46 13.322003/04 1,289,405 252 77.75 275 38,364 14.64 15.16 86.27 67,192 0 100,484 167,676 53,510 97.66 88.47 13.002004/05 1,249,597 259 76.21 277 41,456 14.42 14.36 86.54 38,031 0 118,586 156,617 51,608 97.44 86.58 12.532005/06 1,355,082 245 79.61 295 24,246 14.86 14.05 86.48 46,930 4,896 125,459 177,285 53,128 97.52 87.77 13.08

Ubombo2001/02 1,582,541 255 75.30 343 13.31 13.17 84.41 66,987 28,960 82,811 178,758 97.30 84.46 11.302002/03 1,793,362 253 82.10 360 14.01 13.17 84.64 94,966 23,825 96,277 215,068 97.35 85.09 11.992003/04 1,839,923 263 82.61 353 14.05 13.19 83.03 93,798 20,112 101,894 215,804 96.89 82.95 11.732004/05 1,769,643 235 82.27 381 13.95 13.19 85.15 116,728 0 93,091 209,819 96.94 84.43 11.862005/06 1,932,696 239 83.60 401 14.04 13.19 84.54 123,282 4,660 104,044 231,986 96.62 85.26 12.00

Swaziland Total2001/02 4,179,897 298,568 28,960 166,427 493,955 93,481 11.822002/03 4,608,933 157,098 244,449 181,466 583,013 101,921 12.652003/04 5,046,251 160,990 264,866 202,378 628,234 126,161 12.452004/05 4,883,962 167,721 218,166 211,677 597,564 119,484 12.242005/06 5,173,487 182,746 240,486 229,503 652,735 121,761 12.62

55


ANNEX I-04 SWAZILAND SUGAR AND MOLASSES SALES (2003/04 - 2005/06)

Volume Price Exch R. Price RevenueMarket Year MTtq FC/MT E/FC E/MT E1000

REFINED SUGARSACU 2003 166,719 2,782 1.00 2,782 463,812

FC= R 2004 200,906 2,668 1.00 2,668 536,0172005 196,850 2,589 1.00 2,589 509,645

Regional 2003 0FC= $ 2004 250 194.42 7.27 1,413 353

2005 1,011 217.45 6.05 1,316 1,330TOTAL, REF. 2003 166,719 463,812

2004 201,156 536,3702005 197,861 510,975

VHP SUGARSACU 2003 114,206 240.05 10.16 2,440 278,663

FC= $ 2004 131,014 356.92 7.27 2,594 339,8502005 114,460 420.35 6.05 2,544 291,186

Regional 2003 39,574 174.53 10.16 1,774 70,204FC= $ 2004 69,388 197.17 7.27 1,433 99,433

2005 93,605 194.31 6.05 1,176 110,079UK Special 2003 240 279.92 15.94 4,461 1,071

FC= £ 2004 760 414.13 12.98 5,377 4,0872005 1,000 355.26 11.46 4,071 4,071

TOTAL, VHP 2003 154,020 349,9382004 201,162 443,3702005 209,065 405,337

RAW SUGAREU / ACP 2003 104,156 491.27 9.96 4,891 509,427

FC= € 2004 115,791 481.00 8.52 4,099 474,6272005 119,878 474.09 7.85 3,720 445,946

EU / SPS 2003 47,839 463.64 9.96 4,616 220,825FC= € 2004 30,531 452.01 8.52 3,852 117,605

2005 36,670 437.90 7.85 3,436 125,998USA 2003 15,912 418.42 10.16 4,253 67,674

FC= $ 2004 16,279 368.75 7.27 2,680 43,6282005 15,687 356.24 6.05 2,156 33,821

World 2003 71,979 118.94 10.16 1,209 87,023FC= $ 2004 46,614 140.07 7.27 1,018 47,453

2005 27,513 143.42 6.05 868 23,881TOTAL, RAW. 2003 239,886 884,948

2004 209,215 683,3132005 199,748 629,647

ALL TYPES OF SUGARTOTAL, ALL 2003 560,625 (at an av. of 13.52 USc/lb) 1,698,698

MARKETS 2004 611,533 (at an av. of 16.97 USc/lb) 1,663,0542005 606,674 (at an av. of 19.10 USc/lb) 1,545,959

MOLASSESSACU 2003 180,867 184.08 1.00 184.08 33,294

FC= R 2004 210,466 181.24 1.00 181.24 38,1452005 204,698 188.00 1.00 188.00 38,483

56


ANNEX III-01

Gross margins from irrigated sugar cane under sprinkler irrigation in the Swaziland Lowveld with declining sucrose prices at 13.89% sucrose with direct costs as presented by SWADE (E/ha)

Assuming 2005 WM price Assuming present WM price

Assumptions 20052006 & 2007 2008 2009

2006 & 2007] 2008 2009

Direct costs per ha 12137Sucrose % 0.1389Price per ton of sucrose 1381.00 1182.64 1124.10 1031.58 1262.22 1203.69 1111.17

Revenue at 100 t/ha 19,182 16,427 15,614 14,329 17,532 16,719 15,434Direct Costs 12,137 12,137 12,137 12,137 12,137 12,137 12,137Gross Margin 7,045 4,290 3,477 2,192 5,395 4,582 3,297

Revenue at 95 t/ha 18,223 15,606 14,833 13,612 16,656 15,883 14,662Direct Costs 12,137 12,137 12,137 12,137 12,137 12,137 12,137Gross margin 6,086 3,469 2,696 1,475 4,519 3,746 2,525

Revenue at 90 t/ha 17,264 14,784 14,052 12,896 15,779 15,047 13,891Direct costs 12,137 12,137 12,137 12,137 12,137 12,137 12,137Gross margin 5,127 2,647 1,915 759 3,642 2,910 1,754

Revenue at 85 t/ha 16,305 13,963 13,272 12,179 14,902 14,211 13,119Direct costs 12,137 12,137 12,137 12,137 12,137 12,137 12,137Gross margin 4,168 1,826 1,135 42 2,765 2,074 982

Revenue at 75 t/ha 14,387 12,320 11,710 10,746 13,149 12,539 11,576Direct costs 12,137 12,137 12,137 12,137 12,137 12,137 12,137Gross margin 2,250 183 -427 -1,391 1,012 402 -561

57


ANNEX III-02

20 Year Cash Flow Budget for 1 Hectare New CaneAssumptionsArea to be planted (ha) 1Total establishment cost (1 ha) 31000Maintenance cost post plant and pre harvest per hectare (1ha) 4913Harvest and haulage to mil (at E45/ton)l 4185Yield tons cane per hectare 93Sucrose per cent 0.1389Yield of sucrose per hectare t 12.9177Price of sucrose to grower E/ton

2006 1,1802007 1,1802008 1,1202009 1,0302010 1,0302012 1,0302013 1,0302014 1,0302015 1,030

Gross income per hectare 2006 15,2432007 15,2432008 14,468

2009 and thereafter 13,305Cost of re-establishment E 9,450Establishment loan repayable over years no 10

58


Year 0 1 2 3 4 5 6Cash in E 0 15,243 14,468 13,305 13,305 13,305 13,305

Total cash in from crop E 0 15,243 14,468 13,305 13,305 13,305 13,305

Cash out ECane establishment 31,000Cane maintenance 4,913 4,913 4,913 4,913 4,913 4,913 4,913Cane harvest and haul 4,185 4,185 4,185 4,185 4,185 4,185Cane re-establishTotal cash out 35,913 9,098 9,098 9,098 9,098 9,098 9,098Net operational cash flow -35,913 6,145 5,370 4,207 4,207 4,207 4,207Calculate NPV of net operational cash -32,649 5,079 4,035 2,874 2,612 2,375 2,159NPV -921

FINANCINGOpening balance 0 0 -406 -1,587 -3,931 -6,275 -8,619Net operational cash flow -35,913 6,145 5,370 4,207 4,207 4,207 4,207Cane establishment loan 31,000Cane maintenance loan 4,913 4,913 4,913 4,913 4,913 4,913 4,913Cane harvest loan 4,185 4,185 4,185 4,185 4,185 4,185Cane re-establishment

Repayment of establishment loan capex + interest 6,026 6,026 6,026 6,026 6,026 6,026Repayment of re-establishment loan capex + interestRepayment of annual maintenance loan 4,913 4,913 4,913 4,913 4,913 4,913Repayment of annual harvest loan 4,185 4,185 4,185 4,185 4,185 4,185Interest on annual maintenance loan 368 368 368 368 368 368Interest on annual harvest loan 157 157 157 157 157 157Closing balance 0 -406 -1,587 -3,931 -6,275 -8,619 -10,962

FACTOR TO CALCULATE NPV 0.9091 0.8265 0.7513 0.6830 0.6210 0.5645 0.5132

59


Year 7 8 9 10 11 12 13Cash in E 13,305 13,305 13,305 13,305 13,305 13,305 13,305

Total cash in from crop E 13,305 13,305 13,305 13,305 13,305 13,305 13,305

Cash out ECane establishmentCane maintenance 4,913 4,913 4,913 4,913 4,913 4,913 4,913Cane harvest and haul 4,185 4,185 4,185 4,185 4,185 4,185 4,185Cane re-establish 9,450Total cash out 9,098 9,098 9,098 18,548 9,098 9,098 9,098Net operational cash flow 4,207 4,207 4,207 -5,243 4,207 4,207 4,207Calculate NPV of net operational cash flow 1,963 1,784 1,622 -1,838 1,341 1,219 1,108NPV

FINANCINGOpening balance -10,962 -13,306 -15,650 -17,994 -29,787 -27,942 -26,097Net operational cash flow 4,207 4,207 4,207 -5,243 4,207 4,207 4,207Cane establishment loanCane maintenance loan 4,913 4,913 4,913 4,913 4,913 4,913 4,913Cane harvest loan 4,185 4,185 4,185 4,185 4,185 4,185 4,185Cane re-establishment 9,450

Repayment of establishment loan capex + in 6,026 6,026 6,026 6,026Repayment of re-establishment loan capex + interest 1,837 1,837 1,837Repayment of annual maintenance loan 4,913 4,913 4,913 4,913 4,913 4,913 4,913Repayment of annual harvest loan 4,185 4,185 4,185 4,185 4,185 4,185 4,185Interest on annual maintenance loan 368 368 368 368 368 368 368Interest on annual harvest loan 157 157 157 157 157 157 157Closing balance -13,306 -15,650 -17,994 -29,787 -27,942 -26,097 -24,252


60


Year 14 15 16 17 18 19 20Cash in E 13,305 13,305 13,305 13,305 13,305 13,305 13,305

Total cash in from crop E 13,305 13,305 13,305 13,305 13,305 13,305 13,305

Cash out ECane establishmentCane maintenance 4,913 4,913 4,913 4,913 4,913 4,913 4,913Cane harvest and haul 4,185 4,185 4,185 4,185 4,185 4,185 4,185Cane re-establishTotal cash out 9,098 9,098 9,098 9,098 9,098 9,098 9,098Net operational cash flow 4,207 4,207 4,207 4,207 4,207 4,207 4,207Calculate NPV of net operational cash flow 1,007 916 833 757 688 626 569NPV

FINANCINGOpening balance -24,252 -22,407 -20,561 -18,716 -16,871 -15,026 -13,180Net operational cash flow 4,207 4,207 4,207 4,207 4,207 4,207 4,207Cane establishment loanCane maintenance loan 4,913 4,913 4,913 4,913 4,913 4,913 4,913Cane harvest loan 4,185 4,185 4,185 4,185 4,185 4,185 4,185Cane re-establishment

Repayment of establishment loan capex + interestRepayment of re-establishment loan capex + 1,837 1,837 1,837 1,837 1,837 1,837 1,837Repayment of annual maintenance loan 4,913 4,913 4,913 4,913 4,913 4,913 4,913Repayment of annual harvest loan 4,185 4,185 4,185 4,185 4,185 4,185 4,185Interest on annual maintenance loan 368 368 368 368 368 368 368Interest on annual harvest loan 157 157 157 157 157 157 157Closing balance -22,407 -20,561 -18,716 -16,871 -15,026 -13,180 -11,335


61


ANNEX III-03

15 LIKELY AND UNLIKELY CROPS TO SUBSTITUTE SUGAR CANE IN SWAZILAND Cotton

Lowveld farmers are familiar with this crop, having struggled with it from time immemorial as a rain-fed proposition until the final collapse of the local ginning company • Cash crop • Lends itself to large areas, but is widely grown as a smallholder crop • Can easily be single channel marketed through a ginnery • Is labour intensive • The work is not too arduous to be performed by women • Local variety knowledge is available • It is not perishable • The people know the crop • It can be followed by a winter crop • Is not subject to theft BUT, to date, experience in KwaZulu Natal in similar climatic conditions has shown that yield potential is not above 3 to 4 tons per hectare whereas more desert-like cloudless but irrigated conditions such as are found in the Orange River Valley near Upington in RSA give higher yields. The market for cotton and the associated textiles is currently depressed due to competition from Eastern countries in the RSA market.

Wheat

• Lends itself to large areas • Can be single channel marketed through a wheat mill • Short term crop (115 days) • Can be double cropped with soyas • Is not subject to theft • There is a good local and SACU market BUT, wheat is highly mechanized, not labour intensive, not known in the area, is sensitive to bird damage, may need aerial spraying.

Bananas

• Intensive • Potentially very rewarding • There is a good local and SACU market • Contributes to individual food security BUT the market is not unlimited, bananas do not lend themselves to large scale farming, the culture of bananas has become quite high tech, riverine localities are frost sensitive, easily stolen.

Soya

• Highly mechanised • Can be grown on a large scale • Can be double cropped with winter wheat • Such a combination could compete with present cane margins • Improves soil fertility • SACU and export markets available • Has potential for biodiesel BUT, soya is an unfamiliar crop, gross margins are not high

62


Winter table potatoes • Intensive • Good local and SACU market • Very well suited to winter Lowveld conditions • Leaf diseases require control • Prices fluctuate widely • Excellent gross margins possible • Contributes to individual food secuity BUT markets are not unlimited, potatoes are not suited to vast hectarages, potatoes are bulky, transport is costly, large urban SACU markets are distant

Paprika

• A relatively new crop • Intensive • Potentially highly profitable • Ready SACU (Durban)and export market • High value • Dried paprika is light and valuable and can stand long distance transport • Not perishable • Can be dried “on the vine” BUT paprika does not lend itself to vast hectareages, needs artificial drying for best quality, is susceptible, like all intensive crops to a number of pests and diseases. Hot chilies would have the same advantages and disadvantages but cannot be grown close to paprika because cross pollination adds unwanted zest to the paprika

Vegetables for local, SACU and export markets

• A very wide range is possible • Range includes specialist crops like Mange Tout, Pattipans • Intensive BUT, vegetables do not lend themselves to large scale production local markets are well supplied from Swaziland and South Africa so competition is keen, EU and in some cases SACU export market standards are impossibly high, previous schemes have had a high failure rate. Tomatoes for canning have potential and could be grown on a fairly large area. The potential production areas are a long distance from markets

Dry beans

• Winter crop • Could be grown in winter and double cropped with cotton • SACU is a net importer so demand may be good • Would contribute to individual food security • Can be grown on a large scale BUT, SACU’s alternative sources are highly competitive price-wise, SACU markets are distant

Rice

Rice has been grown in Swaziland many years ago in both the Lowveld and Middleveld. At Big Bend it was the pre-ccursor to sugar cane in the 1950s’ It has all the advantages and disadvantages of wheat, see above

Maize

Even under irrigation maize is a risky crop in the Lowveld summer because very high temperatures at tasseling destroy pollen. It is grown in winter as a vegetable. At present prices, grown for grain,

63


64

margins are disappointing because SACU prices are quite closely governed by world prices and South Africa is a major producer.

Groundnuts

Groundnuts are an important export commodity world-wide, can be grown on a large scale. Presently gross margin estimates are very low. Sandier Lowveld soils are very well suited. Much market and agronomic research needed. Aflatoxin content of poorly stored groundnuts is a potential problem.

Grain sorghum In Swaziland this crop is the potentially viable grain alternative to maize but efforts to encourage its production and consumption as grain have failed. Throughout Southern Africa people prefer maize. Margins are slender at present prices. It would lend itself to large scale highly mechanized production.

Cassava

Much research and effort has gone into trying to commercialise this crop in northern KwaZulu Natal since as early as the 1970s. Efforts have failed, partly because a virus disease common in coastal Mocambique has come inland. It has potential for ethanol production but cannot compete with sugar cane in this connection.

Biodiesel crops, ethanol crops

SWADE recently commissioned and are now digesting a study on biodiesel and ethanol. A few South African farmers are already producing biodiesel from sunflower and soya for their own use but there is not as yet a SACU government policy structure in place to create a significant market for either biodiesel or ethanol for blending into petrol. Crops such as sunflower, safflower, sesame and castor are considered. Biofuels have not entered the market because they have been too expensive to produce. Sugar cane will no doubt be the crop of choice if and when ethanol “takes off”.

Lucerne (alfalfa)

SWADE are considering lucerne with associated beef raising. Research is required, especially regarding the agronomic subjects of weed competition and leaf diseases, and the economics of incorporating lucerne or lucerne products into a livestock operation. There is a substantial market for lucerne itself in SACU. Lucerne lends itself to large scale production.

Documents

TABLE OF CONTENTS ABBREIVIATIONS AND ACRONYMS i · PDF fileTABLE OF CONTENTS ABBREIVIATIONS AND ACRONYMS i EXECUTIVE SUMMARY ... CANGO The Coordinating Assembly of Non-Governmental