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April 02, 2008

Libya to assist Uganda build instant coffee factory

Uganda will build its first instant coffee factory by the end of this year following an agreement between the governments of Uganda and Libya.

According to the Uganda Coffee Development Authority (UCDA), the terms of the agreement signed last September oblige the government of Uganda to provide land for the plant as well as technical support, with regulatory requirements.

Libya, through its Libyan Africa Investment Portfolio, will provide the capital.

UCDA officials said Libya had agreed to invest between $20 million and $60 million depending on the type of equipment chosen for the plant. They also confirmed that the Uganda Investment Authority had already secured land for the factory at Namanve industrial park in Kampala.

This is the third time the government is engaging a foreign investor in attempt to set up an instant coffee plant.

In 2006, the government signed a similar agreement with Tata Ltd of India although implementation of the project is over a year behind schedule, while in 2005 negotiations with Continental Coffee — an Indian and British-owned firm — stalled after the government declined to give it monopoly status.

News of the proposed Libyan-backed project comes at a time when coffee prices in the international market have increased threefold over the past five years to $2,600 a tonne for robusta and $3,527 a tonne for arabica, the highest in 12 years.

In Uganda, farmgate prices are $2 per kg for arabica and $1.76 per kg for robusta. When translated to 30 bags of 60kg of coffee each, which most farmers produce per year on average, they earn about Ush6.1 million ($3,600) at the farm-gate.

An instant coffee plant would add value to Ugandan coffee, fetch premium prices for the farmers.

Currently, the quality remains low due to poor post-harvest handling, says UCDA.

Some countries in the region like Rwanda have revived their coffee production with the emphasis on quality and are now exporting more speciality coffee than Uganda, which sells only a third of its 150,000 tonnes output, according to UCDA. The ideal situation is to follow in the footsteps of Ethiopia and add value to the commodity. This would create more jobs and increase revenue from coffee.

However due to constraints such as capital, a more feasible investment is in processing instant coffee whose demand stands at about 18 per cent of the international market as against speciality coffee at about 12 per cent.

Uganda exports 95 per cent of its coffee as green beans, maintaining its primary producer status.

UCDA has blamed the situation on the inability of the private sector to put up a coffee plant.

Henry Ngabirano, managing director of UCDA, said, “You need more than $20 million to put up an instant coffee plant, and to get that kind of credit, one would need assets in collateral worth about $33 million. Private sector players interested in the coffee business don’t have that kind of money or security.”

However, observers say there is little government commitment to add value to coffee.

“For a sector that earns the most export revenue for the country — $256 million in 2007 — and generates about $500 million in total, the government should have little difficulty in finding $20 million for a coffee factory; it guarantees loans to other sectors that contribute much less to the economy,” said an observer.

In 2006, UCDA introduced a group of private coffee firms in Uganda to the Danish government, which had expressed interest in funding an instant coffee plant in the country.

However, an appraisal mission from the prospective financiers rejected the group on the grounds that they had a weak capital outlay, little experience in the business.

“It is mainly because capital constraints that the government decided to engage foreign investors to take up the business,” said Mr Ngabirano.

Some experts feel that for an instant coffee plant to succeed, there must be a local market as well, as against the government strategy to produce only for export to countries such as Dubai and the US.

David Barry, treasurer of the East African Fine Coffees Association and managing director of Kyagalanyi Coffee Ltd, a member of Swiss-owned Volcafe, was quoted recently as saying, “A healthy volume domestic market is almost a pre-requisite for developing a roasting and soluble business in the producing country.”

The East African

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