Discussion Paper No. 84 of 2007 on Technical Efficiency of Kenya's Sugar Factories: An Agenda for Enhancing Competitiveness

Abstract

This paper provides estimates of technical efficiency in Kenya sugar factories. It examines factors that affect technical efficiency by applying a stochastic production frontier approach over the period 1996-2005 using firm level panel data. The findings show a mean average efficiency for the sugar factories of 81 per cent. Results on efficiency of individual firms show that Mumias sugar factory is technically efficient while Muhoroni is only 48 per cent efficient. The over-all efficiency level of the firms has improved over time from 75 per cent in 1996 to 83 per cent in 2005. The findings shed some light on the possible sources of inefficiency in the sugar industry. If a firm is publicly owned, its privatization is likely to improve technical efficiency to a great extent. A firm’s technical efficiency also tends to be positively related to adoption of appropriate technology. Continued efforts to update technologies and equipment are critical in pursuit of greater technical efficiency in the sugar industry. The findings also indicate that the sugar factories do not enjoy economies of scale (or scope) in production. Based on the findings, the recommendations argue for increased productivity through research, modernization of sugar factories, privatization and expansion of product base.