Report on tea industry not impressive

I recently perused a report on the tea industry commissioned by the Competition Authority of Kenya (CAK) and I must admit it was grossly underwhelming.

One of the issues that stand out in the report is that the tea industry is run under a weak regulatory framework and lacks national policy to guide legislation and regulation of the tea industry.

The report claims the Kenya Tea Development Agency (KTDA) is part of the industry regulator, a position which allegedly gives it the capacity to access insider information to the detriment of its competitors.

Furthermore, the report claims KTDA has lost focus by allegedly adopting an unclear mandate. These allegations are not only baseless, but leave a lot to be desired. To understand the tea industry and the role of various agencies in it, we must go back to the Sessional Paper of 1999.

As captured in the Sessional Paper, the small-holder tea sector underwent significant reforms in 2000, with the Kenya Tea Development Authority, which was then a parastatal, becoming a private company known as Kenya Tea Development Agency Limited.

The new KTDA was to become the managing agent for Tea Factory companies, which in turn are the owners of KTDA. The factory companies themselves are owned by small-scale tea farmers.

The regulation of the entire tea industry was put in the hands of the Tea Board of Kenya, which has since been renamed the Tea Directorate under the Agriculture and Fisheries Directorate.

The Directorate has representation from both the industry and government. This arrangement is not unique to the tea industry as it is also the same system adopted by the Media Council of Kenya, NSSF and NHIF, among other parastatals.

The aim is to bring expertise into the respective agencies and ensure varied interests are taken care of. It is therefore interesting that the report singles out KTDA for blame just because some of the directors of tea factory companies sit on the Board of the Tea Directorate. The report is oblivious of the fact that companies have strategic plans, which they strive to accomplish, and that it is possible to diversify interests without losing focus of the original mandate.

In this case, the KTDA Holdings Ltd has been established as the investment arm of the agency. KTDA Management Service (KTDA MS) will continue to carry on the primary mandate as the managing agent for tea factory companies.

This industry is owned by farmers. The farmers elect Directors for the 54 factory companies operating 66 factories, which they own. They also elect Directors to sit on the KTDA Board. As a rule, a Director must have a minimum number of bushes of tea as provided in the memorandum and articles of the respective company.

It is inconceivable, therefore, that those farmers can conspire to bring down their own business, which has served them well for more than 50 years. It is unfortunate that the decline of tea prices at the auction is now being blamed on alleged collusion when the market forces that determine prices are there for all to see.

Indeed, the decline in auction prices witnessed in the past two years affected not just tea, but other agricultural commodities including coffee, sugar and milk, among others.

But obviously, much attention has focused on tea because of the critical role it plays in Kenya's economy.

Tea auction prices are determined solely by market forces of supply and demand. Also considering the varying climatic and soil conditions in tea-growing areas, it is interesting that some expect the 66 KTDA-managed factories to earn a uniform amount for processed tea offered for sale at the Mombasa Auction.

Whereas the auction remains the primary avenue for selling tea to buyers, Direct Selling Overseas (DSO) has been employed for many years and with reasons that make plenty of business sense.

DSO is an acceptable business practice to sell directly to buyers without going through the auction. But DSO, it must be noted, is based on Mombasa Auction highest price and not some arbitrary figure.

One of the key reasons for going DSO is to meet a client's particular requirements. The second is to avoid creating an unnecessary glut at the auction, which has the effect of lowering prices to the detriment of the farmer.

The third and probably more critical is that there are grades of tea that do not sell in the auction but must be sold.

Some of these grades are specialty teas and other bespoke manufactures. The tea industry remains a key pillar of the economy, bringing in billions in foreign exchange earnings, employing hundreds of thousands across the value chain and supporting related industries.

Therefore the intrigues that currently surround it spell doom for millions of small holder farmers and the economy in general.